In an earlier post discussing the need for payments companies to jump aboard the POS bandwagon, we noted that the greatest risk for smaller POS companies is the sloth and hubris large payment companies – or any large companies, for that matter – can exhibit. Before we get ahead of ourselves we should visit the beginning.
The world is evolving faster than ever. Data is quickly becoming the new oil, and software (built on said data) is eating the world. Many of the large companies around us today were built during a time when “high tech” was the wide-eyed move from snail mail to fax machine.
As is the case with any company that survives its founder, professional management is brought in and inertia – not innovation – keeps the company fed. Waste, fraud, and abuse – a popular politicking phrase but true nonetheless – proliferate as headcount grows. This complacency eventually shows its consequences as every part of the company’s business comes under attack and is forced to compete on its own merits. Those in silicon valley call this term unbundling (definitely read that link).
Around this time the board notices the company is doing, well, nothing. In utter exasperation a meeting is called and professional management, who almost exclusively lack the the inventor’s gene, and are told to create positive change or else. And that’s when the CEO turns to his or her favorite time-tested weapons:
Build, buy, or partner.
It is at this juncture that we must pay very close attention.
In days of old this armament was sufficient if for nothing else than professional management understood what it was doing. Professional management hires similar employees to build similar manufacturing facility.Professional management buys similar manufacturer using the same wrenches and fighting the same union battles. Professional management strikes arrangement with similar manufacturing partner.
But this dynamic changes entirely when relevancy in tomorrow’s world is not so easily cobbled and instead changes at breakneck pace. What happens when the aging behemoth must change what its product is entirely? When none of the people – from professional management on down – have the culture to understand what a relevant product must look like? When the market changes direction and waste, fraud, and abuse become untenable as products from new companies are delivered faster and cheaper without this glaring, expensive baggage?
This is when companies go to their drawing board to force innovation and it can be a very uncomfortable process. In this scenario they come away with four plausible paths forward.
1. Internal investment, internal team.
More traditionally this is known as R&D. But it’s very hard for large companies to attract innovators into their R&D units because innovators hold little appetite for bureaucracy. So if R&D is run by internal people who lack the inventor’s gene and further misunderstand the paradigm change in the industry, what then?
2. Internal investment, external team.
This is the classic case for McKinsey: the old company recognizes it can’t do what it needs to so it hires someone on the outside to tell them what to do. Rarely do these third party firms recognize what really needs to be done if it’s a totally new market emerging. At any rate even if the problem and solution are correctly identified who will execute the change? Are you going to trust McKinsey to build your solution? Are you going to continue paying that premium for updates and iterations?
The most intriguing models for corporate innovation are the remaining two, which get significantly less attention because they imply that Big Co lacks the culture to innovate quickly. But they are increasingly being applied by corporations who are seeing outsized returns, and you know what, we’d rather be in business and admit shortcomings than let our incompetence blow holes in the hull and go down with the ship.
3. External investment, external team.
Sometimes this looks like corporate venture, but more often than not it looks like a partnership. The large company realizes it can’t execute what it needs so it invests time (and maybe a little money) in convincing a partner to work with them strategically and help drive innovation. The key here is to intentionally distance the entity doing the innovation from your culture, which has only proven toxic for progress.
4. External investment, internal team.
Lastly, this form of innovation is the newest, with some companies coming up with incubators or “labs”. The secret to success here is in finding what attracts innovators: namely, distance from a stagnant corporate culture and equity for the upside. Large companies will hold these teams in an office removed from daily operations (many large companies have labs groups in Silicon Valley, for example) and often encourage neutral, third party (i.e. institutional investor) fundraising. If successful the parent company can acquire the labs company and fold in the innovation.
One venture capital firm has publicly shared their thoughts on this matter.
We believe that new ideas thrive outside of the confinement of corporate process. If an idea is big enough that it addresses pain for more than one company and is not core to business strategy, we believe that it has the highest chance of success if it executed outside of the business. We believe this because:
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There is someone who wakes up every day with the sole priority of making that business grow.
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It’s impossible to judge nascent businesses against the same standards as existing businesses — that’s not to say we don’t measure them, we just use different metrics.
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Processes kill nascent businesses — eventually the business will need processes to scale, but even then processes will have to be remade every 6 months if the business is scaling at the right speed.
But even if there is agreement that innovation will only be successful if done externally, that doesn’t mean innovation comes to fruition. Most employees at large companies are so removed from the world of innovation and executing this innovation that they have little self-awareness of their own processes and actions: 45 meetings over 12 months to agree on the color of office post-its is often acceptable behavior, and this has massively negative consequences on progress when markets move faster than ever.
The best analysis of these realities that we’ve come across was undertaken by Aaron Harris, a partner at Y Combinator.
In analyzing what went wrong with [deals with big companies], a few things become apparent. Fundamentally, there is a mismatch between large companies and small startups that reduce the likelihood of deals to nearly zero.
First off, large companies have different priorities in pursuing these deals than small startups. The large company might be interested in the service offered because it will generate revenue or improve efficiency. On the other hand, the execs might be trying to figure out if your company is any good so that they can buy it. In most cases, the startups see this deal as the only thing that matters. That creates mismatched expectations and goals that can’t be bridged.
Second, large companies have significant processes around doing deals. These processes generally involve an ever expanding number of parties in different departments, each of which want different things. This can mean that, as a deal progresses, the startup is forced to convince brand new parties, and build new products to their specifications. Without a counterbalance, this leads to ever more customization that cannot be re-used which has taken time and money to build. While the big company can afford to wait, the startup cannot.
As Mr. Harris lays out, large companies have a number of lengthy processes that are nothing but distracting to innovators. Big company might enjoy these proceedings so every one of their mid-level managers can pat each other on the back, but that’s the surest way to confuse innovators at best, and miss innovation entirely at worst.
Naturally we have some advice for big companies who acknowledge that they need help with innovation.
- The most senior person at the company needs to push innovation from the top down. That means it’s the job of the mid-level management to get their CEO behind their efforts and clearly delineate responsibilities and priorities. Without C-suite support you will lose the attention of innovators as mid-level personnel fight amongst each other and convolute the process.
- Formalize a short partnership process. If a decision cannot be made in one meeting then you’ve not identified the right people nor the right problem/solution. Stop wasting everyone’s time and get your shit together. This means you should have a partnerships manager who is empowered to make all the decisions for the partnership. They should have a timetable for outcomes and deliverables. If other departments need to sign off on things this must be accounted for ahead of time and budgeted into the process. Don’t make an innovator suffer through your dysfunction.
- Have some self-awareness. If you were an innovator would you want to jump through all these hoops? Would you want to be passed around with no company ownership and seemingly ever-changing priorities? How would that make you feel? Having self-awareness forces big companies to simplify processes at every turn to make the partnership experience less like the DMV.
If all of this sounds obvious that’s because you skew more innovator than Big Co. Run through the process at a few larger companies and you’ll see how painful this can be.
POS and payments companies (who are quickly becoming one in the same via consolidation) aren’t immune from these pressures. Anyone in the industry would agree they’re seeing more innovation happening now than the industry has seen over its entire lifespan. This is a great thing as inefficiency is squeezed from the market and increasing value is delivered to customers at decreasing costs.
The downside of consolidation is that small, nimble innovator is being replaced with hulking, monolithic mass. This is a recipe for many dissatisfied customers and ultimately replacement by someone with a better mouse trap – likely an entirely novel business model that incumbents are woefully unprepared to fight. That the payments industry cannot even fathom the reality that interchange will eventually disappear is symptom enough.
The world looks more different than ever and it’s changing in such a way that large companies are insanely vulnerable to competition under these new rules. If you can’t learn how to attract and partner with innovators it will be too late. We’d say you should call Blockbuster, a big company that found itself similarly assailed by a novel business model created by an outside innovator, but you won’t find a number to dial.
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