The Innovation Show

“The hardest part of these decisions was neither the technological nor economic transformations required. It was changing the culture — the mindset and instincts of hundreds of thousands of people who had grown up in an undeniably successful company, but one that had for decades been immune to normal competitive and economic forces. The challenge was making that workforce live, compete, and win in the real world. It was like taking a lion raised for all of its life in captivity and suddenly teaching it to survive in the jungle.”― Lou Gerstner Jr., Who Says Elephants Can’t Dance?

The Evolution of Corporate Energy

Just as living organisms undergo a transformative journey from birth to maturity, companies evolve through distinct phases marked by varying energy allocations. In the early stages, a company’s lifeblood is channelled primarily into growth, akin to a young organism directing energy towards development. As it matures, the focus shifts towards maintenance and preservation, mirroring the energy distribution of an adult organism.

This lifecycle is characterised by a delicate balance of energy expenditure. During the formative years, startups and early-stage companies invest heavily in innovation, market penetration, and team expansion. Every fibre of the organisation is dedicated to achieving rapid growth. However, as companies mature and achieve stability, the emphasis gradually tilts towards sustaining market position and operational efficiency.

While mature organisations ought to protect their gains, a critical oversight occurs when energy is exclusively directed towards maintenance. This neglect of future growth potential can be likened to an athlete solely focusing on injury prevention while ignoring training for the next season. To thrive in an ever-evolving marketplace, companies must strike a balance between preserving their position and investing in future opportunities.

This week’s Thursday Thought explores the challenges associated with this transition, examining the concept of “technical debt” and the psychological barriers that often impede progress. By understanding these obstacles, organisations can develop strategies to navigate the complexities of corporate evolution and ensure sustained success.

From Patchwork to Overhaul

Mirroring athletes patching up injuries for the season, organisations accumulate “technical debt” — the future cost of using suboptimal technology. This debt silently drains resources, diverting IT efforts and budgets from innovation to maintenance. It hinders execution and stifles strategic growth. Worse, boards and executives often misunderstand the issue, placing blame on CIOs/CTOs when budget constraints (*and misguided reward packages, for example, a CFO bonused on EBITDA has a vested interest in delaying overhauls, especially during her tenure) often play a bigger role.

When Amazon.com started, the entire website ran as a single, integrated piece of software. After a few years of rapid expansion, the site had grown to millions of lines of code whose limitations were impacting growth. The company wrote off that debt to liberate new energy and growth that ultimately spawned successes like AWS. Understandably, this is a difficult decision, just like an athlete who must accept that they are just kicking the can (or not kicking anything as the case may be) down the road. Unaddressed, patched-up injuries compound and lead to an unpleasant experience at the end of many careers. While it appears like a sunk cost, organisations must “refactor” their systems and “reskill” their workforce, but the lagging payback and high upfront investment can lead to procrastination.

The sunk cost fallacy, the psychological inclination to persist with failing ventures due to past investments, often hinders progress within organisations. This cognitive bias, rooted in loss aversion, creates a pull towards preserving the status quo (patchwork) rather than embracing new opportunities (or an overhaul). While centralised databases make perfect sense and provide an organisational “single version of the truth,” they also introduce a new challenge: the allocation of scarce resources. Worse still, the allocation of scarce capital with a slow payoff. Engineers pulled (or heavily influenced by senior executives) between maintaining existing systems and implementing innovative solutions, exemplify this dilemma. The pressure to address immediate customer needs (or delay investment) while simultaneously investing in future growth creates a tension that can impede an organisation’s ability to grow.

Technical Debt, Psychological Debt and Organisational Debt

“Conquer yourself rather than the world.” ― René Descartes (1596–1650)

While tech debt plays a huge role, so too does psychological debt, and even more difficult to address is the burdensome organisational debt. As our guest on this week’s Innovation Show, David Rogers says,

“It’s like you have these layers of organisational processes that have built up over time and can become very encrusted like layers of the earth’s core, just the same way that technology when you talk about serious technical debt, you’ve got these layers of systems.

I’ve worked with banks, they’ve got over 100 different applications that are all trying to talk to each other. And some of them were built 30 years ago on cobalt. And, they’re just layered up and unearthing them doesn’t solve the underlying problems. You’ve got to do some archaeology.

It’s the same thing with the organisations, these like processes and budgeting and, and, and resourcing and, and metrics and KPIs and how meetings are run and all of these different things at different levels of the company that actually all impact your ability to change and transform.

And so, you know, just coming in and saying, well, we’re going to change a piece here or we’re going to have a team or a squad that does something different, you know, that may be your starting point that maybe you’re like chipping into the rock and your entry into this giant edifice. But it’s got to keep going deeper and deeper and deeper if you’re really going to drive the change.”

“Progress is impossible without change and those who cannot change their minds cannot change anything.” — George Bernard Shaw

The technological aspect of digital transformation cannot be divorced from the human element. Legacy talent — employees whose skills and mindsets were shaped in a pre-digital era — represents a significant component of psychological debt. Without investment in digital literacy and a culture that champions continuous learning, organisations find themselves weighed down by their own workforce.

Similarly, a legacy culture characterised by top-down leadership and resistance to change stifles innovation and agility. This culture breeds cynicism and disengagement among employees, further entrenching the organisation in its outdated mental and business models. A case study I highlight in my workshops and learning and development content is that of Sears, which spurned the chance to reinvent itself, overburdened by both organisational debt and an overidentification to its past.

SEARS — We are a Retailer

‘’Part of the trick in getting this company moving again is not dishonouring its past but trying to honour the parts of its past that are relevant to the future.” — Arthur Martinez when he joined Sears as head of retail operations in 1992

Richard Warren Sears, a humble railroad station agent, started selling watches post-Civil War, leading up to the publication of the first Sears catalogue in the 1880s. This venture connected countless American homes to what would grow into the world’s largest department store — an “analogue Amazon.” By the time Sears declared bankruptcy in 2018, it had become a mere relic of its former self, struggling to keep pace with the digital age and encumbered by outdated brick-and-mortar stores. While technical debt played a role, the true culprits in Sears’ downfall were psychological and organisational debt. The ingrained cultural inertia, alongside a refusal to modernise its technological stack, proved detrimental.

As early as the 1970s, Sears began to lose its gloss. Newer, nimbler competitors like Kmart and Walmart captured substantial market share, exploiting Sears’ outdated business practices and putting the retailer at a competitive disadvantage. In response, Sears’ executives pivoted from retailing to explore various alternative business models throughout the ’70s and ’80s. They diversified into banking, insurance, real estate, credit cards, mutual funds, and auto supplies, all while trying to maintain the core retail and catalogue businesses.

This diversification was not uncharted territory for Sears. Shortly after starting the catalogue business, they began selling to customers on credit. By 1931, with rising car ownership, Sears identified an opportunity to sell auto insurance, leading to the founding of Allstate. Initially offered through the catalogue and then in-store, Allstate thrived within the Sears portfolio. By the 1950s, it had grown beyond Sears stores, offering a variety of insurance products.

Throughout the 1970s, Sears’ financial services flourished. The Sears in-store credit card circulated in nearly 60% of American households. Allstate established itself as a leading casualty insurer. In 1981, Sears further expanded by acquiring Coldwell Banker and Dean Witter, making substantial inroads into the financial services industry. By the early 1990s, Allstate, Dean Witter, Discover, and Coldwell Banker were successful, valuable subsidiaries of Sears, collectively valued at over $16.6 billion.

What did Sears do? Weighed down by their legacy, they doubled down on their original play. The pressure from investors to address the lagging retail performance led management to divest these profitable assets. The proceeds were intended to refocus the company on its ‘retailing roots.’ They fueled their past with their future. As we know, this strategy failed to overcome the systemic retail challenges Sears faced, leading to its eventual bankruptcy.

Today, Allstate, Dean Witter (now part of Morgan Stanley), Discover Financial Services, and Coldwell Banker continue to perform robustly in their respective sectors.

As with most poster children of disruption, Sears’ legacy serves as a cautionary tale: the crippling effects of psychological and organisational debt can outweigh even the most innovative of diversification strategies. Recognising and addressing these deeper layers of debt is crucial for any company aiming to achieve sustainable transformation in the face of evolving market dynamics.

Breaking the Cycle: A Call for Comprehensive Transformation

“To change business models, you must first change mental models.” — Undisruptable.

Addressing psychological debt requires a multifaceted approach. It is not enough to introduce new technologies; organisations must also cultivate a culture of innovation, empower their workforce with digital skills, and embrace a leadership style that encourages experimentation and collaboration.

The transition to a digitally mature organisation is as much about changing mindsets as it is about upgrading technology. By recognising psychological and organisational debt as a major barrier to transformation, leaders can begin the work of dismantling the legacy systems, talent, and cultures that hold their organisations hostage to the past.

Thanks for Reading

Below is the latest episode of The Innovation Show with David Rogers, the author of ‘The Digital Transformation Roadmap’. He delves into the significant challenges and strategies for digital transformation within organisations.

Key topics include overcoming psychological and organisational debt, technical capabilities required for transformation, the importance of suitable technology, retaining key talent, and evolving organisational culture.

David also shares insights on governance and iterative funding, emphasising the need for smart shutdowns and resource allocation.

The episode is packed with practical examples, including successful digital transformations at Walmart and Netflix.

https://medium.com/media/57c3bb6ad94dc665a2e9be73125b8a17/href

Technical Debt is anchored in Psychological and Organisational Debt was originally published in The Thursday Thought on Medium, where people are continuing the conversation by highlighting and responding to this story.