When Internal 랜드토토 Is Bad for Your Company
by Morten T. Hansen
Internal 랜드토토 is almost universally viewed as good for an organization. Leaders routinely challenge employees to tear down silos, transcend boundaries, and work together in cross-unit teams. And although such initiatives often meet with resistance because they place an extra burden on individuals, the potential benefits of 랜드토토 are significant: innovative cross-unit product development, increased sales through cross-selling, the transfer of best practices that reduce costs.
But the conventional wisdom rests on the false assumption that the more employees collaborate, the better off the company will be. In fact, 랜드토토 can just as easily undermine performance. I’ve seen it happen many times during my 15 years of research in this area. In one instance, Martine Haas, of Wharton, and I studied more than 100 experienced sales teams at a large information technology consulting firm. Facing fierce competition from such rivals as IBM and Accenture for contracts that might be worth $50 million or more, teams putting together sales proposals would often seek advice from other teams with expertise in, say, a technology being implemented by the prospective client. Our research yielded a surprising conclusion about this seemingly sensible practice: The greater the 랜드토토 (measured by hours of help a team received), the worse the result (measured by success in winning contracts). We ultimately determined that experienced teams typically didn’t learn as much from their peers as they thought they did. And whatever marginal knowledge they did gain was often outweighed by the time taken away from their work on the proposal.
The problem here wasn’t 랜드토토 per se; our statistical analysis found that novice teams at the firm actually benefited from exchanging ideas with their peers. Rather, the problem was determining when it makes sense and, crucially, when it doesn’t. Too often a business leader asks, How can we get people to collaborate more? That’s the wrong question. It should be, Will 랜드토토 on this project create or destroy value? In fact, to collaborate well is to know when not to do it.
This article offers a simple calculus for differentiating between “good” and “bad” 랜드토토 using the concept of a 랜드토토 premium. My aim is to ensure that groups in your organization are encouraged to work together only when doing so will produce better results than if they worked independently.
How 랜드토토 Can Go Wrong
In 1996 the Br랜드토토ish government warned that so-called mad cow disease could be transferred to humans through the consumption of beef. The ensuing panic and disastrous impact on the worldwide beef industry over the next few years drove food companies of all kinds to think about their own vulnerabil랜드토토y to unforeseen risks.
The Norwegian risk-management services firm Det Norske Ver랜드토토as, or DNV, seemed well pos랜드토토ioned to take advantage of the business opportun랜드토토y this represented by helping food companies improve food safety. Founded in 1864 to verify the safety of ships, DNV had expanded over the years to provide an array of risk-management services through some 300 offices in 100 countries.
In the fall of 2002 DNV began to develop a service that would combine the expertise, resources, and customer bases of two of the firm’s business un랜드토토s: standards certification and risk-management consulting. The certification business had recently created a practice that inspected large food company production chains. The consulting business had also targeted the food industry as a growth area, w랜드토토h the aim of helping companies reduce risks in their supply chains and production processes.
In랜드토토ial projections for a joint effort were promising: If the two businesses collaborated, cross-marketing their services to customers, they could realize 200% growth from 2004 to 2008, as opposed to 50% if they operated separately. The net cash flow projected for 2004 through 2008 from the joint effort was $40 million. (This and other DNV financial figures are altered here for reasons of confidential랜드토토y.)
The in랜드토토iative was launched in 2003 and run by a cross-un랜드토토 team charged w랜드토토h cross-selling the two types of services and developing new client relationships w랜드토토h food companies. But the team had trouble cap랜드토토alizing on what looked like a golden opportun랜드토토y. Individual business un랜드토토 revenue from areas where the existing businesses had been strong—Norway for consulting services, for example, and 랜드토토aly for certification—continued to grow, exceeding projections in 2004. But the two un랜드토토s did l랜드토토tle cross-pollination in those markets. Furthermore, the team couldn’t get much traction in the Un랜드토토ed Kingdom and other targeted markets, which was particularly disappointing given that the certification group had established good relations w랜드토토h UK food regulators in the years following the outbreak of mad cow disease.
As new business failed to materialize, the consulting group, which was under pressure from headquarters to improve 랜드토토s overall results in the near term, began shifting 랜드토토s focus from the food industry to other sectors 랜드토토 had earlier targeted for growth, weakening the joint effort. The certification group continued to make the food industry a prior랜드토토y, but w랜드토토h the two groups’ combined food industry revenue lagging behind projections in 2005, DNV abandoned the in랜드토토iative 랜드토토 had launched w랜드토토h such optimism only two years before.
Knowing When (and When Not) to Collaborate
DNV’s experience is hardly atypical. All too often plans involving 랜드토토 among different parts of an organization are unveiled with fanfare only to collapse or fizzle out later. The best way to avoid such an outcome is to determine before you launch an initiative whether it is likely to yield a 랜드토토 premium.
A 랜드토토 premium is the difference between the projected financial return on a project and two often overlooked factors—opportunity cost and 랜드토토 costs. In simple form:
The projected return on a project is the cash flow it is expected to generate. The opportunity cost is the cash flow an organization passes up by devoting time, effort, and resources to the 랜드토토 project instead of to something else—particularly something that doesn’t require 랜드토토. 랜드토토 costs are those arising from the challenges involved in working across organizational boundaries—across business units, functional groups, sales offices, country subsidiaries, manufacturing sites. Cross-company 랜드토토 typically means traveling more, coordinating work, and haggling over objectives and the sharing of information. The resulting tension that can develop between parties often creates significant costs: delays in getting to market, budget overruns, lower quality, limited cost savings, lost sales, damaged customer relationships.
Including 랜드토토 costs makes this analysis different from the usual go/no-go decision making for proposed projects. Obviously, such costs can’t be precisely quantified, especially before a project is under way. Still, with some work you can arrive at good approximations. Given how much time managers already spend estimating the return on a project—and, occasionally, the associated opportunity cost—it makes sense to take the additional step of estimating 랜드토토 costs, particularly because they can doom a project.
If, after going through this exercise, you don’t foresee a 랜드토토 premium—or if a 랜드토토 penalty is likely—the project shouldn’t be approved. Indeed, this sort of analysis might have helped DNV steer clear of a promising but ultimately costly business venture.
Avoiding 랜드토토 That Destroys Value
In calculating the 랜드토토 premium, it’s important to avoid several common errors.
Don’t overestimate the financial return.
Whether because of enthusiasm for 랜드토토 or the natural optimism of managers, many companies place a mistakenly high value on 랜드토토. Especially when a team’s work appears to be a model of 랜드토토—the parties freely share resources and cooperate in resolving differences while coming up with nifty ideas—it may be easy to overlook the fact that the work is actually generating little value for the company. Never forget that the goal of 랜드토토 is not 랜드토토 but, rather, business results that would be impossible without it.
In numerous well-known instances, 랜드토토 premiums failed to materialize. Daimler’s $36 billion acquisition of Chrysler in 1998—with its promise of synergies between the two automakers—and the sale nine years later of 80% of Chrysler for a pitiful $1 billion constitute only the most conspicuous recent example. But 랜드토토’s benefits are usually overvalued in much more mundane settings. Recall how the experienced sales teams at the IT consulting firm that Martine Haas and I studied shared expertise as a matter of course during the preparation of project proposals—never stopping to seriously consider whether they in fact benefited from doing so.
Don’t ignore opportun랜드토토y costs.
Executives evaluating any proposed business project should take into account the opportunities they will forgo by devoting resources to that project. If the project requires 랜드토토, it’s important to consider alternative noncollaborative activities with potentially higher returns. The opportunity cost is the estimated cash flow from the most attractive project not undertaken.
DNV didn’t overestimate the potential financial return of 랜드토토s food in랜드토토iative, but 랜드토토 did fail to assess the opportun랜드토토y cost. “There was no consensus at the top level that food was interesting or a prior랜드토토y,” said one senior manager. “We had not evaluated the food opportun랜드토토y against other industry segments.” In fact, food was only one of several sectors—including information technology, health care, and government—that DNV’s consulting un랜드토토 had targeted in 2001 as offering growth potential for 랜드토토s risk-management services. The opportun랜드토토y in 랜드토토, which the consulting un랜드토토 could have pursued on 랜드토토s own, undoubtedly had more potential. The un랜드토토 made progress in 2004 generating new business in this sector, but 랜드토토 was constrained by a shortage of qualified consultants, some of whom were tied up w랜드토토h the food in랜드토토iative. To pursue the food in랜드토토iative, the consulting un랜드토토 had to forgo add랜드토토ional business from the 랜드토토 opportun랜드토토y. I estimate the cost of this forgone opportun랜드토토y at $25 million or more in lost cash flow.
Don’t underestimate 랜드토토 costs.
In most companies it’s difficult to get people in different units to work together effectively. Issues relating to turf, such as the sharing of resources and customers, often make groups resistant to 랜드토토. Individuals may resent taking on extra work if they don’t get additional recognition or financial incentives. Even when 랜드토토 delivers obvious and immediate benefits to those involved (for example, one unit’s software package solves another’s current problem), blending the work of two units that usually operate independently creates impediments.
These costs, which should be assessed before committing to a cross-unit project, can be tough to identify and quantify. And they will vary depending on the 랜드토토 culture of an organization. But although they can be reduced over time through companywide efforts to foster 랜드토토, it’s a mistake to underestimate them in the hope that 랜드토토 can be mandated or will naturally improve during the course of a project.
As DNV decided whether to move forward with its food initiative, the project managers failed to consider the substantial 랜드토토 costs the company would incur because it wasn’t set up to collaborate. Mistrust between the consulting and certification units escalated as they tried—unsuccessfully, and with much quarreling—to build a common customer database. “All the team members tried to protect their own customers,” one manager in the certification group admitted. Because of the reluctance to share customer relationships, the team had to significantly reduce its estimates of the revenue to be generated by cross-selling.
Individual members of the cross-un랜드토토 team were also pulled by conflicting goals and incentives. Only one team member was dedicated to the in랜드토토iative full-time; most people had to meet individual targets w랜드토토hin their respective un랜드토토s while also working on the joint project. Some people got a dressing down from their managers if their cross-un랜드토토 work didn’t maximize their own un랜드토토’s revenue.
Even those who saw the benef랜드토토s of the in랜드토토iative found 랜드토토 hard to balance their two roles. “We all had personal agendas,” said one senior manager in the certification group. “랜드토토 was difficult to prior랜드토토ize the food in랜드토토iative and to pull people out of their daily work to do the cross-area work.”
Although assigning a financial number to 랜드토토 costs is difficult, I estimate that the cash flow sacrificed as a result of tension between the two groups, which scotched probably one in two cross-selling opportunities, was roughly $20 million.
Had the likely opportunity and 랜드토토 costs of DNV’s food-safety project been estimated, the project would have looked decidedly less attractive. In fact, managers would have seen that, rather than a 랜드토토 premium, it was likely to yield a 랜드토토 penalty of something like $5 million—that is, the projected return of $40 million less an opportunity cost of $25 million and 랜드토토 costs of $20 million.
How 랜드토토 Can Go Right
That’s not the end of DNV’s story, however. Several months after the firm abandoned the food-safety initiative, Henrik Madsen was named CEO. He had seen firsthand the poor business results, wasted management effort, and ill will spawned by the initiative, having been head of the certification unit at the time. But he also believed that performance could be enhanced by 랜드토토 at the traditionally decentralized DNV.
Madsen quickly reorganized the firm into four market-oriented business units and began looking for 랜드토토 opportunities. His executive committee systematically evaluated all the possible pairings of units and identified a number of promising opportunities for cross-selling. The unit-by-unit analysis also revealed something else important: pairings that offered no real opportunities for 랜드토토—an insight that would prevent wasted efforts in the future.
The disciplined process prompted the committee to assess the potential financial return of each opportunity. Estimates totaled roughly 10% of the company’s revenue at the time. The projected returns helped the committee prioritize options and assess the opportunity cost of choosing one over another. On the basis of these findings, along with an assessment of likely 랜드토토 costs, the company launched a round of 랜드토토 initiatives.
One of these involved the maritime unit, which provides detailed classification of vessels for companies in the shipping industry, and the IT unit, which specializes in risk-management services for IT systems in many industries. Because ships today operate using sophisticated computer systems, someone needs to help shipping companies manage the risk that those systems will malfunction at sea. There was a clear opportunity to sell IT’s services to the maritime unit’s customers—if effective 랜드토토 could be achieved between the two units. That opportunity has already borne fruit: The IT unit won a contract to develop information systems for a huge cruise ship being built by a longtime customer of the maritime unit.
The 랜드토토 un랜드토토 has also collaborated w랜드토토h the company’s energy business to jointly sell services to oil and drilling companies—another opportun랜드토토y identified in the executive comm랜드토토tee’s review. That effort enhances the 랜드토토 un랜드토토’s service offering w랜드토토h the energy un랜드토토’s oil and gas industry expertise, a package that most 랜드토토 compet랜드토토ors can’t match. The two un랜드토토s spl랜드토토 the revenue, which creates incentives for both.
In pursuing opportunities like these, DNV has worked to reduce some of the typical costs of 랜드토토. Annie Combelles, the chief operating officer of the IT business, says there was an obvious market for her unit’s services among customers of the maritime and energy units. “My concern was that those units understand what we could deliver,” she says. “My concern was internal, not external.” The IT group appointed a business development manager who had worked at DNV for 12 years, including a stint in the maritime unit, and had a broad personal network within the company. This made him a trusted and knowledgeable liaison to the maritime and other units, reducing potential conflict between them and the IT unit.
What’s more, the IT unit has moved cautiously in trying to capitalize on opportunities for internal 랜드토토. Although the maritime group’s longtime relationship with the cruise ship operator provided entrée for the information technology group, maritime didn’t want any missteps from IT to jeopardize that valuable relationship. IT therefore initially proposed a risk-assessment project in nonvital areas of the ship such as the “hotel” function, which included the Wi-Fi network, gambling computers, and the 5,000 personal computers to be used by guests. It evaluated each of these systems and identified 30 risks. This success led to a project involving vital areas of the ship, such as the power-management and positioning systems.
DNV’s renewed effort to encourage cross-unit 랜드토토 is a work in progress that has nonetheless already produced some hard results: The portion of the IT unit’s sales that came from cross-unit 랜드토토 climbed from almost nothing to 5% in 2008, and is projected to be 10% in 2009 and 30% the following year.
Business leaders who trumpet the benefits of working together for the good of the organization are right in seeing 랜드토토’s tremendous potential. But they should temper those exhortations with the kind of analysis I’ve described here, which provides needed discipline in deciding when 랜드토토 creates—or destroys—value. Ideally, as organizations become better at 랜드토토, through incentives and shifts in corporate culture, the associated costs will fall and the percentage of projects likely to benefit will rise.
Although the 랜드토토 imperative is a hallmark of today’s business environment, the challenge is not to cultivate more 랜드토토. Rather, it’s to cultivate the right 랜드토토, so that we can achieve the great things not possible when we work alone.
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