Latest / The Innovation Show / AI Is Rewiring Organizations — McGrath, Osterwalder, Amla & Sheikh

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AI Is Rewiring Organizations — McGrath, Osterwalder, Amla & Sheikh · The Innovation Show

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welcome to this special podcast brought to you by The Kyndryl
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Institute and The Innovation Show.
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We are at an interesting point in time with likely the most powerful
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technology to ever grace the planet.
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It is a reshuffling of how work is done, value is created,
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and permission is granted.
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It is a puzzling time for leaders, as their initial temptation is to use
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AI to optimize existing processes.
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Luckily for you and for us, we have a diverse panel of experts, authors, and
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practitioners to shine some light on the challenges and the opportunities ahead.
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It is a pleasure to welcome to the show Usman Haque, who is the author of Frame
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Break and the MD of High Output Ventures.
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It's great to have you with us, Usman.
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Great to be here, Aidan.
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Long time follower.
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Glad to be on the show.
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Great to have you on the show.
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Also, good friend of the show, prolific author, globally recognized
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expert on strategy and innovation.
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Her work goes back decades.
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She's influenced so many of us, so many people all over the world, saved companies
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that she doesn't even know that she saved.
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She is the author of multiple titles, and a new book coming down the line.
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She is Rita McGrath.
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Welcome to the show.
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A pleasure to be here, Aidan.
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Always great to learn from you, Rita.
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And another person I've learned from, a person I met during the
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pandemic because he was in lockdown, 'cause it's hard to lock him down.
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He's traveled all over the world.
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He's an SVP at Kyndryl now, but he wrote a brilliant book, From
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Incremental to Exponential.
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He is Ismail Amit.
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Welcome to the show.
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Thanks for having me, Aidan.
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Very excited to be here with this panel.
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And finally, friend of the show and good friend.
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He's become a good friend of mine.
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He's the creator of the Business Model Canvas.
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He's written tons of books.
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He's always out in the field working with clients, learning
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from clients, and leading his own business as CEO of Strategizer.
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Alexander Osterwalder, welcome to the panel.
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Thanks for having me, Aidan, and thank you for organizing this conversation.
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It's awesome.
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It is, and I've told you before, I'm so selfish with this.
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I learn so much from both the discussions with you individually, but also I love
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the interaction that happens and the learning that happens between us because
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we have a group of humble leaders here who are open to learning as well.
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I thought we'd get kicked off with something.
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I had a chat behind the scenes with Ismael recently, and Ismael, you
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casually, I hope you remember this you casually said something that I thought
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would spark us today and talk to some of the things we'll discuss when you
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shared how this technology is somewhat different, and it's changing the structure
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of organization and the structure of decision-making in organizations.
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Yeah.
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Yeah, absolutely, and I think we all talk about, this technology
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being, , life-changing, literally.
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And, , by the way, I'm a great fan of the work that Rita has done over the years.
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And as we think about strategy, it's difficult to think about-
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Technology being so dominant in that strategy discussion as it is today.
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And then, if you double-click just one level, you then very quickly
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get to, but this isn't about bolting technology on to make change.
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This is about rewiring everything.
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And I think that is really the fundamental discussion, that not all organizations
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and individuals have got to, but really that's where the value will come from.
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I think that's the sort of chat we were having.
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When you said that to me, I thought about, a learning that I had as a child.
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My granny was brilliant at teaching me the hard way.
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And she said, "I'll give you some pocket money," which wasn't
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very much back then in Ireland.
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We had punts.
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We had our own currency back then.
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And it was like, I would get a pound, which a pound note was huge.
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And my job was to go out and paint a rusty gate.
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And of course, she gave me a tin of paint.
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I went out and I painted over all the rust, and quickly she came out
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and she goes, "Okay, you're gonna have to give me a pound 'cause now
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I have to do this all over again."
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So I had to get a wire brush, clean down the gate, and start over again.
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And it's exactly what I thought of about what we do with these new technologies.
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We try to use them to cover up what we're doing, or the inefficiencies
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we have, or the structures we have that are no longer useful.
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And Alex, I actually thought about you in this where you and I were talking recently
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about your work, your current work, and you're always out in the field working
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with clients, as I said in the intro.
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And you said about how you've seen a huge shift in how organizations do work.
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CE- CEOs, CTOs now, in particular, who have a better seat at the boardroom
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table than ever mo- before, but they're working with other senior leaders out
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with clients in the trenches to learn how to apply AI and AI-related value
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propositions directly with customers.
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I thought that was fascinating, that shift, 'cause we rarely see that
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Yeah, it's, it's been quite impressive to see that the best leaders I get to
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work with, they're really understanding that this is challenging their business
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model, but also their customers' business models and value propositions.
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And they have to go, get out of the building and work with customers to deeply
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understand, for example, in B2B, the work we do where the CEO needs to deeply
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understand the P&L of the customer and how are they with AI and what AI c- can
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or could do, you know, gonna help them.
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So it's not enough to manage what you have anymore, is you really
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need to get into the trenches.
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So I think it's this, revival of the entrepreneurial CEO almost,
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Steve Jobs style, maybe not with the same kind of, aura, but definitely
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that kind of working where CEOs are becoming product people again.
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And I think that's very healthy.
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Like we know that from the startup world, but we don't know that
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from the, you know, Fortune 100.
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So I think this is really a fundamental shift in how we
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need to lead our organizations.
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I was reading recently, there's a new book about the Steve Jobs Next Years,
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and just because you mentioned him there, it was really interesting how
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he was revered by technology providers.
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So Canon, for example, flew him out to Japan because they thought that he
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would see some use for technologies they had created or invented that they
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wouldn't know, and that's how they came along with the optical drive.
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And just because you mentioned that, but it brings to mind Rita's work.
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So Rita has a new book coming out, roughly this idea of a permissionless organization
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where the decision-making is changed to those people who are at the edges,
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those people who are working at the edges of of the organization in the field,
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learning at the point of fi- and having to make those decisions at the time.
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And Rita, I pulled a quote from a comment you actually left on
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somebody else's post recently.
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You said, "The old model of the firm replete with hierarchies, bureaucracies,
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and the mechanisms of control that made mass production feasible is no longer fit
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for purpose. In a digital world or an AI world, companies centered around a common
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mission or values have a strategic edge."
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I thought that was absolutely important because it talks to
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everything we're talking about here.
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It's not just a case of understanding and deploying this new technology.
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It's not just a case of what Alex said there, where you're getting out and
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you're making decisions with your clients.
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It changes the entire structure of your organization
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We were talking a little bit before this began about, where are we in historical
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terms, and I would argue that we are in the midst of a great transition
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from the world of mass production, where hierarchy and bureaucracy,
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are actually a pretty good way of connecting things if your goal is making
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a million identical widgets, right?
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In which case you want everybody doing exactly what they're supposed
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to do at exactly the right time.
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You want decisions to be centralized because advantage comes from economies
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of scale, and, and, and, and, and.
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And the world we're moving into is where we're seeing services replacing
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products, where we're seeing, you know, units of value creation are
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small teams and even individuals.
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We've got our, fabulous story of a guy, a single Israeli guy who worked for six
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months by himself to create a product that got sold to Wix for $80 million.
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Uh, d- like, where is that in the world of mass production?
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It doesn't exist.
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So we're right in the middle of a transition, and these
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transitions are incredibly messy.
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And all the things we're seeing, you know, massive income inequality, political
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turmoil, the rise of populism, all that ha- we've seen this before at least five
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times in these transitions in capitalism.
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Alex, you talked to me before about that when we had a chat recently about
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the idea of a one-person unicorn or a two-person unicorn, where you're using
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all these agents to run your company, to market your company, et cetera.
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Maybe we'll say a word, on that before we come to Usman.
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Yeah, I, I think, you know, what, what you have at your fingertips
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as an individual, without actually having a ton of technological
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knowledge is pretty amazing, right?
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So, you know, the web was made accessible by Tim Berners-Lee and then Netscape
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and then all that came afterwards.
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Then Amazon, with Amazon Web Services made, web infrastructure,
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really powerful web infrastructure, accessible to everybody.
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And then, with ChatGPT we kinda launched something that was around for a long
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time, but it became available to a much larger group of people, these
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powerful AI tools that anybody can use.
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So I think today, as a small team, maybe individual, definitely as a
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small team, you can do things that were only accessible to hundred
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or thousand of people before.
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That is exactly what, Rita is talking about.
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That's a fundamental shift, and you will see a lot of people
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who have to reorient, right?
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They're gonna lose their jobs.
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Are they gonna get new ones?
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Are the same people gonna get new ones?
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So it's a fundamental shift.
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It's a huge opportunity for anybody who's entrepreneurial, and it's a
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real challenge for anybody who, you know, can't or doesn't want to adapt.
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'Cause it's , a question of wanting to.
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Some people just can't because they don't have the means, you
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know, access to all these things.
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So it's a, it's an interesting time, but definitely, as Rita said, it's gonna
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be quite turbulent, this transition.
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You were talking there about the reskilling or unlearning actually that has
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to happen for a lot of people, and many people don't have a great experience of
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education, but also we've been educated for that world that no longer exists.
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And Rita, I wondered about this.
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So if you have- Leaders giving decision-making power to the edges of
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the organization, they may question, "Well, where does my power or status
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come from if that's the case now?" And I wondered how you're seeing
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leaders deal with that conundrum.
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Oh, well, this was actually a big surprise in the research
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I've been doing for the new book.
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So I guess I went into it with the assumption that it would be the, you
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know, Lee Iacocca principle, right?
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Which was, my success in life comes because I hire people that are smarter
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than me and I get out of their way.
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And that's what I thought I'd find, and it turns out that's not the case at all.
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What I see is leaders that are deeply, deeply into the
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weeds in terms of the business.
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Now, what's interesting is they're not command and control.
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So if you take somebody like, Jensen Huang at NVIDIA, everybody in the
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company at the end of the week puts out a memo which is their top five
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things they're gonna do the next week.
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It's called TFTs.
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And, these are all posted to, distribution lists, and Huang has
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access to these distribution lists.
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And what he does on Sunday nights is he takes a couple of
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hours and he just randomly goes through people's top five things.
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And it could be somebody on the front line, it could be somebody more senior.
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It's kind of random.
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And he personally makes comments on them.
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He makes observations.
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But what I think is the key thing is he's directly connected to the edges.
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So we're seeing a difference in the way power is defined.
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It's influential power.
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It's not command and control power, and it's definitely not perks and,
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you know, all that kind of thing.
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So an interesting organizational design is something they're
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experimenting with at Bayer.
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And, Bayer's been through terrible times.
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Horrible acquisition, bad lawsuits, really tough competitive challenges.
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And, Bill Anderson was brought in as their CEO to turn things around.
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And my friend Michael Lourey is sort of his right-hand man.
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He's their chief, chief transformation officer, I think his title is.
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But one of, one of the things that they're doing is they're putting
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the company on 90-day cycles.
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What they've done is they've separated out your work into your professional
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home and your task activities.
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And your job, your promotion, your pay, all that stuff is decided
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by your professional home, not by the exact tasks that you're doing.
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And why I think this is so interesting is it reduces the
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return on politics tremendously.
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You know, if you're not brown-nosing the person to whom you report
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theoretically,, what is your incentive to spend time on politics?
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You might as well do the best work you can because that's what's gonna get
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acknowledged in your professional home.
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It's so interesting, that, because it's the biggest challenge for
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innovation officers or transformation officers is there might be creative,
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they might know how to get things done, but they can't speak politic or
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navigate the corporate maze that is most organizations' political status.
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But I wanted to come to Usman because, Usman, you wrote a brilliant article
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recently, and I loved the title of your blog, Frame Break, this idea, because
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I love the saying, "It's hard to read the label when you're inside the jar."
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But also a guy called Chuck House, a brilliant innovator who was at HP,
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he told me there's even a better one.
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He said, "It's hard to see the picture when you're inside the frame." And
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I pulled a little quote from that.
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You said Speaking to this idea, the time saved on a specific output that requires
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twice the review time is not time saved.
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And what you're talking about here is when this structure is used where now
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I can use these technologies like AI, I can use agents to do my work faster,
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but then it has to go to a layer where I don't have the permission to actually act.
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And we've seen some people got caught out from that badly, which
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has scared a lot of organizations.
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But this idea of overly tracking people or not giving them the
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permission to actually go and ship their work is a huge constraint.
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I'd love you to talk to this, and particularly this article
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that you recently wrote.
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Yeah.
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In the article, I was talking about specifically this verification problem
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where we've sped up the work with the technology that is available to
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us, but the ability to now review the work and see whether it's the
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correct work is lagging behind, and the competence and the judgment
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required to review the work is the bottleneck in a lot of these places now.
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So how do we sort of like create the infrastructure for this to happen?
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And the second part is you can speed up the work, which like a lot of firms
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are equipping their firms, their people to use these tools to produce faster.
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But if it's not impacting, because everyone's moving towards this outcome
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orientation way of billing and the unit of value, and I think these
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two factors are causing problems.
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One, the speed of work is increasing, and we don't know whether it's correct or not.
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Second, even if you speed up and it's not impacting the outcomes that it's
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been created for, I think that's creating tension within the firm, and it's
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causing a lot of problems that Rita spoke about, like the leverage ratio is being
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challenged now because, there was so much.
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The pyramid was constructed so that you could pro- build for that production time.
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But if the cost of production compresses- The pyramid has a lot less to offer now
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And how, how are you seeing that, Ismail, in your work?
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How, how would you see that play out when it comes to, like, a CTO?
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I mentioned now, like, a, a CTO should have always had a,
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a place at the boardroom table.
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A CHRO should have a board- a boardroom place at the table, and they
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haven't n- always in most companies.
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And technology is often treated like an expenditure rather than a
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competitive advantage, and I wondered there, like, one of the things I was
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trying to get at with that idea of the rusty gate, I loo- recently was
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trying to get the max out of my Wi-Fi speed at home, and I rang the company.
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It was paying for a gig power on my Wi-Fi, and I wasn't getting it.
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And the guy goes, "Oh, you need to plug in, and you need to go through
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the g- through the LAN." And I was like going, "Okay." So I did that.
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It's still not working.
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I'm only getting about 500.
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And he goes, "Okay, well, what type of wire are you using?"
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So I had this idea.
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I was like going, "Oh my God." So firstly, the technology has to be
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capable of running that through itself.
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They don't tell you this stuff, of course.
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You're paying for a gig, of speed.
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But I thought about that disconnect and, say, for example, the savvy
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CTO who's listening to this show and goes, "I have been trying to tell
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them that for ages, that we need to upgrade our stack to be able to even
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run this powerful technology upon us, and that's the competitive advantage
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if we get ahead of other people."
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What's happening out there in the field?
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Yeah, I mean, there's, there's two or three things here I
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think worth thinking about.
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One is when we talk about this technology, this technology is a team now of
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agents and people working together.
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And, when you think about that, the role of HR and IT is changing, even to the
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point where some organizations are looking at bringing the CHR and CIO together
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because the role becomes one of treating agents as you would an individual.
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You train them, you onboard them, you reinforce behaviors, you exit
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them when something new comes along.
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And so, the technology people will be managing agents as if
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they were part of the team.
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So that, that, that's one point.
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Secondly, the role of the individual then in that loop, and there's lots
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of discussion, and there's some great discussion on what is the role of the
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human in the loop of a bunch of agents.
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And I really like the view of the human adds meaning to the loop.
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So technology can do whatever it wants, but it can still meet its
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measurable objective, and I think this is maybe what Usman was referring
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to, and miss its intended one.
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So this agentic drift discussion, right?
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Where, for example, in procurement, you've told the technology, "Go and
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get me the best price, reduce costs."
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And in doing that, it reduces partnerships with organizations that are really
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important to you, with organizations where you've got, um sustainable relationships,
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or whatever it might be, right?
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So it's giving you what you asked for, but in doing so, you've gone
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away from the strategy and the meaning of what you were trying to do.
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So I think that b- becomes really important.
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And then the third aspect, and I'm sure the panel will have a view on
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this, is what our customers are worried about is This technology is amazing.
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It's easy to set up.
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Agents are almost free to create.
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The magic is in the workflow.
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But if you've now got hundreds of thousands of agents, autonomous, working
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in your production environment, and you're in a regulated industry, how can you go
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back and have an audit trail and say, "Actually, w- not only are they behaving
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the way I'm asking them to behave, but they're behaving as our organization
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mission and purpose needs them to behave"?
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So I think as we go from brilliant technology to production-ready
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environments, there's some quite interesting people-related stuff.
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It's not, these are not technology, right?
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I think there's some people-related stuff we need to fix, and if
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anything in the world is doable now, that is the idea of imagination.
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What does native AI enterprise and processes look like?
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So everyone we're talking to, Aidan, is going back almost to base zero.
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If you're an insurer, what does a native AI insurer looks like?
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What's the role of the people and the role
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? Absolutely love it.
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I was thinking about something.
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There's a quote by Tolstoy, and he said, "Everybody thinks of changing
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the world, but nobody thinks of changing him or herself." And that
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I, you know, think it's easy to go, "We should do that," and then you go,
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"But your role's gonna have to change.
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Your status, your power is gonna have to change." And your colleague, great guy,
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Tom Rourke, he, he talk he said to me one day about how people resist change.
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He said, "You can't waterboard a horse." You know that idea of,
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like, dunking, dunking the horse.
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"You'll drink, God damn it." And I was thinking about that with
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resistance to using the technology.
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And Usman, you wrote about this recently.
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Uh, it was fascinating, and I mentioned to the panel, many of
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the panel hadn't heard this, where there's now metrics about using AI,
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so people are being measured on it.
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So what are they gonna do?
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They're gonna game the system to be using it just for the sake of using
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it versus actually seeking real value.
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And that forcing people to change never works.
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I'd love you to share your thoughts on that.
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Yeah.
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I think the firm that we're referring to was in the FT (Financial Times) and, it's
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a large, firm that was tracking whether their employees were logging into AI tools
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and linking that to their promotions.
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And it just goes to show that there is this very large narrative to
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be AI-enabled and how much you're adopting the technology, and there
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are metrics that you can put, like so many of my people now use AI tools.
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But I think that confuses what, Ismail was talking about, that we have to start
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measuring how the work is changing, how the pricing structure is changing.
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Because if you're just simply tacking this on and saying utilization of AI
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tools has gone up without the invoice changing or without the delivery
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mechanism changing, then it's short-lived.
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And I think that's where the real opportunity is when I'm talking
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to companies, is that how has your pricing strategy changed,
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or how are you delivering this?
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And in the article that you were mentioning, there was a legal AI company
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that I referenced which, started to bill for their work on the documents that they
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provided versus the hours that it took.
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And these are starting from Rita's, snow melts on the edges, and I
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love that saying because it's gonna start with these wedges that are in
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relatively deterministic workflows.
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But eventually the patterns will catch up and, you'll start to see this drift even
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further within, more complicated cases.
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Speaking of snow melting from the edges, it's a natural segue to come to Rita.
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Rita writes a lot about this idea.
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But Rita, I noticed one of your most popular articles, I follow your thought
23:05
sparks, avidly, and one of your most popular articles was recently about
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how the value of work changes with AI.
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And I'd love you to share both what you wrote about, but
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also the great interaction you had with people about that.
23:21
Yeah, the, the article was, I think that one came out in The Wall
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Street Journal, and it was AI and the Death of the Billable Hour.
23:27
And the billable hour is, in many industries, in law in
23:31
particular, is almost sacrosanct.
23:33
You split your hour into six intervals, and then you bill clients for each
23:36
of those intervals that you consumed.
23:38
Well, with AI, that becomes a meaningless metric.
23:42
And the billable hour has a lot of negatives, right?
23:44
It punishes efficient work.
23:46
It, causes people to look at the wrong outcomes.
23:49
It causes people to, uh, you know, spend more time than they actually need to.
23:53
It's sort of subject to gaming and all kinds of things, and increasingly
23:57
clients are pushing back on it.
23:59
And so the consequences for, as we talked about, the pyramid structure
24:03
of a lot of the professional service firms is going to be challenged.
24:07
And people are gonna be billing more for outcomes rather
24:10
than, rather than the intent.
24:11
So , the locus of value really changes when you're billing for what's the
24:16
outcome that you created rather than the time it took you to get there.
24:20
And I think that's a huge, huge shift.
24:23
So the way that I look at AI and the productive capacity of organizations,
24:28
the analogy I would use is it's very much when electricity was introduced.
24:33
So before you had electricity, , you designed your production facilities in a
24:37
linear fashion because you relied on one power source, so a steam engine or a river
24:41
or a windmill or something, and everything was interdependent, and that was the
24:45
logic that dominated factory production since the first factories were ever built.
24:50
Well, once you had electricity, each machine could now operate independently,
24:54
and it was a completely different organizing logic that was needed.
24:58
And the factories that were built either after the electric- introduction of
25:02
electricity or those that converted over achieved massive productivity gains.
25:05
But it took 40 years before that became the norm.
25:08
And the reason, I think, and I think we're in this moment with AI, is, you
25:12
know you have to write off an awful lot of stuff that you've learned to do.
25:15
You have to depreciate a lot of, existing assets.
25:18
You have to unlearn a lot of painfully gained tacit knowledge.
25:23
I mean, there's just all this stuff that you have to, you know, segue,
25:26
into the past in order to capture the productive capacity of what's to come.
25:31
And I think we're in that moment of, you know, a lot of organizations, they won't
25:34
tell you this, but, you know, they're deeply afraid of having to admit how
25:39
much is tied up in these legacy systems.
25:41
And a place that that shows up is a totally reshuffling of the business
25:46
model, Alex, and how the very business model that might have got you
25:50
competitive advantage today is now gone.
25:53
To Rita's term, it's transient.
25:55
It's gone much quicker than it used to be, and dealing with that.
25:59
So firstly, you're looking at the technology, going, "We have to, we
26:01
have to integrate this technology some way to have a competitive advantage."
26:05
But doing that without looking at the entire structure and below the, the,
26:10
the rust, the rusty gate, removing that rust to see what, what's at the
26:14
surf- at, what the base of it, is where a lot of companies go wrong.
26:18
That's … It's quite interesting, you know, that- With this change
26:22
in technology, we kinda repeat the, the mistakes from the past.
26:26
Like we, we need to go back to the fundamentals, you know,
26:30
the business fundamentals.
26:31
They do not change.
26:32
Who's the customer?
26:34
How are we creating value?
26:35
How are we capturing value with the business model?
26:37
And then hopefully, you know, how are we creating value for the society?
26:40
Those fundamental questions do not change.
26:43
Now, with AI and, and, you know, everything that comes with it, I
26:47
think those… the content of those fundamentals is really, really
26:51
changing, but the questions aren't.
26:53
Now, when you have a- an established business model, it's extremely hard
26:58
to challenge those fundamentals because the shift, you know, will
27:02
require you to completely revamp your business model, you know?
27:06
And we can go back to this really boring example.
27:09
Everybody talks about Kodak, but think of it.
27:12
They actually committed innovation suicide because they invented a
27:16
technology, the digital camera, but they forgot to reinvent the business model.
27:21
So they never shifted their assets from the old world of analog film to the
27:27
new world, and it's more complicated than that, but they didn't do that.
27:31
Now, today, look at, you know, the big service firms.
27:34
You take Accenture, Deloitte, and so.
27:37
They're facing an enormous challenge, and some of them will say, "Yeah, but
27:41
we do AI." Yes, but if your business model is fundamentally changing, you
27:46
might actually be committing innovation suicide like, uh, Kodak did because
27:51
you're changing, you're adopting the technology, but you're not fundamentally
27:55
changing your business model.
27:56
So when your business model ali- relies on hundreds of thousands
28:00
of people, well, guess what?
28:02
It's gonna change radically.
28:04
So it's not enough to actually look at the technology, to embrace
28:07
it, to create new products.
28:09
You need to fundamentally question your business model, and that's the
28:13
leadership that's required today, is to lead your company from today to tomorrow.
28:18
And that's not gonna happen with the ways we've done it so far because many
28:22
business models are gonna get disrupted.
28:24
And to some extent, it's interesting to see some of the physical companies
28:28
are probably less prone to disruption than the technology companies.
28:32
So you'd be surprised.
28:33
I, I think we're gonna see some interesting companies disappearing and
28:37
some that we would've thought, oh, they're old school, they're gonna disappear.
28:41
They might actually rise if they have the… they do the right moves.
28:44
I love that.
28:45
I had this vision of, uh, I should actually get this… I should generate
28:48
this with AI, this idea of arranging the deck chair, chairs on the Titanic but
28:53
using those Boston Dynamics dogs to do it.
28:56
Just push them around the place powered by AI, do it quicker.
29:00
But it, also raises a nice juxtaposition.
29:03
So I was thinking about this.
29:04
So we're, we're talking here a lot about reshuffling or reorganizing or
29:10
recalibrating an existing incumbent firm.
29:13
But maybe we'll compare it to what does an AI native firm look like?
29:17
M- Rita mentioned, for example, that guy with his 80 million, uh, startup
29:21
in a few months sold on to Wix, but I wonder what does that look like?
29:27
So the, the value of being born into this AI as an AI native means you don't
29:32
have any of that legacy we talked about.
29:34
You don't have any of that psychological debt.
29:36
We talk a lot about technological debt.
29:39
But Ismail, from your perspective, what are you seeing that's AI native,
29:43
AI first, where you don't have any of that legacy and you can just
29:47
build and get out of the blocks?
29:48
Yeah.
29:49
And, you know, Alex, I think I, I'm gonna build on what Alex is saying around my own
29:54
industry and what's happening with that.
29:57
You know, only 12 months ago, if you had hundreds of thousands of people
30:01
and you could do labor arbitrage, you had competitive advantage.
30:05
Now it's a competitive disadvantage because you've got to get rid of
30:09
hundreds of thousands of people.
30:11
Because the customer expectations is that when you used to turn up with 10 people,
30:16
seven of them undergrads, you know, on the pyramid, now their expectation
30:21
is you turn up with three people and a consult tool who does the work.
30:26
So the whole economics of, how you do the work How you yourself, and Usman's done
30:33
a ton of work in this space, how you're gonna cost for it, and then how you're
30:38
gonna share some of that value with the customer, 'cause there's an expectation
30:42
that some of that value will be shared.
30:44
And yet you still end up with a business where, you're meeting market
30:50
expectations, albeit market expectations are changing in that the margins
30:56
for this sort of business, I think are gonna be closer to a software
30:59
business than a services business.
31:02
So, you know, you talk about disruption.
31:04
This is about as disruptive as it gets in our own industry, and I think,
31:09
you know, somebody on the pan- panel mentioned the winners and the losers
31:12
might not be what we think they are.
31:14
You know, what… You know, you know, we're sat with 20,000 people offshore
31:18
thinking, "How do we compete with 800,000 people sat in competitor A, B, and C?"
31:24
And now we're saying 20,000 people, that's amazing, 'cause we can compete.
31:27
We don't need more than 20,000 people.
31:30
, And so I think as you think about native AI, again, in our industry, we're
31:36
thinking about autonomous operations.
31:39
So our customers expect… They used to have managed services, outsourcing,
31:44
loads of people doing DevOps, doing, call center management, et cetera, et cetera.
31:51
Basically, you've just got people adding meaning to what the
31:55
technology does is what a native, environment is gonna look like.
31:59
We've got, more and more requirement for curiosity and creativity to
32:07
help our customers think about what a native AI insurer or a bank or
32:13
a manufacturer might look like.
32:15
And it doesn't look like anything we've imagined in the past, and that's where
32:20
our customers are going to need help.
32:22
They don't need help in developing code.
32:25
They don't need help in running operations.
32:28
They need help in imagining what it might look like.
32:31
And then when they're running the operations, they need guarantees that it's
32:35
gonna be secure, it's gonna be scalable, it's gonna be transparent, and it's
32:40
where it's regulated, you can prove the audit trail around regulation.
32:45
So I think the places at which we add value for us as an enterprise native
32:51
service provider changes to the two ends of help me imagine and help me run,
32:56
'cause everything else is, automated.
32:59
And the customer, who are buying now, what we're finding is technology,
33:04
budgets used to sit predominantly in IT.
33:07
Of course, CMO and lots of businesses have some budget.
33:11
The AI budget is sitting all with the business units 'cause
33:13
it's all about outcomes.
33:15
So the customers who are talking to the service providers
33:18
also, are changing as well
33:21
That's a really interesting point that the, the, the owner
33:25
of that budget also changes.
33:27
Like even in your consulting work, that changes how decisions are made and
33:31
who is responsible for that decision.
33:33
And decisions get made faster, which I always find so annoying for
33:37
the poor person who was trying to get the budget in the first place.
33:40
Alex, maybe we'll link to you on that before I come to Usman, because
33:45
you're experiencing this firsthand out in the field and also with your
33:48
own company, where you're changing structures inside the company.
33:52
But I thought there about what Ismail was saying, if you're AI
33:55
native- Or even if you're trying to be, you have to take a first step.
33:59
And what is that first step?
34:01
Is it I start with some type of, a trial, I start with some process that
34:06
I'm gonna get out of the blocks with, and understand that, and then go,
34:09
"Okay, now I have a feel for this.
34:11
Now, I can scale it," just like you would with product development, et cetera.
34:15
Even take a step back.
34:17
So, I'll give you a silly example.
34:18
Like, if you're a skincare company and you have an established brand,
34:23
well, you better be afraid of the skincare company that's going to have
34:28
access to personalized health data because you're gonna have consumers
34:32
who are gonna want to have skincare, in particular the young generation that,
34:35
you know, know what technology can do.
34:37
They want skincare that is for them.
34:40
Now, we're still far away from having a drug developed for your personal
34:44
DNA, but definitely recommendation engines can do much better.
34:48
So, if you don't know that and you don't create alliances to have the right
34:52
partnership, you might actually build stuff that's not gonna have impact because
34:56
you were just blocked from market access.
34:58
So, before building anything, I'd take a step back and ask, "How is
35:02
AI going to disrupt your company?" Because I'll tell you, the startups,
35:07
you know, they're gonna do it, and because there are 100 or 1,000 in your
35:10
field, well, one's gonna get it right.
35:12
And now you're one big company trying to get it right.
35:14
Well, you better, you know, kind of start, start from the strategic
35:19
lens because as an established company, you have some assets.
35:23
You better use those because you don't have the speed.
35:27
Like, I don't know any large companies who have the same
35:29
speed as the startups, you know?
35:31
So, I'd go back to some strategic thinking, then of course not
35:34
overthink, but then get started.
35:36
And I think, you know, take the startup approach and what Rita said, get, you
35:41
know, like, 100 teams out there to start.
35:44
Ah, but 100 teams, that's a big investment.
35:46
No, it's not.
35:46
Like, because startups, they start small.
35:48
So, you need, you know, maybe a million dollars, which is nothing for a large
35:52
company, and have 100 teams trying out.
35:55
One of them is gonna get it right.
35:56
So, you do the same kind of investments like a venture capital firm.
36:00
So, you know, first think, create a strategic frame, and then get as many,
36:06
you know, people in your company and maybe partnerships going so that one
36:11
is going to emerge as the winner.
36:13
Because no leader can pick the winner.
36:15
Venture capitalists can't pick the winner.
36:17
They invest in a portfolio.
36:19
So, the same kind of thing, and really, you know, emphasizing what
36:22
Rita said before and what you're working on, Rita, in your new book,
36:26
the power structures are gonna change.
36:28
You do need to decentralize.
36:30
So yes, you need a top-down leader in the sense that they understand
36:33
product, they can give the strategic direction, they can give the vision,
36:37
but they don't pick the ideas.
36:39
You have teams out there who are much closer to the customer, who
36:42
are much closer to the technology.
36:44
You need to enable hundreds of teams and hundreds of partners,
36:48
and the winner will emerge.
36:50
So, you know, I don't really see that really happening yet with established
36:54
companies, you know, at scale.
36:56
Few have gotten close, um, but I think it's gonna be fun to see how leadership
37:01
changes and how, you know, what Rita is talking about that's complete
37:06
change of, of of leadership structures.
37:09
Uh we are gonna see, you know, some unexpected winners, I think
37:13
And I wanna come to Usman.
37:14
I wanna come to you about the incumbent advantage that Alex said.
37:17
What, what assets do you have that, that can be used or
37:20
redeployed in a different way?
37:21
But Rita, while Alex mentioned that there, that decision-making pushed
37:25
down to the edges that we talked about, I wonder what are you seeing, so in
37:29
your work even in executive education, w- how are leaders reacting to this?
37:33
Because there's gotta be some resistance to that because maybe I could back
37:37
ideas that I liked or products that I liked in the past, and everybody
37:40
feels that of me inside the boardroom.
37:43
I may think that it's a democracy, but I'm actually having a huge influence
37:47
on what gets picked or what's not versus what Alex talked about there.
37:51
Courageous companies are those that are doing what Alex said, which is you get
37:56
out there, you introduce things to the market, and then the market sends you
38:00
signals about whether you, you know, whether that thing is,, liked or not.
38:04
So one of my favorite examples, you talked about a born-digital company, is a
38:07
South Korean fintech company called Toss.
38:10
And they were founded by a dentist, and they're organized around solving
38:14
this friction problem in money.
38:16
It's like, why is money so hard to deal with?
38:18
And they were successful in getting the South Korean government to change
38:21
the way that they were regulated, which is a huge advantage, and they
38:24
have no sort of formal hierarchy.
38:28
They're organized around, teams with what they call directly
38:30
responsible individuals, and the teams take on and release work
38:36
as the market suggests to them.
38:38
So a great example of this is they had a YouTube channel, so regular financial
38:42
advice, and then a- another team had the idea of, "Well, wait a minute.
38:45
There's a whole nother side of money." It's cultural, right?
38:48
So how do ballet dancers get paid, and how does money filter into sports,
38:51
and what do rock bands do with money?
38:53
And so it's like, a cultural side of money YouTube channel.
38:56
Now, in a typical bureaucracy, right, what you would've had would,
38:59
you would've had a YouTube czar, and the YouTube czar would've given
39:02
the thumbs-up or thumbs-down to whatever was introduced to the market.
39:05
In Toss, they, they try it, and because they're all digital, and
39:08
they'll tell you 50% of what they introduce to the market doesn't,
39:11
doesn't stick because the, for whatever reason, the customer doesn't want it.
39:15
But this particular YouTube channel has now been a huge success, and it's
39:19
gaining traction with people who really don't care about financial advice
39:22
but are very, very interested in how their favorite rock band makes money.
39:25
I think it's a beautiful example of what's possible when you do give
39:28
this sort of freedom to operate at the operating level of the company.
39:31
I think, you know, what Rita's saying really illustrates something
39:34
that we're gonna see more of is… Industry boundaries melting down.
39:38
So, you won't be able to say, "Well, I'm in retail banking." Well, now
39:43
that sounds to me like entertainment.
39:44
So what I think, you know, has happened in some sectors like
39:47
technology is gonna happen everywhere.
39:50
You're not gonna be able to think industry anymore, right?
39:53
Or industry forces.
39:54
You know, that's 1985 Michael Porter Five Forces.
39:57
Like, that's great stuff, but that's 1985.
39:59
Like, with, with AI, you know, the world has changed, and you are not
40:04
the victim of any force anymore.
40:06
If you are a leading company, you're creating the spaces.
40:10
And today you have these different companies competing in similar spaces.
40:15
If we take entertainment, you have like a bank competing against a
40:19
Apple, competing against Amazon, competing against Facebook.
40:22
And it's really those boundaries are melting down.
40:26
And again, it goes back to business basics.
40:28
Who's the customer?
40:29
How are we creating value?
40:30
How are we capturing value?
40:32
That's the unit of analysis, which sounds basic, but it's not, because
40:36
when industry boundaries are gone, you have hundreds of thousands of
40:40
choices to make every day as a leader.
40:44
What is my business?
40:45
And that's becoming fuzzier and fuzzier and, and AI's gonna accelerate that
40:50
Is not the huge problem though, Alex, that you've created an advantage.
40:54
You have had an emergent strategy and then maybe you post-rationalize it as,
40:59
"No, that was deliberate." And it rarely is deliberate in the first instance.
41:02
And to Rita's point there about Toss is that they found what worked.
41:06
They didn't actually go out with a deliberate strategy.
41:09
They actually… it emerged which worked out of all these different
41:12
experiments, and that drag, that organizational drag is huge.
41:17
And I wondered, Usman, from your work working with clients,
41:21
what does it look like?
41:23
Where do they start in your view?
41:25
What, what have been the most successful ones?
41:27
I know you can't give away secrets, but some themes that have, arisen for you.
41:31
in my writing, I've been differentiating between the incumbents and the newcomers,
41:38
naturally, as, both Rita mentioned and Alex, that when you have less of
41:42
that drive, you can definitely move faster, reach those points easier.
41:46
For the incumbents, they have the distribution, they have the brand.
41:50
That's their advantage right now.
41:53
I think the biggest thing would be the incentive structures within
41:57
these companies to change over there.
41:59
In lots of services companies partner leverage, how the firm
42:03
goes, promotions based on tenure.
42:06
Like, lots of the way that the firm is set up right now from an
42:10
architectural point of view is going to continue to create drag.
42:14
You know, the example that we were saying earlier about checking logins
42:19
of AI tools is a symptom of this.
42:21
We are trying to fit this change within the structure because,
42:27
let's face it, these incumbent firms make a lot of money still.
42:31
Clients are still paying for them, and I think, we're also discounting clients
42:35
don't necessarily want to change as well because lots of them like the
42:39
predictability of the billable hour because it provides procurement an easier
42:43
way how to bill and get things done.
42:46
So the supply and demand side is changing what Alex said, going and looking at
42:51
a person's P&L, understanding their business, seeing how that's changing,
42:55
and I think that's the challenge.
42:57
So for the incumbents, I think you can take m- the measures like the hire or very
43:04
recently what Block has recently done.
43:07
Jack Dorsey sort of like has famously said, like he's going to get rid
43:10
of the middle management loop.
43:11
He's going to replace it with what he's calling an intelligence layer.
43:15
Humans are going to go to the edges where they're going to make judgment calls.
43:19
That might work for a company which has 10,000 people, but as Ismail said, if
43:23
you have 100,000 people or 200,000 or in some cases 800,000 people- I don't
43:30
think that it's going to be very easy.
43:32
And the second point Ismail made was around accountability.
43:36
Are you going to stand behind the answer?
43:38
What happens when the machine makes a fault?
43:40
Who's going to take responsibility?
43:42
I think large incumbent firms, especially in the services area, have large
43:47
reinsurance, books already in place to protect themselves from this, and
43:50
clients trust that advice from these firms because they know that they
43:54
have that backstop available to them.
43:57
So for the professional services area, it's definitely going to
44:02
be a lot slower from the larger corporate side for this change.
44:06
And a lot of the existing revenue pipeline was sold on the old model,
44:12
and I think that will also take a while for those to play out until they
44:15
have new contracts based on new terms.
44:19
So they're in a transitionary period where they've got to hold onto the
44:22
old model, all while doing what Alex said, like, okay, you've got to spend
44:27
the money, do all of this, but, you know, there's a incentive problem
44:31
that needs to get solved, and this has to start from the top, I believe,
44:34
isn't that it, though?
44:35
As a startup, you can't compete on scale, so you have to compete on innovation.
44:40
And one of the things you're competing on is actually not legacy mindsets
44:44
that exist inside organizations.
44:46
Ismail, I thought about your book and the idea of from incremental to
44:50
exponential, and it, how difficult…
44:52
And I have so much empathy for an incumbent, how difficult it is not
44:56
to get stuck in the incremental trap because oftentimes they think they're
45:00
being innovative, they think they're innovating, but, like, to the customer,
45:03
there's no difference to the product.
45:05
But they're putting all this time into actually driving down costs, putting a
45:10
bit of extra technology in there to make it a little bit more efficient, but the
45:13
customer just sees the same product.
45:15
But it ultimately comes down to people, and it ultimately comes down
45:19
to their resistance, how they're energized, how they're come around.
45:24
Like, I mentioned that Rita's comment earlier on about this
45:26
common purpose or common mission.
45:29
What are you… You're a leader.
45:30
You have a huge group of people under your, under your umbrella.
45:34
How, how… What are you seeing there?
45:36
What was the message that you would like to get through to them to be
45:39
able to thrive in the world of AI?
45:42
Yeah.
45:42
I, I, I think, uh, and just to connect couple of dots with what Alex
45:46
said and what, Usman said, I think if you're an incumbent, you've got
45:50
inherent advantages that had previously maybe had not been advantages.
45:57
So to go back to, Alex's point around industries merging The other thing
46:03
that's happening is everybody has access to the same technology, the
46:07
same learning models, the same data.
46:10
So that's not where the competitive advantage is gonna come from.
46:13
The competitive advantage and where we're gonna build moats, if you
46:17
like, is specific data, business domain expertise, and context.
46:25
And generally, if you're looking at a large enterprise, if we talk
46:29
about some, you know, we're, we're working with 80 of the top 100
46:33
largest organizations in the world.
46:34
When we talk to them, and yeah, they have disadvantages, they're slow,
46:38
they're bureaucratic, takes ages to implement new technology, but they
46:42
have access to information about their clients and their industry
46:45
that nobody else in the world has.
46:48
They have access to data that in the past you'd have to have a 12-month project
46:52
to create a data pool, and now you can create an agent to go and get the data
46:57
and do the work that you want it to do.
47:00
So some of the competitive things have changed because of the
47:03
technology, which I think allows large organizations, if they can get out of
47:09
their own way, to create vertical AI.
47:13
You know, use what's available as commodity, use everything that
47:17
everybody else has, but then take advantage of what only I have.
47:21
Only I know how a pharmaceutical works for these customers.
47:25
I've worked with them for 80 years.
47:27
I have all the data and the ecosystem that nobody else has.
47:30
How do I use that in the context of this new technology to provide
47:35
native services that nobody else can?
47:37
And that's the discussion we're having where we are getting the C-suite to
47:41
go from, "This is a huge threat," to, "Actually, if we think smartly, we
47:47
may create new competitive advantage."
47:50
I thought I'd come to everybody just with your final thoughts that, as you wish
47:55
here What would be your elevator pitch to somebody who goes, "Hey, man, I don't
48:01
know what to do about this AI stuff.
48:03
It's, it's threatening my business.
48:06
It's an opportunity, but I don't know why, how…" How do they get started?
48:10
So maybe as, as an incumbent in particular.
48:13
Maybe we'll, we'll go from who I can see on the screen.
48:16
So Alex, I see you first there.
48:18
Yeah.
48:18
I think, you know, you gotta ask yourself, where is competitive
48:22
advantage gonna come from in the next couple of years or decades?
48:26
And I think very clearly it's gonna come from your ability to reinvent
48:30
yourself all the time, right?
48:32
So Rita has pioneered this thinking, you know, like transient advantage.
48:36
So if you look at, you know, you can love Amazon or hate Amazon, but one thing that
48:40
they have systematically done is reinvent their business model all the time.
48:44
They created new P&Ls, like with Amazon Web Services.
48:47
So the competitive advantage is not gonna come from a specific strategy anymore.
48:52
To a certain extent, you know, still from a business model, like think
48:55
App Store, that's pretty dominant.
48:57
It's hard to disrupt.
48:58
But ultimately it's gonna come from your ability to reinvent yourself
49:02
all the time, and that means you're running your business, you're
49:05
doing incremental innovation.
49:06
Nothing wrong with that with improving products, but it's not gonna be enough.
49:10
At the same time, you know, simultaneously, you're
49:13
inventing the future.
49:14
And if you see the companies doing that, I mentioned Amazon.
49:17
Netflix, No Rules Rule, the book by, Reed Hastings.
49:21
… These are the companies that are gonna stand out.
49:24
They just, know the world is changing.
49:26
We need to reinvent.
49:27
And that goes for individuals as well, and that's gonna be probably the hardest.
49:31
The world is gonna change, so what are the life skills we're gonna get?
49:34
I think most of it is actually not gonna be the skills we learn at school,
49:38
have a good, fight not hate the other person.
49:40
Have a good, conversation.
49:41
Be able to give and provide and take feedback.
49:44
Those are the ultimate skills that are required to constantly change
49:49
and adapt and reinvent yourself.
49:51
So reinvention, I think we're all tired of hearing those kinds of
49:55
words, all those buzzwords, but the reality is that's the, gonna be the,
49:59
the ultimate competitive advantage, the ability to reinvent yourself.
50:03
I'm still working on it, Alex.
50:04
Still working on it.
50:06
We all are.
50:07
We're always works in progress.
50:09
Usman, what's your piece of advice?
50:12
I think for the incumbent, the advice is looking at a particular service line and
50:17
figuring out whether the 50th- Client for that service is markedly better
50:23
than the first by encoding the work into software and systems instead of headcount.
50:29
So if you can actually decouple that revenue growth, get costs down as a
50:34
function of that, then I think that you're building a system that learns.
50:37
And I believe that's going to be where a lot of the alpha is gonna come from.
50:42
Like, Ismail mentioned that there's a lot of data that gets unlocked as you
50:46
do this work, and if you can actually use that to make every next deliverable
50:50
better, that error correction loop actually becomes extremely valuable.
50:55
For the individuals, I think it's getting closer to impact.
50:58
Both the Alpha School and what Alex mentioned, it's, it's going away from
51:03
necessarily the classroom to actually putting yourself out there, putting
51:07
work out there, getting feedback loops running from doing the work.
51:12
And, we've created too many abstractions for young people today.
51:16
They're too far away from the impact.
51:18
If they can get closer to that impact, they're gonna accelerate the rate at which
51:21
they will learn and reinvent themselves
51:25
I love it.
51:25
Rita, I was thinking there what Usman when he said about the, the data that
51:29
Ismail mentioned, the data that you have, and that's almost like breadcrumbs.
51:34
And in your book, The Entrepreneurial Mindset, you talked about this idea
51:38
of stepping stones and scouting.
51:40
And I'll come to you because you have so much experience not just talking to
51:45
executives and coaching executives as a prof- college professor in Columbia,
51:50
but also your own work with Valize.
51:52
You work with clients, you give keynotes, you run workshops.
51:55
What are you seeing there from the people who are most primed to succeed?
52:02
There's a balance of investment, and this has been alluded to before, but
52:05
I talk about investing in your core.
52:06
That's absolutely important.
52:07
That's job one.
52:09
But then you need to be thinking about what are your new platforms that are
52:12
candidates to be the future core.
52:13
So if you look at a company like Adobe, when they went from selling shrink-wrapped
52:17
software that you bought on disks to selling software that you could use in
52:21
the cloud, that was a huge transition.
52:23
It was a platform for future growth, and so you have to make
52:25
a commitment to those things.
52:27
And then you have options, which are small investments, as Alex said.
52:31
You could have 100 of them.
52:32
But they're tiny.
52:32
They're small investments you make today that buy you the right
52:35
but not the obligation to make further investments in the future.
52:39
And I think the companies that are getting this right have a really good
52:42
feel for what's being invested in that spreads across their, portfolios.
52:47
Where I see companies really getting stuck, and this is something you can work
52:51
on, is a disconnect between strategy, which when it's done right, is pulling
52:56
you into the future; budgeting, which all too often is just an anchor in the
53:00
past; project governance, which is often not connected to either strategy or
53:04
budgeting; and what people believe is gonna get them ahead in the organization.
53:08
Unless you can bring those things into alignment, you're gonna have a great deal
53:11
of trouble, getting anything to happen.
53:13
One final thought is, you know, we know what disruption is, right?
53:16
It's when something that used to be really hard to do becomes
53:20
easy, and when something that used to be really inaccessible
53:23
or expensive becomes affordable.
53:25
And that simultaneously interferes with incumbents because it often, removes the
53:31
value from a lot of their existing assets.
53:33
But it also creates enormous growth because if something's now, simple to
53:37
do and cheap, a lot more people can do it, and so it drives enormous growth.
53:41
So I think you've really gotta be looking for what are the spaces in
53:44
which those dynamics are playing out.
53:46
Ismail, we'll come to you for your final word to incumbents in particular.
53:51
I think there's two or three things.
53:52
One is, this idea of organizations wanting to pass on the risk of
53:58
introducing new technology to service providers That time is gone.
54:03
You know, nobody's done this before.
54:06
There's no- nobody has got 10 references.
54:09
So I think there's a, there's an opportunity for organizations
54:13
to understand that this is gonna be a collaborative journey
54:17
where you are understanding and mitigating the risks together.
54:21
The second thing is, I think, as I said before, I think the
54:23
incumbents have this potential advantage of deep domain expertise.
54:29
And so as a service provider, I would be saying, "Don't spend too much time
54:34
thinking about what you're gonna be as a native AI organization. Go and understand
54:38
what your customer's gonna be as a native organization, and help them understand
54:42
how they're gonna get there." And the third point, being, I think one of the
54:46
biggest, dangers in getting there is separation of business and technology.
54:51
I think those days have gone, and if you really want to do a
54:55
technology project, that's fine.
54:56
If you want to do a transformation, the integration of what it means for business
55:00
and technology is gonna be critical.
55:03
I've been talking about this.
55:04
This is a leadership decision.
55:06
It's not an unknown in the sense that we actually know what kind
55:09
of organizational structures we should starting to be put in place.
55:13
It's really a question of courage and leadership, nothing else.
55:16
So yes, there's a lot of unknown, but we actually know which structure
55:19
would, which would be required.
55:21
So I think that's the key maybe that was missing.
55:24
… Leadership, courage, and action is what's gonna make the difference.
55:28
Those who step ahead are going to lead.
55:30
It's, it's pretty straightforward.
55:32
I am so grateful to our brilliant panel for joining us on this
55:36
inaugural, the very first one of these collaborations between the Kyndryl
55:40
Institute and the Innovation Show.
55:41
It's been an absolute pleasure.
55:43
I hope you've learned a lot like I have.
55:45
It's been a pleasure to have you on the show, Alex Osterwalder, Ismail
55:49
Amla, Usman Sheikh, and Rita McGrath.
55:52
Thank you for joining us.