Many CEOs recognize that the nature of the firm is fundamentally shifting. As the shareholder primacy era comes to an end, a new era of business, the Firm of the Future, will emerge. James Allen, who leads Bain's Global Strategy practice, shares how CEOs can adjust their skill sets and discusses leadership models that can help leaders prepare for the coming age of business.
Read the Bain Brief: The Firm of the Future
Read the transcript below.
JAMES ALLEN: As we travel around the world, one thing is incredibly clear when we talk to business leaders, and that's that they all recognize that they're at an end of an era. That something is breaking down in the way we think about business, and that as they think about their planning, they know they need to adjust the firm to be robust and fit-for-purpose for the future. That this idea that there is a firm of the future that will be very different—that will respond better to the new era—is a critical issue going on.
Why do I talk about eras? Well, in many ways, over the last 50 years we've been governed by what we would refer to as the shareholder era. There's been huge alignment across society, across business, that one of the primary purposes of business is to maximize shareholder value, and through taking the actions to do so, you do what is right for the company. You do what is right for your own people, and you do what is right for society as a whole.
And this is beginning to break down. It's not breaking down because the goal of creating value for shareholders is wrong—I think it's necessary—but it's not sufficient. One, the whole goal itself has been undermined by a lot of examples of short-termism, where people have not done the right thing, saying that they were doing something for shareholders.
Also, if you look at millennials and the need to attract the best talent for your firm, that's just a necessary but not sufficient ambition for a company. They want a nobler mission. They want a sense of insurgency, that they're joining a company at war against its industry on behalf of under-served customers.
What are the characteristics of the firm of the future? What does it need to solve for? And we think there are four main things. The first of which is that firms have become overly dominated by the people managing the people that make products and sell products. But we're not celebrating enough the actual engineers, the salespeople, the front-line staff. And the firm of the future is going to have to say, how do we elevate those people?
Secondly, we've been very good in this era at creating all the management tools and techniques to get the benefits of scale—to really understand how, as you grow, you can begin to get scale and scope benefits, learning benefits, market power and influence. I think we've been less good at figuring out how you get the benefits of speed. How do we put systems in that we're not only looking at the disciplines of scale, but that we're getting faster and more agile as we go?
The other thing is that we define the firm now almost as the assets we own and control—but that's not the way CEOs are going to have to lead in the future. They're going to control ecosystems. Which means, yes, there are assets you control, but there are also partners with whom you need to work. The final thing is there's going to have to be a new deal for investors and management and how they work together. The notion that you have perfectly functional public institutions with perfectly functional management teams reporting on a quarterly basis and just simply by running those numbers, it's always going to be best for everybody—that's a little naive.
Now, there are going to be different ownership models. I think you're going to find that as a firm thinks about how to finance things, they'll have different objectives that need different owners and investors for each of those objectives. So it's fuzzy. As a business leader, you cannot say, when you're in the middle of this massive era shift, you have to go from x to y. It's not that clear. But there are patterns of things that are emerging that every CEO is going to have to consider.
Number one: The role of who the leader is in my organization—what skill set they require—is definitely changing. You're going to have much more emphasis on people that can coach and empower talent, especially those that make the products and sell the products in your organization. And so how we think about leadership development is going to change fundamentally.
The second thing is to recognize that the firm that you have established is dominated by this managerial class that is going to have to get on board with the changes you require. You're going to have to get nimbler. You're going to have to get faster. You're going to have to honor new skills that come into the organization. All of which, unless you prepare for it, is going to be very threatening to the very leadership you're going to depend on to make this change.
And so the idea of, how do I bring these people onboard—how do I create heroes of those who figure out new ways of working—is going to be a critical skill set for a CEO. And then the other thing is you have to be highly suspect of some of the tools you use and some of the metrics that show where you're going. A lot of them are heavily oriented towards the disciplines of gaining benefits of scale—absolutely critical. But there are going to have to be new tools around [questions like], am I fast enough? Am I speedy enough? Am I doing things with agility?
The role of failure: Failure has become a very difficult thing in the modern organization. The people that are rewarded perfectly anticipate things, and therefore if a failure happens, you're in trouble. Well, now we're in an era of fast adaptation. Failure is your friend, but you're going to have to figure out how to build that into your metrics and into your rewards.
I think the one thing our work on firm of the future has proven is that this isn't necessarily the time that a CEO can rush to answers, but every CEO has to rush to questions. There are very serious questions you have to start asking about your business to see whether it's fit for the future.
Read the Bain Brief: The Firm of the Future