James Root: The Firm of the Future

INTERACTIVE STORY Explore the Firm of the Future We are nearing the end of an era in the world of business. Explore what the next generation of successful companies will look like.

Read the transcript below.

JAMES ROOT: The idea here starts with the observation that we have from working with many clients and talking to many CEOs that something is really changing. We've all grown up in an era in which returns on shareholder funds has been the most important objective for many, if not all, corporations. And that was a good thing.

Companies since the 1970s have focused on their core business, and shed non-core assets, and reduced costs, and outsourced non-core activities to really focus down on what they do best. And notwithstanding the financial crisis, frankly, since the '70s and the stagflation of that period, [companies have] enjoyed unprecedented returns on those shareholder funds and stock prices.

But what's been changing has been a very clear increase in a version of that focus on shareholder value that seems too short term. As distinct from, let me call it the good version. The long-term shareholder value-creation version. We are not for one second suggesting that shareholder value will not be important in the future.

That would be like saying that because there is air pollution that air is a bad thing. If you think about the more recent past, the version of shareholder value focus that has been too short-term has become a real concern to many people, to many business leaders and politicians. They worry about lack of investment in capital expenditure and in research and development that would fund long-term growth.

They worry about financial leveraging and share buybacks. Governments are more activist in their intervention, particularly in large sectors, in regulating energy, and financial services, and food, pharmaceuticals. There are concerns about what, to many, seem like the out-sized rewards for senior leaders compared to the stagnant wage growth of other employees.

Lots of productivity, in other words, but no real growth. And meantime, inside companies, it is so common in our conversations with executives to hear them express the frustration about how difficult it is to get things done—how complexity has reached critical levels. How hard it is to free up resources that are somehow trapped in the organization when they need to be deployed against the best opportunities that they have.

And then, of course, we have changes in the preferences and styles of the workforce: A younger cohort coming up to become the largest proportion of the workforce who seem to have a very different view about their careers; perhaps prefer to work in the so-called gig economy; and have a very different aspiration than climbing the slippery corporate pole.

These changes seemed very profound to us. And we wondered whether that was unusual. So we've looked back over the last several years of business history around the world and observed that there is a pretty fundamental change in the core idea about what a business is, how it should be organized and operated. About every 50 to 70 years, the paradigm appears to evolve.

And these are not light switches. They don't go on and off. Many things are inherited from one era to another and persist on through. For example, one very important thing that is not going to change in the firm of the future are the fundamental ways in which companies win in their industry. You can win by being low cost, win by having great people, by being faster to innovate, better at delivering in customer experience.

These unalterable laws of business strategy will endure. What we're seeing and inferring about the future is that how companies win is going to change a lot. There's a very famous strategy dictum from the mid-1980s that said companies can either be low cost, or they can be differentiated, but probably not both.

You look at companies like Tencent, Alibaba, Amazon, Google, Tesla—all examples of companies who are taking advantage of the benefits of their scale to continue to drive costs down an experience curve, but can also use the data that they have to create an intimate relationship with their customers to deliver something that at least feels very personalized and, in some instances, is truly personalized by a human being or by an algorithm.

So maybe the firm of the future can do both rather than have to tradeoff between scale advantage or differentiated intimacy. In the future, scale looks different. It's behaving differently. Scale is still going to be very important to companies, as it always has been right through the last 100 years of business. But it's operating in different ways.

First of all, you can now access, as a small company, the scale of a large company. Just phone up Amazon Web Services if you want to take advantage of their service. Phone up UPS Logistics if you want to take advantage of the world's largest distribution network. You don't have to be a big company yourself—to own the assets or own the capabilities—to take advantage of somebody else's scale.

Second, speed has now increased its importance relative to scale. You can understand what customers want, what they're telling you about their preferences, and react fast to adjust your services to the preferences that they're expressing. That speed is a real competitive advantage that can sometimes be more important than scale.

One of the emerging themes in the firm of the future will be a new deal for talent. The last 100 years or so has really enthroned the role of the professional manager in many, many corporations in many, many cultures. And that's been particularly true in the last 50 years where that concept of a professional manager has become absolutely solidified.

We take our best bricklayer and we turn them into a manager of other bricklayers. And they stop making bricks themselves. And that's been the underpinning for many organization designs for the last 50 years. Every company has particular roles in it that are differentially important to that company's ability to deliver its strategy.

And we have a belief and some observations that the people who want to play those roles in the future understand how valuable they are and will begin to demand, in a sense, a higher part of the value that they create. As distinct from the role the professional managers play, which in some organizations is contributing to incredible complexity, the slowing down of decision making, and rampant bureaucracy.

If you can imagine an organizational model where you locate those critical roles—whatever they may be for you, and most companies actually have more than one--but if you imagine locating them in the middle of your organization, in the middle of your operating model, there are a lot of implications for change. You may not need as many professional managers as you have today.

The ones that you do need, because you'll need some, will be doing rather different things—often to do, I think, with resource allocation--but also getting out of the way of the people who are playing those absolutely critical roles. Your culture and your mission will become an even more important part of how you glue your organization together.

Gone are the days when I could say shareholder value is my single focus as a company. That's my mission. That's not what those people, typically, will unite around. They want something higher as a purpose. Your leadership skills will need to evolve.

Yes, of course, there will still be routine processes that need to be managed and optimized and cost-reduced—very important for most companies. But at the same time, equally important will be a leadership model all around coaching, all around developing people. It's going to be a very exciting time in the firm of the future.

Read the Bain Brief: The Firm of the Future