THE FOUNDATION FORUM
THURSDAY 22ND JUNE 2017. WRITTEN UP WITH THE HELP OF SIMON CAULKIN
Disruption has become one of the most familiar and therefore least disruptive words used in business today. Talked about endlessly it’s often an idea that sounds good in theory but then makes only a tentative step or two in the direction of practice.
That’s not really a surprise. Truly disruptive businesses tend to reverse whole sets of industry assumptions.
"While adding value for customers they take value away from the businesses supplying them, until such time as their new ways of making money come into their own at scale"
While adding value for customers they take value away from the businesses supplying them, until such time as their new ways of making money come into their own at scale.
So disrupting a sector isn’t just mentally hard because the approach is hard to imagine, it also looks like proactive suicide for a business apparently doing well and therefore very hard indeed to argue for until a crisis makes the decision the best of a set of poor options. Often by then it’s too late.
The aim of this particular evening of upset, for the establishment at least, was to bring vividly to life the way three disruptors see their world, and then to draw conclusions from their approach and achievements thus far – what are the kinds of insights that make their new models so strong, and what could be learned by bigger businesses trying to do similar things in their own way?
Our three examples came from three great people and three strong organisational ideas in various states of distance travelled:
We had Client Earth, with their Deputy CEO Beth Thoren.
Their reason for existing is to use law as a tool to mend the relationship between human societies and the Earth. They are part of a new breed of activist charities, using belief in the cause to attract motivated individuals who apply scalpel-sharp skills to create impact many times their scale and resources. They protect the environment through advocacy, litigation and science, and they have had a string of successes such as their EU court ruling forcing the UK Government to act on air pollution back in 2014 and then following-up in early May, forcing the government to publish their clean air plans ahead of the General Election. Beth has been there for 9 months after a career that included Directing Fundraising and Communications for the RSPB as they moved to campaigning for nature not just protecting birds, running marketing for the campaign to switch the UK over to digital TV, and playing a similar role for the BBC with their digital marketing
We had Riversimple, with their Chief Engineer and co-founder Hugo Spowers.
They are a Hydrogen fuel cell car company with not just technology that challenges convention but also a business model that creates advantage from apparent constraint. By using Hugo’s motorsport background in combination with his desire to save the planet from our love of moving around, they have a beautiful lightweight high tech car that produces only clean water as an emission. It is owned permanently by Riversimple so they profit from efficiency and longevity and can recycle and re-use all the parts that last for decades. Initially the cars will be leased to people living close to a Hydrogen fuel station for use as their local car, so a genuine market can be created at a small scale. The technology is open, so makers can reproduce the idea around the world at low, profitable volumes and with only what’s needed where they are based – no heating in Saudi for example. Hugo found himself ignored by the major manufacturers thus far, and has duly ignored them in return on the basis that they are the wrong businesses to make the most of the potential in the technology. They are, indeed they have to be, determined to fit it into the rest of what they do like a new and more shiny component. Hugo’s conviction is that the problem needs a new systemic solution, and that applies as much to the business model and the companies involved as to the technology, which is why he has chosen to run his own race in such a determined fashion
And we had Zopa, with their Chairman and co-founder Giles Andrews.
They were the world’s first peer-to-peer lender, and we’re proud to say that one of our alumni, James Alexander, was there with Giles from the start too. They saw that digital technology and the way we liked the communities that followed as a means of toppling the banks, reinventing what they do from the first principles they followed – take money from savers and give them a return, while lending it to borrowers and manage the risk. They are the furthest on in their journey of our three and can describe hurdling a succession of barriers that threatened to disrupt their progress – getting people to trust them or even understand them in the first place, getting beyond the early enthusiast adopters, dealing with competitors when once they were alone, broadening the business while staying true to their principles, and managing succession, for example in CEO, a role Giles filled from 2007 to 2015 before taking the Chair. Giles had form as an entrepreneur, growing a (conventional, polluting) car dealership business before consulting and then Zopa-ing for a living.
How then did the conversations pan out? An overturned establishment might be messy but the views exchanged turned out to be more elegant than that, especially with Simon Caulkin summarising.
The discussion that followed, summed up by Simon Caulkin
It sometimes seems as if the acreage of print devoted to ‘disruption’ over the last decade is in inverse proportion to the insight it generates.
"It sometimes seems as if the acreage of print devoted to ‘disruption’ over the last decade is in inverse proportion to the insight it generates."
No kidding – ‘disruptive mayonnaise’? In 2012 a celebrated spat between historian Jill Lepore and the begetter of disruption theory, Harvard’s Clayton Christensen, broke out in the pages of the New Yorker, the New York Times and HBR over whether ‘disruption’ existed at all.
One thing missing in all the after-the-event analysis and Silicon Valley hype over Uber, Airbnb et al, is the worm’s-eye view – where the new idea came from, how it happened, what it feels like to the people actually doing it: ‘unpasteurised’ disruption, as Foundation Partner and Forum Chair Charlie Dawson put it in his introduction. ‘Before the neat case studies have been written making it appear obvious that the million-to-one shot was nailed on from the start, what was really going on?’
If we didn’t know before, we certainly did at the end of a remarkable June 2017 Forum, which under the title ‘Upsetting the Establishment’ heard three vivid stories of innovation that make Silicon Valley’s ‘we move fast and break things’ look both glib and grotesque. Here instead were examples of the kind of breakthrough innovation that tired economies and tetchy societies badly need,
"...replacing older business models not just with newer but also better ones that align first with human and planetary needs and only then with venture-capital wallets."
Aligning business and human need was a key idea of the evening. Take peer-to-peer lending, the first example, as described by Giles Andrews, co-founder and now Chairman of pioneer lender Zopa. Zopa was born of the conviction that the banks had forgotten who their customers were, selling, or mis-selling, them stuff that they didn’t particularly want but that the bank could conveniently supply. This opened an opportunity, using today’s technology, to start from scratch at the other end: ‘If we look at the business from the customer’s point of view, can we generate enough scale to have an interesting business, rather than looking at it from our point of view and asking, how much money can we make from the customer?’
Zopa’s idea was to use technology not just to align lenders and borrowers but through it also to engender a sense of shared purpose that has vanished from traditional banking. It was a good call. Lenders liked knowing their savings were being recycled to ordinary people rather than money markets or launderers; less expectedly, borrowers responded by prioritising Zopa repayments over other owings.
On the other hand, admiring press coverage of the bank’s ‘disruptive’ business model did not translate into marketing advantage. Mass market consumers don’t want a service to be mould-breaking, says Andrews ruefully: they just want it to be better. The message was underlined in the Global Financial Crash of 2007-2008. In contrast to other lenders, the money Zopa had lent out all came back, and it began to be written about approvingly as stable and boring – for a financial services brand, a much better recommendation than being disruptive, Zopa realised. The crash, which had the additional effect of making Zopa’s returns look attractive as well as stable, was its second piece of luck. The first had been banning of PPI; shorn of its insidious cross-subsidy, the mainstream banks were forced to put prices up for their legitimate services.
However, while an interesting idea and a dose of good fortune are fine, necessary even, they don’t of themselves guarantee success: you have to be good at something, too. Zopa, data-driven and customer-focused (with ‘literally hundreds’ of customer service awards to prove it), is good at credit. So good it now has a lower cost of capital than all of its competitors, which is a real advantage in a sector with razor-thin margins.
Zopa’s final piece of alignment, controversial within Zopa at the time since it had a big head start, was to band with its emerging competitors to form a fledgling industry association.
"Looking back, we gave our competitors an enormous leg up by aligning ourselves with them," acknowledges Andrews. "Yet I still think it was the right thing to do, because we've grown faster as a result"
...partly by leitimising the sector as a whole and partly by making it into a credible interlocutor for the government, which responded by taking a positive view of Fintech in general and allowing sector members to sell ISAs. With all the signs pointing in the right direction, Zopa is now halfway towards launching a bank – ‘the most exciting thing we’ve done since the day of the original launch. It will allow us to use the skills we've built in customer focus, in efficiency, in underwriting credit, and providing great user experience to become, simply put, the best consumer bank in the UK’. We look forward in hope!
Disrupting the motor industry sounds even more quixotic than taking on the banks.
Massive capital requirements, giant factories, economies of scale: you’d have to be certifiable to decide to compete against the US, German and Japanese multinationals – wouldn’t you? But wait. Hugo Spowers, the second disrupter, yields to no one in his respect for the auto industry’s achievement – ‘there's nothing on the planet that’s remotely as good value for money as a modern car with all its complexity and refinement’, he says. The small snag, he adds, is that its product is utterly unfit for purpose in the 21st century.
"Yet the fact that the combustion engine and the business model it engendered are now radically mis-aligned with human and planetary needs gives today’s insurgent an improbable opportunity."
Today’s cars are optimised around the 100-year-old technology of the combustion engine, and there is no obvious incremental route to advanced replacement technologies such as hydrogen fuel cells. On the other hand, notes Spowers, redesigning the vehicle around fuel cells lowers the technical challenges and risk, with huge improvements to costs and a three-times boost to energy efficiency. ‘Riversimple [Spowers' firm] as a start-up has very few advantages, but the one we do we have is a clean sheet of paper. It’s not to be underestimated’, he says.
Which explains the business model. ‘We’re the only car company that hopes never to sell a car,’ says Spowers proudly. Instead, like Michelin in commercial tyres and Rolls Royce with jet engines, Riversimple will sell mobility for a monthly fee that includes fuel. This reverses the usual incentives: the more efficiently they operate, the longer they last and the fewer cars it can build for a given customer mileage – cars which remain on its balance sheet, with long-lasting parts re-used not disposed of – the more successful it will be. Suppliers are aligned too, retaining ownership of their contribution, rewarding them for investing in quality by achieving longevity rather than engaging in a win/lose negotiation with their customer that rewards the highest possible price for the lowest possible cost of production.
To stay true to purpose it has adopted a unique governance arrangement under which the board’s fiduciary responsibility is to provide benefit not only to investors who are promised a fair long run return, but also the environment, customers, staff, supply chain and community, six interests explicitly recognised and given equal weighting in decision-making. The aim, says Spowers, is everywhere to align interests taking a careful long-term view, in accordance with the principle that you can’t optimise a system by optimising the individual elements – you can only do it as a whole system.
The evening’s final variation on the alignment theme was a more direct, even brutal one. Client Earth is a charity with a difference – a legal firm which uses the law to realign governments with their own rules respecting the environment. ‘We sue governments,’ says deputy CEO Beth Thoren cheerfully. ("It's a fraction of what we do, but it is what we are best known for", she added, carefully.)
Client Earth’s insight was the powerful influence it could bring to bear through the law. It’s thanks to Client Earth’s small team of full-time lawyers (earning a fraction of what they would in a commercial firm) that the UK government was obliged first to commit to action on air pollution in 2014 and then to publish its clean-air plans before the 2017 General Election.
It has closed coal-powered power stations throughout Europe. Sometimes matters don’t even get to court. In the case of the UK’s 30 marine protected areas, ‘one of our lawyers wrote to the officials saying, you know, allowing fishermen to dredge the reefs in marine protected areas probably isn’t meeting either the letter or the intent of the law. Oh, and by the way we’re lawyers’. Amazingly, no lawsuit was needed:
"3,000 square kilometres of marine areas and reefs are now protected, effectively because of one letter"
Now, after 10 years, only a minority of Client Earth’s work is adversarial. On the contrary: it has used its reputation to ‘make friends with the establishment’. ‘Two-thirds of what we do is working with governments and helping them write the laws,’ notes Thoren. It advises pension funds on their fiduciary duty around climate risk, constrained resources and various climate effects – even the implications of Brexit. ‘They want our advice, and it’s not a conflict because they realise that, yes, we can challenge them but actually it’s in our interest to help them if they want to listen to us.’
If Client Earth now wields an impact out of all proportion to its size and resource base, however, it didn’t come about automatically. As Andrews and Spowers also recognise, game-changing implementation often requires a change to the context as well. In this case, putting the insight into practice – that the law could be used to reset the relationship of human societies and the planet – was in practice near-impossible because of the huge legal costs involved. So before it could fulfil its purpose, Client Earth had to convince the EU and national governments that the cost represented a denial of citizens’ rights to justice. Eventually it did, establishing a £10,000 maximum that brings legal recourse within reach of most charities and some individuals too.
As this suggests, scale, like everything else, looks somewhat different in disruption-land. Convinced of the imperative to stay small and agile, Client Earth ‘grows’ by expanding the scope of its leverage, and by seeding small imitator groups in other countries. Ignored by the major manufacturers, Riversimple makes its technology open-source so the smart thinking behind its high-tech hydrogen powered prototype, the Rasa, means other makers can reproduce it around the world, each operating at low volumes but as a group finding economies of scale. The Riversimple brand is the differentiator within its narrow market – its mind-set and systemic worldview, as a means to exploit the technology, the difference against the established industry. Zopa shrewdly made its sector more robust and attractive by making common cause with its peer-to-peer rivals, giving it a smaller slice of a much bigger pie; now, with the new bank, its seeks to export its learning into adjoining business areas.
Although all are deeply immersed in science and technology, each is an object lesson in subordinating activities to an overall purpose. Thus for Andrews, blockchain is a technology searching for an application. Spowers thinks the same of self-driving cars, which address none of the industry’s primary issues. What’s more, he adds, they come with a number of negative consequences which given our track record in misapplying technologies will surely dominate. ‘There you go; we can retrofit it to our Riversimple cars, but it’s a red herring’.
"What all three most conspicuously share is a commitment to the great leap forward rather than the incremental improvement beloved of business schools, together with a rock-like sense of purpose."
Indeed the two go tightly together. Purpose can’t be overcommunicated; living it is the leader’s first job, says Andrews. Spowers notes that the reason step-change looks daunting is that it’s viewed from within the old context; challenge the latter and it suddenly seem both logical and doable: ‘I mean, dinosaurs weren’t replaced by better dinosaurs.’ For that reason, purpose can’t be compromised: ‘It’s easier to stick to your principles 100% of the time than 99% of the time, and we have to be pretty rigid about that.’
Perhaps the most disruptive thought is this: we must do these things not because we can or because they make us money (although we hope they will), but because they matter. Let Thoren’s ringing conclusion speak for all of them: ‘I work [at Client Earth] because I care that by 2020 70% of wildlife will have disappeared from the face of the earth. I care that if you believe the United Nations by 2040 there'll be no fish left in the sea. I care that by 2050 cities that we know – New York City, Miami, Guangzhou – will be at grave risk for flooding. I care that instead of a million people immigrating into Europe it'll be hundreds of millions. It’s not right that we use our skies as a sewer. It’s not right that we leave such a world to our children. And it’s for that reason I'm so incredibly proud to be working for a disruptive charity’.
The Foundation's view
An impressive set of big ideas from small organisations. The smaller you are the more able you are to think holistically, and to do something about it if you have courage and conviction too. Our reflections overlap with the account above but bring some of our experience, especially in encouraging the world to succeed by starting with customers, to the fore.
The point about good disruption is not that it’s disruptively different, just that it’s simply better.
As Giles observed, disruption tends not to be described as such until after the event. People rarely set out intending to disrupt an industry, just to improve it, and most customers don’t want to buy something disruptive, just something that works better. He described the early Zopa days where they tended to talk about the completely new peer-to-peer approach but this only attracted a small band of innovation enthusiasts. Once they ditched the idea of telling people how the business worked and focused instead on the benefits – lower rates for borrowers, higher rates for lenders – serious growth into the mainstream took off
To create a step change in performance comes not from hard work improving elements of the existing system, but from hard thinking re-imagining the whole system.
Hugo described the huge investment and vast teams of people needed to gain the small increments of improvement that characterise something like a new car launch. Roughly the same as before but a few percent better is hard work, usually coming from teams working in silos on each aspect of the overall system. When a step change in technology is introduced, performance improves in leaps by working very differently, seeing the entire system and imagining a very different configuration of its elements. He told of Formula 1 history when Ferrari, so strong and with huge teams focussed on ultra-powerful engines, was usurped by Cooper and then Lotus from the UK, using much less special and less powerful motors - in fact, neither ever designed an engine. They had re-imagined the car, taking the engine from the front and putting it behind the driver, making it a part of the chassis and making the cars lighter and much better handling as a result. He is doing something similar with his hydrogen fuel cell car which is part of a dramatically different business model, one that aligns the interests of his company with customers, suppliers and the planet in a number of ways. By only selling miles not cars, Riversimple is encouraged to achieve what customers need with as few cars and using as little fuel as possible, with vehicle designs that stay current for as long as possible. By paying suppliers in similar ways they are incentivised to raise quality and spend more because they, and not their customer, gets the benefit. There’s more to it than that, but you get the idea – smart thinking and the bravery to follow it through produce the potential to leap forward
The ingredients of success – wholesale re-imagining then rapid ego-free learning – come most easily from small teams of young people with a blank sheet of paper.
As Beth talked us through the Client Earth approach one of the many factors that stood out was that they do best by hiring young, smart but relatively inexperienced lawyers not those that know the ropes. Because although people further on in their career might tackle aspects of what they need more effectively, to make something new that started with a blank sheet re-design operate well requires energetic experimentation and a willingness to keep adjusting, in their case finding ways to make the law work for the environment not just for the establishment. Their motivation to get to the outcome and their willingness to take risks, to be wrong in their pursuit of the cause, means the team as a whole has achieved amazing things in the last few years, with the UK’s air and undersea habitats benefitting accordingly
About The Foundation
The Foundation is a management consultancy specialising in growth. We help clients address big organic growth challenges; growing faster, growing into new markets or fending off threats to growth
What these challenges share is the need to influence customer behaviour, but this is inherently tough. Why? Because people in any organisation naturally see the world from the inside-out, with colleagues close and customers distant, and lots of assumptions about how things work that aren't challenged
We help clients look from the outside-in, re-connecting them with what customers really value (the problem they want to solve, not usually what the client sells), then finding new and better ways to create this value
This means working both as expert advisors and facilitators. The issue with simply gathering outside-in information is that it lacks impact to get senior teams to tackle inconvenient truths in what customers want, and to believe their own organisation can be different
By using ‘Immersion’, personal conversations with customers and leaders of organisations in other sectors who have tackled parts of their challenge, we help teams get round beliefs that stand in their way. This helps them develop better answers for customers and new ways of achieving lasting success
We most often answer three questions:
Developing new propositions
Improving customers’ experiences
Developing customer-led strategies for broader issues such as increasing retention or lifetime value
Our clients include HSBC, JLR, O2, M&S and Ebay, with achievements including helping create Plan A at M&S, adding £100m of value to a Travelex travel money proposition, and giving Morrisons a competitive direction contributing to their return to growth
Behind our work our most distinctive characteristic is our team and their outlook. Each individual is motivated to and experienced in crossing the border between the worlds of customers and business which often resist mixing well
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