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The most popular strategies companies use to save money also kill innovation

REUTERS/Vivek Prakash
Popular management practices like Lean, Six Sigma, and outsourcing might save time, but few consider what they lose in the process.
Freek Vermeulen
By Freek Vermeulen

Professor, London Business School

This article is more than 2 years old.

ISO9000, outsourcing, and downsizing have three things in common. First, they became very popular management practices 10 to 15 years ago—and they still are. Second, when implemented correctly, they quite rapidly increase firm performance: ISO9000 helps identify the best way of running key processes and making them “best practices” throughout the firm, which swiftly increases productivity and reliability. Similarly, outsourcing tends to benefit efficiency, and downsizing reduces costs.

However, there is a third thing that that all three systems have in common, and that is that they kill innovation.

Why some management practices become popular in the first place

To understand why popular systems can kill innovation, you first need to understand why they are popular. Practices such as ISO9000, outsourcing, and downsizing spread like viruses—in academic literature, we call this “contagion models”—partly because they are relatively easy to implement. ISO9000 is easy to copy because it comes with a set of clear implementation guidelines, jotted down in an “ISO9000 handbook.” Outsourcing is easy to imitate because it implies ceasing to do something. Downsizing  also implies cutting out stuff. If a company still finds any of these strategies difficult, there are specialized consultants at hand to help you do it (just like viruses spread via pigeons and other third-party carriers). Popular practices are seldom complex, because that makes them difficult to copy.

These management practices are also popular because they work—and quickly. Implement any of them and within less than a year you will spot the performance consequences. This also means that companies witness early adopters benefit from them, which makes them eager to emulate their success.

Downsides of popular tactics take longer to materialize

The disadvantages of popular systems like ISO900, by contrast, materialize only slowly, in the long run. They are difficult to grasp, because they affect soft process like innovation, employee morale, and a loss of knowledge.

Take ISO9000 (and other process management systems like it, such as Total Quality Management, Six Sigma, and Lean): it increases reliability because it standardizes processes. But this also implies—as research by Professors Mary Benner and Michael Tushman has shown—that in the longer term it makes a company’s radical innovation plummet. Innovation requires different ways of doing things, and this is exactly what this system ends. But they don’t tell you that in the ISO9000 handbook, do they?

This long-term effect is not easy to spot and comprehend. A company may notice that its innovation output has plummeted, but it is more difficult to grasp that this drop may have been caused by a system that it adopted several years earlier, and with all the best intentions. ISO9000 and other practices like it impact a tacit and complex process (such as innovation), where the immediate benefits are much more concrete and easy to understand: everybody understands short-term gains in efficiency and productivity, and everyone gets measured reductions in error rates.

Outsourcing and downsizing, similarly, upset tacit processes that in the long run harm innovation. Research by Professors Reitzig and Wagner, for example, has shown how outsourcing part of a company’s activities leads to unexpected detriments in other parts of the firm’s value chain, depriving it of vital knowledge elsewhere. Similarly, research by Professors Guthrie and Datta has indicated how downsizing harms employee morale and increases unwanted attrition, which harms the development of innovation in the longer run. Precisely because the harm to innovation only materializes in the long term and in indirect, tacit ways, companies don’t quite understand the root of their troubles, and unwittingly proceed with the system, unaware the harm it is causing.

So, what can you do about it?

These stealthy innovation killers may in the future operate under different guises but with similar effects. There is always a new popular system. Here is how to avoid the potential negative impacts.

  1. First: Don’t be naïve. Of course popular management practices also have disadvantages. Few things in life – including within organizations – have only benefits. If a consultant ever tells you “no, no, this system only has advantages—there are no downsides at all,” boot her out and do your own thinking. Systems that are good for one thing are not always good for another. Make sure you weigh both the advantages and disadvantages when making an adoption decision. If you conclude innovation is not so important for you in your line of business, go ahead and implement them; otherwise, don’t.
  2. Think about potential long-term consequences. Often, short-term and long-term effects are different. Ask other people in your organization what they think the consequences of adopting the system might be, and then carefully think it through for the long term.
  3. Finally, do not assume that just because it is popular and everyone is doing it that it is a good thing. Lemmings also run in herds, but not always in clever directions.

Freek Vermeulen is an associate professor of strategy and entrepreneurship at the London Business School and the author of “Breaking Bad Habits: Defy industry norms and reinvigorate your business.

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