Innovation and Uncertainty Go Hand in Hand in Business. Here’s What to Do About It

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Eric Ries is an entrepreneur, the bestselling author of The Startup Way and The Lean Startup, and the creator of the Lean Startup methodology, a global movement in business practiced by individuals and companies around the world. Ranked one of the world’s most influential management thinkers by Thinkers 50, Morten Hansen is a management professor at University of California, Berkeley and the bestselling author of Collaboration and Great at Work. The two recently sat down to discuss how people and businesses can deal with uncertainty, work more efficiently and dedicate the time to think like an entrepreneur.

This conversation has been excerpted from the “Open Minds” video series on American Express OPEN Forum®. View the complete video and series for more on management.

For more on management, view the complete video and series on American Express OPEN Forum.

Morten: There’s an amazing amount of change going on in the business world today. Why do you think it’s happening right now?

Eric: When I travel around the world and meet with managers, I hear constant complaining about the level of uncertainty that they face. They are upset about the rise of the software revolution—as Marc Andreessen [says], “Software is eating the world.” All of a sudden, formerly staid and old-fashioned industries have been revolutionized by software. [Also,] the rise of globalization [means that] new global competitors are entering every market. Then, a general sense that consumers in every industry are getting more picky because they have more choices. Things are going faster, there’s more uncertainty, and the standards that companies are being held to are higher. It’s a pretty difficult combination.

Morten: If you think about software eating the world, take the taxi industry—there was no software there before. And now a massive digital revolution is going on in the transportation sector that is impacting the entire world. The speed by which it’s happening is amazing.

Eric: Until a few years ago, people who were talking about self-driving cars were considered futurists or science fiction authors. [But] in a period of 10 years, we’re going to go from a world in which transportation was considered this old-fashioned industry to one in which it’s completely unrecognizable from anything that our predecessors enjoyed.

This change was unexpected, so there’s high uncertainty introduced in all of these businesses. Look at a company like Uber or Lyft that’s bringing the revolution to bear. If you’re a driver for one of those companies, who’s your manager? You don’t report to an individual person as your manager—you use a piece of software. But the software is written by human beings. These companies are not just bringing a new product to market, they’re also pioneering a new style of management that is a bit like a human-machine hybrid that’s constantly trying to evolve.

Morten: This has huge implications for management. Silicon Valley is known as the hub of startups, but it sounds like [there] is also a management revolution coming out of it.

Eric: When I wrote The Lean Startup, I was trying to figure out, what definition of a startup [identifies] the practices that make sense in a startup context? The definition I came up with all those years ago was “a human institution designed to create something new under conditions of extreme uncertainty.” We’ve been focusing on the uncertainty part of it, but it’s also important to remember that building a startup from scratch is an exercise in institution-building. It necessarily involves management.

The problem is that most people have this [idea] that management is old-fashioned, it’s boring, it’s for the guys in the gray suits from the 1950s. There’s an image it conjures that’s at odds with the idea of a dynamic entrepreneur working in a garage. I think we have to get over that conundrum if we’re going to move forward as a management science. We have to accept that even the most uncertain, innovative projects require management. It’s just a very distinct kind of management from anything our predecessors understood.

Morten: I remember when I was teaching at Harvard Business School, we were teaching general management to those people in the gray suits, and they were iconic companies, [like] General Electric and Toyota. They were incredibly good at traditional management, but what we’re seeing now is a very different management principle coming alive. Why do you think that is needed now as compared to 20 years ago?

Eric: If you go back and study the history of these management ideas and why we developed them, so much of that had to do with taking advantage of our new ability to predict, with some accuracy, what was going to happen in the future. We [developed] an incredible system of accounting that [could] make forecasts quarter by quarter, month by month, division by division, region by region, [like] how many cars GM is supposed to sell in a given quarter.

These management tools were developed in a different context, in a different time, for a different purpose. That’s not to say they’re obsolete—there are a lot of situations in the world today where we can still forecast very well. But when I meet managers around the world, I always ask them, “Who here feels like the world is getting more and more stable every day, and so your forecasts are getting more and more accurate?” No one ever says that.

Taxis used to be an example of a very easy business to forecast, and all of a sudden, [everything has changed]. We have to build new management tools that take that reality into account.

Morten: That tool needs to go beyond just dealing with uncertainty. Companies have gotten so good at efficiency, but so bad at entrepreneurship. If you look at established companies, they’re very good at running their business. If you’re a business owner or business manager today, you probably spend all your time, every day, doing day to-day business, but day-to-day business is not going to create the future. How do you combine that [with entrepreneurship]?

Eric: Look, the demands of the present, the demands to make the quarter—those are important pressures, and they impose a certain discipline on the company. I’m not here to say that’s bad. But we have to look at the overall portfolio of work.

If I had a financial portfolio in my retirement account, and I said, “I’m going to invest all my money in only the most conservative financial instruments, only the things that have a very well-defined future earnings forecast where there’s no uncertainty or risk,” I couldn’t possibly get an optimal return. In fact, I couldn’t even keep up with inflation. You have to be willing to take some risk in order to have some return. That doesn’t mean that I should take everything to a casino, and risk it all on the most risky investments. It [means] we should have a portfolio of different kinds of investments that we make simultaneously.

In business, we have to start thinking that same way. The management portfolio of a company should include some basic core things, as well as some more risky things. Then as a business owner, you can ask yourself, “What does my portfolio look like? How have I spread my attention, time and energy across those two different kinds of work?” And if the answer is, “It’s all day-to-day,” then we know you’re not going to have the kind of growth you want.

Morten: That’s [true] whether your business is a small family business of 10 people or a business with over 1,000 people.

Eric: That’s right. I’ve worked with big, multinational companies with hundreds of thousands of employees, and even there, the fundamental constraint is the time and energy of senior management. If you’re the CEO of a million-person company or a thousand-person company or a one-person company, what you yourself put your energy and time into is the most important portfolio of all. If you could take 10%, 20%, 30% of your time and energy and focus it on the future, on taking risks on something different from the day-to-day, that gives you a tremendous advantage over others who are not doing that.

Morten: What if you take a medium-sized business, say 100 people, and you’ve got a few managers running that business, and they can’t keep up with the day-to-day business? They’re already working 60, 70 hours a week just dealing with the urgent, important things. What’s your advice to them in saying, “Wait a minute, you need to create a portfolio where you have some experiments and new initiatives that [will] pay off in the future”? How do you talk about doing both?

Eric: Everyone I meet in business is too busy, and no one can afford to make changes—but that’s a choice. We choose to keep our managers running that way, and to keep all of our people focused on the day-to-day. I have yet to meet a business where that is a requirement.

Before the advent of lean manufacturing, we used to make this mistake with the utilization of individual machines in a factory. We used to think that if a factory was going to be run efficiently, every part of the factory should be run at 100% utilization. The revolution of lean manufacturing said that actually, the component utilization is not what matters. What matters is the productivity of the factory as a whole. In fact, in order for the whole to be running as efficiently as possible, it’s a necessary consequence that some of the individual machines are not going to be utilized at full capacity.

The same thing is true for human beings. If we manage to keep everyone in the company completely busy, then we can’t achieve 100%. Working 60 hours a week, 150% utilization of each individual, is almost always the wrong choice.

This does require a prioritization decision. There are some things that we want to do that we have to not do. That’s a real challenge in any business, but even a hundred-person company can ask itself, “Is there no way we could spare one person, or two or three people, out of 100 to work on something new?”

Remember, some of the biggest, most famous companies today started out as a three-person startup, so you could have one little three-person startup in the company. If you were in the taxi industry, can you imagine if you discovered Uber on your own, instead of having it happen to you? Is that not an experiment worth running?

Morten: The taxi companies in New York could have come up with that.

Eric: Easily.

On this theme of companies being spread too thin, feeling that they’re too busy to change, your research has shown that that even applies at the level of individual employees.

Morten: Yeah, definitely. Having studied more than 5,000 people, both senior managers and junior employees, my research shows that most people report being spread too thin. They’re incredibly busy, but not necessarily busy on the things that matter most. They have this belief that if they can work 60 hours or more, they will succeed more, but that’s not necessarily the case.

Eric: It seems so intuitive that if you work harder, you get more done. Why do we keep making that mistake over and over again?

Morten: Somebody who’s working 60 hours should beat somebody who’s working 40 hours, right? A salesperson has 20 more hours to make sales calls. We think that by working more hours we perform better, but the problem is that we may be working on the wrong things.

What are the key activities that really move the needle? If you start there, you might find that it’s actually working different, not more, that matters most. Cull some of the activities that are not important, and free up a bit of time to work on initiatives that are going to be great in the future.

For example, if you look at your calendar [over] the last two weeks, which meetings were really important, and which weren’t? When I asked that question to managers, many could strike out half of them. Just imagine—half of your meetings may not be that important. Some of them should have just been an email, not a meeting. If you are cutting back on those things, then you might have time for setting up this more entrepreneurial function.

Eric: [Unfortunately,] the culture of company these days is to be obsessed with multitasking and to praise people who work crazy hours, whether they’re being effective or not.

Morten: [Since] when was being busy a measure of being important and being successful? Why would the number of meetings you went to be a measure of accomplishment? It isn’t. People have to take a hard look at the portfolio of their current activities, and make room for the new initiatives you’re talking about.

You also go one step further, saying it’s not enough to just free up a little bit of time for new initiatives—what is required is to establish an entirely new function: entrepreneurship. That’s a radical position. Can you say a bit more about that?

Eric: I see this as the major evolution of the corporate org chart for the 21st century. Ask both a multinational company and a hot startup, “What does your org chart look like?” Apart from the number of boxes, the structure of the org chart is exactly the same. There’s finance, IT, engineering, product marketing, supply chain—and employees are mapped to those functions in a typical management format.

You say, “Okay, show me on this org chart who is in charge of commercializing the next big thing for your company? Who’s thinking about how to harness the power of disruption, or to insure the company against those forces?” The only two answers I hear are, “Nobody’s in charge of that,” or even worse, “Everybody’s in charge of that,” in which case, we all know that nobody’s in charge. We don’t treat it like it’s important.

The head of marketing might be tasked with making sure that we’re innovative, or the head of IT, sometimes the head of engineering. It might be somebody’s part-time job on top of their 60-hours-per-week existing job, but I think that’s a structural defect. I call it the “missing function of the corporation.” Investing in the next generation of products and innovations has not been a core function of the company, and therefore, we’re not good at it.

Morten: I think that’s a profound idea, and it’s structural. We have marketing professionals, [but people] don’t identify with the entrepreneurship profession inside of companies.

Eric: I often meet with the newly crowned head of the innovation lab of some company. They’ve finally convinced the CEO that they need to invest in innovation, and they’ve got a budget, and they’ve got a team. I always ask them, “What metrics is your CEO going to hold you accountable to?” They’re often the traditional metrics.

I say, “Well, your team that you’re working with every day—how is what they do different from what they’re used to?” In a lot of companies, unfortunately, people are multitasking even here. They’ll even have engineers on loan to the innovation lab part-time.

And then the worst question I always ask is, “What happens if, God forbid, one of your innovations is, in fact, the next big thing?” Imagine you’re a taxi company, and you invented the next Uber, and now it needs to grow beyond the innovation lab—it’s about to become a bigger division of your company than the whole parent company put together. What’s the plan if that should happen? Even people who have been thinking about these ideas for a long time don’t know. If you compare that to the development of any of our other functions, it’s laughable how primitive we are.

Morten: When did you have this epiphany that we need distinct traditional and entrepreneurship functions?

Eric: It’s funny because I come to this in the reverse from most people, because I come from the entrepreneurial ecosystem, and I had to learn to appreciate and understand general management later.

I had worked in lean manufacturing and lean startup, and when I got an email one day from a major auto manufacturer to come meet them, it was a big deal, like getting called into the principal’s office. I was little bit nervous; I didn’t know what it was going to be about. Although they had every reason to be defensive and say, “Hey, what [could] you know about this? You’re not a manufacturing person,” they were actually very interested in talking about how Lean Startup could apply in manufacturing.

The meeting had been going on for a little while, and frankly we didn’t know how it was going. Until the senior executive paused the meeting for a moment and he made this declaration, which I’ll always remember: “This is the missing half of our production system. We have the ability to make any product that we can imagine, but we are missing the capability to systematically discover what products need to get built in the first place.” Those two halves of the system summarize what we’re trying to do here.

Morten: So the job of a manager in small business, medium-sized business and large business is really to add this entrepreneurial management, in addition to the traditional management that they’ve been so good at. That’s the task of management today?

Eric: Exactly.

For more on management, view the complete video and series on American Express OPEN Forum.