What is the role of the CEO in highly innovative organisations pushing the boundaries of management and organisation design? Simon Caulkin provides revealing portraits of three renegades in chief: Tim Brown of Ideo; Vineet Nayar of HCL Technologies; and Jeffrey Hollender of Seventh Generation.

Tim Brown and Ideo: Most innovative
California-based Ideo is a company where people think managers are boring and management sucks. This hasn’t prevented it from becoming one of the largest and certainly most creative design-and-innovation companies in the world. At the last count, its 550-strong designers had picked up more than twice as many BusinessWeek Industrial Design Excellence Awards than its nearest rival, and it regularly scores highly in media “most innovative” lists.

Indeed, Ideo’s leaders are in no doubt that the company is successful not despite but because of the thin spread of management. Asked for Ideo’s secret, founder David Kelley once remarked, “I just hire some smart people and get out of the way.” He wanted to establish, he said, a company where he could “work with friends”.

So if it’s not management that holds the place together, what does? In a word, culture, says the current CEO, Englishman Tim Brown. “We’re absolutely dependent on our culture to drive everything we do, our business and our success.” What kind of culture? For a start, note that Brown, like the rest of the renegade fringe, is not a manager by training, instinct or even intention. He studied as an art student and wanted to be a painter. In fact, he says, “It’s only in the last three or four years that we have started allowing MBAs in the building.” Management is tolerated insofar as it is a means to the end of facilitating what people want to do, rather than the other way around.

Time for T
As a design company, Ideo’s work is project-based, yielding a generic resemblance with a McKinsey or any other consulting business. But Ideo has plenty of distinguishing marks of its own. For a start, “one of the things that is key to our culture is an absolutely incessant interest in doing things that are new”. And there is a concomitant lack of interest in anything that is old – however lucrative the project. That, as Brown admits, is a challenge for a company that has to grow and learn from experience – but overall he believes it is a net positive.

A second key “is that we have, accidentally, I believe, figured out how to create a relatively extreme level of collaboration between people that come from very different backgrounds”. One element in this is a very careful selection process. Ideo recruits people who are “T-shaped” – that is, people with deep craft (the vertical stroke) who are also keenly curious about the context surrounding it. I-shaped people needn’t apply – but even in the rare case they do get in they don’t last long because they can’t function in Ideo’s intense, experimental, highly collaborative, small-team mode of working, where no one is in formal control and everyone is expected to contribute on every design aspect. Through hard experience, the company has learned that people from more uptight corporate backgrounds don’t always find it easy to adapt to Ideo’s idiosyncratic ways. New recruits “used to complain that they felt really uncomfortable, it took them a year and a half to figure out what was going on,” acknowledges Brown. “So we do work pretty hard [these days] when people come into Ideo to describe it all to them.”

The third strand to Ideo’s culture is that its pattern of innovation is emergent, not planned. “No one says, today we’re going to move into a new practice area… Things just bubble up. At a partner meeting, we tried to map out everything we knew that was going on in the firm – not what clients were paying us for, stuff that we were doing on the side or investing in. Basically we ran out of time and space with all these projects. At one level it seemed like anarchy, but we could all see just how much incredible value was coming out of this emergent approach to new things.”

The forgiven
Underpinning Ideo’s intensely creative culture is a deep reservoir of trust. This is in its DNA, stemming partly from Kelley’s idea of working with friends, but also from his deliberate intent to create an organisation that positively encouraged people to take the creative risks that were outlawed in other places he had worked in – even to the point of annoying clients if it comes to it. “David always talked about asking for forgiveness, not permission,” Brown says. “Go ahead and do something and then if it really screws up, apologise if you have to. But it’s up to you to figure out if it’s a good thing or a bad thing to do in the first place.”

Can such a culture scale? And if so, how far? As at Google, this is a constant preoccupation. On one hand, Brown admits that in pure efficiency terms, Ideo doesn’t rate very highly. Experimentation means lots of mess, and conveying emergent experience lots of face time and travelling around. This hasn’t hindered growth so far, because Ideo has mostly found itself working for large companies which have both deep pockets and interesting problems to work on. (As a privately held firm, Ideo doesn’t divulge financials.) And Brown claims some progress in developing knowledge systems to harness and make available Ideo’s cumulated bank of experience.

Next, the world
However, there is an issue looming in the future. The vast majority of new recruits, says Brown, aren’t really interested in solving the innovation problems of large companies. What they’re really interested in is solving the innovation problems of agriculture in Africa, clean water or health in India, or even education in North America. “So we have this really critical need to figure out how to adjust our business model so that we can work on stuff that our people are passionate about. Whereas today 85 per cent of our business is working with large corporations in the west, if it is still 85 per cent in five years time, we’ll either be half the size of what we are today or we won’t have anything like the quality of employees that we do today. So the challenge is, how do we get the business model to evolve with the passions of the people? Because that’s how we built the company in the first place.”

Interestingly, Brown believes that Ideo’s restless creative minds are, characteristically, on the way to cracking this new innovation frontier. But he has no doubt that the result will be crucial. The real question about scale, he says, “is not about sharing information – it’s about sharing inspiration. If we can find mechanisms to do that – and I’m feeling pretty good about what we are finding now – then we can probably scale”.

Vineet Nayar and HCL Technologies: Explosive growth
If you’re a $2bn service company struggling to keeping up with demand, whose suppliers’ technology is getting more complex by the day and whose fast-growing business is losing a quarter of its employees to attrition every year, what do you do to cope? Blow up the office of the CEO and tell your customers that your employees come first.

This, put succinctly, was the Olympic-class lateral leap outlined to MLab’s Half Moon Bay Conference by Vineet Nayar, CEO of the Indian IT and software development company HCL Technologies.

For HCL, the epiphany came in 2005. The context: an Indian software business expanding at 25 per cent a year (exports are currently worth some $40bn), and within it a company with 35,000 employees, 8,000 of whom would leave while it was struggling to keep up with business growing at 40 per cent a year. Technological complexity was mushrooming as fast as demand. At the last count, says Nayar, there were 862 technologies that an integrator had to be conversant with and able to converge at the customer’s location, “and you can always depend on the Googles and HPs and Microsofts to create more and more problems and complexities with products that don’t automatically work together”.

Beating commoditisation
Faced with this knot of complexity, HCL had a eureka moment. It saw that IT services had become a commodity market. A high-tech one, true, but one in which there was no real differentiator between suppliers. They all said they were customer focused, “but apart from talk about it, what innovation can you actually do from a service point of view?”

Maybe, Nayar pondered, they had hold of the wrong end of the stick. There was no shortage of customers clamouring for fixes, and no shortage of new problems to be fixed. “But the only guy who can give a solution is the employee. The most precious thing in this entire industry is, what does that employee do when he hits the customer? That’s where the value is created, in the interface between the two. And the higher the quality of employee you have, in terms of capability, enablement, engagement, the better value gets created in that interface.”

Clearly, market developments knitted with far-reaching societal and employment changes – witness the new generation’s lack of deference and resistance to hierarchy. Employees out with the customer knew more about customers than the hierarchy, and the CEO in particular. So logically, telling them what to do and how to manage the interface was not an option. Yet that is what organisations were still trying to do.

The mirror man
The first step in turning this around was, as Nayar tells it, to take a leaf from a fairy story. “Most of us spend all of our time bullsh*!%ing, telling everyone what a great company we are. We launched a huge concept which we called ‘Mirror, Mirror on the Wall’ and we really dragged up all the dirt on the company and brought it out in front of all the employees, and I met every one of them. It unleashed unparalleled energy. Honesty really does pay. So ‘Mirror, Mirror on the Wall’ is constantly what we ask, and it keeps us honest.”

The logic then pointed to full-scale democratisation of the organisation – a daunting prospect for a company that, unlike Gore or Whole Foods Market, had been operating with a conventional hierarchy for nearly three decades. Rather than rip out the group’s operating structure in its entirety, HCL’s solution was to institute profound cultural change with a number of innovative features:

Reverse accountability. To demonstrate that putting employees first wasn’t just words, the company launched company-wide 360-degree appraisals for all managers – and placed the results for all to see on the web. For the last three years, some 20,000 employees have taken part in the survey, ranking 1,500 managers – including Nayar – on 20 employee-related aspects of performance. The survey is not linked to pay or promotion, but the very public nature of the exercise is enough to make managers take it seriously, working to improve areas of weakness or in some cases changing direction, moving out of leadership roles into more technology-oriented work, for example.

Underlining the commitment to a different kind of accountability, Nayar’s internal blog, “Vineet Replies”, allows employees to raise questions on any aspect of company affairs, the dialogue again publicly posted on the intranet. Neither questions nor answers pull punches. But that’s the point. The underpinning belief is that trust isn’t something that comes about through fuzzy good intentions: it is created by transparency.

Parallel hierarchy. Says Nayar: “We are obsessed with the idea that hierarchy gives us certainty. We wanted to destroy the concept that there is just one person who takes the decision, so we launched what we call Destroy the Office of the CEO… We created a parallel hierarchy organisation [which consists of] 32 communities of interest where people can collaborate and create opportunities and IP outside their hierarchy, so no one will be able to control it. Today, after three years, 20 per cent of HCL’s revenues come from ideas or initiatives created out of the communities of interest” – substantial by any criterion.

Hygiene. It’s all very well saying employees come first, but they’ve heard that before: how do you prove it? HCL’s novel answer: the creation of Service Level Agreements (SLAs) between administrative departments and the employee. For any complaint or query – from broken air-conditioning to a contested bonus – an employee opens a service ticket on a portal to which the department is obliged to respond. Crucially, it is only the employee who can close the ticket; and since service desks are measured on their response rates and times there is a strong incentive for rapid closure. By cutting the corporate bureaucracy down to size the SLAs, says Nayar, send a powerful signal that it is the front-line employees who create the value and that the organisation is there to support them rather than the other way round. They also play a positive role, encouraging departments to be proactive and over time craft an organisation that is truly employee-shaped.

The particular interest of HCL’s experience is that it involves the transformation of an existing culture rather than creating a new one from scratch. At the time, not everyone was convinced. Thus, while employees instantly “got” the point of the changes, and many customers did, it took the stock exchange six to nine months to absorb the new orientation and its implications. Looking back, Nayar believes the shock tactics were entirely justified. “One of the things you should always do when you innovate is take it to the extreme,” he says. Without that boldness it won’t work. “We have done nothing innovative from a product point of view for the last three years. We have not gone into any new markets. All we have done is focus on employees, and we are growing faster than everybody else. Our staff are performing far better than everybody else. I don’t know; we’re either lucky or we must be doing something right.”

Jeffrey Hollender of Seventh Generation: See through inspiration
Seventh Generation doesn’t make things easy for itself. It makes very basic commodity products, such as toilet paper, diapers and laundry liquid which like its processes it wants to be not just sustainable but restorative – and which it won’t sell through Wal-Mart. It practices an extreme form of transparency that has its attorneys on tenterhooks every time a spokesperson opens their mouth. And it insists on a name that few people understand – but that guarantees it falls short of its aspirations every day of the year.

“Seventh Generation,” says president and Chief Inspired Protagonist Jeffrey Hollender (another who firmly believes in the advantages of not having a business education), comes from the Great Law of the Iroquois which says that in every deliberation, it behoves to consider the impact of the decision on the next seven generations. “Every advertising agency we hired for the first 10 years told us to get rid of the name... thank god we didn’t,” says Hollender. “It’s a challenge – I mean, imagine having a name that you could never live up to. We will spend the next 100 years, if not 200, trying to fulfil the aspiration that is embodied in the name of the company.”

The essential paradox
But the paradox is, the harder 7Gen makes life for itself in conventional business terms, the better business it seems to do. Founded 20 years ago, and unprofitable for the first 12, privately-held 7Gen is on a roll. As a privately held company, 7Gen does not disclose financials; but growth of 25 per cent a year in the late 1990s went up to 45 per cent last year and is even higher this year. So how does the paradox work?

Well, says Hollender, take transparency. Extreme transparency is mandated by the need for authenticity, one of the three things that comprise Seventh Generation’s “essence”, and that drive everything it does (the other two are justice and equity, and “reconciling systemic dissonance”, of which more below). Transparency means that, for example, when anything bad happens instead of hushing it up the company makes sure everyone knows about it. It’s not enough, say, for the company to be trying to eliminate a certain chemical from its laundry detergent; stakeholders have to be involved in the dialogue. “That inspired us to look at everything we were doing and put on our website anything critical that might be missing that anyone would want to know,” recounts Hollender. “It’s totally counterintuitive to think that you can be that self-critical and transparent and actually grow your business successfully. But I think we live in a world where people feel so cynical and so distrustful that actually it has the opposite effect. It creates a level of trust and comfort that is rare for consumers to find in relationships with companies they buy from.”

The power of influence
Or consider “reconciling systemic dissonance”. Systemic dissonance is a sophisticated medical system that only benefits those who need it least. Or a Wal-Mart whose purpose of saving consumers money “results in maximising the externalities they don’t pay for as a business, which is the antithesis of being responsible”. Says Hollender: “A lot of the mission of the company is to actually engage with other businesses in helping them think about these things, because the solutions aren’t going to come from 7Gen, I mean we’re a little company, most of our influence is not even on our consumers; most of our influence is on other businesses who look at what we do and say wow, that’s interesting, I didn’t think that was possible. I think we generate more change as a result of influencing other companies than we do through anything we directly do ourselves.”

It gradually dawns that 7Gen isn’t really in the green products business, although that’s what it makes. It’s in the saving-the-world business, and the products are a means to that end. A tall order, even reduced to a list of the eight things that the company – the entire company – decided it was best placed to deliver that the world most needed. These are to foster a world of equity, justice and wellbeing through education; to create more conscious consumers and citizens; to create a world rich in value rather than artefacts; to foster governance that favours diversity; to encourage personal development; to view everything through a systems perspective; to ensure sustainable use of natural resources; and – most difficult of all – to make products that don’t just do less harm but actually help make the world better.

Therapy Inc.
None of this is easy. Hollender admits that not everyone can take 7Gen’s intense culture of self-reflection and truth telling – “I’ve told my analyst as long as we’re on this path I’ll never leave therapy because I’m in the endlessly critical, self-evaluative place, he quips – and worries that it’s particularly hard for senior management to keep themselves from slipping back into established patterns that they bring from other companies. Even making an effort to hire people for their values above all, “I often joke that we’re hiring people who have been severely damaged by the other places they’ve worked,” he says. “You hire someone, you tell them that you want them to be honest, you want them to be direct, they don’t believe you; they basically say yeah, I’ve heard that before and I’m not making that mistake again. It often takes years for people to gain the trust that they can actually be what they want to be.”

When they can make that step, however, it’s all benefit: people are passionate not only about their work but about the fact that the company is encouraging them to do what they want to do as individuals – “that’s one of the things that I feel most proud and delighted about”. Improbable as it sounds, “becoming what they want to be’ is also what 7Gen is trying to sell to customers. Through laundry liquid and toilet paper? Constant self-analysis could make the company very inwardly focused, Hollender accepts. To counter that tendency, it tries “really, really hard” to see decisions through the eyes of customers – back to the Iroquois, and something rather different from conventional customer focus. Crazy? Perhaps: “But we think the way we build great relationships with our customers is to engage in a process that helps them be who they want to be and helps them lead the lives that they want to lead. We think that so few companies are engaged in understanding their customers in that aspirational way that there is a big opportunity, particularly for someone in a market like ours.”

Simon Caulkin is the management editor of The Observer.