Andrew Schwedel: Firm of the Future



Over the next 10 years, major structural forces such as technology and a changing workforce will shape a new era of business. Andrew Schwedel, a partner with the Bain Insights Group, discusses the five emerging themes that will characterize the firm of the future and how leadership teams can adapt their skill sets and strategic approaches to pursue their prospective place.

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ANDREW SCHWEDEL: What do we mean by the firm of the future? Fundamentally, it's about new execution models, rather than a complete change to the basic laws of strategy. It's about how you deliver the benefits of scale and intimacy better and faster to your customers in a highly turbulent environment.

The first important point to recognize is that while change happens all the time, there are distinct eras in the evolution of business. These eras typically last about 40-to-50 years. And they're marked by a set of unifying characteristics and a quintessential company that comes to symbolize the era, such as Standard Oil during the trust era at the turn of the last century.

We're currently living in what we call the shareholder-primacy era. Because the single most important theme has been the relentless pursuit and prioritization of shareholder value. You can date this era to the mid-1970s. And it stands in sharp contrast to the previous era of professional management.

Both periods had a lot in common, such as scale to achieve leadership economics, and the power of professional managers. But there are also important differences. The shareholder-primacy era has seen a greater focus on the core; moves away from diversification; and increased alignment of management and ownership, with far higher rewards to capital vs. labor.

It's not always obvious at the time when an era is shifting, and it takes time to play out. But we believe the current era is starting to break down. The next 10 years will see the rise of a new era, and the nature of the firm will undergo its greatest shift since the 1970s.

We see four major structural forces behind this. First is technology, which for many, many years has driven up the returns to scale, but is now favoring returns to speed even more. Second is a more challenging macro environment, with more activist governments, more populism, and a backlash against short-term thinking, along with increased calls for companies to pursue a higher purpose in addition to profits.

Third is the changing nature of the workforce, with the rise of the gig economy and millennials seeking a new deal for talent. Finally, the nature of the firm itself within the firm feels increasingly complex and harder than ever to translate strategy into fast and effective execution.

So what will the new era be like? We see five emerging themes. First is the changing relationship between scale, speed and customer intimacy. Traditionally, strategy has viewed a fundamental trade-off between scale and intimacy. But now technology allows firms to have both.

Technology also makes it easier than ever to rent scale, even as it increases the importance of speed. In the new era, just as firms will continue to manage their unit costs with scale-based experience curves, they'll need to adopt new measures and tools for delivering customer intimacy, such as Net Promoter systems, and speed, such as Agile and Scrum techniques. This is going to require greater investment in peer-to-peer learning systems.

The second theme is the need for companies to adopt a clear mission, translate that mission into mission-critical roles, and rally the entire weight of the firm around those roles. This sounds obvious, but it's a departure from how many companies work today. All too often, we see companies not being disciplined about defining what their mission-critical roles are. And too often, the professional manager is at the center of the firm, rather than those mission-critical roles.

In the future, we see most work being either outsourced or automated. And what remains will effectively be those most mission-critical roles filled by people in self-organizing, Agile, project-based teams, and with far fewer professional managers than today.

A third theme is around the shift from ownership of assets to control of ecosystems as the basis of economic advantage. This will involve a greater use of outsourcing deeper and deeper into the core; more prominence of platform companies, and not just in the technologies sector; and greater intra-industry collaboration. And a key success factor for any firm will be its ability to forge win-win partnerships with companies across that entire ecosystem.

The fourth theme is around the emergence of new ownership models to enable a longer-term perspective, including longer holding periods for private companies, more-concentrated ownership of public companies, and more-flexible capital that allows investors to invest in specific projects rather than in an entire firm. Finally, the firm of the future will need to be able to run two businesses in parallel. An Engine 1 that is all about routines, discipline and continuous improvement, and an Engine 2 that is all about innovation and rapid adaptation, and becomes the vehicle to transform the entire firm over time.

What does all this mean for companies and their leadership teams? First is that the new era is going to require a very different skill set and leadership approach than what's prevailed for the last 40 years. It will look a lot more like the combined skills of a venture capital firm, with its ecosystem-outlook and its focus on mission-critical roles, and a professional services firm, with its ability to rapidly mobilize and demobilize resources, rather than a classic corporate.

Second, the professional managers who have successfully guided us through the last 90 years will either be the greatest partners to or the greatest obstacles to this change. To help them adapt and succeed, we're going to need new metrics and tools for speed, for learning, for helping talent reach its full potential. And this is an enormous change-management challenge that will take years to realize. So companies really need to begin the journey now.

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