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Big concerns would so much like to be like start-ups. But why?
The old yellow phone boxes standing around as decor are a statement: look how far the German company Telekom has come since the old days, look how the old rigid state-owned enterprise has been transformed into a modern company! And how better to demonstrate how contemporary you are than with a co-working space in Berlin, where young entrepreneurs work on their start-ups supported by that same Telekom? This place looks just as you’d imagine the start-up scene in Berlin. There is a motley collection of sofas and armchairs in the ground-floor café. A handwritten notice on one wall offers a table of forthcoming events. And on the first floor, chaos reigns in the open-plan space.
With the coming of digitalisation, the telecommunications sector was the first to feel the pressure to innovate. Now all branches of industry are affected; 70% of German chief executives say digital transformation is the main challenge of the coming three years. German companies that have sailed calmly for more than 50 years now face being left behind at an alarming speed.
Keen not to lose touch, big and medium-sized firms are looking to start-ups. These seem to be everything they are not but would like to be: agile, quick, efficient and close to the customers – customers whose expectations have changed radically over the past few years. The big boys now expect the little ones to provide them with quick access to the latest technologies. What is more, they are hoping to gain new impetus from the way they work, to transform the corporate structure and culture of the bulky giants. “We have to be like a start-up,” runs the mantra.
There is a tried and tested approach: the boss takes a high-profile trip to Silicon Valley. He or she may even leave two or three members of staff there, in little offices tucked away just round the corner from Google and Facebook. In response to this new demand, Lufthansa has run direct flights from Frankfurt am Main to San Jose since April 2016. The company’s next step is to Berlin, where it rents a co-working space that it stocks with highly promising young companies.
The business offers space, technology and mentors; it promises access to its existing customers and its sales department. It usually invests in the start-up. In return it gets a 5 to 15% share in the young company and the pleasant feeling of being right in there where it’s all at. Places where start-ups can tinker with their developments embedded in a company infrastructure – a bit like sheltered accommodation – are known as incubators or accelerators. There is Hubraum (Telekom), Innovation Hub (RWE), the Axel Springer Plug and Play Accelerator or Fielmann Ventures.
“A third of all firms listed on the Dax, Germany’s top-30 stock exchange index, now have their own incubators or accelerators,” says Julian Kawohl of Berlin’s HTW University for Applied Sciences, who is researching the relationship between the giants and the pygmies.
“At the moment there is terrific hype about the start-up scene,” says Kawohl. “The big concerns don’t want to lose touch and are trying everything.” The established firms have an ambivalent attitude to the young entrepreneurs. On the one hand, they envy their innovative spirit and want to have a piece of the action. On the other, they do not yet take the small firms totally seriously, and hardly any of them see them as direct competitors. How fast things can change is shown by Airbnb and Lyft, which are putting enormous pressure on the hotel and taxi sectors.
“The big companies often don’t know what they want from the start-ups,” says Felix Anthonj, founder of the software company Flexperto. His firm is based in Telekom’s Hubraum and advises firms on cooperation with the young firms. There are various ways of doing it: the larger concern can become a customer of the start-up and use its product in its own company. Or the two can develop a joint project that they market together. A third possibility is to invest in new set-ups via a corporate venture capital fund. “At the moment the established firms are doing a bit of everything and are not terribly successful anywhere,” says Anthonj. Kawohl agrees. “It’s too soon to tell whether the cooperation is really worth it. That takes at least five years and none of the projects so far has run for more than three.”
At the moment there is terrific hype about the start-up scene. The big concerns don't want to lose touch and are trying everything.
As they get to know each other, it begins to dawn on both sides how different they are. There is a clash of mindsets and speeds. “We get the classic case: the big companies start off by handing over a 30-page contract and want to check the data-protection provisions and the resilience of the IT,” says Christian Renner, managing director at Kompass Ventures, a venture capital provider. He has advised various firms on the issue and built up the Hubraum for Telekom. Young firms with only a handful of staff soon find that the bureaucracy of the established partners is overwhelming and they need a lawyer. Also, big firms plan so far ahead that there is just no room for short-term cooperation.
For their part, the big firms are often too hasty. They take a stake in start-ups too early, when it is not yet clear where the young firm is going and whether its final product will even fit the company’s needs. After all, it is part of the principle of a start-up to regularly check the product idea, to adjust and change. Flexperto is an example. When Telekom got involved and installed the Flexperto staff in its incubator, the Flexperto software was still aimed at private customers. That quickly turned into a product for business clients, and today its customers are mainly banks and insurance companies. Telekom is now working on similar software better adapted to its own requirements.
Working together is not easy, but the big firms’ expectations of the little ones are high. “We can learn a lot from start-ups,” said Audi boss Rupert Stadler in April 2016. Samsung also wants to be “as agile as a start-up”. And the energy company RWE aims to be the “Uber of the energy sector”.
The steel group Klöckner is currently restructuring under its chief executive, Gisbert Rühl – modelled on a start-up, and Rühl has set up a subsidiary in Berlin, Kloeckner.i. Until recently this 100-year-old firm was still taking orders by fax.
The big management consultancies are also fuelling the hype. They hold workshops and arrange contacts with founders of start-ups. McKinsey now has nine so-called digital labs worldwide, including one in Berlin.
It is understandable why traditional firms are being pro-active. Many concerns such as RWE and Klöckner are facing a crisis and have to reinvent themselves. The start-up scene as a role model is the latest silver bullet after “concentrating on the core business” and “diversification”. The new buzzwords are “design thinking!” (getting closer to the customer); “rapid prototyping!” (developing and testing products at speed, instead of brooding over them for ages in a back room). And, of course, networked structures instead of clear hierarchies and “courage to fail!”
The start-up scene as a role model is the latest silver bullet after “concentrating on the core business” and “diversification”. The new buzzwords are: “design-thinking”, “rapid prototyping!” and, of course, networked structures and “courage to fail!”
Beware of empty phrases
However, repeating buzzwords is as useless as installing colourful felt cube seating for spontaneous meetings, general use of first names or introducing water pistols in open-plan offices. What works for big firms is different from what works for small ones.
“When I mention ‘the courage to fail’ to engineers from Bosch or Daimler, they just roll their eyes,” says Willms Buhse, who advises enterprises on digitalisation. “They’ve heard it all a hundred times, but it is of little relevance in their work.” It is precisely high quality that has made German firms big; squandering that reputation would be fatal. What is still missing, says Buhse, are bridge-builders who identify really useful start-up methods for big firms and connect them with traditional German enterprise. Certain approaches can help to break down structures that have become rigid. “But 30 hipsters in Berlin’s Betahaus will definitely not rescue a major firm.”
Interestingly, even in young firms these vaunted methods do not always work as smoothly as many established companies imagine. The thinktank LEAD interviewed industrialists and entrepreneurs for a study in conjunction with the University of St Gallen. It found that established firms often overrated start-ups. They saw the flat hierarchies as key to the start-ups’ success. They imagined everybody working together for a common goal, without any trench warfare or careerist manoeuvring. Above all, the established firms admired the commitment of the start-up staff and the way the founders were able to communicate their passion for the project. In contrast, the entrepreneurs often reported financial pressure, organisational problems, bosses who were out of their depth and 16-hour days.
It is estimated that up to 90% of newcomers fail. “It is precisely the lauded start-up structures that are ultimately responsible for many young firms going under,” says Stefan Kühl, professor of sociology at Bielefeld University. Unlike the established firms, most start-ups are financed by venture capital. Investors often invest multi-millions in the young companies. Initially, making a profit takes a back seat, what is important is rapid growth and a good market position.
Zalando, a 2008 start-up that is now employing about 10,000 staff with an annual turnover of €3bn (£2.7bn) and striving to be agile, has only been making a modest profit since 2014. And the speed the old bulk carriers long for is risky: products are often launched on the market too early. Software is still full of bugs, the programmers have to patch and the customer is dissatisfied. Moreover, founders need a lot of staff quickly. They often recruit the person they get on with best, rather than who is most competent, says Kühl. The consequences can soon be dire. Very few of the staff have managerial experience.
Problems usually crop up as soon as these firms begin to reach medium size and turnover. “The structures that have grown up working as a group, where everyone knows everything and has a say everywhere, cannot be sustained,” says Kühl. “Problems begin to arise at a workforce of 30 upwards.” Eventually, everyone is spending all their time reading and sending emails to keep everyone up to date. “It is only then that start-ups start to create organisational structures to regulate how decisions are made and who may take what decisions,” says Kühl. In other words: hierarchies form.
But the people who were in at the start are used to having a say, so many of them resent authority as posturing and abuse of power. Middle managers in particular are often not accepted, says Kühl. “That is why all key decisions are often deferred right to the top, to the CEO. Nobody else is prepared to commit themselves, everybody wants to cover themselves and pass the buck.” And that is exactly what leads to the sluggishness and rigidity which the established firms are trying to rid themselves of by turning to start-up methods.
We almost find ourselves hankering for those outdated and unfashionable industrial values: taking decisions and taking the responsibility for them, respecting instructions and implementing them. In this, the new boys could learn from the successful companies.
And that is also true in personnel matters. Most founders are not interested in 35-hour weeks, 30 days annual holiday, Christmas bonuses and protection against dismissal. They can’t afford all that. Strict and carefully worked out data-protection guidelines may be important, but they are not their field of interest. When it comes to diversity, too, the old established firms have often made more progress: the start-up scene is pretty much a boys’ club.
Felix Anthonj from Flexperto wants never to be as sluggish as the established firms, but he has recruited some of their former employees for his own team – well aware that he can learn from them, too.