The Haier model with William Malek
Join Murray Robinson and Shane Gibson as they chat with William Malek about the Haier operating model. Haier, a Chinese appliance giant, transitioned from a failing state-owned enterprise to a highly profitable publicly owned organisation with over 5,700 micro enterprises and $50 billion in revenue.
We explain how Haier uses an internal marketplace to allow microenterprises to trade goods and services with each other, based on a value added mechanism and smart contracts. An approach based on the philosophy of RenDanHeYi, where managers release control and support teams to achieve their potential to create valuable solutions within an open environment.
William makes a compelling case for the benefits of a decentralized agile organizational model in driving high innovation and performance.
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Shanes Summary
Haier, were about to fail and they changed everything. And they became very large decentralized, autonomous enterprise making a shit load of money. So lots of people working without centralized control empowered to just go and do what they need to do
And then you talked about a lot of patterns or mechanisms they used to manage that. So you talked about the value added mechanism, the VAM, where they understood a value chain and that allowed them to find opportunities where a group of people could start a micro enterprise and add value in that step. But they also understood the beginning and the end of the value chain. So they understood how they made money as an organization right through the end customer.
You talked about the ecosystem management community, EMC, which seemed to come later as they scaled and became a decentralized controlling force. And then this idea of a smart contract. And when you talked about blockchain, I was like, ah, I get it. Decentralized contracts are immutable. You can’t change it without agreement and visibility. And it has a core set of metrics you can’t game. So you’re in red, you’re going to pedal a lot faster to get into green, or you’re gonna stop because you’re not adding value and you’ll go and work in another team or on another scenario.
Then you brought onto this idea of scenarios. So you’re almost given the customer, and then you’re doing product market fit. Am I adding something valuable that they’re going to keep buying in a massively competitive environment? There may be people outside my organization that are doing it cheaper and faster, and nobody’s forced to buy off me because I’m inside. And if it doesn’t work, the learnings go back into that scenario repository. As a startup owner, if I could watch and learn truly how other startups have failed at what I’m trying to do. I wouldn’t do those things or I’d do them differently.
Now, the problem in the startup world is all the successful ones tell you the origin story, which is where they ended up, not how they started. Nobody’s honest about what failed. Cause you don’t want to admit that you did. But Haier seem to have a rich repository of information and content and experience that they can pull from.
And you talked about 5, 700 micro enterprise teams and a reduction in the HR team and it reminded me of the Buurtzorg model and this is 16, 000 frontline staff in aged care, 45 back office people. And how do they do that? Small teams of 10 to 12 that were running their own companies, effectively under this organization.
Self selecting team behavior a lot of that in there, but crucially decide your own compensation. So select a team and make money. If the team ain’t making money, select a different team, either you leave or they leave, but true entrepreneurial behavior.
I see some venture studio behavior. So there’s a bucket of money effectively. I can go into the studio and get some of that time and money and there’s a studio capability to help me do it where I’m not on my own. There’s some chaos theory. Just go be successful. Are you going to die? Completely autonomous. There’s some VC theory. The EMC owner to me sounds a little bit like a VC. Hey, yeah, that sounds interesting. Yep. I’m going to support that. It’s a venture. It’s an experiment. Nine out of 10 of them may die. It’d be really interesting to see the success rate of their micro enterprises.
The strategy is if we set up the ecosystem so it can learn and it can add value. It’s going to add value. So I don’t have to worry about anything else. I’ve just got to get the ecosystem and the culture right.
There was a bit of mission command in there. Set the teams up, tell them what the goal is and then let them go off and actually do the work.
And then this idea of decentralized smart contracts. The contracts follow the ecosystem. It behaves the same way you want the company to behave. So there’s no centralized, one team signing off the contracts, which as soon as you do that, you get a hierarchy. So that decentralized smart contracts reinforces that autonomous behavior. So those are the patterns that I got out of it. A very different way of working to most organizations.
Podcast Transcript
Read along you will
Shane Welcome to the No Nonsense Agile podcast. I’m Shane Gibson.
Murray And I’m Murray Robinson,
William And I’m William Malik.
Murray So thanks for coming on today, William. We want to talk to you about the Haier operating model, but why don’t we get you to introduce yourself to the audience first?
William Okay. I was an engineer by trade, a mechanical electrical engineer. For about 15 years, I sat in the energy industry. And I went back to school, got a master’s degree focusing on how technology would impact businesses. I ended up training companies on project management from strategy, how you set projects all the way down. And I got a call from Stanford university about advanced project management. That was my next step into the academic side of organizational systems and dynamics. I had research budget. We had programs going twice a year on campus. We had online courses and ~~ ~~clients calling us in all the time.
Really opened my eyes up to the root causes of issues with respect to performance in organizations. I wrote a book with Harvard business school called executing your strategy. Went to Thailand to do a book tour 16 years ago and went back into training and consulting full time.
Understanding the Haier Operating Model
Murray How did you get involved with Haier?
William About four years ago, the Haier model Institute wanted me to do a presentation at their annual events called nine 20, and they said Oh, I’ve read your stuff. Would you be interested in telling us what our organization look like from an outsider’s perspective.
It took me a good seven weeks of questions back and forth, as I went through one layer, I said, okay how are you doing this? And they would give me a response and I would go, wow, that’s unusual. I’ve never heard that before. And so bottom line is I had an existential crisis. What I was teaching was obsolete, irrelevant. I realized this is so radically different.
Haier’s Decentralized Autonomous Enterprises
William I formed a partnership based on that called the RenDanHeyi Southeast Asia Research Center to help promote, consult, train, and support the concept of Decentralized Autonomous Enterprises, which is the fundamental DNA of Haier.
That moved me quickly into a client that said, we love this. And we want to do what you’re talking about. And this was a very top down patriarchal organization. That was a nine month project and it was absolutely amazing to be in the middle of the conversations as to how people would react to the concepts that Haier had.
Murray Probably a lot of people don’t know what Haier is. I know of them from washing machines and dryers. Tell us about Haier. What does it do? How big is it?
William The genesis was the appliance world. So washing machine, stoves, and refrigerators and things like this at the very beginning and the appliance part of the business is still there, but that’s just the product. They could go in any direction, as a product manufacturer, because now I can add services on top of that through ecosystem partners.
Now, what they’re known for is the services that they develop in the marketplace that are what I call ecosystemic based services where they’ve allowed themselves to have a whole new operating model, a boundary-less organization. They are not afraid of working with competitors to bring solutions to the marketplace that are rather unique and different.
Murray How many people do they have? What sort of revenue?
William We’re talking about 50 billion US dollars in annual revenue. They have about 150,000 plus. More importantly, they have about 5,700 micro enterprises. The entire organization is comprised of these micro enterprises. Which are small entrepreneurial teams. And that is the primary DNA of the organization that’s delivering these ecosystemic services and products into the marketplace driven by a decentralized operating model. And, part of this is due to the fact that strategy doesn’t come from the top. It comes directly from the micro enterprises. It’s bottom up.
Murray Do you know anything about their growth rate and their profitability?
William Yes. The last report about 9 months ago is that they have double digit growth on top line. But more importantly they have double digit growth with gross margin. Now that happens to be because of the ecosystemic approach. What they do is they co create with other partners to deliver services. They share in the risk, but it’s not a contract relation where I have to pay for the service. So they’re able to lower and optimize their operating costs, the value chain that they’re delivering a service on. This is how they can actually get the gross margins while they’re growing. And that’s because one, the ecosystem strategy externally, and then internally they have a whole mechanism of an internal marketplace where people compete, they get the lowest price, but yet the highest value is the goal out of the system.
Murray How are their net profit margins compared to other appliance manufacturers that they compete with?
William I don’t know the answer to that directly but it’s going to be substantially higher. I just haven’t seen any company that’s operating at this level of financial performance.
I asked Zhang Ruimin are you afraid of competition? And he said, no. We’re going to out experiment the market. We are going to run so many innovation projects that we will stumble upon the right stuff because we have so much experimentation going on.
Haier’s Global Expansion and Ecosystem Strategy
William And they’re not just Chinese anymore. They bought GE appliance for 4 billion bucks in cash four or five years ago. They just bought Carrier Corporation. These are just very natural extensions of their ecosystemic strategy.
Navigating Challenges in Communist China
Murray Okay, so Haier is a Chinese company operating in communist China. So on the one hand, they seem hyper capitalist but on the other hand, they’re operating in a chinese system, which has heavy government Intervention and often provides heavy financing for growth companies like this. So what’s going on there with operating within communist China?
William Haier started as a state owned enterprise, but it was failing dramatically. And Zhang Ruimin was brought in. Did a turnaround of major proportions so the government just let him go. Essentially he was able to work his way out of domination by the state owned enterprise by flipping the model. No, you don’t control it from the top. We get to let the market determine what’s going on. So through natural process of how his business model emerged. He was just allowed to carry on because he fixed the company, grew the company. He became, hyper competitive in the marketplace,. And Zhang Ruimin was able to turn the company around to the point today, they actually own a bank. So they don’t even have to worry about state funding or state enterprise. They’re doing this, without government intervention. But they’re not being told what to do necessarily by the Chinese directly. Now they do include them.
Murray So are they privately owned?
William They’re a publicly traded company, you can buy Haier group stock, on the market today.
The Micro Enterprise Model at Haier
William Now what’s very different though is the micro enterprises. They’re seed funded by the corporate body, like shared ownership at the beginning. At Haier, you don’t get a salary unless you actually are getting value from the customer. In other words, if you don’t have a paid customer that’s that you’re generating value for it, you don’t get paid.
Now that is controlled through a system that manages risk. But those micro enterprises can scale dramatically because they’ve got a huge global infrastructure. Some of these micro enterprises go to an IPO in less than a year. You tell me any American company that’s got a business unit that went to an IPO in less than a year. It’s stunning to watch how much entrepreneurial energy is impacting their global growth.
Shane I’m quite keen to drill into how they execute a decentralized autonomous organization. So one of the ones you mentioned was people don’t get paid a salary based on title or role. They get paid for the success. So that startup behavior of you’re running a small business you make money, you get money, you don’t make money without customers, you don’t get paid. So how does that work? Is it just treated like a startup or is there actually a set of patterns that they have put in place to enable them to do that with 150, 000 people?
William Yeah, if it’s all decentralized and all the teams make their own decisions how the heck do they keep it all coordinated?
Smart Contracts and Value Chains
William Part of this is what’s called the value added mechanism. And the value added mechanism goes like this. The value chain from supplier to delivery of product or service into the marketplace is actually designed from the beginning. Production, manufacturing, supply chain, procurement line up and they say, I’m willing to do my work in the value chain at this rate. And what they’re able to do is agree profit level. When we sell one washing machine, what’s the distribution of profit across the value chain? And they agree to that before the product is in the marketplace. So that value added mechanism is the glue that keeps the whole value chain coordinated and orchestrated. But it also keeps them together to work out each other’s issues when they do come up, because sometimes, problems cascade all the way through the system and you got to come together as a group and figure that out.
And so they’ve actually got another part of their system that’s emerged over the years called the EMC, the ecosystem micro community. Think of this as the internal coordination of the networks. So Haier have the ability to coordinate large groups of smaller companies, and they do this through the EMC. And this is the value added mechanism, the coordination of the value chain, the ex ante determination of what value you’re going to get paid as we sell a product is all done ahead of time. And, agreed to contractually through smart contracts.
Shane So let’s say that we’ve got a unit of people and they see a gap that they can fill, so they go, cool. We’re going to experiment to fill that gap. They set a price, which gives them profitability of the unit, which will pay them the money that they need to live. And nobody takes it up. So there’s no internal customer. What happens when there’s a failure of a unit?
William So smart contract. They agree to this up front and they have a performance agreement. They set goals themselves, not the leader. There’s no managers and management at Haier. But what they do is through the smart contract, you are required to report on your journey. Are you hitting the marks that you thought you would hit .
Now, they have a dashboard system red, yellow, green. And if you get to a red condition, it means, Oh, we’re not performing to expectations. So after a period of time, if they can’t get out of the red and back into either yellow or green, your project is shut down.
There’s no emotion about it. There’s no leader coming up. Oh, we’ve decided this and that. The system based on analytics, for the most part says you’re not performing, this is not working. So we have to mitigate our risks. We’re shutting the project down. Now the question becomes what happens, remember, we’re talking high experimentation, high entrepreneurship. You’re going to have those failures. So first of all, there’s never a failure at Haier. It’s all about learning, so they have a project that gets closed. Those scenarios, or I would call it value proposition never get lost. They actually have a whole platform where they bring those scenarios up to the rest of the organization. The project didn’t work, but the scenario might have had just something that was missing that somebody else, could see and pick up. And, I might be going in there one day and going, Ooh, that’s a project I can do. How can we do that better next time? And you can go grab the scenario, make a proposal for a new project. And you can create a team and be back in the business with a new scorecard, with a new contract.
Now in China, if you lose your project, I can go apply to the 5, 700 micro enterprise teams. The average turnaround time is in the area of two to three days. That’s how fast and how robust their system is. But again, it’s based on mutual selection. It’s a mutual cooperative game.
And so they have a strong, employee engagement level and you have to be accountable. The expectations are that you will become your own CEO, which means, I have to be proactive. I’ve got to be responsible. And with that in mind you get people who are risk takers capable of making value added products.
Murray So, William, let’s say the three of us are working for Haier and see an opportunity for something new. How do we go about setting up a micro enterprise, who do we convince? Where do we get the funding from? What are the rules around a micro enterprise?
William So for the most part this system, Ren Dan HeYi, is trying to optimize the value that’s created for the user. Ren in Chinese is the human. We are human centric in what we’re doing. The Dun is the user and the value that they wanna experience. And then the Hui, is the integration between the human and the user and the value that they need to create.
The power of decisions is at the micro enterprise level in this system, so governance is a huge issue . It’s totally different. Now, it starts off with a project proposal that leads to a smart contract once you get approved. At Haier to have your smart contract approved. You got to have an EMC owner that’s going, yeah, this is pretty cool. That matches what our resource platforms are, and where we’re going. So the EMC owner is a executive sponsor and a coordinator of all these networks. And that EMC owner works with the micro enterprise owner, and they actually help build that network proposal where you establish price and value. So if you and I wanted to start a business of three people, we just have to write a project proposal. As long as our idea fits into one of their platform businesses and we have an EMC owner that sees the value in our business proposal, boom, we’re in, check, go.
And what’s interesting is they own a bank. So they’re not worried about initial financing and so they really operate like a corporate venture capitalist. And that’s how they’re able to do so much so fast.
Shane So how have they dealt with the fact that there are some immutable rules that the entire organization must comply with. How do they manage that governance?
William So the team has decision rights. They decide their own compensation, which is going to be hinged upon the value added mechanism. They decide who they want on their teams. And then they negotiate the interface with the EMC owner. But they own it. They have to drive it like a CEO.
Zhang Ruimin said, our strategy is to expand human creative potential. The most important trait for that system to be optimal is compassion. This creates an energy that is not even seen in other companies. I become responsible for what I’m doing. I take ownership of the things that I’m trying to do. And just by that I can back off on all , the intense human resource policies and stuff that are used to try to control an organization.
Murray Let’s come back to this example. The three of us work for an appliance division, and we’ve seen an opportunity to provide a consumer finance service to help people buy more appliances. So can the three of us become rich or are we only going to get salaries?
William There are people there that have gone from rags to riches. So the bottom line is there is nothing but upward potential and remember you decide your own compensation. If you’re growing that business and you understand the value added mechanism, and if it’s a billion dollars, fantastic. And this is why they have more IPOs coming out of the back end of their system at a level that most companies would just die for.
Murray Okay, so we put up a business case, which says, this is how we want to do it. We want to get a base salary from Haier. And then we want to get X percentage of profit, which we’ll share amongst ourselves and the rest of the people in the team. And then there’s some negotiation with other parts of the business and with your executive sponsor. And you come to some sort of agreement based on this is how we usually do it. So I’ve done that. And then that gets en forced through smart contracts that I have with the rest of the organization. Here’s my contract with the internal bank. Here’s my contract with the appliance manufacturer and so on. So let me understand what is the smart contract? How does that work?
William So it’s based on smart contracts that are blockchain. So if you change it, you have to go into the system and negotiate any change in that. You can’t change the contract at will, because if you’re in a value chain, every part can cascade the impact. It happens all the time by the way. One of their products during COVID was gourmet Beijing Peking duck delivered to your home as though you’re eating in a five star gourmet restaurant. And they did all the business model, worked it out, got Chefs and the kitchen hardware and the delivery system all set up. So they knew what the constraints were in the business model. And what ended up happening is they got the value added mechanism wrong. They realized that the chef value was not as big as they thought it was. So they went back to that individual actor in the deal and said, you know what, customers are not buying Peking duck at X Yuan, we got to go lower. Would you be willing to take a cut? Because we have to get our price in line with what the market demand is. And he said, yeah, if I have to give up a little bit of my share of to get more then I’ll do that. And then that was an agreement that instigated a change in the value added mechanism. And the smart contract was modified so that the project could continue. So the smart contract is what keeps everybody true to what is trying to be accomplished .
Murray And these smart contracts, are they centrally maintained and reviewed and checked somewhere within Haier.
William Yes. It’s not necessarily central. The most important thing is the EMC owner. There’s an annual review every year. How are we doing? How’s the ecosystem doing? The EMC, everybody is doing what I call a retroactive. They do it every year. After they have this conversation every year, they go back and there are major changes that are occurring to continue to optimize the system. And the smart contract is understood by the entire value chain that’s executing that.
You can’t get in there unless you know what your role is in the EMC, because remember you’re dealing with multiple micro enterprises to line up what you’re designing, building and delivering into the marketplace. It is a discrete thing. And by the way, I might be working on another project. My team might’ve agreed to only work, halftime on this project and halftime on another. So it is allowed for moonlighting but it’s all conscious it’s intentional and it’s all above board.
And so the nature of that smart contract being with the EMC owner, everybody is getting it. You’re reporting on the scorecard weekly and everybody can see it. It’s fully transparent. It’s hard to hide stuff because everything is brought to the fore in the system.
It isn’t like some hidden document or somebody’s controlling this. It’s well known and you can access it depending on where you’re at and what team you’re on and what EMC you’re involved with.
Internal Marketplaces and Organizational Efficiency
Murray So , what if I’m not happy with the service provided by a Haier microenterprise in the value chain and I want to go outside. Can I just decide I don’t want to get my recruitment and accounting done by people within Haier. I want to go and get it done by people I know instead. Can I do that?
William Absolutely. If I’m an entity, that’s not creating value for the people that I’m serving. And this goes to HR, it goes to IT. It goes to every single corporate function. If I’m not delivering value, the team has the authority, as long as it’s got its approved budgets, I can go outside. I can hire outside organizations. And this is why, they’re described as a boundary less organization is because I am not bounded by the decisions of having to work with internal teams if I’m not getting the value that I think I need there.
So this is ultimately a checks and balances on inefficiency inside the organization. McKinsey did an interview with Zhang Ruimin just about a year and a half ago. And they looked at their HR department from 10 years ago to where they are today. 10 years ago, it was like 800 people in the HR department. And you could expect that, a company of a hundred thousand people globally easily get to 800 people running HR. Today they’re at 11. And the reason they’re there is because those 11 people figured out how to provision HR services digitally at a value level and speed that nobody else could touch. But imagine a corporate function going from 800 to 11, and they’re still growing at double digits. It’s because if my value is not being delivered the way I think it is, I can go outside the organization and everybody knows that.
Murray I want to give the opposing argument to this and see how you respond. So, I’ve worked for very large corporate in a telecommunications sector. And they required that we use Infosys for nearly all of our work because the executives had negotiated a set of discounts and a set of rates for overseas people that they thought were a lot lower. Instead of hiring a contract software developer for a thousand dollars a day, I can get someone that they claimed was equivalent for 400 a day. Yet there were some very serious performance problems that we all experienced with offshore development teams . And we simply were not allowed to go to other organizations that worked very well already within the company. I remember having an argument with an executive one day and he said. We’ve agreed on a scaling arrangement with them that if we spend more than a billion dollars, we get a 15 percent rebate at the end of the year. So we have to meet that target. And so therefore you have to use them whether you like it or not. And so the argument is that’s much more efficient because we’re negotiating in scale, which you couldn’t do with all these micro enterprises. I wouldn’t think.
William Yeah. My response is, how’s that working for you? I get it. Corporate, centralized models where IT managers are trying to get their value established. That’s all bureaucracy. It’s all systems of contracts that are not based on whether or not we’re delivering value to the customer. The idea of being responsive to the market, that all goes away. That is not front and center. And if that customer happens to be one of your business teams in your organization, and they’re suffering because of your stupid scaling contract that you put into place. Shame on you. Where is your capacity to be agile, to be adaptable? I got to get the work done. I got to get product out the door. And I can’t wait for bureaucratic processes to bring me a solution that I need now.
So I get that. And Murray, that’s the world that I taught for eight years at Stanford. Okay, it all flows down. You got to have IT portfolio committees and the CSO and the strategy execution officer. And it’s all got to come from the smartest people at the top of the organization. And we have found that doesn’t guarantee any level of success.
Murray Yeah. Cause often they’re extremely out of touch with what’s going on with customers, users, and people doing the work on the ground.
William Yeah. Let alone being able to be deployed quickly. You got to remember in an entrepreneurial organization. Timing is critical. Timing is everything. And if you’re not getting what you need at the right time, you’re going to fail. It’s a setup for delay, compromising on scope. And this is the power of an entrepreneurial system is they home in on the best way to get value created at the lowest price as fast as we can get done . And that is the difference.
Murray Yep. All right.
Summarizing Haier’s Innovative Approach
Murray I think we better go to summaries. Shane, what do you think?
Shane Alright so, this company, Haier, were about to fail and they changed everything. And they became very large decentralized, autonomous enterprise making a shit load of money. So lots of people working without centralized control empowered to just go and do what they need to do.
And then you talked about a lot of patterns or mechanisms they used to manage that. So you talked about the value added mechanism, the VAM, where they understood a value chain and that allowed them to find opportunities where a group of people could start a micro enterprise and add value in that step. But they also understood the beginning and the end of the value chain. So they understood how they made money as an organization right through the end customer.
You talked about the ecosystem management community, EMC, which seemed to come later as they scaled and became a decentralized controlling force. And then this idea of a smart contract. And when you talked about blockchain, I was like, ah, I get it. Decentralized contracts are immutable. You can’t change it without agreement and visibility. And it has a core set of metrics you can’t game. So you’re in red, you’re going to pedal a lot faster to get into green, or you’re gonna stop because you’re not adding value and you’ll go and work in another team or on another scenario.
Then you brought onto this idea of scenarios. So you’re almost given the customer, and then you’re doing product market fit. Am I adding something valuable that they’re going to keep buying in a massively competitive environment? There may be people outside my organization that are doing it cheaper and faster, and nobody’s forced to buy off me because I’m inside. And if it doesn’t work, the learnings go back into that scenario repository. As a startup owner, if I could watch and learn truly how other startups have failed at what I’m trying to do. I wouldn’t do those things or I’d do them differently.
Now, the problem in the startup world is all the successful ones tell you the origin story, which is where they ended up, not how they started. Nobody’s honest about what failed. Cause you don’t want to admit that you did. But Haier seem to have a rich repository of information and content and experience that they can pull from.
And you talked about 5, 700 micro enterprise teams and a reduction in the HR team and it reminded me of the Buurtzorg model and this is 16, 000 frontline staff in aged care, 45 back office people. And how do they do that? Small teams of 10 to 12 that were running their own companies, effectively under this organization.
Self selecting team behavior a lot of that in there, but crucially decide your own compensation. So select a team and make money. If the team ain’t making money, select a different team, either you leave or they leave, but true entrepreneurial behavior.
I see some venture studio behavior. So there’s a bucket of money effectively. I can go into the studio and get some of that time and money and there’s a studio capability to help me do it where I’m not on my own. There’s some chaos theory. Just go be successful. Are you going to die? Completely autonomous. There’s some VC theory. The EMC owner to me sounds a little bit like a VC. Hey, yeah, that sounds interesting. Yep. I’m going to support that. It’s a venture. It’s an experiment. Nine out of 10 of them may die. It’d be really interesting to see the success rate of their micro enterprises.
The strategy is if we set up the ecosystem so it can learn and it can add value. It’s going to add value. So I don’t have to worry about anything else. I’ve just got to get the ecosystem and the culture right.
There was a bit of mission command in there. Set the teams up, tell them what the goal is and then let them go off and actually do the work.
And then this idea of decentralized smart contracts. The contracts follow the ecosystem. It behaves the same way you want the company to behave. So there’s no centralized, one team signing off the contracts, which as soon as you do that, you get a hierarchy. So that decentralized smart contracts reinforces that autonomous behavior. So those are the patterns that I got out of it. A very different way of working to most organizations. Murray, what do you got?
Murray All right. I think I understand the model. I worked for a very large corporate telco, 15 years ago running projects. And I was required to use a lot of internal service providers who were absolutely dreadful, like extremely slow, 12 weeks to get a firewall rule change, and that costs 80,000 dollars in effort. 18 months to get new servers in production for my service to run on. And that costs millions. I’ve worked with other organizations that could do that in a few weeks for 5 percent of the cost. But because of the way the organization worked, and because all the decisions were made centrally by senior executives we had to use a lot of internal services that were extremely inefficient, very controlling. There was this high cost of delay to everything we did. And I remember thinking, wouldn’t it be great if we had an internal marketplace where I could buy the services I wanted from inside or outside. So I could deliver the project that I had to deliver. We’d done a business case, we’d got a budget, I was in control of the budget, what I could do with that budget was extremely limited by the options I had available to me.
The internal services were generally dreadful, but nobody cared what I thought because I was considered to be at the end of the chain. The organization wasn’t being run so that we could deliver new services for customers. The organization was being run to optimize the HR department or optimize the procurement department . Or to get the rebate from the big service provider. And, my experience the whole time was the executives making these decisions we’re just extremely out of touch about the impact of the decisions they were making. And when anybody said anything about it, they got slapped around for bringing information that was unpleasant or unwanted or for daring to criticize the executive. So the normal way of running corporations, I think is tremendously inefficient. The theory of the firm says that it’s more efficient to do things within an organization than it is to engage with external parties. And that’s why we have a firm, but in reality, it’s not. The reason why you’re forced to do these things, even though they’re incredibly inefficient is mainly because of the power dynamics within the organization. People are building their empires and increasing their salaries and maintaining their status.
So the politics of organizations mean that you have to use services and follow rules within your organization that you would never ever do you had any choice because you wouldn’t achieve your goals. There’s no way I was going to make more money out of it I was just wanting to achieve our goals and make our customers happy and deliver good results And I would have been able to do that so much better if i’d been allowed to negotiate with the internal services and go to external ones if they were bad.
So I can see there is an obvious, massive benefit to organizations from running a micro enterprise model with a internal marketplace. The question really is what are the rules to the internal marketplace? How do you run the internal market so that it works? How do you provide funding? And clearly Haier have been on a journey to develop that over a long period of time. It’s been hard to understand what it is that they’re doing because they don’t speak English and they don’t really speak to the outside world because why would I share my competitive advantage with the rest of the world?
But frankly, I think it’s going to be almost impossible for large American or European organizations to copy this model because it disempowers senior executives and they will not tolerate that. I’m getting paid a million dollars a year in my big office. Why on earth would I tolerate this decentralized thing when I’m going to lose my power and my status and my income. They just will not do it. So therefore people won’t be able to compete with Haier and Haier, we’ll just keep growing and gobbling up the market.
And this is how new models like this eventually take over. The old organizations refuse to change because of their internal dynamics. And so they just slowly wither away and the new model gradually takes over. That’s my thinking on it.
William I want to raise a couple of things that people should think about. Number one is this didn’t happen overnight and they are still changing as we speak. So iteration, innovation, improvement is happening all the time. So it took decades and what they learned to do occurred as a result of emergent learning. They learned it from listening to and watching their own people and their own system.
Now, to your point, Murray, who’s going to give up their job? First of all, leaders just have a different job and a different role in a decentralized organization. I’m a systems leader and a systems designer of the ecosystems that are in the organization. Now, whether or not that leader will fit that need or those competencies is a different question.
I asked Zhang Ruimin what’s the most important thing for leaders to understand and he goes, Oh, it’s the ability to let go of control. If you have leaders that can’t do that, don’t try the system don’t fool yourself. This requires courage and yes there is a mental model of leadership that I believe is disintegrating as we speak because of the market of globalization.
And I truly believe that emergence is not about power and control. It’s about enablement. And compassion and serving others and doing this with embedded trust and safety that I’m not going to lose my job.
And if the top executive team doesn’t understand the opportunity they have and how they will be acting and doing different role competencies in the system. Don’t start. But there’s ways to approach this, to experiment. So you don’t have to bite off the whole apple at once.
When Haier bought GE appliance, GE appliance was given the option as to what they want to do. They want to continue the current business model. Or adapt and adopt the principles of Haier, because GE Appliance is not in China. They contemplated this and they’ve adapted it. And now they’re starting to really see the entrepreneurial growth. And this is a hundred year old company. And they’d been flatline for a decade or so. And all of a sudden now they’re seeing the growth. But they’re adapting it. They’re not deciding their own compensation, they decided that labor unions would never, ever tolerate that. So what they ended up doing is they took the top several thousand people, and for the first time, they started giving compensation in some options. As part of the deal. So de facto, you can start to optimize the principle in a way that’s acceptable in your organization. And you don’t have to change every single thing the way Haier in China is running it.
Murray Yeah. I think the most important part of this is that you’ve got micro enterprises and you’ve got an internal marketplace that you have to regulate and set up.
Final Thoughts and Recommendations
Murray Let’s finish up. What are three books you would recommend that people read if they want to understand a bit more about this approach?
William The top recommendation I have is zero distance by Danah Zohar. That’s the one I would actually point to because she was able to aggregate a lot of the case study, a lot of the other books that have been written about Haier into what she was doing It’s more recent and recency really matters because Haier changes every single year, so what was true two years ago, isn’t true today.
The other recommendation I would make is go to microteams. net. It’s a portal into a course that I developed for them that gets into the detail of how do I start a team? How do I mature a team? And oh, by the way, if I want to adapt these practices, what do I do? There’s about nine hours of video instruction and about 450 slides that took me a year to work with Haier to get the specifics down, examples. I have multiple case studies in there. And I, encourage you to look into that because it has multiple resources that I’ve looked at, including though being validated and verified by Haier itself.
Murray All right. Now how can people get in touch with you. What sort of services do you provide and so on?
William You can email me at William dot Malik at gmail. com. So right now I’m doing coaching. I’m doing training, but training is highly contextualized. And for the most part, I do virtual facilitation. My passion is to help companies understand the transformation journey that they need to think about in order to go through this process of emergence and really recognize the power of the principles of RenDanHeYi.
Murray And you work with a company called Desirable Futures in Australia.
William Yeah. So they’re helping in Australia and they’re emerging out of the agile, systems thinking space helping organizations transform to something like decentralized autonomous teams. And so they have real strong foundational capacity of years of experience converging this into the context.
Murray All right. Thank you very much for coming on, William.
That was the No Nonsense Agile Podcast from Murray Robinson and Shane Gibson. If you’d like help to create high value digital products and services, contact murray at evolve. co. That’s evolve with a zero. Thanks for listening.
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