Disruptive Innovation: Is your organization ready for it?

By Sukanya P, Senior Program Manager, Mphasis Wyde

Zenefits is not a name unheard of, either in the insurance or in the IT industry. This is a company I had been closely watching, not just because they were declared as the fastest growing Silicon Valley startup or because their valuation was sky-rocketed but also for the reason that their business model was unique and disruptive. They were operating in a domain where we sell software products.

Zenefits gives away software for small and medium–sized businesses and serves as health insurance broker for its customers, making money on commissions earned from insurance companies. Zenefits recently found itself in legal trouble after it was confirmed that some of their brokers were not licensed to sell insurance. The CEO was forced to resign on these grounds and the company had to acknowledge that their processes, controls and actions around compliance had been inadequate.

The current crisis that Zenefits has gone into has led me to think more in terms of the disruptive model and the underlying questions around it. Are innovative ideas and a disruptive model enough for transformation of organizations?

Disruptive Innovation vs. Sustaining Innovation

The term “disruptive innovation” has been the buzzword in the industry for a while and almost all the companies either claim themselves to be disruptors of the current business or aim to achieve it. Disruptive innovation was a term coined by Clayton Christensen in 1995, and it describes a process by which a product or service takes root initially in simple applications, at the bottom of a market, and then relentlessly moves up, eventually displacing established competitors. (Christensen, 2016)

While we blindly follow this mad rush to do things differently, we probably need to take a step back and assess our strategies before we move forward.

In this context, let’s review the difference between sustaining disruptive innovations. Sustaining innovation involves understanding the customers’ predictable needs and servicing those using market experience. Whereas, disruptive innovation creates dramatically new businesses that are separate from the mainstream and displaces existing market leaders and alliances.

The sustaining business is very well defined, with fewer risks a linear growth trajectory. And this is primarily the reason the sustaining companies often ignore the disruptions in the marketplace until the game is almost over. Hence, it is absolutely essential that businesses consciously keep an eye on the disruptions and re-invent themselves before they are outpaced.

However, before we talk in detail about disrupting the market, it is important that companies do a retrospection on a couple of aspects.

Here are three principle tenets to consider:

Company’s own readiness in bringing about disruption

The first and foremost question that the companies need to ask is about their own inclination towards being a disruptor. This often requires a paradigm shift in their attitude, risk appetite and the ability to move away from time-tested approach. Established organizations typically tend to have slower decision making processes, high levels of bureaucracy, and multiple layers of hierarchy, which do not lend them very well to being thought leaders in the field.

When organizations reach higher maturity levels, they typically move from the art of invention to the science of sustained delivery. The pressure of meeting quarterly targets drive the employees to seek operational efficiency, leverage existing potential and appease the most valuable customers to maximize profit. This calls for evolutionary changes in their delivery practices while a revolution is neither warranted nor appreciated.

This is confirmed by the fact that out of the 500 largest companies listed by Fortune magazine in 1955, only 71 of them still thrive after 60 years.

Companies should, therefore, be cognizant of their inherent culture and make a deliberate effort to move off the beaten track.

Readiness of the target market to take up the changes

As Christensen himself points out, many times companies try to invent faster than the pace at which the customers can consume them and end up producing products or services that are either too sophisticated or too expensive for the end customer. For example, Apple’s Newton, which was an early stage PDA, was a failure way back in 1993. Even though the idea of a hand-held device was excellent, it was still premature and was not well accepted in the market back then.

Readiness of the Industry 

Regulatory and compliance systems. Insurance has traditionally been an industry with a lot of regulatory and compliance requirements. A recent survey from PwC showed that 86% of insurance industry executives mentioned that their companies have a chief compliance officer as against a 69% across all industries. There were also 88% that suggested that they tend to increase the compliance spending.

This would likely be the single most important parameter to be considered while bringing about disruptive changes. Innovating in long existing and often heavily-regulated areas of businesses creates challenges, as regulators struggle to keep pace with what the technology enables.

The case of Zenefits

Launched only in 2013, Zenefits quickly grew to be the hottest startup in 2014, with a whopping valuation of $4.5 Billion in May 2015. This was an example of the current tech boom with meteoric growth and no regards for the conventional wisdom or the long-standing industry rules.

However, the company today finds itself in the midst of a major legal hassle. It is forced to tone down its language and pace and is compelled to appoint a compliance officer. They have been obligated to move away from the “ready, fire, aim” mantra to a new “operate with integrity” motto.

Having said that, it would not have been possible for Zenefits to become a leader, if not for their unconventional business model. Now that they have reached a point of success, sustenance would be the key element going forward.

The Key Message

While it is true that businesses need a sustainable model for incremental growth, they may soon become redundant in the industry if they are not ready to redefine themselves.

Hence, disruptive innovation is not only a choice but also a basic survival need in today’s context.

However, companies may need to exhibit caution with respect to their disruption and ensure that their precipitous growth does not come at the cost of compliance and regulatory violations, especially when they operate in sensitive industries that deal with human life and health. As companies undergo disruptive innovation, it is crucial to keep revisiting the three tenets - market readiness, organization readiness and industry readiness /alignment with regulations to ensure the advancements work in favor of and not against the organization.

The author is Sukanya is a Senior Program Manager at Mphasis Wyde, leading and directing product customization and new feature development initiatives for several clients. She has more than 15 years of progressive management experience in guiding project initiatives, directing project plans and achieving revenue & performance targets.