Freek Vermeulen, an associate professor of strategy and entrepreneurship at the London Business School, argues that too many companies are following so-called best practices that are actually holding them back. They do it because of deep-seated industry tradition—and because it’s hard to know how seemingly successful business models will hold up over the long term. That’s why, he says, organizations should avoid benchmarking and instead routinely test their business practices before there’s a problem. Vermeulen is the author of Breaking Bad Habits: Defy Industry Norms and Reinvigorate Your Business.
SARAH GREEN CARMICHAEL: Welcome to the HBR Ideacast, from Harvard Business Review. I’m Sarah Green Carmichael.
Before I came to HBR, I worked at a Harvard bookstore, shelving titles and processing returns. When I’d order books from publishing houses, I didn’t worry about getting too many, since, if our customers didn’t buy them, we could always ship them back. That’s just how it’s done in the industry.
Book buyback guarantees are one of many management practices that our guest today says don’t make any commercial sense.
Freek Vermeulen, who teaches strategy and entrepreneurship at the London Business School, urges managers to ask themselves why their organizations are doing what they’re doing. Because bad management practices spread like viruses, posing as good ideas—even best practices.
In his new book, Breaking Bad Habits, Vermeulen explains how these practices emerge, persist, and take down companies and industries. And while he admits they’re hard to spot over the short term, he tells managers and executives what warnings signs they should be looking out for.
Freek, thank you for joining us today.
FREEK VERMEULEN: Of course. Thank you, Sarah.
SARAH GREEN CARMICHAEL: I think it’s interesting that there is value in shaking up your organization. And yet it is something that people really push back against. They really don’t like to do it, even when there’s a compelling reason to change, people often resist change. Why do you think that is something that we do?
FREEK VERMEULEN: Well, change, of course, is inevitable. I guess the only time a company wouldn’t have to change is if it’s a perfectly stable business, and no business is perfectly stable. The thing is that usually companies wait with change until they have trouble. In fact, it’s not all that difficult at that point in time to convince people to change because everybody can see, Gosh, we’re bleeding cash; we’re underperforming; our competitors are doing better. But then it has become very difficult because the old situation doesn’t work anymore; and therefore, change, I guess, is difficult.
Don’t wait for trouble. Be proactive. Because if you’re proactive, then you end up having to do less of it. Of course, it is very difficult to convince people to change when there’s no trouble yet. In fact, I spoke to managers as well as CEOs, and they said, I wanted to change my company proactively, but then people said, “Well, why change a winning team? Why are you disrupting us while we’re doing so well?” So, indeed, the rationale for change is sometimes more difficult to make if you’re doing it proactively.
SARAH GREEN CARMICHAEL: It seems like to me that it would be especially hard to lead a change program against a practice that everyone just assumed was good.
FREEK VERMEULEN: Yes. So, indeed, benchmarking is a practice in itself, but it’s also through benchmarking you can pick up on some things that we think of as best practices because everybody’s doing it. But our, sort of, best practices can be bad practices in disguise. And that is really because if you do benchmarking, we look for answers at the top performers in the market and then we explicitly look for what do they have in common. Surely if, say, 80 percent of top performers in the market is doing it, then it cannot be a bad thing. That’s not necessarily true, as we also know from research. One very simple reason can be that sometimes these are just very risky strategies, and then indeed 80 percent of the top performers does this practice. But it might be that 90 percent of the companies that go out of business did this as well, but those companies we do not pay attention to.
So, we sometimes pick up on bad practices, although because we’re looking at our performance, we assumed that they must be best practices and good ones, and they don’t really have to be.
SARAH GREEN CARMICHAEL: So, one example is the buy-back guarantees that publishers offer to book retailers. And that’s just one I know about since I work in the publishing industry. But, how does something like that get started, and why does it persist?
FREEK VERMEULEN: Yeah that’s indeed a very good example of what is, at least, a potentially bad practice. The booksellers only have to pay for books that they have sold, and they can actually return unsold books to the publisher at the publisher’s expense. Now, that is a good example of a practice that started out as a good one because it actually started in a 1930s—economic crisis—but it was also the time when booksellers were mostly small independent book retailers, and basically they couldn’t afford to buy books anymore and sold them to the public because of the financial risk. And it was a big publisher—actually, it was Simon & Schuster who then came up with a fairly innovative idea, to say to booksellers, You know what, we’ll take on the risk that you just pay for the books that you’ve sold. And if you haven’t sold them, then you can send them back to us.
Therefore, the booksellers didn’t have any risk. That actually was a good practice for Simon & Schuster, simply because it enabled them to continue selling books, and actually that was something that was quickly copied throughout the entire publishing industry, at least in the US.
Now things have changed. We’re not anymore in such a bad economic climate as in the 1930s, at least. But certainly, the thing that has also changed is that now booksellers and retailers have also become big companies. And now this practice really isn’t so necessary anymore, and it does come with a set of inefficiencies. But now, we just continue doing it that way. And it has become an established practice. And once the booksellers are also used to this, and actually publishers as well, it becomes very difficult to stop it precisely because everybody’s doing it and it would sort of be an illegitimate thing to do if a publisher didn’t offer it.
SARAH GREEN CARMICHAEL: How does a publishing company overcome something like that?
FREEK VERMEULEN: That’s indeed the problem. As soon as an individual publisher now says, we’re going to stop doing that, booksellers may stop purchasing their books. So, there’s a bit of a short-term risk and it is certainly an unknown.
Now, of course, the way to perhaps get around this is there are cost advantages to stopping the practice, to pass on some of these cost benefits in terms of pricing to the booksellers. So, there might be ways to overcome these hurdles. But the main point is publishers don’t quite know what will happen if they stop doing this. There’s a lot of uncertainty and they might lose their position in the market, and it’s exactly that uncertainty that prevents them from doing it.
SARAH GREEN CARMICHAEL: You also talk about processes that can lead to bad practices. So, things like Six Sigma or Lean, for example, that companies put into practice so that they can get better ideas. You say those can also backfire. How does that happen?
FREEK VERMEULEN: Yes. So, I don’t think the average manager is evil and adopts things that are bad for their firms and perhaps good for their own paycheck or so. That means that these bad practices, let’s say, masquerade as good ones.
They need to have some sort of association with success if bad practices were very obviously bad, then the majority of managers would simply not adopt them and they will die out. One such association with success: it could be that they worked in the past, and we still have that memory of a while when it was a good practice and therefore we continue doing it. But some of the practices you bring up now, like lean or Six Sigma or the old ISO 9000 or so, also have an association with success because in the short term, they often do lead to better results. It’s just in the long term that they lead to worse performance.
For instance, process management systems like Six Sigma, we know that in the short term, they boost efficiency and productivity and sometimes quality levels. But we also know from research that in the long term, they can deprive a company of innovation. They cut off a company from learning opportunities. Now, the point is that well willing managers who are not evil and who are trying to do the best for their organizations do see the short-term results, and they do see the short-term results also in error in their peers: Hey, if they genuinely adopt Six Sigma, then we see that the performance goes up.
The long-term results only materialize more, by definition, in the long term. And we can’t anticipate them. But even when we’re in them, we don’t quite know the cause-and-effect relationship. We find it hard to say, Well, we don’t have enough innovation because six years ago we implemented Six Sigma. And therefore, these good practices—seemingly good practices—are actually bad in the long term.
SARAH GREEN CARMICHAEL: If these things are hard to diagnose, how do leaders diagnose them?
FREEK VERMEULEN: By sheer definition, they’re not easy to identify, because if they were, they would die out. But there are certain things that you can do. There are certain things that you can build into your organization, but there are also simple things that you can start with. So, for example, one thing that I found out is that although managers and people in the organization, also in lower level in the organization—middle managers and people on the work floor—they cannot give me conclusive evidence and say, Gosh this practice that we’ve been doing for many years is really a bad practice. But I have learned that people have suspicions, and those are the things that you can look out for. I’ve learned that if I walk into a company, and I ask about a certain key process, and they tell me, I don’t know; That’s how we’ve always been doing it. Well, that’s one point to start paying attention. If you can’t explain from your own organization why is this a good practice, then it’s worth looking at whether it’s still the right way of doing things.
SARAH GREEN CARMICHAEL: One of the things you recommend to find a better way of working is experimentation. But it also seems that managers have a really hard time designing fruitful experiments. What is the usual stumbling point there?
FREEK VERMEULEN: Yes. So, experimentation can be a very good way to identify bad practices. If you’re really thinking about, Gosh, we’re going to experiment with a different variant of our product, this can be a fantastic way to think about certain elements of up offering in terms of products or services are outdated and can we stop doing them, for example. The tricky thing about such experiments is that you can also really design them very badly. There’s one thing worse than not running an experiment, and that’s actually running a bad experiment because then you can get spurious results. I’m very much in favor of running experiments if you can. But then you really have to do it properly. You have to make sure that everything is the same, except for this one practice that you’re experimenting with.
SARAH GREEN CARMICHAEL: Have you ever seen an organization actually pull off that kind of really good experiment?
FREEK VERMEULEN: Most definitely. The Independent experimented simply with the size of the newspaper because their hypothesis was, in hindsight, correctly, that customers preferred a smaller-sized newspaper. And they launched the newspaper in a small format and in a large format, and that was the only thing that was different about a newspaper.
Everything else was the same. The articles were the same. The photographs were the same. The distribution points were the same. The time of distribution was the same. Absolutely everything was the same, except the size for the newspaper. And then the smaller newspaper sold significantly better than the larger one. And then they could conclusively say, we should reduce the size of a newspaper.
And that’s the important thing. If you do experiment, then do it properly, and then it can be a very useful way to identify outdated practices.
SARAH GREEN CARMICHAEL: One of the other things that you propose is a concept you call “reverse benchmarking.” What is that, and how does that work?
FREEK VERMEULEN: Sometimes you should do benchmarking and then do the opposite, because if everybody in a particular industry is doing something and has been doing something for a very long time already, then sometimes you may benefit, and you may build a new innovative business model, by doing the opposite—by quite deliberately doing something different.
SARAH GREEN CARMICHAEL: I am wondering if this is a good moment to talk about the example of the Capitec bank in South Africa.
FREEK VERMEULEN: Yeah. Capitec is an example of a company that really built a new business model and a whole business and a very successful business stopping outdated practices in an industry—and in that sense, an example of reverse benchmarking as well. They looked at everybody in the industry and saw certain practices that everybody was doing, every consumer bank was doing, and that to them, they couldn’t explain why they made any sense. And they thought, well, these seem outdated practices.
One simple example is that all banks all consumer banks in South Africa close at four o’clock in the afternoon and now that gradually all money and all transactions basically have become electronic, Capitec indeed said, Well, that’s one thing that were going to stop. We are going to stay open till six, till eight, so that people can come in after work. And they have about 300 branches or so that are open on Saturday.
And there’s a range of such practices that they have that they used as a basis of a new business model.
SARAH GREEN CARMICHAEL: At a bank like Capitec, how come their competitors just don’t copy them if what they’re doing is working so well?
FREEK VERMEULEN: The CEO said to me, We actually had expected our competitors to copy us much quicker, but they didn’t. And he said and he explained to me why. For instance, banks in South Africa make money all transactions. People send money to a different account. They charge a percentage of, say 1 percent. It’s actually less than that but, say, 1 percent. So, if you transfer 100 South African rands, you pay one rand. But if you transfer a thousand francs, you pay obviously 10 rands. And Capitec said, Why is that? Because it’s not more costly for us to transfer 1,000 rands than 100 rands. Why don’t we just charge one standard fee?
Now the reason why this percentage probably came about is from a time long lost, namely when most money was transferred by check, a check in the post, and then indeed you had to charge more for a check of 1,000 rands because there was more risk associated with it, that would get lost of fraud or something like that. But now that all transactions electronic, it really doesn’t make much sense anymore.
So, Capitec said, First of all, lets us make it much simpler. Regardless of the size of the transaction, we charge one standard fee, and then we actually can also offer a better fee because we have a very simple operation. One transaction fee; every transaction is the same for everybody. And he said, Well I expected competitors to emulate us, but they didn’t. And I thought about why, and when I spoke to people, they explained, Well, you know, this percentage, these fees that we receive based on the percentage of the transactions, well, that has become embedded in our budgeting and hence in the resources that different departments have. And therefore, it feeds back into the headcount that we have in these departments. And actually, our incentive system, so people’s remuneration is also tied to that, and so on.
And that’s the point, indeed. It seems like a simple thing, switching from a percentage to a fixed fee. But it has all the sort of knock-on effects in an organization that has been doing this practice for a very long period of time. And because it’s interwoven with so many other things—with bonuses, with headcounts, with budgets, and so on, therefore, it’s actually very difficult to emulate for existing competitors. And therefore, stopping a bad practice is sometimes easier said than done. Perhaps that’s sometimes a good thing for a bank like Capitec because it means that competitors cannot copy them that simply and quickly.
SARAH GREEN CARMICHAEL: Are there other exercises that executives could run or managers could work on with their teams that would help them break out and try a more innovative path?
FREEK VERMEULEN: We do have certain exercises, and broadly speaking they are exercises by what we call “perspective taking.” And this can be the perspective of a different point in time, but it can also be about now, say, a different person. A good example: Andy Grove was having doubts about whether Intel should still be in memory. That was before the switch, the very successful switch to microprocessors. But, for instance, as CEO Gordon Moore was still very convinced that they should be in the DRAM memory and Andy Grove eventually managed to convince Gordon Moore by asking the question, Well, suppose that an outside management team would come in to Intel, this company. What do you think, Gordon, that they would do?
And then Gordon Moore, forced to take the perspective of someone, else namely a new outside management team, had to admit that actually, an outside management team would get out of DRAM. And then Andy Grove said, Well let’s take the revolving door—as he called it—and pretend that we are that management team. And that’s what convinced Gordon Moore to get out of DRAM. That is a clever example of interpersonal perspective taking.
We have developed some exercises to do that systematically. For instance, a hedge fund shorts your stock. Why might they do that? Or a group of middle managers has written a memo asking us to change course and stop this practice. Write that memo for them. You force people into the perspective of someone else who has doubts and helps them think through the arguments of that person. And placing someone in the shoes of someone else can help uncover some of these emotional attachments to bad practices.
SARAH GREEN CARMICHAEL: What can managers do to get more of their frontline employees to really tell them, hey, this practice doesn’t make any sense.
FREEK VERMEULEN: It’s not necessarily the people in the frontline engineers or doctors or other types of middle managers or soda that that they have evidence. Usually they have suspicions, and that’s one thing that sometimes we, of course, see in organizations that also managers don’t respond well to hunches and guesses and, I think this might be, and they say show me the evidence or show me a spreadsheet. Managers have to be more deliberate about it, more deliberate about asking engineers and asking doctors but also be open ended to, I think this might be a bad practice rather than insist on evidence, for example.
SARAH GREEN CARMICHAEL: What if you’re a new employee? That’s a person who often has fresh insight, can look around and see things that don’t make sense in a company. But they also often don’t have any credibility when they, sort of, say, Hey, that doesn’t make any sense; we shouldn’t do it that way. People will, just, sort of, say, Oh, no, no, that’s just how we do it around here. If you’re in that position, What’s the best way to bring it up and get people to agree with you that this is something that should be uprooted?
FREEK VERMEULEN: The first thing is that you should be brave enough to speak up, and you actually need at least a subgroup of two people before people start listening to you. First find some other people in the organization, perhaps one is already enough, who has the same doubts as you.
SARAH GREEN CARMICHAEL: What if, conversely, you are a manager who sees bad practices all around you, and you’re trying to get your team to let go of some of them?
FREEK VERMEULEN: I think the best way to do that proactively is to build it in more systematically into your organization. So rather than say, me, as a manager, I’ve identified a bad practice, and now I’m going to convince others to stop doing it— that’s perhaps not very possible. Not in terms of convincing people but also not very plausible that it’s a top manager who’s going to identify these bad practices by him or herself.
What I mean with building certain things in your organization is I think you can do things systematically in your organization so that people in the organization themselves—engineers, middle managers, doctors, and so on—pick up on some of these things and stop doing them. These are things like change for change’s sake. So, what are things that you can build into your organization as a top manager that don’t necessitate you to identify these bad practices, but that, sort of, ensure that the organization as a whole picks up on them prevents you from adopting them in the first place and sometimes sheds them in the process.
SARAH GREEN CARMICHAEL: Well, Freek, thank you again so much for talking with us today.
FREEK VERMEULEN: You’re very welcome. It was my pleasure.
SARAH GREEN CARMICHAEL: That’s Freek Vermeulen. He’s a professor of strategy and entrepreneurship at the London Business School. His new book is Breaking Bad Habits: Defy Industry Norms and Reinvigorate Your Business. Find it on HBR.org.
Thanks for listening to the HBR IdeaCast. I’m Sarah Green Carmichael.