Phil Fersht — CEO and Chief Analyst, HFS Research[00:05]
Hey, everyone. I’m Phil Fersht. I’m the CEO and Chief Analyst at HFS Research. I’m delighted to be joined today by, I think, a familiar face to many, someone I’ve known for many, many years, Cliff Justice from KPMG. And as we begin, Cliff, maybe you could just do a little recap on where you are in your career and maybe a little bit about your background.
Cliff Justice — Head of Enterprise Innovation, KPMG[00:30]
Sure. So, thanks for having me, Phil. It’s good to see you. So yeah, I head up Enterprise Innovation for KPMG. I’ve been in this role for a couple of years now, and our mission here, and our job here, is to really explore and define the next generation of businesses and services that are going to be relevant and important for our clients and for KPMG over the coming years. Part of that comes with exploring a lot of emerging technologies and the business models and the disruptions that come with that, preparing our industries and our sectors for these types of disruptions. We have what we call a studio, which is an incubator and an accelerator and a center of excellence, and that’s where we experiment and play with a lot of these new business models and a lot of these new technologies.
Phil Fersht — CEO and Chief Analyst, HFS Research[01:34]
Excellent, excellent. So let’s talk a bit about the study we did where we spoke to several hundred CEOs and presidents around innovation. And 50% of them said innovation must deliver on big bets, right? But what do you make of that? What are the big bets that you see enterprises making today? And do you see a lot of the people you talk to, a lot of your clients, do you see them delivering on that?
Cliff Justice — Head of Enterprise Innovation, KPMG[02:04]
Yeah, well, I think the most stark and obvious realization that comes from that survey data is that there is a pretty sizable and noticeable gap between what the executives and the CEOs believe they are exploring in terms of innovation—the stated objectives for innovation—and then, once you pull back and look into the organization and talk to the managers and directors and executives that are responsible for executing on that innovation, there’s a big gap between what the vision of that program should be from the CEO’s perspective, and what the execution, the funding, the resources, the actual implementation of these innovations actually are in the business units and in the functions. That’s not a surprise, but it just came out really crystal clear in this survey data. It is a challenge for an organization to have to manage the day to day—feed the beast, deliver revenue, deliver operational results—and then think ahead and think about what’s coming, especially in today’s age where disruption is happening faster and faster. It’s moving at an exponential pace. It’s just very hard to manage and walk that tightrope, to deliver on today’s business and plan for a very disruptive future that’s moving at an accelerating pace.
Phil Fersht — CEO and Chief Analyst, HFS Research[03:55]
Right, right. And you know, with this kind of global assault on everything we once knew as stable happening in the world right now, and things seeming to accelerate in the last few months, how is this impacting innovation? Is this stifling mindsets? Is this causing leaders to think more conservatively about big bets, do you feel? Or do you think some are being even bolder and saying this is the time to double down and take advantage of the situation?
Cliff Justice — Head of Enterprise Innovation, KPMG[04:21]
It’s a little bit of a mixed bag. So there is a focus on sort of reining in expenses and getting prepared, battening down the hatches for a recession, and those discussions are impacting investments. But at the same time, executives are not clueless to the fact that disruption is happening faster and faster. If you look at the startups that are emerging, there’s investment still happening in these seed stages of these startups. The later stages are backing off maybe a little bit. Valuations are certainly coming down on the more advanced stages, but the seed startups are still getting funded. And those are the early indicators of where the disruption is happening. So in the large established Fortune 500 companies, the innovation groups are aware of this. The corporate venture capital is still out there, it’s still making investments in complementary businesses and these businesses that are potentially impactful to those firms. But these are the times where the opportunities for picking up good deals, for making investments in some of these disruptive companies, are good—but it also comes at a time where cash is trying to be conserved. Yeah, but this is the time to invest. This is the time to make the moves. Valuations are reasonable right now, and if you’re looking outside and making investments and making acquisitions—but, on the other hand, there’s a lot of uncertainty in the market.
Phil Fersht — CEO and Chief Analyst, HFS Research[06:05]
Yeah, I mean, it’s like those companies who doubled down during the pandemic. I remember Delta Airlines put a lot of investment in—they brought forward their investments in their terminals across the US, while other airlines just battened down the hatches, and so now they came out the other side and really profited from that. So sometimes it takes a bolder vision to think this isn’t going to last forever. Recessions don’t last more than a few quarters. And, hopefully, this situation in Europe, this war, will be over eventually. So things will change. But as we come out the other side, what do you think is going to be different? I know there’s a lot of talk around decoupling and globalization shifting. How do you think the world is going to emerge from this sort of current economic slump that we’re in?
Cliff Justice — Head of Enterprise Innovation, KPMG[07:15]
That’s a good question. The decoupling question is likely to be one of the biggest drivers for the next decade. Manufacturing is going to be repositioned. A lot of investment in retooling and remaking manufacturing, probably closer to home. In North America, that means Mexico, it means Canada, it means Latin America as closer locations for manufacturing. So a lot of investment in those areas, and a lot of innovation that takes place with these foundries that are being established in the United States. These are going to be very modern, state-of-the-art fabs that are going to allow for faster and faster innovation. There are geopolitical elements to this that do impact the traditional supply chains, the traditional relationships that the West has had with China and other countries, and out of that comes a lot of innovation, a lot of opportunity. And we’re starting to see companies prepare for that type of change.
Phil Fersht — CEO and Chief Analyst, HFS Research[08:38]
Yeah, and it seems there’s a lot more factors now in the equation. I think, you know, when we used to talk in the old days, innovation was very much around technology and who had the best AI, who was being more forward-thinking about changing business models around tech. But when we ran the study, only 25% indicated that the CIO led the innovation agenda. Do you think that we’re heading towards a sort of chief innovation officer developing within companies? How do you see that evolving as companies look at all the dynamics that are going to make them very successful in the future?
Cliff Justice — Head of Enterprise Innovation, KPMG[09:30]
It depends on how the company is structured. A lot of the innovation is occurring in the business itself. So the CIO still is managing innovation in the IT function and in the back office in a lot of cases. But the broader view of innovation is the products that companies are making, the business that companies are in, the business models and how those companies operate—and in those instances, the broader view of innovation is occurring closer to the business. The Chief Innovation Officers, many times, have a coordinating role in conglomerate-type companies, looking for synergies across multiple business units, looking for opportunities to acquire, to combine, to introduce new technologies that may be synergistic. Artificial intelligence might change how businesses engage with their end users, with their customers. Some of the discussions around ChatGPT and DALL-E and some of these newer generative AI technologies really have the potential to reshape the competitive landscape, especially if you’re a company that is managing a traditional business. We’ll see startups emerge that are native to generative AI. And generative AI is still—even though it’s emerged over the last three or four years, it’s accelerating quickly—but it is still in its infancy. We haven’t really seen native AI companies emerge with business models that challenge the traditional businesses in healthcare and in life sciences and media and telco. These are coming. They’re going to vary by sector, they’re going to take on a different role by sector. And in terms of the question around the enterprise, business units and functions are going to have a role, but much of this affects the core business, the core operating business of the company. So if it’s healthcare, the clinical practices; if it’s insurance, managing risk. The core business of these industries is going to be impacted by a lot of these innovations. The back office functions are going to be totally reshaped. Productivity will be improved by some of these technologies in ways we haven’t seen yet, and a lot of that is because of the friction and the ease of access of this API-driven economy around AI. You’re not going to build the stuff yourself. You’re going to be accessing APIs from the big tech players who are building the generative AI, and you’re going to be able to access the most powerful artificial intelligence in the world. It’s going to be business-led in many cases. Not in all cases—you’re still going to have data scientists working through data models—but a lot of the technology is going to be offered as a utility through APIs, and your ability to ask the right questions is going to be the differentiator. As you see, and as you play with right now with ChatGPT and DALL-E, the quality of the output is directly related to how good your question is.
Phil Fersht — CEO and Chief Analyst, HFS Research[13:06]
Yeah, it’s like—you can invest in all the AI you want and have incredible algorithms that can make predictions, but unless you as a leader have a team behind you who truly know the data you need to be effective, or make the right products, or be disruptive, it’s really how people use the technology that’s going to be key, right? And aren’t we getting to the point where the technology is getting better and better, and the focus is shifting more and more to us as leaders, managers, trainees, to just shift how we think and change how we operate as entrepreneurs and business people, right?
Cliff Justice — Head of Enterprise Innovation, KPMG[13:51]
That’s going to be the biggest challenge—the shift in mindset. It’s going to be a generational challenge, but we’re not going to have a full generation to adapt because the curve is tightening, the pace of change. From the time AI was really introduced to the world in its modern form—probably 10 years ago when Watson won Jeopardy—in 10 years it’s come a long way, to be free, open, and accessible to all in a much more powerful application. It’s 10 times more powerful than anything you saw back then, and it’s almost free. The cost they’re offering for the API calls is really negligible. And as competition heats up around this, and as the technology improves, it’s just going to be embedded in just about everything. So the business models, the talent models, what people actually do for work, how the organization designs and architects its workflows and its talent strategies—those are going to have to evolve to include artificial intelligence. And this artificial intelligence is accelerating at a pace that—I’m pretty close to it, and I’m pretty sure I don’t fully understand how fast this is moving. I know enough to know that I don’t know.
Phil Fersht — CEO and Chief Analyst, HFS Research[15:30]
So it’s moving quick, right. So let’s move to what I think leaders and enterprises need to do to be more innovative. The study revealed only 23% of firms actually have a head of R&D or a Chief Innovation Officer. 69% see innovation happening in pockets—it’s not a cross-functional exercise—and 54% said they don’t innovate because they don’t have the time or the money to do it. And on top of that, 40% don’t have programs in place that allow them to innovate with partners or peers. So it’s pretty clear right now that a good 50, 60% of enterprises just don’t have a tied-together innovation strategy. So what’s your advice on how we can move the needle, break the cycle, move forward more aggressively? What are things that you’re seeing that can shake things up a bit?
Cliff Justice — Head of Enterprise Innovation, KPMG[16:53]
Yeah, and I would say that the flip side of that is about half the companies do. And the half that do clearly see the opportunity and the threat associated with an accelerating pace of change. And that’s really what innovation groups and capabilities and skill sets and a culture of innovation are really designed to help do—capture that opportunity and mitigate the downside risk associated with an accelerating pace of change. I think if we do this survey again in a year or two, those numbers are going to change, because corporations are going to be forced to embed innovation as a part of the enterprise architecture. It is a competitive advantage today. It’s going to be table stakes in a few years.
Phil Fersht — CEO and Chief Analyst, HFS Research[17:14]
I completely agree. I mean, some companies are shrinking, laying off, trying to do more with less, realizing you can’t keep operating with the same old models that sometimes were designed after the Second World War. There has to be a break from the past and a move to the future, and we’re seeing a lot of innovative firms stealing in. So I’m completely with you—we’re at the pace of change where what’s happening now is a trigger for what’s happening next. Things tend to be triggered by economic events, inflation, low unemployment, lack of people. There’s a lot of things coming together that we’ve never seen before. So it feels like we’re being forced into this, as opposed to trying to plan ahead, right?
Cliff Justice — Head of Enterprise Innovation, KPMG[18:26]
Events like ChatGPT—this latest release—have served as a wake-up call for those organizations that don’t have innovation groups. For those that do, they’ve been playing with this for a couple of years. And as the API has become more and more user-friendly, more and more organizations and non-technology or non-innovation-oriented users have become familiar with it. But those that have the innovation groups and the R&D, they’ve been aware of this and experimenting with this and testing business models around these types of disruptive technologies—and not just ChatGPT, that’s a good example, but blockchain and metaverse and some of the Web3-type technologies like DAOs that are going to disrupt business models and how operating models operate for the future of the internet. So these things are all coming. Innovation groups know that they’re coming and are playing with them now and beginning to experiment and understand how it’s going to affect the enterprise. At some point, they’re going to become so mainstream that it’s going to be a wake-up moment for everybody else. And that’s the difference. Some businesses are fine being fast followers, and you can do quite well in many cases being a fast follower—you don’t have to be the first mover. But as the pace of change accelerates, it’s harder and harder to survive effectively as a fast follower, and that window will close faster and faster as these exponential-type technologies continue to emerge. So it’s not just AI, it’s many other things that are on the horizon, and they’re coming quicker.
Phil Fersht — CEO and Chief Analyst, HFS Research[20:27]
So what’s your advice here on how companies can improve their efforts with their partners and peers to be more innovative as an ecosystem, to stay ahead of the curve rather than react to the curve? Are you seeing models which are helping drive more innovative technology thinking in how we move forward?
Cliff Justice — Head of Enterprise Innovation, KPMG[20:52]
Absolutely. I would say taking a portfolio view of the innovation landscape—and by that I mean looking at the outside, and how the innovations that are occurring outside the four walls of the company can impact the core business. Looking at universities, looking at the startup world, looking at where the smart money is going in these earlier-stage startups.
