What’s the biggest challenge confronting the world’s private and public sector leaders today?

Over the course of more than 1500 face-to-face interviews with CEOs and other leaders, the IBM Institute for Business Value 2010 Global CEO report reveals “dealing with complexity” as the biggest challenge confronting leaders worldwide.

The common denominator? The realities—and challenges—of global integration. We occupy a world that is connected on multiple dimensions, and at a deep level—a global system of systems. That means, among other things, that it is subject to systems-level failures, which require systems-level thinking about the effectiveness of its physical and digital infrastructures. It is this unprecedented level of interconnection and interdependency that underpins the most important findings contained in this report. Samuel J. Palmisano, Chairman, President and Chief Executive Officer, IBM Corporation

It’s no surprise that CEOs reported they operate in a world that is substantially more volatile, uncertain and complex and that incremental changes are no longer sufficient in a world that is operating in fundamentally different ways. What’s insightful about this report is the analysis of the “Standouts”—organizations that have turned increased complexity into financial advantage over the past five years. To do so, they have focused their attention on three areas that set these high-performing enterprises apart:

1. Embody creative leadership
2. Reinvent customer relationships
3. Build operational dexterity

I encourage you to read the entire 76 page report and I extracted key phrases to synthesize the findings below. What companies do you see these characteristics?

Embody creative leadership.

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What we heard through the course of these in-depth discussions (my own interview took place on December 2, 2009) is that events, threats and opportunities aren’t just coming at us faster or with less predictability; they are converging and influencing each other to create entirely unique situations. These firsts-of-their-kind developments require unprecedented degrees of creativity — which has become a more important leadership quality than attributes like management discipline, rigor or operational acumen. Samuel J. Palmisano, Chairman, President and Chief Executive Officer, IBM Corporation

Creative leaders invite disruptive innovation, encourage others to drop outdated approaches and take balanced risks. They are open-minded and inventive in expanding their management and communication styles, particularly to engage with a new generation of employees, partners and customers.

1. Standouts believe that creativity is the most important leadership quality. Standouts practice and encourage experimentation and innovation throughout their organizations. Creative leaders are comfortable with ambiguity and experimentation. To connect with and inspire a new generation,they lead and interact in entirely new ways. Leaders must be comfortable with and committed to ongoing experimentation.
2. Standout CEOs expressed little fear of re-examining their own creations or proven strategic approaches. Standouts rely more on continuously re-conceiving their strategy versus an approach based on formal, annual planning.
3. Standouts focus on quick decisions even when facing uncertainty. Standouts master this dilemma by finding ways to push past uncertainty—they were 54 percent more likely to rely on quick decisions rather than thorough study. Of course, no one advocated making ill-considered judgments, but avoiding unnecessary delays was a recurring ambition. “The world is spinning faster,” said a Government CEO in Australia. “We need to keep pace.” CEOs must be able to test, tweak and redesign their core activities continually. Today, partnerships, revenue models and a host of core business decisions require modification in light of the fast-changing forces impacting their organizations. To operate more effectively in a volatile environment, creative leaders strongly encourage and experiment with all types of business model innovation.
4. Standouts recognize that continuous change is the norm and they must equip their entire organization to be a catalyst for creativity. To benefit from the diversity of ideas each employee can contribute, Standouts encourage a new mindset of questioning. They invite employees at all levels to challenge assumptions based on past experiences and scrutinize “the way we’ve always done things.” To enact continuous change, Standouts avoid the old command and control style of leadership. Fifty-eight percent prefer to persuade and influence compared to just 17 percent that tend toward command and control. In addition to leading differently, CEOs and their teams are communicating differently. To communicate with customers and employees, they are experimenting with and assessing the results of using many newer types of digital media and social networking channels. Standouts reported a better balance of communication approaches—they acknowledge the continued importance of communications “from the top,” especially to establish clarity of purpose and company values. But they also are embracing “viral” forms of communication to engage those inside and outside their organizations.

Reinvent customer relationships.

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Customers have never had so much information or so many options. CEOs are making “getting connected” to customers their highest priority to better predict and provide customers with what they really want. In a massively interconnected world, CEOs prioritize customer intimacy as never before. Globalization, combined with dramatic increases in the availability of information, has exponentially expanded customers’ options. CEOs said that ongoing engagement and co-creation with customers produce differentiation. They consider the information explosion to be their greatest opportunity in developing deep customer insights.

1. Get even closer to the customer. Customer intimacy is foremost on CEOs’ minds. Eighty-eight percent of all CEOs, and an astounding 95 percent of Standouts, picked getting closer to the customer as the most important dimension to realize their strategy in the next five years. These CEOs are convinced they must not only stay connected (or reconnect) with customers, but keep on learning how to strengthen those bonds.
2. Data rich, insight poor. A staggering number of CEOs described their organizations as data rich, but insight poor. Many voiced frustration at not being able to transform
   available data into feasible action plans, let alone to detect emerging opportunities. “We seem to have more data, but our information is worse,” said an Electronics CEO in Canada. “It is more difficult to sift out what is most important.”
3. Massive growth in social networking. “Social networks are at the heart of collaboration and information sharing,”according to a Telecommunications CEO in the United States. “It will drive differentiation.” A Utility CEO in the United Kingdom acknowledged,“There is a whole new generation of customers we must learn to engage with; they’re all ‘twittering’ and we’re not.”
4. Standouts are more focused on the price-value equation. Organizations recognize the need to better understand customers’ price-value trade offs.
5. Design the customer experience. Organizations are finding new ways to better understand evolving needs. In addition, they are designing better customer experiences for all their interactions.
6. Co-create. The most successful organizations co-create products and services with customers, and integrate customers into core processes.

Build operating dexterity.

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Successful CEOs refashion their organizations, making them faster, more flexible and capable of using complexity to their advantage. CEOs are revamping their operations to stay ready to act when opportunities or challenges arise. They simplify and sometimes mask complexity that is within their control and help customers do the same. Flexible cost structures and partnering capabilities allow them to rapidly scale up or down.

1. Simplify for speed. Standouts were 30 percent more likely than others to be focused on simplification. “Simplifying our products and processes is our response to the extended complexity in the world,” one Banking CEO in the Netherlands told us.
2. Design for dexterity—replacing fixed costs with variable costs. The most dexterous CEOs focus much more on variable cost structures so they can scale up and down more quickly. By adopting a service model approach, outsourcing and partnering more extensively, they are able to tap into skills and can scale their businesses as required. This gives them more flexibility to pursue targeted pockets of growth. They standardize processes where possible, and take advantage of shared service models across key functions, such as Human Resource and Finance operations. This frees them up to put more emphasis on activities that customers or citizens value.
3. Be “Glocal”. The dexterous group was 23 percent more intent than all others on achieving an optimal balance between global and local markets. They prioritized the analysis of which operational elements work best on a global level versus those that are better addressed at local levels. Find the right mix of global and local. Be global where possible, local where necessary. Gain an in-depth understanding of what really needs to be localized. Allow for cultural differences and don’t assume what worksfor one country or market will work in another.
4. Leverage the world through partners. Being nimble often means not doing it alone. Know where the best opportunities lie at any given time, and pursue them. Strengthen partnering skills to replace fixed costs with variable costs, and take advantage of geographic expertise and cost advantages as much as possible.

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