 Live from San Francisco, it's theCUBE. Covering IBM Think 2019, brought to you by IBM. Welcome back to Moscone North here in San Francisco, California. I'm Stu Miniman, my co-host Dave Vellante. We're in day three of four days, live wall-to-wall coverage here at IBM Think. Happy to welcome back to the program, talk about one of our favorite topics. Cube alum, Steve Hill, who's the global head of innovation, that topic I mentioned. I'm from KPMG, Steve, welcome back to the program. Thanks for having me, good to see you. All right, so we know that the only constant in our industry is change, and one of those things, I look at my career, it's like innovation, is it a buzzword? Has innovation stalled out of the IT industry? But you're living it, you're swimming in it, talking to lots of people on it. KPMG has lots of tools, so give us the update from last year. Well, I think we talked about several things last year, innovation was a key theme, and what I would share with you is that I think across all industries, innovation as a capability has become more mature and more accepted. Still, not widely adopted across all industries and all competitors and all kinds of companies, but the reality is, innovation used to be kind of one person's job off in the closet. Today, I think a lot of organizations are realizing you have to have corporate muscle that is as engaged in changing the status quo as the production muscle is in maintaining the status quo. It's become a cultural. It's become part of culture, and so I think innovation really is part of the evolution of corporate governance as far as I'm concerned. One thing I worry about a little bit is, I see a company like IBM, they have a long history of research that throws off innovation over the years. I grew up in the backyard of Bell Labs and think about the innovation they drove. Today, the culture is faster, faster, faster, and sometimes innovation needs us to sit back. I need to be able to think longer. How does an innovation culture fit into the ever-changing, fast-paced, need to deliver 90-day shot clock of reality of today? Well, I think innovation has to be smart, meaning you have to be able to feed the engines of growth, so you're horizon one, if you will, of investments and your attention and efforts have to pay off the short term. But you also can't be strategically stupid and build yourself into an alleyway or to a corner because you're just too short-term thought through, right? So you need to have a portfolio of what we call horizon three, blended with horizon one, and horizon two types of investments, so your short-term, your middle-term, and your longer-term needs are being met. Of course, when you think about it like a portfolio of investments, you're going to have probably a smaller number of investments that are further out, more experimental, and a larger proportion of them going to be helping you grow, you could say almost tactically or sort of adjacent to where you are today, incrementally, but some of those disruptive things that you work on in H3 could actually change your industry. I mean, if you think about it today, where we are as an economy, intangibles are starting to creep into this notion of value in ways we've never seen before. Today, the top five companies in terms of net worth all fundamentally rely on intangibles for their worth. Five years ago, it was one or two, and I would argue that the notion of intangibles, particularly data, will drive a lot of very transformative types of investments for organizations going forward. So you've got to be careful not to starve a lot of those longer-term investments. Right, and it's almost become bromide. Oh, large companies can't innovate, but those five companies you just mentioned, well, alluded to, Amazon, Google, et cetera, Facebook, Apple, Microsoft, they're innovators, all right? So, can large companies innovate? Clearly. Yeah, but you have to have muscle. It doesn't happen by accident, and you do put discipline and process and rigor and tools and leadership around innovation, but it's a different kind of discipline than you need in the operation. So, I'll make up a ratio that makes sense. Maybe 95% production, 5% innovation in an organization, that innovation engine is always challenging that 95%, are you good enough? Are you relevant enough? Are you fast enough? Are you agile enough? You need that in every corporate organization in terms of governance to stay healthy and relevant over time. So, it's interesting, I was at a session that Jack Welsh talked once, and he's like, I hear big companies can't innovate. He's like, big companies are made up of people, people are the things that can innovate. Absolutely. But I've worked in large organizations, we understand that the fossilization of process and the go-to market that you have will often kill those new flowers that are blooming. What separates the people that can drive innovation and put those processes in place and kind of the also rands that get left behind when the disruption happens? Well, there's a couple things that I would highlight of a longer list. One of them would be culture. I mean, I think innovation has to be part of a culture. People in the institution have to value innovation and want to be part of it. And there is a role that everyone can play. Just because you're in operations, if you will, doesn't mean you ignore change or you ignore the opportunity to improve the status quo. But you get paid to operate. What I find that is related to culture that gets a lot of people slowed down or roadblock is the disconnect between the operating part of the business and the innovative part of the business. If you build them too separately, what happens is you have a disconnection. And if you innovate the best idea in the world over here, but you can't scale it with production, you lose. So you have to make sure that as a leader over all the entire enterprise, you build those connections, rotations, leadership. How do you engage the production engine into the innovation engine? It should be very collaborative. It should be seamless. Everyone likes to say that word, reality, seamlessness is heavy architecture. You've got to build that collaboration into your model of how you innovate. Don't innovate in a vacuum. And it comes back to the cultural aspects we're talking about. Stu, you mentioned the 90-day shot clocks. We're here in the Bay Area, Silicon Valley, the most innovative place in the world. They've lived along the 90-day shot clock forever, and the sieves have not hurt that so-called short-term thinking. Why is that? Well, there's so much startup here. I mean, at the end of the day, there is so much churn of new thinking and startup and VC and there's so much activity that it's almost a microcasa, right? Not every place in the world smells, feels, looks like Silicon Valley, right? And the reason for it is in part because there's just so much innovation in what happens here. And these things change. I mean, if you think about these unicorns that we have today, today there's what, 391 unicorns. Just five years ago, there were 160 globally. And before that, hardly people didn't, they were hardly recognized. But that's all coming from pockets of innovation like Silicon Valley. So I'd argue that what you have here is an interesting amalgamation of culture being part of a macro environment, like a region, that really rewards innovation and demonstrates that in market valuations, in capital raises, I mean, today a $100 million capital raise is pretty common, especially for unicorns. Five, 10 years ago, you never, I mean, it was very difficult to get a $100 million capital raise. I mean, you're seeing billion dollar companies do half a billion dollar raises today. I mean, it's just the same, right? And some of them don't make a profit. Which is, I mean, and that's kind of the irony, which is, are those companies, what do they get that the rest of us, you know, those that live on Wall Street, right, out of New York, what do we not see? Is it some secret that downstream is going to be some massive inflow? Hard to say. If you look at Amazon as an example, they've used an intangible to take industries out that they were never in before. They started selling books, and they leveraged customer behavior data to move into other spaces. And this is kind of the intangible dynamic and the inflection point I'm talking about. The data was the fuel for that digital disruption. So as you travel around the world, do you see that folks outside of Silicon Valley are really sort of maybe creating new innovation recipes? Yes, I think that what you see here is starting to go viral, right? And the way that KPMG likes to share a holistic way to look at this for our clients is what we call the 21st century enterprise. So the things that we used to do in the 20th century to be successful, hire people, build more machines, buy more assets, hard, durable assets, those things don't necessarily give you the recipe for success in the 21st century. And if you look at that, if you think about the intangibles work that's been well written about, there's all kinds of press on this today, you'll start to realize that the recipe for success in this new century is different. And you can't look at it in a silo to say, okay, so I've got to change my IT department or I've got to go change my widgets. What you've got to think is that your entire enterprise. And so our construct called the 21st century enterprise looks at four things. Actually, it's five. And the fifth one is the technologies to enable change in the other four. And those technologies we talk about here at IBM Think, which are cloud, data, smart computers or AI, blockchain, et cetera. But those four pillars are first, the customer. How do you think about your customer experience today? And how do you rethink your customer experience tomorrow? I think the customer dynamic, whether it's generational or it's technologically driven change is happening more rapidly today than ever. And looking at that front office and the customer dimension is really important. The second is looking at your asset base. The value of your assets are changing and intangibles are a big category of that change. But do your hard assets make the difference today and forward or all these intangibles? Companies that don't have a data strategy today are at peril of falling victim to competitors who will use data to come through a flank. And Amazon's done that with groceries, right? The third category is as a service capabilities. So if you're growing, contracting, going into new markets or opening new channels, how do you build that capability to serve that? Well, there's a phenomenon today that we know is I think very practiced but usually in functions called as a service by capability on the drink. Instead of going out and doing big BPO deals, think about APIs, think about other kinds of ways of get access to build and scale very flexibly your capabilities. And then the last category, which actually is extremely important for any change you make elsewhere is your workforce. Culture's part of that, right? A lot of organizations are bringing on chief culture officers, we and KPMG did the same thing. But that workforce is changing. It's not just people you hire under your four walls today. You've got contingent workforce, you have gig economy workforce. A lot of organizations are leveraging platform business models to bring on employees to either help customers with help desk needs or build code for problems that they like to solve for free. So when you talk about productivity, which we talked about last year, and you start thinking about what's separating the leaders from a productivity standpoint from the laggers from a productivity standpoint, a lot of those attributes of change in customer value of assets as a service growth and workforce are driving growth in productivity for that subset of our community in many industries. Yeah, so when you look at the firm level, you're seeing some real productivity gains versus just paying attention to the macro number. Correct, I mean macro, we think productivity is relatively flat and that's not untrue. It's because the bottom portion, the laggers, aren't growing. In fact, productivity is in many ways falling off. But the ones that are at the frontier, those top 10%, 1,500 global clients we've looked at with an OECD study, show that they're actually driving growth and productivity substantially and the chasm is getting larger. So Steve, Steve, I'm curious what this means for competition. I think about if I'm using external workforces in open source communities, you know, cloud and AI changes the environment as opposed to, I used to kind of have my internal innovation now. I'm out in these communities. So, you know, we're here at an IBM show. You know, I think back to the word co-opetition, I first heard in context of talking about how IBM works with their ecosystems. So how do those dynamics change of competition and innovation in this, you know, the gig economy with open source and cloud and AI everywhere? Big implications. I mean, I think, you know, and the funny point you made is non-traditional competitors because I think most of our clients and ourselves recognize that we have an incredible amount of non-traditional competitors entering our space. In professional services, we have companies that are not overtly going after our space but are creating capabilities for our clients to do for themselves what we used to do for them. Data collection, for example, is one of those areas where clients used to have to spend money for consultants coming in to gather data and to aggregate data. With tools today, that's a very short process and they can do it themselves. So that's a disintermediation or unbundling of our business. But every business has these types of competitive non-traditional competitive threats. And what we're seeing is that those same principles that we talked about earlier of the 21st century enterprise applies, right? How are they leveraging their asset base and how are they leveraging their workforce? Are they, do they have a data strategy to think through, okay, what happens if somebody else knows more about my customers than I do, right? What does that do to me? Those kinds of questions need to be asked. And innovation as a capability, I think, is a good partner in driving that. The other thing I would say is that ecosystems, and you mentioned that word and I want to pick up on that, I mean, I think ecosystems are becoming a force in competitive protection and competitive potential going forward. If you think about a lot of household names relative to data, you know, Amazon's one of them, they are involved in the back office and the middle office of so many organizations. They're integrated in those supply chains and those value chains. I think services firms in particular need to be thinking about how do they integrate into the supply chains of their customers so that they transcend the borders of, you know, their four walls. Those ecosystems and IBM is, we consider, KPMG considers IBM to be part of our ecosystem, right? As well as other technology products. So there, one of the things we're hearing from IBM, Jenny talked about it yesterday and her keynote was doubling down on trust. And essentially one could, you know, she's implying that trust is a barrier to AI adoption. Is that true? Is that what your data shows? Yeah, we see that very much in space. In fact, you know, AI, if you think about it, quite frankly, RPA has driven a lot of people to class two and class three and organizations are opportunities. But what's happening is we're seeing a slowdown because the price of some of these initiatives are big, but trust, culture and trust are big issues. In fact, we just released recently an AI and control framework, which includes methods and tools, assessments to help our clients. In fact, we're working with the city of Amsterdam today on a system for their citizens that help them have accountability, make sure there's no bias in their systems as AI systems learn, and importantly, explainability. Imagine, you know, a newlywed couple going into a bank to get a house note and having the banker sit back and have his AI driven, you know, assessment for mortgage applicability come up, a mortgage recommender saying, no, you, I can't offer you a mortgage because my data shows you guys are going to be divorced soon. Right? I mean, you don't want to tell it to a newlywed couple, right? So, explainability about why it's doing what it's doing and put it in terms that relate to customer service. I mean, that's a pretty, it's a silly example, but it's a true example. Yeah, there's a lack of explainability in terms of how AI is coming up with some of its conclusions. Black box, right? Right, so trust in AI is a big issue. All right, Steve, the framework that you just talked about, the 21st century enterprise, is there a book or their papers? Do I just go to the website or do I need to be a client to read more about this? Absolutely, you can go to our website, kpmg.com, and you can get all the download you want on the 21st century enterprise. It talks to how we connect our customers front to middle to back offices, how they think about those pillars, the technologies we can help them with that make change happen there, et cetera. So I appreciate that. We'll check it out. That blogging. We don't want to be left in the 20th century, come on. No, you can't use 20th century answers to solve 21st century challenges. Well, Steve Hill really appreciate giving us the 21st century update for Dave Vellante, I'm Stu Miniman. We'll be back with our next guest here at IBM Think 2019. Thanks for watching theCUBE.