When Internal Collaboration Is Bad for Your Company

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Without question, internal collaboration can produce benefits for an organization. This doesn’t mean, however, that the more your employees collaborate, the better off the company will be. It may, in fact, be worse off.

The author, a professor at UC Berkeley and at Insead, offers a simple method for determining when collaborating on a project makes sense. He calls it calculating the collaboration premium—what’s left after you subtract opportunity costs and collaboration costs from a project’s expected financial return. The opportunity cost is what’s lost by devoting resources to the collaboration project rather than to something else—particularly something that doesn’t require collaboration. Collaboration costs arise from the challenges—conflict over goals and budgets, competing objectives, logistical roadblocks—involved in working across organizational boundaries. Sometimes those costs are so high that the project results in a collaboration penalty.

The Norwegian company Det Norske Veritas (DNV) would have done well to apply Hansen’s calculation before it launched a food-safety initiative combining the expertise, resources, and customer bases of two business units: standards certification and risk-management consulting. According to initial projections, from 2004 to 2008 the joint effort would quadruple the growth to be realized if the two units operated separately. Unfortunately, DNV hadn’t formally evaluated food safety’s potential relative to other promising sectors; the consulting unit might have more profitably pursued IT risk management on its own. Meanwhile, mistrust and quarreling between the two units scotched efforts to cross-sell, while conflicting goals and incentives pulled individual team members in opposing directions. Two years after launching the initiative, DNV abandoned it.

The challenge is to cultivate not more collaboration but the right collaboration. Hansen’s formula can get you started.

The Idea in Brief

Are you promoting cross-unit collaboration for collaboration’s sake? If so, you may be putting your company at risk. Collaboration can deliver tremendous benefits (innovative offerings, new sales). But it can also backfire if its costs (including delays stemming from turf battles) prove larger than you expected.

To distinguish good collaboration from bad, estimate three factors:

  • Return: “What cash flow would this collaboration generate if executed effectively?”
  • Opportunity cost: “What cash flow would we pass up by investing in this project instead of a non-collaborative one?”
  • Collaboration costs: “What cash flow would we lose owing to problems associated with cross-unit work?”

Would the return exceed the combined opportunity and collaboration costs? If yes, put that collaborative project in motion.

The Idea in Practice

In deciding whether to launch a collaborative effort, managers can fall victim to three common errors. By understanding these errors, you stand a better chance of avoiding them.

Overestimating the Return

Many companies place a mistakenly high economic value on collaboration. Often, the expected results don’t materialize.

Example: 

Daimler’s $36 billion acquisition of Chrysler in 1998 failed to deliver the promised synergies between the two automakers. In 2007, Daimler sold 80% of Chrysler for a mere $1 billion.

Ignoring Opportunity Costs

Executives often fail to consider opportunities they would forgo by devoting resources to a particular collaborative project. They don’t evaluate non-collaborative activities that might have higher potential.

Example: 

Risk-management services firm DNV decided to combine the expertise, resources, and customer bases of two business units—standards certification and risk-management consulting. The goal? To cross-sell services to help food companies improve food safety. DNV estimated the collaboration’s return as $40 million.

But DNV never compared the food-industry opportunity that required cross-unit collaboration with other industry opportunities that wouldn’t require collaboration. One opportunity in IT could have been pursued by the consulting unit alone, and it had more potential than the food opportunity. But because many of the consulting unit’s experts were tied up with the food initiative, progress on the IT opportunity was constrained. The cost of the forgone opportunity was $25 million in revenue.

Underestimating Collaboration Costs

In most companies, it’s difficult to get people in different units to work together effectively, because:

  • They resent taking on extra work if it provides little recognition and no financial incentive.
  • They have conflicting priorities; for example, some people are dedicated to the initiative full-time, while others aren’t.

These tensions create problems that, combined with opportunity costs, can eat into the collaboration’s potential—and produce a collaboration penalty.

Example: 

At DNV, competition over customers between the two units caused tensions that ultimately scotched 50% of cross-selling engagements. That amounted to $20 million in collaboration costs. Added to the $25 million opportunity cost for the non-collaborative IT opportunity, total costs were $45 million—$5 million over the collaborative food opportunity’s expected return of $40 million.

Internal collaboration is almost universally viewed as good for an organization. Leaders routinely challenge employees to tear down silos, transcend boundaries, and work together in cross-unit teams. And although such initiatives often meet with resistance because they place an extra burden on individuals, the potential benefits of collaboration are significant: innovative cross-unit product development, increased sales through cross-selling, the transfer of best practices that reduce costs.

But the conventional wisdom rests on the false assumption that the more employees collaborate, the better off the company will be. In fact, collaboration can just as easily undermine performance. I’ve seen it happen many times during my 15 years of research in this area. In one instance, Martine Haas, of Wharton, and I studied more than 100 experienced sales teams at a large information technology consulting firm. Facing fierce competition from such rivals as IBM and Accenture for contracts that might be worth $50 million or more, teams putting together sales proposals would often seek advice from other teams with expertise in, say, a technology being implemented by the prospective client. Our research yielded a surprising conclusion about this seemingly sensible practice: The greater the collaboration (measured by hours of help a team received), the worse the result (measured by success in winning contracts). We ultimately determined that experienced teams typically didn’t learn as much from their peers as they thought they did. And whatever marginal knowledge they did gain was often outweighed by the time taken away from their work on the proposal.

The problem here wasn’t collaboration per se; our statistical analysis found that novice teams at the firm actually benefited from exchanging ideas with their peers. Rather, the problem was determining when it makes sense and, crucially, when it doesn’t. Too often a business leader asks, How can we get people to collaborate more? That’s the wrong question. It should be, Will collaboration on this project create or destroy value? In fact, to collaborate well is to know when not to do it.

This article offers a simple calculus for differentiating between “good” and “bad” collaboration using the concept of a collaboration premium. My aim is to ensure that groups in your organization are encouraged to work together only when doing so will produce better results than if they worked independently.

How Collaboration Can Go Wrong

In 1996 the British government warned that so-called mad cow disease could be transferred to humans through the consumption of beef. The ensuing panic and disastrous impact on the worldwide beef industry over the next few years drove food companies of all kinds to think about their own vulnerability to unforeseen risks.

The Norwegian risk-management services firm Det Norske Veritas, or DNV, seemed well positioned to take advantage of the business opportunity this represented by helping food companies improve food safety. Founded in 1864 to verify the safety of ships, DNV had expanded over the years to provide an array of risk-management services through some 300 offices in 100 countries.

In the fall of 2002 DNV began to develop a service that would combine the expertise, resources, and customer bases of two of the firm’s business units: standards certification and risk-management consulting. The certification business had recently created a practice that inspected large food company production chains. The consulting business had also targeted the food industry as a growth area, with the aim of helping companies reduce risks in their supply chains and production processes.

Initial projections for a joint effort were promising: If the two businesses collaborated, cross-marketing their services to customers, they could realize 200% growth from 2004 to 2008, as opposed to 50% if they operated separately. The net cash flow projected for 2004 through 2008 from the joint effort was $40 million. (This and other DNV financial figures are altered here for reasons of confidentiality.)

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