Improvements in the Manufacturing Industry Versus Health Care Industry

Failure an Option At Toyota Financial allowing for missteps is

key to the C-suite's innovation strategy

BY TIM S C A N N E L L

When George Borst made the jump in 1997 from general manager of Toyota's Lexus division to head of the com- pany's finance group, he was faced with a big decision.

The finance group's four core systems were in woe- ful shape, needing upgrades to improve performance and keep up with the rapid growth of finance opera- tions. Borst came to the job long on strategy but admit- tedly a bit short on the intricacies of IT and finance, having come from sales, marketing and product-plan- ning groups.

"I wish I'd paid a lot more attention in college to my economics and finance courses." he jokes. "But I was sent over there for a reason: to help increase sales and get closer to the dealers."

Borst decided to upgrade all four systems at the same time, inci uding the core receivables system, think- ing that a staggered plan would take longer and trigger an endless cycle of updates and redundant fixes.

As it turned out, that decision was a mistake. "George's error was in signing on to the upgrade of

multiple legacy systems concurrently without increas-

ing the manpower and business prowess to be suc- cessful," says Ron Guerrier, CIO at Toyota Financial Services (TFS). The core receivables system was hard- est hit. Guerrier says, noting that the effort had to be restarted three times.

The IT department's reputation also took a hit. "Even though it was my fault," Borst says, "people were blaming IT for not having the capability to do it."

His mistake was trying to solve a problem without first gathering all the details and considering every variable, all while essentially flying solo. It's a mistake that neither he nor the company would repeat today. Not because Borst has a deeper understanding of all the complexities of IT, but because he later pulled together a trusted team of executives willing to share responsibil- ity and accountability, in good times and bad.

The team includes the CEO. CIO, the vice presidents of sales and product marketing, and even the finance

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COVER STORY :: Innovation

group's VP and general counsel—many of whom came up through the ranks together over the past decade or more, cementing their collaborative rela- tionships. It is a C-suite dream team, although its members might eschew that phrase because egos and lofty titles get in the way of collaboration and trust. The number one rule for this group: Leave that baggage at the door.

The TFS team's recipe for innova- tion and collaboration includes a list of basic ingredients: trust, courage, con- fidence, a sprinkling of diversity and a healthy dollop of mutual ownership of both successes and failures. Like many recipes, however, there is some wiggle room. "I'm huge on unity, but that doesn't mean everybody agrees," notes Mike Groff, who was until recently the senior VP of sales, mar- keting and product development at TFS. He was tapped to replace Borst as the organization's president and CEO when Borst retired on Sept. 30.

"You have to be transparent and you have to have courage," Groff says. "You've got to be willing to say things are going well when they are and when they are not, and then be able to adjust course."

The team's cohesiveness grew even stronger when TFS was spun off as a separate Toyota subsidiary in 2001 and Borst was appointed its first president and CEO. Under his lead- ership—with close support from the C-suite team—TFS has grown from $74.4 billion in total assets in fiscal 2009 to more than $95 billion in fis- cal 2013. The company has more than 4 million customers and employs more than 3,200 workers.

TFS works with a nationwide network of dealers to manage all the financial aspects of purchasing or leasing a Toyota vehicle, and goes head-to-head against some formida- ble competitors in the finance industry, including Capital One, Chase, Bank of America and Wells Fargo.

Building a Bridge CIO Ron Guerrier played an instru- mental role in building and maintain- ing a collaborative bridge between the sometimes-insular business segments

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of Characters The C-suite team at |

Toyota Financial Services:

Katherine Adkins: VP & General Counsel, also acts as the company's^

innovation champion

George Borst: Retired as President & CEO on Sept 30, continues as an

executive adviser to the company through the end of next year

Pete Carey: VP of Sales, works closely with IT on customer-service technology

Mike Croff: Incoming President & CEO. promoted from SVP of Sales, Marketing

and Product Development

m Ron Guerrier: VP & CIO, started his career with Toyota 17 years ago in coliections and moved up the ranks

to his current position

Karen Ideno: VP of Product & Marketing, maintains close connections with dealers to keep them apprised of new products and pricing as well as how products are

positioned and sold

and IT, as well as in establishing a high level of trust among the compa- ny's top executives. Borst says. Street smart and technically savvy. Guerrier brought a no-frills vibe to the group and the organization by eliminating unnecessary barriers and chipping away at mid-management fiefdoms that stood in the way of productivity and innovation.

Guerrier is also one of the driving forces behind the company's Innova- tion Lab, or iLab, which was created a two years ago and is now the center of technology creativity at TFS and a nexus between IT and the organiza- tion's various business sectors. The iLab's success in bridging the gulf and enhancing the relationship between IT and business at TFS was one ofthe reasons it was selected last year as a CIO 100 award winner.

"I know everything I do in terms of technology systems is a part of this longer value chain, and it's to meet the needs of that end customer," says Guerrier, whose 17-year tenure at Toyota began soon after his graduation from the University of Illinois.

He grew up in some ofthe tougher areas of Chicago, where violence was an everyday occurrence, and his life could have taken a very different tra- jectory. After college, however, he set . his sights on the business world and immediately started interviewing at companies like Philip Morris and Toyota. Guerrier applied to the auto- maker's customer service department, but ended up in collections, a stint he refers to as "eye-opening." Toyota seemed a good fit since he was look- ing to join a socially minded company and he was a car enthusiast. Perfect.

Today, Guerrier spends a lot of time working with youth groups to educate inner-city young people about the world beyond gangs, and working with other departments at TFS to improve IT'S reputation. "I need to build up our street cred," he says. "I need to show that IT is adding value along the way."

Dealing With Adversity Nearly every company can look back at its history and point to times of adver- sity, when executives and employees

COVER STORY :: Innovation

Many members of the C-suite team at Toyota Financial Services-(left to right) George Borst. Karen Meno, Katherine Adkins, Ron Guerrier, Pete Carey and Mike Groff-came up through the ranks together over the past decade or more, cementing their collaborative relationships. Their philosophy: To foster trust and collaboration, leave the egos and lofty titles at the door.

either rallied and survived or were crushed by the challenges. Toyota is no exception, although in its case the difficulties had more potential to devastate than most.

Four years ago, the automaker was forced to recall 14 million vehicles worldwide due to problems with the accelerators, and last year it recalled roughly half that many automobiles due to a risk of fire. While safety-related recalls are common in the auto industry, these incidents dealt a hard blow to Toyota's longtime reputation for quality and manufacturing excellence and trig- gered a surge of critical media.

In 2011, the company faced another frightening crisis in the form of the earthquake and tsunami that battered north- eastern Japan. A few months later, unrelenting monsoon rains brought destructive flooding to Thailand. Both events severely disrupted Toyota's supply of parts and affected the worldwide production capabilities of all Japanese automakers. The earth- quake alone caused Toyota's profits to plunge more than 18 per- cent as production lines went idle and orders were left unfilled.

All this occurred as the Great Recession swept in, an impla- cable force that battered the economy and the business models of companies like Toyota that are dependent on new sales and the disposable income of consumers. Despite all this, Toyota bounced back and earlier this year recaptured the title of the world's largest automaker with global sales of about 9.75 mil- lion vehicles last year.

It would be easy to attribute Toyota's resilience to the worn cliché that Japanese companies operate according to a less indi- vidualistic philosophy than most U.S. concerns. This is true to some extent, of course, but it's an oversimplification.

"We live in a world of kaizen," says Borst, dropping the Jap- anese term for continuous improvement and change for the better, though in this case he also means pulling together and overcoming seemingly insurmountable obstacles.

"Toyota is a very collaborative environment," adds Groff. "We had some failures along the way, and that just caused us to take a step back" and reassess, he says, pointing to a few missteps

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COVER STORY :: Innovation

affecting both the business and IT. One Innovation Lab project that

seemed to have potential, but was ultimately dropped, was a secure printing app for mobile devices. The printing app went against the grain of TFS' green initiatives and was not approved to move forward, says a company source.

But when executives emerge from adversity and take responsibility for both failures and successes, the bonds between them grow even stronger.

Sometimes admitting failure can be not just tough but also expensive, as in the case of the early and wrong deci- sion to upgrade all the group's core systems at once. "I think it was one of the most disappointing things during [Borst's] tenure here, because we spent so darn much money and didn't have much to show for it," Groff says.

The company has since improved its decision-making process by add- ing a division information officer who oversees business-IT partnerships on specific technology projects and man- ages requirements gathering, says Guerrier. In October 2012, for example, the IT department got the green light to take a more surgical and collabora- tive approach when the decision was made to again upgrade the core receiv- ables system. Guerrier says.

Another project, which has been rolled out to TFS dealers as a major new product, is the e-Contracting sys- tem, which streamlines the entire legal and financial process associated with customer contracts, including policy checks and document management.

Rolling Out Mobile Apps Meanwhile, the Innovation Lab acts as an incubator and helps vet ideas for smaller but stiU-important IT projects. For example, the lab was the genesis of successful iOS and Android apps that were pitched and created by internal mobile app development groups to build on the company's expanded use of smartphones and tablets in its interactions with dealerships.

Two of these apps were showcased in August at the com- pany's national sales conference:

• an enterprise social networking app (in development) that leverages SharePoint 2013 to give sales associates immediate access to multiple feeds of relevant information and sends them push notifications of important leadership or sales meetings

g A big payoff awaits those who can build a collaborative C-suite team. Here's how to do i t Duplicating t h e success that Toyota Financial Services has had in buiiding and nurturing its C-suite dream team is quite simpie. Gather executives who have spent a long time working together-maybe a decade or so-and have estabiish trusted relationships, iHave a CEO and team members wiiling to ignore titles and give every- one an equai voice, Get the blessing of a company with deep pockets and the will- jngness to ride out some inevitable bumps along the innovation road. Simple! \ Whiie that may not be a plan most companies can follow, TFS executives offer !ome advice that any CIO can use to build a collaborative C-suite:

• Develop partnerships with other executives and keep a business-first mind-set • Ensure that all executives view IT as a true enabler of business success, not as

a necessary evii, • Find the sweet spot in technology conversations-make sure executives can

comprehend the topic, but don't oversimplify, Chailenge them to raise their tech IQ. • Don't forget to think long-term. CIOs who are short-term thinkers-or worse,

obsessed with getting recognition for what they did today-wiil lose the trust and mfidence of their C-suite peers, • Buiid a candid, trusting reiationship with the CEO on matters of IT spending. If a

project is going to go over budget don't wait to teli the CEO and other stakeholders. This level of executive teamwork won't happen at companies where protect-

ing turf and divisional boundaries are part of a hierarchical management culture, says Peter High, a management consultant and president of Metis Strategy, A collaborative culture starts at the top, with a CEO who has an extraordinary degree of self-confidence,

"If you have a CEO that wants to think of the org structure more as a miiitary hierarchy, as has been tradition, then it's not going to filter down," High says,

"I'm hearing more and more CEOs say they want this type of culture, where lead- ership team members transcend their respective functional needs and expertise and embrace mutual responsibility for the digital opportunities and challenges," says Rick Pastore, vice president of strategy at the CIO Executive Council, a business unit of CIOs parent company. Collaboration and mutual ownership of IT-enabled innovation represent a cuimination of the Future-State ClOJourney, the council's progression model for IT-business reiationships, "It's the opposite end of the spec- trum from the business handing off solutions for IT to implement as a service pro-

îastore says, layoff is big. According to PricewaterhouseCoopers' fifth annual Digital

IQ study, companies with strong relationships between the CiO and other C-suite executives are four times as likely as less-collaborative teams to achieve business resuits such as revenue growth and high profit margins -IS,

• a reporting app (being deployed now) that delivers per- formance indicators and measures—such as vehicle sales and market share—that help sales staff take a moi-e interactive and controlling role in the consultative sales process with dealers.

The iLab was created during the tenure of Guerrier's pre- decessor as CIO, Dan Priest. The idea was to establish a formal hub where both business and IT people could come together to discuss new concepts and hopefully provide the spark for projects that would benefit the company.

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COVER STORY :: Innovation

need to build up our StVeet CVed I need to show that IT is adding value along the way."

-RON GUERRIER, CIO, TOYOTA FINANCIAL SERVICES

"Dan did a phenomenal job of resetting our agenda," Guer- rier says, noting that when Priest arrived in June 2010, IT had a lot of mudfl—the Japanese word for waste and uselessness—that Priest cleaned up. "He gave us the breathing room to do such things as the Innovation Lab."

Guerrier has worked with other TFS execs to take the lab to the next level, turning it into a game-changing asset that func- tions as an idea generator to inspire creativity among employ- ees at all levels ofthe organization and determine which ideas have the most promise. Participants in the annual Innovation Fair showcase projects that have already been implemented in their departments. And throughout the year, creativity and innovation workshops bring people from different depart- ments together to analyze an issue and brainstorm potential solutions.

TFS also stages internal innovation competitions, where all employees can pitch new ideas and possible projects—some more far-fetched than feasible. The competitions are organized by VP and General Counsel Katherine Adkins, a member of the C-suite team who has an official sideline as the company's champion of innovation.

While the lab is basically a space outfitted with computers, large touch-screen displays for presentations and videoconfer- encing, collaborative workspaces and other tools, it is part ofthe glue that binds the TFS team together and gives its innovation strategy staying power. Oddly enough, the lab has also helped people in both the business and IT acknowledge the possibil- ity of failure—and figure out when to pull the plug on a pilot.

Adkins says she works closely with the CIO on her innova- tion efforts and that, while IT owns the iLab, having someone outside IT serve as an innovation coordinator improves how others perceive the effort.

"If you have a CIO who is also the chief innovation officer, then that connotes to your people that only technology equals innovation," she says, but in fact innovation can certainly hap- pen outside of IT.

CIO Guerrier says he's comfortable with Adkins' role as chief innovation instigator. "It's not about her better position or my worse position," he says. "If she does this right, and I do my part right, we're all better."

Guerrier's comfort with Adkins is based largely on the fact they have a long history of working together at TFS. They first met when Guerrier came to the Torrance, California, headquar- ters in July 200S as a national manager overseeing IT opera-

tions and service. Adkins was also a national manager and a retained attorney at the time, and she worked with Guerrier on a number of projects—as he puts it, "sitting in the trenches, going through long negotiations"—where they developed a relationship of trust and respect.

The Next Chapter The C-suite dynamic may see some subtle changes as Groff, the new CEO, looks to make his own mark on the organization. Whereas Borst projected a professorial and almost folksy image during his tenure as CEO, Groff seems to be a more pragmatic, by-the-numbers type of leader.

Groff is committed to C-suite collaboration and to sparking innovation, but he says the efforts need to mature and become totally aligned with business objectives. "We're not quite there yet," he says.

While it's still early in his tenure, Groff says he'd like proj- ects and initiatives to progress more quickly from concept to execution—without getting bogged down in overanalysis. "The world is moving awfully quick, and I think you've got to keep changing with it," he says.

In the last few years, TFS has let innovative experiments run "for a few months, six months, maybe a year, and then we'U decide whether we're really going to plunge into it in a big way," Groff says. But if a project isn't going anywhere, the new CEO may be a bit more aggressive in pulling the plug, given his back- ground in finance (as opposed to the previous CEO's experience in sales, marketing and strategic planning).

"In the past, we probably had a tendency to stay with it, fuel it with more money, bring in a different team, and then two years later say, 'This isn't going anywhere.' Instead, I'd like to see us be willing to say, 'This one just isn't going to fly, now let's move on.'"

If there is a sharper focus on success metrics and less toler- ance for marginally successful projects, that could also put a bit more pressure on Guerrier as CIO. Groff says he'll be expecting the CIO to have the courage to tell the new CEO whether the company is on the right path or not.

"I'm really going to be looking for Ron to do that. Be honest, be transparent, and be thoroughly straightforward," Groff says. "We've got to be honest with each other." QB

Tim Scannen is director of strategic content at the CIO Executive

Council {www.council.cio.com).

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