DESIGN SPECIAL ...The business value of design PART I

The business value of design PART I

How do the best design performers increase their revenues and shareholder returns at nearly twice the rate of their industry counterparts?

We all know examples of bad product and service design. The USB plug (always lucky on the third try). The experience of rushing to make your connecting flight at many airports. The exhaust port on the Death Star in Star Wars.

The business value of design

We also all know iconic designs, such as the Swiss Army Knife, the humble Google home page, or the Disneyland visitor experience. All of these are constant reminders of the way strong design can be at the heart of both disruptive and sustained commercial success in physical, service, and digital settings.

Despite the obvious commercial benefits of designing great products and services, consistently realizing this goal is notoriously hard—and getting harder. Only the very best designs now stand out from the crowd, given the rapid rise in consumer expectations driven by the likes of Amazon; instant access to global information and reviews; and the blurring of lines between hardware, software, and services. Companies need stronger design capabilities than ever before.

So how do companies deliver exceptional designs, launch after launch? What is design worth? To answer these questions, we have conducted what we believe to be (at the time of writing) the most extensive and rigorous research undertaken anywhere to study the design actions that leaders can make to unlock business value. Our intent was to build upon, and strengthen, previous studies and indices, such as those from the Design Management Institute.

We tracked the design practices of 300 publicly listed companies over a five-year period in multiple countries and industries. Their senior business and design leaders were interviewed or surveyed. Our team collected more than two million pieces of financial data and recorded more than 100,000 design actions.¹ Advanced regression analysis uncovered the 12 actions showing the greatest correlation with improved financial performance and clustered these actions into four broad themes.

The four themes of good design described below form the basis of the McKinsey Design Index (MDI), which rates companies by how strong they are at design and—for the first time—how that links up with the financial performance of each company.

Our research yielded several striking findings:

1. We found a strong correlation between high MDI scores and superior business performance. Top-quartile MDI scorers increased their revenues and total returns to shareholders (TRS) substantially faster than their industry counterparts did over a five-year period—32 percentage points higher revenue growth and 56 percentage points higher TRS growth for the period as a whole.

2. The results held true in all three of the industries we looked at: medical technology, consumer goods, and retail banking. This suggests that good design matters whether your company focuses on physical goods, digital products, services, or some combination of these.

3. TRS and revenue differences between the fourth, third, and second quartiles were marginal. In other words, the market disproportionately rewarded companies that truly stood out from the crowd.

An elusive prize

In short, the potential for design-driven growth is enormous in both product- and service-based sectors . The good news is that there are more opportunities than ever to pursue user-centric, analytically informed design today. Customers can feed opinions back to companies (and to each other) in real time, allowing design to be measured by customers themselves—whether or not companies want to listen.

Lean start-ups have demonstrated how to make better decisions through prototyping and iterative learning. Vast repositories of user data and the advance of artificial intelligence (AI) have created powerful new sources of insights and unlocked the door for new techniques, such as computational design and analytics to value. Fast access to real customers is readily available through multiple channels, notably social media and smart devices. All of these developments should place the user at the heart of business decisions in a way that design leaders have long craved.

What our research demonstrates, however, is that many companies have been slow to catch up. Over 40 percent of the companies surveyed still aren’t talking to their end users during development. Just over 50 percent admitted that they have no objective way to assess or set targets for the output of their design teams. With no clear way to link design to business health, senior leaders are often reluctant to divert scarce resources to design functions. That is problematic because many of the key drivers of the strong and consistent design environment identified in our research call for company-level decisions and investments. While many designers are acutely aware of some or all of the four MDI themes, these typically can’t be tackled by designers alone and often take years of leadership commitment to establish.

Top-quartile companies in design—and leading financial performers—excelled in all four areas. What’s more, leaders appear to have an implicit understanding of the MDI themes. When senior executives were asked to name their organizations’ single greatest design weakness, 98 percent of the responses mapped to the four themes of the MDI.

Unpacking the MDI

In the remainder of this article, we’ll describe the four clusters of design actions that showed the most correlation with improved financial performance: measuring and driving design performance with the same rigor as revenues and costs; breaking down internal walls between physical, digital, and service design; making user-centric design everyone’s responsibility; and de-risking development by continually listening, testing, and iterating with end users.

More than a feeling: It’s analytical leadership

The companies in our index that performed best financially understood that design is a top-management issue, and assessed their design performance with the same rigor they used to track revenues and costs. In many other businesses, though, design leaders say they are treated as second-class citizens.

Design issues remain stuck in middle management, rarely rising to the C-suite. When they do, senior executives make decisions on gut feel rather than concrete evidence.

Designers themselves have been partly to blame in the past: they have not always embraced design metrics or actively shown management how their designs tie to meeting business goals. What our survey unambiguously shows, however, is that the companies with the best financial returns have combined design and business leadership through a bold, design-centric vision clearly embedded in the deliberations of their top teams.

A strong vision that explicitly commits organizations to design for the sake of the customer acts as a constant reminder to the top team. The CEO of T-Mobile, for example, has a personal motto: “shut up and listen.” IKEA works “to create a better everyday life for the many people.” And as Pixar cofounder Ed Catmull told readers in a McKinsey Quarterly interview, to “wow” movie-goers continually, his company encourages its teams to take risks in their new projects: Pixar considers repeating the formulas of its past commercial successes a much greater threat to its long-term survival than the occasional commercial disappointment.

It’s not enough, of course, to have fine words stapled to the C-suite walls. Companies that performed best in this area of our survey maintain a baseline level of customer understanding among all executives. These companies also have a leadership-level curiosity about what users need, as opposed to what they say they want. One top team we know invites customers to its regular monthly meeting solely to discuss the merits of its products and services. The CEO of one of the world’s largest banks spends a day a month with the bank’s clients and encourages all members of the C-suite to do the same. Through personal exposure or constant engagement with researchers, executives can act as role models for their businesses and learn firsthand what most frustrates and excites customers.

Many companies, though, acknowledge a worrying gap in understanding at the top of their organizations.

Less than 5 percent of those we surveyed reported that their leaders could make objective design decisions (for example, to develop new products or enter new sectors). In an age of ubiquitous online tools and data-driven customer feedback, it seems surprising that design still isn’t measured with the same rigor as time or costs. Companies can now build design metrics (such as satisfaction ratings and usability assessments) into product specifications, just as they include requirements for grades of materials or target times to market.

The value of such accurate insights is significant—one online gaming company discovered that a small increase in the usability of its home page was followed by a dramatic 25 percent increase in sales. Moreover, the company also discovered that improvements beyond these small tweaks had almost no additional impact on the users’ value perceptions, so it avoided further effort that would have brought little additional reward.

More than a product: It’s user experience

Top-quartile companies embrace the full user experience; they break down internal barriers among physical, digital, and service design. The importance of user-centricity, demands a broad-based view of where design can make a difference. We live in a world where your smartphone can warn you to leave early for your next appointment because of traffic, and your house knows when you’ll be home and therefore when to turn on the heat. The boundaries between products and services are merging into integrated experiences.

In practice, this often means mapping a customer journey (pain points and potential sources of delight) rather than starting with “copy and paste” technical specs from the last product. This design approach requires solid customer insights gathered firsthand by observing and—more importantly—understanding the underlying needs of potential users in their own environments. These insights must be championed at every meeting. Yet only around 50 percent of the companies we surveyed conducted user research before generating their first design ideas or specifications.

Combining physical products, digital tools, and “pure” services provides new opportunities for companies to capture this range of experience. A hotel, for example, might do more than just focus on the time between check-in and check-out (the service element) by promoting early engagement through social media or its own apps (the digital dimension) and providing physical mementos aimed at encouraging customers to rebook. The reception team of one big hotel chain we know gives departing guests a rubber duck adorned with an image of their host city (such as clogs and tulips for Amsterdam). The team includes a note suggesting that guests might like to keep the duck at home as a reminder of their stay and could build a collection by visiting the group’s other properties. This small touch led to a 3 percent improvement in retention over time.

Design-driven companies shouldn’t limit themselves to their own ecosystems. The best businesses we interviewed think more broadly. Ready-made meals are popular with the hard-working singles who grab them on their way home. A retailer of these meals has considered teaming up with Netflix to devise a one-click meal-ordering system, which would come into play two hours into an evening’s binge viewing when the customer would receive a screen prompt. Mobile-payment services such as Google Pay and Apple Pay were the result of a willingness to think across boundaries to devise easier ways to access cash. A piece of plastic in your wallet is one solution, but how much easier is it to use a device you already carry in your pocket?

CONTINUES IN PART II