How to Structure Agile Companies. A Developing Story.

Everybody, in profit and not-for-profit organizations, will know by now how to run a scrum project or set up agile teams. The topic I try to explore here is more far-reaching: are there any good ideas out there on how to build your entire organizational structure to accommodate agile working?

I use concepts developed by Steve Denning (author of The Age of Agile) for a working definition of agile:

  1. Agile responds to the central challenge of business today: how to provide instant, frictionless, intimate value at scale.
  2. The law of the small team. Agile practitioners share a mindset that work should in principle be done in small autonomous cross-functional teams working in short cycles on relatively small tasks and getting continuous feedback from the ultimate customer or end user.
  3. The law of the customer. In truly agile organizations, everyone is passionately obsessed with delivering more value to customers. Everyone in the organization has a clear line of sight to the ultimate customer and can see how their work is adding value to that customer—or not.
  4. The law of the network. Agile practitioners view the organization as a fluid and transparent network. In the agile manifesto this is described as “individuals and interactions over processes and tools”.

Having worked as a scrum master on various agile projects myself, a question slowly developed over time: How would you draw the lines in an organization that wants to adopt agile working for the entire organization? In other words, what does an agile organizational structure look like?

A number of management thinkers have tried to answer just this question. What follows is a brief overview and some preliminary conclusions.

Bain & Company – Agile at Scale

In a recent Harvard Business Review article, consultants from Bain & Company argued that structuring for agile should at least be situational:

  • Companies often struggle to know which functions should be reorganized into multidisciplinary agile teams and which should not.
  • Not every function needs to be organized into agile teams; indeed, agile methods aren’t well suited to some activities. Even the most advanced agile enterprises – Amazon. Google, Netflix, Bosch, Saab, SAP, Salesforce, Tesla – operate with a mix of agile teams and traditional structures.
  • Changes are necessary to ensure that the functions that don’t operate as agile teams support the ones who do.
  • Routine operations such as plan maintenance, purchasing, and accounting are less fertile ground for agile. In companies that have scaled up agile, the organization charts of support functions and routine operations generally look much as they did before, though often with fewer management layers and broader spans of control as supervisors learn to trust and empower people.

Bain argues that one of the features of Agile is delayering. (Which, by the way, is another well known management concept, just as ‘situationality’ is). According to Bain a delayered organization should speed up decision making. When senior managers then also leave the decision on how to innovate to agile teams, “senior leaders get time to create and communicate long-term visions, set and sequence strategic priorities, and build the organizational capabilities to achieve those goals. Leaders remove constraints and solve problems.”

McKinsey – The five trademarks of agile organizations

In a January 2018 article on their website, McKinsey wants us to believe we are in a paradigm shift (possibly game changing as well?) from thinking about organizations as machines, to thinking about organizations as organisms. Weirdly, the writers mention Gareth Morgan when they write about organizations as machines, but not when describing organizations as organisms. Morgan did so in his 1986 (!) book Images of Organization. (He came up with a number of other useful metaphors for thinking about organizations, such as organizations as a brain, a culture, a political system, a psychic prison, a change or flux, and as an instrument of domination. It’s a classic.) To credit McKinsey though, they are first to attempt to draw an agile organizational structure. It looks like this:

The writers go on to discuss their five trademarks of agile organizations:

Reading through this list of five items; are these all really trademarks that we’ll only find in agile organizations? That’s a question you might want to answer yourself.

London Business School – Adhocracy

Julian Birkinshaw and Jonas Ridderstråle of London Business School, in their recent book Fast/Forward, also argue that in the current VUCA age (volatile, uncertain, complex and ambiguous) we need to say goodbye to old modes of structuring organizations. Their solution is the adhocracy. Not that the adhocracy is a new model, it has been around for multiple decades. The definition that springs to my mind is the one given by Mintzberg in another classic, The Structuring of Organizations:

In adhocracy, we have a fifth [after the simple structure, machine bureaucracy, professional bureaucracy and the division structure] distinct structural configuration: highly organic structure, with little formalization of behavior; high horizontal job specialization based on formal training; a tendency to group the specialists in functional units for housekeeping purposes but to deploy them in small market-based project teams to do their work; a reliance on the liaison devices to encourage mutual adjustment the key coordinating mechanism -within and between these teams; and selective decentralization to and within these teams, which are located at various places in the organization and involve various mixtures of line managers and staff and operating experts. To innovate means to break away from established patterns. So the innovative organization cannot rely on any form of standardization for coordination. In other words, it must avoid all the trappings of bureaucratic structure, notably sharp division of labor, extensive unit differentiation, highly formalized behaviors, and an emphasis on planning and control systems.

Birkinshaw (in Forbes) puts the emphasis on action:

Adhocracy is an action-based view of the organization focused on capturing opportunities, solving problems and getting results.

Ask yourself the question: is this really new, or is it an old concept that might be adopted by more and more firms now that more business environments seem to get more turbulent? I give you some more Mintzberg quotes from 1979 (emphasis added):

Contrary to the other configurations, large parts of the organization are organized into ad hoc project teams which solve specific projects.

This team grouping makes mutual adjustment the favored coordinating mechanism.

On a daily basis, the organization’s work force may be grouped into functional units, but if required by the managers, almost everybody can participate in temporary market based units. Intergroup coordination and communication with the strategic apex is done by the use of liaison devices.

Nobody in the organization monopolizes the power to innovate, and management typically does its best to ensure a setting that nurtures creativity and innovation.

An attempt to describe an agile organization structure

With all of the above in mind, here are some things to take into account when trying to build your agile organizational structure:

  • Agile is about small teams that can freely innovate to deliver value to internal and external customers. There still needs to be management direction on where to innovate, however.
  • To draw the lines in the organization, it is best to adhere to proven management methods in building organizational structures. Senior management still has to decide at least three things:
    • how to divide labor, or ‘who is doing what?’
    • how to make decisions, or ‘who decides what?’
    • how to coordinate activities, or ‘who talks with whom about which topics?’
  • You might want to consider keeping to one of the traditional structures (functional, geographic, product) for housekeeping purposes such as HRM-processes, but at the same time deploying staff to agile teams for day-to-day work.
  • Before you do anything else, ask yourself the question if your business environment warrants a highly flexible organization that structures work around every opportunity or customer whim in sight. Is your specific business environment really VUCA? We all like to be Spotify or Tesla. But in reality, we also need traditional production and logistics firms that might not operate in VUCA environments.
  • Probably it is best to deploy a few agile teams, track the results, and deploy more teams when business results improve because of agile.
  • ‘Only VUCA needs an adhocracy’, could be a useful credo.

Don’t get carried away

The first of two closing comments that buttress my attempt to describe an agile organizational structure comes from The Economist:

(..) companies need to adapt to a world that is VUCA (volatile, uncertain, complex and ambiguous) and which requires continuous innovation in order to keep up. Agile teams are the equivalent of in-house startups. It is worth remembering, however, that many startups fail to gain traction. There is a danger that, while a firm’s best talent is off pursuing new ideas, the core revenue-generating business deteriorates due to neglect. Permanent revolution may sound an enthralling idea in theory but may lead to chaos in practice.

The second closing comment is from Steve Jobs. I often have to think about this quote when agile practitioners preach about the need to listen to customer’s wishes:

“A lot of times, people don’t know what they want until you show it to them.”

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6 Tips to Foster Practical Wisdom in Decision Making

Aristotle might be best known for ‘inventing’ science (see my discussion of The Lagoon – how Aristotle invented science) and being a rather rational kind of chap. Although this is certainly true, and you can learn a lot from reading his treatises (his extant works read more like lecture notes than books) such as On the Soul, Physics, and Metaphysics, I stumbled upon the interesting Aristotelian term phronesis that translates as ‘practical wisdom’.

In The Nichomachean Ethics, Aristotle explains that practical wisdom (phronesis) is something else than scientific knowledge (epistēmē). In the sense that practical wisdom is rooted in action and can essentially create different realities (or outcomes) by taking action; scientific knowledge, instead, describes how reality is:

(..) since scientific knowledge involves demonstration, but there is no demonstration of things whose first principles are variable [such as decision making in reality], and since it is impossible to deliberate about things that are of necessity, practical wisdom can not be scientific knowledge nor art [technē, a technique, in the sense of making things]; not science because that which can be done is capable of being otherwise, not art because action and making are different kinds of things. The remaining alternative, then, is that it is a true and reasoned state of capacity to act (…).

This passage is pregnant with implications for managerial decision making. Although you should make use of scientific insights if they are available, and you should take into account knowledge on how to build real-life things (i.e. cars, bridges, consumer products, etc.), managerial decision making often has other, less tangible characteristics. For example, think about creating a strategy, an organizational structure or a company culture. Some characteristics of this kind of decision making that spring to mind are:

  • Uncertainty. You probably do not have all the knowledge and all the details. Outcomes cannot be predicted with certainty and are, thus, contingent.
  • Context-dependent. You are not taking a decision in isolation: How will my competitors act? What will my employees think and do? How will my stakeholders react?
  • Non-demonstrable outcomes. There are no scientific rules. There is not even an exact copy of the problem at hand.
  • Action-oriented. Your decision entails an actual follow-up in the real world; in a way, you will alter reality with your actions.
  • Multiple outcomes possible. Your actions will alter reality. But, the outcome is not fixed as it would be if there was scientific certainty. You change the outcome by taking different actions: you can create endless variations in strategies, organizational structures or cultures, for example.

Professors Ikujiro Nonaka and Hirotaka Takeuchi, in their Harvard Business Review article, call for ‘wise leaders’ to make decisions in such a context:

Dependence only on explicit knowledge prevents leaders from coping with change. The scientific, deductive, theory-first approach assumes a world independent of context and seeks answers that are universal and predictive. However, all social phenomena – including business – are context dependent. (…), the world needs leaders who will make judgments knowing that everything is contextual, make decisions knowing that everything is changing, and take actions knowing that everything depends on doing so in a timely fashion. They will have to see what is good, right, and just for society while being grounded in the details of the ever-changing front line. Thus, they must pair micromanagement with big-picture aspirations about the future.

Echoing Aristotle and Nonaka & Takeuchi, I therefore conclude that (managerial) decision making is not a science (epistēmē) and not a technique (technē). But, rather, it is applying practical wisdom (phronesis) to a situation that demands an analysis and a wise decision when facing uncertainties and incomplete information. Now, with Hardin, we can ask ourselves the question ‘What operations are implied by these statements?’ Or, ‘What does this mean in practice?’

In the following paragraphs, I will therefore offer 6 tips to operationalize the concept of practical wisdom.

Tip 1: use your mission and vision as a guiding principle in decision making

In taking on any decision, hold it against your mission and your vision. Your organization’s mission tells you the organization’s reason-of-being: why does your organization exist in the first place. The vision tells you what you are trying to achieve in the medium to long term. For more on one of the most important aspects of business (i.e. your mission), see my blog on business fundamentals.

Tip 2: get to the essence of a problem or a decision

Always ask yourself these questions: Why is there is a problem? What are we trying to solve? What are we trying to achieve? Nonaka and Takeuchi describe it as ‘relentlessly asking what the basis of a problem or a situation is.’ They go on to describe routines to do just that at two Japanese multinationals:

At Toyota employees ask “Why?” five times to get to the root cause. At Honda they ask the “A, A0, and A00” questions. A questions are about specifications – such as “What should the horsepower of this engine be?” A0 questions are about concepts – such as “What is the idea behind this engine?” A00 questions are about the essential goals of the project – such as “What is this engine for?”

Tip 3: understand the difference between epistēmē and phronesis, and when to use it

You don’t usually need scientific knowledge to make wise decisions (although it can be part of the data that you need for to make a decision, of course). Recognize the existence of practical wisdom (phronesis) as opposed to scientific knowledge (epistēmē). In a funny example, Nassim Taleb explains how relying on epistēmē in a situation where phronesis might be more suited, can lead to serious mistakes. He calls this the green lumber fallacy:

In one of the rare noncharlatanic books in finance, descriptively called What I Learned Losing a Million Dollars, the protagonist makes a big discovery. He remarks that a fellow named Joe Siegel, one of the most successful traders in a commodity called “green lumber”, actually thought that it was lumber painted green (rather than freshly cut lumber, called green because it had not been dried.) And he made it his profession to trade the stuff! Meanwhile the narrator was into grand intellectual theories and narratives of what caused the price of commodities to move, and went bust.

Tip 4: use heuristics (rules of thumb)

According to Taleb ‘heuristics are simplified rules of thumb that make things simple and easy to implement. But their main advantage is that the user knows that they are not perfect, just expedient, and is therefore less fooled by their powers.’ Using heuristics does not require scientific knowledge but can give you insight into what’s going on pretty quickly. In turn, you might be able to use these shortcuts for your decision making. A powerful heuristic, for example, is the 80/20 rule or Pareto principle that states that in many events 80% of the effects come from 20% of the causes.

Tip 5: develop your own heuristics through practice and experience

In practical wisdom, experience and practice take precedence over scientific rules. Through practice in the real world, you might be able to create your own heuristics about your specific (business) contexts and realities. In time, you will develop rules of thumb, or even a ‘feel’, for how things play out for your organization in a specific (Aristotle uses particular) situation. In The Nichomachean Ethics, this concept is illuminated as follows (emphasis mine):

Nor is practical wisdom concerned with universals only – it must also recognize the particulars; for it is practical, and practice is concerned with particulars. This is why some who do not know [i.e. do not have scientific knowledge], and especially those who have experience, are more practical than others who know; for if a man knew that light meats are digestible and wholesome, but did not know which sorts of meat are light, he would not produce health, but the man who knows that chicken is wholesome is more likely to produce health.

As an example, read why I use redundancy (as a heuristic) in project plans.

Tip 6: read widely

Now that we have established that (organizational) decision making is practical wisdom instead of science, you might want to practice as much as possible (and create your own practical heuristics along the way). Another way to expose yourself to as many situations as possible, and see how people react to and solve problems, is reading. Peter Drucker famously said that management is a liberal art. Liberal because management is about broadening general knowledge and experience; and an art because management is practiced by doing. So, pick up some philosophy, some history, and some literature once in a while to broaden your exposure to more Aristotelian particulars. A place to start? See last year’s holiday reading list.

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On the Need for Redundancy in Project Plans

IMG_0541 (800x597)

As a preface to this blog entry, forget about the strict definition of redundancy found in the Oxford English dictionary that tells you redundancy means ‘no longer needed or useful’. As will become clear – I hope -, redundancy is needed to have an option to maneuver when things happen that you could not possibly have predicted. In other words, redundancy gives you optionality. See redundancy not as superfluous but as an insurance. Or, as an investment even.

Projects fail to meet deadlines and budgets all the time. While rereading random passages in Nassim Taleb’s stimulating and provocative books The Black Swan and Antifragile, it struck me that I always try to build a little redundancy in project plans because ‘you never know what will happen’. Almost never taking time to consider the rationale behind my sub-conscious whispering ‘you never know what will happen’.

Taleb shares some nice insights on the reasons why redundancy (in general) is useful. I hope reading this blog entry will make you look at redundancy – and the world – from a somewhat different angle. (In a way, it is what this blog is all about: discussing concepts and tools that change the way you look at the world. Remember Proust? ‘My destination is no longer a place, rather a new way of seeing.’)

I will discuss two of Taleb’s concepts that will make it easier for you to include some well contemplated redundancy in your future projects. Including redundancy will definitely increase the success rate of your projects. But, you need to be able to explain why you included it in your budget. Here’s how to do that.

Concept 1: the world is more random than you think

Taleb constantly challenges you on how you look at the world. One of the main themes in his books is that the world is more random than we think, and that we are often fooled by this randomness. In Antifragile he argues:

Black Swans (…) are large-scale unpredictable and irregular events of massive consequence – unpredicted by a certain observer (…). I have made the claim that most of history comes from Black Swan events, while we worry about fine-tuning our understanding of the ordinary, and hence develop models, theories, or representations that cannot possibly track them or measure the possibility of these shocks.

Black Swans hijack our brains, making us feel we “sort of” or “almost” predicted them, because they are retrospectively explainable. (…) Life is more, a lot more, labyrinthine than shown in our memory – our minds are in the business of turning history into something smooth and linear, which makes us underestimate randomness.

In The Black Swan, Taleb claims that large scale events cannot be predicted (and are in effect random to the observer):

I discovered (…) that no researcher has tested whether large deviations in economics can be predicted from past large deviations – whether large deviations have predecessors, that is. (…) My results were that regular events can predict regular events, but that extreme events, perhaps because they are more acute when people are unprepared, are almost never predicted from narrow reliance on the past. The fact that this notion is not obvious to people is shocking to me. It is particularly shocking that people do what are called “stress tests” by taking the worst possible past deviation as an anchor event to project the worst possible future deviation, not thinking that they would have failed to account for that past deviation had they used the same method on the day before the occurrence of that past anchor event.

In Antifragile, he goes as far to call this a mental defect:

I have called this mental defect the Lucretius problem, after the Latin poetic philosopher who wrote that the fool believes that the tallest mountain in the world will be equal to the tallest one he has observed. (Note: Read the wonderful poem on science and philosophy by Lucretius called On the Nature of Things. In the 2007 Penguin edition, the translation of the passage Taleb is referring to actually reads as follows: “And any stream will seem to be, to one who’s never seen a larger, the greatest of rivers (…). Indeed, anything we see, we shall imagine, is the largest specimen of its kind if it’s the largest we’ve laid eyes on.”)

So, taking into account that randomness is a fact of life and we cannot predict big events, there needs to be some redundancy to counter for this. The next time you sit down and think through the things that can hurt your project plan, think ‘randomness’ and ‘Lucretius problem’.

Concept 2: the world is more random than we lead ourselves to believe

A second reason why you need redundancy – there might be more reasons, but my aim here is to introduce two new ways of looking at the world offered by Taleb – is the narrative fallacy. Planning is nothing more and nothing less than a narrative – a story – you create around your project based on your previous experiences with projects. You want this story (the budget and the planning) to unravel according to plan. You take with you all the things – the good and the not so good – that happened in previous projects, create a narrative why this happened, and include that knowledge in your current plan. I wrote about narratives and stories before in my blog entry Successful Businesses and the Halo Effect. It’s almost as if rereading Rosenzweig’s comments on stories in the Halo Effect when Taleb writes:

We like stories, we like to summarize, and we like to simplify, i.e., to reduce the dimension of matters. The first of the problems of human nature that we examine in this section (…) is what I call the narrative fallacy. (…) The fallacy is associated with our vulnerability to overinterpretation and our predilection for compact stories over raw truths. It severely distorts our mental representation of the world; it is particularly acute when it comes to the rare event.

And:

If narrativity causes us to see past events as more predictable, more expected, and less random than they actually were, then we should be able to make it work for us as therapy against some of the stings of randomness.

Needless to say, Taleb argues that we are ill prepared for randomness and will always be fooled by our tendency to attach an explaining narrative to events in the past. The narrative, however, will never prepare you for events in the future.

Redundancy as buffer against unforeseen events

The combined effects of randomness of the environment, the Lucretius problem, and the narrative fallacy create a background where you can easily underestimate the impact of unforeseen events in your project (or business plan, or – even – life itself). Build in some redundancy and use the concepts discussed here to rationalize your hunch that tells you: ‘you never know what will happen’. It’ll make your project plans more robust and realistic, and it’ll give you options. A final word from Antifragile:

Redundancy is ambiguous because it seems like a waste if nothing unusual happens. Except that something unusual happens – usually.

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