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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Successful Business and the Halo Effect

Being influenced in my thinking on business strategy and execution mostly by the work of Igor Ansoff (see Implanting Strategic Management), I have always wondered why business books like In Search of Excellence and Good to Great had such huge success. Ansoff stressed that business performance is highly dependent on the specific environment your business finds itself in at any given time. Consequently, he was very much against the notion of an ‘if you do this in any situation, it’ll always work’-approach as advocated by such business books.

So, following Ansoff, to me it seems that the prescriptive mantras for long-lasting high business performance are just not in sync with a situational or conditional approach (based on so-called turbulence levels of the business environment). Moreover, companies hailed as consistent high performers at one point in time, will sooner or later come crashing down. (As you may well ascertain when browsing through the companies listed as high performers in older business blockbusters.)

So, the question really is: what’s going on here? Are there really business laws (like laws in physics) that safeguard lasting high business performance? Or are these laws a mere fallacy?

It was only recently that I came across a fascinating theory called the The Halo Effect by Phil Rosenzweig (the book with the same name was first published in 2006 with an updated version published in 2014). It tries to shed some light on the apparent attractiveness of a recipe for long-lasting business success. Rosenzweig argues that our thinking about business performance is shaped by a number of delusions:

For all their claims of scientific rigor, for all their lengthy descriptions of apparently solid and careful research, they [i.e. science in business books] operate mainly at the level of storytelling. They offer tales of inspiration that we find comforting and satisfying, but they’re based on shaky thinking. They’re deluded.

He goes on naming a number of delusions in our thinking about business performance. The pre-eminent delusion Rosenzweig names the Halo Effect:

[The Halo Effect is the] tendency to look at a company’s overall performance and make attributions about its culture, leadership, values, and more. In fact, many things we commonly claim drive company performance are simply attributions based on prior performance.

It’s not so much the result of conscious distortion as it is a natural human tendency to make judgments about things that are abstract and ambiguous on the basis of other things that are salient and seemingly objective. The Halo Effect is just too strong, the desire to tell a coherent story too great, the tendency to jump on bandwagons too appealing.

It turns out that most business blockbusters that tell you precisely which companies to mimic for success, suffer from the Halo Effect. Consequently, the companies that are given as examples in most business books (e.g. Xerox in In Search of Excellence, Fannie Mae in Good to Great; also see this article in The Economist) are not consistent high performers after all:

Yet for all their promises of exhaustive research, Collins and Porras [in Built to Last: Successful Habits of Visionary Companies] didn’t address a basic problem: the Halo Effect. Much of the data they gathered came from the business press, from books, and from company documents, all sources that are likely to contain Halos.

You would have been better off investing randomly than putting your money on Collins and Porra’s Visionary companies.

But why the appeal then? Why are these prescriptive books such a huge success? Time after time? The answer, Rosenzweig argues, is that we like stories:

Managers don’t usually care to wade through discussions about data validity and methodology and statistical models and probabilities. We prefer explanations that are definitive and offer clear implications for action. We like stories.

Now, there’s nothing wrong with stories, provided we understand that’s what we have before us. More insidious, however, are stories that are dressed up to look like science. They’re better described as pseudo-science.

And:

Readers, too, prefer clear stories. We don’t really want to hear about partial causation or incremental effects or threats to validity. And there’s a further problem compounding all of this. As Harvard psychologist Stephen Pinker observed, university departments don’t always represent meaningful divisions of knowledge. If you’re a professor of marketing, you care a lot about market orientation and customer focus, and there’s a natural tendency to want to demonstrate the importance of your specialty.

Does this mean that everything that is written about good business practices is just nonsense and everything might as well be left to chance? No:

Success is not random – but it is fleeting. Why? Because as described by the great Austrian economist Joseph Schumpeter, the basic force at work in capitalism is that of competition through innovation – whether of new products, or new services, or new ways of doing business. Where most economists of his day assumed that companies competed by offering lower process for similar goods and services, Schumpeter’s 1942 book, Capitalism, Socialism and Democracy, described the forces of competition in terms of innovation.

But the main point is that high performance is difficult to maintain, and the reason is simple: In a free market system, high profits tend to decline thanks to what one economist called “the erosive forces of imitation, competition, and expropriation.” Rivals copy the leader’s winning ways, new companies enter the market, consulting companies spread best practices, and employees move from company to company.

These findings show that performance is not random but persists over time, yet there is also a tendency to move toward the middle, a clear regression toward the mean. Competitive advantage is hard to sustain. Nothing recedes like success.

However, real science on business performance, as opposed to mere storytelling, is out there. But it might not make for such a good story:

Anita McGahan at Boston University and Michael Porter at Harvard Business School set out to determine how much of a business unit’s profits can be explained by the industry in which it competes, by the corporation it belongs to, and by the way it is managed. This last category, which they called “segment-specific effects,” covers just about everything we’ve talked about (…): a company’s customer orientation, its culture, its human resource systems, social responsibility, and so forth. Using data from thousands of U.S. companies from 1981 to 1994, McGahan and Porter found that “segment-specific effects” explained about 32 percent of a business unit’s performance. Just 32 percent. The rest was due to industry effects or corporate effects or was simply unexplained. So maybe all of the studies we’ve looked at make sense after all! It’s just that, as we suspected, their efforts overlap – they all explain the same 32 percent [italics mine]. Each study claims to have isolated an important driver of performance, but only because of the Delusion of Single Explanations.

Rosenzweig stays clear from coming up with his own take on a recipe for long-lasting business success. However, understanding that strategy always involves taking risks, that links between input and outcomes are sketchy at best and that flawless execution (once you have made up your mind about your strategic direction) is needed at all times, can veritably be read as a good starting point for discussing your company’s performance. It also means you do not have to resort to the latest and newest four, five, or eight-point list promising the holy grail of ever-lasting high business performance.

So, what’s the very mundane advice that Rosenzweig has to offer to managers?

When it comes to managing a company for high performance, a wise manager knows: (1) Any good strategy involves risk. (2) If you think your strategy is foolproof, the fool may well be you. (3) Execution, too, is uncertain – what works in one company with one workforce may have different results elsewhere. (4) Chance often plays a greater role than we think, or than successful managers usually like to admit. (5) The link between input and outputs is tenuous. But when the die is cast, the best managers act as if chance is irrelevant – persistence and tenacity are everything.

Will all of this guarantee success? Of course not. But I suspect it will improve your chances of success, which is a more sensible goal to pursue.

If you want to read your management books more critically, the lessons drawn by Rosenzweig in The Halo Effect  might just be invaluable.

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