In part one of this series, we mentioned that there is an increasing awareness of the importance of the network model for organizations as the recent article ‘Creating a Network of Networks’ by SAP CEO Christian Klein makes clear.
We urgently need a new model because there is clearly something very wrong with the way most companies above a certain size are managed. They are fragmented, wasteful, slow, over-bureaucratic, unable to leverage internal talent, detached from their customers’ needs and, in most cases, a frustrating place to work. When a global crisis hits, these inadequacies become acute and a real threat to survival. A new and different way of envisaging and managing companies is long overdue. Indeed, a complete overhaul of the prevailing management style is urgently required.
In part one of this article, we looked at the ‘Adaptable Organization’ that, according to Deloitte, overcomes silos, and we highlighted the various fallacies in the organizational model they propose. We pointed out their omission of how such a solution can be implemented operationally, what new control mechanisms leaders can count on and how accountability is covered in a network.
Why did we do this? Because we are not a traditional management consulting firm. Our foundation is organizational science. For us, the transformation journey starts with asking fundamental questions to solve the problem first paradigmatically and then operationally, something that Deloitte by its nature would not and, we believe, could not do. This article is certainly longer than a ‘post’, but it is our response to the offensively shallow document from Deloitte. A genuine shift in the paradigm of management has to be based on substance and method, not just a shiny idea.
Physicists, unlike accountants such as Deloitte, are educated to ask fundamental questions to understand the nature of things and to understand them in terms of energy and speed. Our founder, Dr. Domenico Lepore, started out as a physicist with an understanding of non-linear dynamics and a keen interest in management. In the 1990s, Lepore was invited by the Management School of the Italian equivalent of the Department of Trade and Industry to design a program for SMEs to improve their performance. His research led him to eschew most of the mainstream management thinking and practices that made little sense and that have led to the creation of traditional style organizations. This is because mainstream thinking is firmly rooted in a pre-complexity interpretation of the world, totally lacking in the understanding of the unprecedented level of interconnections and interdependencies and the non-linear phenomena that result from this that have characterized our reality for decades. Most companies are further prevented from understanding this complexity because of the cost accounting methods they use that distort their view of reality. (Deloitte, like the other big accounting and consulting firms, is a pillar of cost accounting.)
Lepore embarked on a profound study of two major contributions to management thinking: Dr. W. Edwards Deming, the founding father of Quality who introduced the understanding of the company as a whole system, and Dr. Eliyahu Goldratt, who developed the Theory of Constraints. Lepore had an intuition that has provided the basis of our work for over 25 years: through a structured blend of the approaches of Deming and Goldratt, (both physicists), companies could adopt a reliable method to radically improve performance, increase throughput and accelerate the speed of flow of materials, money and information. In the best scientific tradition, this method was then applied through dozens of implementations in increasingly complex environments and continuously refined over the years. As it is a ten-step process, we called it ‘The Decalogue’.
The Decalogue rests on a fundamental, systemic understanding of organizations:
- Every organization is a system, a set of interdependent resources, processes and competencies that work together to achieve a common goal.
- Every process is affected by variation.
- Every system has a constraint – the element that dictates the pace with which the entire system produces throughput.
These are the foundational elements of knowledge that allow companies to interpret their activities and the wider context that they are part of – a network of networks – so they can radically improve performance, always have the customer clearly in focus and continuously innovate.
The Ten Steps of the Decalogue are:
- Establish the goal of the system, units of measurement, and operational measurement.
- Understand the system (map the interdependencies).
- Make the system stable (manage variation so that processes are statistically predictable).
- Build the system around the constraint – a strategically chosen leverage point.
- Manage the constraint – buffer management.
- Reduce variation at (of ) the constraint and the main processes.
- Create a suitable management/organizational structure.
- Eliminate the ‘external constraint’ – sell all the capacity the system has available.
- Where possible, bring the constraint inside the organization and fix it there.
- Create a program of continuous learning.
Discovering the real obstacle to transformation
After several years of working alongside top management teams, it became evident that a major obstacle to true transformation was the hierarchical/functional organization design that the majority of organizations are encased in.
So we had to step back and ask the right questions to solve the problem paradigmatically and practically. The Theory of Constraints provides a systemic thinking process for framing a problem and finding a breakthrough solution. The ‘conflict cloud’ works so well because it provides a structured way of eliciting the assumptions, or mental models, that lead to a situation of blockage. It is only by challenging these mental models that we can clear the way for a real breakthrough. Without this upstream rigour, a solution risks being half-baked. More fundamentally, this process is essential because if we do not address the cognitive limitations of a situation, even the best solution will eventually fail.
Following this pattern of thinking, what became clear to us at Intelligent Management over ten years ago was that complexity, i.e. a reality that is highly interconnected and interdependent, is forcing organizations to experience an inherent conflict: adopt a traditional hierarchical/functional structure with its resulting silos, or abandon the hierarchical/functional model. Companies have seen the traditional structure as a way of protecting a legitimate need for accountability and control over the organization, whereas abandoning it would fulfill another equally legitimate need all companies must address: increase performance through sales. A goal common to both needs is the sustainability of the organization. We can verbalize the major assumptions/mental models that underpin this conflict as:
- A hierarchy can only be vertical.
- Control has to be exercised equally over all components of the organization.
- The global optimum is equal to the sum of the local optima.
These assumptions are all the outcome of a mechanistic mindset. They keep companies trapped in traditional functional/hierarchical models that create silos with all the related undesirable effects and frustrations (no visibility of interactions/flow/customer, internal competition and fear, internal bureaucracy, inefficient use of resources etc.)
Understanding what an organization really is and does
At Intelligent Management we continued to ask fundamental questions to further develop the solution for managing complexity and shifting organizations beyond the trap of mechanistic thinking and silos. By addressing the inherent conflict that the majority of companies are in, surfacing the mental models and addressing the most crippling assumptions, we realized that the way out of this conflict is to acknowledge that an organization is A, a network (of value), and B, part of a larger network (of value).
Now we had to articulate this realization into an operational solution that would allow companies to focus on what they truly seek: to achieve an increase and acceleration of throughput, the pace at which the organization generates cash through sales. For non-profit organizations, throughput can be defined as the pace at which the organization generates units of its goal.
Throughput is the natural focus of any company but it is kept hidden from view in traditionally managed structures. Indeed, they do not even have a measurement for it and Deloitte certainly does not. IBITDA, EPS, EVA and similar measurements aim at capturing cash generation but fail in doing so because they are all marred by the idea of product cost that clouds the real issue – cash generation. Product cost is a zombie idea, something that is dead but every now and then comes back to haunt us.
Once it is clear that the focus has to be throughput, then the attention shifts to:
- Quality of products and services
- Flow of material, information and cash
- Involvement of people: commitment to the goal generated by personal and professional alignment with the goal/value system of the organization
That sounds all well and good, but the question always remains, how, in a practical and operational way, do you achieve it?
Managing an organization as a network
We had to dig deeper and ask some more fundamental questions to find a way to forgo a command and control management style but, at the same time, have a powerful mechanism to ensure that activities are properly coordinated and everybody in the network is accountable.
That led us to look at the fundamental elements that make up the work of an organization. Just as the key constituents of life are hydrogen, oxygen, carbon, nitrogen, phosphorus, and sulfur, we realized that the basic constituents of work are repetitive processes and one-off projects. At this point, a new organizational design emerged, based on the management of a complex, strongly interconnected and synchronized ‘Network of (processes and) Projects’.
What propels the performance of such a network are low variation processes and a finite capacity-based algorithm, Critical Chain from the Theory of Constraints, that allows a realistic allocation of available resources from an available pool of competencies. This requires a complete shift from a hierarchical/functional mindset to a systemic one to overcome the command and control management style in favor of whole system optimization.
Designing and managing organizations as Networks of Projects equips them structurally, operationally, and cognitively to optimize their interactions with larger networks of value through digital and decentralized transactions. This has become even more relevant with the amount of work that is now being done online as a result of COVID-19.
A network is not just a buzz word. It is a set of nodes connected by links; it is not a static entity, indeed it is something that continuously evolves, and its sustainable development is governed by a dynamic dictated by the emergence of a few hubs strongly connected to nodes through links whose behavior is statistically predictable. This dynamic is, especially in the specific case of human networks, nonlinear because of the intrinsic nonlinearity of the interactions between the nodes (people or groups of people).
At the most fundamental level, organizations are networks of different communities of practices; it seems only reasonable that the prevailing, silo-based, hierarchical/functional organizational design be replaced with an organic way of structuring such practices. First, in ‘Sechel: Logic, Language and Tools to Manage Any Organization as a Network’ (Intelligent Management Inc., 2011), followed by our chapter for Springer, ‘Managing Complexity in Organizations Through a Systemic Network of Projects’ (2015) and then more comprehensively in ‘Quality, Involvement, Flow: The Systemic Organization’ (CRC Press, 2016) and recently in ‘Moving the Chains’ (BEP, 2019), Intelligent Management presented a new model for the sustainable growth of organizations based on the concept of a Network of Projects. A Network of Projects leverages the power of the Critical Chain algorithm developed by Dr. Goldratt to build organizational systems where control mechanisms, feedback cycles, and rational allocation of finite resources are more effective and in line with the goals of the organization.
Everything that an organization does can be thought of in terms of a project. Some projects, like bookkeeping, are repetitive, and others, like developing a new product, introducing a new technology, or launching a new marketing campaign, are non-repetitive. These projects do not live in isolation, they are a network. The Network of Projects that makes up the life of the organization is a particular kind of network, called oriented network, where the ‘orientation’ is provided by the goal of the organization. Such networks are called scale free, with a hierarchy of hubs and nodes. Accordingly, in an organization, there will be hub-projects, namely the ones more relevant for the success of the organization, and node-projects, projects that are smaller but still necessary for the development of the organizational network. What ensures the connection among these hub and node projects is the finite capacity algorithm for their synchronization, fueled by an appropriate database of resources. Within the 10 steps of the Decalogue for managing organizations as systems, based on managing variation and constraints, Step 7 regarding organizational design becomes the design of a Network of Projects.
What Deloitte should understand is that it is not sufficient just to track and map the networks that already exist within traditional organizations. You have to have a way of orienting those networks towards the goal.
A Network of Projects leverages the power of the Critical Chain algorithm developed by Dr. Goldratt to build organizations as systems where control mechanisms, feedback cycles, and rational allocation of finite resources are more effective and in line with the goals of the organization.
Overcoming the limitations of functions
Designing and managing an organization as a systemic Network of Projects allows us to overcome the strictures that interfere with performance resulting from the artificial divisions of a traditional hierarchy/function style of management. The activities carried out in any organization need to be staffed with people with suitable competencies. It will be very cumbersome to deploy these competencies in a timely and systemic way if we organize them functionally. Why? Because any attempt to use a resource allocated to ‘Function A’ to perform its competence beyond the boundaries of its Function will immediately result in a conflict between the head of the Function and whoever has been given the task to deploy that competence, usually a project manager. This is a major operational problem that Deloitte’s hybrid model does not acknowledge.
Unfortunately, virtually every minimally complex activity needed by any company to achieve any goal is cross-functional in nature, hence we are stuck in a real dilemma about how to best utilize the resources at hand. (This dilemma is particularly felt by CIOs and CDOs attempting to roll out technologies end to end across an entire organization.) The more we realize how paralyzing this dilemma is, the closer we come to understanding the paradigm shift needed to create organizations that are not sub-optimized.
The clash between a functional organization and achieving cross-functional goals is, quite plainly and simply, what keeps organizations stuck. This dilemma is the chronic conflict that keeps the science of management from evolving into the real engine of economic growth. Addressing the multilayered issue of how to optimize finite resources to maximize throughput is critical if we are to generate wealth sustainably.
So what happens if we view the recurrent and non-recurrent activities in an organization as projects? Whether we seek to improve the speed at which we develop and manufacture new products, install new equipment, organize shipments, or file quarterly closing, we need the coordinated and synchronized efforts of many different competencies. Deploying these competencies in a logical sequence is relatively easy. However, breaking assumptions about the way performances should be controlled and measured seems to be a true cognitive ordeal. The measurement of performances seems to be inextricably connected with a local, i.e., functional, indicator whereas we all know that what matters is the global bottom line of the company. How do we come out of this seemingly irreconcilable conflict? We do so by asking ourselves what company functions are for, and uncovering the obvious truth that functions should house competencies, not fiefdoms.
Engineers, accountants, scientists, subject matter experts should not be considered members of a company function. Rather, they should be seen as valuable competencies that can be deployed for the goal of the whole company. These resources, all the resources, should be available for whatever project the company needs to accomplish.
What kind of control mechanism can we rely on in a Network of Projects? Project buffers not only provide the control mechanism to protect against disruption, but also give us statistical understanding of project development and early warnings on potential delays and are normally measured in time. Simply put, buffers cumulate protection from variation associated with the execution of every task. In this way, they provide a time ‘shield’ against delay.
The statistical property that buffers leverage is called covariance; let’s say that it is a very efficient way to ‘pool’ time.
How about money?
A company viewed as a Network of Projects is a natural evolution of W. Edwards Deming’s original 1952 system design. Each project is protected with a time buffer. Success in project execution is measured in terms of timeliness, adherence to specs, and cash outlay; the first two are peculiar to each project, but cash can be pooled to protect the entire Network of Projects.
Said in a different way, the money buffer that protects each project from variation in cash outlay (typically, Totally Variable Costs, TVC— the subset of the inventory that goes into a project) could be pooled in a buffer that protects all the projects. Covariance holds for money too.
The rationale for this choice is mathematically obvious, less so its organizational implications. Pooling resources is a systemic concept; it comes from a paradigm of whole system optimization and the reconciliation of the inherent conflict between local vs. global performance measurement.
Pooling cash to protect the entirety of the network of projects (enabling maximization of results) is possible only if we abandon the idea of ‘functional budgeting’ and cost centers. We can make intelligent decisions about how we invest our money only if we make intelligent decisions about how we want to work.
Critical Chain as the engine of a systemic organization
What we are saying is that any company should be seen as a network of projects with the global goal of maximizing the throughput of the company. The theme of Goldratt’s book ‘Critical Chain’ is that we can maximize the speed of new product development by adopting a particular approach to Project Management (PM). The implications of that approach are truly far reaching and pave the way for a complete and yet largely unexplored solution to the inherent conflict of any organization (hierarchy vs. no hierarchy).
What we have been able to discover in over 20 years of implementing the Decalogue is that the Critical Chain method that Dr. Goldratt developed can be used not only to maximize the use of the finite resources of a company; this algorithm can be used to redesign the way any company works. Critical Chain becomes, then, much more than simply an algorithm to accelerate project completion; it is the vehicle to integrate, control, and deploy the resources of the organization. Coherent with this thinking, we developed our software Ess3ntial that allows finite capacity scheduling not just of resources but of competencies in multi-project environments.
What does the network of projects organization look like? Instead of company functions, there are networks of projects; instead of heads of functions, there are managers of increasingly complex projects that draw their resources from a pool of available competencies with no resource contention; instead of executives that fight for power, there is cooperative work that is in synch with the goal of the company. Instead of often-conflicting local indicators of performance, there is one single driver for everybody. An organization as a network is part of a network of networks. This realization, and the shift in mindset it requires, open up new opportunities and possibilities beyond individual companies for collaboration along entire supply chains.
Shifting beyond the hierarchical mindset
Replacing the outdated hierarchical/functional structure with a much more organic design, based on managing variation and constraints and that reflects the intrinsically project-like nature of the work of organizations is not a cosmetic change, it is transformational. It is rooted in a paradigm of cooperation, togetherness, and win–win. The new covenant that everyone in the organization – as well as the value chain in which the organization is embedded – must embrace requires a much higher ability to think, communicate, and act; it requires a new ‘wiring’ in the way we measure, manage, and sustainably improve our efforts toward our goals.
The real challenge in bringing about a transformation based on a Network of Projects lies in the subliminal, unchallenged mental models that make us believe that an organization requires a superimposed control mechanism, be it a boss, a function, or an accounting structure based on cost-accounting type considerations. An emotional and cognitive shift needs to occur in the way people learn and use their knowledge as well as how they see themselves develop and interact in the workplace. The Thinking Processes from the Theory of Constraints were developed by Dr. Goldratt to aid that shift. Far from being a mere technique, we have found them to be a critical element in transforming organizations into thinking systems because they foster in people the ability to see interdependencies, resolve conflicts, be empowered, work cooperatively, communicate effectively, and, at a higher level, perceive (and act consistently with) the oneness of the organization with its business and physical environment.
The Thinking Processes were developed by Dr. Goldratt to sustain and focus the change process underpinned by the process of ongoing improvement at the heart of the Theory of Constraints. Goldratt identified three major phases of change:
1. What to change
2. What to change to
3. How to make the change happen
Goldratt created the Thinking Processes to support and facilitate each of the three phases. He did so as he realized how important it was to provide a strong cognitive support to combat the difficulties associated with change that people inevitably experience. Used together, the Thinking Processes have proved themselves to be an effective way to supervise and guide the change process. They are also an ideal companion for developing project plans.
The good functioning of an organization where conventional hierarchy has been challenged relies on enabling higher forms of systemic thinking that are stifled by both current educational systems organized into silos and the corporate world. It is not enough simply to change processes. Flat organizations could easily turn into a short-lived gimmick unless we systemically challenge working and, ultimately, existential paradigms governing the image that we have of what it means to live and work together. This requires a considerable cognitive effort and, without the right cognitive supports to sustain that effort, there can be little guarantee of continued success.
The new focus of leadership
It may seem paradoxical to many, but a legitimate solution for managing complexity creates a radically simpler job for leadership in terms of focus. Instead of trying to focus on all the various parts as separate pieces, their efforts can be concentrated on the constraint and on the project buffers that indicate exactly how projects are progressing. Less simple is the change in mindset and the leadership skills required to manage an organization as a network in a complex world. The basics for this new style of leadership (none of which are currently taught in business schools) would be:
- a systemic understanding of organizations and the interdependencies they are part of (complexity)
- ability to base decisions on understanding variation
- ability to base decisions on systemic, throughput-based measurements
- ability to give clear instructions
- ability to empower staff operationally by aligning responsibility with authority
- ability to manage conflicts systemically
- ability to frame situations systemically to develop breakthrough solutions
Achieving so much more
Network theory teaches us that the interaction of hubs and nodes gives birth to emergent properties, i.e., structures or behaviors that emerge spontaneously from interaction. The years of implementations have shown us that we can consider the Decalogue as an emergent property – something that goes far beyond the simple combining of two separate elements. It is a unique methodology that lays the foundations for continuous improvement and sustainable growth and points at a new organizational model. This organizational model evolves the systemic combination of Deming and Goldratt into the design of the Network of Projects – a vision and a method that can make the systemic organization truly operational. To build this reality requires a higher form of intelligence and ethical awareness. We can achieve this with the ecology of the mind that systemic thinking provides and by embracing the values of a worldview where profit and the common good are inextricably interdependent. The aftermath of COVID-19 does not have to be only a tragic one. It provides an opportunity for a genuine reset of how we interact, as individuals, corporations and value chains, for the better. Let’s not settle for half-baked ‘solutions’ from the Big 4.
Both W. Edwards Deming and Eliyahu Goldratt understood that humanity is capable of so much more than we imagine. Whatever situation or business we are in, we can do fundamentally more, and we can achieve that in a meaningful way, not to the detriment of others, but by creating something new, better, and from which all will benefit, all through the value chain from the supplier to the end user. Far from being a utopia, this understanding is rapidly becoming the obvious solution.
This is part two of a two-part series. If you would like to read the first one, click here.