Understanding Systems

A systems view focuses on interactions and dynamics, it encompasses complexity and non-linear phenomena as inherent in our reality and it allows us to find solutions for optimization that would otherwise be inaccessible.

When it comes to organizations and industry, a systems view is epitomized in the work of W. Edwards Deming, the American physicist and statistician whose teachings enabled Japan not only to rise from the ashes of WWII but to become a leading economic power. While Deming’s work has been around for decades, it has been largely ignored or confined to the limited space of ‘quality management’. The transformational power of a deep understanding of quality as intended by Deming has sadly been largely swallowed up into the ‘silo’ of quality departments, whereas understanding quality is something that must start in the boardroom and permeate the way of thinking and working throughout any organization.

Deming introduced to the world of management the understanding that, rather than being a set of separate components, an organization is one, whole interconnected system where there are inputs that are transformed into output through a series of interactions. The diagram he produced back in the 1950s is radically different from any linear kind of depiction such as a traditional organigram. It also brings the customer directly into the picture as well as a feedback cycle that allows a process of continuous improvement.

Understanding quality and seeing the organization as a system are the first steps in the direction of transforming organizations from the prevailing style of management towards one of systems optimization. This is not only necessary but urgent because the majority of organizations still operate with the flawed assumption that the most effective way to control what is happening in the organization is to divide it up into separate areas and functions. This practice is reinforced by anachronistic ‘static’ accounting methods that are unable to take into consideration the speed of flow.

An inevitable outcome of this practice is to create silos and artificial barriers to the flow of necessary interactions to achieve the goal of the organization. Silos are a problem not only because they create frustration but because they are a major cause of sub-optimization of the resources available, further fuelled by a flawed reward system and by accounting methods that via allocation create the phantom of ‘product cost’. Silos are the fruit of linear thinking that fails to recognize that it takes time for a signal to propagate through a system and so the result of an action can only be seen much later, making it harder to understand where the result came from in the first place. It induces us to concentrate on costs and not on how to maximize throughput and it confuses price with value.

Linear thinking imposes old patterns; it expects more of the same because it sees a past that continues in a linear way into the future. For this precise reason, linear thinking is blindsided to disruption.

Putting new knowledge to work

“Stamp out the fire and get nowhere. Stamp out the fires puts us back to where we were in the first place. Taking action on the basis of results without theory of knowledge, without theory of variation, without knowledge about a system. Anything goes wrong, do something about it, overreacting; acting without knowledge, the effect is to make things worse.” – W. Edwards Deming in the documentary ‘Deming of America’.

While the concepts of network, nodes and hubs have become part of our contemporary consciousness thanks to the development of social networks, this is much less true for the concept of a systemic worldview that embraces complexity and the related principles that govern how we interact. Why is it so much harder for people to adopt a systemic worldview? Still today, schools perpetuate a vision of the world based on separation, where subject matters are taught largely independently of each other in much the same way as has been done for decades. When it comes to business, the accounting methods used to measure performance and set prices that ‘determine profit’ are based on the idea that any business is made up of separate parts, and if we optimize each part, then we optimize the whole. This line of thinking leads to:

• A vision of an organization that is hierarchically fragmented, rather than systemic;
• The pursuit of local optimization at the expense of global optimization;
• A management approach oriented toward a ‘cost reduction world’, rather than an ‘increasing performance world’.

Ever since we have gained a new way of understanding phenomena based on complexity, we have known that these are fundamentally flawed ways of looking at reality. They do not provide the vital insight that businesses and organizations need today in order to understand how they are performing as an interconnected whole. What we require, instead, is a systemic measurement, something that lets us know how the whole system is performing so we can make informed decisions.

There are two fundamental measurements that help us to understand how a system is performing:

• Variation, and
• Throughput as defined in the Theory of Constraints.

Variation

Part of Dr. Deming’s major contribution was to insist on the understanding and management of variation. Every human process, from waking up in the morning to sending a man to the moon, is affected by variation; a process can never be repeated in an identical way. Incorrectly managed variation in manufacturing, for example, leads to scrap, waste and lost money.

It is impossible to eliminate all variation because entropy exists and is intrinsic to any process. However, through correct statistical methods, it is possible to understand variation, measure it, manage it and take actions to reduce it. This requires a mindset of continuous improvement as opposed to monitoring. In spite of the disastrous and costly effects of ignoring the importance of statistical studies, surprisingly few managers are conversant with them.

Throughput

Throughput, as defined in the Theory of Constraints, is the pace at which the system generates units of the goal (through sales if the organization is for-profit). The Theory of Constraints was designed to accelerate the flow of material, money and information through a system and serves as a highly effective way to produce the maximum with the resources we have available. The Theory of Constraints calls for the identification of a strategic constraint that becomes the leverage point that dictates the pace at which we produce units of the goal (throughput).

We can increase the amount of throughput that we produce in the entire system by designing all the other activities in the organization to subordinate to the constraint so that it works constantly, like a heartbeat that must never fail. To do this, we need some excess capacity in the system to protect it from fluctuations, in other words, to absorb the cumulative variation generated by the system and to prevent this variation from generating disruption to the constraint. This is very far from what Lean methodologies seek to achieve. In Lean, we will find no concept of protective capacity or buffers. This approach can work in a limited number of situations where there is a highly predictable environment. However, in any event, the absence of an identified, strategic constraint ultimately leads to a series of interconnected bottlenecks. In a situation of crisis, this comes dramatically into focus.

More important than efficiency

An article in the Washington Post, ‘The virus shows that making our companies efficient also made our country weak’ criticizes the relentless pursuit of efficiency that Lean thinking has spurred globally. The author, Roger Martin, concludes, “As this pandemic has shown us, we need to value other qualities such as redundancy and buffers, if we are to tackle the next catastrophic event.”

Roger Martin is the former Dean of the Rotman Business School at the University of Toronto. Paradoxically, Rotman, like the vast majority of business schools, still today offers courses in Lean and Six Sigma. While the latter is an outright statistical hallucination unworthy of any comment, the former is yet another worldview that reveals a linear mindset. It captures very poorly the essence of Deming’s message and perpetuates a cost-accounting worldview. In a world dominated by complexity, we continue to adopt linear thinking and engender anachronistic approaches and methods at our peril.

Hardly any business school offers courses in the Theory of Constraints, the natural habitat of what Martin describes as “redundancies and buffers”. The word redundancy is misleading. To run well, companies can certainly eliminate redundant activities, for example the unnecessary repetition of tasks that can occur because people work in silos rather than as a whole system. However, the systemic view that the Theory of Constraints instills demonstrates that there must always be protection capacity in the system to make sure that the constraint is always subordinated to and able to work constantly as it is the constraint that dictates the pace at which the system generates units of the goal (throughput). Moreover, there must always be a buffer to protect the constraint and buffer management is a foundational element of the Theory of Constraints.

Understanding systems

Thanks to Deming and Goldratt, we learn fundamental aspects about systems and how to manage them in the most effective and productive way. Only if we have a deep understanding of the behavior of a system, or ‘Profound Knowledge’ as Deming called it, can we hope to manage a system for success. Without this knowledge we are flying blind.

For Deming, quality management means a commitment to the continuous improvement and innovation of products and processes. To achieve this, it is mandatory to build the organization as a clear and shared system in which interpersonal relations are not of dependence but interdependence, where communication is encouraged, and where the needs of the individual are catered to and combined with group work.

An organization determined to build quality helps its people to understand the systemic nature of their work. It encourages the study of effects in order to discover their profound causes and orients itself to looking at processes instead of just concentrating on results. Deming’s vision of quality entails a radical re-thinking of company management; it requires a purely intercultural approach, and the study of areas of knowledge that are very different from each other.

Deming’s work is generally referred to as ‘Deming’s Philosophy.’ Its bases are contained in the Theory of Profound Knowledge (TPK), or, in his own words, “knowledge for leadership of transformation.” They are:

1. Appreciation for a system

2. Knowledge about variation

3. Theory of knowledge

4. Psychology of individuals, society, and change

Goldratt further enlightens us by emphasizing that every system has a constraint, whether we know it or not, a limiting factor that dictates the throughput the organization as a whole can produce. Once this is understood, the constraint provides the organization with a strategic leverage point that allows optimization of the way all the resources available contribute towards the goal. The Theory of Constraints enables radical improvement in the performance of the system as a whole through the rethinking of how every aspect of the company is orchestrated and synchronized on a strategically chosen constraint.

The Theory of Constraints strengthens the ability to think, plan and act systemically. One offspring of this is a new set of measures and operational measurements that provide the information needed (and completely missing from traditional accounting) about the speed of flow of throughput and that support decisions regarding profitability and investment.

Given the monumental contribution to management thinking and science that Deming and Goldratt have produced, the absence of the Theory of Profound Knowledge and The Theory of Constraints from the curricula of the majority of business schools underlines the gap in knowledge that still exists today in the preparation of leaders and managers.

For over twenty years, in different capacities and in both Europe and North America, we have employed systems science to enhance the business performances of a variety of organizations; industry primarily, but also government, healthcare and education. Starting in the mid-1990s we began to integrate the two management theories of Deming and Goldratt, and this integration evolved into a coherent systems-based methodology that we call ‘The Decalogue’.

We first published our findings in 1999 in our book ‘Deming and Goldratt: The Decalogue’ (Lepore & Cohen, North River Press). As we worked on various implementations of the Decalogue supported by a team of physicists, mathematicians and engineers, the substantial improvement in performance that companies were able to achieve confirmed the validity of the Decalogue approach.

It also became evident, however, that the majority of organizations are shaped and measured in a traditional way that prevents them from reaping fully the multiple benefits of managing themselves as a whole system. The prevailing hierarchical/functional style of organization inevitably leads to silos that prevent companies from accelerating flow of throughput and achieving their potential with the resources they have available. We came to realize that Network Theory could become central to understanding and developing more effective ways for everyone in an organization to contribute to the goal in an operational way, a discovery that we outline in several books and publications that we have produced.

Revealing the Network of Projects organization

Making the best use of the resources we have in a sustainable way was always necessary, but it has become dramatically evident and urgent following the coronavirus crisis. The lockdowns that have forced organizations to carry on working outside their normal locations is also accelerating a major change that was already taking place – the shift towards digital and decentralized work. As we emerge from lockdown, companies must urgently rethink, structurally and operationally, how they can adapt and compete in an increasingly digital and decentralized market.

In the mid-2000s, once it became clear to us that the major obstacle for an organization to realize the full potential of all its resources was the prevailing hierarchical/functional style of organization, our focus shifted to finding an operational solution involving network science. We perceived that a network-based approach to the organization of industry, healthcare, government and education was the natural offspring of a systems view of the world epitomized by the work of Dr. Deming. Network science could act as a catalyst for embedding the systems view into a practical way of operating that allows all the resources available, human and otherwise, to express their potential towards achieving the goal of sustainable growth. Understanding an organization or a value chain as a complex, oriented network opens up new and unprecedented possibilities for collaboration and sustainable prosperity.

We were aided in this understanding by framing the problem of organizing work in a way that is effective for the 21^st century as an ‘inherent conflict’. Companies must protect two fundamental needs: individual accountability and growth. The need for individual accountability will prompt them to adopt a traditional hierarchical/functional structure with its resulting silos, whereas the need to grow will prompt them NOT to adopt a traditional hierarchical/functional structure. This conflict creates a situation of blockage that keeps organizations stuck in a reality where they are unable to achieve their potential. We came to realize that the way out of this conflict was not to impose any artificial new structure but to acknowledge that an organization is intrinsically:

(a) A network, and
(b) Part of a larger network of value.

So, if organizations are intrinsically networks, how can we operate and manage them as such? Managing an organization as a network entails foregoing a command-and-control management style but at the same time requires a powerful mechanism to ensure that activities are properly coordinated and synchronized and that everybody in the network is accountable.

To find a suitable organizational structure we first have to take a look at the fundamental elements that make up the work of an organization. Just as the key constituents of life are hydrogen, oxygen, carbon and nitrogen, we can say that the basic constituents of work are repetitive processes and one-off projects.

With this realization, a new organizational model emerges that is based on the management of a complex, strongly interconnected network of projects. We call it the Network of Projects organization design.

What propels the performance of such a network are highly reliable, low variation processes and a finite capacity-based algorithm that allows a realistic allocation of available resources from a pool of competencies. This requires a complete shift from a mechanistic mindset to a systemic one to overcome the command-and-control management style in favor of whole system optimization.

Managing organizations as networks of projects is a highly effective way to equip them structurally, operationally, and cognitively to optimize their interactions with larger networks of value through digital and decentralized transactions.

This is the second article of a mini-series! If you would like to read the next one, click here. If you would like to read the first one, click here.