Six Simple Rules

by Yves Morieux

  The creativity workshop had only allowed each unit to work longer and deeper (and, one hopes, more creatively) in isolation from the others. Given this tendency, it was not surprising that when the hardware and software were eventually put together, nine times out of ten they were incompatible. Numerous modifications were necessary to make the overall product work, further adding to cost and delays.

  Improving creativity is a great lever to use, but, as with any interventions, you must first understand why people do what they do. It is not the lever that matters, but how it will shape the work context, what impact it has on the goals, resources, and constraints. An important resource of the robotics company’s hardware and software units was that they were internal monopolies and could therefore make the rest of the organization bear the consequence of their lack of cooperation. So they became creative monopolies, at the greater expense of the organization.

  To create a substitute for these units, we recommended that the marketing department start forming alliances with external research centers. By giving people in marketing a choice of who they could work with (they could now control a stake for R&D), the company was able to ensure better cooperation from the internal R&D units. A marginal opening of the organization to external sources of knowledge and expertise was sufficient and far more effective than forcing the use of scorecards, KPIs, controls, and incentives. Within two years, the company surpassed its best competitors in speed of releasing successful innovations and at a comparable cost.

  Reduce Some Resources

  The second mechanism to reinforce rich objectives to increase reciprocity is to reduce resources. You might assume that, in order to reduce resources, you first have to improve cooperation, which frees up resources so they can then be cut back. This is true, but you can also do it the other way around: make a reduction in resources to impel cooperation. At home, you will have much more luck creating cooperation by removing the extra TVs than by first requiring everyone to read up on game theory.

  At Industronal, the management team decided to cut the purchasing budget of the internal customers and, at the same time, set rich objectives for the two units of the purchasing organization. With fewer resources available, the internal customers had no choice but to cooperate with the purchasing units. In this way, purchasing shifted from being a constraint to being a resource for internal users.

  When resources are plentiful, each person or group can act alone. These resources are not used to create value, but just to allow dysfunctional self-sufficiency and often to create monopolies. The abundance of resources basically removes interdependencies and the need to cooperate. A unit can use excess resources to provide a buffer that ensures it is not affected by what happens in other functions. If there is plenty of extra inventory on hand, for example, that reduces the need for procurement and manufacturing to cooperate. The problem of extra resources, in many cases, is not their cost but that they allow people to avoid real cooperation.

  When resources are removed, people have to share. They become more interdependent, more affected by what happens to others, and therefore more likely to take into account the effect on others of what they do. Putting others in a bad situation may backfire because people are likely to be reciprocally affected. The feedback loop is based on interaction between what happens to each one. You can then avoid the bureaucracy of internal contracts, service level agreements, and so on.

  One of the most important resources in any organization is time. If people have the time they need according to their own procedures, they don’t need to account for the situation and needs of others. At MobiliTele, the manufacturer of telecoms systems, delays—an overconsumption of the time resource—created a bubble within which each of the engineering units could work independently of the others.

  The reverse is also true: if people don’t have enough time to complete their tasks according to their own resources, they lose the comfort of having to attend only to their own devices. This is why organizations, when confronted with the urgency of a crisis, will experience a much higher level of cooperation than normal.

  In a crisis, people are acutely aware of the need for reciprocity. Everyone is affected. If I don’t help you, we will go down together.

  The goal of reducing resources is to enhance capabilities, not cut costs. There is a major difference between reducing resources with the explicit purpose of increasing reciprocity and reducing resources simply to cut costs. The former takes into account the complex dynamics that surround cooperation. The latter typically does not.

  An organization always needs to consume more resources to compensate for deficient cooperation: time (delays), equipment, systems, teams, working capital in the form of stock when procurement and manufacturing do not cooperate, and so on. So who pays the cost of this overconsumption of resources? In today’s complex business environment, both customers and shareholders have more and more options. They will eventually refuse to bear the cost of the extra resources. Who is left to bear the cost? The organization’s employees. They must provide more and more individual efforts. But working harder (and sometimes longer) never fully compensates for the lack of cooperation. All too often the only result is increased disengagement or burnout.3

  When cost cutting is done without understanding the opportunities for superior performance through cooperation, an organization may improve short-term productivity, but at the cost of diminishing its capabilities. Sometimes, those capabilities become so degraded that they result in product defects, mistakes, safety problems, and missed strategic opportunities. By contrast, when an organization cuts resources as part of a plan to impel people to cooperate, the result is superior group capability. Not only do costs fall; innovation and product quality can also improve.

  Lack of cooperation not only has a negative effect on the company’s ability to satisfy multiple performance requirements; it also can erode the productivity improvements the company may have realized through other means, such as technological innovations, scale, and the experience effect. The use of information and communications technologies (ICTs) in conjunction with modern management methods may produce something that looks like a productivity gain, in the form of reduced waiting periods or shorter downtimes. That is, there are more minutes of work achieved per hour of employee presence in the workplace. But, without cooperation, the value produced in those extra minutes actually decreases because of the proliferation of non-value-adding activities (rework, modifications, writing reports, control, and so on). Without the conditions to get cooperation, ICTs not only do not realize their full potential, they can also be used to avoid real cooperation—think about the multiple cc’s in e-mails and the meeting requests sent to ten or more invitees to a conference call. Is this real cooperation or a way to protect ourselves?

  Multiplexity: Create Networks of Interaction

  A third way to reinforce the rich objectives that increase reciprocity is to make sure people belong to multiple networks of interactions that complement each other. This is what we call “multiplexity.” In addition to designing rich objectives for the purchasing unit and removing some resources from the purchasing budgets of the line organization, Industronal management also created three interaction networks in order to put people in situations where they felt compelled to confront their multiple performance requirements. This was particularly important to ensure an effective contribution in the gray area where no objective measurable criteria, let alone incentive, could be used. In any case, given the financial situation of the company, it could not rely on incentives, whether the objectives were measurable or not.

  The first network consisted of the category strategists, the managers of the buying units, and their internal customers. Every two weeks, these three groups met to review progress in filling orders. The internal customers could voice their concerns: “When are my supplies arriving? Will my order be on spec, or will I get a shock when I see it?” If internal customers thought there was a problem with the category strateg
y, they could complain to the strategists. They had little interest in how innovative the category strategy was. If it did not help the buyer deliver the goods to the required specifications for quality, quantity, and delivery time, it was of no value to them.

  The second network of interactions consisted entirely of the category strategists and took the form of what is often called a “community of practice.”4 They periodically got together, and each category leader presented his or her latest buying strategy to the rest of the group. Unlike in the progress review with the internal customers who didn’t care much about innovation, the innovativeness of the strategy mattered a great deal in these meetings. The strategists were keen to hear about and evaluate their peers on the degree of insight and creativity in the strategy. How did it exploit (or ignore) specific procurement optimization levers such as bundling, supplier management, demand management, order standardization, and in-sourcing opportunities? As one participant put it, “It is like a TED talk for category strategists.” If a strategist performed poorly, he or she would lose face and reputation.

  The third network was another community of practice, this time for the managers of the buying units. They would get together to compare the productivity of their teams and how fast they were learning new skills.

  In all three networks, the people involved were focusing on the same pieces of work: the specific purchasing requests, with the corresponding category strategy; the guidelines and tools; the savings targets; the order specifications; and deadlines. But each network examined the results from a different perspective. Together, the three perspectives captured all the performance requirements, even when they were contradictory. This was not achieved through conflicting orders from above but through flexible interactions. In these interaction networks, people were exposed to significant risks, such as feeling the wrath of their frustrated internal customers or suffering the loss of reputation with peers. In such feedback loops, the stake of saving face is very high.5 Symmetrically, the satisfaction of successfully performing in these interaction networks was also very high. This kind of satisfaction is generally very rare in purchasing units. At best, when things go well, purchasing is transparent for others, and people don’t feel pride for being transparent.

  Each individual—category strategist or buying manager—was part of more than one network of interactions. Each network dealt with a subset of performance requirements and also contained a feedback loop. Belonging to multiple networks—multiplexity—impelled the individuals to contribute in his or her specialized role to the multiple performance areas: innovativeness, practicality, buyer productivity, and the satisfaction of customer needs. By being at the intersection of the various networks of interactions, the individual eventually had to satisfy the union of the requirements in play.

  Because of the rich objectives and reinforcing mechanisms, the purchasing organization at Industronal ultimately met its 20 percent cost-reduction target. It also received the highest possible rating on satisfaction from its internal customers.

  Multiplexity is a way to avoid the hard fixes of procedures, scorecards, and control mechanisms, including all the documentation and monitoring they require. The feedback loops within the networks impel people to fully apply their intelligence and knowledge while benefiting from the cooperation of others.

  Greater Accountability, Less Complicatedness

  Increasing reciprocity addresses the question of accountability, which becomes more and more critical as the need to satisfy multiple performance requirements puts organizations in situations where they need to achieve both differentiation (that is, specialization for greater expertise or for more local responsiveness) and also greater integration (fluid and end-to-end cross-functional efficiency). They can do so by framing rich objectives and then embedding feedback loops that retain the benefits of specialization while ensuring a synergistic interplay. The effect is that capabilities are more distributed throughout the organization. It is much like the brain, where functions such as language do not emerge from one physical area of the brain, but from the interactions across many different areas.

  Simple rule four also helps managers push back against the intense pressure to clarify responsibilities and situations, a pressure that tends to be counterproductive. It helps them understand—from a performance and organizational point of view—where clarity is needed and adds value as opposed to where it is superfluous or even detrimental to performance.

  There is also a direct effect on complicatedness. By setting overlap objectives, you can avoid the creation of middle offices. In the relay race, there is no coordinating sprinter whose role is to take the baton from one sprinter and give it to the next. The feedback loops created by eliminating internal monopolies, removing some resources, and creating multiplexity allow you to avoid the need for multiple scorecards, compliance metrics, and incentives. These feedback loops allow for decentralized control, since it is based on interaction among people, each one partly controlling the behavior of others. Control becomes distributed and flexible, as opposed to top down and rigid, which enables the organization to be more adaptive to changing conditions.

  SUMMARY OF SIMPLE RULE FOUR

  In the face of business complexity, work is becoming more inter-dependent. To meet multiple and often contradictory performance requirements, people need to rely more on each other. They need to cooperate directly instead of relying on dedicated interfaces, coordination structures or procedures that only add to complicatedness. Reciprocity is the recognition by people or units in an organization that they have a mutual interest in cooperation and that the success of one depends on the success of others (and vice versa). The way to create that reciprocity is by setting rich objectives and reinforcing them by eliminating monopolies, reducing resources, and creating new networks of interaction.

  5

  Simple Rule Five

  Extend the Shadow of the Future

  In this chapter, we will describe a rule that creates feedback loops in a very particular and powerful way by exploiting the effect of time. What game theory calls the “shadow of the future” is the importance of what happens tomorrow to us as a result of what we do today. By extending the shadow of the future, we make the more-or-less distant horizon—that point at which our present behavior will eventually reveal its consequences—much more important and evident to us now. To extend the shadow of the future you need to create feedback loops that make people feel the consequences of how they deal with multiple performance requirements sooner, more frequently, and for longer periods of time.

  In this chapter, you will learn:

  How to recognize the traps of strategic alignment. One of the major reasons that people often remain unconnected from the consequences of their actions is their organization’s adherence to the idea of strategic alignment. Strategic alignment is a sophisticated form of the hard approach that is extremely popular today. As you might expect, however, the standard practice of strategic alignment only adds to organizational complicatedness, blocks cooperation, and has a deleterious effect on overall performance.

  How to use feedback loops based on time to create a more effective work context. We will offer four different ways for extending the shadow of the future: tightening the feedback loop by increasing the frequency of interactions, bringing the end point forward, tying futures together, and making people walk in the shoes they make for others. This simple rule draws the most heavily on game theory and Axelrod’s thinking on the evolution of cooperation. However, our work in organizational analysis and experience with executive teams has sometimes led us to recommendations that might seem to contradict Axelrod. But, as you will see, at a deeper level, there is no contradiction.

  We will illustrate the perils of strategic alignment and the benefits of extending the shadow of the future using a variety of case studies. We will pay special attention to the story of MotorFleet, a manufacturer that was struggling to incorporate a new performance requirement—the reparability of its ve
hicles—among the many requirements (cost, quality, safety, energy consumption, time-to-market, and so on) that it already had.

  Strategic Alignment: A Trap of Complicatedness

  What do managers mean by strategic alignment? If it means the organization must be designed to support rather than hinder the execution of the strategy, then it’s simply a truism and not very helpful. Who would argue that structures, processes, and systems should not help in the execution of strategy?

  In fact, what managers mean when they use this term is often far more specific and elaborate than a simple truism, and this is where the problem starts. The standard practice of strategic alignment has three major limitations:

  It takes a mechanistic approach that, when confronted with the realities of business complexity, turns the organization into the equivalent of a “stupid machine.”

  It binds the organization to a linear design sequence that only ties people up into knots.

  It creates bad organizations that can only develop bad strategies.

  A Stupid Machine

  In its crudest form, strategic alignment is the mechanistic application of the well-known mantra: “from strategy to structure.”1 To understand the problem with this approach, imagine that an organization is a stupid machine that has but one routine: each time a new performance requirement is introduced, the machine adds a new, dedicated function to handle it: “Quality is a new requirement. Add one quality department to the organizational machine.”

  As we have seen, the number of performance requirements has grown roughly sixfold over the past fifty-five years, which means that our stupid machine would have had to gear each new dedicated function with all the existing ones, such that complicatedness would multiply by at least thirty-six times.2 This is distressingly close to the increase in our complicatedness index (described in the introduction): thirty-five times. In other words, the corporate world has actually evolved almost exactly as our imaginary organization machine has: asymptotically to maximum mechanistic stupidity.