A Roadmap to the Perpetually Adaptive Enterprise Ecosystem

As Mark Schwartz points out in his book "A Seat at the Table: IT Leadership in the Age of Agility", digital transformation initiatives work a lot like a New Year's resolution. After years of neglecting important practices, like continuous improvement and continuous innovation, and with competitors threatening the enterprise core franchises, leadership teams try to launch themselves into the future with a "digital transformation" resolution.

And sometimes it works. To be sure, the creation of a new techno-sparkly-shiny system will move the needle. It will give you a bump in sales. It will generate great press. You will feel ebullient for a few weeks - maybe longer.

But technology is only an enabler. It is not sufficient, by itself, to provide the fundamental sustenance your enterprise needs.

The problem is, that the problem these technology initiatives are trying to solve, is only a small part of the much bigger problem enterprises are facing.

In a paraphrase of "The Lean Startup", you first need to understand what problem you are trying to solve, and you need to make sure that it is the problem that you really need to be solving.

The problem that enterprises are really up against

The book, "The Seventh Sense: Power, Fortune, and Survival in the Age of Networks", was Joshua Cooper Ramo's attempt to wake us up to the "hammer that is now cracking our world" - the ubiquitous digital inter-connection of over four billion people, and hundreds of billions of "things" - into a speed of light network that envelopes the earth.

This global "networkification" of literally everything, has changed the personal and business context for all of us - regardless of whether we are connected or not.

It is not just that the context has changed. It is that the globally networked context: ecological, economic, social, political, personal and technological, has entered into a state of perpetual and accelerating change.

Every day, day in and day out, new communications satellites are launched, new submarine cables are laid, new football field sized datacenters go online, and the mobile devices we carry around in our pockets grow exponentially more powerful than the super-computers of the 20th century.

This state of escalating uncertainty, popularly referred to as VUCA (volatility, uncertainty, complexity and ambiguity), is the new normal. Yuval Harari, in his book "21 Lessons for the 21st century" calls our new condition the "age of bewilderment." New technologies, and the interaction models they produce, are coming at us so fast, that our reductionist thinking has simply lost its grip on the causal chain.

Those whose eyes have been opened to this paradigm shift, understand that the business strategies they have used for years are failing. Home field advantage and the fast-follower strategy, have both become ineffective. Your next competitor is likely to be a company you have never heard of, and if you try to follow their lead, they are quite likely to easily outrun you.

Classic 20th century enterprises have to adapt to this new context, and they have to adapt at a velocity that is at least equal to the velocity at which that context is changing.

20th century enterprises were not designed to adapt

20th century enterprises are organized as silos of resources allocated to execute standardized and repeatable processes. They are designed for achieving economies of scale, and running and maintaining those economies for as long as they can sustain a profit.

To accomplish this, business theorists, during the last century, developed and perfected an organizational model we variously call: bureaucratic, command and control, authoritative, hierarchical, top-down, siloed, or Taylorist (after Frederick W. Taylor who invented "Scientific Management" at the beginning of the 20th century). Most of the commercial enterprises in the world today follow this model. It has been hugely successful for at least a hundred years.

So why does it no longer deliver the goods?

Taylorism makes a clear distinction between those who think, and those who act. Essentially, those who think, tell those who act, what to do. This means that even though an enterprise has 100,000 employees, the amount of brain power that is dedicated to thinking strategically - is miniscule.

This works as long as two factors are true: the enterprise is a simple system; and that simple system is operating within a context that is changing slowly and predictably.

If, on the other hand, the enterprise has grown into a complex system, and the context within which it operates is changing rapidly, then that enterprise is in for trouble. The most obvious symptom of trouble is latency.

Consider how the standard enterprise decision cycle works.

First, the enterprise senior executives run all their annual, semi-annual and quarterly business strategy sessions; then the middle management layers take those strategies and develop them into a set of processes, procedures, directives, and trainings; and then all of the lower layers are trained to be competent in the execution of those processes, directives and procedures; and then, finally, actions are taken up by the "workforce" and the strategy is released into the wild…

This may take three months, six months, a year, multiple years... By the time all of this has happened in today's VUCA world, the context has moved on, the market has changed, and the network has pointed customers to numerous better and more responsive alternatives.

When the context starts to change rapidly, unpredictably, and perpetually, bureaucratic command and control hierarchies cannot keep up.

Of course, you don't have to transform. You can stay the course. In the words of W. Edwards Deming, "Change is not required, since survival is not mandatory."

Adapting at Velocity

In order to adapt, or in Andreessen's terms, achieve "product-market fit", an enterprise needs the ability to: understand the context, craft a strategy (hypothesis), take action, analyze and understand the results, and then repeat; all in real time.

A lot of work has been done in this area, including that by W. Edward Deming in Japan at the end of World War II. A key artifact that he developed is known as the PDCA loop: Plan, Do, Check, Act. This is called the Deming cycle (although Deming always gave credit to Shewhart for it).

The PDCA cycle is a core aspect of Lean. It is also the original source and inspiration of the iterative process used in Agile software development. There are also variations such as Six Sigma's DMAIC: Define, Measure, Analyze, Improve and Control; or Shu-Ha-Ri's: learn rules, break rules, and find your own way; and the Air Force's OODA loop: observation, orientation, decision and action.

Instead of Scientific Management, which depends on one or more strategizing geniuses at the top, the Deming cycle is the basis for a distributed implementation of the "scientific method" across the entire enterprise workforce.

Let's consider the OODA loop for a moment. The Air Force uses OODA specifically in air-to-air combat engagements - otherwise known as "dog fights." One can hardly imagine a context that is changing more rapidly than two fighter jets dueling for supremacy. The idea behind OODA is that if you can work through the observation, orientation, decision and action loop faster than your opponent, then you will get "inside" their decision making process, and be able to dictate the outcome.

A formula for competitive advantage

20th century strategies for creating a competitive advantage centered on creating a monopoly, or at least a moat, or a series of moats, or at least a set of trade secrets, or at least some tightly protected intellectual property (IP).

But like the command and control orthodoxy; monopolies, moats and tightly held IP only work well when the context is changing slowly and predictably. When the context is changing rapidly, and new ideas and technologies and techniques are being generated by billions of people, on speed-of-light networks encircling the earth, it is almost impossible to prevent others from finding new ways around your fortifications.

As Bill Gates once famously said, "IP has the shelf life of a banana."

PDCA, on the other hand, is a basic heuristic for generating adaptive knowledge. Having current, up to the moment, quality, adaptive knowledge, is one of the only ways, within a VUCA world, to achieve a real competitive advantage.

A well-documented example of the deployment of a knowledge generating heuristic is the Toyota Production System (TPS) - which essentially put American and European automobile manufacturing to shame during the later part of the 20th century. You may have come across terms such as Kaizen, Kanban, Jidoka and Obeya (not to mention Lean), all of which originally came to us from the TPS.

There has been a wealth of research reports, studies and books attempting to explain just how Toyota accomplished this - most notably Stephen Spear's book, "The High-Velocity Edge: How Market Leaders Leverage Operational Excellence to Beat the Competition", and Mike Rother's "Toyota Kata: Managing People for Improvement, Adaptiveness and Superior Results."

Both of these works provide us with a deeper understanding of how an improvement heuristic was continuously and broadly applied at Toyota. According to Spear, the heuristic loop was known at Toyota simply as, "see a problem, solve a problem, share what you have learned."

Perhaps you have heard of the andon cord or pull?

The andon cord is an alarm that a factory worker can trigger whenever they encounter a defect or problem. "Pulling the andon cord" will potentially stop an entire production line, and bring a swarm of workers to your assistance.

Certainly, this is something that you want to happen as little as possible. Rother tells us an insightful story about a Toyota plant where the average number of andon pulls was about 1,000 per shift, but then there came a period when andon pulls dropped off, for no apparent reason, to around 700 per shift. 

Sounds like a good thing. Fewer problems encountered. What's not to like?

But if your true goal is to generate adaptive knowledge, fewer andon pulls is a problem. It means you are learning less, and not adapting as fast.

The leadership of the factory called a meeting. They reminded workers that the manufacturing process is not perfect, and that they need to pull the cord every time they encounter a problem. They further encouraged managers to tighten the production parameters in order to get the number of andon pulls back up.

Clearly, this is not the way most enterprises think.

In enterprises operating a traditional command and control hierarchy, there is a leadership team that establishes strategies and processes, with the expectation that the workers will adhere to them. Improvements are possible at the next set of planning sessions, but it is not considered desirable for the line workers to be evolving and changing their processes and procedures on a daily basis.

So what do workers at classical institutions do when they encounter a problem? They do what Steven Spear calls, "Coping, firefighting, and making do." They find some ingenious trick to get around the problem. And those workers who "just make it work", are given a pat on the back and possibly a bigger bonus. 

The problems and issues (that are an unavoidable part of all systems) are then preserved and endured by the workers. When new problems occur, they are worked around - and another valuable opportunity to learn, adapt, and gain a competitive advantage, is lost.

Spear emphasizes the distinction between "working around" a problem, and "solving" a problem. This is important, and worth understanding, because most of the time when we work around a problem, we think of it as having been solved - when in fact we have actually avoided solving it.

Workers who have learned how to create adaptive knowledge, and are empowered to act upon that knowledge as they are creating it, are not only engaged in continuously redesigning the system - they are also in position to evolve and adapt that system as the context in which it operates changes.

In Stephen Spear words, the outcome for the enterprise is clear, "Toyota's success is largely attributable to its 'velocity of discovery' - the speed with which the company improves, innovates and invents."

Building an adaptive ecosystem

General Stanley McChrystal's book, "Team of Teams: New Rules of Engagement for a Complex World" provides us with a thoughtfully written case study - of the transformation of the American Military's Joint Special Operations Task Force, from a command and control hierarchy, into a 21st century ecosystem of cross-functional units.

This transformation was required by the conflict with Al Qaeda of Iraq (AQI). A conflict that General McChrystal describes as "different from any kind of war waged in the twentieth century."

AQI was organized as a loosely coupled network, that easily adapted to whatever the Task Force's command and control hierarchy dished out. There were occasional victories, but on the whole, the Task Force was outflanked on all fronts.

Facing failure, General McChrystal resolved to "adapt to the truth of the situation as he found it", and he determined to transform the Task Force into a "more transparent, more organic entity."

He realized that "being effective in today’s world is less a question of optimizing for a known (and relatively stable) set of variables than responsiveness to a constantly shifting environment. Adaptability, not efficiency, must become our central competency."

The organizational model the Task Force ended up with is known as a heterarchy. This structure can perform much faster than a hierarchy since it encourages direct horizontal communication between the units in the network.

Each of the units in the network are intentionally cross-functional. They include all of the personnel and resources that are required to achieve their goals. They are also self-organizing through the interdependency that cross-functionality brings. One member of a unit cannot succeed without everyone else on the team succeeding. This forces them to pull together, and to pull each other.

Ultimately McChrystal boiled down his approach to two core "yin and yang" principles:

• empowered execution - "the decentralization of managerial authority… Individuals and teams closest to the problem, armed with unprecedented levels of insights from across the network, offer the best ability to decide and act decisively."
• shared consciousness - "emergent intelligence… achieved through strict, centralized forums for communication and extreme transparency."

The transformation of the Task Force was a huge success. McChrystal's operators and units were able to get "inside" the decision loop of AQI, "hitting them faster than they could regenerate", and over time, they were able to significantly reduce AQI's operational capability.

As McChrystal tells it, "We had become not a well-oiled machine, but an adaptable, complex organism, constantly twisting, turning, and learning to overwhelm our protean adversary."

Self-organization requires a shared purpose

In considering McChrystal's principles and the network of cross-functional teams he assembled, it might occur to you that this approach is similar to the way teams are structured in Agile software development. In "The Age of Agile: How Smart Companies Are Transforming the Way Work Gets Done", Stephen Denning devotes an entire section to discussing McChrystal's insights in exactly those terms.

"The Age of Agile" serves as a primer on the formation of Agile organizations, and includes sections on both tech startups and the tech giants, including Microsoft's software development division - where thousands of Microsoft developers have operated for many years within an Agile organizational structure.

In 2001, a group of seventeen software developers joined together to publish "The Manifesto for Agile software development." Their manifesto contained a total of twelve principles. The first of these principles is:

• "Our highest priority is to satisfy the customer through early and continuous delivery of valuable software."

Agile's "highest priority" is to satisfy the customer. This is a theme that Denning discusses at length. He calls it the "The Law of the Customer."

Within an adaptive ecosystem, the individual teams and team members need to have a broad understanding of the entire end-to-end system, and they need to have a deep understanding of their part in that system, but in order to achieve "self-organization", they also have to have an understanding of, and a commitment to, the purpose of the system - their "shared purpose."

In McChrystal's case the shared purpose was an obvious one - the defeat of the Al Qaeda terrorist network. The shared purpose for a business enterprise is often less clear.

Peter Drucker contended that "there is only one valid definition of a business purpose: to create a customer." Drucker's thinking along these lines "led to the advent of management practices such as Lean, Design Thinking, quality and eventually Agile."

But there is a second vision, that of Chicago economist and Nobel prize winner, Milton Friedman. Friedman rejected Drucker, saying "there is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits."

The prioritization of these two competing objectives: the delivery of shareholder value versus customer value; leads to two very different organizational cultures.

The command and control hierarchy of the 20th century has a strong internal focus that gravitates towards the delivery of shareholder value; while the 21st century adaptive enterprise model, with it's strong external focus, aligns more logically with customer value.

An adaptive enterprise ecosystem is built through self-organization. Self-organization is driven by a shared purpose. A shared purpose is one that everyone on the team believes in, and that everyone is motivated to pursue. Delivering a better product, that people love, and that improves their lives, is far and away the greater motivator when compared to delivering a higher stock price.

Of course, employees are quite often also shareholders, and therefore a higher stock price can provide some additional motivation. But you may be surprised to hear that financial incentives are not always the best motivators.

A book that has been highly influential in this regard is Daniel Pink's, "Drive: The Surprising Truth About What Motivates Us."

In this book Pink talks about a series of studies performed by economists at MIT, and funded by the Federal Reserve Bank, that determined that higher compensation does cause a related increase in performance when the task involves only mechanical skills.

But for any task that requires even rudimentary cognitive skill, higher compensation actually leads to poorer performance.

This is surprising and seems counter-intuitive, but these results have been replicated over and over, in different populations, using different types and sizes of rewards.

The conclusion is that money is only a motivator in the sense that you need "to pay people enough so they are not thinking about the money", and can then focus on the work. Once they are focused on their work, then Pink tells us there are "three ingredients of genuine motivation" that play a much larger role in producing better performance: "autonomy, mastery and purpose."

The fact is that people want to be the masters of their own time. They want to learn new challenges and new skills. And they want to feel that their work contributes to the greater good. And no matter what they may tell you, they want these three things a lot more than they want a higher salary or a higher position of authority.

Autonomy, mastery and purpose are the things that lead the enterprise workforce to become fully engaged in their work - and full engagement is table stakes for getting an adaptive enterprise ecosystem off the ground.

The leadership of an adaptive enterprise ecosystem

It is at this point, in most articles on teams and Agile, that you are told "you absolutely have to hire the right people to make this work."

There was a study on team performance a few years ago at Google, and the conclusion was, in short, that if you hire the best people and put them together on the same team, you do not get the best performance. The best team performance comes from teams with relatively more modest qualifications, but they have something better, they have the right team culture that provides: "psychological safety, dependability, structure and clarity, meaning and impact."

There is a story in the book "Extreme Ownership" about a group of Navy SEAL teams going through a training exercise racing 7-man rubber boats. One particular team was winning every race, and another particular team was dead last in every race.

The leader of the losing team insisted that he had "a team of underperformers who, no matter how hard he tried, simply could not get the job done." The instructors then switched the leaders between the winning and losing boats, leaving everyone else in these boats the same. The team that had been winning every race, was now losing every race, and the team that had been called by their previous leader, "underperformers", was now the consistent winner.

The conclusion: "there are no bad teams, only bad leaders."

It is leaders who create and cultivate the culture. They are the ones that deliver psychological safety, dependability, structure and clarity, meaning and impact.

The traditional leadership model of the 20th century is built on the myth of the leader as the grand chess master. Leaders are understood to be the ones with the master plan. They are the ones who decide every move, from start to finish.

Unfortunately, if you want the members of your teams to become fully engaged, using their own ingenuity and resourcefulness to create adaptive knowledge, there is hardly anything worse you can do than to tell them what to do. Whenever people recognize that the team dynamic is authority-driven, rather than competency-driven, they turn their brains off. Why should they waste their time working out a good strategy or a good solution when they know in the end the authority in the room is going to call the shots.

In "The Culture Code: The Secrets of Highly Successful Groups" by Daniel Coyle, a Navy SEAL team leader tells us, "we have an authority bias that’s incredibly strong and unconscious—if a superior tells you to do something, by God we tend to follow it, even when it’s wrong. Having one person tell other people what to do is not a reliable way to make good decisions. So how do you create conditions where that doesn’t happen, where you develop a hive mind? You have to create the conditions where they start to do it.”

General McChrystal describes his role in the Joint Special Operations Task Force as that of a "gardener." His task was to cultivate the ecosystem to create the conditions needed to allow the individual and team capabilities for knowledge creation and decisiveness to thrive and grow.

Part of this gardening task, is teaching the teams and their members how to create adaptive knowledge and how to act on that knowledge by themselves, without consulting a higher authority.

Though the knowledge creation heuristic itself is quite simple, mastery of the heuristic grows only through conscious practice over time. Teams need to improve not only in the quality of the knowledge that they are creating, but they also must improve in the process that they use in the creation of that knowledge.

This requires everyone on the team to be fully invested in making the ecosystem work.

When Satya Nadella first took the helm as CEO of Microsoft, he asked everyone in the company, all 110,000 people, to read Carol Dweck's book, "Mindset: The New Psychology of Success." In an interview with GeekWire Magazine, Satya explained that, "there’s this very simple concept that Carol Dweck talks about, which is if you take two people, one of them is a learn-it-all and the other one is a know-it-all, the learn-it-all will always trump the know-it-all in the long run, even if they start with less innate capability."

He was creating the conditions for everyone at Microsoft to stop coming to work intending to tell each other what to do, and instead come to work with the desire and drive to explore, to experiment, to discover, and to take on the collaborative responsibility to adapt and become agents of Microsoft's transformation.

Leadership has to have, and evangelize, and mentor, and coach, a real and meaningful purpose, one that drives the human activity in the adaptive enterprise ecosystem at the highest levels of engagement.

In Daniel Coyle's words, "building creative purpose isn’t really about creativity. It’s about building ownership, providing support, and aligning group energy toward the arduous, error-filled, ultimately fulfilling journey of making something new."

Recap of the Roadmap

A large percentage of digital transformation efforts fall short. Often these initiatives are not aimed at solving the real problem that enterprises are facing.

• The real problem facing enterprises today has been caused by the global, speed-of-light "networkification" of 4 billion people and hundreds of billions of things
• Global networkification has increased the level of complexity, and accelerated the rate of change, of the global context: ecological, economic, political, social, personal and technological
• VUCA (volatility, uncertainty, complexity and ambiguity) is the new normal
• 20th century enterprises are built on a bureaucratic, command and control model that suffers from a high degree of latency, and they cannot keep up with the 21st century levels of complexity and accelerating change
• There is an emergent organizational model, the adaptive enterprise ecosystem model, that is better able to handle complexity and accelerating change
• This model deploys a knowledge creation heuristic across a network of cross-functional teams to form an enterprise ecosystem
• This model requires a culture based on competency rather than authority, and is prioritized to deliver customer value rather than shareholder value
• The goal is to achieve what General Stanley McChrystal calls: empowered execution and shared consciousness
• All of the teams and their members need to have a view of the whole system, combined with their own intimate understanding of their part in that system
• This ecosystem requires a shared purpose that keeps the teams, and the team members, rowing in the same direction and together, while providing them with the essential intrinsic motivation needed to stay perpetually ahead of the context
• It is the job of leadership to provide a real and meaningful purpose, to cultivate the ecosystem, and create and nurture the conditions needed for it to perpetually grow and flourish

The transformation of your enterprise into an organizational model that engages all of the resourcefulness and creativity of your entire workforce in the generation and application of adaptive knowledge, will provide the capability to fathom the emerging complexity, master the rapidly changing context, and make the adoption of transformational digital technologies and techniques a natural part of achieving your enterprise purpose.

Michael Yeager is a Business Technologist with the Digital Advisory Services group at Microsoft Corporation. The opinions expressed here are his own and are not necessarily those that are held or endorsed by his employer.