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S02E02 First principles of business agility
Getting things done in organizations, why digital transformations fail, agility vs agileᵀᴹ, cargo cults, sociotechnical systems thinking, explore & exploit through optionality and flow
Last season, I looked at organizations through the lens of complexity theory, far removed from the day-to-day business reality. In season two, I go down a level. Instead of theorizing about evolution writ large, I’ll write about the stripes of the tiger and the shell of the turtle. Like animals, companies co-evolve with their environment, and some are better at this game than others.
In corporate evolution, rapid changes in technology are usually the forcing function. Digital transformation is the boardroom term for the evolutionary process of getting toward the desired state of business agility - the holy grail of being able to adapt to any market evolution.
In today’s article, I want to tackle the following questions:
Why do so many digital transformations fail?
What are the principles that underlie true business agility?
Why do digital transformations fail?
Companies are usually aware that the playing field is changing and that they need to adapt in order to survive. The trickier question is how to internalize that ability. The seemingly safe path is to hire a reputable consulting firm to come up with solutions that aren’t too much of a stretch compared to existing practices. For example:
Erect a skunkworks circus tent and launch a digital studio that is unencumbered by the bureaucracy of the rest of the organization — this may have worked for Lockheed, but you are just as likely to subsidize rival factions by creating a second IT department.
Adopt a MACH architecture — probably a good idea, but is the company able to address all the social and technical challenges that lie hidden under this recommendation?
Implement scaled agile framework — no one ever got fired for recommending SAFe, but I haven’t heard many success cases either.
When companies hire management consultants, it is because they need to get something complex done (and things get complex quickly in enterprises). To persuade others to adopt a thing, enterprise execs usually need more than logic; they need evidence that can withstand scrutiny and criticism when someone inevitably questions the decision.
Enterprise companies turn to the McKinsey’s of this world to rationalize and clarify their decisions. They’re buying a seal of approval, not original thinking. There is nothing inherently wrong with this approach, but it does lead to mimetic behavior.
Take agile software development. Over the past decade, enterprises have been flocking to agile as an organizational fountain of youth. If that sounds too good to be true, it is. Any moment now, companies will start to realize that their expensive agile software development frameworkᵀᴹ did not translate to actual business agility.
The failure of digital transformation programs begins with outdated mindsets at the board and c-suite levels. Instead of addressing this behavioral change from first principles, many companies attempt to purchase a packaged solution.
Agility is not something you can buy off the shelf, but there are plenty of agileᵀᴹ certified consultants who are willing to take your money and claim otherwise. Industry veterans know that this pitfall leads to cargo-cult agile - the superficial adoption of agile practices without a deep understanding of the underlying principles.
I’m not sure if I’m still allowed to define a cargo cult in 2023, so I have asked Bing to do it for me:
Imagine you live on a remote island in the Pacific Ocean. One day, you see strange metal birds flying over your head. They land on a nearby airstrip that was built by foreign soldiers during a war. Out of these birds come men in uniforms who bring food, medicine, tools and other goods. You are amazed by these gifts and want to receive more of them.
You observe how the soldiers behave: they wear headphones, wave flags, march in formation and salute each other. You think that these actions must be some kind of magic that summons the metal birds and their cargo. You decide to copy them: you carve wooden headphones, make flags out of leaves, march around and salute each other.
You hope that by doing this, you will attract more metal birds and more cargo. But nothing happens. The war ends and the soldiers leave. The metal birds stop coming. You are confused and disappointed.
You have just become part of a cargo cult.
Meanwhile, on IT island, cargo-cult agileᵀᴹ leads to frustration and disillusionment with agile, further entrenching traditional development practices. In a failed attempt to one-click-install agileᵀᴹ, the enterprise ends up even further removed from its stated goal of business agility.
First principles beat imitation
Modern digital leaders understand that there are no turnkey solutions when it comes to organization design and business strategy. Instead of imitating patterns, they look beyond the boundaries of the current best practice.
A world without best practices is a scary vision for traditional managers, but there are ways to deal with variation and non-determinism.
Not only do modern leaders articulate the principles that underlie their views on management and strategy, but they also question these principles and update their priors with new information. I believe that this Bayesian approach is a managerial superpower. I will come back on probabilistic methods throughout the season but here is a short primer:
What are the first principles of business agility?
One manifestation of Bayesian reasoning is the idea of optionality. Nassim Nicholas Taleb popularized this concept in his book Antifragile. Taleb defines optionality as "the property of asymmetric upside (preferably unlimited) with limited downside":
Taleb arrived at optionality from the perspective of financial options trading. In the world of capital allocation, the concept seems to come naturally. Venture capitalists or private equity firms face uncertainty about the future performance of investments, and they leverage optionality to hedge their bets:
Develop models to find the companies with low downside risk but high upside potential.
Holding cash as a reserve to take advantage of opportunities as they arise.
Diversifying across sectors, geographies, and stages of development.
In adaptive markets, no matter how much analysis we perform, we rarely know with certainty what the best course of action is. In a VUCA world, open-ended options are an excellent alternative to knowledge and prediction. In order to leverage the concept of optionality, we need to maximize the options at our disposal. Options give us the right - but not the obligation - to take an action.
Companies are not that different from capital allocators. They too have finite resources to allocate and strategic bets to place. Great leaders manage their company as a portfolio of real options, essentially creating a probabilistic framework for decision-making that allows them to adjust their strategies and actions based on new information.
How does optionality enable business agility?
Leaders that understand the underlying principles of optionality, non-determinism, and complexity will have a much stronger grasp on the implementation of lean management and agile software development.
Here, lean and agile are not a matter of imitation. These companies minimize waste and maximize value by only investing in what is absolutely necessary, while building in the flexibility to pivot if market conditions or customer needs change.
They appreciate that the lowest common denominator implementation of agileᵀᴹ (JIRA, sprints, backlogs, story points,…) does not automatically unlock the ability to pivot or jump on an opportunity when one presents itself.
Instead, modern leaders leverage their understanding of the underlying principles toward true business agility. Let’s make this tangible.
Product teams can only adapt to changing market circumstances when they have the autonomy to do so. Autonomy is never absolute, but leaders need to be aware of the interconnections and feedback loops in their organizational structure and how they impact decision-making.
In hiring and rewarding people, a product team is constrained by an HR department. In selecting tools, they are constrained by a procurement department. In deploying software, they are constrained by the enterprise architecture.
These constraints exist for a reason, and they are only problematic when there is a misalignment in terms of the underlying principles. If an organization's design enables aligned autonomy, the coordination overhead is reduced, and agility comes within reach.
When we are talking about alignment and first principles, these are social challenges. At the end of season one, I introduced the idea of sociotechnical systems thinking, an approach that recognizes the interaction between people and technology in our workplaces.
The sociotechnical approach to architecture is a good example. It emphasizes modularity as an important design principle for agility. Sociotechnical architects strive to align architectural boundaries with team topologies, domain knowledge, and business value. Good architecture is about more than producing UML diagrams in Archimate.
There are many practices in the agile toolbox to position companies to capture opportunities, but they don’t come prepackaged in a box. Every context is unique, and leaders will have to do the hard work of figuring out what makes sense for their company.
Clearly, the role of leadership is important. That does not exclude bottom-up, team-level optionality that can contribute to business agility.
Take behavior-driven development (BDD) and test-driven development (TDD), for example. These practices create the option to change the software by telling us when we have broken it. The earlier we catch errors, the easier it is to change course.
The same can be said of the practice of ensemble programming. The best way to learn as a team is to actually collaborate and get the most out of each other’s unique set of skills, perspectives, and experiences. Teams that work together like a jazz band benefit from immediate feedback, faster flow, increased focus, and better software quality. Again, the resulting optionality is what makes organizations and teams truly agile.
Optionality (and downstream ideas like lean and agile) are not just about capturing the upside. They can also help in managing risk. In order to do that, teams and companies want to avoid decisions with a fixed upside but an unlimited downside. For example:
Technical debt. On the upside, you get to release slightly sooner, but on the downside, you are jeopardizing the ability of the product to evolve in the long term.
Infosec investment. On the upside, you get to cut some costs or avoid those pesky ISO27001 audits. On the downside, you might find yourself locked out of your data and being held hostage by ransomware attackers.
The best options are asymmetrical in the other direction. They have a fixed cost but an unbounded upside (like unstructured innovation and experimentation). John Cutler has a great visualization that looks at optionality from a capacity planning perspective:
It is also a good introduction to the logical follow-up questions. Companies have to explore and exploit. At what point do we sink our teeth into something? And how do we balance optionality and focus? I’ll come back to these questions in my next essay.