CHAPTER 8

The Issue of Control and Curing Silo Sickness

It should be clear by now that if we want our organizations to take full advantage of digital technology and build chains of greater value, we need to redesign them to do so. However, let’s keep it real: leaders will only entertain the notion of redesigning their organization for higher Quality of processes and products, proactive and systematic Involvement of their people, and accelerated Flow of information, products, and money if they feel that in the new world they can retain sufficient “control.”

Control and Vision in the Decision-Making Process

Control and Vision are two undeniable needs that must always be satisfied. These needs are common to individuals as well as organizations and they take on different verbalizations when focused on specific, practical applications.

Control is something that has to do with the here and now as well as what will happen in the future. Control can be about restricting and dominating things, and the more we feel threatened, the more we feel that we must keep a tight grip. Having control gives us a sense of stability and security. In certain situations, control is connected with confining things in a way that others cannot “interfere.” In other situations, control can mean not entering into areas that we feel can destabilize us.

Vision, unlike control which is associated with contraction, is about expansion. It’s what makes us get up in the morning. It’s about pursuing or achieving what we feel is intimately connected with who we are. Vision connects us with participating in something that is bigger than we are, and by doing so we achieve something that is uniquely human.

The question is, how do “control” and “vision” translate in the decision-making process? A decision point is where we are confronted with the possibility of change. Whether we are cognizant of it or not, every day we make a myriad of decisions; these decisions foreshadow in our mind a “change,” hence trigger a conscious decision point, only when we feel that by changing we alter irreversibly the current state of reality AND we are in some way uncomfortable in the current state. In other words, we truly feel the need to make a “life-changing” decision only when the current state of our reality shows some or many elements of discomfort. On the other hand, regardless of our current situation, our innate drive toward elevation and improvement will push us toward wanting to make life-changing decisions.

In this process, “control” takes the shape of “security” and this need leads to not making the change; “vision,” on the other hand, will be translated as “satisfaction” and will gear our decision toward making that change (Figure 8.1).

Figure 8.1 The Change vs. Don’t Change conflict

The Change vs. Don’t Change conflict is an archetypal conflict. In other words, it can be relevant to a wide variety of situations with ­different verbalizations that in their essence boil down to “Change vs. Don’t change.”

The decision process takes us, then, to a very precise and fundamental dilemma: Change vs. Don’t change. This dilemma is originated by the two core needs of “control” and “vision” that in the decision process can be verbalized as “security” and “satisfaction.”

Let’s think about this in relation to the very fundamental Hierarchy vs. No Hierarchy Conflict we saw in Chapter 3. As we saw before, the conflict is obvious. On the one hand:

A hierarchy fails to acknowledge three critical aspects of the life of a successful company: interdependencies, feedback cycle, and the customer. For these reasons, it is not suitable for sustaining a continuous ­improvement effort.

On the other hand: A hierarchy seems to cater for accountability and provides a sense of control.

The conflict rests, then, on the idea of control and how this idea is translated into a consistent, and consistently measured, organizational system.

Let’s see if I can shed some light on the issue. Leaders of conventional Hierarchies, wittingly or subliminally, view control as an activity to be exercised on the “pieces” that make up their organization. Their ­rationale is: If I control the individual pieces, I will have a handle on the whole. Legions of Comptrollers are hired precisely for that reason and, still today, the core teachings of Business Schools revolve around the dogma of accounting for costs and the quest for their “rational allocation.” An Accounting Cathedral has been erected to sanctify the Holy Grail of “cost detection and its management,” and the whole edifice of “transparency” toward investors in quarterly communications to shareholders rests on the information provided by GAAP-based reporting. Good luck with that.

A shift toward the design of truly systemic organizations that are realistically capable of taking full advantage of the wonders promised by digital and poised to build chains of greater value cannot take place without rethinking what we want to manage and how we want to measure performances. Accordingly, even the most primal, rudimentary form of management, “Control,” must be reevaluated.

Control and Statistical Understanding

A systemic organization, as we have said before, is a network of components working together toward a common goal. The components of this network are the (repetitive) processes and the projects the organization is made of. If we want to “control” the organization, we must then “control” how these processes and projects are performed. The control, to be effective, must be consistent with the nature of the organization; if the inherent, defining feature of a system is the interdependence of its components, then control must be exercised on such interdependencies.

This is precisely where conventional accounting stops providing valuable input and begins to be misleading.

Accounting was invented in Medici’s Florence; the double entry system is, in fact, called “The Italian Method” and was devised long before calculus came about. It is therefore devoid of the idea of ­“derivative” and consequently lacks the concepts of speed and motion. GAAP, despite the acrobatic attempts of patching up its deficiencies with “Cash Flow ­Statements” and all the forms of measuring money inflow (e.g., EBITDA), remains a fairly archaic, static, (pre)-Newtonian way of measuring performances. Most certainly, it is inadequate to support decision making in environments where speed of Flow is paramount.

So, if “controlling the pieces,” the game of conventional accounting, is inadequate and hinders the transformation from silo to system, what do we control and how?

In previous chapters, I tried to illustrate why variation in processes and their synchronization on a rationally chosen process, called “constraint,” are the founding elements for a Deming–Goldratt-based approach to the design and management of organizations. The Decalogue methodology was developed to support that design (that we called “Systemic Organization Cartoon”). How do we transform that Cartoon operationally into a living and breathing organization and how do we manage it?

Remember, management is about prediction, what we can anticipate as the outcome for an action we intend to take. Placing emphasis on Predictive Statistical Studies, originally developed by Walter Shewhart, in the management of organizations was the hallmark of Dr. Deming’s teachings. This is precisely what we need to do: understand how variation affects the flow of all the main processes making up the system. A very comprehensive body of knowledge has been developed for this purpose and it goes under the name of Statistical Process Control (SPC). Over the last 25 years, I witnessed firsthand the wealth of knowledge it brings to the life of companies in every sector.

SPC does not just provide a nondeterministic understanding of numbers; unlike the “seat of the pants” variance analysis of traditional ­budgeting activities, SPC provides insight into the predictability of processes. It allows a rigorous evaluation of the intrinsic level of reliability with which processes are operated and, most importantly, provides the focus necessary to launch improvement process initiatives. Simply put, there can be no sustainable improvement, let alone effective control, without statistical insight.

The applications of SPC in organizations are limited only by the imagination of managers.

SPC shows how different work methods, behaviors, market situations, and equipment interplay to generate an outcome; it provides invaluable understanding of how one critical variable under observation is evolving in time and informs the thinking associated with controlling and improving that variable (e.g., the variation affecting the consumption of project buffers). If leaders and managers are serious about “control,” they must embrace the idea of statistical understanding of the phenomena they want to exert control over and set up a way to measure it. In the Appendix, we provide information about how systemic measurements can be made.

Control and Constraint in Projects

How do we go about exerting control over projects, the lifeblood of a successful organization?

Dr. Goldratt tackles the issue of variation from a different angle. He looks at the “cumulated variation” generated in the system (we can call it “covariance”) and where it could produce the most damage, on the constraint. Instead of looking at the variation of individual processes, the Theory of Constraints leverages statistical understanding of the properties of cumulated variations to establish a “buffer” to protect the constraint. Most importantly, the buffer, if managed, provides insight into the inner workings of the system as a whole. We can look at the buffer as an ­“oscillator”; as such, it can be understood in terms of its variation, just like any process in the organization.

A project is a collection of interrelated activities aimed at achieving a goal within a given timeframe and specified parameters (typically, money and specs). These activities must be orchestrated through tasks that follow some logical sequence, and part of that logic is the availability of the resources needed to perform the tasks. Moreover, each resource (humans, but also machines) has different skills (competencies) and although not all of them are of the same level, they can all be useful for the completion of the multitude of projects that make up the organization.

In a project, the constraint is the longest chain of dependent events (tasks) that takes into account the availability of resources/competencies (the ones that must execute the tasks). A “realistic” way to manage a project, one that can anticipate its outcome in terms of specs, timeline, and budget, must take into account the finiteness of resources. For this reason, Dr. Goldratt described this arrangement of resources on a timeline as “finite capacity scheduling” and called it Critical Chain, in order to distinguish it from the more popular (and misleading) Critical Path.

The Critical Chain algorithm for managing projects leverages well-known statistical features of cumulated variation to establish a buffer at the end of the Critical Chain (the “Constraint” of the project). This project buffer will contract or expand based on its consumption (tasks can be completed early as well as late): if buffer oscillation measured with SPC techniques (called Control Charts) shows statistical predictability and the range of this oscillation is smaller than the length of the buffer, then the project has a high probability of finishing on time. Most importantly, if the Control Chart exhibits lack of statistical predictability, we will have very early warnings that something is going wrong and we can intervene. Using SPC to monitor the consumption of Project Buffers is an innovation of the Decalogue methodology and provides a more scientifically rigorous and insightful way to manage the overall project than dividing the project buffer into zones. (See the Appendix for further information on Control Charts.)

The Critical Chain Method for managing projects was devised to accelerate the development of new products; its stomping ground was R&D. Indeed, it can be used to manage any project and I have been personally involved in several implementations and in many different ­environments, from Industry to M&A.

Invariably, the main obstacle to reaping the benefit of the Critical Chain approach has been the availability of resources due to an organizational design that was siloed. If we look at the pool of available resources/competencies as belonging to different silos and the performance of the individual silos are measured, by definition, individually, then there will always be reluctance from the Head of the silo to allow “their” resources to be used in a “cross-silo” project. “Teamwork,” and all the training on how to do it best, in the end, becomes just a feel-good, nice word ­developed by HR to justify the work of their silo.

What my colleagues and I began to see, with greater and greater ­clarity, starting from the early 2000s, is that the Critical Chain algorithm can be the harbinger for a new organizational design.

If an organization is, essentially, an ongoing collection of unfolding projects, then the focus of leadership (Board, C-Suite, etc.) must be on how well and timely these projects are executed. The “Control” must be exercised where projects going haywire would produce real damage: on the Constraint, indeed.

Hence, any form of meaningful control can only be exercised through managing the Buffer that is the real thermometer that measures the ­temperature of the organization.

By constantly monitoring the state of the buffer for each of the ongoing projects, leadership can have a real insight, not numbers from a spreadsheet, into how well the flow of events is generating units of the goal the organization is pursuing.

Unlocking the Potential of Everyone in the Organization

The Transformation from Silo to System is fueled by the Critical Chain algorithm developed by Dr. Goldratt and sustained by relentless attention to the management of variation throughout the system. We shall talk about the cognitive shift needed to operate that shift in Chapter 10.

A critical aspect of this organizational transformation is the way human potential and value is unlocked. Each individual has talents, drive, inventiveness, and many other characteristics that make him/her unique; each of these must be leveraged. One of the most critical is his/her ­competencies, the skills and the aptitudes he/she is capable of contributing.

All of us are capable of doing different things, have different skills, and have personal traits; in a siloed organization, our competencies are straight-jacketed into what the silo needs in order to enhance its locally measured performance. In a project-based organizational structure, each and every one of these talents is leveraged to maximize its contribution to the overall performance and to increase the number of projects that can be successfully run simultaneously.

Not every competence that any individual possesses is of the same level; Ms. Smith may be capable of performing, say, five different kinds of activities but not necessarily all at the same level. Let’s say that she can perform A and B with great dexterity, whereas C and D with a good (not great) skill; but she is also capable of contributing a modest amount of competence in activities such as D.

If an organization is running in parallel a multitude of projects, the more it can deploy suitable competencies, the more it has a chance to complete these projects successfully. And so, it may well be that a modest amount of competence in activity D is what it takes in project X to finish on time without having to wait for somebody with a higher level of skill D but who is busy performing on a task in another project. Ms. Smith’s modest amount of competence in D (in a project with tasks that require only a modest amount of the D competence) could be all that is needed to finish on time.

In a “system,” as opposed to a “silo” organization, the name of the game is how well I can leverage what I’ve got for a global result. A ­project-based organization epitomizes, algorithmically, exactly this concept.

In a project-based organization, we can finally make sense of the all too vague idea of “Teamwork”; we can actually have people working in Teams without resorting to excruciating and hilariously off-putting “team-building” sessions. We can simply facilitate teamwork by ­removing the barriers that prevent it; we can do so by orchestrating people’s talents and skills in a time-sensitive and continuously evolving Network of Projects, bearing in mind the overall goal of the organization, whether financial or otherwise.

The guiding scheduling principle to build successful Networks of Critically Chained projects is, then, the availability of Competencies that each Resource brings to the table.

Silos are a sickness that can be cured. In the end, ignorance (on how to do it) is a condition that can be addressed; stupidity (refusing to learn it) is a choice. As Dr. Deming would put it: “Learning is not compulsory, but neither is survival.”

Curing the Silo Sickness: Let’s Sum It Up

1. A functional structure is not suitable to support the systemic approach to managing organizations in our new digital age. Organizations, by the nature of their work, are cooperative and cross-functional. This is because none of the activities of any company can be performed within the narrow boundaries of a single function.
2. Any plausible template for an organizational structure that can foster cooperative work must also take into account the evolution in time of the interdependencies needed to accomplish any activity.
3. In essence, the management of any organization becomes the management of a network of recurring, orderly, and evolving-in-time activities. We call them projects. Control is exercised through ­ensuring orderly coordination, not functional reporting.
4. The backbone of any organizational effort becomes, then, the ability to manage the network of projects that comprises any organization.
5. The springboard to overcome the paradigm of today’s functional silo structure is the idea of a company seen as a network (with a stated goal) of projects.

How to Build the New Organization for the Digital Age: Principles, Methods, and Tools

How can we do this on a practical level? By combining the approach of the Theory of Constraints with a purely systemic view based on interdependencies and interactions.

In other words, we do so by

1. Building interdependent processes managed through the control of variation
2. Subordinating these interdependencies to a strategically chosen ­element of the system called “constraint”
3. Designing the organization as a network of interdependent projects with a goal

It’s time we stopped repeating the mistakes of the past and embraced our new reality of complexity. As former Navy Seal Chris Fussell concludes in his article, “The battlefield experience that made me realize the danger of silos and isolated teams,” I realized just how far we had to go. There was no single person who bureaucratically owned this issue, no standalone order that would force us to collaborate. This would be a culture change, something that would take years …

If we no longer have silos that we can control vertically as “parts,” what we can control are the buffers of projects managed at finite capacity with Critical Chain. These buffers provide protection for ongoing projects and the buffers can be monitored using SPC. It would even be possible to create a kind of “dashboard” that would give leaders real-time information on exactly what is happening in the projects that make up the work of the organization. To this end, we have developed an algorithm (and a piece of technology out of it) that we call Ess3ntial (www.ess3ntial.com).

We live in a digital world that is transforming. We work, increasingly, in a network of networks. We have the science, and thanks to the contribution of two major management thinkers, Dr. W. Edwards Deming and Dr. Eliyahu Goldratt, we also have the method and the tools. Let’s put them to work.

Summary of Chapter 8

• Control and vision are two fundamental needs that must be satisfied for individuals and organizations.
• Decision making involves us in the dilemma Change vs. Don’t Change.
• Traditional hierarchies satisfy the need to control based on the assumption that it is possible to exert control over the whole organization by controlling the “pieces” of the organization, and accounting methods are based on this assumption.
• Designing an organization that takes full advantage of digital technology and building chains of greater value cannot take place without rethinking what we want to manage and how we want to measure performances.
• A systemic organization takes into account interdependencies, and traditional accounting is inadequate and misleading as it cannot support decision making where speed of flow is paramount.
• To manage and control an organization, we must understand how variation affects the flow of all the main processes making up the system, and SPC serves this purpose.
• If leaders and managers are serious about “control,” they must embrace the idea of statistical understanding of the phenomena they want to exert control over and set up a way to measure it.
• To be completed within budget and on time, Projects must be managed taking into account finite resources.
• Using the Critical Chain Project Management method based on finite capacity scheduling, we can protect projects with a buffer at the end that expands and contracts based on its consumption. This consumption can be monitored statistically using SPC.
• Silos interfere with the availability of resources.
• Critical Chain can become the engine for a systemic ­organization design.
• By constantly monitoring the state of the buffer for each of the ongoing projects, leadership can have a real insight into how well the flow of events is generating units of the goal the organization is pursuing.
• Projects require varying levels of competencies.
• We can unlock the potential of individuals in organizations by building a network of synchronized projects based on scheduling competencies.
• The principles, methods, and tools to work within a network of networks already exist. See www.ess3ntial.com.

What Comes Next

The following chapter is written by Stefano Righetti, CEO of Hyphen-Italia, from the point of view of an entrepreneur who has embraced the systemic model I have put forward in this book. The idea of a systemic organization is something we began to discuss many years ago when Stefano first took an interest in a Deming and Goldratt approach to management. By working together, Stefano absorbed and built on the concept of the organization as a system. He saw the need to conceive the software products Hyphen produces in a logic of flow and has persevered in communicating to clients a systemic view of the work of organizations as fundamental for success with digitization. Thanks to Stefano, Intelligent Management has gained understanding of the intricacies of developing and implementing digital technologies and the systemic implications. Stefano’s chapter describes his personal journey with ­digital technology and his insight and experience add significantly to the ­message of this book.