CHAPTER 11

Leading the Transformation for the Digital Age

We’ve got a problem: we are overheating, overproducing, ­overcrowding. Who is going to fix all that? An Actor? Probably not. You know who can do it? Business, and I know who can help them do it.

—SAP commercial

The upbeat advertisement from SAP is right. Undoubtedly, Business can help with fixing many of the problems the world is experiencing. ­However, businesses also contribute to many of those problems when they fail to see the systemic implications of their actions. The same can be said of technology. It can be of enormous benefit and we could not imagine our lives today without it. However, for technology to be meaningful and not just further complicate people’s lives, it needs to be consistent with the goal of an organization and it must alleviate existing restrictions.

A C-Suite with a Clear Purpose

Transformation requires not just technology but new thinking, new methods, and a new outlook. That is the only way we will be able to accomplish what is needed: transformation of the prevailing silo-based ­management style into one of whole system optimization. This transformation is no longer a choice; digital technology is making it unavoidable and it is dictating the pace.

Transformation requires relentless effort, but ultimately, it allows organizations to consistently fulfill their role in the world with the ­highest quality and speed. This requires knowledge, method, and tools, and it requires a special kind of leader.

Anyone who has any experience with leadership in corporate life ­cannot fail to see how profoundly damaged this life can be. The kind of interaction that creates a cage for CEOs and Boards is often surreal and sadly too often tragic for all the stakeholders. Just to make sure we are clear: CEOs spend a lot of their time trying to prove to the Board and the investors they represent that what the company is doing makes sense; in order to do so, they meet with the Board three or four times a year and engage in conversations that span from strategy to GAAP-based financial results. Indeed, Boards are only privy to what the CEO (and the CFO) wants them to know; the financial transparency is guaranteed by some audit subcommittee and the strategy is discussed by people that, more often than not, have mental models that are the reason for which they have been summoned. Doesn’t that sound a bit like Enron?

It doesn’t have to be like that. The Conflict Cloud we looked at for complexity, hierarchy, and change can be used very specifically in the setting of any organization to capture their specific Core Conflict, i.e., the inherent conflict of that particular organization. Once that has been captured and the assumptions are surfaced, we have the possibility to develop a full, systemic set of “injections” to those assumptions. Another way of saying it is: we now see clearly what is keeping us stuck and, logically, we also know how to come out of the “swamp” we are in.

The path out of the swamp, or any path forward, must be sustained by a clearly elucidated cause–effect map. This map must provide

1. Some epistemological (knowledge-based) rigor
2. Some ability to predict the outcome of the actions to be taken
3. A realistic schedule of how and when these actions will be taken

This is what we have labeled as “Projects.”

Intrinsically, the work of any organization is made up of the network of all the projects that emerge from the injections to a well-articulated core conflict. The role of Leadership (Board and C-suite) in this context is therefore very clear. It is to

1. Create the environment for these projects to be conducted ­successfully
2. Supervise their execution
3. Intervene in a timely manner with corrective actions triggered by unanticipated statistical fluctuations
4. Ensure that every stakeholder benefits from the success of the projects

If somebody is willing to spell out the basic (very few) details for a Board to operate in this way, we will be able to spare ourselves much of the chatter on corporate governance that currently clouds the issue.

This transformation is neither easy nor for the fainthearted and it is only possible if we recognize and embrace the new paradigm of interconnectedness we live in. Recognizing the emergence of a new paradigm is very difficult and takes time; but it also takes a new kind of intelligence, one that is capable of understanding the multidimensionality of the implications of our choices: physical, mental, and spiritual.

It is not just about seeing the forest where everyone else only sees trees, it is about understanding the forest as the emergent property that is generated when a number of trees grow together.

Leading with Knowledge and Intelligence

For leaders to lead in a systemic way with knowledge, they must have appropriate methods and tools. These methods and tools must be completely in line with the systemic essence of an organization; they cannot be separate (or contradictory). They can have a technical content but they cannot be techniques; they must be a direct emanation of a way of thinking. Moreover, they should enhance and increase people’s systemic ­intelligence through their use.

When presented with some sort of “Quality improvement toolkit,” Dr. Deming was almost invariably dismissive as he perceived them as either unnecessary or conceptually wrong. Apart from a tepid endorsement of the Ishikawa diagram for cause–effect analysis, Deming only relied on predictive statistics studies (SPC) and its natural companion, the Process Improvement Chart, at the time simply called Control Chart.

Why is process improvement and managing variation through SPC so important? Leaders and managers need to be able to make rational decisions about their organizations, and the work of their organizations consists of processes. Therefore, managers should know how processes behave, both now and in the future. Whether they are aware of it or not, all processes are affected by variation.

Why should an executive go to the trouble of understanding the statistical behavior of any process? To understand this fully, we have to make a distinction between forecasting and predicting. Executives may be asked to make forecasts, and these are empirical suppositions based on previous evidence and, in many cases, fears and hopes. The usefulness of such forecasts is limited, and reliance on them perpetrates a totally inadequate empirical approach to management. Executives, instead, need to be able to predict how any given process will behave in the future as a result of their decisions. This prediction must be grounded in statistical understanding and the epistemological stance it portrays. Statistical Predictability means that the process oscillates “predictably” within its upper and lower limits of variations. This is the only kind of prediction that leaders and managers can reasonably make and the only one that gives rational value to their decisions, as opposed to management based on hunches.

SPC and process improvement charts are indeed the very backbone of any systems-building exercise as they provide insight, not just ­numbers. (See Step 3 of the Decalogue methodology in Chapter 3.) SPC shelters us from the risk of “linear thinking”; it avoids the mental trap of spreadsheet-fueled, deterministic calculations that are blindsided to speed of flow and systemic implications. Indeed, when properly absorbed and used, SPC is never a technique; it is, as Dr. Deming has said, a way of thinking.

Moreover, seeing systemic implications opens us up to understanding the importance of collaboration beyond the boundaries of our own organizations.

Leading with Critical Chain

Statistical predictability in the processes making up an organizational system facilitates greatly the creation of a network of projects. We can create this network by leveraging the power of the finite capacity scheduling underpinned by the Critical Chain approach to managing projects.

Critical Chain represents the embodiment of a vision of the organization based on pace of flow, people’s involvement, and great emphasis on quality. Quality, involvement, and flow are the basic philosophical pillars of the systemic organization, so Critical Chain plays a major role in the building of an intrinsically systemic organization.

Organizations that are functional/hierarchical grids are clearly inadequate because of their inability to fully support, measure, and promote intrinsically cross-functional activities. They trap the potential of their people into silos. The solution is to design organizations as a network of interdependent projects that work together to achieve the goal of the organization. The allocation of people to tasks according to their skills and level of competency unlocks their potential. It produces an effective use of the resources available, a more ethical consideration of people’s capabilities, and allows us to unleash the power provided by the “intelligent” implementation of project management. Critical Chain enables all this to happen methodologically and practically.

When we combine Critical Chain with the use of SPC, we equip leaders with a “dashboard” that enables them to have real-time monitoring and control of what is going on inside their organization, ­allowing them to understand what really matters: the state of the ­Project Buffers.

Designing organizations as networks of projects is not just important for organizations as individual entities; it equips them structurally, operationally, and cognitively to optimize their interactions with larger networks of value.

Leading with Intelligent Emotions

It is not possible to trigger a better functioning of our intelligence without some sort of handle on our emotions. We have come to call the ability to harness the power of our emotions to propel the rational side of ourselves Intelligent Emotions. A leader above all needs to develop these.

This brings us back to the Conflict Cloud. Emotions manifest themselves in the form of the mental models, or assumptions, that link the elements of a Conflict Cloud. The states of reality typified by the conflicting positions in a cloud exist as a result of some level of “amplification” of the needs for security and satisfaction; this amplification creates the “separation,” what we experience as “conflict.” For instance, when we focus on our fears or decide to exercise restraint, we almost invariably end up justifying “not doing” something, to maintain the situation the way it is. On the other hand, when we pay attention to our satisfaction, when we focus on the fulfillment of our desires, we become prone to wanting “to do” something. Both the neurology and the metaphysics of this phenomenon are a fascinating field of investigation.

The mental models that constitute these amplifiers, as well as the ones that underpin the conflicting positions in a cloud, are the emotions that we want to harness. Why? Because if left to themselves, they would single-handedly jeopardize any attempt at managing the variation and the synchronization that our organization so painstakingly pursues. Unguarded and unchecked emotions can be vital for some artistic (not necessarily creative) endeavors but can easily disrupt organizations because they are powerful catalysts of entropy. The Thinking Processes from the Theory of Constraints that we looked at in the previous chapter provide a highly practical way of developing intelligent emotions.

In short: Leadership in a complex, network-like environment requires an enhanced kind of systemic intelligence and the ability to master the emotions that are generated by the change underway. The science of management that goes with this intelligence should adopt methods and tools that are consistent and adequate for the work required.

Leading with a New Economics

Deming’s warning was clear. Unless we arm ourselves with new knowledge then, no matter how hard we work, we will only dig ourselves deeper into trouble. Deming provided us with this new knowledge for creating systems-based organizations and this knowledge, in turn, calls for a new economics. Only systemic knowledge and intelligence can enable the new economics and these need to be fostered and groomed. Before we can make it new, what do we mean by “economics”?

Economics belongs to the realm of the “social sciences.” It aims at investigating the production, distribution, and consumption of goods and services. Economics also concerns itself with the study of ­economies and how the players, the decision makers, act to guide ­economic choices.

At the most fundamental level, economics should pertain to the understanding of how to deal with the resources at hand and optimize their use for a stated goal. In this sense, economics is also a “political science” because the use of these resources should be guided by political decisions. (Indeed, politics should be guided by a philosophical and ­ethical vision, but this is another story.)

Economics mimics science by developing models, in this case economic models, that should explain the economic outcome of certain decisions and these models are, or should be, inspired by a vision of the world. In recent decades, The Royal Swedish Academy of Sciences has instituted a Nobel Prize for Economics and several economists have been awarded for the models they have developed.

In summary, an economist, hopefully inspired by a vision of the world, develops models that should guide the economies of countries to an optimal utilization of their resources for a stated goal. Governments, hopefully guided by a vision, embrace economic models based on their adherence to their vision.

Where does the problem with models lie? Any model is and must be based on a set of assumptions. When these assumptions are not verified and validated, the model is bound to fail in providing the results it was designed for. Of course, the political circumstances of any democratic country change very frequently and the ability to translate models into effective policy making is always less optimal than one would wish; moreover, an increasingly interconnected world calls for increasingly complex models with assumptions that are harder and harder to validate. Indeed, governments are pressed to take actions and these actions have to accommodate for political agendas that are not necessarily driven by the vision that inspired the economic model. Moreover, when time (and perceived risk/reward) comes into the picture and we slide into the field of “finance,” we witness the full potential of the prevailing economic paradigms as reflected in the models that, tragically, still today purport to create value.

If we continue the analysis of this chain of causes and effects, we can understand why the world is experiencing the current economic predicaments.

Why Current Economic and Financial Models Are Flawed

We need to broaden our view of what economics should be because it affects us all, and leaders in particular. Mainstream economic and financial models, the ones that currently rule the markets and determine value, have shifted their focus over the years. Whereas previously the attention was placed on what was best for the society they were trying to model, now the emphasis is on what it is mathematically possible to achieve for the benefit of a few. It is thanks to mathematics that we understand the physical world and it is thanks to its rigorousness that we are confident that the scientific method can provide acceptable validity. Sadly, the models of most economists and financiers are far from being the offspring of any scientific method.

Current mainstream economic and financial models are flawed for two sets of reasons:

1. They are often divorced from realistic assumptions about the situation they seek to model AND from the managerial actions that should ensure the predicted outcome. In other words, the modeling happens in the vacuum of second tier “mathematical” speculations with flawed assumptions about what is possible or impossible to achieve managerially.
2. Far too many, and often prevailing, economic and financial models pursue an idea of value that is divorced from any concept of the general wealth and well-being of individuals and society. Such models are based on a systematically disproven “rational” behavior that is driven by the desire for individual profit. These models are rooted in the paradigm that if somebody wins somebody else has to lose. They call it “competition” and a gigantic and ineffective apparatus has been created to “ensure” fair competition. 


Providing a Sustainable Outlook on Value and Wealth

In order to reassert economics as a useful field of investigation, we have to reground it in a new paradigm; a new economics can only be originated by a new outlook on value and wealth. As Senator Robert F. Kennedy once said, “The GDP cannot be considered a measure for the standard of our lives.”

The starting point is to define what the role of the government should be and which policies an economic model should mirror. Any government should first and foremost protect the freedom of its citizens, for sure: freedom from any risk of slavery. Three major factors impact our freedom, other than the ability to protect ourselves from enemies and practice the religion of our choice: freedom from ignorance, freedom from the tyranny of diseases we cannot afford to cure, freedom to start or adhere to ventures, business, or otherwise.

So, the role of the government in establishing and endorsing an economic model is clear: a solid education and research system, affordable health care for everyone, and a network of support for the development of any form of free enterprise.

How we build these systems, how we manage them, and what set of values should inspire them are the kernel of the new economics. Economics, then, really becomes the science that studies how countries should develop.

The new economics should not just be concerned with better mathematical models to portray scenarios; any serious mathematician would always alert decision makers to the probable fallacy of such models. The new economics must be intimately connected with the ways wealth can be created and the best ways to increase the distribution of this wealth.

The world we live in is becoming exponentially more interconnected and wealth (and its creation) is a multifaceted entity. Which is the wealthier country, one where the GDP is high but millions of people cannot afford serious education and health care, or one where the GDP is lower but these “freedom rights” are guaranteed? This conflict exists only because “economics” is anchored to flawed assumptions about wealth and value.

The distribution of wealth, seen as conflicting with the right of the individual to amass personal wealth to the detriment of others, has always been labeled as “socialist” and as such, unsuitable for the free world. The ugly truth is that prevailing economic and financial thinking has led to the squandering of the resources that the planet has available and to the stifling of innovation. This thinking has systematically favored short-term decisions over long-term planning. This thinking has swayed tens of thousands of talented people away from applying their minds to constructive and foundational work and toward the sterile and artificial domain of “financial products.” This thinking has led us to believe that we can create something out of nothing.

Never in human history has the word “scarcity” meant so much. Our resources are scarce and we need to learn how to use them; the name of the game of any serious economic effort then becomes “sustainability.” The new economics must become the science that studies the optimization of scarce resources and, in order to do so, must tap into the ­bodies of ­knowledge that deal with how finite resources can be successfully managed.

The new economics must also be based on the founding assumption that no win can be based on somebody losing; that we are all interdependent and the well-being of individuals is critical for the well-being of society; that wealth must be created in order for it to be distributed and any form of imbalance will soon turn into a global loss; that individual success to the detriment of others cannot be sustained. The new economics is founded on the assumption that individuals, organizations, large systems and networks, and, ultimately, countries are vehicles for the creation and distribution of ideas, products, services that help everyone to live better, more intelligently, and harmoniously with our environment.

The new economics will strive to provide not just mathematical ­platforms but also the practical means to achieve a meaningful life.

A New Kind of Learning for Complexity and the Problem with Business Schools

Still today, in spite of the acceleration that new technologies are bringing, business schools tend to offer a body of disconnected knowledge taught in a fragmented manner and within the framework of a functional understanding of the life of organizations. With few exceptions, if Deming’s work is taught at all, it is labeled as “quality” and this limits the ability to understand his work as a systemic philosophy for business and economics. Similarly, while it is true that Goldratt’s book The Goal is recommended reading in many schools, it is relegated to “operations” and students are unlikely to deduce from reading this book in isolation just how universally applicable the Theory of Constraints is. (In one surreal conversation, I was asked by the dean of a business school in Canada what Deming and Goldratt had to do with business.)

Even where there are some attempts in schools to include “systems thinking” as a course or module, these lessons are provided alongside traditional financial and management accounting courses and the lingering ghost of “the invisible hand” believed to be regulating the markets. In other words, systems thinking, if offered at all, ironically becomes just another silo. This is also happening in corporations that have introduced systems thinking departments, no doubt with the best intentions but demonstrating a complete lack of understanding of how to apply systemic knowledge operationally. As long as managers are measured on local, siloed efforts, they will be unable to see the real advantage of any systemic approach.

The result, as amply predicted by Dr. Goldratt in his novel Critical Chain set in a university, is that MBA students not only end up unable to “connect the dots,” they lack the understanding of which dots need to be connected in the first place. Consequently, MBA programs and the like continue to qualify individuals without the knowledge and tools to build, lead, manage, and grow organizations.

The challenge for academic institutions faced with the task of imparting business education is, just as for any organization, a paradigmatic one. And it is based on the same assumptions of organizational design and control. The design factor, in the case of business schools, concerns “the design of the learning pattern” (not just the elements of the learning pattern) and the control aspect is related to the assurance that their students are hired after graduation. Moreover, business school faculties are often populated by academics who may have little direct knowledge of business as they are on an academic career path and that is a very different pattern.

Last, but not least, management is seen by business schools as something connected with economics and finance, with a smattering of operations and some marketing notions. In other words, there is little understanding of the roles that science and neuroscience play in the education of future managers and leaders. The result is the ballooning of fees for courses whose major value lies in the alumni network to which they provide their students access.

We have attempted to capture the conflict that concerns the teaching curriculum of business schools in the conflict cloud (Figure 11.1).

Figure 11.1 The business school conflict

Proposing a New Curriculum for Complexity

If leaders and managers today must be able to understand how things interdepend and evolve in order to navigate complexity, what kind of curriculum should business schools be offering? Whereas students will always need to understand things like marketing and how to read a balance sheet, business schools are not able to offer the subjects in a sufficiently ­integrated way for today’s reality because they are structured hierarchically and in silos. Even if schools consider themselves to be interdisciplinary, this structural limitation prevents them from innovating what they teach and the way they teach it in a significant way. Their courses are offered in “pieces” that are then assembled together, but they never form a holistic whole. I would like to suggest the areas that an adequate program should include.

A New Kind of Thinking

Linear thinking, the kind that is reinforced by vertical hierarchies and that does not look beyond Excel spreadsheets, is inadequate for complexity. Managers today need to be able to think in a radically different way if they are to keep up with and anticipate change. A simplistic way of putting it is to say that they need to be able to connect the dots. An accurate way of describing this is to say they need to be able to think systemically. They need to have a holistic understanding of the reality they are in; they need to know that when they make a decision and act on that decision, there will be repercussions. They need a way to “see” those effects before they happen.

A New Way of Counting

The kind of management accounting that students are taught in MBAs is necessary because of the way tax reporting is done and balance sheets are written. However, it is not the most useful way of understanding cash coming in and cash going out. When managers lose a sense of the real money they are handling (money in and money out) as opposed to accounting numbers, they can put an enterprise at risk.

A New Way of Understanding

A company is made up of processes, such as sales and production. These processes display a behavior and this behavior can be measured. There are statistical methods for understanding precisely whether a process is in statistical control or not. If a manager does not have this detailed level of understanding of the processes under their responsibility, then they cannot possibly know when and if it is the case to make changes for improvement. Without this knowledge, they risk doing more harm than good.

A New Way of Caring

Processes, apart from purely mechanical ones, are operated by humans. As humans, we have fears, desires, needs, and a whole range of ­emotions. Managers need to be able to interact with their staff on an emotional level, with intelligent emotions, especially in an increasingly digitized and decentralized world. This kind of skill can be learned and developed.

In order for leaders and managers to act proficiently and effectively in today’s complex environments, they need to be able to understand and navigate complexity. A curriculum today should therefore

• Enable a systemic understanding of organizations and the interdependencies they are part of
• Teach systemic thinking skills for complexity
• Teach accounting methods for throughput management
• Teach statistical methods to gain real insight into process behavior
• Teach management skills to manage conflicts and interact with staff in a meaningful way

This curriculum for an “MBA for complexity” can be built right away with the Thinking Processes from the Theory of Constraints, Throughput Accounting, and statistical methods that have been around for decades (Figure 11.2).

Figure 11.2 A new systemic curriculum for Business Schools

Summary of Chapter 11

• Meaningful technology must be consistent with the goal of an organization and alleviate existing restrictions.
• Transformation is not a choice and digital is dictating the pace.
• The Core Conflict Cloud can be used to capture the inherent conflict of an organization, surface nonverbalized assumptions, and systemically identify a way ahead in a network of projects.
• The Network of Projects organization renders the role of the C-suite radically clear.
• The necessary transformation toward whole system optimization requires a new kind of leadership based on knowledge and systemic intelligence.
• Designing organizations as networks of projects is not just important for organizations as individual entities; it equips them structurally, operationally, and cognitively to optimize their interactions with larger networks of value.
• Statistical Process Control and Critical Chain Project ­Management form the backbone of the knowledge leaders need for transformation.
• Leaders need to learn to cultivate intelligent emotions.
• Transformation requires a new economics and leads to a new understanding of sustainable value and wealth.
• Business schools are not up to date on the necessary knowledge for transformation.
• A new curriculum is required based on systemic knowledge, understanding, and practices.