CHAPTER 12

Recapping It All: Embracing Complexity in the Digital Age with an Operational Solution

The greatest challenge for organizations today is complexity. This is a word that is often misunderstood. Complexity for organizations means unprecedented levels of interdependencies. Companies today face unparalleled degrees of interconnectedness, a fast-growing socioeconomic environment shaped by networks, and the rapidly increasing role that digital and decentralized technology plays in our lives. All these factors call for a major overhaul of how we understand, manage, and operate not just transactions, but entire organizations and value chains. It is an unprecedented challenge.

How can we adapt and compete in an increasingly digital and decentralized world? We have to rethink structurally and operationally the way organizations are designed. A major obstacle is that there is little real understanding in the corporate world of what complexity is, how it originates, and what deep shifts, not just in technologies, techniques, and tactics, are required to operate and innovate in a complex world. Indeed, big names in the consulting world talk about “cutting through” complexity, or breaking it down, revealing a complete lack of understanding of the issues or the concept of emergence. Emergence means that there are properties that emerge when parts of a system interact that are not present at the level of the single parts. Every level of complexity gives rise to new emergent properties. This is the sense behind the expression that the whole is greater than the sum of its parts. When we acknowledge this new interpretation of reality, we inevitably see the need for an appropriate way of thinking, organizing, and acting. This cannot be the same way of leading and managing that was appropriate for a mechanistic world.

Unfortunately, organizations (and business schools) are still very much trapped in an outdated paradigm of silos, fragmentation, conflicts, and a zero-sum game. There has not yet been a real shift away from an outdated, deterministic worldview of organizations toward an urgently needed understanding of organizations as one whole system. No matter which techniques forward-looking managers may try to adopt, management remains widely rooted in the idea of command and control, and this is reflected in a traditional, hierarchical/functional organizational design (silo mentality). In reality, the inherent nature of organizations is based on interactions. These interactions can be limited to one physical location or distributed over a global network.

The work with my team at Intelligent Management with organizations over the last 20 years has been to challenge the prevailing ­Newtonian, mechanistic mindset of management and to develop an operational solution that acknowledges the intrinsic nature of organizations as whole systems. The role of leadership for complexity then becomes very clear: to guide how the network of interdependencies occurs so that an organization can achieve its maximum potential, beyond any artificial constrictions.

Fundamental Questions for Radical New Answers

Physicists are accustomed to asking themselves very fundamental questions in order to understand nature. When it comes to managing organizations, we have to ask fundamental questions to develop the kind of radical solutions required for our fast-evolving reality. We also need a robust means of investigation to support this work. The Theory of Constraints provides a structured framework for developing and communicating breakthrough solutions with its Thinking Processes. By framing a situation of blockage as a conflict and surfacing the assumptions (mental models) that make the conflict exist, we can systematically challenge outmoded thinking to create real innovation. By real innovation, we mean something that removes an existing limitation.

Let’s take the issue of managing complexity and how people try to tackle it. On the one hand, people believe they can manage complexity by breaking it up into its parts, or structures. They adopt this position to ­protect a legitimate need that we can verbalize as understand the components. The opposite, conflicting position is to manage complexity by focusing on the interactions and dynamics, or patterns. The legitimate need that this position tries to protect is to understand the interdependencies. We can move forward out of this impasse by challenging the assumptions that keep the conflict in existence. We can summarize these assumptions as (1) the whole is equal to the sum of its parts; (2) no new properties emerge from interactions among the parts; and (3) interactions among the parts are always and only deterministic and linear (mechanistic view). Now that we have verbalized those assumptions and they are “out in the open,” we have cleared a path to find a solution that will allow us to lead and manage organizations in a way that is appropriate, adequate, and effective for today’s complex reality. But first, we have to look at why organizations are still stuck in the hierarchical/functional model.

Mechanistic Thinking and Silos

The “complexity conflict” is in fact intrinsically connected with why people persist with the hierarchical/functional model. This anachronistic model is related to “understanding the components.” It mechanistically divides an organization up into divisions and ranks.

The concept of hierarchy is deeply embedded in our psyches. As far back as biblical times, Moses was advised by his father-in-law, Jethro, to create a hierarchy to help him deliver his teachings to the population more effectively. There was a clear advantage in delegating responsibility in a hierarchical way and it became a standard way to build an organization.

When organizations are created and organized in a matrix of vertical hierarchy and functions, it creates inevitable negative consequences. It causes a series of “walls” or divisions that inhibit the resources involved in producing an optimal result toward the overall goal, communication gets slowed down or completely blocked, innovation struggles to emerge through the ranks and bureaucratic obstacles, projects are delayed and go over budget, quality suffers, and reaction time to changing market demands is too slow.

When it comes to negative effects for people, individuals suffer because they do not have the authority to carry out the tasks for which they are responsible. Careers are limited because people work for a boss who has to improve their own performance in a vertical way. This means that competencies, both technical and managerial, do not find a natural way to develop. This creates frustration due to artificial “ceilings.”

Even more dramatically, “silo sickness” means that the larger implications of cause-and-effect relationships that exist in organizations are totally disguised. It takes time for the effects of a cause to propagate through a system. People have no means of understanding the implications of their local, siloed decisions for the big picture. Even the heads of functions are blind-sided to them.

Overcoming the Hierarchical/Functional Model with 10 Transformational Steps

Just as with the complexity conflict, there is a conflict that keeps people stuck in adopting a hierarchical/functional model vs. not adopting it, and there is a set of assumptions that keeps this conflict in existence.

To move forward, we must question the assumptions, i.e., mental models that create the conflict and keep it alive. Over the years of our on-the-field research and development, at Intelligent Management, we have come to summarize the assumptions that keep the hierarchy conflict alive as

• A hierarchy can only be vertical.
• Control has to be exercised equally over all components of the organization.
• The global optimum is equal to the sum of the local optima.

To challenge these assumptions operationally, we need a plan of action that can transform an organization into a whole system. Our work at Intelligent Management began with the systemic vision of Dr. W. Edwards Deming and statistically controlled processes (Theory of Profound Knowledge) and grew to embrace the concept of managing a constraint (Theory of Constraints). By working on a synergy of these approaches, we discovered a powerful way to orchestrate and synchronize the efforts of an organization toward its goal. We came to see that we could bring together the idea of constraint with the idea of a statistically controlled system. To do that cohesively, we have to orchestrate statistically controlled processes and subordinate them to a well-defined (and very statistically stable) part of our system, the constraint. If these stable, i.e., reliable, well-orchestrated, processes all have the capacity to subordinate to the chosen constraint, then all we need in order to protect the whole system is a “buffer” in front of the constraint; needless to say, the oscillation of the buffer must be controlled statistically. We developed a visualization for the concept of a systemic organization designed around a constraint and we refer to it as the “Systemic Organization Cartoon.” The “Cartoon” is illustrated in Figure 12.1 and is inspired by a sketch made by Dr. Deming of “Production Viewed as a System.”

Figure 12.1 The “Systemic Organization Cartoon”

We were able to define how to shift an organization operationally away from silos to become a whole system in 10 macro steps that we called “The Decalogue.” From a philosophical as well as scientific viewpoint, the Decalogue attempts to shift management from the obsolete, Newtonian worldview in which the results of the whole organization equal the sum of its individual, separate, and hierarchically conceived parts, toward a systemic network made of interdependent components. The shift is achieved by combining the allegedly “reductionist” approach of the Theory of Constraints with a purely systemic view based on interdependencies and interactions. It does so in practical terms 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 processes and projects managed at finite capacity with a clearly defined ­common goal

The 10 macro steps of the Decalogue methodology were published in 1999 in “Deming and Goldratt: The Decalogue.” It was the first book to be published by Dr. Goldratt’s publisher about the Theory of Constraints that was not written by Goldratt himself.

The steps to shift from silos to system are the following: 


1. Establish the goal of the system, the units of measurement, and the operational measurement (without a common goal, there is no ­system). 

2. Understand the system (draw the interdependencies). 

3. Make the system stable (understand variation and its impact on the network, make sure that the oscillation of the processes is statistically predictable). 

4. Build the system around the constraint (subordinate the ­organization to the constraint, the only part of the system that can never stay idle). 

5. Manage the constraint (protect the constraint from the intrinsic variation present inside the system with a “buffer”—buffer ­management). 

6. Reduce variation at (of) the constraint and the main processes (wider variation implies poorer management; low variation improves ­predictability, reduces inventory and WIP). 

7. Create a suitable management/organizational structure (design the network of interdependencies as a network of projects to improve the performance of the system).
8. Eliminate the “external constraint” (sell all the capacity the system has available). 

9. Where possible, bring the constraint inside the organization and fix it there (an “internal” constraint is much easier to manage than an external constraint). 

10. Create a continuous learning program (improve the system through personal improvement). 


The Fundamental Constituents of Work

We did not have a complete answer for Step 7 of the Decalogue, ­“Create a suitable management/organizational structure,” when Deming and Goldratt was published. Over the years of working with the Decalogue, and, true to our vocation as organizational scientists, with our increasing familiarity with complexity science and Network theory, what emerged was a new organizational design for complexity.

Moving beyond the blockage created by a hierarchical/functional structure is, above all, a cognitive challenge. The notion of hierarchy, as we have said, is deeply etched in the human psyche. What we need, then, for a viable solution is something that preserves the concept of hierarchy but that shapes it in a completely different way.

In order to generate a solution for a suitable organizational structure, we needed to ask fundamental questions about what work actually is as opposed to how it is carried out in most organizations today. This is the only way we can avoid making the same assumptions we have made in the past and repeating the same errors. By answering accurately the question “What is an organization?” we can understand both ­conceptually and on a practical, day-to-day level the most effective way to manage.

When we overcome a limited and utterly deterministic perspective, when we put aside the artificial distinctions and barriers that result from silo thinking, we can take a much deeper look. We can then identify the basic elements that make up the life of an organization. At the most basic, elementary particle-like level, what do leaders and managers have to deal with? We can boil it all down to four things:

1. The elements of the system under the responsibility of leadership
2. How these elements interact to produce the desired outcomes
3. The context within which elements and their interactions play out, in other words, the market
4. All the stakeholders—board, investors, employees, society at large

These four constituents form the essential core of leading and managing an organization. In order to cope with the ever-growing complexity of these four constituents, an astonishing number of techniques have been developed to help leaders navigate the agitated waters of the corporate world. Many of these techniques have merit and some of them are certainly more than a palliative. A technique, however, is only a partial remedy. What is lacking is an approach that (a) helps to understand better each of these four constituents and (b) provides a unified vision and a corresponding method to tackle them.

New Awareness About Interactions

The elements of a network, their interactions, the common goal they pursue, and the context within which they exist do not have to be dealt with in isolation. We began to see that there is a way out of the blind alley of organizational divisiveness that stems from artificial silos and it begins with understanding that company functions should be seen in a very different way. They should be perceived as a repository of competencies or ­subject matter expertise. In other words, they contain the know-how needed in order to achieve the tasks at hand.

These tasks, no matter how difficult or complex, require some form of interdependence with other sets of competencies; accordingly, ­organizational design only makes sense when it concentrates on ­creating the best, easiest, and smoothest way to allow these ­competencies to interact.

Interact for what? To achieve a common goal; invariably, this goal is connected with satisfying the Market. Only when we truly understand what an organization is can we design one. Organizations are whole systems. Organizational design, then, is the science, not the magic, of enabling different competencies to achieve the goals for which they have been brought together.

A New Organizational Design: The Network of Projects

How can we best allow competencies to interact? Essentially, any organization is engaged in two kinds of activities: repetitive processes and one-off projects. Repetitive processes, such as closing the books or performing scheduled maintenance, lay the foundation for the life of the organization. This is what statistical understanding is all about: ensuring the reliability, dependability, and predictability of processes. This is the very fabric of quality.

One-off projects are what propel the organization to success; new ideas, new technologies, innovation, experimentation are the raison d’être for any organization. However, they are only possible and produce results when they emerge from strong roots in quality.

Process and projects have very many things in common; they both are, essentially, a set of activities aimed at a very well identified goal. Both have, in general, a timeline for their execution and both need to be operated with a certain degree of statistical predictability in order to be effective (and cost effective).

Unlike repetitive processes that are often confined to functions, ­Projects take the predicaments of a siloed structure to a new and different level, and for the following two reasons:

1. A project is, by definition, a one-off activity and, more often than not, draws resources from a variety of company functions, in this way increasing the need for collaboration among people accustomed to working and thinking locally. 

2. A project is often something that brings innovation, a positive disruption in the life of the organization. Cognitively, a project challenges, albeit in a desirable way, the all too human tendency to resist change in an organization.

A project, in other words, exposes in a blatant and somewhat ­“violent” way how impossible it is for a conventionally hierarchical structure to accommodate the flow of activities.

Logically, if the essence of an organization is the projects (and processes) it is made up of and project buffers offer a very effective real-time way to monitor the overall impact of actions taken toward the goals that the organization is pursuing, then it makes a lot of sense to consider an organizational design that reflects the very nature of the work the organization does. We call this design the Network of Projects.

What we advocate is the transformation of the conventional silo-based hierarchy into an organization where there is full systemic optimization, made up of projects and processes, where the control mechanism is the management of buffers through statistical understanding. In this organizational design, company functions are seen exclusively as pools of competencies. These competencies are allocated to projects using a mechanism based on finite capacity, that is, we never schedule a resource simultaneously on two different tasks, we forfeit multitasking in favor of stacking activities, and we foster a culture of promptness as opposed to procrastination (student syndrome). This can be achieved effectively through the Critical Chain Project Management method from the Theory of Constraints. Critical Chain becomes, then, much more than simply an algorithm to accelerate project completion; it is the vehicle to integrate, control, and deploy the resources/competencies of the organization.

What does the Network of Projects organization look like? Instead of company functions, there are networks of projects; instead of heads of functions, there are managers of increasingly complex projects that draw their resources from a pool of available competencies with no resource contention; instead of executives that fight for power, there is cooperative work that is in sync with the goal of the company. Instead of often-­conflicting local indicators of performance, there is one single driver for everybody.

In this systemic organization as a Network of Projects, leaders will be the enablers of meaningful and market-driven projects and will foster a new organizational climate, one of cooperation and win–win.

The Network of Projects that makes up the life of the organization is a particular kind of network, called directed network, where the “direction” is provided by the goal of the organization. Such networks are called scale free, with a hierarchy of hubs and nodes. Accordingly, in an organization there will be hub-projects, namely the ones more relevant for the success of the organization, and node-projects, i.e., projects that are smaller but still necessary for the development of the organizational network. What ensures the connection among these hub and node projects is the finite capacity algorithm for their synchronization (Critical Chain) fueled by an appropriate database of resources. (Figure 12.2 depicts the Network of Projects synchronized through Critical Chain.)

Figure 12.2 Depiction of the Network of Projects

Stated simply, two key elements enable the optimal management of finite resources: predictability in the execution of activities and their synchronization. In other words: IF individual activities are performed with a high degree of reliability, with quality, AND these activities are orchestrated with a powerful algorithm that allows the best possible synchronization toward the stated goal, THEN we have an infrastructure that can maximize the throughput that the organizational system can generate.

In a systemic organization, anyone, at any time, is part of a project. They lend their competence to a project that is designed, along with all the other projects the company is made up of, to maximize the results of the whole company toward its goal. Every member of staff at any given time is a resource for a project or a Project Manager for a project; ­sometimes they are one or the other on multiple projects. Some people will develop competencies for managing increasingly complex projects, some others will continue to deepen their competencies and enrich the content base of the company. Most importantly, all of them will naturally be placed within a continuous learning pattern to strengthen the cognitive skills necessary for continuous innovation.

The Mindset Necessary for Digital and Decentralized Enterprises

Digitization is accelerating a shift toward decentralization. What businesses increasingly need to consider is how their production supply chain is integrated with a digital supply chain, and beyond that, their interdependencies within entire supply chains or supply networks.

Once we have freed ourselves from the notion of mechanistic, siloed enterprises and we adopt the idea of the enterprise as a system, operated as a Network of Projects, we unleash potential in a way that has not yet been possible. We give individuals the opportunity to develop their competencies beyond the confines of functions. We create space for emergent properties to exist. We can go beyond the boundaries of single companies and create products and services through networks of companies, drawing on a much broader pool of competencies scheduled into finite capacity projects. We overcome the boundaries of geography and fiefdom to achieve a global goal.

To achieve this reality requires a higher form of intelligence and ethical awareness and ability to go beyond a localized “what’s in it for us” mentality. We can accomplish this with the ecology of the mind that systemic thinking provides, and by embracing the values of a worldview where profit and the common good are inextricably interdependent. Both W. Edwards Deming and Eliyahu Goldratt understood that humanity is capable of so much more than we imagine. Whatever situation or business we are in, we can do significantly better, and we can achieve that in a meaningful way, not to the detriment of others, but by creating something new, superior, and from which all will benefit, from the supplier to the end user and throughout the supply network. This requires new economic and political thinking beyond national boundaries. Far from being a utopia, this understanding is rapidly becoming the obvious solution, because it is the only sustainable way ahead.

Summary of Chapter 12

• To adapt and compete in an increasingly digital and ­decentralized world, we have to understand complexity and rethink structurally and operationally the way organizations are designed.
• Organizations are whole systems. Only when we truly understand what an organization is can we design one.
• An organization is

  o A network

  o Part of a larger network of value

• Mechanistic thinking and silos are what keep organizations trapped in a traditional hierarchical/functional model where silos exist.
• It is possible to overcome silos and the artificial limitations of the hierarchical/functional model with a whole system perspective and method.
• Leaders and managers have to deal with four fundamental constituents of work that are increasingly complex. These four constituents are
  1. The elements of the system under the responsibility of leadership
  2. How these elements interact to produce the desired outcomes
  3. The context within which elements and their interactions play out, in other words, the market
  4. All the stakeholders—board, investors, employees, society at large
• With a systemic perspective, the focus shifts toward awareness about interactions.
• A new organizational design for complexity that overcomes silos can be found in the Network of Projects.
• Leading and working in increasingly digital and decentralized enterprises is a cognitive challenge and requires a new, systemic mindset.