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In a divided hierarchy, work is essentially divided up and distributed into zones, with each zone performing highly specific, repeatable and well-defined tasks that are delegated top-down in a command and control style.
Figure B: Illustration of Dave Gray’s “divided company”
In certain environments, divided hierarchies are an effective way to create value because they maximize efficiency and enable scale. This is particularly true for stable environments like manufacturing, where work is often routine, repetitive and knowable.
But divided hierarchies are much less effective when applied in unstable and uncertain contexts like digital, where value is generated through an innovation process that is significantly more unpredictable.
For transforming organizations, the challenges presented by outdated organizational structures can be a significant impediment. To become a truly innovative digital enterprise, an organization must adopt an organizational structure that enables high-quality information flow, cross-functional collaboration and daily learning.
As noted earlier, organizational challenges tend to be tightly coupled and interdependent. This is particularly true of the relationship between organizational structures (discussed above) and organizational mindsets and culture. They are two sides of the same coin, with the key distinction being that organizational structure strongly influences how work flows (i.e. how it is distributed and delivered), while organizational culture strongly influences the mindset and behavior of those performing the work.
In our consulting experience, rigid and hierarchical organizational structures tend to foster mindsets and cultures that reflect those traits, which are likely to manifest in beliefs and behaviors that are sub-optimal for an adaptive environment like digital.
In adaptive environments, ambiguity is often high, and employees need to feel safe to ask questions, experiment and apply divergent thinking in order to discover the right solutions for the challenge at hand.
In his 2014 paper entitled, A typology of organisational cultures , sociologist and professor Ron Westrum studied organizational culture in complex and risky environments and developed a typology he calls The Three Cultures Model. In it, Westrum’s findings indicated that organizations are largely either pathological, bureaucratic or generative based on the following traits.
Table I: Westrum's Typology of Organizational Culture
One of Westrum’s key findings was that safety has a key predictive relationship in organizational performance, particularly in complex and risky environments, i.e. digital innovation.
For transforming organizations, this is a key challenge that must not be overlooked. As noted earlier, digital enterprises create value through innovation, and innovation cannot succeed in an environment that either shoots the messenger or buries them in bureaucracy.
While outdated organizational structures and sub-optimal mindsets and cultures are significant challenges on their own, many organizations are also grappling with outdated and expensive systems and platforms.
At the heart of the challenge is the question of how to either modernize or replace many of the vital platforms and systems that underpin their daily operations. It’s a significant challenge that many enterprise organizations avoid due to mounting technical debt linked to monolithic code bases and poor modularity.
This challenge leaves leaders with a range of poor options to choose from. One option is to rewrite their core applications from the ground up, but this involves significant cost and risk. The other option of course is to do nothing, but that will only increase risk and further exacerbate the existing problem. Alternatively, they may choose the lesser evil and buy time by incrementally reducing their technical debt. However, the underlying issues remain the same.
This is often referred to as the legacy system trap.
For transforming organizations, overcoming the trap is imperative, because digital innovation is exceptionally hard to do when product teams are constrained by systems that cannot create the digital assets they require.
In order to move forward, established organizations should prioritize decoupling the delivery of digital products and experiences from the underlying transactional infrastructure, while implementing a longer-term strategy to eliminate these kinds of systems that are no longer fit-for-purpose.
Just as fixed and divided hierarchies are ineffective when applied to adaptive working environments, so too are fixed budgeting processes.
Digital is just too dynamic and fast-changing for an annual or even quarterly budgeting process to work. It’s simply too inflexible to be compatible with work that is emergent and unknowable. There are a number of challenges to cover under the heading of budgeting, but we will focus on three that must be addressed to enable a truly responsive digital enterprise.
The first challenge occurs during the annual budgeting process when managers are asked to produce high fidelity business cases based on nothing more than an untested hypothesis. Generally, this lengthy and cumbersome process produces very little tangible value, and often amounts to nothing more than an attempt to demonstrate due diligence and governance. More than anything else, the annual budget approval process creates “lock-in”, and leaves very little room to increase funding as value scales, or to redistribute funding to more promising opportunities.
This brings us to the second challenge, which is how funding is allocated. In most organizations, funding is typically allocated by department or function, which tends to further reinforce divided and hierarchical thinking and encourage local optimizations that are often unrelated to the broader business strategy.
The third and perhaps the most vexing challenge of all, is that established companies tend to be highly risk-averse and prefer to fund what they know. This often results in a reluctance to fund anything that is new or different, especially for initiatives with high levels of initial uncertainty such as a transformation or new innovation.
Ultimately, to succeed as a digital enterprise, your organization must develop the capability to fund in an adaptive way. But finding an approach that works well in your organizational context may take some time and experimentation. The first step requires promoting the benefits of an adaptive budgeting process to key stakeholders within your organizations. And although this might seem daunting at first glance, the Beyond Budgeting Institute has produced significant reference material over the past several years to help organizations make the shift.