Architecting the resilient enterprise, Part II

In Part I of this series we discussed the leadership and incentives aspects of enterprise resilience. The timing turned out to be propitious — in fact the latest Nobel in Economics was in part awarded based on the work pointing out the importance and the difficulty of creating the right incentive structure. In this article we will zoom in on the leadership aspects creating a resilient enterprise: the right culture and the right enterprise architecture.

Right architecture

In my experience, the resilience of an enterprise is fundamentally rooted in its architecture, which is in turn closely tied with the concept of the right incentive structure. After all, incentivizing employees to take the right action is not very likely to have the desired effect if they are not empowered to do so. As I see it, the three core principles of right architecture are: alignment of authority with responsibility, delegation of authority to the people closest to front line, and maximizing cooperation.

If basing incentives on metrics that are out of employees' control is demoralizing, then holding them responsible for outcomes they had no power to change is even more so. It often takes only a single incident of disciplining an employee for outcomes determined by someone else in the organization to permanently ruin morale for his or her entire team. It behooves CEOs to make sure that each department and each business unit is designed to align authority with responsibility — and not just for line and middle managers, but also for responsible individual contributors.

No illustration of the delegation principle is more striking than the early successes the German army was able to achieve in WWII despite numerical and frequently material inferiority. Its Auftragstaktik doctrine was arguably its most effective weapon until the army was forced to abandon it under pressure from the top, leading to a series of disasters. Fundamentally, Auftragstaktik (literally "mission-type tactics," or Mission Command in US doctrine) means that subordinates at every level are assigned clear objectives, resources and time tables. Tactical leaders are expected to reach their objectives as they see fit, according to circumstances and their ingenuity. There is a direct application of this principle to enterprise architecture, as well as to the management approach which we will discuss in the next article. It is the managers and responsible contributors closest to the point of execution who are best positioned to see emerging problems before they are are developed fully and to take corrective action in good time. Their superiors' task is less to direct them in doing their jobs and more in clearing the way for them to act and securing the right resources when required, not forgetting of course to balance this support with accountability. Front-line people who feel that they are supported by their managers and top executives tend to be not only far happier, more productive and turn over less frequently, but also come up with more effective solutions more often than their counterparts in closely managed environments.

On the larger organizational scale, careful architecture of departments and business units to maximize cooperation and keep competition for resources from becoming destructive allows the resilient enterprise to better to focus its exec team's competitive spirits on external threats. Some conflicts can be engineered out, such as channel conflicts, but others are fuzzier in their nature. Built-in conflicts and divide-and-conquer tactics beloved of so many CEOs tend to destroy value without building anything more tangible than these CEOs' egos. This is not to say that success shouldn't be rewarded — it should, and executives who deliver the best results should get the resources to further their successes — but rewards should be measured, and methods for achieving these results shared among the exec team with collegiality. When executives are freed from competition with their peers for resources, power and access to the CEO, they become more ready to embrace and promulgate a supportive and collegial culture, as we will discuss next.

Right culture

If the art of management is about ensuring that organizations deliver on objectives, then the art of leadership is fostering a culture that makes the art of management effective. Perhaps the most difficult part of leadership is that there are so few real tools to help effect it, even if there are now emerging ways to take the temperature of the organization. Much has been written about corporate cultures: how they can be toxic or empowering, corrupting or uplifting, drive quality or slacking. A great deal of late has been written about fostering cultures of innovation and of productivity. I will not be addressing this well-trodden ground here, nor will get into the pros and cons of cult-like tribal cultures, such as those enjoyed by the likes of Apple, Palantir, or Zappos. Instead I will focus on guidelines for creating a culture of resilience.

It was probably W.E. Deming who first pointed out how corporate culture affects product quality and is in turn affected by he style of management. I will get into how his ideas are applicable for today's enterprise in the next article, but for now I can say that it the right culture that is the factor most responsible for creating enterprise resilience.

In order for aggressive delegation of authority on the Auftragstaktik principle to be made effective, the culture of taking responsibility for outcomes has to be extant. Such a culture must be fostered from the very top, by CEOs who create an environment of trust and collegiality among their immediate reports and see to it this their executives do likewise. The right corporate architecture plays a large role in making this possible — by eliminating high-stakes competition among top executives, which in turn enables them to see one another as resources rather than as rivals. Collegiality and mutual assistance can and should be incentivized for all employees, regardless of position, while empire-building and budding inter-funciton rivalries in turn severely discouraged.

Of course hiring people who exhibit the right attitude in the first place makes culture-building a great deal easier, but it is in the remit of the CEO to take the lead by avoiding playing favorites, practicing divide-and-conquer, and being as open in commutations to the enterprise as is legally permissible. It is up to the CEOs to reward team members for showing initiative, taking the lead in resolving issues, and championing and taking up new projects. It is up to the CEOs to foster openness and honesty in speaking truth to power, so that information can flow freely in both directions. It is also up to the CEOs to take responsibility for missteps, because no one will trust a leader who throws his followers under the bus.

None of this is to say that a healthy dose of competition is not a good admixture to the culture pie, but like all seasoning it must be used with a light hand. Stakes in internal competition might involve bragging rights, prizes that recipients would value out of proportion to their cost, and most importantly public appreciation from the highest levels for effort and results alike. Rewards would rarely involve promotions — lest contributors are promoted to the level of their incompetence — and almost never large raises or other stakes outside of the defined incentive plans such as might threaten to undermine collegiality.

Finally, it is important in culture-building to be sure to match the culture to the mission of the enterprise. Especially nowadays, when every business wants to be thought of as a tech company, CEOs would do well to guide their cultures in directions that build long-term shareholder value rather than simply promoting creativity or stoking their own egos.

In the next article we will get into the very controversial topic of the right management style and use of metrics and objectives.

Cross-posted to LinkedIn Pulse

Architecting the resilient enterprise, Part I

My last series of articles (Part I, Part II) demonstrated how difficult it is for CEOs, and even more so for boards, to know everything that happens in the trenches and to forestall negative surprises. The only repeatable way to counter the fog inherent in the management of complex enterprises is to bake in the agility to avoid many of the worst surprises and the resilience to recover from the unavoidable.  In this series I will explore how to build this agility and foster resilience.

With apologies to Gautama, the road to enterprise resilience lies in the noble five-fold path: the right leadership, the right incentives, the right architecture, the right culture, and the right management approach.

Right leadership

There is a Russian proverb that says, roughly "A spoiling fish starts rotting at the head." It is not that a great CEO will always ensure ultimate success, but a rotten CEO will oftentimes bring on disaster. As it happens, however, rotten CEOs are rarely replaced in time. Public company boards are notorious for too often backing management regardless of performance, and even many private owners are all too often reluctant to take this step until the business is in extremis.

While this is good news for incumbent CEOs, it is not necessarily so positive for shareholders, customers or employees. One reason that boards are so reliant on CEOs in place is that they have poor visibility into the enterprise, as I have discussed in a previous article. Yet understand they must, if they are to fulfill their duty of providing governance and oversight. For starters, they should trust top management say-so less and seek to understand what they are not being told, whether deliberately or because of CEOs' blinders. Directors would do well to spend time with middle managers, to mingle with employees, to look beyond slides and presentation numbers, to set measurable objectives and hold management to them.

In the occasion that a CEO is in fact replaced, boards would do well to select wisely and set up the new exec team for success from the beginning. In briefing their search agents, they would do well to mark that flashy stars are rarely top performers, that if a CEO looks too good to be true then she probably is, and that great CEOs don't necessarily come from the same space as the company's own sandbox.

What I said about boards and top managers applies as well to CEOs and their cabinets. A rotten head of marketing or engineering may well doom an otherwise well-managed company, while great ones often pull out some impressive rabbits when the circumstances warrant.

Right incentives

Once right management has been achieved, it is time to pay attention to the incentives it receives. There is a great deal of literature that objects to the use of incentives to maximize performance, and much of it is in fact on point; however, I will posit, if controversially, that all work is performed mainly because of the incentives - even if the incentive is the ability to feed one's family, to make a difference or to satisfy ambition. I will argue that while poorly designed incentives can do much harm, the right incentives are crucial to achieving positive results.

Boards in particular often struggle in designing the right incentive structures for their CEOs because of their limited visibility into the company's inner workings. If their and the management's incentives are not aligned then the CEO will have every reason to obfuscate emerging problems for as long as possible, in hopes that they will in time go away or become irrelevant. Only when the management feels like they are on the same side of the table as the board will they treat the board as their strategic resource and seek to work together to air and resolve emerging problems.

It is a truism in economics that the outcome one incentivizes is one received, and indeed incentives demonstrably matter at all levels in organizations. As important is it is to set the right ones, achieving this nirvana is by no means a simple matter. People are remarkably adept at finding unexpected ways to achieve metrics being measured, no matter legal or ethical considerations, often enough causing in the end considerable harm. CEOs would be well-served to give a great deal of thought to unintended consequences of their incentive plans, to adjust plans regularly, and to keep a sharp lookout for sharp practices - superior performers should be scrutinized closely even as they are being held up for emulation. This scrutiny need not come from the place of overt mistrust - after all, if they are to be emulated then their methods demand thorough understanding.

Just as important is setting the types of incentives that have the power to motivate the target employee population. For an extreme example, incentivizing salespeople purely with recognition and engineers solely with cash can both be counterproductive. Most companies use annual reviews and base pay adjustments as cornerstones of their incentive structures for middle managers and the rank and file, even though their effectiveness in producing desired results is as dismal as the effort to produce reviews often enough brings real work to stand-still. My recommendation for CEOs is to separate pay from incentives and to think of incentives in terms other than necessarily financial. I will explore this concept in greater depth in the a future article.

Finally, it is important to tie incentives to metrics that are in the power of the employees to directly influence. There is nothing so demoralizing as knowing that you will miss your bonus because you have had no opportunity to impact the metric that was incentivized. This is not to say that profit-sharing schemes are to be discouraged, to the contrary, they can be a valuable took to build cultural cohesion - but they should not be confused nor conflated with incentives.

In the next article series we will address the art of leadership in creating the right culture and enterprise architecture. 

Cross-posted to LinkedIn Pulse

The fog of management, Part II

In the last part of this series I have discussed how difficult it can be for managements and boards to detect dangerous developments before they are so far gone that they threaten to become disasters. In this part we can drill into some of the solutions to this common problem.

Marketplace trouble might be the easiest for executives to spot given all the tools we have to monitor the market, provided that we are looking for trouble's signs instead of congratulating ourselves on our own perspicacity. Extending sales cycles for enterprise-oriented companies are a big warning sign, as are flattening conversion rates for freemium product categories. Missing target sales numbers for more than a single period should ring alarm bells. The questions that are always asked when these signs of trouble show up are "why?" and "what could have been done to prevent the sales decline?" Preventing marketplace surprises is a capacious topic, worthy of a book-length treatment at the least. I will highlight a couple of the highest-value strategies which I found to be useful.

First and foremost, it is imperative to make the salesforce your strategic partner in the business. Too many companies have so much confidence in their product vision that they lose track of what their sales prospects are actually demanding. The salesforce is your eyes and ears into the market. Salespeople are the first to hear about problems with your product concept, feature set, competitiveness and pricing. If you fall into the thinking that their job is flogging whatever gets thrown over the wall to them by product teams, then you will be running blind until your sales begin to wither. What might sound to an untrained ear like mere sales-folk whingeing may in fact be actionable information. To maximize your effectiveness in the market, you might want to make sure that you attend lost-sale postmortems, as well as postmortems on sales that were close calls. When salespeople talk - listen, because in the end none of us are wiser than the market.

No less important than the salesforce is your competitive research, and I do not mean comparing spec sheets with those of the competition. It means understanding what your competitors are telling customers about you when you are up against them in a sale. It means getting insight into the competition's product pipeline that they are making public, semi-public, and what they keep internal. Interview their employees for open postings should they apply, have your proxies visit their trade show booths, and don't stint for competitive research consultants - every iota of information about competition is a finger in the levee which is always threatening to break.

Of course much of the demand issues can be prevented given sufficient market validation before the product vision is finalized. Given how quickly product cycles move in today's market, it is no longer possible to take many months to validate specs and feature sets, so we must take advantage of the agile development techniques to get the product in front of customers as early as is practical and iterate rapidly based on feedback. We simply do not have the luxury of waiting for them to come simply because we had built it.

Another area where managements are often blindsided by negative surprises is in product development efforts that suddenly head off into the weeds with blown deadlines and busted budgets in their wake. Again, the topic is too large for a short article to really cover, but I will mention a few signs of trouble that might help you detect this early.

Engineering managers know to break down projects into small and manageable tasks, so they can detect trouble relatively early. Executives, and boards even more so, are often loath to monitor development projects quite so minutely. Engineering managers, for their part, are understandably reluctant to air emerging problems early - mostly because they believe these can be repaired before they become disasters, even though they so often do. A solution I find to be useful is to set up incentives for product managers in such a way that their success depends on engineering results as much as it does on the PMs' own. This tends do a decent job of focusing PMs' minds on monitoring schedules and budgets and discourages them from forming common fronts with developers against the management.

In the next several articles I will discuss how boards and CEOs can architect their enterprises to be resistant to negative surprises and more nimble in navigating through the dangerous waters of their markets.

Cross-posted to LinkedIn Pulse