Every improvement is a change but not every change is an improvement

Lost in Space

Fundamentally, a transformation is a learning process – empirical and experiential. Making change upon change can get us lost in space, not knowing which way is up or down, left or right. Measurement is the only way to retain a handle on what’s real. Plan, do, check, act. Design a way to measure the impacts of change in terms of the desired results.

How can we know what to change?

Every company operates according to its policies. Those policies are encoded into the processes. Some policies are good – they make sense; some processes are effective and efficient enough. Some policies and processes are not so good. How can we know which ones to change? Do we go after the easiest ones? Or the cheapest ones? Or the ones people complain about the most? Perhaps we should just start again?

In knowledge working the constraints can be invisible. What we see is the tip of the iceberg. The bulk of the ‘berg, hidden beneath the surface, is really dictating what happens. It’s easy to assume, knowingly or not, that we work within an ordered system. “Danger Will Robinson!” Beware the retrospective coherence trap. For example, doing Scrum will not necessarily lead to the desired results. The world of software development and delivery is complex. How can we identify the weakest link in an invisible chain? Our approach to change needs to be scientific. Let’s collect hard data and analyze it, and verbalize our intuition and emotions as we rigorously test our assumptions. Then we can better understand the system and select where to intervene and make changes that will lead to improvements.

Change to what?

When we find a bonafide constraint what do we replace it with? What will the improved system look like? How will it feel? How will it behave? We’ve all experienced solutions that didn’t work, solutions looking for problems, and solutions that fixed the problem but also caused other problems. What does better look like? How will we know when we get there?

There’s a need to clearly show how the selected action leads to the elimination of the constraint; how the proposed solution solves the defined problem. Describe the desired future in a way that we can determine what we want, why we want it, and avoid unintended and undesired consequences that might result. And let’s measure the outcome (and impacts) of each change.

How to cause the change?

It’s easy to spend a lot of our time doing stuff. Then we get frustrated because we’re working so hard, doing so much, and improvement just isn’t happening. Our busy-ness isn’t taking care of business. We come up with solutions fast – arguably before we truly understand the problem. As Einstein said:

“If I had an hour to solve a problem I’d spend 55 minutes thinking about the problem and 5 minutes thinking about solutions.”

Let’s take the time to work through why we think a specific action will lead to a specific result. Moreover, it seems like we rarely stop to define, in a quantifiable way, the outcome we’re trying to achieve. By unambiguously defining problems or constraints, and the desired outcomes, we can systematically design and execute the steps to overcome the obstacles in between and recognise when our plan should be altered.

Stop and think. Then do

In an age where agility has quickly become the key to competitiveness, the demand for a change blueprint wrapped up in what’s being called an Agile Transformation is about as bogus as it gets. Business agility and true competitive edge lie in our ability to learn faster and generate deeper knowledge and to use that knowledge to inform purposeful action – deliberate and designed actions that solve clearly defined problems and produce unambiguous and valuable business outcomes.

There needs to be a big-picture frame for making small bets

What’s the point of doing a roadmap? It doesn’t help get rid of uncertainty (although some people behave like it does). There’s no way to be certain about any future outcome.

The act of describing desired future states in a roadmap identifies where we want to play and have impact. It provides a frame of focus that helps us figure out what we need to pay attention to and how we can get better. Within that frame we can identify options; we can continuously make small bets about the future and respond rapidly based on measurement of the outcomes and impact. We’re saying “this is what we think will happen.” Then we watch what actually happens. We observe any deviations from our expectations, we take appropriate action and, as early as possible, we update the roadmap and new bets based on the new information.

Without a roadmap and unambiguous, quantified measurements we have no way of knowing if what we’re doing is truly adding value, we won’t know what to watch for or how to make sense of the things that happen – we’ll be much slower to respond.

A meaningful roadmap with unambiguous, quantified measurements should raise the signal-to-noise ratio of any feedback from customers and business stakeholders. It can improve our odds of success.

Business agility requires financial agility

The calendar or fiscal year might be an appropriate period for reporting results to investors but is it an appropriate period for managing business? Strategic initiatives usually extend beyond the annual budget period and managers scrambling to meet arbitrary targets by the end of each period actually disrupts flow, drives further dysfunctional behavior, and likely damages long-term capability building.

Instead of negotiating numbers once a year and following a predetermined plan, why can’t financial planning be a continuous and inclusive investment process informed by open information systems that make truth visible and deploy relevant data to the right people at the right times? When decisions are made closer to the action, the information hasn’t decayed (or been tampered with by people in the middle to make it look better). According to Beyond Budgeting case studies, a significant benefit of managing without a predetermined plan or budget for the year ahead is that managers become more aware of the changing business environment, are better prepared to face different situations and are able to focus attention on responding to events in order to realize the most value. As a consequence, I can imagine more businesses being able to build the capability to respond to customers more quickly and produce better outcomes.

More entrepreneurial business capability

Does everyone in a company typically feel like they’re accountable for customer experiences and business outcomes? Are they committed to satisfying customers profitably? Is the responsibility for value-creating decisions distributed throughout the organization?

Responding to customer demand with high speed and low costs requires devolved and adaptive working so that expertise can quickly come together to cause delight. A person must feel free to respond to customer demand. Innovation and responsiveness doesn’t come from people when they’re confined to functional departments and restricted to predetermined plans. Imagine what would be possible in a culture where people are safe to challenge assumptions and risks, where they have time and space to think deeply about constraints and economics, and are free to make small bets across a set of options to prove the best course of action or investment to make.

“Purpose and principles, clearly understood and articulated, and commonly shared, are the genetic code of any healthy organization. To the degree that you hold purpose and principles in common among you, you can dispense with command and control. People will know how to behave in accordance with them, and they’ll do it in thousands of unimaginable, creative ways. The organization will become a vital, living set of beliefs.”

– Dee Hock, founder and former CEO of Visa

Why not devolve business strategy and responsibility for business performance to teams closer to customers and benefit from richer participation of people and more entrepreneurial business capabilities that are able to coordinate actions according to customer demand? There can be explicit principles and boundaries so people know what they can and cannot do.

More effective governance

Every implementation of governance I’ve seen has been a major source of impediments. Everyone subjected to it complains about it. Conventional governance is obsessed with productivity, resource utilization, and cost. When value isn’t clearly defined, isn’t well understood and isn’t quantified and measured, communication is reduced to time, scope, and cost: “Go faster. Deliver more. Cut costs.” I wonder if quality has almost become an ‘undiscussable’. People in business think they’re buying it and assume they’re getting it but have no way to test for it. A lot of people don’t hang around long enough to feel the pain of poor quality and appreciate economic consequences. Just because things were late last time, or came in over budget, or didn’t deliver on critical business objectives doesn’t mean the answer is more (of the same) governance!

Governance has to focus on continuous value creation for customers and stakeholders, including shareholders. It has to monitor portfolio performance through relative business performance indicators. Only when governance lives at the gemba can it truly know what’s going on and support local decision making. Such a governance framework provides strategic direction and guidelines to front-line people making decisions to create customer value consistent with company goals and challenges their key assumptions and risks prior to investing. It need interfere only when absolutely necessary. Largely people ought to be left to get on with things. Governance ought to be inquiry-by-exception “based on outliers from the patterns and trends that possibly reflect changes in customer behaviors.”

Open information systems that make truth visible

People on the front line making decisions about business strategy, customer needs and customer profitability need access to real-time, unadulterated financial and operational information. Their insights come from asking important questions, challenging strategic assumptions, and calling out the risks as and when they see them. A prerequisite is being safe. Everyone has to be trusted to live up to the principles and values expected of them. Beyond Budgeting talks about values such as integrity, openness, and fairness adding to the effectiveness of risk management.

While the finance department often feels like a dark overlord perpetuating misconceptions about software development (it’s nothing like manufacturing) it does sit on some very relevant measurements. An objective is continuous monitoring of existing initiatives by looking at their impact on business performance characteristics such as profitability and cash flow, among other things. Another objective is continuous re-evaluation, prioritization and investing. No more annual round of estimating and agreeing budgets, RAG reports and variance analysis. Instead? ‘Fast actuals’ deployed to the front line in real-time through a simple accounting system that’s always up-to-date. Rolling reviews of outcomes in line with trends connecting ‘fast actuals’ with ‘flash forecasts’ made quickly and only looking immediately ahead. More informed small and reversible strategic decisions. Cost is no longer driving everything but there is now a rolling system of cost management. Bring on fair finances and ethical reporting.

Business agility requires financial agility

Managing to a predicted future provides only the illusion of control. A discovery-driven approach that makes small bets builds competence in sketching future options that traditional budget-driven processes fail to see until it’s too late.

More control very rarely delivers success. Success requires responsiveness – the anticipation of possibilities, seeing options and responding effectively to events. Responsiveness requires liquidity. Business agility requires financial agility and operational flexibility.

Casino software development

We can’t reliably predict which ideas will work and which won’t so we’ve got to experiment to find out.

Big bets fail big

A feature specification or description is a solution hypothesis. When we build a feature and delay validating it with customers we’re making a bet that it’s “right”. What if we’re wrong? Building feature upon feature this way ups the ante until we find ourselves betting the budget on a big-bang release. When we do this we’re not only creating more inventory, we’re investing deeper and deeper, taking on more risk, and essentially making a bigger and bigger bet.Capital investments in IT projects are big bets made on the merits of business cases built on assumptions. Senior managers often have stronger psychological attachment to bigger projects because they’re assumed to have bigger payback over the long term. Ned Barnholt, HP Executive Vice President and former CEO of Agilent Technologies called this the “tyranny of large numbers”. People get carried away with the expectation of gains instead of what can afford to be lost. Unfortunately, the bigger the investment, the less likely it will be questioned. The business case gets treated as a statement of fact by those responsible for delivery when, really, a business case is also nothing more than a hypothesis.

More control doesn’t reduce the bet

There are some big assumptions being made in this approach, for example:

1. The requirements define the right solution.
2. All requirements must be delivered before any value can be realized (all or nothing).
3. If all requirements are delivered, the value will be realized.

Conventional governance and management practices attempt to optimize productivity. This actually does nothing to address the big risks in the above assumptions. There’s no way to reliably predict what will be valuable and what won’t. There’s more concern about maintaining control than delivering value. As John Seddon likes to say, “it’s about doing the wrong things righter.”

Can we deliver less without delivering too little?

Yep. By making smaller bets we can prove earlier what’s valuable and what’s not valuable. And we can determine what’s enough rather than just paying for everything. If we bet what we can afford to lose each time, we can pursue a set of options and get faster feedback to discover the best and right solution. We can focus on the user, their context, what they’re trying to achieve – the outcome they desire, rather than pursuing a single definition of a feature thought to be the solution users want.By making small bets we create multiple, repeating opportunities to test for value. We maintain a smaller overall investment while enabling massive flexibility to achieve business objectives. We build capability through learning about users. We fold innovation into delivery through creative discovery and experimentation.

Incremental capital and operational investments

If we were to take a product-oriented or business services view of the world, where end-to-end cross-functional IT capabilities were on the business front-line so to speak, then we could manage portfolios of products or business services rather than IT projects. Governance then faces the exciting opportunity to help business investors make investments that maximize business performance. Isn’t that more valuable? Isn’t that more meaningful? In this context, why not make smaller incremental capital and operational investments based on actual business measurements rather than on predictive annual budgeting and forecasting? To do this people need simplified accounting and real-time and relevant information. Beyond Budgeting talks about Fast Actuals and Flash Forecasts using moving averages and rolling monthly and quarterly reviews to inform continuous re-evaluation and prioritization.

At Energized Work, we’ve been using cash-basis accounting and value-oriented governance in and across product streams since we originally experimented with throughput accounting with a client in 2008. The types of measurements we take fall within the following categories:

• Individual product or business service cash flows.
• Overall portfolio performance.
• Risk exposure.
• Impending obsolescence.
• Cost of delay.

Basically, we place small bets across a portfolio and monitor for profitability, customer and stakeholder delight, operating risks, and staff morale. Looking at the data coming back, we gain insights that inform our governance and operating decisions. We can continue investing, making small bets to test for further value. We can stop capital investment early when enough value has been realized, and not waste money on features that won’t be used, while continuing operational investment for as long as the product or business service operates profitably with acceptable risks. We can stop investing in systems approaching their ‘sell-by date’. Today’s projects are tomorrow’s legacies. Imagine this – by sensing impending obsolescence, we can make letting something become a legacy be an explicit portfolio decision based on risk, rather than it just happening in the background. Or we can exit, shutting down anything that’s no longer profitable or adding value, and move the people onto other streams.

Decisions are bets. Understand the gamble

How long does it take for decisions to be tested in your company? Days? Weeks? Months? As Sean Blezard said, “Count the cost, understand the gamble.” We can afford to be more scientific. There are still no guarantees but we can be smarter with our money by making more informed decisions based on evidence. Making small bets allows us to discover new ideas and strategies through an emergent process. Small wins validate the direction. False starts and small mistakes give a signal to proceed in a different way. Making small bets doesn’t mean there’s no bold ambition. We just adapt as we go rather than follow a course set out at the start that may lead to failure.

Something Will McInnes said in his book Culture Shock nicely sums up small bets: “We’re no longer seeking ‘the single best decision for all time’. Instead, we’re free to make a whole series of the ‘best decision right now’. [..] We shift from ‘perfectly planned’ to ‘always learning’ in the face of uncertainty and constant change.”

(This post is based on one of the topics from Energized Work’s World Cafe event at the Agile Business Conference: Governance – Friend or Foe?)