1.

The embarrassment of complexity begins when we realize that old structures are no longer adequate and the new ones are not yet in place. Currently we are in a transition phase. The old never yields to the new in one precise moment in time and this is what makes transition phases exciting, risky – and sometimes embarrassing.

The sheer multiplication of networks of various kinds and the unprecedented density of interactions generated thereby has opened access to information and information sharing to a multitude of new users.

So has the spatial expansion of every type of activity around a rapidly globalizing world. And the flood of ever new technologies and the novel gadgets is proof that more can be done in less time.

As we joyfully engage in the benefits these developments bring, at times we also feel overwhelmed by a massive, unaddressable complexity that seems to come with them.

But neither technology is the cause of this feeling; nor globalization per se.  Doing more things in less time – the division of labour – was at core of industrial revolution and has spurred management ever since.

The truth is that complex systems are beset and energized by a phenomenon called non-linear dynamics. In other words, what produces complexity is not so much the presence of many direct cause-effect links which operate with subtlety versus precision, but rather the presence of indirect, non-linear relationships between the variables, parts, and dimensions of the whole. What make complex systems so complex, therefore, are their multiple feedback loops and their indirect cause-effect relations which, moreover, play out at different speeds and on different time scales.

These are the reasons why we arrive at what I am calling “the embarrassment of complexity” – when it dawns on us that the categories we normally use to neatly separate issues or problems fall far short of corresponding to the real world, with all its non-linear dynamical inter-linkages.

Worse, managers have to act as if they could look at the whole, when what they see is only a part. They have to act as if in command of the kind of integrative thinking that cuts across the separated issues.

So how do we cope with this increasing complexity? And how to embrace it?

Managers have developed models and mechanisms to reduce it. The fewer variables there are, the more direct the cause-effect relationships, the easier it becomes to make decisions. Thus, complexity reduction is a familiar way for any organization to cope with complexity.

But what, if these models and mechanisms no longer seem to suffice, as more and more issues escape any direct cause-effect link and, as hinted above, follow the unpredictable trajectories of non-linear dynamics?

And what, if we begin to recognize something that has made our embarrassment much more acute in the past decade. We have come to rely much – too much? – on instruments and tools that a dynamic information and communication technology sector, drawing on all the research that preceded and accompanies it, has bestowed on us. Computers and the modeling that can now be done through them have become indispensable for the financial sector and the real economy; for the military; for moving people, goods, and ideas across the globe. They permit us to collect, process, store, and transform the new precious raw material of our age: information.

But there is an indisputable downside to this growing digital reliance on what I call numerical complexity reduction: numbers, indicators and algorithms take on a life of their own. They acquire a Eigendynamik that nobody any more can control. And they have an additional, unintended consequence. The more numbers are introduced, the lower becomes the priority placed on training, cultivating, and rewarding independent human judgment. Yet, this is what must be retained if we hope to master the tools we have created instead of being mastered by them.

When decision-support tools become too powerful and ubiquitous, when continuous monitoring, benchmarking, ranking, and other performance technologies allow governance by numbers to take over, the human faculty of independent judgment takes a backseat. Don’t get me wrong: of course, indicators, curves, algorithms, and the analyses based on them are vital. But all must still be interpreted. Figures speak for themselves only to those who understand how they have been constructed and in which context they are to be used.

Faced with the densely compressed information that numbers, algorithms, and indicators offer, managers increasingly tend to rely on what they suggest as action to be taken – sometimes, as the financial crisis so dramatically demonstrated, to our great peril. Time-starved administrators, policymakers, and decision-makers grow less confident to challenge them. Even if they know all the caveats, flaws, and imperfections of these tools, they are overwhelmed by their apparent objectivity, availability, and time-saving utility.

Indeed, given this plethora of benefits, human subjective judgment begins to look like a quaint, if not obsolete, survival trait of human evolution.

And it’s no wonder, then, that indicators and related numerical instruments take on a life of their own. Their promised utility seems beyond doubt: they do reduce complexity. Their power stems from their ability to make people perform in the way in which the goals of their performance have been set.

2.

There are positive sides to complexity. It allows us to glimpse connections that were hidden before our eyes – the famous wing of the butterfly that can cause a tornado brought it home to us. Some of these previously hidden interlinkages contain new opportunities of insights and knowledge waiting to be translated into action.

Also, the embarrassment of complexity should make us more humble. It should cautions us to be much more careful regarding the consequences of our actions and decisions. It shows us the limits of what we can predict, and the power of unintended consequences.

Where does this leave the well-honed capability to plan and to steer, if the future is prey to contingencies that we are not able to foresee? One of the unintended consequences is that, paradoxically, complexity makes it more difficult to attribute both credit and blame to individuals as well as to collectives.

Credit – as more and more creativity and performance is the result of genuinely shared practices and ideas.  The younger generation is a generation of sharers. If self-organizing processes, bottom-up and emerging, unleash creative spurts at an unprecedented rate – what are the mechanism for assigning credit to individuals who continue to be motivated by receiving recognition, if the ultimate product of  collective creativity is the genuine results of fertile collaboration?

Blame – as is becomes more difficult to locate where and which mistakes have been made. Numerical complexity reduction allows to hide behind the complexity of numbers. If hierarchies are flat and no visible strict line of command is any more in sight, who is responsible if something goes wrong? And all too often, procedures and rules take precedence over the outcomes they are set up to achieve.

In the 1990ies, the management literature was full of exhortations like ‚Make more mistakes and make them faster’ as the best way forward to learn from mistakes.

Learning from mistakes that have been made is an arduous and sometimes long-term process with a complexity of its own. This is even more evident in times of the current financial and economic crisis. Mistakes, indeed grave mistakes, were made – but not by us. As social psychologists Carol Tavris and Elliot Aronson show in their book with the same title, we are all prone to solve the tension generated by cognitive dissonance through self-justification and blaming others. We can blame the economists, who can blame politicians who did not understand the fine points of their analysis; everyone can blame the deregulated forces of globalization; or China, Germany or the US Fed, or you name it.

Probably, we could also all agree that the system of world finance and its relation to the real economy has become too complex for anyone to manage. But who will take responsibility and for what? Who is willing to stand up and to admit that mistakes have been made – by us?

3.

Can the embarrassment of complexity lead to the emergence of new ethos adapted to and capable of coping with complexity?

Such an ethos would be based on the acknowledgement that complexity requires integrative thinking, the ability to see the world, a problem or a challenge from different perspectives.

As each perspective has an epistemic claim of its own, thinking them through requires to acknowledge their entangled relationship, even if we are far from understanding it. We are dealing with a system which at best offers only a ‚crude look at the whole’ (Murray Gell-Mann). Reaching out across different domains and adopting different perspectives to achieve some kind of synthesis, synergy, perhaps even some kind of synchronicity in the ways we perceive, analyze and interpret the world – note that the term ‚syn’ in these words comes from the Greek  for ‚together’ – we begin to realize that we are part of dynamic complex systems. Any such system is open and evolving.

Open – towards an unknown and unpredictable future which is not deterministic but full of potential that we are far from grasping. Evolving – in the sense of diversity and variation continuously giving rise to new configurations which are selected and transformed depending on the specific features and contingencies of the fitness landscape in which this process occurs.

‚All the progress of human civilization’ writes cosmologist Lee Smolin, ‚from the invention of the first tools to our nascent quantum technologies, is the result of the disciplined application of the imagination’.

So, let us apply our collective and individual imagination. Numerical complexity reduction alone will not suffice to cope with the increasing complexity. It has unintended consequences. It leads to a certain kind of conformity in thinking and in how people see and interpret the world. The ability to induce independent human judgment in young minds becomes ever rarer in our educational systems. Overwhelmed by the increasing reliance on computational instruments, our faculties to discern, to rise critical doubts, to judge between alternative interpretations, are devalued and they deteriorate.

Let me be clear: No human group can survive, let alone effectively cooperate, without being able to develop a shared outlook on the world which is the precondition for acting together. But it is also the case that social groups thrive by making room for plurality, dissenting voices, and different perspectives. This is why management continues to advocate diversity as integral part of any successful organization. This is why what I call competent rebels are needed everywhere: individuals who are able to combine the necessary professional capabilities with the fresh, challenging outlook required for progress. The code of an organization, remarks James March, can learn only from those who deviate from the code.

Confronted with the embarrassment of complexity and faced with the challenge of overcoming inter-domain complexity, let us remember that integrative thinking does not spring out of models, indicators, or computer graphs, unless we put it into them. It requires the ability to combine parts of the whole, however crudely, into an approximation of the look at the whole which we will never see entirely. It requires us to draw on the faculty of human judgment to focus on the smaller picture in order to comprehend the larger one. It requires a sense of being part of the whole. Perhaps, this is the beginning of an ethos of how to manage complexity.

Literature:

Lee Smolin (2013) Time Reborn. From the Crisis in Physics to the Future of the Universe. Boston-New York: Houghton Mifflin Harcourt.

Carol Tavris and Elliot Aronson (2007) Mistakes Were Made (but not by me). Why We Justify Foolish Beliefs, Bad Decisions, and Hurtful Acts. New York: Houghton Mifflin Harcourt Publishing Company.

AUTHOR:

Helga Nowotny is Professor emerita of Social Studies of Science, ETH Zurich and a founding member of the European Research Council. In 2007 she was elected ERC Vice President and in March 2010 succeeded Fotis Kafatos as President of the ERC. She holds a Ph.D. in Sociology from Columbia University, NY. and a doctorate in jurisprudence from the University of Vienna. Her current host institution is the Vienna Science and Technology Fund (WWTF). Helga Nowotny is a member of the University Council of the Ludwig Maximilians University Munich and member of many other international Advisory Boards and selection committees. From 2005 – June 2011 she was Chair of the Scientific Advisory Board of the University of Vienna. She is a Foreign member of the Royal Swedish Academy of Sciences and long standing member the Academia Europaea and recipient of several prizes and awards.

Helga Nowotny has published more than 300 articles in scientific journals. Her latest book publications include Naked Genes, Reinventing the human in the molecular age, (with Giuseppe Testa), MIT Press, 2011, Insatiable Curiosity, Innovation in a Fragile Future, MIT Press, 2008, and Cultures of Technology and the Quest for Innovation (ed.), New York and London, 2006.

The complex and ambiguous conditions of this century are unlikely to respond to the old school of leadership. Old norms were honed in a different environment – one in which it was perhaps easier to view one position as right and the other wrong, easier to predict, to forecast, to control.  But despite today’s complexities, many notions of leadership remain deeply embedded in the conditions and assumptions of the last century.

What perspectives and skills are needed to lead organizations today?  How do we help future leaders develop?

The answers require recognition of a shift that is occurring at three levels:  in the nature of work – role of leaders – as well as in the process of development itself.

All three of these spheres are moving from a requirement to perform to an external standard to one of tapping into an internal reservoir – from executing against plan to creating in the midst of complexity.

Consider first the nature of work.

We come from a world in which there was a best practice, an optimum way of getting the work done.  Leaders needed to define that path and communicate it clearly, to cascade the message. Leaders helped individuals understand the rules and gain the skills necessary to execute at maximum effectiveness.  Through standardized execution and performance to plan, we achieved scale, quality, and cost.

Today, much of our work depends upon discovery – our ability to form insight, to make connections, to sense and understand emerging needs.  There is no explicit path, only a goal.  As individuals, we are challenged to invent as we go – to develop new approaches – to interpret and respond complex signals.

In this new work, the role of a leader shifts.

In the past a leader needed to articulate the course ahead and hold individual employees responsible for completing quality work on time. This was done through various forms of direction and measurements, and assessed execution against standards at annual performance reviews.

Now individuals hold themselves accountable for their part on the project, and communicate with other team members to ensure work is done well and delivered in the right timeframe.  The role of a leader becomes contextual – creating the environment in which this work can best be performed – assembling the conditions for success.

Through my research, I have defined four key roles of a contextual leader in complex times:

• Building the organization’s collaborative capacity – ‘wiring’ the organization, literally and figuratively, in ways that allow the easy flow of information and ideas throughout
• Disrupting with diversity – insuring that the organization has a continual infusion of new perspectives – that it’s people are immersed in, rather than protected from, the complexities of today’s world – and that there is an appreciation of the value of diverse points of view
• Asking great questions – framing the challenges facing the business in ways that are evocative and inspiring – ways that invite the broad organization to invest in creating innovative solutions
• Conveying meaning required to tap discretionary effort – understanding what makes being part of this organization special, why people choose to work here, and what we must provide in return to maintain their commitment and passion for the work at hand

How do we help individuals develop the skills necessary to provide contextual leadership?  What are the implications for leadership development?

Consider the difference between coaching an athlete to compete in a well-understood discipline – let’s imagine a swimmer — versus training an elite fighting force to embark on an uncertain mission.

In the first, one can focus on fine-tuning the mechanics of execution.  Of course, there are opportunities for continually refining the approaches, but a primary role of the trainer is to help the individual execute each stroke to the highest known standard.  However, in the second, the coach must equip individuals with a broad set of skills and knowledge, a reservoir to draw from depending on the specific demands of the complex environment they find.

Today we are developing leaders for a workforce that will not execute against a well-understood set of routines, but one that must have an inner reservoir of insight, perspectives and understanding to adapt as the situation requires.

In the past, important lessons were ones related to approaches and metrics: questions of what, when, how, and how much.

Now, the most significant development opportunities are those designed to allow participants to discover inner capabilities and build resources to draw upon: why and who.

Our development efforts must focus on helping future leaders:

• Build their own network and appreciate the role connections play in today’s world
• Understand their own biases – and appreciate the value of diverse points of view
• Create paradigms for shaping questions, for making sense out of seemingly overwhelming and disparate data
• Connect with their authentic selves – what they care about, what they value – what they want to share with others.

How do we help individuals develop these skills?  Approaches include:

• Provide talented individuals with the opportunity to form strong, trust-based relationships with others throughout your organization.  Don’t pit peers against each other.  Make extensive use of project-based work, encouraging teams to form and re-form across the organization.

• Expose individuals to the varying logic and legitimacy diverse individuals.  Help them understand how history has shaped our ideas of ‘normal.’  Insure that they develop insight into their own biases.

• Help them develop a ‘tool box’ of frameworks for sense making.  Create exercises, perhaps using computer simulations, to put them at the helm of organizations in complex circumstances.  Allow them to experience how their daily decisions can affect the business as a whole.

• Give them time and guidance to discover their authentic selves.  Move out of the classroom.  For example, send groups to developing countries to get them out of their comfort zone.

Development, like leadership, must evolve from helping individuals conform to a pre-set standard – to providing experiences that help participants understand more deeply who they are as individuals, what they care most about, and ways to use their strengths to create a positive context for work in the organizations they lead.

Tamara J. Erickson is a McKinsey Award-winning author, a leading expert on generations in the workplace, and a widely-respected expert on collaboration and innovation, the changing workforce, and the nature of work in intelligent organizations. She has three-times been named one of the 50 most influential living management thinkers in the world by Thinkers50, the global ranking of business thinkers created by Des Dearlove and Stuart Crainer.  She has written a trilogy of books on how individuals in specific generations can excel in today’s workplace:  Retire Retirement, What’s Next, Gen X? and Plugged In, and is working on a fourth book for the generation under 17 today. Tammy has authored or co-authored numerous Harvard Business Review articles and the book Workforce Crisis: How to Beat the Coming Shortage of Skills and Talent. Erickson holds a BA degree in Biological Sciences from the University of Chicago and an MBA from the Harvard Graduate School of Business Administration and has served on the Board of Directors of two Fortune 500 corporations.  Tammy is the Founder and CEO of Tammy Erickson Associates, a firm dedicated to helping clients build intelligent organizations.

Before the Industrial Revolution reliability wasn’t a granted thing. The whole concept of craftsmanship was intrinsically tied to the idea that the quality of the output varied widely with each individual. This lack of uniform standards meant that the benefits of scale economies were out of reach. The big invention fostered by the Industrial Revolution was reliability (arguably at the expense of craftsmanship). Process and procedures become more important than human skill, and indeed people were expected to perform as reliably as machines. This was possible as long as the output was predominantly physical in nature. So one could venture to guess that the biggest “unseen” output of the world in the last 100 years is standards, procedures and processes.

But as the rate of technology innovation and insertion is increasing so is complexity. Picture just one example: two technologies produced by two vendors have each very well defined “how to” procedures. However since the two technologies belong to two different parent companies, there isn’t someone out there worrying about procedures managing the possible interaction. Now scale the argument by a hundred fold and the number of possible interactions increases exponentially. Even if we decided to institute a body whose sole purpose is to create procedures to manage the interaction of various technologies, there wouldn’t be enough time and resources to tackle this endeavor. And so, the same procedures that have served us so well in the Industrial and Knowledge Economies, will fall short in helping us with the complexities of the Conceptual Economy.

Here’s where resilience comes into play. Resilience brings back the “non-reliable” (i.e. adaptive) character of human intelligence. What was seen in the Industrial Revolution as a fallacy of humans, improvisation, will likely make a forceful comeback. Consulting companies have long used jazz-bands and symphony orchestras to advertise performance. But there was a clear disconnect between pictures and words: performance really is more closely related to reliability than complexity. Now resilience works in a complex world precisely because it expects the human to improvise in order to cover the gap between the performance space covered by procedures and the larger space of possibilities yielded by unforeseen interactions.

This brings me to the mechanisms of resilience. I’ve already alluded to the adaptive mechanism that relies on the unique human ability to improvise. There is also a second, structural mechanism of resilience. This structural mechanism provides the build-in buffers within which improvisation can safely happen without degrading the functional coherence of the larger system. In the jazz-band analogy, the drum beat provides the structure within which solo instruments can improvise. And so I strongly believe the world will again come to rely on craftsmanship. I am however unsure as to how we will get there; for example, I am still unclear as to how popular concepts like crowd-sourcing score against the resilience mechanisms criteria I have just reviewed.

Organizations around the globe in all sectors continue a trend of increasing size and complexity that began over 100 years ago with the business strategies of the likes of Carnegie and Rockefeller. New and emerging technologies for communication and data sharing have accelerated this process in recent decades. We view this process as a natural and inevitable occurrence due, if for no other reason, to simple economics. Expenses will rise through time in many ways that management cannot prevent no matter how much they try. Those pesky employees always seem to want and expect raises, healthcare expenses increase, rents go up every year according to contracts, governments seem to want a greater piece of the action, and the list goes on and on. If top line revenues remain constant and expenses increase due to any or all of these sources the squeeze point becomes the bottom line. These are simple economic realities which force executives to constantly look for ways to increase the top line and keep their jobs.

There are, of course, any number of ways to increase the top line some of which include expanding market share in current markets, expanding into new markets, and introducing new products or services using an almost endless list of strategies. This is inevitable yet many, if not most, executives continue running very large enterprises using management techniques and structures developed in an industrial age which is very different from the rapidly changing, complex, business environment of the 21st Century. Argyris and Schon pointed out that the management challenges in business where there is little or very slow change is very different from those in uncertain environments. We would suggest that it would be difficult today to identify ANY businesses not in uncertain environments. If increasing complexity is a natural and unavoidable condition and that uncertainty and rapid change influence virtually every organization then what do we know for sure?

What we do know is that we don’t know what opportunities or threats will emerge or what the best way to take advantages of opportunities or respond to threats will be. We also know that whatever course of action is decided the decision must be made quickly and execution must be swift and decisive. Additionally, because of the complexity of organizations effective decision-making by one, autocratic, individual is likely a formula for failure. We also know that the overwhelming body of knowledge within an organization exists in the minds and experiences of people, particularly knowledge workers [Link 1].

The Borg – Ultimate Knowledge Collective

The “Star Trek, Next Generation” TV series introduced the ultimate evil, the Borg. The Borg society consisted of millions of individuals who were all connected mentally through a vast neural network so that the experiences of any single individual were immediately shared with the entire collective. The result was that with the power of millions of minds sensing then working on a problem, solutions were developed very quickly allowing the Borg to adapt rapidly to any threat that the intrepid crew of the Enterprise dreamed up. The ability to sense, evaluate, implement, and adapt to threats faster than our heroes made them nearly invincible. Ultimately, our heroes defeated the Borg by introducing a virus into their network disrupting their ability to sense individual experiences and apply the collective knowledge of millions of individuals to find solutions. We suggest that the most effective organizations manage complexity and uncertainty by accessing the collective knowledge of all individuals through social networks connecting a performance triangle of leadership, systems, and culture of the organization.

Viruses Disrupt the Performance Triangle

People, through collaboration, purpose, and relationships connect a performance triangle of leadership, systems, and culture and drive the organizations ability to effectively manage complex structures in rapidly changing situations. The triangle model [Link 2] emerged over a 10-year period from information gathered from over 100 business case studies involving organizations in different industries throughout the world. Statistical analysis of the results of a diagnostic survey conducted with 50 of these organizations between 2006 and 2011 established the validity of the performance triangle model and provided deep insights into the potential for dealing with the growing complexity of organizations and the barriers that keep employees from using and sharing their knowledge. The research indicated that viruses disrupt or inhibit that flow of knowledge among people that degrade the ability of the organization to sense what is happening and tap into the collective knowledge base. These viruses are insidious because they are typically unseen and undetected because they exist in the minds of individuals or groups of individuals on a mostly subconscious level. We have sat in countless meetings and observed the highest ranking individual dominate the idea pool while all others simple attend. In many organizations, we have listened closely to talk in the hallway and other places, away from earshot, to see how people distrust management and each other therefore they are unwilling to share what they know. These would be two examples of organizational viruses but the list is endless and cannot be observed without looking and listening closely through an objective electron microscope. We all know that successful managers advance within an organization because they fit in and promote the values, beliefs, and assumptions of the organization that made it successful. These highly successful managers are unlikely to detect disruptive viruses because they are themselves infected. Some successful managers observe the outward signs of these viruses and a few are able to detect viruses but truly rare are those leaders who can remain objective enough to go further and actually do something to eliminate the viruses.

Get Rid of those Nasty Viruses

After years of stalling growth, the new CEO of high-tech firm diagnosed his performance triangle to discover that the organization had inadvertently introduced viruses. Well-intentioned but flawed leadership introduced formal routines and processes that had the effect of disrupting the flow of knowledge and essentially apply brakes to the company’s growth. The systems formalities have names such as TQM, extensive process orientation, request an approval forms, and scorecards that required frequent updates. When organizations grow fast, most entrepreneurs install a leadership team and introduce professional tools and routines to cope with the growing complexity. However, much of these instruments added to the complexity with managers hiding behind processes rather than interact with people to collaborate and use their collective knowledge. “We follow rules rather than to communicate and interact” was the key realization from a diagnostic workshop with the new CEO. The cleanup was simple. He decided with his management team to rework their management system and retool the box with the perspective of (1) supporting the exchange of knowledge of their well-trained staff and (2) relating them to collaborate rather than to engage in well-intended but cumbersome routines. By simply detecting the viruses and cleaning up an infected bureaucracy, the organization returned to its growth path.

What happens if you don’t – deal with complexity by tapping into the vast reservoir of your employee’s knowledge? As the CEO of a regional utility firm confirmed, viruses creep slowly into the operating system of your firm. Unwillingly and unknowingly, they divert your attention from what truly matters and use up time that is not available to tackle the real challenges. The call for help came on a Saturday morning from his office. The first visit revealed a desk with folders full of pending issues, a closed door to his office assistant, dead silence on the executive floor during prime hours, and decisions that always migrated to the top! The diagnostic confirmed our gut-feel: tight managerial performance routines, detailed Management by Objectives tools, stifling bureaucracy, and closed-door conversations prevented any free flow of knowledge, kept employees within tight boundaries, and prevented creativity. Combined with the ongoing deregulation of the industry, the CEO faced a managerial situation that required an instant fix – on behaviors and its guiding managerial systems.

Conclusion – Become Borg-like

So, one key to effectively navigating a complex organization that is constantly becoming more and more complex in an ever changing world of uncertainty is to become more Borg-like. Nurturing neural networks to facilitate the flow of knowledge throughout the organization comprised of many individuals becomes essential for effective sense-making and to get critical information to the right people at the right time. Successful 21st Century companies will develop structures very different from industrial age command and control designs that emphasize free flow of knowledge throughout the organization. Doing this, however, requires recognition of infecting viruses that block collaboration, blur common purpose, and destroy productive relationships among people that degrade effectiveness to managing complexity. Firms with Borg-like knowledge networks, free or with reduced viruses will survive and prosper while those that cannot will fail due to the weight of their own complexity and constant threats from an uncertain environment that, like Star Fleet, will never give up and will always find a new approach to try.

About the Authors

Dr. Herb Nold, Professor of Business Administration, Polk State College, Florida, USA. Winner of the Emerald Literati Network 2013 Award for Excellence for ‘Linking Knowledge Processes with Firm Performance: Organizational Culture’ in Journal of Intellectual Capital and the 2013 International Award for Excellence for ‘Using Knowledge Processes to Improve Performance and Promote Change’ in the International Journal of Knowledge Culture, and Change Management

Lukas Michel, MD of AgilityINsights l Sphere Advisors AG, Switzerland. Author of “The Performance Triangle” and diagnostic mentor to management teams worldwide.

[Link 1: Linking knowledge processes with firm performance: organizational culture. http://www.emeraldinsight.com/journals.htm?show=abstract&articleid=17010190 ]

[Link 2: The Performance Triangle: A Diagnostic Tool to Help Leaders Translate Knowledge into Action for Higher Agility: http://ijmoc.cgpublisher.com/product/pub.258/prod.16 ]

L. Michel, “THE PERFORMANCE TRIANGLE: Diagnostic Mentoring to Manage Organizations and People for Superior Performance in Turbulent Times, LID Publishing, London, September 2013.

It goes without saying that big companies are complex. And it is also pretty obvious that their complexity is a double-edged sword. Companies are complex by design because it allows them to do difficult things. IBM has a multi-dimensions matrix structure so that it can provide coordinated services to its clients. Airbus has a complex process for managing the thousands of suppliers who contribute to the manufacturing of the A380.

But complexity has a dark side as well, and companies like JP Morgan, IBM and Airbus often find themselves struggling to avoid the negative side-effects of their complex structures. These forms of “unintended” complexity manifest themselves in many ways – from inefficient systems and unclear accountabilities, to alienated and confused employees.

So what is a leader to do when faced with a highly complex organisation and a nagging concern that the creeping costs of complexity are starting to outweigh the benefits?

Much of the advice out there is about simplifying things – delayering, decentralising, streamlining product lines, creating stronger processes for ensuring alignment, and so on. But this advice has a couple of problems. One is that simplification often ends up reducing the costs and benefits of complexity, so it has to be done judiciously. I have written about this elsewhere.

But perhaps the bigger problem is this advice is all offered with the mentality of an architect or engineer. It assumes that Jamie Dimon was the architect of JP Morgan’s complexity, and that he, by the same token, can undo that complexity through some sort of re-engineering process.

Unfortunately, organisational complexity is, in fact, more complex than that. To some extent, organisations are indeed engineered systems –we have boxes and arrows, and accountabilities and KPIs. But organisations are also social systems where people act and interact in somewhat unpredictable ways. If you try to manage complexity with an engineer’s mindset, you aren’t going to get it quite right.

I have been puzzling over complexity in organisations for a while now, and I reckon there are three processes underway in organisations that collectively determine the level of actual complexity as experienced by people in the organisation.

1. There is a design process –the allocation of roles and responsibilities through some sort of top-down master plan. We all know how this works.

2. There is an emergent process – a bottom-up form of spontaneous interaction between well-intentioned individuals, also known as self-organising. This has become very popular in the field of management, in large part because it draws on insights from the world of nature, such as the seemingly-spontaneous order that is exhibited by migrating geese and ant colonies. Under the right conditions, it seems, individual employees will come together to create effective coordinated action. The role of the leader is therefore to foster “emergent” order among employees without falling into the trap of over-engineering it.

3. Finally, there is an entropic process – the gradual trending of an organisational system towards disorder. This is where it gets a bit tricky. The disciples of self-organising often note that companies are “open systems” that exchange resources with the outside world, and this external source of energy is what helps to renew and refresh them. But the reality is that most companies are only semi-open. In fact, many large companies I know are actually pretty closed to outside influences. And if this is the case, the second law of thermodynamics comes into effect, namely that a closed system will gradually move towards a state of maximum disorder (i.e. entropy).

This may sound like gobbledegook to some readers, so let me restate the point in simple language: as organisations grow larger, they become insular and complacent. People focus more on avoiding mistakes and securing their own positions than worrying about what customers care about. Inefficiencies and duplications creep in. Employees become detached and disengaged. The organisation becomes aimless and inert. This is what I mean by entropy.

The trouble is, all three processes are underway at the same time. While top executives are struggling to impose structure through their top-down designs, and while well-intentioned junior people are trying to create emergent order through their own initiatives, there are also invisible but powerful forces pushing the other way. The result is often that everyone is running very fast just to stand still.

So let’s return to the leader’s challenge. If these three processes are all underway, to varying degrees, in large organisations, what should the leader do? Well, sometimes, a sharply-focused and “designed” change works well, for example, pushing accountability into the hands of certain individuals who are much closer to the customer.

But more and more the leader’s job is to manage the social forces in the organisation. And in the light of this blog, it should be clear that this effort can take two very different forms:

1. Keeping entropy at bay. This is the equivalent of tidying your teenager’s room. It involves periodically taking out layers of management, getting rid of old bureaucratic processes that are no longer fit for purpose, or replacing the old IT system. It is thankless work, and doesn’t appear to add any value, but it is necessary.

2. Inspiring emergent action. This is the equivalent of giving a bunch of bored teenagers a bat and ball to play with. It is about providing employees with a clear and compelling reason to work together to achieve some sort of worthwhile objective. It isn’t easy to do, but when it works out the rewards are enormous.

And here is the underlying conceptual point. The more open the organisation is to external sources of energy, the easier it is to harness the forces of emergence rather than entropy. What does this mean in practice? Things like refreshing your management team with outside hires, circulating employees, making people explicitly accountable to external stakeholders, collaborating with suppliers and partners, and conducting experiments in “open innovation”.

A lot of these are initiatives companies are trying to put in place anyway, but hopefully by framing them in terms of the battle between emergence and entropy, their salience becomes even clearer.

While the process of design was not codified until the 1960’s through the work of Herbert Simon and others, the act of design is as old as humanity. Each and every stone-age axe was designed. Carefully honed to meet the specific needs of the maker and his immediate community. Jumping forward several thousand years, it was the industrial revolution that created the stage for the emergence of the professional practice of design as we perceive it today. Artists, craftsmen and philosophers such as William Morris and John Ruskin responded to the explosion of mass manufacturing with its attendant poor quality and ‘bad taste’. They argued that society needed designers to mediate between the needs and desires of people and the inherent inhumanity of industrial technology. Morris is credited with creating one of the first professional design practices with the foundation of Morris and Company in 1861. Over the succeeding 150 years design proliferated to the point where, by the end of the twentieth century, it touched every aspect of life in modern industrial society. Designers shape the products we use, the services we experience, the cities we live in, the software we immerse ourselves in, the brands we consume from and even the organizations we work in.

As time has gone by the complexity of the systems designers touch has increased considerably and our expectations of the quality of those experiences constantly rises. We now expect using an automobile to be as satisfying and seamless as owning a luxury purse or well made piece of clothing. Airlines strive, with variable success, to make flying as delightful as listening to a favorite piece of music on iTunes. City planners and urban designers have long strived to make cities as ‘fit for purpose’ as the best industrial products. Yet, as we interact with these more complex systems that have, in theory, been designed to meet our needs our experiences so often range from disappointment to outright dismay.

To understand why we need to go back to that stone-age proto-designer crafting his axe. He has probably made countless axe heads and spear points in his career from apprentice tool maker to master craftsman. He knows every aspect of the material and can predict with high certainty the outcome of every design decision he makes as he strikes the piece of flint with his granite hammer-stone. Because the design is simple he can predict the outcome and therefore shape it with high degrees of control.

This is exactly how most designers think and work today even though their task maybe infinitely more complex. This is what I think of as the Newtonian model of design. Just like Newton’s laws of motion that can predict the a future state of a system based on knowledge of the current state, so designers attempt to predict and control the future state of an experience. The tool with which the designer attempts to exert that control is the blueprint. The specific description of the design that determines, often with little flexibility, exactly how the design will be executed.

Unfortunately, as with Newton’s laws, these predictions go awry when they are applied to all but the simplest situations. Buildings are designed that do not anticipate changing modes of use. Software applications are designed that do not account for the variations in context and expertise of users. Products are designed with no account toward the negative impacts they have on precious natural systems. Designers are stuck with an approach that seems to be incapable of facing the complexity of the challenges being posed today.

However, there are alternatives. In science we have migrated from mindsets largely dominated by the physics of Newton to ones guided by an equally influential scientist who lived just 150 years later, Charles Darwin. We see the principles of evolutionary biology being applied across multiple fields of science, often underpinning our most important technologies ranging from personalized medicine to the internet. I believe the same can be true of design. Open ended, emergent, evolutionary approaches to the design of complex systems can result in more robust and useful outcomes and we are seeing evidence of this in some of today’s most successful and exciting innovations.

The democratization of design via platforms such as Kickstarter, Etsy, Pinterest and Open IDEO is allowing thousands of new designs to be funded, designed, shared and sold more quickly and cheaply than previously possible. Design is being put into the hands of users so that they can respond to local needs in ways centrally operating designers can never do. 3D printing is even allowing those same users to manufacture for themselves. Technologies such as genetic algorithms allow solutions to evolve rapidly in response to their environment while designers are learning how to code behaviors into both humans and machines. Coding is an alternative to the blueprint as the principle method by which designers act on the world. Codes can be based on simple rules and can act in relatively simple ways and yet have large scale, emergent and responsive outcomes. In other words it is through designing via code that designers can bring the skills of the stone-age axe maker to bear on the complex systems of the 21st century.

Why do decentralized, seemingly disorganized market economies routinely outperform centrally planned, tightly controlled economies?

One reason is the principle of obliquity. Direct, goal-oriented action works well in simple stable contexts , where tasks are easy, consequences of actions are predictable and feedback is quick. But in complex, turbulent contexts, where tasks are difficult, consequences of any individual action are unpredictable and feedback is delayed, oblique or indirect goals generally work better.

In 2004, economist John Kay recommended applying the principle of obliquity to business: “meeting global business targets [is] the type of goal that [is] best achieved when pursued indirectly.”[2] Thus, when Peter Drucker wrote in Management in 1973 (p. 61) that the only valid purpose of a firm is to create a customer, his proposal reflected the principle of obliquity: pursuing goal A (value for customers) should lead to results B, C and D (long-term shareholder value, employee satisfaction and social goals ) Drucker’s emphasis on decentralization also reflected the principle of obliquity.

Studies confirm the relative success of companies pursuing oblique goals. A recent review concluded: “companies that consistently invest in their employees, in their relationship with their external stakeholders, and in a vision that all stakeholders can subscribe to, outperform peer companies that are more narrowly focused on financial objectives.”(Reinventing Management, 2010, p.127) Examples include SouthWest Airlines, Handelsbanken, WL Gore, Whole Foods Market, Tata and Toyota .

The role of business schools

Nevertheless, many large firms still focus narrowly on direct goals like maximizing short-term shareholder value. Moreover business schools reinforce this thinking. As Sarah Murray wrote in the Financial Times in July 2013 : “While there is growing consensus that focusing on short-term shareholder value is not only bad for society but also leads to poor business results, much MBA teaching remains shaped by the shareholder primacy model.”

Short-term shareholder value thinking is embedded in the core curricula of MBA courses around the world. Managerial economics and accounting tend to assume that short-term profits will lead to long-term shareholder value. Profits are “the overall goal” of the firm.

Constraints to change in business schools

Why do business schools still teach the linear thinking implicit in shareholder value theory? It is not that the professors slavishly believe the theory. In fact, every discipline actively debates how to be more relevant. Yet interlocking institutional arrangements tend to prevent change.

First, business schools often constitute a significant revenue stream for their universities. Students from around the world want “a standard MBA”. Administrators are hesitate to tamper with core curricula lest it jeopardize this revenue stream.

Second, business schools succeed in part because graduates get jobs in consulting and finance-sectors still dominated by direct financial goals. These firms are seen to want students schooled in efficiency and shareholder value theory

Third, the tenure system generates incentives to do research that is methodologically rigorous but often has little relevance to business. The research is usually conducted within an existing paradigm. The “efficient market hypothesis” in microeconomics, for example, still underpins much research in finance.

Fourth, the accreditation process of business schools is slow, cumbersome and inflexible. This creates additional pressure to stay with the status quo.

Finally, business school rankings by the Financial Times and others are built on criteria such as acceptance of articles in academic journals, the academic accreditation processes and starting salaries of graduates—thus reinforcing the status quo .

The issues facing business schools are thus principally issues of institutions, not individuals. Changes in personnel will have little effect without shifts in management processes.

Change is coming

Nevertheless deep change is imminent. First, business schools in emerging countries are on the rise, as shown in recent rankings. This phenomenon will disrupt business education in Europe and North America.

Second, Massive Open Online Courses (MOOCs) that can reach much larger numbers of students at much lower cost will inexorably generate disruption for all universities. Business schools that master the opportunity as a tool for improvement will prosper, while many that don’t won’t survive.

Third, funding from government and industry is forcing greater attention to the practical impact of teaching and research . Business schools are increasingly seen as essential components of business enterprise in local communities, job creation by incubating startups, and student employability with practical real-life work skills.

Recommendations

We believe that business schools should consider the following:

1. A renewed focus on purpose: Business schools should be equipping graduates to be leaders of the 21st Century organization that operates in a complex environment where innovation and responsiveness to customers and society are key. Moreover as work is increasingly done in self-organizing self-managing teams and networks, the “professional manager” concept is giving way to a vision of management in which everyone in the organization has management and leadership responsibilities.

2. Updating the core curriculum: A core curriculum built on the linear thinking of shareholder value and efficiency is unsound education for the 21st Century leader. Merely adding more relevant courses on the periphery will be insufficient. Forward-looking business schools should join together in generating textbooks and courses that reflect the complexity of today’s business world.

3. Changes to the ranking system of business schools: The ranking of business schools by the Financial Times and others should include a criterion that reflects practical relevance, vitality and impact. A new approach to measurement and metrics should reflect society’s complex expectations of business schools .

4. Putting “business” back in business schools: Academic recruitment and accreditation processes should be overhauled to reflect today’s complex business world and the need for greater practical relevance. Impact assessments should be adopted in accreditation processes.

5. Interdisciplinary approaches in research and teaching: The complex problems now facing firms do not fit traditional disciplinary boundaries. They require radical cross-disciplinary thinking that challenges the old assumptions of each discipline. Some business schools are already experimenting with integrative approaches to teaching.

These recommendations are meant to further discussion about how business schools can support business leaders in transforming organizations from linear, efficiency-driven, shareholder-value-maximizing machines into complex organs of the society, as envisioned by Peter Drucker years ago (Management, 1973, p.41). What do you think of the role of business schools today and in the future in dealing with complexity?

This article is a joint effort of all six authors.

Authors:

Alan W. Brown is Professor of Entrepreneurship and Innovation in the Surrey Business School and the author of Enterprise Software Delivery (2012)

Julian Birkinshaw is Professor of Professor of Strategy and Entrepreneurship at the London Business School and the author of Reinventing Management (2010).

Steve Denning’ is the author of The Leader’s Guide to Radical Management (2010) and has a regular blog on radical management on Forbes.com.

Tom Roy is a management consultant and an adjunct faculty member at George Washington University.

Vlatka Hlupic is Professor of Business and Management at the University of Westminster and CEO of the Drucker Society London.

Franz Röösli is professor and management trainer, Director of the Beyond Budgeting Round Table (BBRT) and a co-author of The Leader’s Dilemma (2011).

[1] http://www.johnkay.com/2004/01/17/obliquity

[2] http://www.ft.com/intl/cms/s/2/e392f12c-adac-11e2-82b8-00144feabdc0.html

Not sure where the clear connection to complexity is. This could all be said without reference to “Managing Complexity”.

Consider that networked individuals around the globe are no longer passive and docile recipients of supply, thanks to digitization, globalization, the World Wide Web, advances in interactive communications and information technologies, social media, and ubiquitous connectivity. Rather, all stakeholding individuals expect not sure – they want to be served even better than what they could imagine to be active participants and collaborators in the value creation process, as co-creators of value through the lens of their human experiences. The fundamental distinction between a human experience and a good/service is that the former must by definition involve the individual. It is impossible to create an experience of value to you without engaging you actively (in contrast to the conventional “production” of goods/services.) From the perspective of enterprises, platforms of engagement based on human experiences are the new locus of value creation. Such experience-based engagement platforms—assemblages of people, artifacts, interfaces, and processes, whose design evolves with value-generating experiences—are both the means and ends of value creation, and the key to thriving on complexity. But first, we must recognize the shift in thinking that this requires:

1. Engaging stakeholders personally and collectively in creating value together, as much on their terms as those of the enterprise, expanding how the enterprise thinks about opportunities and resources.

2. Recognizing that value is subjective and varies from individual to individual, as a function of their interactions with their environments around them;

3. Viewing individuals as attaching meaning to actualized outcomes and imputing value as a function of their human experiences over time;

4. Leveraging the capabilities of meshworks across social, civic, business, and natural communities in which individuals are embedded, together with the capabilities of stakeholders themselves; and

5. Virtualizing new potentialities of value-creation by building ecosystems of capabilities together with other private, public, and social sector enterprises to expand wealth-welfare-wellbeing in economy and society as a whole.

Co-creation can be practiced everywhere in the ecosystem in which the enterprise operates, designed for varying purposes. As this blog entry is not the place to discuss examples in detail, see the book, The Power of Co-Creation (Simon & Schuster, 2010, with F. Gouillart), for over forty enterprise examples from over twenty sectors, and the forthcoming book, The Co-Creation Paradigm (Spring 2014, Stanford University Press, with K. Ozcan), for a detailed exposition of the theory and practice of co-creation as a paradigm of value creation and innovation, entailing engagement platforms for:

• Product-service offerings themselves;

• Encouraging entrepreneurship and decision-making;

• Enabling the design of offerings;

• Harnessing ideas and insights;

• Supporting the delivery of offerings;

• Facilitating training and sales interactions; and

• Expanding the circle of value creation stakeholders.

Innovating experience-based engagement platforms can enable enterprises to thrive on complexity by:

• Learning faster through the experiences of its customers and other stakeholders;

• Building deeper relationships and trust with the communities served and whose resources it depends upon;

• Generating new ideas and insights rapidly and becoming more resilient to unpredictable events in the system;

• Experimenting with new offerings quickly and engendering stickier brand collateral; and

• Enhancing new sources of value creation advantage by inclusively leveraging network and stakeholder resources (as opposed to just allocating resources) and accessing competencies in the ecosystem on demand.

Senior executive leadership must also pay attention to both the technical and social architecture of engagement platforms. On the technical side, the platforms must be reconfigurable, scaleable, linkable, and generative, with the capacity to enable and support new forms of value together with stakeholders. On the social side, it must enable and support a participatory culture in the organization that enables “silo-breaking” engagement inside the organization with appropriately designed incentives (designed together with people), encouraging collaborative decision-making, and strategy execution and re-formulation that expand capability ecosystems.

If leaders become co-creative engagement orchestrators, we can thrive on complexity by co-evolving our organizational systems, structures, and states (offerings, decisions, ideas, and relations) into a more holistic, next generation co-creative value creation that has built into it the expansion of wealth, welfare, and wellbeing of individuals, enterprises, economies and societies.