Turn Your Company Outside-In!, part I II. A Special Edition Paper on Cell Structure Design

1. Make it real! TURNYOUR COMPANY OUTSIDE-IN! Howtobuildthedecentralizednetworkorganization, puttinganendtocentralizedcommandandcontrol. ApaperonCellStructureDesign BetaCodexNetworkwhitepapersno.8&9.Jul2012,originalversionOct2008special BetaCodexNetworkAssociates NielsPflaeging&ValéryaCarvalho&GebhardBorck&AndreasZeuch edition

2. Whatyouwillfindinthispaper OrganizationDesignisalostart.Atroubledandsomewhatabandonedgreyspacewithinthe fieldoforganizationaltheory.Nonsensicaltheoryandadviceaboundinthesphereof OrganizationDesign.Andthatisforareason. Inthispaper,weoutlinetherationaleforadifferent,non-tayloristic,waytostructuring organizations–leadingtothequestionofhowtobuildorganizationscapableof (1) accommodatinghumanbeings,and (2) competingintoday'sdynamicandnon-linearmarket-places. Part1and2ofthepaper… • describewhypreviousideassuchassystemstheoryfailedincreatingsignificant momentumforchangeinorganizationalpractice,andoutlinedthedesignprinciplesthat decentralized,networkedcellstructureorganizationsmustadhereto. • detailtheingredientsofsuchstructures,whichinclude (1) asphereofactivity, (2) networkcells, (3) stringsand (4) marketpull. • Finally,wedescribesomeoftheconsequencesofapplyingsuchadesign,highlightingkey advantagesaswell. Inparts3and4ofthispaper,wedescribetwocasesfromourconsultingpractice, inwhichtayloristiccommandandcontrolorganizationswereredesignedas decentralizednetworks.

3. Part1: Thetroublewith organizationdesign

4. Thinkabout organizationaldesign Youarenowprobablyconjuringupimagesofmanagers ormanagementconsultantsshufflingboxesonanorganizationchart. Right?

5. Organizationaldesign:thelostart Well,thatkindof”corporaterestructuringexercise“hardlydeservestobecalledorganizational design.Thetopicofeffectiveorganizationaldesigntranscendsdisciplinarylines.That'swhyitisnot effectivelytaughtatbusinessschools,that'swhythereislittledecentresearchinthetopic,that'swhy usuallynobodyinanorganization,except”topmanagement“,darestotouchit.Todesignan organizationeffectively,youneedtounderstandbusinessmodels,organizationalbehavior, informationtechnology,accounting,andleadership. Inrecentyears,writersandthoughtleadershavecoinedadizzyingarrayofbuzzwordstohelp managersthinkorganizationsafresh.Thereistalkofnetworkedorganizations,boundary-less organizations,virtualorganizations,learningorganizations,federalistorganizations,wiki organizations,starfishorganizations,andthelike,tonameonlyafew. Butifyouactuallyreadandstudytheseworks,youwillshareourfrustration.Withfewexceptions, mostwritingonthistopiciseitherutopian,orlimitedtocertaintypesoforganization,orisshallowina sensethatitoffersadvicethathasnotheoreticalunderpinning.Theutopionansrailatthestifling natureofhierarchyandextolthevirtuesof“organizationswithoutstructure“:self-organizingwork, networks,andemployeeempowermentwill,theyargue,miraculouslydriveoutcommand-and-control empires.Theothersetofbooksandarticlesoffersdesignchoicessupportedbydetailedlistsofpros andcons.Yettheseanalysesquicklyprovetobeunsatisfying.Listsoftradeoffsandconsiderations failtoprovideaclearsenseofdirection.Whenyoufinishachapter,itisneverclearwhatexactly organizationsshoulddo–choicesabound,butnorationalefordecisionandnoconvincingtheoretical underpinningisgiven. TheBetaCodex,incontrast,presentsanintegratedtheorythatgivescleardirectionabouthowto designorganizationsandhowtomakeitfitwithmanagementprocesses,andleadership.Tooutline howthenewbreedoforganizationaldesignworks,thispaperoffersatourdeforcethroughdifferent disciplines,andthroughmanyoftheconceptualframeworksthattheBetaCodexisbasedupon.

6. First,someconsiderationsaboutorganizationaldesign Organizationaldesignisameanstoanend.Notmore,notless. Andthatendistocreateandmaintainanorganizationcapableof achievingsustainablecompetitivesuccessinadynamicandcomplexworld.* Inthiscontext,itisimportanttoremember: ?  Thereismoretoorganizationsthandesign– sotobringthedesigntolife,youneedtocreateacoherentwholeincludingvalues, language,communication,leadershipstyle,processes,etc. ?  Thereisnosinglerightdesignforyourorganization– butyourdesignprocessshouldbebasedonrobustdesignprinciples ?  Organizationaldesignisanevolving,iterativeprocess– whichonlyfeelsmessyandcomplicatediftheprinciplesthatareappliedaremessy,and ifimportantassumptionsarenotmadeexplicit. ?  Thedesignyouwillcomeupwithatfirstwillnotlastforever,orevenforlong– becauseyouwilllearnmoreandmoreaboutdifferentdesignoptionsandlearningloops willinevitablyoccur. *ThisclaimiscloselyrelatedtotheBetaCodexNetwork'smission.

7. Thenotionof dividinganorganization intofunctions, andthendepartments, isfundamentallyflawed. Butwhatisthealternative?

8. Whyshouldwelookforanalternativeway ofbuildingandgoverningorganizations? Bydividingafirmintofunctions,andthendepartments,youactuallyimpedeworkflow,build organizationalterritories,anddriveoutinitiativeandentrepreneurialthinking.Butcompanieshavedone exactlythatforages. Organizationstodayarecrippledbytayloristicthinkinganddivisionbetweenfunctions.Taylor'sideaof separatingthinkingfromexecution–liketheassumptionthatresponsibilityforcontrolandcoordination shouldbelocatedonelevelabovefromwheretheworkisactuallyperformed–havecreatedimmense misalignmentwithtoday’scriticalsuccessfactors.Theseproblemshavebeenlaidoutindetailbythe BetaCodexmovementsinceitsfoundation (thencoined“BeyondBudgeting”) in1998,andalsobyafair amountofmanagementthinkersandscientists.Assoonas1960,DouglasMcGregorwrote,inhis groundbreakingbook“TheHumanSideoftheEnterprise”,that“itisprobablethatonedayweshallbegin todraworganizationchartsasaseriesoflinkedgroupsratherthanasahierarchicalstructureofindividual reportingrelationships”Forfurtherreferenceontheproblemswithtayloristicmanagement,seethe BetaCodexNetwork'swebsite. Thealternativetotaylorism,however,hasnotbeenthatclear,untilrecently.Andknowledgeabouthowto transformtayloristicorganizationsintopost-tayloristicorganizations,whicharecapableofreintegrating thinkingwithdecision-makingandexecution,hasbeenpatchyatbest.Soifwewanttodepartfromthe currentstandardofcorporatemodern-world“slavery“,basedonnowobsoletethinking,weneedtwo things.First,weneednewmentalmodelstobuildandgovern21stcenturyorganizations.Andwealso neednew,systemicmodelsforchange,inordertoenablewide-spreadtransformationoforganizations. Theproblem,overall,isnotthatpeoplewerenotfitforaccelerateddynamicandmorefiercecompetition. Weclearlyholdadifferentview:that,instead,organizationsastheyaredesignedtoday,arenotfitforthe capabilitiesofthehumanbeingsthatworkinsidethem.Thetayloristic“machineorganization”isdoomed, inanageofdynamicsandcompetition.Thetayloristicmodelnowhasbecomeanimmoralchoiceasa blueprintfororganizationaldesign.Why?Because,quitesimply,itstandsinthewayoftheirpeopleto fulfilltheirpotential,andfurthermorebecausequiterecently,thevisionandpracticalroad-maptoan alternativemodelhasemerged.Wecallthisalternativethe“BetaCodex”.

9. Outliningthe‘industrialage’model (a.k.a.management) anditspitfalls “commandandcontrol“ “keepontrack” strategy •  Toocentralized •  Tooinward-looking •  Toolittlecustomer-oriented •  Toobureaucratic •  Toomuchfocusedoncontrol •  Toofunctionallydivided •  Tooslowandtime-consuming •  Toode-motivating •  … Fixed performance contracts control Fromthefilm‘ModernTimes’withCharlieChaplin,1936

10. Recurringthemesinorganizationaldesignthatanyrobust designmodelmustaddress Clarify ownership Allocate authority andpower Define resourceand valuecreation flows Embed governance Assure coherenceand cohesion … Create robustnessfor growthand evolution

11. Commonalternativewaystovisualizeorganizations– accordingtoHenryMintzberg Organizationsas“pyramids andchains” • Processchainstrengthenstheverticalchain (hierarchy) • Sustainscentralizationandheroicmanagement: “Thetopmanagerasanimportantperson,removed fromoperations,takingdecisionsbasedonanalyses andcalculation” • Imagineahospital,alaboratoryoraproject– theysimplydon'tworkthisway! Organizations as“hubs” • Thepointsoffocusarehubs:it'sthem whoattract, emitandmovepeople,thingsandinformation • Lessfocusedonsequentialactivities • Example:Hospital -thepatientasfocalpoint • Someorganizationsnaturallydon'thaveacentre (e.g.labs,orprojectteams...) • Theyarenetworkswithfreeinteraction,embeddedin collaborativerelationshipsthatworkinanydirection • It'snotamodel“withoutstructure”– itjustfollowsanotherlogic. Onethatisnotfocusedonactivitiesormanagers. Organizations as“networks” Source: Mintzberg, 2004

12. Howtoovercometheburdensoftaylorism Highlydevolvedorganizations,asopposedtocommandandcontrolorganizations,arenotstructured hierarchically.Infact,sincehierarchiesdon’tacceptanyotherrulersbut“topmanagement”,or “bosses”,radicalempowermentbaseduponthedecentralizationofdecision-makingisnotcompatible withstructuresbasedonpowerrelationshipsandhierarchy.Althoughitiswell-knownthatmany organizationsarefactuallyrulednotbyformal,butbyinformalnetworks,thecommonwaytomake teamsactresponsiblyisstilltogivesomeoftheorganization'smembersa“commanding”,or “managing”position. BetaCodexorganizations,ontheotherhand,wanttoachievesomethingentirelydifferent:Theywant everybodyinacompanytothink,tobeandactresponsible,inordertoincreasethevalueandwealth creation.Therefore,aBetaCodexorganizationdoesnot“believe”inhierarchy.Itbelievesin empowermentandinthecapabilitiesofitspeople.Andthebest-knownandsuccessfullypracticed routetoempowermentistoturntheorganizationintoanetworkofinterrelatedcells. Acellstructure (asopposedtoadesignbasedon“departments”and“functions”) iscapableof interactingsituationally,inmorediversewaysthanfunctionallydividedhierarchies.Evenmoreso,it doesn’tneedcommandstobecontrolled–itcanbecontrolledandgovernedjustthrough“market pull”.Othercontrolmechanismsthatmakesensewithinadecentralizedcellstructureareself-control, “peerpressure”,culturalcontrolinspiredbystrongsharedvaluesandculture,aswellasafarhigher levelofinternalandexternaltransparencythaniscommoninthetayloristicmanagementmodel. Overall,bycreatinganetworkofthesecells,andbymakinguseofpeople'sfullpotential,businessis beingturnedassimpleandasstraight-forwardasexecutivesalwaysdreamtitwouldbe.

13. Sowhatorganizationshaveactuallyaccomplishedthis, inpractice? EricSchmidt,CEOofGoogle,oncehumorouslyandwithanodtocoinedit“theborg”,referringtothe extraterrestrialraceonStarTrek.DennisBakkeandRogerSant,ofUS-basedenergyfirmAES,dubbed it“thehoneycomb”.RicardoSemlerofSemcofromBrazilcallsitthe“circularorganization”. TerriKelly,CEOatW.L.Gore,talksaboutthe“latticeorganization”,aconceptthecompanyhas appliedsincethe1960s.Inthepast,othershavecalledit“theonion”. Ultimately,theyarealltalkingaboutthesame:Anewwayofthinkingaboutorganizationswithouta commonhierarchy.Asonecansee,wearestillfarcryfromreachingaconsensusonwordingwith regardstothe“alternative”organizationalmodelthatwillsucceedtayloristiccommandandcontrol pyramids.Schmidt,Bakke,Semler,Kellyandothersarealldescribingthenotionofanorganizational structurethatisaneitherbasedonpowerrelationships,noronhierarchyorfunctionaldivision.These organizationshavebuiltdevolved“senseandrespond”networks. Anexample:Semco'sSurvivalManual,thecompany'sonlywrittensetofprinciples,claimsthat: “Semcodoesnotuseaformalorganizationalchart.Onlytherespectoftheledturnssomeoneintoa leader.Whenitisabsolutelynecessarytosketchthestructureofsomepartofthecompany,wealways doitinpencil,anddispensewithitassoonaspossible.” MuchlikeSemco,severalotherBetaCodexpioneers,suchasGuardianIndustriesandHandelsbanken, donothaveanorgchartatall,andtheygetalongwiththreelayersofhierarchyonly.Thatsaid,the pioneersstillhavesomehierarchy,thoughusuallynotmorethanthreelayers,regardlessoftheirsize. Intheirorganizationaldesign,thus,“hierarchydoesn'tmatter“.Itisperceivedasarathertrivialfact, andonethatisnotreallyrelevantforday-to-daywork.

14. Thechallenge:Fromhierarchytonetworkstructure. Weneedmethodologiesforredesignandcreatingthechange! Traditionalmodel: (centralizedfunctionalhierarchy) Newmodel: (decentralizedleadershipnetwork) Changingmental models,leadership andstructure •  “Bosses”rule! •  Top-downcommandandcontrol •  Topmanagementisalwaysincharge •  Centralizedleadership •  Functions,departments,divisions •  Outside-invaluecreationrelationships/”pull” •  Functionaldivisionguidesstructure •  “Themarket”rules! •  Outside-insenseandrespond •  Peripheralteamsarealwaysincharge •  Devolvedleadership •  Networkcellsasmini-enterprises •  Hierarchicalpowerrelationships/”push” •  Functionalintegrationguidesstructure

15. Whatisnewaboutthis? Althoughpreviousconceptshavefailedtofullyexplaincellstructureasabusinessorganizationstructure, thereisstillalotwecanlearnfromotherthinkersonthesubject. Oneofthemostsignificantcontributionstothefieldoforganizationaldesignprobablycomesfrom systemstheory.StaffordBeer,thefatherofBritishsystemsthinking,whodiedin2002,laidthe foundationsoftheViableSystemsTheory–atheoreticalconceptthatlackspracticality,butthathas inspiredmanywithinthefieldoforganizationaldevelopmentanyway.DirkBaecker,afollowerofGerman systemstheoristNiklasLuhmann,convincinglypointstothesystemicincoherencebetweengeneral knowledgeofsystemsandwhathappensinbusinessorganizations.Buteventhoughsystemstheory explainslotsofthephenomenathatoccur,withinfirms,theadviceofBaeckerandothershasbeen insufficientforpractitionerswithadesiretotrulytransformtheirorganizations. Othertheoristshaveexplainedimportantelementsofanalternativemodel,butinvariablyfailedtodescribe acoherenttheorythatwouldworkforanycompany,ortheconsequencesthatcomewithimplementingit: Mostscientists,forexample,haveignoredtheimpactofsteeringprocesses,suchasperformancetargets, planning,andcompensation,onorganizations.Evenworse:Mostleadingthinkerspartiallyremained withintheboundariesoftheold,tayloristicmindsetwithregardshowbusinessorganizationshavetowork andbeled. CharlesHandywroteaboutwhathecallstheCloverleafOrganization,basedonhisobservationsaboutthe individualandhisresponsibilityinsociety,andtheeffectsofthatwillbeseeninbusinessorganizations oneday.HenryMintzbergmadepromisingattemptsatderivingconclusionsfromdifferent“typologies”of organizations.JayGalbraithdevelopedwhathecalledthe“starmodel”oftheorganization,andrecently, expertslikeThomasW.Malonehavebeentalkingoforganizationsas“democracies”,“freemarkets”,or “loosehierarchies”,inwhich“nodirectiontakesplaceanddecisionsaremetatthefrontlines”.Butone mightask,if”frontline”,“democracy”,or”loosehierarchy“aren'tratherfeebleconceptstobeappliedin reallife.Again,thisadvicehasnotbeentooactionable,overall.

16. Whyhavesofeworganizationsadoptedanetworkeddesign? Notsurprisingly,maybe,someofthebest-understoodnetworkorganizationsofthepasthavecome fromtherealmsofthenon-profitsector.Assuccessandimpacttheredepends,primarily,on volunteersthatresistto“beingmanaged”,convincingalternativesto“management”havealways beenastandardthere.ManyexpertshavedescribedkeycharacteristicsoforganizationsliketheWWF ortheinternationalboyscoutmovement,asproofthatcellstructureorganizationscanactuallywork. Butisthesamepossibleintheprofitsector?Attemptsondecentralizedorganizationalmodelsmade bypreviouslytraditionallyorganizedfirmsoftencouldnotmeettheexpectations.Ahigh-profilecase fromthe90swasABB-buttheirmuchlauded“matrix”organizationsoonwentintodecline.Andfor goodreasons.Othertransformedorganizationshavefaredmuchbetter,astheychosemorecoherent waysofworking,waysthatwerefirmlyrootedinmoreradicallydifferentmentalmodels.Surprisingly, though,somefirmswithnotablecompetitivesuccessthatabandonedtayloristicmanagementlong agohaveneverbeenrecognizedasnetworkstructures.Afewofthesefirmshavesucceededin buildingandsustaininga“decentralizednetwork”structureoverthecourseofmanydecades,asis thecaseofW.L.Gore,ToyotaandHandelsbanken.Butalthoughtheevidenceisthere,runninga profitablecellnetworkactuallyisseenasanexoticachievementofsomeexceptionalleaderslikeGore. Neitherorganizationaltheory,normanagementsciencehavebeenabletofullydescribetheprinciples ofsuchstructures,orhaveformulatedadecentroadmaptowardscreatingthiskindofinnovative design.Thisisabouttochangenow.Wewillarguethat,basedonthe12principles,orlaws,ofthe BetaCodex,itispossibletobuildahighperformancecellnetworkforanycompanyofanysize.

17. Organizationalevolution:Typicalphaseswithinthe lifespanofanorganization,accordingtosystemsthinking Cyberneticsrightlystatesthatorganizationshavemuchincommonwithlivingorganisms.Inthesame wayinwhichorganismsevolvethroughdifferentstagesthroughouttheirlives,sodoorganizations typicallychangeoverthecourseoftheirexistence.Systemstheoryhasaddedtothisaconceptwhich relatesintimatelytowhatwecalltransformation. Organizations,inthisview,typicallybegintheirlivesconsistingofveryfewpeople,andina“Pioneering Phase“,whichischaracterizedbyahighlevelofentrepreneurship,informality,autonomousand improviseddecisionmaking.Thereislittle“structure“here.Apioneerorganizationmayfeelchaotic-but acertainamountofchaosseemsnormaltoeverystart-up,doesn'tit? However,asanorganizationbecomessuccessfulandgrows,sometimesveryquickly,newforcesstart toapply:Thereisapressureto“professionalize“,tocreateamoreformalstructure,tohirespecialists, toimplementsystems,tostandardizeprocessesandtodolotsof“planning“.Inthis“Differentiation Phase“,hierarchy,functionaldivisionanddepartmentalizationincreasestrongly,decision-making becomesmorecentralized,andrulesandprocessesstarttosubstituteimprovisationandfreedomtoact. Thoughperceivedasablessingbymany,differentiationisalsoalwaysaccompaniedbythedeathofthe organization'smoreentrepreneurialfounding,orpioneeringculture.Theplacebecomes“lessfun“,in ordertobecomemoreorderly.Manyofushaveseenthishappeningtoorganizations,andwehaveoften observedthelossofentrepreneurshipthatcomeswithdifferentiation. Mostorganizationsremainforeverinthetayloristicparadigm.Fewhavesofarescapedthedifferentiation trap,activelymovingtowardswhatwemaycallthe“Integrationphase“.Integrationmeansapplyinga thinkingthatturns“large“organizationsintosmall,functionallyintegratedmini-firms,whichcanactwith greatindependencyanddecision-makingpower.Avisualizationofthe“phaseconcept“isshownonthe followingpage. Asnoted,feworganizationsfirmshaveactuallymadethistransformation.WithintheBetaCodex researchsince1998,however,wehaveidentifiedacoupleofnotableanddiverseexceptions,suchas dm-drogeriemarkt (Germany),Semco (Brazil),Toyota (Japan),andHandelsbanken (Sweden).

18. Organizationalevolution:Typicalphaseswithinthe lifespanofanorganization,accordingtosystemsthinking Whoshould“integrate”– andhowdoesthisconceptrelatetoanorganization´sevolution? youshouldbe! Evolution withinthedecentralizedmodel (cultureofempowerment andtrust) Sustainingand deepeningofthe decentralizedmodel, throughgenerations THISiswhere Integration phase Beta!Highdegree ofdecentralization/ empowerment Transformation throughradical Decentralizationofdecision-making Differentiation phase Stagnation withinthetayloristicmodel Alpha!Lowdegreeof decentralization/empowerment Bureaucratization throughgrowinghierarchy andfunctionaldifferentiation Pioneering phase Beta!Highdegreeof decentralization/empowerment Severaldecadesold Foundation Timescale:organization'sage

19. Part2: Principleddesign&structureforanewera

20. Whatmakesthedifference? Insteadofcentralizedfunctionsanddepartments,BetaCodexorganizationshavealeanandorganic networkofindependentteams,orcells,whicheachworkasfullyaccountablebusinessunits,orprofit centers.Tocreateanetworkofcells,however,youwillhavetofundamentallychangethewayyou havethoughtaboutorganizationalstructure. ?  Youwillapply“functionalintegration”–asopposedtofunctionaldivision,practicedbytayloristic organizations.Thissoundseasierasitis:Becauseourbrainsareastonishinglyhard-wiredinto thenotionoffunctionaldivision.Youmaynoticethatfurtheron. ?  Youwillcreateastructureinwhichthereiscontrolintheformsoftransparency,“marketpull”, self-control,andpeerpressure–asopposedtocontrolthroughhierarchyadmanagementstaff. Cellsthemselvesareaccountableforresults–notmanagersmanagingtheteamexternally,or managerswithinthecell.Thisrequires,firstandforemost,amassivechangeinthinking. ?  Youwillbuildindividualcellsthatconsistofpermanentteams,of (temporary) projectteams,orof ad-hocandvoluntarytaskforces.Thoughnotatallcommonintraditional,functionallydivided commandandcontrolorganizations,teamsbasedonvoluntaryparticipationcanbehighly effectiveandenthusiastic,asseveralofourcasestudiesshow. Anetworkedcellstructurehasalotincommonwithlivingorganisms,aswesawbefore.Celldivisionis acommonfeatureaswell.Ithappensbothinorganismsandinnetworkedorganizations. Organizationsofthenewkindsharethebeliefthatasinglecellshouldneveroutgrowapsychologically soundsizethatcangranthigh-trustcommunicationamongteammembers.Consequently,incell networkfirms,onceateamexpandstoomuch,thisteamgetsdivided“asneeded”.Thiskindofcell divisioncanbefoundatplacessuchasAES,Aldi,Handelsbanken,DellandW.L.Gore.Maximumcell sizedefinedbyanindividualfirmmayvarygreatlyfromindustrytoindustry,anditvariesamongthe caseexamples.W.L.Gore'sunitsize,forinstance,islimitedtoaround150teammembers.

21. Howislifewithina“networkcell”differentfrom workinginacommand-and-controlhierarchy? Generallyspeaking,singlecellswithinadevolvednetworkdonotentailhighlyspecializedpeople,but mostlygeneralistswhosharetheworkloadflexiblyamongthemselves.Furthermore,traditionaltayloristic jobdescriptionsfocusingonanindividualaredisplacedbyroledescriptionsforentireteams,whichfocus ontheresponsibilitiesthathavetobeassumedbyindividualcells.Theserolesareoftenjuggledwith amongteammembers,whichmeansthat“rolerotation”isverycommonhere.Inordertoallowforthis flexibility,generalisttalentsofpeoplearemoreappreciatedinnetworkedorganizations,asopposed detailedtechnicalknowledge,whichistypically (over)valuedintayloristicorganizations:Here, organizationssadlyclassifytheirpeoplebytheirwork,orjobdescriptions-notbytheirtalentsorabilities. Inordertomakeadevolvednetworkbecomereal,thinkingaboutworkandperformancehavetoundergo adeeptransformation.Inasinglecell,employeeshavetobeentrepreneurialthinkersanddoers,whereas managersinthesestructuresserveasadvisorsorkeepersofsharedvaluesandprinciples.Theirrole extendstonotmorethantostewardtheorganization.Inthewordsofsomeofthepioneers,thismeans beinga“catalyst” (RicardoSemler) oran“enabler” (VineetNayar).Managersintheirtraditionalroleas commander,inspectorandexecutorarenotneededinanetworkedstructure,butthereareroles traditionallyfilledoutbymanagerswhichcanbeassumedbysinglepersonsorbydifferentpersonsinthe cell'steam.Theleadcanbeandistakenbyeveryonewhotakestheresponsibilitytoactfortheteam. Besidestheneedforpeopletoassumetheroleof“temporaryleaders”,thereisaneedfor“newroles”, whicharenotcommonintayloristicorganizations,butwhicharevitalfordecentralizednetworkstosustain coherenceandlearning.The“master”role:Theseinitiatelearningprocessesintheorganization,inorder tokeepthecellspreparedforcurrentchangesandkeeptheminnovative.The“symbolist”role:Symbolists havethesenseforsymbolicgestures,signsandritualsinordertomake,maintainanddevelopinternal andexternalrelationshipsaswellasmaintaining,keepingconsciousandpenetratingtheorganization repeatedlywiththeitsprinciples,reasonforbeing,values,identityandvisions).The“anthropologist”role: Anthropologistsprovidetheunderstandingofnormsandculturalvalues,ofdesiredattitudes,mindsets andconvictionsofpartnershipinternal/externalinthenetwork.

22. Let'stakealookatthedesignprinciples foranalternativeorganizationalstructure. Ifyouaresomewhatfamiliarwith theBetaCodex,thenyoualreadyknowtheseprinciples...

23. The12lawsoftheBetaCodex: Afullsetof“designprinciples“forcomplexity-robuststructure Law §1Freedomtoact §2Responsibility §3Governance §4PerformanceclimateResultculture §5Success §6Transparency §7Orientation §8Recognition §9Mentalpresence §10Decision-making §11Resourceusage §12Coordination Beta ConnectednessnotDependency Cells Leadership Alpha notDepartments notManagement notDutyfulfillment notMaximization Fit IntelligenceflownotPoweraccumulation RelativeTargetsnotTop-downprescription Sharing notIncentives Preparedness notPlanning Consequence notBureaucracy Purpose-drivennotStatus-oriented MarketdynamicsnotCommands

24. Comparingthemodels

25. Theimportanceofdesignprinciples Inthispaper,wearesuggestingtwomainconcepts: 1.  TheorganizationdesignmodelthatistheBetaCodexwithits12laws. 2.  ThetransformationmodelthatwecalltheDoubleHelixFramework-asthewaytoadopting theorganizationmodel,ortobringitintolife. Itisnotverycommon,actually,thatacoherentandfullorganizationalmodel (BetaCodex) andan implementationmodel (theDoubleHelixFramework) arebroughttogetherintoasingleapproach, thusallowingnotonlytoenvisionaneworganizationalform,butalsotodevelopit. Havingtherightdesignandtransformationprinciplesiskeytotransformation.Thereasonforthis isthat,ideally, ?  Designprinciplesshouldbesoclearandsimplethat anyoneinanorganizationcanunderstandandapplythematalltimes. ?  Thepeopleinanorganizationthemselvesaretheonesbestsuitedtodevelopthenew organizationalstructure.Consultantsshouldonlyprovidemoderationandguidanceinthe processofshapingoutthestructure. ?  Foranorganizationtomaintainanorganizationalstructurethatisnotcommandandcontrol, thenewprinciples (orthenewmentalmodel) havetostickwithpeople.

26. Thedesignprinciplesofthenewmodel Conventionalmanagementpracticehasignoredtheimportanceofunderstandingprinciplesbefore leapingintoaction.Usually,organizationsfeelpressuredintoadoptinganewmethodbecause “everyoneelseisdoingit“.SixSigma,Lean,theBalancedScorecard,BusinessReengineering,or CRMaresuchmethods.Typically,neithermanagersnortherecipientsofsuchschemescanarticulate thedesignprinciplesthataredrivingthemethod.Andusuallythemajorityoforganizationalmembers don’thaveaclearideaofwhyspecificchangesarebeingmadeandhowsuchchangewillaffect them. ThisisdifferentwiththeBetaCodex.Thecodexemploysasetof12designprinciplesforthenewtype oforganization.Thedesignprinciplesarenotrigidrules,butinstructivecodesthatshapeourthinking abouthowrelationshipsbetweenpeople,roles,tasks,andresponsibilityshouldbestructured.They (andtheirtayloristiccounterparts) reflectdeepculturalassumptionshavingtodowiththeissuesof power,authority,controlandvaluecreationinorganizations.Designprinciplesareequivalenttoa mentalmodelthatactsasasystemicframeworkforconstructingorganizations.Thedesignprinciples thusgettotherootsofhoworganizationsshouldbestructuredtogettheworkdone,andtoachieve superiorcompetitiveperformance,together. Becauseorganizationsarehumanandsocialcreations,designprinciplesprovidethecriteria– implicitlyandexplicitly–thatguidethewaywestructureandleadorganizations.Itisimportantin BetaCodexTransformationtomakethe”old“setofdesignprinciplesandthenewoneexplicit. Thisway,thementalmodelsofallmembersoftheorganizationcanchange.Thedesignprinciplesare farmorethanjustrhetoric–theygototheheartofunderstandingtheunderlyingpremisesandthe structurallogicthatinfluenceleadershipandbehavior.

27. Howmarketsgovernorganizations“fromtheoutsidein” Periphery Center Decision Information Command Centralistcommandand control“collapses“in increasinglycomplex environments Impulse Reaction

28. Why“make-and-sell”businessmodels,combinedwith “commandandcontrol”management,don'tfitanymore Classic20thcenturyorganizationsfromtheindustrialageusuallyappliedmake-and-sellbusiness models,whichmeansthatyoudevelopproducts,producethemandthengivethecustomeran incentivetobuythem.Highperformanceorganizationstodayuseasense-and-respondapproach, whichappliesanoutside-inphilosophy. Anyorganizationcanapplyanoutside-insense-and-respondapproach. ?  Famously,ToyotaandDellhaveinventedoutside-inbusinessmodelsintheirindustries (cars andcomputers,respectively),submittingproductiontosinglecustomerordersorprojects. ?  GuardianIndustriesoriginatedasimilarbusinessmodelforflatglassandmirrorproduction, beingthefirstcompanyintheindustrytoselldirectlytocustomers. ?  Handelsbanken,dmdrogerie-marktandScandinavianretailerAhlsellwork fromthebranchoutside-in. ?  SouthwestAirlines,AESandSemco,EgonZehnderInternationalandW.L.Goreworkfrom singlevaluecreationstreamsorcustomerprojects. Thehighperformersofthe21tcenturyare“managed”bymarketpull,notthroughinside-out commandandcontrol.Wasteandevendamageoccursifinsidemanagersinterferewiththe mechanismof“market-pull”.Everysinglepersonneedsafreeandclearviewtothemarketforces thataredrivingtheorganization.

29. Waystoorganizeforempowerment Hierarchicalorganizationchartsdissimulatetheviewthatorganizationmembers“servetheboss”,or hierarchy.Theythusstandinthewayofthemarketforces,bymakingpeoplelook“up”,not“out”.In thisway,hierarchieslimitthepotentialoftheirmemberstoservethemarket. BetaCodexorganizations,ontheotherhand,don’t“produce”withoutmarketpull.Theyactually makeuseofthepullfromtheoutsideintoenergizeandstabilizetheiradaptivenetworksofcells.That way,BetaCodexorganizationsusethesomehowdifferinginterestsofthemarketforceslike legislation,investorsandcustomersto“manage”theirnetworksofcells. Therearedifferentwaystoorganizeforempowerment,whichareallcoherentwithBetaprinciples. Thedifferenttypologiescanalsoexistincombination. ?  Profitcenternetworks (e.g.Handelsbanken,ToyotaandScandinavianretailerAhlsell) ?  Multi-projectorganizationorprojectorientatedorganizationwithtemporarycentersofproject teamsestablishedinsteadofpermanentprofitcenters ?  Cross-organizationalvaluecreationnetworksbetweenself-dependentcells Adoptingacellstructuredesignisvitaltomakingintegration,ortransformationwork.Withoutthis kindofconcept,buildinganorganizationwithlittlehierarchyandnocommandandcontrol,isnear- impossible.

31. Thebuildingblocksofthedevolvednetworkedorganization Accordingtothesystemicviewofanorganization,adevolvednetworkconsistsof onlyfourtypesofstructuralelements,whichwewillexplainmoreindetailinthissection. Understandingtheroleofeachoftheseelementsiskeytodesigningatrulydevolvedorganization. Thefourstructuralelementsofthemodelare: 1.  Spheresofactivity 2.  Networkcells 3.  Networkstrings 4.  Marketpull That'sit.Simple,isn'tit?Solet'stakealookatthesedifferentstructuralelements.

32. BuildingblocksofthenetworkedorganizationI: “Spheresofactivity“-distinguishingtheinsidefromtheoutside •  Everyorganizationoperateswithinitsown“sphereofactivity”. Consciouslyorunconsciously. Thesphereoriginatesfromthecombinationofanorganization’spurposeand identity.Thisencompassesitsbusinessmodel,itssharedvaluesand principles,itsbrandproposal,itsvisionandmission. •  Traditionalcommandandcontrolorganizationsfrequentlyfailtomaketheir sphereofactivityexplicittoitspeopleandstakeholders.Thespherethus remainsambiguoustotheinvolvedpartieswithinthesystem. Notsoinpioneeringorganizationsofthenewmodel,whichalwayshavean extremelystrongcorporateculture,aclearvaluesystemandexplicit boundaries.Thepioneershaveaneedforawell-definedsphere,becausetheir governancedoesn'trelyoncommandandcontrol,useofpower,andfear. •  Intraditionalorganizations,consequencescauseactions. Inpioneeringorganizations,ontheotherhand,allactingisaconsequence. •  Definingthesphereofactivityisakeyingredientofthecaseforchange, whichhastobewrittenupinthetransformationfromcommandandcontrol (Alpha) totheBetaCodex.

33. BuildingblocksofthenetworkedorganizationII: “Networkcells“–howtheydifferfromfunctions&departments •  Networkcellsintegrateseveralfunctions,rolesandduties, whichwouldbetraditionallyseparatedintodifferentdepartments,divisionsandareas. Acellthuscontainsdifferentfunctionsandroles! •  Networkcellsofferandsellproductsand/orservicesonitsown,andonlydependonits marketinitsdecisionsaboutthem. •  Networkcellsarecustomerfocused,astheyrespondonly tointernalorexternalclients,nottohierarchy. •  Networkcellsareheldaccountablebyother membersoftheorganizationandareresponsible fortheirownvalue-creation.Eachcellhasits ownP&Lstatement.Cellsaresociallydense. •  Networkcellsapplythefullsetof 12lawsofthebetacodex.

34. BuildingblocksofthenetworkedorganizationIII: “Networkstrings“-thecommunicationandvaluecreationlinks • Stringsdepicttheconnectionsbetweencells,showing ahighlevelofelasticity.Suchconnectionsarisefrom severaldifferentkindsofinteraction: ?  Valuecreationflowsfromtheinsideout, ?  Formalcommunication,and ?  Informalnetworking. • Internalmarketsandpricingmirrorthevaluecreationflow frominside-out:Cellnetworkspracticeinternalpayments, fromtheoutside-in,tocompensateforinternalservices.

35. Buildingblocksofthenetworkedorganization,IV: “Marketpull“-theforcethatactually“manages“organizations •  Marketpulliswhatconnectsthemarketwiththeorganizations,andthustheouter partofthesphereofactivitywiththeinnerpart.Wheneveranexternalstakeholder ofanorganization“wants“or“demands“,“orders“ordoessomethingrelevantto theorganization,itoriginatesmarketpull. •  Marketpullcanbeappliedbycustomerswantingsomething,butalsoby shareholdersdemandingacompensationfortheirinvestments,orabank demandingpaybackofaloan,orthestatedemandingthepaymentoftaxes,ora competitorlaunchinganewproduct.Marketpullthushasvariedsources. •  Intherealworld,thereisnosuchthingas“marketpressure“. Thismightatfirstsightappearasacounter-intuitiveclaim.Butifyouconsider organizationsasoperatingwithintheirown,self-definedSphereofActivity,then marketssimplycannotapply“pressure“.Whatmarketsreallydoisthattheyapply “pull“.Theydothisallthetime.Andpullisapowerfulforce.Allmarketactorspull. Theystimulatebypulling.Theywantthings.Theygoverntheorganization.

36. Theimportanceof“marketpull“ Marketpullcomeswithaninterestingcollateral.Becauseoncemarketpullisacceptedasagoverning andenergizingforce,consciouslyandbyallmembersofanorganization,itiscapableofturning managementasaninternalfunctionunnecessary. Infact,managementhasbeenoutsourcedtomarketslongago.Thishappenedwhencompetitionand dynamicchangetookoverwithintheenvironmentsofourorganizations.Inconsequence,anyeffortto “manage“anorganizationfromthetopdowntodaymeansmakingapainstaking,butultimately fruitlesseffortto“steerfromwithin“,ortointernallyduplicate“whatactuallymanagesus“. Inotherwords:managementthesedaysusuallymeanstryingtodosomethinginternallythatthemarket alreadydoesforyouinamuchbetterway,becauseitdoessoinamorerelevantandtimelyfashion.

37. Someguidelinestocreatingaworkingcellstructure: Whatcharacterizesatrulynetworkedorganization •  Itgainsstabilityandresiliencenotthroughpowerrelationships, orthrough“resistancetopressure”,butthroughthe“pull”thatcomesfromthemarket outside. (Soundssimple?Itis!) •  Itistransparent,throughopeninformationsystems. •  Itshowsitsinternalinteractionsinasimplemanner, basedon“market”and“pull”relationships. •  Itcreatesasharedunderstanding ofthe“inside”and“outside”relationshipsoftheorganization. •  Itdoesn’tcareabouthierarchy (whichisregardedas“trivial”, butaboutvaluecreationstreams,basedonnetworkingpatterns. •  Ithastheinterconnectionsneeded-notmore,notless •  Itappliesthefullsetof12BetaCodexprinciples.

38. Part3: CasestudyNo.1-Technologyfirm fromtheGermanMittelstand

39. CaseStudy“TechnologyfirmfromtheGermanMittelstand”: Anoverviewoverthecompany Thecasecompanyinanutshell: •  Producerofhouseholdequipment,soldtolocalresellersandcraftsmen.Fourdifferent productlines,severaldifferent“saleschannels“,dealtwithbydifferentteamsandareas •  Approx.350people,ageofthefirm:approx.20years •  StrongpresenceinGermanyandItaly,weakerpresenceinothercountries.Twoproduction sites–oneinGermany,oneinChina. •  Sometechnologyandproductionleadership,inastronglycommoditizingmarket–which createspressuretointernationalizethebusiness. •  Hugegrowthpotential,butinthepast,internationalizationhinderedbyinternalquarrels, lackofcoordination,andacultureofinternalpoliticking •  Longhistoryof“feeble”financialresults,and,occasionally,dramaticfinanciallosses, compensatedforbytheownerfamily. •  Alargenumberofproductengineerscontrolsinnovationandotherprocessesandthus actsasapowerfulfunction.

41. Whatthecompanylookedlike •  Structure: ?  5directors:“Technology”,“Finance”,“Production”,“SalesGermany”, “SalesInternational” ?  20middlemanagers,manydepartmentswithmassivecoordinationproblems. Stronglinkbetweensalariesandjobtitles. •  Example:Thefirm'ssalesforceinGermany Previous structure: -29salesforcemavericks (whosedecisionmakingpowershasbeenerodedovertime) -15fieldengineers -15back-officesalesemployees ...neatlydividedintodifferentdepartments,withdifferentbosses,targetsandinterests.

42. Thecasestudy:whattheorganizationalstructurelookedlike Director Sales Germany Director Technology CFO Region 1&2 Region 3&4 Region 5&6 Region 7&8 Cont. educa- tion Control- ling Engeneers, Developers Admini- stration Marke- ting/CI Assis- tant IT HR Region 9&10 Region 11&12 Region 13&14 Region 14&15 Tele- phonists Accoun- ting Assis- tant Customer Services Sales office After-Sales Services Region 16&17 Region 18&19 Region 20&21 Region 22&23 Saleslarge equipments Technical Hotline Projects& Offers Region 24&25 Region 26&27 Region 28 Region 29 Complaints Director Production Director International Branch I Branch II Branch III Branch IV Cont. Educa- tion Qualit y Production Leader Sales OEM Assis- tant Material Planning Admini- stration Sales OEM Assis- tant Marke- ting Sales Sales Sales Sales Work planni ng Pro- duction Assem- bly Customer Services Centralsales support Internalsales services Logistics Purchasing & Disposition Saleslarge systems Technical Hotline Projects& Proposals Process optimization Toolings& Maintenance Complaints Design

43. Thecasestudy–puttingthepiecesoftheprevious tayloristicorganizationalstructuretogether Andwheredoesthemarketfitintothisdesign? CEO Answer:Itsimplydoesn´t! Director International Director Technology Branch II Director SalesGermany Branch IV Director Production CFO Branch I Branch III Region 1&2 Region 3&4 Region 5&6 Region 7&8 Marke-ting/ CI Cont. education Sales Production Leader education Sales Sales QualityMaterial Cont. Engeneers, Developers Planning Sales Sales IT Assistant HR OEM Control-ling Admini-stration Sales Assistant OEM Admini-stration Assistant Marke-ting Region 9&10 Region 11&12 Region 13&14 Region 14&15 Accoun- ting support Work Customer Services Sales office plannin g After-Sales Services Telephonists Internalsales Assistant Customer Services Centralsales Region 16&17 Region 18&19 Region 20&21 Region 22&23 Pro-ductionAssembly services Logistics Saleslarge equipments Proposals Technical Hotline Design Saleslarge Projects& Region 24&25 systems Region 26&27 Region 28 optimization Region 29 Maintenance Complaints Purchasing& Disposition Projects&Offers Process Toolings& TechnicalHotline Complaints

44. Thecasestudy: Whatwasdone?“Theweekoftruth“ Statusoftheproject,roughly12monthsintothetransformationinitiative 1. 2. 3. 4. 5. 6. 7. Createa senseof urgency Pulltogethera guiding coalition Develop changevision andstrategy Communicate forunderstan- dingand buy-in Empowerall others toact Produce short-term wins Don´t letup Phasein% 1.  Thereisastrongguidingcoalitionthatsustainsthetransformation. 2.  Allovertheorganization,“profoundchange“isconsideredrelevant,thereisasenseofurgency. 3.  Differentgroupsintheorganization (taskforces) alreadyworkonspecificchanges.

45. Thecasestudy: Whatwasdone?“Theweekoftruth“ Approachtoredesign Workshopexecution: •  Three1-day“cell-formation”workshopsrun inearly2008,about1yearafterthestartof theBetaCodexinitiative,heldoverthe courseofasingleweek •  Threegroupsformed: 1.Market,2.Product,3.CentralServices •  About60participants (approx.20%ofthe firm'semployees) representingallpartsof theorganization •  fromallareasofthefirm. •  fromallhierarchicallevels. •  Workshopsdesignedtobreakuptraditional departmentsandhierarchicalpower; theworkshopsstartthecreationofthenew, networked,organizationalstructure Phase1–Speakinga commonlanguage Phase2-Recognize &describecurrentsituation Phase3–Thinkanddescribe networkedcellstructure

47. Groupexerciseduringphase3ofeachworkshop: “Thinkanddescribedecentralizednetworkedcellstructure“ Someofthedesignprinciplesapplied (seepartIofthispaperfordetails): •  Themarketistheboss (“outside“rules!) •  Therearefourkindsofbuildingblocksofadevolvedorganization: ?  Asphereofactivity, ?  networkcells, ?  “strings“, ?  “marketpull“. •  All“keytasks“performedintheoldorganizationalstructure mustalsobeperformedinthenewstructure (“businessmustcontinue!“) •  Acellisnotadepartment:Itisfunctionallyintegrated,notfunctionallydivided! Acellhasclients-externalorinternal–towhichitprovidesservices. Andithasatleast5teammembers,sothatactualteamspiritandpeerpressurecanstrive. •  Everycellaswellastheentireorganizationappliesthe fullsetof12lawsoftheBetaCodex.

48. Cellstructurechartfora“BetaCodex”organization: DefiningtheSphereofActivity Society Clients Legislators Suppliers “Market” Competitors Shareholders Politics Technology “SphereofActivity” Banks Investors Associations Previouslyoutlinedin writingina “caseforchange” manifesto …

49. Definingcellsandtheirroles Definedduringinitialworkshop: •  Cellnameandtype- permanentortemporary (ifprojectortaskforcerelated) •  Roles-functionsandduties •  Clients:Whoarethecells´ customers,internallyorexternally? Definedlater: •  Teammembers: Whoispartofthecellteam? •  Listofproducts/services andpricingforinternalservices •  Reporting:P&Lstatement, internalandexternalbenchmarks “Market” “Cell1” “SphereofActivity”

50. Thesolutionidentifiedduringthedesignworkshops,1stpart: “R-cells“-empoweredbusinessteamslocatedintheperiphery •  Allcustomerresponsibilitywouldresidewithintheso-calledRegionalcells,orR-cells, whichareresponsiblefor“everythingrelatedtothecustomer“–integratingawidearrayof previouslyseparatedfunctions (now:roles).Thepreviousdepartmentsceasetoexist. •  Therewouldbesixsuchintegrated,virtualregionalbusinessteamsfortheGermanmarket andanothertwocellsforothercountriesandregions,subjecttocelldivisionwhenever acute. •  Insteadofdifferentareasandpeopleaimingatdifferentcustomersegmentsandchannels –oftendeterminedbyproductlines,now,regionalteamswould ?  decidethemselvesonthecustomersegmentstheywouldtarget, andontheirstaffing. ?  eachhaveafullP&Laccount,beingrankedmonthlyamongthemselvesinfinancial indicators,andpayingothercellsofthenetworkfortheirservicesandproducts throughaninternalpricingsystem. •  Supportcells:Fromthepreviousdepartmentalstructurewith“marketfocus“,onlytwo market-relatedkeyroleswouldremainseparatedfromthenewlyintegratedR-cells.These rolesare“over-regionalmarketing“ (ofwhich,asoneorganizationmembersaid,“very littleshouldbedoneinthefutureorganization”),andmarket-relatedtraining. Thesetworoleswouldbeintegratedinacellcalled”CentralMarketServices“