April 1, 2014

Dear W.H.,

Business 3.0: Top Down Transformation

Introduction

You asked me to conduct research on enterprise business architecture and provide recommendations based on my findings. The goal was to align the human and digital resources of the organization and to achieve a fair division of responsibilities between human and digital resources with a constant delegation of work (which would gradually become a routine) to the digital resources.

Special emphasis was paid to bringing together considerations and best practices related to designing complex organizations, as well as advancements in software engineering. This means that I have considered an organization unit as a complex system that consists of interrelated human and digital (software) resources, which perform work to support the unit's purpose.

My recommendations aim to strengthen both the human and digital architecture of the organization and will also result in a radical transformation of the top organization levels. Even though the following recommendations will have significant implications for organizational design, I also provide advice on where to start and the first steps that could be taken in order to transform the organization into a real-time enterprise.

Summary of Key Recommendations

  1. Redesign and renovate a business organization by transforming it into a system (network) of sociotechnical business systems (units) that aligns human, digital, and physical resources.
  2. Redesign organization units by transforming them into sociotechnical systems and create formal digital constructs to support their purpose, function, behavior, and structure.
  3. Change the way CEO/CxOs manage the organization by conducting a systemic transformation of the top organizational levels and enabling real time management and decision making.
  4. Use a top-down approach to transform the organization, which will not only strengthen the top organizational levels, but will also create the infrastructure and a blueprint for further transformation.

Background

In this research, I looked at organization design and architecture from the Systems Thinking perspective.

My recommendations were also influenced by the development of the following fundamental technologies, which, in synergy with the principles of Organization Design, Enterprise Architecture, and Systems Thinking, can substantially strengthen the organization:

  • Service Oriented Architecture
  • Business Process Management
  • Enterprise Messaging and Event Management
  • Enterprise Data Management
  • Enterprise Content Management
  • Business Rule and Decision Management
  • Enterprise Business Intelligence and Analytics

While conducting my work, I was guided by one key principle: the recommendations must deliver the following benefits to the organization.

  • Clarity. The complex organization could have been designed with a clear hierarchical structure, where each business capability can be recursively decomposed into a combination of related capabilities. Each capability can be implemented as a sociotechnical unit with digital elements that support its purpose, function, behavior, and structure.
  • Precision. Most organizational design decisions (business rules, policies, business processes, and business interactions) are implemented as unambiguous, computer-executable digital artifacts.
  • Timeliness. The proposed organizational design enables the creation of a real-time enterprise with event-driven interactions between units and process-centric integration inside the units.
  • Visibility. A unit's digital elements are visible and—being machine-executable—are always up-to-date and under pressure for constant improvement.
  • Self-organization and self-development. Each autonomous business unit is encapsulated and empowered within its boundaries, maintaining full ownership and control of its digital and physical resources.
  • Effectiveness. Business units do the right things that stem from their purpose(s). Function elements logically support the units' purpose, behavioral elements support the function elements, and structural elements logically support the behavior.
  • Consistency. All organizational units (atomic and composite) are built following the same design principles.
  • Agility and growth. The organization can quickly change and grow by adding, replacing (including outsourcing), or removing business capabilities.

1. The Organization as a System of Sociotechnical Systems

The research that I conducted on organizational design through the prism of systems thinking led me to the conclusion that the most optimal structure for the organization is a system (network) of interrelated business capabilities, with each one implemented as a sociotechnical system, which I will be referring to as sociotechnical units (STU) or simply "units," because the word system has so many meanings that it could mean almost anything. This structure must satisfy the following rules:

  • The organization cannot contain components other than STUs. Each human, physical, and digital resource must be (logically) encapsulated and owned by one or, in some cases, several STUs. No human role may exist outside of a unit.
  • Each STU must be sufficiently autonomous and (semi-)independent.
  • The organization must be able to add, replace, or remove a unit without affecting other units.
  • STUs could be of two types: specialized (atomic) units and managerial (composite) units. Specialized units perform work using their own physical, digital, and human resources by executing specialized business processes. Specialized units may contain internal sociotechnical units, however, those lack autonomy and independence. Managerial units represent composite business capabilities; they manage and coordinate interactions between units that report back to them and make sure that each unit contributes optimally to further the success of the whole. Managerial units run analytical and decision-making processes that result in the creation/modification of policies and business rules.

Today, instead of building software that aligns with the organization architecture, organizations frequently purchase specialized enterprise software (e.g. investment accounting software) that fails to align. It is obvious that a vendor that has over 200 installations in 30 countries will never be capable of fully aligning with the business architecture of a particular organization. In an attempt to meet the requirements of multiple clients, vendors produce massive software that—instead of mirroring the human architecture of your organization, actually distorts and misshapes it. It is not a secret that in many organizations, business strategies are named after the name of a vendor or a software suite: Vendor X strategy or Software Suite Y strategy. Those vendor products not only create an elephant-sized footprint on an organization's architecture and infrastructure, but also leave awkwardly shaped gaps that are eventually filled by in-house developers.

Recommendation 1

Redesign and renovate a business organization by transforming it into a system (network) of sociotechnical business systems (units) that aligns human, digital, and physical resources.

2. Redesigning Business Units

Organizational units (OU) are sociotechnical systems that are characterized by four main attributes:

  • Purpose: The role(s) the OU chooses to play in the environment; it connects the unit with other systems both inside and outside the organization.
  • Function: This defines how others can use the OU; it consists of human, digital, and physical interfaces, therefore creating the unit's boundary. Function is the only thing that customers can see/view after discovering the unit by its purpose: it is a contract between the unit and other elements of the environment.
  • Behavior: This is a set of organized activities that support the unit's function; it is comprised of business processes and business tasks.
  • Structure: This consists of a set of human, digital, and physical resources that are capable of supporting the behavior of the units.

In order to become an effective part of an organization, each business unit should be transformed into a well-balanced sociotechnical system as follows:

  1. Encapsulate the unit in support of its purpose. The encapsulation decisions can be made based on the current human architecture of the organization: business units that already have autonomy and (semi-)independence are good candidates for encapsulation, which means that they must be provided with digital and physical work resources and must assume ownership of those resources. Loosely coupled units that have full control over their resources can self-organize, self-develop, and innovate faster.
  2. Create human interfaces (web applications, mobile apps, etc.) and system interfaces (web services and RESTful APIs, etc.) that will comprise a unit's boundaries in support of the unit's function.
  3. Create explicit machine-executable business processes in support of a unit's behavior.
  4. Create a unit's structure by defining roles and effectively dividing responsibilities between human, digital, and physical resources.

Atomic Business Capabilities

Units that perform specialized work represent atomic business capabilities. They may contain not only human workers, but also specialized teams that were not encapsulated for various reasons. These units operate in a boundaryless environment; they feature boundaryless information flow and process-oriented integration between resources.

Composite Business Capabilities

Composite units focus on management and governance activities: they delegate specialized work to other units. A composite unit exists independently and has its own boundaries and resources, which creates a qualitatively different business context. As a result, information is bounded to each parent and subordinated unit (context); this pattern features event-driven integration between the units.

Recommendation 2

Redesign organization units by transforming them into sociotechnical systems and create formal digital constructs to support their purpose, function, behavior, and structure.

3. Reinventing the CEO/CxO

The business world was willing to generously compensate business executives for their hard work for a good reason; their work demanded not only strong leadership, but also the ability to process complex information and make the right decisions. However, lately, because of a significant increase of the volume, velocity, and variety of information, CEOs of large corporations have claimed even higher compensation without being capable of processing the increased information flow. It is no longer enough for an enterprise to have a CEO: it needs an advanced executive business capability that must be able to identify, aggregate, and analyze relevant information and make appropriate decisions in a timely manner.

With the increased pressure for the improvement of precision, timeliness, speed, and consistency of executive decisions, the situation demands the creation of fully digital, well-equipped executive systems that will provide complete analytical and decision-making support to the executive's office. The executive sociotechnical systems (ESTU) should have received additional human and digital resources and be encapsulated and organized similarly to other sociotechnical units, with their operations implemented as computer-managed business processes and interactions, that are implemented as decision services, business rules, and policies.

Recommendation 3

Change the way CEO/CxOs manage the organization by conducting a systemic transformation of the top organizational levels and enabling real time management and decision making.

4. Top Down Transformation

This report argues that even though the business organization is hierarchical by nature, it is best implemented as a system (network) of interrelated sociotechnical systems (autonomous business units). With this implementation, the hierarchical structure of the organization manifests itself in interactions between the units (decision services on one side; information/reporting services on the other). To gain the most benefits from the transformation, it would be more practical to begin with greenfield projects at the top levels of the organization, where very few constraints or needs for renovation are imposed by prior work. The initial transformation may involve the following steps:

  1. Identify and encapsulate sociotechnical systems at the top two levels of the organization, e.g. the CEO Office, Finance, Risk Management, Investments, and Human Resources.
  2. Design and implement their boundaries. The boundaries will consist of human and system interfaces that enable the units' interactions with the environment. At the top levels, boundaries are mostly comprised of decision services oriented down the hierarchy and information/reporting services oriented up the hierarchy.
  3. Define and implement computer-managed business processes in support of business interactions.
  4. Create a messaging infrastructure to enable both synchronous and asynchronous interactions between the units.
  5. Enforce formal ownership rights and responsibilities. Each digital asset—whether it is a business process, a human/system interface, a business rule, or a data/information asset—must be owned by a unit. The enterprise asset management platforms, such as business process management suites, database management systems, etc., should be owned by the IT unit.

Formalization of the top business contexts will not only strengthen the organization, but also provide a showcase implementation for the downward transformation.

Recommendation 4

Use a top-down approach to transform the organization, which will not only strengthen the top organizational levels, but will also create the infrastructure and a blueprint for further transformation.

Thank you for asking me to prepare this report. I hope it provides you with some insight into what it will take to create a next generation business organization, while also supplying you with recommendations that will enable you to make an informed decision about the future of your business.

Respectfully submitted,

A. M.