How to Turn an Organization Agile & Digital
- Thomas Vrba
- May 15, 2021
- 15 min read
Learn Best Practices from Industry Leaders and Adapters but also from Companies that tried and did not make it .
Based on Research from: Harvard, MIT, HEC Paris, Bain, McKinsey.
And experiences from: Amazon, Netflix, Spotify, USAA, ING, Bosch, SAP, Microsoft, Rogue Soft, GE and IBM (not all made the best of it).
Key Learning Sections
There is a big shift going on in companies to today. This is driven by the success of Amazon, Facebook, Google, Microsoft and many more.
All these companies are innovative and work following agile principle but most of all.
They have a New Mindset: Absolute Focus on the Customer
Example: Amazon’s customer obsessed mindset
Amazon’s sophisticated logistics expertise did not come from wanting to be a supply chain company. It came from understanding that the customer experience was greatly affected by flexibility, speed, and quality of delivery.
Amazon Web Services (AWS) did not come from wanting to be a cloud technology company but from needing to provide a scalable infrastructure to provide a great online customer experience.”
In meetings, Jeff Bezos would leave one chair empty. It was for the customer to have a seat at the table. It should focus the whole meeting outcome towards improving the customer experience.
A leadership team hoping to scale up agile needs to instill agile values and principles throughout the enterprise, including the parts that do not organize into agile teams.
This is why Amazon has a specific set of agile driven Leadership principles (see below) and other companies like Bosch or ING developed new leadership principles and put a lot of focus to communicate them throughout the company.
They wanted to ensure that everyone understood that things would be different and that agile would be at the center of the company’s culture.
Amazon’s Leadership Principles
Customer Obsession
Leaders start with the customer and work backwards. They work vigorously to earn and keep customer trust. Although leaders pay attention to competitors, they obsess over customers.
Ownership
Leaders are owners. They think long term and don’t sacrifice long-term value for short-term results. They act on behalf of the entire company, beyond just their own team. They never say “that’s not my job."
Invent and Simplify
Leaders expect and require innovation and invention from their teams and always find ways to simplify. They are externally aware, look for new ideas from everywhere, and are not limited by “not invented here." As we do new things, we accept that we may be misunderstood for long periods of time.
Are Right, A Lot
Leaders are right a lot. They have strong judgment and good instincts. They seek diverse perspectives and work to disconfirm their beliefs.
Learn and Be Curious
Leaders are never done learning and always seek to improve themselves. They are curious about new possibilities and act to explore them.
Hire and Develop the Best
Leaders raise the performance bar with every hire and promotion. They recognize exceptional talent, and willingly move them throughout the organization. Leaders develop leaders and take seriously their role in coaching others. We work on behalf of our people to invent mechanisms for development like Career Choice.
Insist on the Highest Standards
Leaders have relentlessly high standards — many people may think these standards are unreasonably high. Leaders are continually raising the bar and drive their teams to deliver high quality products, services, and processes. Leaders ensure that defects do not get sent down the line and that problems are fixed so they stay fixed.
Think Big
Thinking small is a self-fulfilling prophecy. Leaders create and communicate a bold direction that inspires results. They think differently and look around corners for ways to serve customers.
Bias for Action
Speed matters in business. Many decisions and actions are reversible and do not need extensive study. We value calculated risk taking.
Frugality
Accomplish more with less. Constraints breed resourcefulness, self-sufficiency, and invention. There are no extra points for growing headcount, budget size, or fixed expense.
Earn Trust
Leaders listen attentively, speak candidly, and treat others respectfully. They are vocally self-critical, even when doing so is awkward or embarrassing. Leaders do not believe their or their team’s body odor smells of perfume. They benchmark themselves and their teams against the best.
Dive Deep
Leaders operate at all levels, stay connected to the details, audit frequently, and are skeptical when metrics and anecdote differ. No task is beneath them.
Have Backbone; Disagree and Commit
Leaders are obligated to respectfully challenge decisions when they disagree, even when doing so is uncomfortable or exhausting. Leaders have conviction and are tenacious. They do not compromise for the sake of social cohesion. Once a decision is determined, they commit wholly.
Deliver Results
Leaders focus on the key inputs for their business and deliver them with the right quality and in a timely fashion. Despite setbacks, they rise to the occasion and never settle.
Driven by Customer Metrics
Agile organizations place more value on adapting to change than on sticking to a plan, and they hold themselves accountable for outcomes (such as growth, profitability, and customer loyalty), not outputs (such as lines of code or number of new products).
Example: Amazon’s customer metric focus
At Amazon real-time customer metrics are built into every aspect of the work. As a result, “customer value” wins battles that it wouldn’t win in firms run with a financially oriented mindset.
Amazon doesn’t start an activity or develop a capability unless and until the team has figured out how it will measure customers' response. Amazon builds in customer metrics as a “forcing function” from the outset.
By now the article seems very Amazon focused. The main reason is that Amazon has proven that it can work. Have a look at the development of the share price. It is a reflection of successful the successful growth based on new products and services.
Agile Organization Principles
Which functions should start and how do they interact with the rest
Agile approach and teams best suited to innovative functions, i.e. profitable application of creativity to improve products and services, processes, or business models.
Not every function needs to be organized into agile teams; in fact, agile methods aren’t well suited to some activities. Routine operations such as purchasing, and accounting are less yield less.
To allow existing and new organization to work effectively together well defined interfaces and specific collaboration models / agreements are required.
How to setup an agile organization?
The core element are agile teams.
Agile teams are organized around capabilities and services as opposed to projects.
The teams are autonomous. Interactions with other teams are well defined. The team owns and is responsible for every aspect of its capability and service.
One of the primary goals is to lower the communications overhead in organizations, including the number of meetings, coordination points, planning, testing, or releases. Teams that are more independent move faster.
Example: Amazon's Two-Pizza Teams
At Amazon, the so called Two-Pizza Teams work like semi-independent entrepreneurial hothouses. Insulated from the greater organization’s bureaucracy, the Two-Pizza Teams encourage ambitious leaders, provide opportunity, and instill a sense of ownership.
The Two-Pizza Team owns its own data. No other team may access or change the data except through APIs. Application programming interfaces (APIs) are the interfaces with enforced rules allowing other teams to integrate and use the team’s capability.
New Organization vs. In the existing Organization
Choice depends heavily on what the organization is trying to achieve.
Existing Organization: The agile units are setup in or close to the existing organization. This allows agile principles to be quicker introduced to the organization as a whole. It also allows more control.
New Organization: To create significant disruption from current business practices, the teams within your company that are dedicated to creating innovation need to be separated from the teams representing the status quo.
Example: Amazon's Lab126
In Amazon’s case, the company has a special team called Lab126 that is focused only on creating innovation in their devices.
That team is based in California, far from the company’s Seattle base. While physical separation can be important, it’s more about independence from the legacy business and having unfiltered communication and collaboration with a company’s CEO or senior leader.
Another example is how Charles Schwab setup its online brokerage business by setting up a completely new company.
What about hierarchies?
Flat Hierarchies – Leaders as owners
Move and reduce middle management as much as possible.
Senior managers are often put in charge of important initiatives heading some of the most innovative teams. Senior managers are considered doers, not merely overseers of others.
Agile teams work differently from chain-of-command bureaucracies. They are largely self-governing: Senior leaders tell team members where to innovate but not how.
Leaders solve problems and remove constraints rather than delegate that work to subordinates.
What is the role of a senior leader?
This approach frees up senior leaders to create and communicate long-term visions, set and execute strategic priorities, and build the organizational capabilities to achieve those goals.
The executive team sets priorities and selects opportunities to improve customers’ experiences and increase their success.
The agile leadership team, like any other agile team, has an “product (agile initiative) owner”. This owner is responsible for the overall results and a facilitator who coaches team members and helps keep everyone actively engaged.
How can agile be applied in large organizations or projects?
Agile Principles can be applied to large scale organizations or ventures. Studies show that many executives have trouble imagining that small agile teams can attack large-scale, long-term projects.
Establish “team of teams” that work on related initiatives - an approach that is highly scalable.
Example: Saab’s aeronautics business building the new Gripen fighter jet
More than 100 agile teams operating across software, hardware, and fuselage (one fighter jet costs around $43 million).
The coordination of all efforts is coordinated through daily team-of-teams stand-ups.
At 7:30 AM each frontline agile team holds a 15-minute meeting to flag impediments, some of which cannot be resolved within that team.
At 7:45 the impediments requiring coordination are escalated to a team of teams, where leaders work to either settle or further escalate issues.
By 8:45 the executive action team has a list of the critical issues it must resolve to keep progress on track.
Example of a Major Transformation: International Banking Giant ING from the Netherlands
ING was faced by a thread through Fintechs and a huge shift from in person to online banking.
ING had to react. By the spring of 2015 the headquarters had replaced most of its traditional structure 3,500 employees with a fluid, agile organization composed of tribes, squads, and chapters.
Thirteen tribes were created to address specific domains, such as mortgage services, securities, and private banking. Each tribe contains up to 150 people. (Employees in sales, service, and support functions work outside this structure—in smaller customer-loyalty teams, for instance—but they collaborate with the tribes.)
Each tribe has a lead who sets priorities, allocates budgets, and ensures that knowledge and best practices are shared both within and across tribes.
The tribe lead has also the key responsibility: to create self-steering squads of nine or fewer people. They address specific customer needs by delivering and maintaining new products and services.
Therefore squads are cross-disciplinary to be able to deliver the product or service across all functional areas involved. These could be marketing, data analytics, user-experience , and IT. One squad member is selected as the the “product owner,” responsible for aligning stakeholders (internal & external customers) and setting priorities.
The time a squad stays together will vary, depending on the specific tasks assigned. Sometimes they might work on a specific topic only for a few weeks, e.g. a new feature to capture additional information on an online form. In other cases they continue driving the product development for years.
Working in such small units and with colleagues from various capabilities, squad members can quickly resolve issues that before would have been passed on between functions with no one taking ownership.
Applying agile principles like scrums and sprints drives the ownership the team feels and forces information sharing and short feedback loops. This also increases customer satisfaction as the team usually directly interacts with the customer and quickly understands if their solution is meeting the requirements or not.
Agile coaches help the tribes to stay true to these principles. They ensure the collaborative approach in solving the customer's problem. The squad owns the problem and need to work together to resolve it.
Even in such a large organization like ING Netherlands, adapting to the new ways of working was actually not as difficult as one might think. Many long-term bank employees embraced the new model as ING Netherlands CIO Peter Jacobs confirms: They “adapted even more quickly and more readily than the younger generation.” One reason for this might be that also long-term employees are tired of the old red taped processes and are happy to see that they can move something quickly forward.
In addition there are chapters. They are tracking and sharing best practices across specialists focusing in the same capability, e.g. data engineers, mobile app developers. At ING they are also responsible for performance management and coaching.
Following a sprint type of approach, every two weeks squads review their work. Squads get to decide how they will continue to improve the product for our customers, or if they want to ‘fail fast.’ This is not exactly agile and seems to leave the customer out of the equation, though.
Squads do a thorough self-assessment after completing any engagement, similar to a release retrospective. Tribes also perform quarterly business reviews (QBRs). They review their biggest successes and failures, as well as their most important learnings. From this goals for the next quarter are derived.
When agile is not really agile
When reading the very impressive ING case study, sometimes you find yourself comparing old organization to the new agile organization.
There are strong similarities between the two. A few examples:
Agile Traditional
Tribe Lead => Department Head
Chapter Leads => Area Leads
Product Owner => Team Lead
Squad => Team
There is a danger that all is just renamed. Daily team alignments become stand-ups or huddles and so on.
It takes a bigger effort to truly change an organization and adapt new ways of working.
When is an Agile Team Considered Ready?
No agile team should launch unless and until it is ready to begin. Ready doesn’t mean planned in detail and guaranteed to succeed. It means that the team is:
Focused on a major business opportunity with a lot at stake
Responsible for specific outcomes
Trusted to work autonomously—guided by clear decision rights, properly resourced, and staffed with a small group of multidisciplinary experts who are passionate about the opportunity
Committed to applying agile values, principles, and practices
Empowered to collaborate closely with customers
Able to create rapid prototypes and fast feedback loops
Supported by senior executives who will address impediments and drive adaption of the team’s work
Integration with the Rest of the Organization & Ways of Working
The big risk is that your newly agile units are constantly frustrated by bureaucratic procedures or a lack of collaboration between operations and innovation teams. The potential tension from the organizational friction might lead to conflicts and poor results.
Implementing agile at scale requires modularization and then seamlessly integrating workstreams.
Example: Modular approach by Tesla
Building on the modular approach to product development pioneered by Toyota, Tesla meticulously designs interfaces among the components of its cars to allow each module to innovate independently.
Thus the bumper team can change anything as long as it maintains stable interfaces with the parts it affects. Tesla is also abandoning traditional annual release cycles in favor of real-time responses to customer feedback.
CEO Elon Musk says that the company makes about 20 engineering changes a week to improve the production and performance of the Model S.
Other Concepts to Facilitate Collaboration between Old and New Organization
Mindset shift for functions like quality, finance, and HR. Customers are the teams they serve not functional bosses.
Priority lane approach, the new agile organization gets quicker response for their requests. This might seem unfair but in the mid-term will help the overall process. An example here is supplier onboarding.
Institute customer reviews or Net Promoter surveys to collect feedback on whether those customers would recommend the functions to others. Make it known that dissatisfied customers could sometimes hire outside providers.
Some members of corporate functions may be embedded in agile teams, or a portion of a function’s capacity may be dedicated to requests from agile teams.
Departments such as legal reserve buffer capacity to deal with urgent requests from high-priority agile teams.
Example: Riot Games
Riot Games has applied most of these successfully out of a need to serve agile teams faster.
Speed being the key in all these considerations.
Implementation Principles
Companies need to decide, are they looking for an agile overhaul or do they want to deliver a specific product very fast avoiding standard bureaucratic processes.
In the second case, it works usually better to create a separate unit or even company that fully focuses on the new digital offering and is not held back by standard processes but rather has the agility and speed .
In case of a complete overhaul which will serve the company as a whole better, leaders recognize that they do not yet know how many agile teams they will require, how quickly they should add them, and how they can address bureaucratic constraints without throwing the organization into chaos.
So they typically launch an initial wave of agile teams, gather data on the value those teams create and the constraints they face, and then decide whether, when, and how to take the next step.
It allows to balance increased agility and costs. If the benefits outweigh the costs, leaders can continue to scale up agile. Introducing agile concepts to further parts of the organization.
If not, they can put more focus on making agile work (for instance, by reviewing agile processes implemented and why they are not yielding the results expected).
In general it does not make sense to rollout a system that is not working. Fix first the prototype and then deploy in the next waves across the organization.
McKinsey is recommending companies to create a full taxonomy of opportunities. Like agile teams they are supposed to compile a backlog of work to be accomplished in the future.
McKinsey advises to follow agile’s modular approach, break the taxonomy into three components - customer experience teams, business process teams, and technology systems teams - and then integrate them.
This is a very structured and logical approach but agile principles are usually centered around satisfying a customer demand by improving on the proposed solution using quick feedback loops.
It takes a lot of time to build a full taxonomy and the prioritize and then build the first teams or squads around that.
Turn this around and look where you have the biggest pain points, where do you lose the most money or where is the biggest customer demand for a new feature or solution.
Pick one of those areas, learn how you can deliver the solution faster and better. Then apply those learnings to other areas, always following the biggest internal or external customer pull.
In this way you avoid analysis paralysis and building a taxonomy that most probably will have changed considerably by the time you have gained enough experience with the prototype agile teams.
McKinsey estimates that a $10 billion business might identify anywhere from 350 to 1,000 or more potential teams. Those numbers sound daunting, and senior executives are often loath even to consider so much change.
So you better start where the impact is biggest and proves that agile can be a game changer.
ING went for full change: It dissolved the organizational structures of its most innovative functions, including IT development, product management, channel management, and marketing—essentially abolishing everyone’s job. Then it created small agile “squads”. About 3,500 employees had to reapply for 2,500 redesigned positions on those squads.
About 40% of the people had to learn new jobs, and all had to profoundly change their mindset.
But big-bang transitions are hard. They require total leadership commitment, a receptive culture, enough talented and experienced agile practitioners to staff hundreds of teams without depleting other capabilities, and highly prescriptive instruction manuals to align everyone’s approach. They also require a high tolerance of risk, along with contingency plans to deal with unexpected breakdowns. ING continues to iron out wrinkles as it expands agile throughout the organization.
Companies short on those assets are better off rolling out agile in sequenced steps, with each unit matching the implementation of opportunities to its capabilities. At the beginning of its agile initiative, the advanced technology group at 3M Health Information Systems launched 8 to 10 teams every month or two. After two years, more than 90 teams are up and running. 3M’s Corporate Research Systems Lab got started later but launched 20 teams in three months.
Talent Management Principles
The general recommendation is that Companies that are scaling up agile need systems for acquiring star players and motivating them to make teams better. (Treat your stars unfairly, and they will bolt to a sexy start-up.)
This is only partly true. Agile is all about a team collaborating and achieving goals because all are feeling responsible for the team's results.
A star player can be very detrimental to this as they often expect to be in the limelight. Therefore a charismatic leader of a specific initiative can help a lot to drive efforts, rallying all to the same cause. In the teams and squads this type of personality is less desirable.
Therefore companies should focus on unleashing the wasted potential of more-typical team members and build commitment, trust, and joint accountability for outcomes. There’s no practical way to do this without changing HR procedures.
A company can no longer hire purely for expertise, for instance; it now needs expertise combined with enthusiasm for work on a collaborative team.
It can’t evaluate people according to whether they hit individual objectives; it now needs to look at their performance on agile teams and at team members’ evaluations of one another. Performance assessments typically shift from an annual basis to a system that provides relevant feedback and coaching every few weeks or months.
Training and coaching programs encourage the development of cross-functional skills customized to the needs of individual employees.
Job titles matter less and change less frequently with self-governing teams and fewer hierarchical levels. Career paths show how product owners - the individuals who set the vision and own the results of an agile team - can continue their personal development, expand their influence, and increase their compensation.
Companies may also need to revamp their compensation systems to reward group rather than individual accomplishments. They need recognition programs that celebrate contributions immediately. Public recognition is better than confidential cash bonuses at bolstering agile values—it inspires recipients to improve even further, and it motivates others to emulate the recipients’ behaviors.
Leaders can also reward “A” players by engaging them in the most vital opportunities, providing them with the most advanced tools and the greatest possible freedom, and connecting them with the most talented mentors in their field.
Planning & Budgeting in the Agile World
In bureaucratic companies, annual strategy sessions and budget negotiations are powerful tools for aligning the organization and securing commitments to stretch goals.
Agile practitioners begin with different assumptions. They see that customer needs change frequently and that breakthrough insights can occur at any time. In their view, annual cycles constrain innovation and adaptation: Unproductive projects burn resources until their budgets run out, while critical innovations wait in line for the next budget cycle to compete for funding.
In companies with many agile teams, funding procedures are different. The decision makers of ongoing funding recognize that for two-thirds of successful innovations, the original concept will change significantly during the development process. They expect that teams will drop some features and launch others without waiting for the next annual cycle.
As a result, funding procedures evolve to resemble those of a venture capitalist. VCs typically view funding decisions as opportunities to purchase options for further discovery. The objective is not to instantly create a large-scale business but, rather, to find a critical component of the ultimate solution.
This leads to a lot of apparent failures but accelerates and reduces the cost of learning. Such an approach works well in an agile enterprise, vastly improving the speed and efficiency of innovation.
References
Steve Denning: How Amazon Became Agile. Forbes.com, June 2019.
Darrell K. Rigby, Jeff Sutherland, and Andy Noble: Agile at Scale. Harvard Business Review Magazine, May-June 2018.
Dominic Barton, Dennis Carey, and Ram Charan: One Bank’s Agile Team Experiment. Harvard Business Review Magazine, March-April 2018.
Steve Denning: How Agile Principles Built Trillion Dollar Companies. Forbes.com, May 2020.
Steve Denning: How Microsoft Vanquished Bureaucracy With Agile. Forbes.com, August 2019.
Wouter Aghina, Karin Ahlback, Aaron De Smet, Gerald Lackey, Michael Lurie, Monica Murarka, and Christopher Handscomb: Agile organizations—of any size and across industries—have five key elements in common. McKinsey Report, January 2018.
Veronique Nguyen (HEC Paris): The Most Agile Companies Organize Themselves Like A Bamboo. Forbes.com, July 2018.
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