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Source: Business-improvement.eu
WorldClass: Value adding, smooth & perfect organization
Agile means cyclic and adaptive change Scrum, Squads, Lean Startup, Holacracy and Rendanheyi
Agile organization & innovation

By Dr Jaap van Ede, editor-in-chief Business-improvement.eu, 19-09-2023
Available in Dutch on Procesverbeteren.nl

Companies want to develop new products and services faster and faster. At the same time the uncertainty increases: things customers ask for today, may be out-dated tomorrow!

Agility is the answer to both issues. Agile methods make companies, as it were, fluid. This allows them to respond quickly to changes. Self-managing and multidisciplinary teams, which continuously adjust their goals on the basis of gradually growing insight, are central to this.

Yet, agility can encompass two different things. The first form is the flexible and incremental development of new products and/or services. Approaches such as Scrum, Lean Startup and Squads focus on this. The recipe is in all cases: notice customer needs as quickly as possible, and adjust the development path if needed.

The second form of Agile is the quick adaptation of the organisation itself, by adjusting the tasks of the employees. The Holacracy concept is one of the best-known methods to accomplish this. Rendanheyi, known from the Chinese company Haier, combines this with entrepreneurship. It transforms a company into a dynamic ecosystem of startups that can easily form, combine and grow, but can dissappear just as easy.

Becoming agile does not only have advantages. The chaos in a company increases as a result. Therefore, Operational Excellence (OpEx) methods, which create stable and efficient processes, and Agile methods, which change processes, are like yin and yang. You have to find the right balance between continuous improvement (OpEx) and continuous change (Agile). That said, both approaches strive for the same thing: maximum value creation for the customer.

The core of Agility is creating space to innovate, learning while incrementally doing that, and making adjustments on the way, based on growing insight. These are exactly the things a start-up company is good at, and an established one much less!

There are two ways to make a company Agile. In the first form, new products or services are no longer developed along prefined paths, but incrementally, seeking and learning on the way. We will come back to this later.

The second way to become Agile, is to make the division of tasks (roles) in the organisation flexible.

Both forms of Agile use a cyclic approachBoth forms of Agile use a cyclic approach
(photo: Eise Eisinga Planetarium, The Netherlands)


Holacracy

The Holacracy concept focuses on this second form of Agile.

Holacracy makes work and its apportion flexible. To this end, the organisation is split into self-managing teams called circles. Examples of companies that opted for this are in the Netherlands (business) training comparator Springest, mortgage consultant Viisi and business telephony provider Voys.

Circles replace the traditional corporate departments. The main differences are:

  1. Circles are much smaller than departments, and are multidisciplinary in composition
  2. People perform varying 'roles' in multiple circles.
  3. Circles can be 'nested' within each other. Then there is a certain hierarchy, with so-called Rep Links acting as circle representatives.
  4. The management is replaced by so-called Lead Links. These are people who oversee the apportion of the roles within their circle.
  5. Circles are volatile. Circles, and the roles within them, are in a Holacracy constantly created, modified or even abolished, according to the current needs of the organisation and its customers. There are strict and specific rules for this process.
The volatility of the roles makes the organisation agile. Anyone can propose new roles, to respond to new problems or opportunities. In addiition, everybody is more or less free to take on roles by choice. This increases the engagement of the employees, but sometimes also increases the amount of stress they experience.

Within Agile organisation Springest, a playful environment stimulates creativity
Within Agile organisation Springest, a playful environment stimulates creativity


Benefits
The benefits of a Holacracy are clear. It not only makes a company more agile, employees can easily take on roles that fit their competences, and they can stop doing unwanted tasks.

Everything someone contributes is also clearly visible, so that he or she receives recognition for it. In a traditional company, if you contribute something outside your regular work, this cannot be seen. In a Holacracy this is different: any new task means an extra role, with matching responsibilities and goals.

In a similar way, it is always clear what each person does. The route to change tasks is also clear. So there is never a reason to point at each other, nor to accept that a certain a process is not (or no longer) going well!

Holacracy creates freedom, but at the same time there is enough structure and alignment. To this end, there are strict rules for meetings, and for the way new roles are created and evaluated. So, Holacracy is freedom within boundaries.

Self-managing and nested circles within mortgage advisor Viisi
Self-managing and nested 'circles' within mortgage advisor Viisi


Challenges
One of the challenges concerning Holacracy is the connection with a company-wide strategy. How do you ensure that the voice of the customer resonates throughout the company? All roles in a company should contribute, be it directly or indirectly, to value creation for the end customers.

Especially in larger companies, a process chain is often needed to realise value creation. Navel-gazing within the circles, as separate links in the chain, is a risk. However, there is a solution to prevent this: the formation of a separate strategic circle, with which the other circles communicate via Rep Links. This is comparable to the interplay between a central government and provinces and municipalities.

However, there are other pitfalls. In July/August 2016, Harvard Business Review (HBR) published the article beyond the Holacracy hype, written by Ethan Bernstein, John Bunch, Niko Conner and Michael Lee. This article can be retrieved via hbr.org. Interestingly Bunch, at least at the time of the publication, was working within Zappos. This was one of the first large organisations that started to apply Holacracy.

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Bureaucracy
In a Holacracy, many governance meetings are needed, to continuosly (re)distribute and change the roles, and to match these with responsibilities. Thus, while Holacracy eliminates bureaucracy in the form of unnecessary tasks, it reintroduces bureacracy on another place.

It also makes your work more fragmented, since you perform multiple roles in different circles. This raises questions as: How many time do you loose while switching between roles? How do you keep focus, and how do you prioritise? And how do you avoid stress, caused by lack of routine and working with different people all the time?

Last-but-not-least, it is more difficult to determine an appropriate salary for each employee. Zappos experimented a few years ago with skills & experience badges. These indicate what skills people possess and use. However: isn't this a step backwards, towards more formalised and fixed job roles?

Helicopter view

The HBR authors also comment on the Holacracy model itself. The assumption is that, by continuously adapting the roles, a company will automatically evolve towards an organisational form that best suits the environment, read: the market demand.

However, incentives from the market are not always a good predictor of future demand. Remember Ford with his famous statement: 'if I had asked people what they wanted, they would have said a faster horse'.

According to the writers of the HBR article, a helicopter view is often needed to develop a strategy. I agree with them. Take Nokia: if that company had been a Holacracy, would it have developed a smart phone in time?

Agile definition

Agile make companies flexible, so that they can cope better with uncertainty. The essence of agility is that you react quickly and incrementally to changes, and learn from each step you take. So, an Agile approach is always iterative, incremental and adaptive.
Satisfying customer needs, and listening carefully to their feedback, plays a crucial role. Small and multidisciplinary teams are the 'workhorses' of agile. Their degree of autonomy can vary from only internal, to the freedom a mini-company has.

Agility can encompass two different things, which can reinforce each other:

  1. Flexible innovating: the efficient and agile development of new products and/or services, learning as you go along. Approaches such as Scrum, Squads and Lean Startup are examples of this.
  2. Flexible organising: an organisation that quickly adapts itself to new customer requirements and market demands. This is done by changing the division of tasks (roles). Corresponding methods range from self-managing teams to Holacracy and Rendanheyi.
Making many different but already existing products efficiently, is sometimes also called Agile. For this, see Quick Response Manufacturing.

This definition of Agile was created based on hundreds of case descriptions on this platform and on Procesverbeteren.nl


Market-based dynamics
Zappos changed their organisational model, after they came across some of the aforementioned drawbacks of Holacracy. They struggled with two issues:

  1. There was too much emphasis on internal process optimization within the holacracy circles, the aforementioned navel-gazing.
  2. Governance meetings were needed too frequently.

To get more focus on creating customer value, Zappos switched to what they call market-based dynamics. This means a structure with autonomous mini-companies, responsible for their own results. It is the same structure you see in far-reaching forms of Quick Response Manufacturing.

Mini-companies can supply customers, and/or each other. As a result, there is both external and internal market pressure. Mini-companies can also develop new products. A number of management roles were probably reintroduced. The circle structure was retained, but Zappos transformed Holacracy into its own system, with on the one hand a maximum space for market-driven intiatives, but on the other hand (traditional) management when needed.

Rendanheyi
The Chinese company Haier Group combines market-based dynamics with entrepreneurship. Now, every employee can start their own mini-company! Haier calls this business model Rendanheyi.

RenDanHeyi: mini-companies appear and disappear within (sub)platforms, which in turn use shared servicesRenDanHeyi: mini-companies appear and disappear within (sub)platforms, which in turn use shared services. Source (with permission): Corporate Rebels.


RenDanHeyi connects (Heyi) employees (Ren) with customer value (Dan). The main goal of all employees should be to help fulfil customer needs.

To this end, employees should be as closely in touch with (potential) customers as possible. In addition, everyone needs freedom to solve customer problems and to meet customer needs, they believe at Haier. Therefore, everyone fulfils a mission in one of its many mini-companies, and everyone can start a new mini-company if they like.

The mini-companies, each in direct contact with internal or external customers, form a network. From a distance, they look like cells, which appear, disappear, merge, form chains, have symbiotic relations, and sometimes even split off from Haier and become independent. The boundary between a mini-company and the outside world is vague: mini-companies can also form supply chains that include external parties!

The main challenges around Rendanheyi are the income security of the employees, the spreading of entrepreneurial risk between Haier and their people, and the stress that working in a highly dynamic work environment can create.

Innovation

As already mentioned in the introduction, making tasks or roles more flexible is not the only way to become Agile. Another approach is the flexible (incremental) development of new products and services. In other words, innovation!

This is not part of Holacracy and Rendanheyi. In a Holacracy, people formulate goals, but nothing is said about how they achieve them when new products need to be developed.

Rendanheyi transforms a company into an ecosystem of startups. However, it is not clear how product development is organised within these mini-companies.

Lean
Lean manufacturing, although this focuses on optimization instead of change and innovation, offers a systematic way to achieve results through cycles of hypothesis formation, doing and learning.

In Lean, processes are improved step by step, always learning from the previous step. The problem-solving behaviour of the improvement teams is called Kata. These are ingrained behavioural routines that help people find and solve the root cause of problems and challenges, see the figure below.

The Improvement Kata in a nutshell
The Improvement Kata in a nutshell: Improvement teams strive for a Target Condition, which takes them one step closer to a vision for a far future. (source: Mike Rother, Toyota Kata, © Business-improvement.eu, 2011-2022)


Scrum and Lean Startup
The Kata approach, although originally ment for process improvement, can also be used to develop new products and/or services, step by step. So, this brings us back to Agile!

You can cyclically experiment with (partially) new products, learn while doing this, and make adjustments based on advancing insight. An example of a Kata-like approach to Agile is the incremental development method Scrum. It is among others used by the Dutch public transport company NS and health insurance provider VGZ.

The related Lean Startup method applies the same principle: testing and learning in small steps. The Squad model, see the separate box about this, is a special form of Scrum, with additional organisational aspects to align people and their work. In this article Squads are however seen as a form of flexible innovation, be it that in terms of organisation there is also some similarity with the Holacracy model.

Scrum splits the development of a product into several sprints
Scrum splits the development of a product into several sprints. This enables quick customer feedback. (source illustration: Wikipedia)


In phases
In both Scrum and Lean Start-up, multidisciplinary teams deliver new products in phases.

The aim is to get feedback from (potential) customers as soon as possible. This feedback is used to adjust the product development route along the way. Finding your path as you go along, is another way to formultate this! That way, you avoid that you end up with a product that does not (or no longer) match with the market demand.

For a company that wants to become Agile, incremental product development is just as interesting as making the organisation more flexible, as discussed in the first part of this article.

Squads
The Dutch banker ING appiies the Squad model, originally developed by the Swedish company Spotify. Within ING, Squads are self-managing Bus-Dev-Ops Teams. These multidisciplinary teams develop, build and manage IT applications. Separate business departments for those activities no longer exist.

The Dutch insurance provider VGZ also transformed themselves into an organisation with multidisciplinary Lean teams and Squads, although the latter term is formally not used by VGZ.

Squads involved in the same project are grouped into a Tribe, with a Tribe Lead as 'tribal leader'. Coordination and knowledge sharing between people from the same professional discipline, who used to work in one corporate department but are now dispersed over the Squads, takes place via Chapters. That way, a matrix organisation is created.

Squads, with a customer journey expert as product owner, are central in the organization of ING
Squads, with a customer journey expert as product owner, are central in the organization of ING.


The Squads, in which the actual work happens, form the heart of the organization. Everything else, such as coaching, is aimed to make them function as well as possible.

Unlike circles in a Holacracy, Squads are always engaged in product development. In adddition, they do their work in the Scrum way. So, partial solutions are developed and then tested by (potential) customers, with the idea to make adjustments timely. Another difference with Holacracy is that people in Squads do not choose their own tasks, nor do they work in multiple teams. As a result, the organisation is much more rigid. Squads are therefore primarily a form of of flexible innovation, while Holacracy is a form of flexible organisation.


Integrated approach
Agile organising and innovating are two sides of the same coin. Remarkably, there is not yet an integrated approach that addresses both issues at the same time.

Holacracy and Scrum, for instance, can complement each other very well, and this is sometimes already done. Also the Squad model, see the box about this, can bridge the gap between agile organising and innovation. Squads are basically Scrum-teams, with as extrra an organisational structure for alignment. To transform Squads into an agile organisation, employees should have more freedom to choose their own tasks. This is currently not possible in the Squad model.

Rendanheyi also offers a framework that could be extended to an integral Agile approach. It seems well possible that the teams in the mini-companies develop products in a Scrum-like manner. Perhaps that is even practised already, since one important starting point for Scrum is present. The mini-companies know their own customers and their needs very well, since zero distance to customer is one of the core principles of Rendanheyi.

Preconditions
Just as flexible organisational methods have drawbacks, there are also preconditions that limit the applicability of flexible innovation methods like Scrum.

In their May 2016 article Embracing Agile in Harvard Business Review (HBR), Darell K. Rigby, Jeff Sutherland and Hirotake Takeuchi mention the following pre-requisites for the successful application of Scrum (their article can be retrieved via hbr.org):

  1. There is a complex problem, for which the solution is unknown.
  2. This problem can be chopped into pieces, for which partial solutions can be developed.
  3. Those partial solutions can be safely tested by (potential) customers.
  4. The impact of any errors in partial solutions is minor. Mistakes are an opportunity to learn.
  5. Thanks to this learning process, the specifications of the incrementally developed solution gradually change.

In the beginning, Scrum was only used for software development. However, its potential span of application is much larger. Think of the gradual development of physical products. A Scrum-like approach is also possible to marketing, supply chain optimisation and to strategy development. Companies such as John Deere, Saab and GE are using Scrum for these purposes, state the authors of the HBR article mentioned above.

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Cultural change
If Scrum is applied in an appropriate environment, productivity increases, waste decreases, customer engagement increases, and the risk of wrong solutions decreases.

Yet, introducing Scrum is not always easy. It requires a major cultural change. In addition, barriers to Agile behaviour must be removed.

Scrumming is sometimes introduced without the idea of cyclic learning by way of customer feedback. In that case, it becomes an empty shell. This is wind in the sails for criticasters, who then come up with persiflages on the Scrum-jargon.

If you want to apply Scrum, starting small, in the environment for which Scrum was originally developed (flexible software development), seems a good idea. Rigby, Sutherland and Takeuchi also suggest to work with Scrum as management team, with a backlog (list) of the most important business problems to be solved. Those problems can then be solved via team sprints. This brings as additional advantage, that it becomes visible to everyone in the company what its executives are doing.

Cyclical operation
The table below summarises the cyclical operation of both forms of Agile, namely flexible innovating and organising:

Agile type 1  Agile type 2
Flexible innovating Flexible organising
...with e.g. Scrum, Squads or Lean Start-up ...with e.g Holacracy or Rendanheyi
1. What new products or services does the customer want? 1. Which 'tension' is there in terms of the division of tasks (roles) in the organisation?
2. Which new partial functionality will be developed first, in support of which 'customer story'? What has, at this moment, the most added value for a customer? 2. What new or changed role can remove this tension, and who will take on this role? Or: which role will disappear?
3. Develop a minimal viable (but secure) partial solution, that supports the customer story
3. Define new roles and corresponding responsibilities
4. Check, based on feedback from (intended) customers, whether the partial product satisfies the needs of the customer 4. Check after a while whether the new defined roles contribute to better fulfilment of the customer needs
5. Retain functionality which is good, but adjust the product or service if necessary, by returning to step 3.
If completely successful, return to step 2 (continue with the product development), or return to step 1 (select a new innovation project).

5. Retain roles which are good, but adjust them if necessary, by returning to step 2 and 3.
If the new roles are succesful return to step 1, to detect new organizational tensions.

Both forms of Agile are cyclic.  © Business-improvement.eu


OpEx versus Agile
Finally, some words about the relationship between Agile on the one hand, and Lean and other methods for Operational Excellence (OpEx) on the other.

OpEx methods such as Lean, Six Sigma and TPM improve an existing situation, through an increasingly better alignment of the production steps to each other. As a result, the flow (value) which streams towards the customers increases.

Agile methods, on the other hand, continuously adapt products, services and tasks, to changing markets and customer needs. Each change (temporarily) reduces OpEx. Therefore, one should strive for an optimal balance between improvement (OpEx) and change (Agile).

Sometimes an organization needs to be more chaotic (Agile) for a while, in order to renew itself. Otherwise you will end up with a company that makes very efficient (Lean) products, which no one wants anymore. However, too much chaos is also not desirable. This is because, after every change, the logistics chains need to be optimized again.

Agile and Lean are like yin and yangYin and Yang
Agile, ongoing change, seems to be the opposite of Lean, doing existing things better and better. Yet there is a common goal: create increasingly more value for the customer. In addition Agile, like Lean, uses cycles of hypothesis formation, testing and adjusting. So technically, both methods improve in the same way!

In Agile, the improvement cycle is: Sense (what new customer requirements are there, or what tensions exist in the organisation), Respond (what is the hypothesis), Plan (experiment), Check (validate) and Act (evaluate and adapt).

Note the strong overlap with the well-known Plan-Do-Check-Act cycle from Lean! The only difference is that each cycle starts with options for change, instead of options for improvement! Opportunities are identified, after which action is taken to realize them. Finally, it is checked whether the result is as expected.

Therefore, Lean and Agile are like Yin and Yang, and you have to find the balance that creates most customer value. I noticed already one interesting solution to accomplish this: VGZ transformed itself into an organisation with multidisciplinary Lean teams that improve the operational processes, and Scrum teams that develop IT products in support of the Lean teams.

Lean means delivering existing products increasingly more efficient, and Agile means responding to change increasingly more efficient. For this, there is no standard recipe. It is necessary to develop a tailor-made solution yourself, using existing insights and case descriptions.

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