Monday, June 4, 2012

The Value of Organization


Knowledge Worker Logic

What is the value of organization?
According to Peter Drucker, the “Knowledge Worker” owns the means of production.
In the IT Organization the majority of value is created by how these workers are organized to apply their knowledge and technology for a desired outcome -  their production.
Business is about taking raw materials, adding value to it, to solve a client's problem(s) or need. It is a basic recipe with three key ingredients: 
  • Firstly, Raw Materials: The stuff that will go into the value creation process to either manufacture a product, or facilitate an outcome.
  • Secondly, Value Creation: This is where the manufacturing takes place. The processes and knowledge together with raw materials are applied to create a solution, outcome or product. 
  • Thirdly, the Elimination of a Problem or the Provisioning for a Need: Business always start with the customer. We are trying to address the customer's problem, or provide for his need. The customer finds the solution or product useful, and is willing to pay to have it.
In IT, the raw materials are the people and the technology at play. The people are these Knowledge Worker IT Professionals that own the means of production. The IT Professional constitutes around ninety percept of the raw materials for IT Business. Therefore, in simple terms the IT business is about combining the knowledge of the  IT Professionals, the Knowledge Workers, with technology, in value creation processes. The outcome of these processes are solutions to clients' business problems. 
The process of creating value in the IT Business can in basic terms be referred to as “organization”. How we organize ourselves in IT has a fundamental influence on the type and amount of value created in the IT company. 
The business needs the IT Professional's means of production – the potential value. The IT Professional needs the business’ organization. Without this organization, the potential value cannot be successfully unlocked and maximum return realized. Combine the two efficiently and you have a winning combination for maximum value and return. 
The basic premise of organization justifies the existence of the Organization in the first place. There are IT Organizations that has not yet discovered how fundamental this organization is to their business' existence and success.  Without it, little value is generated by the company, and the business is always at risk from easily duplicatable business models. The IT Professional can easily leave to seek out opportunities of more value elsewhere.
In short: Those IT Companies and departments that can successfully organize IT Professionals around an outcome, are the successful businesses offering most value to its clients. The degree of organization determines the degree of value that is added by the company.
In this Blog entry, I discuss if, and how, the IT Organization creates value for its stakeholders through organization. These stakeholders include the shareholders, the IT Professionals and ultimately the Company’s clients. 
The value of “organization” is under scrutiny in a time when reorganization and restructuring is the order of the day.
Business Models and Value

I have commented a few times in this Blog, on the generic IT organizational business models. 
I've made the case that the business model of the IT Organization has a fundamental impact on the people model utilized by the company. The people model needs to support the business processes, if the respective business models are to succeed. 
Fundamentally, if people are your raw materials, you must ensure that you have the right people at the right time available for the right price. You can then assemble or organize these people, the IT Professionals, into a set of processes that will allow them to facilitate a wanted outcome. This is called “organization”.
The challenge is knowing what is required under the topic of “right” people. This is determined by a number of factors, and most importantly the processes at play in your business model. 
The more complex the business model the more organization is required, and the more “mature” the organization should be. Process maturity models like CMMi attempts to define these maturity levels.
We have covered three generic business models in our previous discussions:
  • The “Body-Shop”: This is the hire-out of talent as individual or team on a periodic basis, for use by the client's Organization. The objectives for these Professionals are to assist or facilitate an outcome for the client. The financial and time risks are with the client. For example: A Project Manager is contracted to a client to manage a project on behalf of the customer.
  • The “Solution-Shop”: This is where the I.T. Organization is contracted to provide a once-off business outcome, with a tangible measurable business productivity and or financial benefit. The I.T. Organization wears the primary risks to achieve these outcomes. It is then rewarded proportionally based on business benefit provided to the client, instead of effort expended. For example: A vendor is contracted to implement a new business process with supporting technology to improve the logistics of a manufacturing Organization. This improved process' objective is to reduce their stock overhead. They are only rewarded when they are successful in lower stock levels, and is proportionally rewarded based on the cost savings the client derives from the initiative.
  • The “Service-Shop”: In this business model, the I.T. organization is contracted to provide a continuous business outcome. It is rewarded based on business value provided per unit, and is wearing all the risk for ensuring the desired outcome is achieved for the client. For example: The vendor provides salary payment services to the client using its own technology and processes, and is rewarded per successful salaried payment and pay-slip, and penalized for delivery failure.
What is the value added or benefit in each of the above business models to the stakeholders? To answer this question we have to examine the amount, and complexity of organization.
Organization in the “Body-Shop”

The amount of organization in the “Body-Shop” is low to minimal. In this model the challenge is finding the Professional, engaging the Professional on a permanent or temporary basis, and ensuring the Professional remains billable through assignment to customer organizations.
The Professional is assigned to the client, and becomes part of the client’s organization. The value is not created in the vendor organization other than sourcing and assignment, and therefore the organization required from the vendor company remains simple and minimal. The vendor company in its (lack of) organization therefore offers relatively low value to its clients.
The risk with low value and simple business is that it is easily duplicated, and the potential margin is therefore always under threat. Because the value is low, the Knowledge Worker has more flexibility and can take his talents easily elsewhere. The barrier to depart and apply his skills elsewhere is low.
The people model of this low value organization is relatively simple. The objective is to find the I.T. Professional with the highest competency and skill, and engage this person in as flexible a relationship as possible. Thereby, ensuring that the person is highly marketable, and curbing the risk of expense without income, when having the person unassigned.
Organization in the “Solution-Shop”

The amount of organization in the “Solution-Shop” is high. The difference with the “Services-Shop” is that this organization is temporary for the duration of the engagement. After the engagement the organization is typically disbanded, and the members go their separate way. These engagements are typically referred to as Projects.
The organization is usually done around Solution Delivery Models like RUP and AGILE. In this model the challenge is not only finding the Professional, engaging the Professional on a temporary basis, but also ensuring that each Professional knows and subscribes to their roles within the delivery models, processes and team. The roles are well defined and dynamic based on the needs within the team. 
The whole team can suffer if one member doesn’t perform as expected. It is the role of the Project Manager to ensure that the team is organized in the most efficient way, thereby ensuring maximum value is derived from the organization.
The Professional is assigned to the project team. The value is created in the project team and not necessarily in the vendor or client organization. That is why either vendor or client can be disadvantaged once the team is disbanded after the project is completed. The value of the organization only exists for as long as the project or team exists. 
The Knowledge Workers has flexibility to engage and apply his talents, and is usually committed for the duration of the project. If the vendor company can keep the projects coming, and re-use the team and its members, then the I.T. Professionals should remain loyal as long as the team value their contribution. Else, once the project is completed, the team will naturally disband, and the I.T. Professionals can and will take their talents elsewhere.
The people model of this this project organization is more complex, but still require a level of flexibility. The objective is to find the I.T. Professional with the highest competency and skill, and engaging this person in a relationship for the duration of the project. This ensures that the person is highly capable to play his role in the team’s organization. The flexibility in the relationship assists to curb the risk of expense without income. Income is usually of a variable nature, and therefore the organization attempts to align its costs with the income.
The value created in this organization is potentially very high, but it is temporary for the duration of the project.
Organization in the “Service-Shop”

The amount of organization in the “Services-Shop” is high. The difference with the “Solution-Shop” is that this organization is continuous for as long as the service is required. This affords a great opportunity to continuously innovate and improve on the organization.
The organization is usually done around operational service delivery models like ITIL. In this model the Professional is usually engaged on a permanent employment basis. The “Services-Shop” requires that each Professional knows their roles within the delivery model, processes and team. It also provides ideal ongoing scope to train new Professionals into required roles. The roles are well defined and usually static. 
The whole team can suffer if one member doesn’t perform as expected, however there is time to assist underperforming team members due to the routine nature of the work. 
It is the role of the I.T. (Operations) Manager to ensure that the people are organized in the most efficient way, thereby ensuring maximum value is derived from the organization. This efficiency can be improved over time, and the available value increased through efficiencies and better staff assignment and training.
The Professional is engaged on a permanent basis into a services team. The value is created in the vendor company that is providing the service. If one Professional leaves the team, then he can easily be replaced by another in the next cycle of delivery. The value of the organization exists for as long as the team and its organization exists. 
The Knowledge Workers are most dependent on the organization in the “Services-Shop”.
The people model of this process driven organization is more complex, and static. The objective is to find the I.T. Professional with the necessary skill, and engaging this person in a relationship for as long as is profitably possible. This ensures that Professionals with sufficient skill (not necessarily the best) plays their role in the organization. The income in this model is usually of a fixed and routine nature, therefore the costs are preferably as well.
The value created in this organization is potentially very high, and it can be increased the more mature and automated the processes and organization become and the less sophisticated the I.T. Professionals are that is required to perform with this organization due to the potential to automate tasks and outcomes.
Conclusion

The I.T. company is creating the most value or benefit for its stakeholders the more complex, mature and automated its organization and processes become.
The most value is created when a service is offered on an ongoing basis, routinely, and the vendor can evolve and innovate its organization to an extreme level of efficiency, maturity, and ultimately automation.
The Knowledge Worker benefits from efficient organization because it provides the framework and structure that best utilizes the Professional’s potential and capability.
I urge I.T. Organizations to pay more attention to the way they organize themselves. This will allow the companies that do, to provide increased value for all stakeholders, including the Knowledge Worker I.T. Professional.
As always, your comments and questions are welcome.
Hendrik van Wyk

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