Are we there yet? The high cost and slow speed of building new org capability

Faster, cheaper, better. We all know that you can’t have all three, only two. Yet leaders repeatedly set goals that require all three simultaneously.

This is a big issue when it comes to building new organizational capabilities. Quality. Customer service. Technologically cutting-edge applications. Time to market. Innovation. Uptime. Waste/efficiency. The list of critical – or strategic – organizational capabilities can be quite long.

In the long run, it is possible to have “faster, better, cheaper” in many cases. Speed in this context refers to how long it takes to produce a product from beginning to end. Or how long it takes to resolve customer issues. Or the throughput on a manufacturing line or a supply chain. With enough time, it is usually possible to cut down time to market while maintaining quality and cost, especially when new technology or ways of working innovatively can be deployed to improve productivity.

Yet when talking about the speed of building a new organizational capability – the time to proficiency – it always takes an extended time, typically one to three years minimum. Thus it is never possible to have one’s cake and eat it, too, at least in the immediate short run. If you want the capability built very quickly, then either quality (better) or cost (cheaper) have to be sacrificed.

In addition, the budgeted cost almost always exceeds the plan. Leaders consistently overestimate how easy and cheap it will be to build the new capability to the point where it operates at scale, efficiently. So the outcome is often “better quality, at higher cost, and longer timelines.”

In this article I explore three aspects of the challenge:

1. The incentives leaders face to over-promise and the unrealistic expectations created by successful pilots.
2. The predictable yet unavoidable tensions between legacy and new capabilities.
3. The challenges of building new capabilities that are seamlessly integrated into the existing operating model and organization design.

Promises, promises, and hope

When planning for new capabilities two things happen. First, the leadership has to assess the work to be done, timelines, and budget. Because resources are limited, funding decisions are made comparing the “bird in the hand” of current products and services against the promise of “two in the bush” – future revenue from new ventures requiring new capabilities. There is pressure to underestimate the costs involved and time needed to build the new capabilities at scale, efficiently.

In most cases, a pilot can be tried: launching the new work in a site, customer segment, etc. and comparing the results against expectations. Because the stakes are very high with the pilot, with everyone watching, huge effort is put in to make it succeed. If it does not, then the capability is usually deemed not viable. Yet a failed pilot often is due to unrealistic expectations around time to proficiency, which trace back to the incentives leaders have to over-promise, and the challenges of building something new for the first time.

If the pilot succeeds, in contrast, that usually is taken as the clear signal that the company will be successful rolling it out and operating at scale. Yet the learning during the initial pilot phase is only one part of the much deeper learning needed to operate at scale across the enterprise, efficiently. That happens only gradually as the capabilities are scaled up, and can take multiple years.

Tensions between legacy and new capabilities

Unless the new capabilities are built in an entirely new organization with no ties into your existing operating model and organization design, there will be tensions between legacy and new. The legacy products and services have proven business models that generate profits and positive cash flow. The new products and services have to compete for investment resources, and they have to leverage at least part of the current structure and processes.

This means that many or most existing finance, HR, IT and work processes will be leveraged (not changed), and the new capabilities have to be established using those processes. In other words, people are not allowed to totally reinvent time-honored ways of working simply because we are building something new.

Yet the bigger the scale needed to operate the new capabilities efficiently, and the bigger the market opportunity, the more we may have to bend or change current ways of working for legacy products and services. Thus, over time, the requirement of operating the new capabilities at scale and efficiently often creates demands to alter time-honored ways of working in finance, HR, IT and the business.

Challenges of building “adjacent” capabilities

Generally speaking, there are three different strategies for setting up new capabilities:

• Separate: Entirely separate operating model and organization design.
• Embedded: No changes to existing operating model and org design, so the new capabilities are built entirely embedded within the legacy operational, HR, Finance, and IT structures and systems.
• Adjacent: Partially leverage the existing operating model and organization design, and partially build new elements needed to produce the new capabilities.

The strategy chosen needs to match the capabilities and the business model.

Building entirely separate capabilities means having an entirely different organization, operating model and organization design. The governance structure is a holding company. An example is diversified industrial companies such as Danaher.

The separate capabilities strategy is ideal for doing things faster and better, but at the expense of the highest budgeted cost: all support functions and overhead have to be duplicated, with little to no cost savings from shared services and corporate functions. This approach is used only rarely because there are no cost savings from shared services and work processes.

Building embedded capabilities is the opposite strategy: minimize any and all disruptions to the existing operating model and organization design. This approach is ideal for doing things cheaper and faster. The tradeoff is that building new capabilities usually requires reconfiguring parts of the system.

The embedded capabilities strategy therefore runs the risk that the “better” objectives will not be achieved. If the new capabilities require doing work in fundamentally different ways, for at least some processes and teams, there is a large probability the embedded approach will mean underinvesting the time and resources needed to make things happen the right way.

Which brings us to the adjacent capabilities strategy. This is how most new capabilities need to be built, taking advantage of some elements of the current operating model and organization design, while doing some things differently. The economic rationale for this approach is that adjacent capabilities are strategic fits, so we leverage parts of our current capabilities – “how we do work around here” – to build new ones.

The problems come from the challenges discussed above:

• Leaders overestimate the ease of building the new capabilities.
• This is due partly to competition with legacy products and services.
• The other part is the challenge of leveraging existing finance, HR, IT and operational processes to save money.

So how can your organization best manage the tensions and tradeoffs, to successfully build the new capabilities? There is no quick solution. Yet the path is clear. You need to:

• Carefully evaluate where and how the new capabilities can leverage existing elements of the operating model and organization design.
• Assess the stated expectations for time and cost against realistic projections.
• Collect data and do sense making in real time as the work of building the new capabilities proceeds, with leaders and key stakeholders.
• Resolve the tensions with the structures and work needed to support legacy products and services, and evolve finance, HR, IT and operational processes accordingly.

For a deep dive into the challenges raised here, please join our workshop November 7-9 in Chicago, featuring outstanding case studies with executives from Nike, Novartis, Microsoft and INW: Optimizing Capability to Drive Business Performance

This article builds off the six part Organization Capability series co-authored with Dr. Johanna Anzengruber :

Part One: Organization capability: The missing piece connecting organization design and the operating model

Part Two: Resolving confusion about organization design, the operating model and organization capability

Part Three: The operating model and organization design strengths and weaknesses

Part Four: Challenges of system design and optimization

Part Five: Organizational capability definition, strengths and weaknesses

Part Six: Combining organization design and capability for deeper impact