Principle 4 - We need to encourage innovation internally

Symptom

A lot of friction can occur when empowered teams interact with traditional organisational structures. This is because the traditional functional departments have different expectations for collaboration, turnaround timelines and decision-making processes. For example, Stream Teams need to interact with Marketing, Sales, Customer Success, Legal, Finance, and other teams in the organisation who each have different priorities and ways of working.

Another challenge is that cross-functional teams lose some of the economies of scale that come from specialisation. There can be a lot of duplication of similar activities in each of the Stream Teams across one or more products which is inefficient and leads to a lack of consistency in the way that work is done.

Cause

Both of these seemingly separate issues are in fact caused by the same thing. The functional structure was created to be efficient for the function and intentionally inefficient for cross-functional collaboration.

The efficiency improvements within a function are a result of identifying the best way to perform particular tasks and then consistently performing them. Novelty is actively avoided because the best ways of working have already been defined so it will be less efficient, at least in the short-term.

When Frederick Taylor proposed the functional structure in the early 20th Century he was aware of this trade-off but with the context of his time, mass-manufacturing, the efficiency gains were more important than flexibility because changes were infrequent.

Since each function is optimised for the efficient execution of their work, any requests from other departments are seen as a distraction. But when we're building new products we often need input from other departments. While important to us, it is often seen as a distraction for the other team, and this can slow down delivery. One way that this manifests is that you might need a charge code to even talk to someone not in your team. Collaboration across departments is actively discouraged.

The Context Change

We are always building new products today. This means that change is constant rather than infrequent. The average lifespan of a company on the S&P 500 has dropped from 61 years in 1958 to 18 years today. New competitive forces are continuously emerging so companies need to be able to change quickly. A short lead time is the biggest differentiator because learnings compound. Instead of optimising for stability we need to shift to optimise for flexibility.

Solution

Encouraging flexibility

Internal departments are monopolies. And monopolies are not known for being customer-centric or efficient. We can try to set targets and internal metrics but the most effective approach is to introduce competitive forces. There are two ways that companies have experimented with this: internal competition and external competition.

Internal Competition

The supermarket chain VkusVill has a policy of at least two suppliers for everything, including internal services. This means that they have two finance departments, two legal departments, two HR departments etc. Each supermarket location, equivalent to our Stream Teams, is free to choose which internal department they want to work with. If one supplier is consistently being chosen then it receives more funding at the expense of the other supplier. This puts the incentive on the departments to structure their services in a way that is most valuable to the teams.

External Competition

Haier took a different approach. Each internal team is set up as a standalone company and they need to balance their P&L. If an internal team needs legal advice, for example, they are free to choose between the internal legal department or an external law firm. The idea is that if the internal teams need to become as efficient as products in the market. The upside is that if they can find a way of working that is more efficient than external suppliers then they can also capitalise on that by selling their services externally. Using this model Haier has produced 7 spin-off unicorns (valued at greater than $1bn) as well as 120 gazelles (growing revenue at greater than 20% for four or more years from a base of $100k).

Functional Efficiency

We can improve the performance of the Stream Teams by both removing duplicitous work and putting dedicated focus on the upskilling of the people in the teams.

Duplication of Work

When we identify that teams need to replicate the same work across multiple products we can create a new team that is responsible for that work, separate from the Stream Teams. This team is responsible for converting these duplicated actions into a high-quality product that can be used by all of the Stream Teams. Examples include technical platforms and design systems.

Consistency of Work

Every person has different levels of skill in different areas. The challenge is that in cross-functional teams people are isolated from their functional peers so serendipitous upskilling is limited. We can address this by creating dedicated Enabling Teams, who are responsible for the upskilling of the Stream Teams as well as for encouragingn cross team knowledge sharing to help each team avoid re-inventing the wheel.

Impact

Traditional internal departments, including teams that build platforms, will need to re-think their approach to servicing their customers, the Stream Teams. To ensure that they are meeting their needs the internal departments will need to do research work to understand the needs of the Stream Teams, design work to identify and evaluate solutions and delivery work to iteratively deliver the new services. In essence we need to encourage internal departments to "productise" their offerings and become Internal Product Teams.

EVeryone always maintains that their services are too complex to be productised. But many examples exist from AWS to Design Systems to show that this is possible. The key is to start small and iterate.

INtroducing competition only works if the internal teams are truly faced with market dynamics. This means that we need to have a way of pricing the services that are being provided internally. This is known as Internal Pricing and it can be pretty contentious in a lot of organisations because it is reminiscent of the blockers that currently prevent internal collaboration, such as asking for timecodes before you can work with another department.

Mitigating the Impacts

Haier had this problem. The way they solved it was by providing all teams with a centralised system that simplified the processes of internal contracting and payments. This removed all of the manual haggling over prices and made it as easy as signing up for a SaaS product online. The system dramatically reduced the time, cost and effort of working with internal suppliers.

The key to making this work though is having true competition where teams have real choices on who to work with. Stream Teams need the ability to go elsewhere if they are not happy with the service they are getting.