Digital Transformation Core Capabilities: Navigational Aids for a VUCA World

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What core capabilities and practices does an organization need to transform and evolve in today’s volatile, uncertain, complex, and ambiguous (VUCA) world? For business and IT leaders in 2021, it’s not merely a question of adding new capabilities, although there is a central theme around governance and management of data that certainly includes the need for new solutions. In order for organizations to successfully navigate uncertainty and complexity, we need reality-based navigational aids and sense-making mechanisms, as well as enabling constraints and distributed sensor networks, that’ll allow us to keep moving in the right direction.

“The greatest danger in times of turbulence – it is to act with yesterday’s logic.”

Peter Drucker

Instead of a traditional linear roadmap, we need something akin to a guidance system for an organization, that can continually calculate changes in position, velocity, altitude, or rotation and allow us to rapidly adjust. This means that the basic capabilities we’ve long trusted and taken for granted, including those related to strategy, policy, decision-making, and management of risk, will need to be rethought entirely.

In the digital age, it’s no longer possible to set the traditional 3-to-5 year strategic goals, build the roadmap to get from here to there and then simply execute that plan. As Dave Snowden has said, we need more chefs and fewer recipe book users. This is because following a recipe (including a traditional strategic roadmap) will not work for complexity (and VUCA). What is required is nimbleness, combined with adaptability, an enthusiasm for uncertainty, and direct visibility of well-managed real-time data, to help us navigate this new world. 

What core capabilities and practices do organizations need to digitally transform and evolve in a volatile, uncertain, complex, and ambiguous (VUCA) world? Here @Veridity explores. #digitaltransformation #ITSM Click To Tweet

What are some of the challenges in a VUCA world?

A big one is that most organizations are struggling with how to adapt their strategy practices to be non-linear, adaptive, and potentially multi-modal. Another challenge is that the data we have used to make decisions in the past is in many cases incomplete, incorrect, has murky provenance, or is not relevant because it only shows us what has happened in the past. In our complex and uncertain world, we actually increase our risk if we rely on past outcomes to predict the future.

Another is that most organizations today still have a one-size-fits-all set of governing constraints, such as policies and hierarchical decision authorities. These can work well for known-known risks and operational activities which need to be consistent, but they’re not suited to complex, emerging risks, multiple concurrent courses of action, and objectives that may contradict those in other parts of the organization.

In our complex and uncertain world, we actually increase our risk if we rely on past outcomes to predict the future – @Veridity #digitaltransformation Click To Tweet

As an example of contradicting objectives, one part of the organization may be focused on innovation, experimentation, and learning while another is mandated to achieve cost-cutting, standardized workflows, and efficiency. It’s possible to accommodate both these sets of objectives, but many organizations have not yet achieved this and will not with a one-size-fits-all set of policies. Everyone in the organization should also understand why these conflicting objectives are both needed. The way we measure such different objectives may also need to be different, for example using vector targets rather than outcome-based targets, since we’re not comparing apples with apples.

Still another (related) challenge is that it’s difficult to convince professionals who have faithfully followed traditional methods for strategy, risk, and decision making throughout their careers to upend those practices and rebuild them. We prefer the familiar. It feels safe. And yet, as an example, traditional risk management is only consistently applicable to a small percentage of known risks where likelihoods and impacts can be credibly estimated. It simply cannot address the endless stream of new risk types, emerging risks, and “quantum risks.”

Peadar Duffy, in his recent paper on Quantum Risk, describes the navigational term called “dead reckoning.” As he reminds us, this term comes from the time in our history long before radar and GPS. In those days, navigators used the sun and stars to safely navigate the globe, even on uncharted seas to locations that had not been attempted before. He says:

“It worked as follows: Assuming you knew your ship and crew’s capabilities, knew where you were starting from, knew where you were going to, knew your speed, understood wind and currents and how to use the sun and the stars to set your bearings and chart a course; you could reckon where you were, in navigational terms. Back in those days, there was much uncertainty and large margins for error when steering a course across both known and unknown seas. Even when you hit the expected landfall it could take you some time to find out exactly where you were and finally get to your chosen destination.”

In this digital age, we need to cultivate the capabilities needed to help guide our way through this VUCA world.

So, where do we start?

In this digital age, we need to cultivate the capabilities needed to help guide our way through this VUCA world, says @Veridity. So, where do we start? #digitaltransformation Click To Tweet

Strategy in a VUCA world

Just like with dead reckoning, we start with understanding where we are in the present. We continually manage the present to create a new direction, rather than fixating on potential future outcomes that may or may not be where we’ll end up. This requires a very different way of thinking, which is well articulated in Managing complexity (and chaos) in times of crisis: “In a complex adaptive system we manage the evolutionary possibilities of the present: we start journeys rather than seeking to achieve goals. Goal-based behavior implies the inability to develop the opportunities that emerge along the way and which we could not anticipate.”

When we’re navigating unknown terrain, we need to get an understanding of the lay of the land in several directions to make the best determination about which of these is the best option. This is what is meant when people speak about “safe to fail experiments,” which are essential to managing complexity and uncertainty.

Of course, a tried and tested way to understand and get clarity about where we are is through maps. Wardley Maps have been around for a while now – they’re an extremely useful tool and provide both needed visibility and a powerful way for organizations or teams to communicate in a way that depersonalizes and takes the politics out of the discussion so that everyone can collaborate on the best way forward. Where a graph or a chart or a SWOT analysis may be open to different interpretations and doesn’t always clearly indicate where to move next, a map is practical and can make otherwise ambiguous choices sometimes glaringly obvious. For example, “should we outsource this capability or keep it in-house?” “Should we invest in this new capability or not?” Where the decision is clear, the organization can move decisively. Where there’s a lot of volatility or uncertainty (think VUCA again), the organization can take small steps in a direction, testing frequently, always looking to continually adapt as the environment, context, risks, and opportunities evolve.

In developing Wardley Maps, Simon Wardley made the essential distinction between the strategy of purpose and the strategy of movement. While organizations need a defined purpose, it’s also important to understand what moves/actions are needed, or possible, to achieve the desired outcomes. If the purpose is to win a chess game, the moves of the pieces are critical to that, and the ability to see the board (our map) makes it possible to take decisions based on this game at this point in the present rather than relying on data based on another game played in the past.

Wardley Maps captures the evolution of each capability, as well as their relationships and dependencies. This is significant for digital transformation and evolution. The map shows us which of these elements are “custom” and need to be built in-house with Agile techniques, which are “products” that can be used off the shelf and managed with Lean, and which are “commodity” that can be outsourced to utility suppliers and managed by a more operational focus on minimizing defects. This becomes tremendously helpful for investment decisions and prioritization through the digital transformation and evolution of the organization.

Maps are fundamentally a communication tool rather than a prediction tool. They make it easier to see and challenge our assumptions, and they’re a tremendous navigational aid in our VUCA world.

Sensemaking and decision making in a VUCA world

The well-known and loved Cynefin Framework provides us with a wealth of navigational tools. Firstly, it makes the essential point that you cannot manage complexity (or chaos) the same as you would an ordered system. This concept is absolutely fundamental to digital business transformation and evolution, and it addresses the need for different types of constraints depending on whether you’re dealing with complexity, chaos, or an ordered system. Where we’re dealing with the Clear (known knowns) or the Complicated (known unknowns), we can (and should) use the governing constraints we have in place, such as mandatory requirements, policies, etc. However, for Complexity (unknown unknowns), we need enabling constraints rather than governing constraints.

It’s vital to recognize that evolution doesn’t happen without constraints. Good organizational governance and management is about creating the right constraints for the right context. Organizations need to find the balance, rather than going to one extreme of either imposing overly draconian or prohibitive constraints or going to the other extreme and eliminating all constraints entirely.

Where governing constraints are there to ensure a single, proven way of doing something is performed consistently, enabling constraints are intended to facilitate novelty and innovation. They encourage the generation of new ideas and the creation of many possible solutions. They also allow us to course-correct rapidly and to make context-sensitive decisions rather than enforcing a one-size-fits-all policy. Kanban and Scrum are examples of enabling constraints. An artist choosing to work with a monochromatic palette can be an example of an enabling constraint – forcing creativity through limitation. A set of principles that provide guidance and alignment across the organization while allowing for distributed decision-making, such as the ITIL 4 Guiding Principles, can be an enabling constraint.

Wardley maps can be used to create a visual representation of clear, complex, and complicated problems in Cynefin terms, and Simon Wardley provides several examples of employing a specific principle or enabling constraint to focus on a key aspect of a map. If you want to focus on improving the customer experience, concentrate on those elements of the map that most directly contribute to the customer experience and are most visible to the customer. If you want to understand how many small teams you need and what each team should be focused on, you can identify clusters of elements on the map to better visualize this and get team members’ input.

How does innovation happen, and can it be developed into a capability? @Veridity explores. #digitaltransformation Click To Tweet

Imposing a limitation or restriction that is intended to trigger innovation is a very powerful mechanism when used in the proper context. Creating a boundary or guard rail, which still allows us to move within it as needed, provides another type of navigational aid appropriate to our uncertain and complex world.

Enabling constraints and innovation

In my first article in this series, Why Organizational Integration is Essential to Digital Transformation, I stated that to be successful in this digital age, organizations cannot focus exclusively on operational excellence – they also need to focus on digitally-enabled business innovation and experiential excellence if they want to remain competitive. This will require the ability to rapidly identify and deliver new customer value propositions and digital offerings. And that requires innovation.

But how does innovation happen, and can it be developed into a capability? One answer to this critical and commonly asked question is that while organizations cannot “cause” innovation, they can activate the conditions that enable innovation to emerge, using fit-for-purpose constraints to stay on course. In other words, constraints as a navigational aid.

As William Evans says, “Innovation, that is the intentional generation of novelty, is increased by the use of highly participative, self-organizing teams and empowered culture, lightly constrained, with clearly articulated decision rights. It also is evident that self-organization and emergent interactions happen within boundaries created and tended by leadership and senior management championing the innovation effort.

Alicia Juarrero has produced really great work on the subject of innovation and constraints. She reminds us to think of the idea that constraints represent changes in probabilities – they change the likelihood of something. They bias likelihoods. She distinguishes between two types of constraints, which she describes as “context-free” and “context-sensitive.” Examples of context-free constraints for an organization would include having a shared understanding, purpose, and goals. These are overarching and applicable to all circumstances, activities, and roles across the organization.

However, an organization cannot create the conditions for innovation using context-free constraints like purpose and goals alone. Awareness of this is essential for business and IT leaders involved in digital transformation and evolution. What is needed is the addition of context-sensitive constraints. Examples of these are actions, events, or processes (think mentors, pairing, or collaboration) that change the probability of which elements, participants, or perspectives are included and what will happen next. Given this, then that will happen. A context-sensitive constraint is conditional on a specific state. “I like to swim” is context-free. “I do not like to swim when the water is freezing” is context-sensitive. Most solutions are context-sensitive.

An organization cannot create the conditions for innovation using context-free constraints like purpose & goals alone. Awareness of this is essential for business & IT leaders involved in #digitaltransformation and evolution –… Click To Tweet

Cadence and rhythm are examples of context-sensitive constraints that are temporal (for example two-week sprints or release frequency), so we can impact our trajectory not only in space but in time.

Governing constraints like policies and mandatory requirements, when used effectively in the right context, are also navigational aids. For example, information security controls put in place to protect the organization’s information or maintaining safety protocols on a construction site. Because our navigation through this VUCA world requires that we maintain a course inclusive of both value creation and value preservation.

Which brings us to the topic of risk.

Quantum risk in a VUCA world

Management of risk is another example of an essential capability that is no longer fit for purpose for our VUCA world and needs to be reconsidered and updated. Enterprise risk management (ERM) is not achieving its intended aim, which is to identify, assess, and prepare for any dangers, hazards, and other potentials for disaster –both physical and figurative – that may interfere with an organization’s operations and objectives.

Management of risk is another example of an essential capability that is no longer fit for purpose for our VUCA world and needs to be reconsidered and updated – @Veridity #digitaltransformation Click To Tweet

2020 was a wake-up call and a master class for all organizations regarding the need to manage risk differently for VUCA. Management of risk in 2021 has a significantly increased focus across all sizes and types of organizations, because the pace of disruption, the degree of uncertainty, and the complexity of our modern world make risk identification increasingly difficult. As Peadar Duffy says, “Risk events will occur faster than managers can identify, let alone understand them. Given that we need to first identify the existence of a risk before we can estimate the likelihood of its occurrence, traditional tools are likely to quickly become suspect, and in some cases no longer fit for purpose.”

Added to this, “risks which reflect multiple interconnections and interdependencies across systems can be observed in one system but not in another as they can be named, described, and measured differently.” Duffy has defined the concept of quantum risks which are highly relevant to complex systems – these are “risks that exist in different states simultaneously across systems even though they cannot always be observed together.” Just as we can no longer rely on traditional, linear roadmaps for strategy, we can no longer rely on traditional risk management approaches for complexity.

The Uncertainty Continuum

Peadar Duffy describes The Uncertainty Continuum, which is defined as “a coherent and continuously evolving strategic frame of reference.” It reflects both value creation and value preservation as well as Value over Time, with the intention of connecting measurable and unmeasurable uncertainties across complex systems and increasing accelerated visibility of risks and their connections.

Just as we can no longer rely on traditional, linear roadmaps for strategy, we can no longer rely on traditional risk management approaches for complexity – @Veridity #digitaltransformation Click To Tweet

As a navigational aid, Duffy proposes to address this with a Dynamic Input Output Decision Engine (DIODE) including crowdsourced decision-making checkpoints and a decision support sandbox. This provides an organization with a far more agile decision-making capability, as well as the kind of transparent ESG (Environmental, Social, and Corporate Governance) decision-making practices that are such a priority in 2021 for Boards and Executive leadership teams.

A key issue raised by Duffy is that risks which materialize as value destructive risk events can come as a surprise to boards and senior management. But they’re often much less of a surprise to people closer to those risks on the ground who may have had visibility of the risks, or at least some of their attributes.

Another related issue is that as risks are reported up through an organization, a risk that may have started red at ground level can morph into amber as it’s reported up through management – sometimes ending up green by the time it reaches executive and Board level. This can happen for many reasons – managers not wanting to be blamed, poor communication, inconsistent measurements used at different levels, etc. One solution to this is increased visibility of real-time data from a much wider network of participants across the organization or ecosystem, which can result in a significant improvement in risk identification, classification, and treatment. In other words, a distributed human sensor network.

In Managing complexity (and chaos) in time of crisis, distributed human sensor networks are described as “Cognitively, culturally, and experientially diverse groups of people to whom we have direct access, assessing the situation independently of each other without the chance of cross-connection.”

A well-governed and managed data catalog can be used to support such a network in real-time. This network can provide situational assessments from multiple perspectives, as well as option identification and evaluation and inputs into the non-linear strategy, in addition to supporting the agile management of risk. 

Embracing uncertainty in a VUCA world

Humans love linearity. But complex systems are not linear. Linearity may be comforting but it’s a construct – it doesn’t reflect reality and organizations need to navigate this VUCA world based on reality. Humans also love homogeneity. We like to interact with others who share our world view and experience. When everyone in a group agrees and thinks alike there is no conflict. But this can become an echo chamber where biases are reinforced. It may feel safe, but it’s dangerous. Ultimately, it results in a dead system. Because interestingly, uncertainty and diversity are both necessary for life. And organizations are living systems.

Humans love linearity. But complex systems are not linear. Linearity may be comforting but it’s a construct – it doesn’t reflect reality and organizations need to navigate this VUCA world based on reality – @Veridity… Click To Tweet

We’re living in a new Age of Exploration. In the digital age, no single individual has sufficient knowledge, diversity of perspectives, and situational awareness to navigate these volatile unexplored seas alone. We need to work together.

Nassim Taleb describes anti-fragility as positioning oneself to benefit from radical uncertainty and the unknowable future. He says, in his book “Antifragile,” “Humans thrive in conditions of radical uncertainty when creative individuals can draw on collective intelligence, hone their ideas in communication with others, and operate in an environment which permits a stable reference narrative.”

This is why diverse multi-disciplinary teams, a focus on the co-creation of value, and harnessing the power of distributed human sensor networks have become foundational concepts for organizations in the digital age. An organization’s ability to collaborate, and to bring together multiple perspectives to generate new ideas, to rapidly identify complex or emerging risks through wide collaboration and consolidation of information, to make better decisions and to navigate complexity and uncertainty (VUCA again) – these capabilities can determine whether the organization is fragile and likely to break when impacted by volatility, or whether it’s anti-fragile and able to thrive and be unaffected by volatility.

To be an explorer in the digital age is to have tremendous freedom and the opportunity to move civilization forward. It’s exciting. We will make mistakes. We will end up in places we didn’t expect. But we will continue to get better at these new ways of working and understanding this new world as we embrace uncertainty and learn to use it to our advantage.

Conclusion

As organizations transform and evolve their capabilities and practices for strategy, decision-making, leveraging fit-for-purpose constraints, and the management of risk, they become more adaptive, nimble, enthusiastic about uncertainty, and increasingly adept at navigating our VUCA world. That is the whole purpose of digital transformation.

And so, we come full circle from whence we started this discussion, two articles ago.

Digital is an enabler of organizational transformation and is, therefore, more than digitization. It’s a fundamental shift in the ways an organization delivers value to the market, encompassing a revolutionary rethinking of how to manage information, technology, people, relationships, and practices to significantly transform execution and business performance across the entire enterprise and its ecosystem. It’s ultimately a fundamental shift in how the organization as a system operates, evolving from prioritizing efficiency, productivity, and control toward agility, velocity, and value creation.

This means that to ensure success:

  • The development and execution of the organization’s strategy needs to be significantly more agile and responsive than in the past
  • Tangible value needs to be achieved quickly and consistently
  • Integration and coordination across different perspectives needs to be prioritized, as well as a balanced focus on both operational excellence and innovation.

Key to digital business transformation is understanding and coordinating the organization as a complex adaptive system rather than an industrial-age mechanistic system. The various navigational aids described in this article provide us with aspects of what can form a guidance system, to better understand where we are, what it means, and how to proceed.

Key to digital business transformation is understanding and coordinating the organization as a complex adaptive system rather than an industrial-age mechanistic system – @Veridity #digitaltransformation Click To Tweet

The digital age is one of disruption, but this presents as many opportunities as it does risks for organizations, as long as they are prepared to evolve in an integrated way with intention and nurture a culture of innovation. And hopefully, to inspire joy in exploration, discovery, and creativity.


Digital Transformation Core Capabilities: Data, Value & Experiential Excellence

In the next article of this series, I will discuss the importance of the following capabilities for successful digital transformation and evolution:

  1. Mature data governance, management, and integration
  2. Value mapping and measurement
  3. Experience management (and achieving experiential excellence).

Why is it essential for all the aspects of an organizational system to work together in an integrated way to be successful with digital business transformation and evolution? What do we mean by “organizational system”? This article provides the answers: Why organizational integration is essential to digital transformation.

People are the most fundamental component of organizational transformation and evolution. When I ask business and IT leaders in pursuit of digital transformation, acceleration, and evolution what the biggest obstacle to change is in their organization, the answer is invariably the same – culture. This article addresses Culture and Transformation in the Digital Age.

Managing Director at Veridity Pty Ltd

Erin Casteel is a strategic advisor, governance and management system expert, and business architect, helping organizations transform and thrive at velocity in the digital age. She works with organizations to design, implement, run, and improve whole organization governance and management systems to create and protect value.

Erin is a lead architect and author of ITIL 4 and an editor of/contributor to a number of international (ISO) management system standards, including the ISO/IEC 27000 family of standards for information security management and the ISO/IEC 20000 series for service management.

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