Winning competition through organizational agility

Winning competition through organizational agility

May 2016

Copyright © 2016 McKinsey & Company. All rights reserved.

2

What is agility and what is the value of being agile?

1

Elements of agile organization2

How to become agile?3

3

Today

Organizational structure and mission have passed throughseveral development eras

Last 10 yearsLast century1,000 years ago10,000 years ago

Metaphor: WOLFPACK

Metaphor: ARMY

Metaphor: MACHINE

Metaphor: FAMILY

Metaphor: LIVING ORGANISM

F. Laloux, Reinventing organizations

4

Management approaches have evolved substantially toward a bigger role for individuals in decision making and work organization

F. Laloux, Reinventing organizations

▪ Catholic church▪ Army▪ Feudal systems

▪ General Electric, Procter & Gamble

▪ Southwest Airlines, Ben & Jerrys

▪ Spotify▪ Zappos▪ Buurtzorg

▪ Tribal organizations

Metaphor: WOLFPACK Metaphor: ARMY Metaphor: MACHINE Metaphor: FAMILYMetaphor: LIVING ORGANISM

▪ Authoritative▪ Hierarchical

▪ Goal oriented▪ Top-down decision

making

▪ Consensus based▪ Employees involved

in decision making

▪ Distributed leadership▪ Common goals as

main motivating factor

▪ Power drivenManagement approach

▪ Official roles▪ Process definition

▪ Push for Innovation▪ Meritocracy

▪ Delegation▪ Value-based corporate

culture

▪ Self-organization▪ Goal orientation ▪ Evolutionary growth

targets

▪ Submission to head▪ Segregation of duties

Key features

5

The “living organism” organization is able to cope with today’s rapidly changing world

SOURCE: McKinsey

The world has becomeVUCA …

… with implicationsfor businesses

V Volatility Decisions and adjustments need to be executed at a much faster pace

U Uncertainty Strategy and organization must change faster than once every 2-3 years

C Complexity Management teams are less able to set guidelines applicable in all situations

VU

A Ambiguity Companies face unknown unknowns, decisions must be made at the forefront

6SOURCE: McKinsey

Agility is not a new concept: the “living organism” has shown how work should be approached and the momentum keeps increasing

First examplesas far back as 1950

2000s acceleratedthe trend

Tipping point2015-2016

▪ Existed long before the internet - even the great internet examples are based on old principles

▪ Millennials & demand for more “purpose” at work

▪ Scalability via digital tools▪ Reducing economies of scale,

outsourcing

▪ Customer sophistication, multi-channel world

▪ Increasing adoption of Agile across industries

7

Agility is about being both dynamic and stable at the same time…

Stable, efficient and lean organization

SOURCE: McKinsey Organization Design Service Line

Agility is traditionally perceived as a choice..

…but in reality you need bothat the same time

Dynamic nimble and quick organization

Dynamic, nimble, and quick organization

Stable, efficient, and lean organization

8

… and is the target for both large traditional companies and smaller, dynamic start-ups

Control

Fast

Fast

Slow

StrongWeak

Start-ups


9

Agile companies demonstrate superior organizational healthand financial performance …

X2,0

X2,2EBITDA

Book value growth

SOURCE: McKinsey Corporate Agility KIP; McKinsey Organization Practice

% of agile companies by quartilesof org. health

% of companies with performanceabove median

Bottom Mid Top

5 25 70Bottom Mid Top

31 48 68

Bottom Mid Top

31 52 62

10

… and operational performanceTraditional Agile

12

1

-90%

-40%100

60 70

-30%100

127+27%100

Time to market Productivitymonths Percent

“Change” cost “Change” headcountPercent Percent

SOURCE: McKinsey Organization Design Service Line, interviews

11

What do we mean by an Agile Organization?

McKinsey’s Definition of Agile


An agile organization has a highly productive operating model that fluidly reconfigures towards opportunities that create value, while highly engaging andempowering people

12


1



13

Agile is a completely new way of working

SOURCE: Agile Manifesto

Agile working was originally developed in 2001 as the12 principles of agility for Software production and was successfully adapted to all organizational aspect states…

“We are uncovering better ways of developing software by doing it and helping others do it. Through this work we have come to value:

People and interaction over Processes and tools

Working software over Comprehensive documentation

Customer collaboration over Contract negotiation

Responding to change over Following a plan

That is, while there is value in the items on the right, we value the items on the left more”

14

Agility rethinks organization across 5 key dimensions

Operating model

Methods Core Technical Foundations

Support functions

Change Management

1 2Organization Program definition 3 Teams 4 Co-location

5 Engineering methods

6 Technological Architecture

7 Continuous delivery

8 Release Management

9 Change and release process

10 Environments and APIs

11 12Finance HR 13 VendorManagement 14 KPIs & Metrics

15 16Centers of excellence Training 17 Mindset &

behavior 18 Communication

Detailed later

15

Chapter Squad

TribeGuilds

Visualization/transparency

Daily Stand-ups

SOURCE: McKinsey analysis

1. Organizing for agility – “tribes”, “squads”, “chapters”

Structure Process

▪ Chapters are functional competence groups (e.g. product manager, programmer)

▪ They meet each other regularly to exchange

▪ Ensure high quality resources available for staffing in squads

▪ Guilds are informal communities across tribes

▪ Guilds gather people with the same interest, who want to share practices and knowledge

▪ Cross-functional, self-organizing, self-learning teams, co-location▪ High accountability and E2E responsibility

▪ Group of squads, e.g., around music player

▪ Less than 100 people to foster effective collaboration

▪ Conducts regular gatherings to inform of current status, and share learnings

▪ Group of business and development resources, e.g., for payment solution

▪ Located physically together▪ Have skills and tools to design, develop,

test, and release their SW▪ Self-organizing and decide about their own

way of working▪ Product owner prioritizes the work,

but is not involved in how it is undertaken

▪ No upfront overall planning▪ End-product focus through,

e.g., continuous integration and test-driven development

▪ Many flexible processes boxed in short “sprints”, making work transparentto all

▪ No long-term project plan, but clear interaction rhythm– Daily: 5-15 min stand-up

to coordinate– Bi-weekly: progress review

and gaps/ deprioritization– Quarterly/6-monthly: strategic

product council to prioritize products and allocate IT teams

16

2. Program definition – optimal compromise between top-down directions and horizontal autonomy

SOURCE: McKinsey

Board

Management layer

Strategy

Squads

Tribe/Clusters

StrategyThemes

Epics

Product features

History

3 years 1 year 12 weeks 2 weeks2-12 weeksPlanning/upward feedback timing

A way of achieving business results with concrete business case and KPI

A way of achieving business results in defined micro-segment or functional subarea with concrete KPI

Description of client experience for the products or service for each tribe

E2E client journey/experience related to the product/service assigned to each squad

whathow

whathow

whathow

whathow

Board level

17

3. Work in Agile teams

▪ One cross-functional team consisting of all necessary stakeholders

▪ End-to-end responsible ▪ Team has mandate to make

or influence decisions▪ Team is accountable for critical

business metrics▪ Transparent KPI dashboard on metrics

vs performance▪ 9-12 persons to ensure efficiency

and joint accountability (no free riders)

▪ Trust via weekly team meetings and daily check-ins

▪ Connectivity via online instant messaging in team, co-location etc.

▪ Growth of individuals and teams via open 360 feedback

▪ Autonomy via giving the team the team as much power as possible (level 2 or 3)

▪ Setting up the team and defining mission▪ Training in integrative team problem

solving and Agile – “How to make effective decisions as a team”

▪ Coaching and facilitation support in case team is not meeting the bar

▪ Functional expertise, best practices and tools from the other teams

▪ Efficient infrastructure, e.g., Common tools, digital systems and platforms

SOURCE: McKinsey

Starting point: Well-defined team with a clear mission

1 Applies best practicesof Agile

2 Supported by thestable backbone in charge of…

3

18

30

70

10

10

0

0

10

30

30

10

0

0

100%

Value-add work

Self-development

Syndication withother functions

Agile organization

Idea generation

Meetings

Administrativetasks

Traditional organization

Meetings

Value-add work

09:00-09:15 Team check-in at board

09:15-11:30 Work on to do’s

11:30-12:00 Team based problem solving (Kaizen) on specific topics

12:00-13:00 Lunch

13:00-14:00 Individual working time on a subject matter

14:30-17:50 Working on to do’s

17:50-18:00 Individual check-out

14:00-14:30 Quickly gather input in team and take key design decision

08:30-09:00 Come to area of cross-functional team, check open to do’s on board

3. Agility profoundly affects the daily work of individuals in squads

Typical squad daily routine in Agile


19

3. Team includes a leadership triangle and a working teamwith strong specialization

▪ Represents the business community▪ Ensures value delivery▪ Acts as voice of the customerProduct owner

▪ Oversees the Scrum process and coaches the team▪ Removes impediments to facilitate progress▪ Enables cooperation across all roles and functions

Scrum master

▪ Drives the technical direction of the project by coaching the team▪ Facilitates the creation of technical architecture▪ Helps the team implement software engineering practices for higher code

qualityArchitect

▪ Delivers potentially shippable software at every sprint▪ Staffed with cross functional team members▪ Is self-organizing and empowered

Team


20

4. Co-Location: the team room should serve as a source of inspiration and energy for the team

AA

BC

C

D G

F

A

B CD

Small team room to host all members of each Feature Team with adjustable desks and easy access to each other’s screens

A

Lounge area with whiteboards outside the room to perform daily stand-ups and sprint planning, retrospectives

B

Huddle room for one-on-one discussions and coffee breaksC

Screens demonstrating KPIs in real timeD

Boards for process mapping and trackingA

Plenty of wall spaceB

Enough workstations for the entire teamC

Preferably daylight to increase energy levelD

Easy access to restrooms, cafeteria to minimize time lossE

Printers and office suppliesF

Meeting room facilitiesG

WiFi-access for all team membersH

The ideal room setup should perfectly accommodate the needs of feature teams (Spotify example)

If this is not possible, at least a minimum set of features needs to be in place

Critical features Critical features

E

SOURCE: McKinsey

21

5. Lean, Agile and DevOps need to be combined to ensure continuous delivery in combination with agile frameworks

Client Agile teams IT operations

Lean Product Development

Agile

DevOps

Lean Product Development emphasizes small batches, rapid feedback and limiting work in progress in order to achieve continuous flow

Agile improves collaboration within and across teams by enabling development of working solutions frequently to iteratively align requirements with client/customer

DevOps improves collaboration between agile teams and IT Ops in order to deliver through faster release cycles, using continuous delivery

SOURCE: McKinsey

22

Working software

Sprintrequirements

Product requirements

Sprint: 2 weeks

5. The combination of Lean product development, Agile and DevOps shifts delivery from the traditional waterfall to a flexible, iterative model

SOURCE: Client interviews

… to a flexible, iterative model (e.g. Scrum)From fixed duration waterfall …

Scoping

Requirements

Design

Build

IT Testing

User Acceptance Testing Deployment

Post production support

8 weeks

8 weeks

8 weeks

8 weeks

8 weeks

4 weeks

1 week

4 weeks

23

5. The sprint process

Sprint Backlog Time-boxedTest/Develop(No changes)

Working features ready to deploy

Product Backlog(prioritized features)

Sprint 0 (Release planning)

Time-boxed “Sprint” Cycles (2 weeks)

Sprint Planning

▪ Review product backlog

▪ Estimate sprint backlog

Daily Stand up

▪ What did I do yesterday?

▪ What do I plan to do today?

▪ What are my issues?

Sprint Review

▪ Demo features to all

▪ Share key project metrics

Sprint Retrospective

▪ Done after each sprint

▪ Aims to improve the process for next sprint

SOURCE: McKinsey

24

Technical readiness

Hig

h

Bus

ines

s re

adin

ess

3

2

1Low

Med

ium

HighLow Medium

6. However, there are optimal agile archetypes for each level of business and technical readiness

Examples (30+ parameters):▪ Value add potential▪ Readiness to adopt

agility, and agility cultural fit

▪ Strong push for innovation required

▪ Fast changing business requirements and needs

Examples (30+ parameters)▪ Complexity of enabling technology▪ Opportunity to auto-test software, parallel

programming, …▪ Level of insourcing of product/software development

Pure Agile

Fast Waterfall

3

Fast Iterative2

1

SOURCE: McKinsey

25

“Flying”“Starting to walk”“Learning to crawl” “Running”

7. Continuous Delivery builds on 8 practices and can be implemented at 4 different levels

Version control

Unit and integration testing

Unit tests

Functional tests

Perf. tests

Security tests

Development

QA

Staging

Test driven development

ProductionAuto-scaling of infrastructure

Cloud

1 Suite of automated tests4 One-click continuous deploy to any environment

5 Self-service access to prod-like environments

6

2

Streamlined code review

3 Continuously integrate w. “single source of truth”

7

8 Automated performance management

Build status Code metrics Site monitoring Integrated logging

SOURCE: McKinsey

26

8. Release management needs tailoring to the agile archetype adopted by different teams

Legacy team

Agile team

▪ Legacy teams work Agile as well, or are fully integrated in a multidisciplinary team and deliver functionality in periodic sprints

▪ Agile team awaits release of required back-end systems and works Agile to deliver functionality built on top of backend changes

▪ Required services are extensively documented up-front

▪ Agile and back-end team deliver E2E functionalityby working closely together and directly discussing required services

▪ Legacy functionalities delivered via micro-releases, though leveraging traditional approach

Fast waterfall 1 Fast Iterative2 Pure agile3

Legacyteam

Agile team

Legacy team

Agile team

SOURCE: McKinsey

27

8. Multiple tools are available to support agile ways of working

Source code management Build tools Continuous integration

Automated testing Code quality measure Infrastructure automation

Infrastructure as a service Monitoring Log Management

SOURCE: McKinsey

28

11. Finance and budgeting in agile organizations

Investment philosophy

▪ Instead of approving total budget for a multi-year core banking transformation, select the most critical MVPs and make the decision to proceed based on their success

▪ Experiment with uncertainty on business value and make incremental investments based on value creation, which are closely monitored and revised

Financial authority

▪ Delegate financial decisions as much as feasible within approved limits

▪ Allow CPOs to reallocate the budget within the programs based on programme backlog while tracking the total programme budget

▪ Allow POs to reallocate the budget within the team based on feature backlog

Planning process

▪ Ensure maximum involvement of delivery organization in planning process

▪ Budget for each program is planned jointly by CPO from the business and Program manager from IT

Flexibility ▪ Reconsider priorities inside the program when required without complicated administrative process

▪ Enable CPOs to decide on the spend based on the program backlog and redefine priority features for different teams when needed

Reporting ▪ Add benefit tracking in addition to cost tracking ▪ Review the success of each program and delivered benefits at quarterly program board meetings and regular retrospectives with the business

Main features Examples

CLIENT EXAMPLE

SOURCE: McKinsey

29

12. Flexible staffing and roll-off decisions

Portfolio ▪ Portfolio board members decide on roll-off

of the Program managers and Chief product owners based on performance and closure of the program

▪ Board approves overall budget and staffing plan for each epic proposed by tribe leads

Tribe ▪ Program manager develops plans for the program

▪ Tribe Lead approves staffing plan for the program

▪ Program manager conducts final interview to ensure fit in the program

▪ Program manager approves team member roll-off decisions and initiates the process of moving the resources to a separate HR talent pool

Squads ▪ Product owner approves the staffing plan per team, jointly with chapter leads

▪ Scrum master submits plan based on what is in the backlog per team

▪ Iteration manager conducts first interview to ensure fit in the team

▪ Scrum master initiates roll-off decisions based on team member performance and required capacity of the team

HR ▪ HR facilitates hiring process and ensures compliance with bank policies

▪ HR manages separate HR talent pool and reallocates resources that do not fit in new structure

Staffing decisions Roll-off decisions

CLIENT EXAMPLE

SOURCE: McKinsey

30

13. Relationships with key vendors need to be revised to enable more dynamic sizing of squads

SOURCE : McKinsey

▪ Insource scarce and strategic capabilities▪ Shift work more to time and material▪ Define clear responsibility for deliverables▪ More flexible approach to forecasting

of demand (e.g. require vendors to provide/roll-off up 20% more resources within 2 week if needed)

▪ Build Agile capabilities for outsourced resources and coordination layer

▪ Contracts based on trust with common incentives (e.g. vendor fees depend on the project delivering the benefits in the business case)

▪ Ambitious push for innovation – frequentcommunication and shared understanding of market context becomes necessary

▪ Close and intensive interaction between team members on-site

▪ Cross-functional and cross-domain teams▪ Highly flexible scope and requirements▪ Smaller work packages that are delivered

in sprints, with strong need for coordination

New requirements for vendors Agile vendor management approach

31

14. Different KPIs can be used to measure the effectiveness and efficiency of the teams across key domains

Financials ▪ % of working hours (productive) dedicated to development of committed epics, including

▪ Helps teams maximize share of time dedicated to delivery

Quality ▪ Helps teams to take on reasonable deadline commitments

▪ New Agile development issues logged within sprint (per team)

Productivity ▪ Monitors number of features committed compared to capacity, ensuring balance between both

▪ Committed story points per gross team hour worked (hours per day x days x team members - deductions)

Timeliness ▪ Analyses difference between committed development and delivered points

▪ Story points delivered divided by story points committed per sprint

Organizationhealth

▪ Ensures sustainable health and involvement of employees

▪ Surveys of engagement and excitement of employees (surveys)

Why it is important Examples

SOURCE: McKinsey

32

15. Agile transformation requires a dedicated Center of Excellence

COE executivecommittee

COE lead

Metricsand communication

Change leads per business/ IT area

Coaching hubPractice hub Guilds

15-25

1

3-5 20-40

2-3

SOURCE: McKinsey

33

16. All employees and management in agile development go through a 5-day training program in addition to daily training on-the job

13:00 LUNCH

Time

Mindset & behavior

Waste

Monday Tuesday

18:00 Drinks

Wednesday

17:00 Reflection on yourWhy & What of Agile

Reflection on yourWhy & What of Agile



16:00 Continuous improvement towards perfection Agile: Practical experiences Agile safari

Thursday

09:00 Introduction Review previous day Review previous day Review previous day Review previous day

Friday

Why and what of Agile

10:00 Continuous Delivery Flow Seeing the whole (system thinking) Starting Agile and scaling up

Commitment11:00 Kanban

12:00 Lean and agile principles Operational management & KPIs

Continuous improvement exercise Agile – practical experiences

15:00 EvaluationOM of self directed teams

KPIs cont.

Portfolio management and planning

Leading the change

Being a change role modelPerformance management

14:00 Basics of scrum Commitment contd.

First line and middle management are in the driver’s seat

1 9 9 9 9

2 11

10

16

15

21

20

243 12

4

5

6

7

6

12

13

14

8

17

18

8

8

25

22

23

8

4

25

CLIENT EXAMPLE

SOURCE: McKinsey

34

17. Agile culture builds around several building blocksCLIENT EXAMPLE

AGILE TEAM PHILOSOPHY ATTRIBUTES: Self-organizing organizational units, based on Size-limited, End-to-end responsible team working in time boxed, well defined sprints delivering new products to the market (potentially) in a continuous fashion

CommitmentScrum teams commit to goals and are accountable for results; each sprint creates value

FocusLimited non value activities, End-to-end way of looking at problems; fully dedicated resources

RespectFostering ownership and mutual trust instead of ‘command and control’; positive work environment, Roles not hierarchy

OpennessInformation freely accessible Open and public peer-to-peer feedback

Customers firstPutting the customer’s voice into everything delivered to unlock the true value

Courage for change Fast failure, fast iterations operational modeOpenness to change, try and fail/succeed

SOURCE: McKinsey

35

18. A holistic communication plan has to followed to foster the change across the board

Town-halls ▪ Town-halls are full-day or half-day events with participants from the entire organization▪ Ideally suited to announce big initiatives (e.g., capability model kick-off) and celebrate success

E-mail newsletter or blog▪ Frequent, short updates to show continuous progress on the transformation to keep momentum going▪ Ideally suited to announce upcoming events, gather feedback on ideas, and announce important

changes

Video▪ Short videos, preferably by well-known personalities in the organization (e.g., CXO,

head of transformation)▪ Ideally suited to reach a wide audience while retaining the personal touch of a townhall

Communities▪ Communities are self-organizing informal gatherings of people interested in a specific topic

(e.g., certain capabilities or tools)▪ Ideally suited to foster knowledge exchange within the organization to supplement structured

coaching approaches

Public presentation(e.g., at conferences)

▪ Active participation in public presentations (e.g. Automation conference) by letting selected staff present their achievements and share approaches with a wider audience and foster knowledge exchange

Description

Round-tables ▪ Exchange of experiences and best-practices in round tables in the same industry or across industries

Community ▪ Share achievements in the transformation and development efforts (e.g., by making key concepts or software tools available as open source)

Inte

rnal

com

mun

icat

ion

Exte

rnal

com

mun

icat

ion

Channel

SOURCE: McKinsey

36


1



37

The agile transformation can be structured in several ways

… ……

Agile only in selected, strategic customer journeys

Bi-modal organization aligned with technical/business readiness Full-fledge agile organization

▪ Only selected, highly critical products and customer journeys

▪ No significant organizational changes required

▪ Virtual and temporary agile teams embedded in existing organization

▪ Agile methodology implemented in areas with high business and technological readiness

▪ Local Organizational changes required (bi-modal organization) in agile areas

▪ Agile methodology implemented across whole organization

▪ Areas with lower business and technological readiness adopt “fast waterfall” archetype

▪ Massive Organizational change

SOURCE: McKinsey

38

Agile transformation needs to be structured along waves

Design

Pilot phase

Transformation

Timing ▪ 3 months ▪ Depending on scale ▪ 2-3 months

Activities

▪ Piloting and “trial & error” in selected areas

▪ Preparation of agile “cookbook”

▪ Transformation planning▪ Communication plan

▪ Target agile model selection

▪ High-level design of target organizational model and processes

▪ Identification of pilot areas and training of key roles

▪ Planning of pilot phase, and communication

▪ Execution of organizational changes

▪ Full implementation of agile processes and tools

▪ Full co-location of teams and training on-the-job

SOURCE: McKinsey

39

Our core beliefs for a successful Agility Journey

Agility requires the executive team to give up top-down, directive control, and empower the organization to take decisions

Readiness to give up individual control

Agility requires a holistic change in the operating model, ways of working and management paradigm – not just “implementing levers”

Fundamental change, not individual levers

Success depends on being able to simultaneously top-down design a stable operating model and allow learning & local adaptation in growing the dynamic elements

Combine the bottom-up with the top-down

Managers need to let go of the need for predictability and control and allow for flexibility in how both the journey and end state will look

Dare to leap into the unknown, let go & learn

First prototypes and implementation actions should start in business critical areas of the organization and be tied to overall business objectives

Launch in the most critical areas first to secure momentum

Many organizations have Agile parts (e.g. innovation units, War Rooms) –the challenge is to scale this beyond the 10% to the whole organization

Scale beyond the tipping point

SOURCE: McKinsey

Business

Winning competition through organizational agility