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October 10, 2005

Charging ahead with the "Returns" on Investments

As business people in complex organizations, we've reached the point where we accept without argument the idea that change is a business constant. But when it comes to actually being prepared for change we still too often literally manage to be our own worst enemy. Unless re-examined specifically in terms of change, what we do can prevent or contradict what is necessary to satisfy need.

Getting in the mindset for constant change means figuring out how to be both flexible and agile; that is, on the one hand it's necessary to have many ways to handle a given situation, while on the other it's necessary to be able to handle many different situations.

Most of what we think of as "organization" is concocted to address those two issues. It's as basic as formulating the team to put on the game floor, in a way that anticipates the range of situations expected in the game. Several players may have to fill the same role, and any given set of players have to face a variety of problems.

So it's not surprising that organizational design - whether as processes or workgroups -- has taken and kept a planning spotlight continuously since Y2K, the onset of this period of relentless change.

The more critical the capabilities of flexibility and agility become for handling situations provoked by competition, the higher priority they must have in the range of investment opportunities.

But during this same period, the need to "optimize resources" has been equally urgent. Optimization has always really meant that somehow all resources must be managed in a way that has them doing the right thing at the right time, as continuously as possible. The major point of difference from earlier efforts in the period to later ones has been:
- how to define "the right thing", and
- how to associate the right thing with a presumed resource, without disrupting the progress of things that the resource had previously been supporting.

The first of those two items distinguishes entire businesses from each other.

However, the second of those two items presents a special political complexity very common across all different businesses. Often, the status of an ongoing business plan or situation is that "progress" is rated as sufficient while the "goal" or subsidiary objectives of the effort have not yet been met. Since resources are typically allocated through justifications based on earlier established goals and objectives, changes provoked by new priorities seem to violate the ROI of earlier commitments.

The tension between earlier projected ROI and new priorities encourages an expanded notion of what is meant by "returns". In circumstances of constant change, adaptability hovers above current business as a critical success factor and therefore must be dealt with as a fundamental need that generates followup organizational requirements. From that perspective, goals must be understood in terms of value gained amidst change, but likewise the capacity of the business to continue pursuing goals amidst change must have equal importance as an achievement.

Continuous change means that "progress" is still the center point of the view on investments -- but it is not simply boiled down to the effective refreshment rate of equivalent consumed assets. Progress calls for the subtle shift in thinking from "managing investments" to "managing returns."

If progress is measured against goals but also (and equally) against capacity, then the principle behind managing "returns" on investments should be based on relevant gains made in an approved manner. The question around this is one of how much it matters that the business is predicated on committment to that principle -- and the answers will likely reflect the differences amongst stakeholders.

A focus on compatibility with the appropriate manner of gain can easily be strategically prioritized across all stakeholders as protection against the risks to agility and flexibility -- and what we're finding now in the field is that it's not an optional move. For example, internet security and Sarbanes-Oxley are major re-organizational influences dictating the "manner of gain" behind business performance. They shine brightly as changes in the environmental tolerance of certain business behaviors -- and "mismatched" behavior can quickly shut down the possibility of leveraging the new opportunities that the business may have spotted. Other risks to agility and flexibility include inconsistencies in procedures, communications, and analyses -- which create availability, readiness and competency problems that prevent or disrupt the chance to engage opportunities. That explains why standards, certifications, and other capability maturities also qualify as valuable "returns" or investment objectives.

The idea of risk-weighting progress thus provides a rationale for the principle of balancing current opportunity "expense" against future opportunity "cost". But the problem remains to select the future opportunities.

Ordinarily, we get into probability assessments to develop a picture of the future environment and landscape, and therein to assume and vet certain opportunities. But without the proverbial crystal ball, establishing readiness now for future opportunities means focusing on categories of opportunity rather than on specific events, and focusing on essential competencies needed in the categories rather than on specific goals or effects. A category-level understanding of opportunity provides enough specificity to associate certain types of resources, yet provides enough generality for current resources to stay directed at today's requirements even while positioned meaningfully for the future.

To play out this stance, management can embrace the linking of resources to categories through integrating architecture and portfolio management practices. Meanwhile, investment techniques such as "real options" provide a superior logic to the conventional perspectives such as NPV, and allow organizations to understand the real source of ongoing value generation amidst change.

Posted by Malcolm Ryder at October 10, 2005 7:48 PM

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