Understanding systems still matters

When start ups grow to scale, the game is to replace manual activities with processes: your offering has found buyers, demand increases and what you used to do by hand now needs structure to support volume. For example, you used to hire on the spot the few people crazy enough to follow you, but now you need a HR process to hire at scale to fill in several positions a month.

Then these processes grow into full systems. HR now needs to support pay as well as hiring, then compensation, review, training and so on. These processes rely on mutual resources and interface in various ways, often adding IT systems to support human work.

Each such system tends to organise itself around team members (habitually doing routine job), supervisors (making sure the rules are applied and handling changes to the rules when needs be) and officers able to solve complex problems, take decisions and execute them.

The overall organisation becomes a system of such systems - not just the processes themselves, but their relationships as well. In practice, many of these sub-systems compensate each other in an equilibrium of checks and balances. Sales, for instance, is always looking to sell a new contract, but Finance will control margins and make sure extra sales are profitable. Marketing will come up with new ideas for products or new segments to pursue but Engineering will compensate with feasibility and the responsibility of product success (customers keep asking for more) or failure (customers hate the product and turn away from the brand).

As with the human body, these systems must grow in balance with each other. When one system fails to compensate for another, the business can be in dire trouble and not know it. When BP's cost-control budgeting system failed to be compensated by the maintenance system the outcome was one of the largest environmental disaster in US history at Deepwater Horizon as well as a $65 billion write-off for the company - so much for cost-cutting. When Boeing financial systems stopped being compensated by its quality culture, planes started falling from the sky, and so on.

Look at them piecemeal and systems can be evaluated in terms of hygiene (the basics are in place), health (the system behaves as it should) and vitality (the system renews itself and adapts). Vitality in itself is not always good news - if a subsystem has so much vitality it stops being compensated by others, the organization can find itself in bad trouble. We saw what happened to the banking world in 2008 when the vitality of subprime sellers overwhelmed rating agencies that were supposed to compensate for too much bad credit.

Founders generally have a good intuitive grasp of how systems balance each other from having built them piece by piece. Nicolas Chartier , the talented co-founder of Aramisauto a fast growing B2C company told me that he saw customer service system not simply as a process to satisfy disappointed customers, but as a key element in compensating for production's growing bureaucracy (with now 6 production sites across Europe, production weighs far more in the balance). By stressing customer service's importance daily, as for instance Jeff Bezos did in many public statements, the founder maintains the balance throughout the overall system so that the company can continue to grown on a solid basis.

But executives hired later on in the process tend to have a very partial view of the system - mostly from their own functional specialty. Their vision of success is to sustain the vitality of their area rather than the overall balance of systems as a whole. As a rule, they are key operatives in the overall system with a limited understanding of how the system work and easily take misguided or even dangerous action. Their win can easily be everyone's loss. Think for instance of the Head of IT's successful bid for a complete remodeling of the firm operational software that easily can end up in a catastrophe - 50% to 70% of ERP implementations are considered to be failures.

Truth is as the ubiquitousness and complexity of systems increase, understanding of these systems seems to fade away. The start-up boom of the 2000s has left us with a process view of the world which obscures the most fundamental aspects of systems: push hard one way, and the system will push back in opposite reaction, weaken key supporting areas, such as training or maintenance and the system will collapse with no clear path to recovery, and so forth. Systems are about understanding relationships, variation, basic psychology and balance.

Without some degree of managed balance, systems crash into their limits and then swing back, at a tremendous cost to us all. Each sub-system can be driven for outputs, and any executive can ask for an increase in their outputs. But the overall outcome is far from a sum of outputs. Whereas outputs are the measurable results of processes in the short term, such as the number of units produced, services delivered, or tasks completed, outcomes represent the eventual effects or consequences that those outputs have on a larger scale, such as improved sustainability, growth, profitability or benefit to society.

Tensions between sub-systems tend to become very personal as executives identify with their roles - and defend them against others which they see as their competitors for power, prestige and budgets.

CEOs need to accept that this tension is healthy: for optimal outcomes executives need to cooperate and resolve their differences in creative breakthroughs. Here in the picture, you can see a sub-systems analysis at hypergrowth Theodo Group with founder Benoit Charles-Lavauzelle and lean officer Rémy Luciani . In a way, the conflict is the solution if people bring all their known facts and experience together, find a joint formulation of the problem, and seek catharsis moments when differing perspectives produce truly innovative and workable solutions. True strategic insight is often born from putting together real-world constraints in a novel way, reframing the situation and learning to operationalize the new insights. But to to this, executives in charge of one sub-system must actively seek to understand other sub-systems and how they come together as a whole (one way of doing this is rotating senior execs as heads of functions they are unfamiliar with).

To a large extent, strategy-in-use can be explained by the problems the executive team chooses to engage with and those it continues to ignore:

Without a robust mental model of how the system they operate in works, executives are likely to fail at strategic problem solving, sensible decision making and, well, just running things so they work. How can we bring back a systems vision into higher executive theory? As Silicon Valley discovered the hard way "move fast and break things" might make sense if you know what you're breaking - if not, it gets you into run it till it breaks mode fast. Similarly, favoring finance over every other system rarely ends well either.

My fear is that without a deliberate effort to educate about systems again we are bound to witness catastrophe after catastrophe without ever quite understanding what is happening to us. Understanding systems matters more than ever, with so many of our systems on the brink of failure or disruption and yet the conversation has largely moved away from the one question we need to grasp today and tomorrow: how do systems behave?