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Brad Westpfahl, Manager, IBM

Posted: August 18, 1998

Self Organizing Resource Allocation:
Managing Value Creation
Copyright B. L. Westpfahl - August, 1998

Editor's Note: Published for the first time here, this article discusses a practice designed and evolved by the author at IBM - one that required no management action for assigning resources to projects, and no management action to allocate performance incentives among project team members.

Managing Value Creation

Senior executives, consultants and process reengineering professionals have realized that there are benefits to the implementation of agile practices within almost any organization. Organizations that are highly responsive to customer needs and marketplace opportunities produce better returns for stakeholders. Business leaders who attempt to implement agile practices throughout their organizations discover that it is not easy for managers and employees who have been trained in traditional, industrial-era operational techniques to suddenly become agile. The full benefits of agility will not be realized until agile management methods become as easy to practice as the methods that have been taught to every employee and manager since the maturation of industrial organization practice in the early part of this century. This article discusses agility from a management-practitioner viewpoint in the belief that no organization can be agile until its line organizations master techniques that allow them to be agile in every process, every day. It describes firsthand experience in the implementation of an alternative to current standard management practices. I refer to this set of techniques as Managing Value Creation.

Obstacles to Agility

To build and implement an inherently agile management system one must first examine the aspects of our current management techniques that make them "un-agile". Those who practice management today have honed their craft within a single management era -- the industrial era. We are so familiar with its tenants that we have forgotten that the way we practice management today reflects a series of choices that were made by the developers of the industrial management code. Many of those choices were well suited to the construction of industrial behemoths that used manual labor to produce a limited number of products on a fixed schedule for delivery to a hungry consumer market. They may not work as well today. In fact, if we could retrace the steps of the industrial organization pioneers we may find that options they discarded have more applicability to some of the environments in which we manage today than do those they kept.

In an effort to extend the relevance of our current techniques we have subjected ourselves and our employees to a series of empowering, alliance building, cross functional teaming, outsourcing, down sizing, cycle time reducing techniques. Each of these had the expressed purpose of undermining one or more of the pillars of existing management practice. For example, empowerment counters the tendency of command and control systems to overlook issues that are obvious to people in the field. Similar descriptions can be rendered for most management innovations of the recent past. Collectively I refer to the practices of industrial era management systems as being plan pushed. That is, the action of the organization is accomplished through the development of a plan at a central site and that plan is pushed through the organization to achieve the desired results. In this context recent innovations are appliqués to the fabric of industrial management -- they cover its worn spots, but haven’t fundamentally changed it.

Agile Models

There are two ways to approach the development of innately agile management systems. The first is to examine systems that are agile and pattern a new approach after them. The second is to identify the obstacles to agility with our current doctrine and develop alternatives to overcome those obstacles. This work used both approaches. The model systems I chose as examples of agile organizations were small, growing businesses and selected natural systems. In contrast to rigid, plan pushed industrial organizations, these both tend to be environmentally pulled, that is, they are directed more by responses to their environment than to a central command authority.

The organization structure and practice of small business tends to be very fluid. There are two sources of this fluidity. The first is the close awareness that everyone in a small business has to the fundamental health of the business. The second is the fact that no employee is so entrenched in a specialty that they can’t change what they are doing to focus on an activity that is more important to the survival of the business. In a small organization these factors form a stimulus/response mechanism that can reshape the entire organization rapidly to pursue opportunities that will produce a stronger organization.

The animal kingdom offers many examples of complex organizations that operate successfully without planning departments, budgets or management structures of any sort. They draw their success from an ability to recognize opportunities and threats and coordinate the efforts of every individual to respond accordingly. An ant colony doesn’t wait for an order from the queen to send its legions to plunder a dropped ice cream cone. Neither does a flock of sparrows need a team meeting to determine when it is time to turn. A successful agile system must be in close contact with its environment and be able to respond instinctively to environmental changes. It must also have the ability to scale from an organization comprised of a few individuals to one very large in size.

Primary Value Measurements

The development of an intrinsically agile management system began with the examination and definition of measurements. A common element of both the small business and natural systems is their reliance on a simple, ubiquitous measurement system. Small businesses are dependent on the generation of enough profit to cover their expenses and keep the business solvent. They respond rapidly to the opportunity to pursue profit-generating business or to threats to existing, profitable opportunities. Animal colonies need to acquire and defend food sources. Their measurement of success is their ability to feed their population. In each case, all members of the organization have a common understanding of what it takes for the organization to succeed and a clear linkage exists between success for the organization and success for the individual.

This is rarely the case in a large organization today. We all manage through the creation of specialized departments with functionally-specialized measurements. Although sales, manufacturing and procurement all have a responsibility to contribute to revenue and profit growth, they each carry objectives specialized to their function. These measurement differences frequently produce friction that prevents the organization from reaching desired agility levels.

My experience deploying this value creation system occurred in a field sales organization. Our measurement obstacles were created by the use of a traditional sales territory structure and a complex system of objective setting, performance measuring and sales commission allocation. Our traditional approach produced an environment where resources didn’t always flow to the best opportunities because management had granted exclusive, geographic franchises to each sales representative.

The solution was to remove the territory structure and refine the focus to a single measurement. I refer to this simplification as the determination of a primary value measurement. The most appropriate measurement is one that reflects the value generated for customers by the organization. This belief is rooted in the notion that value generated for customers can be converted to value for stakeholders. I chose gross profit as the measurement of value creation for my sales team because it was easy to measure and truly reflected the value that we produced for our customers. I reasoned that a customer who was more satisfied with our coverage would be more likely to buy from us. Our success in selling information systems and services is basically a solution creation process. If we created superior solutions for our customers they should even be willing to pay a premium.

Of course, the generation of gross profit also served our corporate interests, thus it placed my team on the route that translates customer value into shareholder value. Other functions and other organizations could select a different primary value measurement that better reflects their needs. For example, if the senior management of a design engineering organization believed that they enhanced customer and shareholder value by shortening the design cycle they could assign a value measurement for the elapsed time from project inception to completed design. It is critically important that measurements such as this reflect the true value produced since resources will be allocated to competing opportunities and projects based on this value. Also, value measurements should be expressed in dollar terms even if they are derived from non-monitary sources.

Allocating Value Produced

Once the primary value measurement is established it must be allocated among team members. A fundamental element of this process is to only allocate what is legitimately produced as projects are completed. For example, the gross profit I used as the primary value measurement for my sales team was the true gross profit on the sales they made. If no sale was made at the end of a project, there was no value to be realized by the people who worked on the project. To be responsive to market changes, an inherently agile management system will work best with as little adjustment and regulation as possible. Just like a free market economy, less regulation, less taxation and fair competition produce the best result for all participants in the organization.

The allocation of the primary value measurement credit to individuals is a process of subdividing or packetizing the work of the organization. The first step I took in implementing this methodology in the sales organization I managed was the dissolution of traditional sales territories. That didn’t mean that I allowed customers to go uncovered or for my people to compete with one another for the customers’ attention. The traditional territory assignment was replaced with a list of open opportunities on which we were working. Each of these opportunities had a steward assigned from among the sales team. Where previously a sales rep was assigned to a geographic territory, now they were assigned stewardship of opportunities as they were identified.

Opportunity stewardship was generally assigned to the person who identified the opportunity. That was generally the same person who used to be assigned to cover the territory. While the concept of packetizing work may sound like a significant departure from traditional approaches, in many cases it is a minor adjustment to the status quo. It is critical for each work packet to have discrete boundaries. In a sales territory this could be a specific customer over a period of time, or a specific opportunity or project. In a manufacturing environment it might be a work order, a complete customer shipment or the output from a specific assembly line or work cell for a period of time. For a law firm it might be a case and for a construction company a specific job. Whatever the setting, it is management’s responsibility to define the grouping of work and to see that a qualified steward is assigned to each discrete packet.

The role of the steward is to define the plan that will accomplish the work as efficiently and effectively as possible. That could involve nothing more than the steward’s own labor or it could involve the engagement of many people who each bring unique skills and access to capital resources to the project. In every case, the steward is responsible to engage any other resources necessary to complete the project. He or she does this by using management-provided means to advertise or promote the resource needs for each project.

The skills to complete the project may reside in the employees of the organization or may be accessed externally through employees who manage procurement or alliance relationships. The currency the steward uses to buy the services of others is a percentage share in the project that he or she is managing. This creates a free market structure where opportunities seek the labor and capital they need to produce value, and labor and capital seek opportunities in which they can generate value. The steward’s share of the project is whatever percentage isn’t allocated to other team members in the process of enlisting their capabilities.

When practiced within an organization, this process provides the same benefits that it does in free markets. Once a team is formed, every team member has an incentive to increase the project’s production of value because in so doing they increase the value of their shares. Similarly, each team member is anxious to conclude the project successfully and as quickly as possible to allow themselves to claim their share of the value and free themselves to pursue membership in other project teams. Perhaps most significantly in the long run, the participants in successful projects, particularly those individuals who show creativity, innovation and leadership, increase their value as members of future teams. This linkage between past contribution and future value is a strong stimulus to increased performance.

Value Generation is Only Half of the Equation

Individuals gain value credit through negotiations with other team members for share of credit on projects. They realize this value when the project concludes successfully. That addresses the effectiveness needs of an organization, but does nothing to improve efficiency.

I measured each person’s total expense consumption as the first step toward imbedding an efficiency component into this management system. Total expenses included salary, commissions, benefits, travel, telephone, office space, and many other categories. If I could measure it and attribute it back to an individual I did so. While it was not a part of my sales team’s expense profile, an individual’s expenses could also include depreciation of capital equipment, space in a warehouse or other facility, transportation costs, scrap or rework of inventory, carrying costs or other expenses particular to a given discipline. Each individual needs to have full visibility into their expenses. They also need to know what the total expense budget and total goal for the primary value measurement were for the team.

The quotient of these two (expressed as value-measurement / expense) was the organization-wide objective and was shared by each member of the team. A person with higher expenses was, therefore, expected to produce proportionally higher amounts of value measurement to support the achievement of team objectives. Since all team members knew and understood this, they brought the knowledge of their expense position with them when they negotiated with teammates on the share of gross profit they would need to acquire for each project.

This produced two significant results. First, it ensured that every expense was matched to a desirable result for the organization. Each individual had to attest for themselves that they were spending the organization’s money wisely because any expense they incurred went against their personal measurements and increased the amount of value they needed to acquire as a team member or steward. Second, it provided each person with an incentive to economize.

As the manager of the organization it was still my responsibility to approve all expenses, but each individual on the team now shared in the goal of improving the efficiency of the team. If an out-of-town trip was not necessary it wasn’t taken -- not because managerial wisdom was brought to bear, but because the individual recognized that the expense incurred wouldn’t produce the value required.

Value Creation in Motion

The advantages of an inherently agile management system don’t become evident until it is put in motion. Like a bicycle that is only stable when it is moving, an agile management system only shows its value over time.

Several advantages appeared as I deployed these techniques. The most important of these can be illustrated in the old adage that "None of us is as smart as all of us". The use of open market exchange to manage resource allocation brought to the organization the same benefits it has brought to market-based economies.

For example, people’s ability to function and contribute within a team environment became a measurable attribute. In one case a steward came to see me to say that a teammate had accepted a 50% share in a project but was not doing what he had committed. Although I had a discussion with the teammate just as I would have if I had assigned him to the project, the real price he paid for his lack of commitment to the team came when he next tried to get on another of this steward’s projects and discovered that he could only get half the share for the same work -- his value as a team member had found its proper price in the marketplace. If this person tried to repeat his over-commitment with another steward and that steward had checked with stewards of other projects on which this person had worked he or she would have learned this person’s capabilities and made an appropriate offer.

Conversely, stewards whose successes and reputation are solid will find it easier to attract solid performers at reasonable rates because those people know they are getting a fair deal on a solid, well managed team. In my experience, some stewards couldn’t find labor for their projects at any price although management would probably have assigned resource to them in a traditional setting. Let’s face it, sometimes employees collectively recognize a dog before management does.

Employee Revenue Share Expenses ROE
Average 2,558,000 118,750 21.5
Inherently agile management systems need to promote continuous innovation and steady improvement in efficiency. Unlike traditional reengineering in which standard processes are periodically reviewed in the hope of producing quantum improvement, a value creation based system such as the one I implemented allows innovation on each new project, work package or opportunity. There is strong incentive for individuals in the organization to innovate for greater effectiveness and efficiency -- after all, they immediately see the benefit of efficiency or effectiveness improvements they make, and replication of those enhancements increases their value on subsequent projects.

In my commissioned sales team I used each person’s individual measurement of value-produced / expense-consumed to allocate commission payments. People whose performance exceeded the standard for the organization received proportionally higher commission payments (which also raised their expenses and brought their performance closer to the standard!). Those with lower relative performance were not as well compensated. This linkage of performance to compensation or advancement is easy in a commissioned sales environment but could also be employed in other settings through its use in determining individual bonus payments, profit sharing or promotions.

Where Next?

This experiment in the creation of an inherently agile management system has evolved over time. I have implemented some or all of its principles in a variety of sales settings and have reviewed the concepts with people from many different fields. This approach offers significant benefits to environments where organizational success is tied to people’s ability to reconfigure themselves regularly to serve customers.

This could be applied as easily to a custom manufacturing shop using a value measurement that quantifies the benefit of manufacturing cycle time as to a law office that measures dollars billed. The approach can be moderated and monitored by management through the judicious establishment of requirements such as the engagement of an auditor or lawyer on project teams or the imposition of a tax as an expense on certain types of labor. For example, people who contract-out work could be required to incur an expense of 10% that is designed to favor inside labor by that amount.

In one case I designed an approach that allowed management to fund strategic projects through allocation of primary value measurement credit that was not tied to successful project completion. This was successful in seeing that a measured amount of labor was deployed against strategic projects that otherwise would have been under-covered as people pursued current opportunities. These illustrate a few of the many variations on this theme that could be implemented to tailor the basic approach to a variety of conditions.

While there is applicability for implementation of approaches like this in departments of large organizations or even throughout large organizations, the most promising environment for deployment of intrinsically agile management practices is in small, growing businesses. As small organizations which are accustomed to rapid, widespread reconfiguration begin to grow they reach a point where their only option to sustain growth has been the implementation of traditional industrial organization practices. These businesses can continue with a much more familiar approach through the implementation of a value creation based management system.

Brad Westpfahl, Manager, Personal Systems Marketing
IBM Global Government Industry

Would you like to offer some thoughts or add to the dialog? Responses of general interest may be posted below. Send your comment to . IMPORTANT: Make sure the subject line of your message contains: Comment on Guest Speaker 8/98.
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From: (Jack Ring) Date: Thu, 20 Aug 1998
Excellent work. Thank you.

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From: (Tony Kortens) Date: Wed, 9 Sep 1998
Thanks for the rich examples. I appreciate the value of such "open book" financials and the degree of self-organizing inherent to your design. Just in case I don't get too idealistic here, I did have some questions / thoughts about how you managed (or led) in such a way as to avoid optimization at the small group level, i.e. that the team boundaries were flexible enough, i.e. that sufficient cross fertilization of knowledge occurred between teams, how you minimized the development of an oligarchy which might reduce the flow of knowledge to newer or less experienced staff, etc. In some ways I fear the parallel to what has been termed "late stage capitalism" when we see greater polarization and inequity - unless we act with great care and some strategic leadership ...? Which I assume you applied - perhaps intuitively ...? Thanks again, Tony.

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From: Bradley Westpfahl Date: Thu, 10 Sep 1998 09:59:18 -0400

Tony: Thanks for the comments and questions. As I read your question I think you are asking "What is the role of managers in self-organizing management systems?". This is a broad and important topic that I didn't have space to address in the article you read. There are two aspects to my answer.

The first is based on theory and analogy. Self-organizing management systems mimic many aspects of our self organizing economy. There are many examples of out-of-balance conditions that can occur in the economy (e.g.: monopolies, collusion, cartels, contrived shortages, etc.). Each of these undermines the basic assumption that free and open competition will produce an optimized result overall. Each of these conditions has found a remedy in our capitalistic society through legislation and enforcement. The first role of management in a self-organizing structure is to preserve free and open access to opportunity and to resources. In the implementation I lead, this was rather easy since the team was small and scattered and I personally discussed every opportunity with every member of the team. In larger scale implementations this behavior would have to be institutionalized across a larger management population. The good news is that an organization doesn't have the same challenges as a society in codifying and enforcing its principles. Don't confuse self-organizing with self-managing. Management's role in opportunity selection and resource allocation diminishes in the self-organizing environment I described, its role in enforcing the essential behaviors of the organization does not.

The second answer I would offer is a practical and subjective one. All members of our company have annual performance objectives. Among those are specific elements that address leadership, commitment to teammates and diversity. These elements offer ample traction to managers to guide the behavior of people whose individual tendencies don't reach the mark. The concern you express is one that would be most pronounced among more senior and experienced staff. Our culture in IBM is that these people have a responsibility to use their experience to help lead their less experienced teammates. I would use individual coaching and counseling to guide any individual who was using their position as a steward to exclude less experienced people from key positions that would develop their talents and deploy their skills. If the behavior was not corrected, I would take that into consideration in the annual performance review process. In chronic or pronounced situations anti-team behavior could be the basis for dismissal.

While these principles have not been deployed in a large organization yet (hundreds or thousands of people in a single resource pool), it is my hope that the combination of desire to succeed, an organization culture of fairness and inclusion and minimal management guidance would keep the process open for all.

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