Systems Thinking for Leaders

The words “systems thinking” are very familiar to most engineers. Yet even within the technical community, it’s commonly believed that unless you’ve specifically been educated as a systems engineer, you’re probably not a real systems thinker. 

In actuality, the roots of any sophisticated way of thinking can be traced to engineering and mathematics. That’s why we live in this kind of world, with all its miracles of progress. Systems are everywhere and a part of everything – from a part to an assembly to a product to an organization. 

The house in which you live, the car you drive, the food you eat, the roads you travel, the process of education, the pattern of threads in your pants – all of these are a product of systematic thought and action. Nothing happens by happenstance, as the great minds of science have proven. 

Systems are administrative in nature, mechanical, electrical, chemical, social, organizational, even spiritual in nature, and this is surely not a comprehensive listing. The Seven Habits of Highly Effective People is a system. So is way you train an athlete to perform. So is the human body and, arguably, the human mind.

Of course the engineers know this, even though some are better at connecting the parts to the whole, while others are better at architecting the parts themselves. That’s why certain engineers are project managers and others are technical specialists. 

If systems are a universal prerequisite for effectiveness, then it’s not just technical systems that need to be optimized. Leadership and managerial systems need to be optimized too. 

Maybe this is the attitude we should adopt about leadership: if you haven’t been trained to think and act systematically, you really don’t know much about how to lead. While leadership is about passion and industry knowledge, it’s also about understanding the whole, and about orchestrating the many parts of the whole for optimization. 

Really, all of business is a function of the connected interplay between strategies, people, departments, processes, functions, products, programs, methods, initiatives and a much longer list of organizational parts and pieces. 

Someone sees a vision of what the company can be, someone architects the management system and others design its parts. Just like the technical world has managers and detailers, so does the managerial world. 

Easy to agree with but, in practice, how connected really are all the performance pieces? What is the vision for connecting them? With what kind of rigor and predictability does everyone work in lockstep toward that vision? 

Much has been written about the importance of strategic partnerships and mergers in today’s competitive business environment. And certainly forming such partnerships requires a certain degree of systems thinking. 

In fact, when two companies bring themselves and/or their agendas together, whole teams of professionals put on their systems thinking caps. Where are the synergies and how do we build them? How do the strengths of the one organization overcome the weaknesses of the other? 

Many large companies have a “grand strategy” for customers, and for driving their portfolio of businesses. But rarely does this outwardly focused strategy include a component for driving internal change. And strangely, that’s exactly what’s needed to perform better.

When you think about it, as companies grow, the associated due diligence usually feeds into the restructuring of business units or profit and loss (P&L) centers to reduce complexity and increase accountability. 

While this seems good, upon deeper examination, the preoccupation with structural configuration is the antitheses of systems thinking, and generally sub-optimizes a business. Under the rubric of keeping a business “whole,” such thinking is about financial engineering, not about effective business architecting. 

It’s nuts-and-bolts performance integration we need, and the systems thinking that drives it. We can make the detailed requirements and specs for assembling a complex product, but at the same time we have no specs for bolting departments together to meet all of our internal customers’ needs. 

Take, for example, a business that sells an off-the-shelf software product, but also sells software development services. Software products and software services are two very different businesses, and as a result, the company separates them into different P&L centers, each with a senior VP in charge. 

The result is organizational fragmentation, not process integration. Each can optimize its ability to serve customers, but neither benefits from the other’s presence to the extent possible. In the process, customers lose a potential value proposition they might have had with better systems thinking and execution. 

The problem is that certain attempts at systems thinking can be shallow. On the one hand, you might spend time and money to reorganize the accounting function and, by doing so, save headcount and resources. On the other hand, you might spend that money to help Accounting truly support the decision-making needs of the business, regardless of how the function is organized. 

Debits and credits, accruals, deferred revenue accounts, year-over-year depreciation schedules do little to describe the actual dynamics of an operating business. So maybe at some point it becomes more important to reengineer the Accounting process, keeping it fragmented and localized but intimately connected to business performance. 

The accounting team can be an analytical force, not just a tracking and reporting mechanism. The tracking and reporting processes not only have a certain capability; they have a certain capacity too. As long as your team is tracking numbers and making reports, why not make them into experts at telling you how you can make the business better? 

Therefore, the more P&L centers you have the better, if you subscribe to this thinking. Because an ivory-tower accounting department won’t tell you much about how things really work where work is done. While certain reports will help you characterize the state of the business, they won’t truthfully tell you the state the business is in. 

Even though Wall Street and executives are preoccupied with financial systems thinking, we need better systems thinking when it comes to coordinating operational synergies. This is THE WAY you do business, and there’s a lot of power in optimizing that.

Comments

[Laura Gibbons]

We met at the Lean Six Sigma conference last year in Las Vegas. My name is Laura Gibbons and I work for Expedia. I am sorry we didnt get to spend more time talking about RapAnalyst and some of the other ideas we were bouncing around. This article clearly articulates your knowledge of this business and I would love to continue chatting more the next time you are in Seattle.