The Ghost in the Machine

Fabrizio Salvador, Professor of Operations Management at IE Business School.

The success of companies such as Dell, Capital One, MINI Cooper, and Amazon has been ascribed to the use of flexible technologies that enable the delivery of tailored products and services to millions of customers. Research has dissected in detail how these companies reconcile the conflicting goals of adaptation to the customers and productivity. Flexible machinery, product platforms, flexible supply networks, and highly reconfigurable and scalable IT all play a role in this game that has been popularized as “mass customization.”

Nevertheless, if you take a look at the way customization is delivered by mass customizers, you will immediately notice that behind the scores of available options lies a very rigid design constraining customer choice within a pre-designed “solutions space.” Yet, in contrast, there are many businesses that frequently yet less glamorously have to deliver highly customized solutions without the possibility to fully pre-design what they are going to offer. Think of consulting companies, hospitals, private banks, and in general most business-to-business companies. In all these cases, when customers approach the product or service provider, their requests entail some degree of uncertainty, ambiguity, and novelty for the provider. In all these cases, the request for customization requires a truly flexible response to the client. Full automation is impossible.

When a truly flexible response to the customer is needed, the human factor plays a role. You cannot expect a machine to deliver something that has not been codified. Not even the smartest algorithms can mimic the creativity of a human mind in dealing with the “new.” But, how can people contribute to flexibility while simultaneously ensuring efficiency? You might think that scores of studies have already delved into such an important question, but surprisingly little research has been conducted on this topic, which lies in a no man’s land between Human Resource Management, Organization Theory, and Operations Management.

How can corporations take advantage of human agency – the purposeful action of individuals – to build the capability to be both flexible and efficient in response to the market? To address this question, together with a team of colleagues from various universities, I interviewed almost 50 executives and entrepreneurs across Germany, Italy, Slovenia, Spain, and the United Kingdom and surveyed a sample of 260 managers in those same countries with responsibilities in sales, engineering, and operations of business-to-business companies. Our results are both good news and bad news for any organization interested in building such flexibility-efficiency capability.

First of all, when organizations need to deliver a flexible response, managers and employees must engage in the execution of the prospecting task. What is that exactly? Consider Permasteelisa – the world leader in the engineering, manufacturing, and installation of architectural envelopes (curtain walls), the company which dressed such iconic buildings as Jin Mao Tower, Taipei 101, and Hearst Tower. Each time a client approaches them, Permasteelisa evaluates how a shape previously created by a design wizard – think of Renzo Piano or Zaha Hadid – can be turned from paper to reality, what “effect” the architect is really looking for, and whether the customer’s need can be profitably served given the pool of competencies controlled by the organization. People are essential in this prospecting task because the organization needs an attention filtering device that in conditions of high uncertainty and lack of complete information, can identify potentially appropriate solutions and, conversely, prevent the organization from setting to work on unduly uncertain or problematic tasks.

Next, organizations that need to be flexible and efficient have to rely on people for the execution of the blueprinting task. Consider IBM Global Business Services division. Once a deal is made, a large and tailored consulting project is to be executed – such as implementing an enterprise resource planning system for a global manufacturer or setting up a multichannel system for a bank. To maintain attractive margins in these highly customized projects, IBM started with the basic observation that not even the most exotic customer requests require devising completely new solutions. For this reason, IBM has invested in the creation of an organizational memory that enables the re-use of experience and learning across projects.

Where is this organizational memory? Think of databases, knowledge management systems, and other fancy software scattered throughout the corporation. Unfortunately, when a new consulting contract is signed, the deployment of this knowledge cannot be automated: Dell product configurator or Amazon business intelligence algorithms will not serve the purpose. People operating in the sales, technical, and operational areas become a fundamental tool for the retrieval and recombination of organizational memory to precisely define the characteristics of the process needed to deliver a customized solution.

Finally, flexible and efficient organizations need people to engage more often and more creatively in the patching task. The patching task refers to adjusting the delivery process to accommodate deviations from delivery plans originating either within or outside the organization. Such unplanned events are relatively frequent for organizations addressing novel and ambiguous customer requests – to the extent that (paradoxically) improvisation becomes a quasi-routine. While organizational improvisation is a group-level phenomenon, it requires individual improvisation as a starting point. Of course, the need to react to unexpected events is required also when standard products or services are offered but, in this case, the frequency of errors is inherently lower and the failure modes of the system tend to be more predictable, so that there is less of a need for improvisation.

Why are these results important? Simply put, top management has to have a vision of what human capital is needed to strike a balance between efficiency and flexibility, whenever this is a competitive necessity. Without such clear vision, two opposite kinds of risk arise. On the one hand, the company may erroneously try to mimic mass customizers, thus overinvesting in advanced knowledge management solutions. It is a real risk once we recall that most corporations have technical staffers who tirelessly endorse highly automated systems for order and customer relationship management. On the other hand, the company must avoid the trap of believing that “it is all about people,” downplaying excessively the role of automation. For example, I found that human resources facilitate the process of recombining organizational memory in the blueprinting process, but this does not mean that the company should not rely on knowledge management systems to actually store its memory. Bottom line, there is a time and a place for people within the simultaneously flexible and efficient enterprise.

So what is the bad news? Well, to correctly execute these tasks – prospecting, blueprinting, and patching – managers and employees across sales, engineering, and operations must share a complex pool of abilities that transcend the boundaries of functional specialization. For example, people in sales need to know, to some extent, what the back office can or cannot do and, likewise, technical functions should understand the application domain of what they are asked to deliver. Indeed, this is a demanding requirement that works against the logic of functional specialization and division of labor – the way people are typically trained and evaluated, especially at the lower level of the organization.

Nevertheless, if you take a long-term perspective, this bad news might turn out to be good news. Our results suggest that, as people across functions engage in executing these three tasks, they also become more knowledgeable about constraints and opportunities residing outside their core area of expertise. The need to create costly inter-functional links is reduced and, therefore, efficiency gained without compromising flexibility. Ultimately, the cost of organizational integration in response to uncertainty can be reduced by having integration occur at a cognitive level, in the mind of workers and managers.

A final caveat of the research should be kept in mind by the executive: all key people in the organizational workflow need to be aware of the cross-functional nature and importance of the prospecting, blueprinting, and patching tasks – and what they mean in terms of managerial and worker-level competences. While these three tasks seem to be quasi-obvious once you learn about them, our field research reveals a different truth. In fact, no single executive in our interview study has been able to clearly articulate these three tasks and their underlying attention-filtering, organizational memory-recombination, and organizational improvisation logic. Only once an organization-wide awareness of the importance of these three tasks has been achieved, will recruiting and training activities promote the fostering of the prospecting, blueprinting and patching abilities within the managers and workers. Our findings indicate that those firms who take this path are positioned to outperform competitors in the delivery of highly tailored yet comparatively cost-effective solutions.

[This research paper has been reproduced with permission of the authors, professors of IE Business School, Spain http://www.ie.edu/]