Siloed operations problem

‍

I don't think this problem has to be introduced to anyone with experience in leading a project, team or any initiative in a large organisation. Especially if you lost your project, team or initiative due to endless battles and unexplainable politics between the people that shouldn't even have the power to influence your job. Yet, there they are, people without competencies to tell you what's right to do, telling you what's right to do, wasting everyone's time and company's budget.

Silos refer to business units (teams, departments, whatever you call them) that operate in isolation, without effective communication or collaboration with other units. Similar problems occur in any innovation environment with decentralised management units like the Center Of Excellence. One of the major consequences of siloed business unit operations is a lack of synergy and coordination, which results in redundancies and inefficiencies in operations.

‍

Redundancies

Silos are not about the lack of processes, sometimes it's the process redundancy that creates silos. The most straightforward effect is increased operational costs, however the cost itself is very hard to estimate without a comprehensive audit. One of the reasons why organisations operate in silos is people's belief it's the amount of processes that defines organisation's efficiency.

The hidden cost silos can lead to, is lack of innovation and reduced agility, as different units are not sharing knowledge or working together to solve problems. That situation can create an environment of competition rather than collaboration between different units, where too many people try to manage the same thing - a responsibility redundancy. That lead straight into a culture of internal politics, where different units are more focused on achieving their own goals rather than the overall success of the organisation. In the long-term, these problems can have a significant impact on the development and growth of the company. Lack of innovation and coordination can make it difficult for companies to keep up with changes in the market and to stay competitive. In addition, a culture of internal politics can lead to high turnover rates, reduced employee engagement, and a negative company culture.

‍

Data

Recent research findings consistently indicate that companies with more integrated and collaborative business units outperform their counterparts operating in silos. Here's a breakdown of the recent studies that shed light on this topic:

• McKinsey & Company's Insight: Their recent analysis of 32 companies across various sectors showed that organizations with highly integrated business units reported a 30% surge in shareholder return compared to those with less integration.
• Harvard Business Review's Take: After surveying 495 organizations across different industries, they found a striking correlation between collaborative cultures and performance. Companies that championed a culture of collaboration were five times more inclined to achieve top-tier performance than those that didn’t prioritize such teamwork.
• Communication Is Key: A study from the Journal of Business Research analyzing 182 firms across numerous sectors found a clear connection between collaboration and organizational performance. Effective communication across business units was identified as a pivotal factor for companies to align their goals and enhance performance.
• The Detriments of Silos: Deloitte’s extensive report on the future of work, after surveying 10,000 business and HR leaders from 140 nations, highlighted that silos hamper effective talent management. This not only limits career progression for employees but also contributes to a decline in engagement levels.
• Silos and Employee Well-being: A study featured in the Journal of Business and Psychology surveyed 401 employees and found that silos can deteriorate employee well-being. This leads to reduced job satisfaction and a spike in stress and burnout levels.
• Risk Management Concerns: PwC's report, based on feedback from over 1,200 business and HR leaders across various industries, emphasized that operational silos can obstruct a company's ability to manage risks effectively, leaving them exposed to emerging threats.

The collective insight from these studies underscores the adverse impact of siloed business operations on numerous fronts – from financial results to talent management and employee morale. Moreover, the presence of operational silos stifles innovation. Breaking down these barriers and fostering collaboration across business units could be the blueprint for companies aiming to nurture innovation and maintain a competitive edge in their domains.

‍

Focus Area Dispersion - Your No.1 Enemy In Efficient Innovation

‍

Before we dive into the topic, let's set the scene up regarding some of the phrases we're going to use. Whenever we call out "BUs" or "Business Units", we understand entities that correspond to the client’s company organisational structure. Their list and shape will vary depending on the type, size and governance type of the company. According to the rules of appropriate siloed operations problem mitigation, this process should limit the number of entities to the maximum, leading towards merging entities into groups. Here, refer to a Business Unit as the first line structure layer, according to examples below.

‍

‍

The problem with sustainability of continuous foresight is that when a decision regarding innovation investment is made in one particular BU, the interest of that BU may not be fully aligned (or not aligned at all) with the company's interest, even if HQ supports BU’s development direction. If the company doesn’t have a centralised, long-term investment policy, all decisions regarding innovation investments are left to potentially biassed BU executives and individuals with separate agendas. This often leads to a situation where innovative ideas are “sold” to the executive board through lobbying derivatives of the initial BU development vision.

‍

‍

‍

The outcome of this situation is that BU’s initial innovation investment strategy - Focus Area  is dispersed. This means, portions of new innovations falling outside of the initial BU Focus Area widens the Focus Area, lowering the Innovation Profitability Potential. As a result, BU’s Focus Area Dispersion may reach a certain critical point, when BU’s innovation strategy is blurred to the level where its majority falls outside of the profitable potential. This level is denominated as “Critical Focus Area Dispersion '' where a combined Return on Investment indicator of all BU’s innovation ventures falls below the “Effective Innovation Investment Level'' and turns negative.

‍

‍

Investment decisions within siloed business units can be made independently, without input or collaboration from other business units. In such situations, each BU usually focuses on its own priorities and goals, rather than considering the needs of the organisation as a whole. This can lead to inefficient allocation of resources and missed opportunities for growth and development. In a siloed environment, investment decisions are based on individual business unit performance, rather than the overall performance of the organisation. This leads to a lack of alignment between business units, and can make it difficult for the organisation to achieve its strategic goals.  Furthermore, in a siloed environment, decision-making processes may be slow and bureaucratic, as each business unit may need to consult with multiple stakeholders before making a decision. All these things result in missed opportunities for investment and growth - shrunk innovation profitability potential.

‍

‍

The Focus Area Dispersion is based on a zero-sum game between BU resources and costs. Focus Area (company’s innovation ROI2 zone), widens overtime due to inappropriate resource management, as resource allocation is often put into areas outside the company’s interest. Every business unit holds a responsibility for a certain area of company innovation investments, which due to a limited amount of resources - Human Intellectual Capital and budget, has a limited area of potentially profitable investments. This resolution comes from Li, Xing, Guo, Hou, and Liu (2021), who examined the relationship between human capital allocation and innovation performance in China's knowledge-intensive service industry. They found that a limitation in human intellectual capital resources can lead to limitations in a company's innovation performance. Specifically, the authors argued that a company's ability to innovate is closely related to the quality and quantity of its human capital resources.

The problem is that the risks of investment in innovations have a different nature and are managed in isolation, which reduces the effectiveness of risk management—the reduction of some risks leads to the growth of other risks, and the risk component of investments in innovations is preserved at a high level. The financial interests of business and the economy (economic growth and high-tech export) contradict the interests of employees (stability, refusal of any changes), and the resolution of this contradiction in addition to corporate social responsibility impairs innovation growth and violates the action of the market mechanism. This impairment is fixed to the measure of innovation investment risk, associated with the company's financial risk, and constitutes the cost of an innovation.

This leads to a situation, where high-risk investment decisions, made outside of the company’s investment interest, exploit BU resources creating an isolated financial risk source. In a situation, where an individual interest group is actively lobbying for bad investment sustainment, the cost (risk) grows over time. This resource exploit effect is multiplied by the growing number of similar isolated investments; however their magnitude tends to fall due to shrinking resources.

‍

Redundancy Auto-regulation Mechanism

The main reason why Focus Area Dispersion and Focus Area Selectiveness take place is the fact that siloed BU investments are deprived from auto-regulation mechanisms. If new business investment decisions were made in a collaborative mode using shared resources,  this would imply much more careful decision making based on a shared-cost (risk) responsibility.

Such an approach in creating an auto-regulating mechanism would require a shared innovation investment risk management strategy. The risk is directly associated with BU’s innovation investment cost, which leads to a conclusion that in order to create a shared-cost responsibility, it is necessary to distribute investment risk equally between all units. One of the key benefits of shared cost responsibility is that it can help to ensure that investments are made based on the needs of the organisation as a whole, rather than the priorities of individual business units. Shared cost responsibility can also help to promote a culture of collaboration and teamwork within the organisation.

A study by McKinsey & Company (Lee, J. H., & Kocak, A. (2019)) found that companies with a shared cost responsibility model for innovation investments were more likely to have successful innovation initiatives. Specifically, the study found that companies with a shared investment decision-making process were 1.5 times more likely to report successful innovation outcomes compared to those with a centralised decision-making process. The study also found that companies with shared investment decision-making processes were more likely to have innovation initiatives that aligned with their overall strategy. This alignment can be achieved by introducing a company-wide Investment Mandate, which is the overarching investment regulation that all BUs must comply with.

‍

‍

An Investment Mandate ensures that all innovation initiatives are aligned with the company’s investment strategy aiming to maximise the ratio between the Investment Profitability Potential and Innovation Focus Area width. In other words, the Mandate dictates that all innovation projects fall into the company’s maximum investment interest area and are distributed proportionally to the addressable market volume.

‍

Responsibility Model - A Risk Distribution Network

‍

In a standard approach towards a shared cost responsibility model, each business unit would take responsibility for a certain risk area towards the investment, based on their size, revenue, or other factors. This however, creates a potential risk of the Focus Area Selectiveness or in case there is no unified company innovation investment policy - Focus Area Dispersion. Moreover, it may lead to unbalanced force distribution among BUs, as units responsible for the majority of the cost management would have leverage against those with a smaller contribution. This may lead to certain business unit exclusion from an overall innovation strategy impact, which inevitably leads to Focus Area Selectiveness and loss of a portion of the Addressable Market.

The diagram below shows a standard approach to a shared cost responsibility model between business units, in which a shared investment strategy exists, dictating the overall Focus Area. It is clear that in such cases, when BUs with unequal resource contribution share a unified investment strategy, they cannot share an equal investment risk. The leverage is used by the business unit with the highest resource contribution to lobby for their market segment addressing, which despite the data-driven basis, has a negative impact on the company’s long-term innovation strategy. In such a model, BUs are forced to look for a compromise between the market they could potentially address, and the market segment addressed by the stronger contributor.

‍

‍

‍

Shared Responsibility Model - An Innovation Immunity System

In the approach used by Intranove, a shared-cost responsibility model offloads the financial risk towards an isolated, independent unit - Internal (Corporate) Venture Capital - CVC. In such a model, BUs are not sharing the same pool of financial resource contribution, but they share an Intellectual Capital pool only. An advantage here is that the risk associated with potential leverage based on the budget volume contribution is mitigated.

‍

‍

According to Maslow's hierarchy of needs, when financial stability of a shared responsibility model is provided, innovators have more space to satisfy their intellectual needs - to innovate. A considerable cost in such circumstances is associated with business continuity risk, as organisations need to apply appropriate measures in order to let their employees dedicate a certain amount of time to lead their innovation projects. This risk can be minimised through an appropriate talent management (human intellectual capital management) policy.

A critical requirement to apply a shared responsibility model is to ensure that business units are proactively engaged in fostering innovation. Engaged business units increase the profitability by 21%. However, to achieve such results it is important to provide the freedom and the space where employees can contribute to such a goal. Horizontal setup of the Community of Practice (CoP) helps to break down operational silos and create a culture of collaboration and innovation that spans across the entire organisation. Such community structure brings together employees from different business units and departments to collaborate on innovation ideas that span across the organisation. This fosters cross-functional collaboration, which can lead to more innovative ideas and solutions that might not have been possible within a siloed structure.

A horizontal CoP can facilitate the sharing of knowledge and resources across the organisation. Members of the CoP can share best practices, learn from each other's experiences, and leverage each other's resources to drive innovation across the organisation. Horizontality of CoP can bring together employees with diverse backgrounds, experiences, and perspectives, which can lead to more creative and innovative ideas. This can help break down groupthink and drive the organisation towards more profitable innovation ideas. It also provides access to a broader range of expertise than what might be available within a single business unit or department. Thanks to that, the organisation can tackle more complex and challenging innovation projects that require a diverse set of skills and expertise.

In addition, multiple studies suggest that human intellectual capital resource limitations can have a significant impact on a company's innovation performance. To overcome these limitations, companies may need to invest in developing and managing their human capital resources and create a supportive organisational culture that fosters innovation. Establishment of a horizontal CoP leads to a natural human capital resource management, which not only fosters cross-organisation collaboration and engagement, but also distributes equally the risk associated with a company's human intellectual capital management.

‍

Resources:

• Harvard Business Review study: Reeves, M., & Deimler, M. (2011). Adaptability: The new competitive advantage. Harvard Business Review, 89(7/8), 134-141.
• Deloitte study: Deloitte. (2015). Innovation from everywhere. Retrieved from https://www2.deloitte.com/content/dam/Deloitte/global/Documents/About-Deloitte/gx-innovation-everywhere.pdf
• Accenture report: Accenture. (2016). Innovation: From buzzword to business imperative. Retrieved from https://www.accenture.com/_acnmedia/PDF-21/Accenture-Innovation-Research-Study.pdf
• McKinsey & Company study: Lee, J. H., & Kocak, A. (2019). When and how shared services for R&D and innovation can work. McKinsey & Company. Retrieved from https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/when-and-how-shared-services-for-r-and-d-and-innovation-can-work
• PwC survey: PwC. (2018). R&D: Innovation from everyone, everywhere. PwC. Retrieved from https://www.pwc.com/gx/en/industries/industrial-manufacturing/innovation-survey.html
• Harvard Business Review article: Pisano, G. P., & Verganti, R. (2008). Which kind of collaboration is right for you? Harvard Business Review, 86(12), 78-86.

‍