The Trilemma of Organizational Unbundling
This article explains the concept of organizational unbundling, the idea of making organizations more resilient by separating them into smaller, loosely coupled pieces. Reading this piece will help organization designers understand the tradeoffs between autonomy, coherence, and adaptability.
In this article, we explain what organizational unbundling is and why it is key for the future of organizations. We also clarify that although we’d like to have organizations that are highly adaptable to change and disruptions, leave maximum autonomy to the participants, and – at the same time – present themselves coherently to the market, these are achievements we can’t completely obtain concurrently. Tradeoffs operate between them.
Organizational unbundling is the act of either: favoring the separation of existing large, (functional, siloed, and bureaucratic) organizations into smaller pieces or the idea of growing an organization by keeping units reasonably small and growing their number. At Boundaryless we believe that the current market and societal setting are characterized by a rapidly changing risk landscape. This characteristic coupled with the emergence of new technologies, and enablers, that make smaller teams more capable makes a strong case for adopting an organizational unbundling. Unbundled organizations respond more effectively to market shifts, capitalize on technological innovations more easily, and maintain a competitive edge in an increasingly complex business environment.
Among the pioneering companies that have inspired our 3EO Framework for organizational unbundling, there are for example Amazon and Haier. Both companies have implemented innovative approaches to improve efficiency, flexibility, and overall performance:
- Amazon’s CEO Jeff Bezos notoriously introduced the idea of the “Two-Pizza Team“: the idea is that teams should be small enough to be fed by two pizzas. By keeping teams small, Amazon encourages autonomy, agility, and quicker decision-making. Furthermore, Bezos is famous for his “API-first mandate” a 2002 mandate that forced all (software) teams in the company to expose a service-oriented, externalizable (that can be put in direct connection with the market), and programmable interface (read more on the mandate on Steve Yegge’s famous rant and more of the consequences for Amazon in this amazing take from Ben Evans in 2017).
- Haier – the key partner of Boundaryless in developing the 3EO framework – has implemented its famous Rendanheyi model as a way to decentralize and empower its workforce. The Rendanheyi model combines “Ren” (employees) with “Dan” (user needs) and “Heyi” (integration) and its objective is to create small, self-managed, and autonomous business units called “micro-enterprises” that are responsible for their own profit and loss, decision-making, and innovation and operate in direct connection with the customer (are actually “paid by the customer”). They operate independently and focus on meeting specific customer needs.
Both Amazon’s and Haier’s organizational unbundling techniques emphasize the importance of decentralization, autonomy, and customer-centricity. By breaking down traditional hierarchical structures and empowering teams, these companies have been able to foster innovation, responsiveness, and operational efficiency, effectively reducing or preventing the formation of organizational debt.
As we’ve been able to explain already at Boundaryless, Haier and Amazon are only two examples of a more general “pattern” that we are experiencing on the market – we called it a “common protocol of organizing”.
Why is unbundling key in modern organizations? Reducing debt and increasing resilience
Unbundling is a central feature of resilient organizations, as it promotes broader agility and adaptability by distributing criticality across different units. Criticality refers to the extent to which a specific part of an organization is on a ‘critical path’ in the value creation process and, consequently, the likelihood that it may cause failure when faced with a stressor. By unbundling and granting greater autonomy to these critical units, organizations can better manage risks and respond to challenges more effectively.
Building a resilient and adaptable organization in the risky world of today goes through reducing the number of unnecessary critical links that a productive unit has with other parts of the organization: in a few words, unbundling it. In an unbundled organization, certain units, processes, and pieces can fail (at achieving product-market fit, responding to market changes, at producing a certain service level…) and still leave the organization able to reconfigure and thrive.
Also, organizational unbundling is often coupled with a broader penetration of the market inside the organization through:
- enabling and favoring the connection of the organizational units directly with their customer;
- distributing profit and loss statements widely across the organization and in the smaller context possible;
- using mechanisms of skin in the game that connect the team’s upsides with their capability to perform according to key forcing functions that the organization deems crucial (for example positive P&L itself);
Unbundling and connecting the organization with the market can reduce (or prevent) organizational debt.
Organizational debt is a concept that refers to the cumulative negative consequences that arise from the sclerotization of suboptimal decisions, inefficient processes, and outdated agreements and structures within an organization.
Similar to technical debt, organizational debt accumulates over time as a result of complacency, risk aversion, shortcuts, compromises, or inadequate attention to long-term choices. Such debt can manifest in various forms, such as poor communication, misaligned goals, lack of clarity in roles and responsibilities, or outdated policies and procedures, and can hinder a company’s growth and agility, as it leads to inefficiencies, increased costs, and reduced employee satisfaction and productivity.
Addressing and resolving organizational debt often requires significant effort and resources to analyze, identify, and implement changes to improve the organization’s overall health and performance: organizational unbundling can be a powerful shortcut to addressing debt without a top-down approach.
What are the key elements of organizational unbundling?
If achieved in your organization, organizational unbundling can generate a powerful boost to autonomy and evolution. In our experience, the transition must go through three essential elements.
1. Single Threaded leadership of cross-functional teams leveraging on clear autonomy to seek success
The first essential element is that of cross-functional teams with single-threaded leadership. According to stoa.com‘s definition:
“Single-threaded leadership is an innovation developed by Amazon that emphasizes the importance of a single person, unencumbered by competing responsibilities, owning and leading a team towards the achievement of a specific goal”
We’ve seen experiences of organizational unbundling involving co-ownership of multiple people (for example at Haier, where micro-enterprises can be co-owned) but the element of being unencumbered by competing responsibilities owning and leading a team towards the achievement of a specific goal is the essential one. Establishing such cross-functional teams with dedicated leadership allows these units to produce their value proposition with limited dependencies on other parts of the organization.
In such a context your organization will benefit from a clear set of policies subject to evolutionary updates when a new unprecedented case presents itself: by implementing policies that cover most known ambiguous situations, organizations can effectively reduce the need for approvals on specific cases, maximizing decentralization of decision-making and enabling teams to act autonomously.
Furthermore, transparent and clear performance metrics and evaluation criteria that align with the organization’s goals allow teams to track their progress, make data-driven decisions, and adjust their strategies as needed. This will foster a results-oriented culture that encourages teams to take ownership of their outcomes.
2. Transparency and information access
Another key element of unbundled organizations is transparent access to information and data. Data about the unit’s performance, their service catalogs, their P&L statements, and other key metrics: the more transparent they are, the more the units will be able to situate their contribution to the system’s success and the more will they be able to either inspire or be inspired by others. Think of this a bit as a “leaderboard”. In a recent piece on the HBR, titled How Chinese Companies Are Reinventing Management” the authors explain how HStyle “sets task indicators (sales, gross profit, and inventory turnover) for each team annually.“ and how the company “ranks team performance every day, and teams’ results are accessible to everyone in real-time, putting each team under pressure to deliver.”
3. Supportive Leadership and enabling shared Services
Finally, in this setup, leadership plays a crucial role in fostering a culture that enables organizational unbundling. Leaders should act as investors, coaches, and strategy advisors, supporting teams in their product decisions, and other efforts. The organization needs to set up shared common services that mimic the role that – in a public government of a city setting for example – things such as road infrastructure, the police, and other common services have in enabling a thriving ecosystem.
As we wrote in our Adopting a Product-Centric Operating Model at Scale, by the way, the organization should vary of “obliging customer units to source such services only from the captive environment” and – at the same time – such shared service providers should “be encouraged to seek to provide services outside the organization when possible”.
In an unbundled organizational model, shared services can play a crucial role in ensuring consistency in the organization’s operations, processes, and branding, and ensure that teams adhere to (or rather leverage) the same standards, guidelines, and best practices, thus preserving the organization’s identity and strategic direction. At the same time, such shared platforms can help eliminate redundancies and reduce costs: this enables teams to focus on their core responsibilities without being bogged down by repetitive or administrative tasks and bearing too high costs.
Shared services often cover:
- Commodity/basic services: such as services that are not considered a differentiation advantage by teams, potentially sourceable on the market but preferably consumed internally (e.g. Legal advisory);
- Scalability: scalable common infrastructures that can accommodate the organization’s growth. As new teams or units are created through unbundling, they can easily access the shared services without the need for additional investment in support functions (e.g. IT operations).
- Flexibility: offering flexible frameworks as “enabling constraints” such as contract templates, playbooks, and capabilities that can be adapted to accommodate the unique needs and requirements of different teams or units.
- Knowledge sharing and culture building: acting as repositories for organizational knowledge and best practices, ensuring and favoring valuable information is accessible to all teams.
In summary, shared service platforms are essential in an unbundled organizational model as they provide a foundation for coherence, efficiency, collaboration, scalability, flexibility, and knowledge sharing across autonomous teams or units.
Yes to autonomy but with skin in the game
Embracing an autonomy-enhancing organizational model can’t be done without balancing autonomy with skin in the game. With skin in the game, we essentially mean the need to make sure that employees bear the consequences of operating in shallow ways with respect to the forcing functions that the upper layer of the organization sets. Autonomy without accountability to the purpose set by the upper layer of organizing can be a recipe for disaster.
In a recent interview we held with Alicia Juarrero she helped clarify that:
“the purpose and the directedness come from the level above. The level above decides what the purpose will be, and then sets the context that will facilitate the accomplishment of that purpose [ed: through forcing functions and enabling constraints].
And the role of the entity, at the embedded level, is to carry out that purpose or to align in the service of that purpose. So, when you speak of platforms, and you speak of contracts, and you speak of micro-enterprises, the same must be orchestrated, they must be coordinated to achieve the purpose of the overall corporation or entity in which they are embedded.”
What forcing functions?
If we imagine for a moment a completely unbundled organization that lives in full continuity with the market, where there’s no constraint to units in how they source the services and products they use in producing their output, and no overarching direction imposed by the “mother” organization, the aptest forcing function is probably that of bearing a positive profit and loss.
One would argue what would be the connection between the unit and the larger organization at that point. Two major practices to enact this connection emerge from our experience. In one case, for example at Haier, this connection is made possible through contractual relationships. When creating a micro-enterprise at Haier the owners negotiate a contract called VAM (Valuation Adjusted Mechanism). Such contracts detail the frame within which the ME has to seek its positive P&L. This is the same mechanism we’re using at Boundaryless – as proof that this approach is rather a size invariant.
This contractual framework includes things such as the funding that the mother organization has to invest into kickstarting the new unit and – as a counterbalance – the objectives that the Micro-Enterprise aims at achieving both quantitative (for example in terms of revenues generated during a certain timeline) and qualitative, such as it’s ecosystemic impacts, market penetration and more. Once reaching certain “inflection points” the MEs “unlock” positive outcomes such as profit-sharing or equity transfers (in case the ME is “separated” from the rest of the organization). This way of “bundling through contracts” is extremely interesting as it keeps the units relatively unbundled but at the same time lets the organization – that plays the role of the investor – steer the ME in a certain direction.
Imposing positive P&L to the divisions (or MEs) makes the case for such units to have as much as possible unmediated access to the market and customers without having to go through centralized market access functions (centralized sales force, centralized customer research, centralized marketing, and branding). In some settings, such services are provided by the organization but often WITH no “obligation” to use them.
Embracing a “free to reach the market” structure makes the organization more subject to creative entropy that – besides its obvious innovation and adaptability benefits – can bring up a certain lack of coherence (with a potentially conflicting array of products or services making it difficult for the organization to maintain a clear and consistent brand message), resource inefficiency and more.
Therefore controlling how units within an unbundled organization access the customer and the market may be needed when organizations are concerned by the potential impacts of having multiple units reaching the customer in potentially conflicting ways. Despite its benefits, centralizing or controlling market and customer access can obviously have some drawbacks:
- Reduced agility: slow down decision-making and the limited ability of individual units to respond quickly to customer needs and market changes.
- Stifled innovation: an organization that controls the go-to-market strategies, can limit experimentation leading to less creative and less effective solutions for customers.
- Bureaucracy, inefficiencies, scapegoating, and debt: additional layers of approval may lead to inefficiencies and delays in getting products or services to market.
- A diminished sense of ownership: units may feel less empowered and motivated when they lack control over their market access, leading to reduced engagement and suboptimal performance.
- Missed opportunities: restricting the freedom of units to access the market may result in missed opportunities, as the central organization may not be as attuned to the unique needs and dynamics of each market segment.
Introducing other forcing functions (KPIs) and “soft bundling” approaches is also possible. To set different metrics and forcing functions without relying solely on positive P&L and freedom to access the market, an organization can consider adopting a variety of other metrics to which to link the unit’s skin in the game upsides:
- Customer satisfaction metrics: emphasizing the importance of delivering value and a superior experience to customers (this is for example very core to Amazon’s operational planning process despite Amazon’s divisions being tasked with managing their own P&L).
- Employee engagement metrics: that track employee retention, satisfaction, and engagement such as turnover.
- Innovation accounting metrics: that track and reward innovation efforts, such as the number of new ideas generated successful prototypes, or patents filed.
- Other metrics contextual to particular strategic issues that the organization wants to “fix” or evolve such as time-to-market metrics, market share, and growth metrics, collaboration metrics, learning and development metrics, or adaptability metrics.
By focusing on a diverse set of metrics and forcing functions, organizations can strike a balance between autonomy and control, encouraging units to be agile, innovative, and customer-centric while still maintaining strategic alignment and coherence. Linking the pursuance of such metrics with skin in the game (in the form of salary upsides, access to a share of profits, or even access to the equity of the whole or of the single unit) is a powerful lever to transform employees into entrepreneurs.
The Trilemma of Organizational Unbundling
Like in many other cases, we believe that progressing through organizational unbundling presents itself as a trilemma. A trilemma is a complex decision-making scenario in which a person or organization faces three competing options or constraints, and optimizing one or two of them often comes at the expense of the third. It presents a difficult choice, as finding a perfect balance among all three elements is usually not possible. Examples of trilemmas include the Iron Triangle of Planning, where project managers must balance scope, resources, and time; the blockchain scalability trilemma, which involves trade-offs between security, scalability, and decentralization; and the trilemma of economic policy, where governments must navigate the trade-offs among the free movement of capital, Independent (autonomous) monetary policy, and fixed (managed) exchange rates. In each of these cases, decision-makers must carefully assess their priorities and weigh the potential consequences of their choices to find the most effective compromise.
In the context of our discussion on organizational unbundling, we’ve explored the concept of a trilemma that arises as organizations strive to balance autonomy, coherence, and adaptability where:
- Team Autonomy: this is the freedom of teams to make decisions on their execution, go-to-market strategies, and evolution.
- Adaptability: the capacity of the organization to adapt to a changing landscape, including market shifts, customer preferences, and competitive forces.
- Coherence: the consistency of the strategic direction, the brand message, the product portfolio, and the execution of those throughout the organization.
Organizations must thus make an intentional choice to prioritize certain aspects of their operations, as optimizing one or two elements often comes at the expense of the third.
As you can see below, you can think of a trilemma by seeing how imagining three movable pins on the dotted lines on the “radar” charts below, the perimeter of the triangle can only remain the same. It’s tradeoffs all the way down. Let’s look into the trilemma in more detail.
In case an organization wants to optimize aspects such as autonomy and coherence, likely adaptability needs to be sacrificed: as the organization provides individual teams with autonomy to execute most aspects of their work while imposing constraints related to coherence in brand, message, and product strategy, this can result in rigidity and reduced responsiveness to changing market conditions. A company that has a strong brand identity with autonomous teams can be slow to adapt to new trends, technologies, or customer preferences.
One example of such a type of organization may be Rolls-Royce Motor Cars, a luxury automobile manufacturer, known for its strong brand image and commitment to crafting the finest automobiles, with individual teams or craftsmen granted autonomy to customize and handcraft various elements of the cars.
In case an organization wants to optimize aspects such as adaptability and coherence, autonomy likely needs to be sacrificed: as the organization implements top-down control and centralized decision-making on market changes – for example with a centralized strategy unit that monitors market trends and does customer research centrally – this approach might enable quick reactions to market changes (especially for existing customers) and maintain a consistent brand and message but, inevitably, reduce individual teams’ autonomy and freedom.
Apple is an example of a company that has achieved high adaptability and high coherence in its organizational structure and operations. Apple has consistently demonstrated its ability to adapt to changing market conditions, emerging technologies, and evolving consumer preferences (High adaptability). On the other hand, Apple maintains a strong and consistent brand identity across its product lines and services, which is characterized by sleek design, seamless user experience, and a focus on innovation. The company is also known for its cohesive ecosystem of products and services, which work together seamlessly and encourage customer loyalty. This coherence extends to Apple’s marketing, retail stores, and customer support, providing a unified experience for consumers.
While Apple does allow a degree of autonomy within its teams, it is generally known for its top-down management approach, with the company’s vision and strategy being driven by a central leadership team. In this sense, Apple prioritizes coherence and adaptability over a high level of autonomy across its organizational units.
In case an organization wants to optimize aspects such as adaptability and autonomy, likely coherence needs to be sacrificed. An organization that encourages adaptability and autonomy through independent teams, and allows individual teams to make decisions to respond to market changes and seek new product development opportunities may lead to creative entropy and inconsistencies in branding, messaging, product lines, and strategic direction. Haier Group has, for example, a strong track record of adapting to changing market conditions: the company has evolved from a small refrigerator factory to a global leader in home appliances and consumer electronics by continually innovating its products, entering new markets, and expanding its product portfolio. This level of innovation has largely been achieved by allowing MEs the freedom to make decisions about product development, marketing, and other operational aspects without the need for top-down approval from central management. Despite the company managing to maintain a good level of brand coherence when we interviewed GE Appliance’s (a Haier company) CEO Kevin Nolan, he clearly said that GE Appliances doesn’t have a strategy but that rather “Micro-Enterprises do”. Such a comment nicely connects with an iconic statement from then CEO Zhang Rumin who once said in an exclusive interview with Boundaryless that – in the long term – Haier looks into becoming “like water”.
Using Profit and Loss, and Other KPIs to Ensure Skin in The Game
In the different optimization scenarios described above positive Profit and Loss and other KPIs can be used as forcing functions and have a role in balancing the implications of the trilemma.
Conclusions & further research
Organizational unbundling makes organizations more resilient, and more capable of adapting: it reduces bureaucracy and leaves space for talents to express themselves inside the organization.
The use of KPIs such as profitability and other metrics can be used as forcing functions to balance the implications of an incumbent trilemma that prevents optimizing for adaptability, autonomy, and coherence concurrently. Looking at your organization through these lenses is the first crucial step to envision how you can either address organizational debt and bureaucracy that have accumulated over time, or set policies that will allow you to grow without bureaucratizing – a requirement that is necessary for organizations to face current market and risk landscape challenges.
In upcoming research, we’ll share emerging heuristics that organizational developers can use to approach organizational unbundling both in growing and already large organizations to ensure that they can find a good synthesis across the three dimensions of the trilemma and improve the organization’s overall resilience. We’ll also address how these choices complement working on product portfolios and product taxonomies and how these can be helpful in reducing the impacts of the trilemma, with product portfolios that can be easily updated and evolved by a plethora of coherent and collaborative teams always seeking to enable new user scenarios.
To learn more about Boundaryless’ approach to unbundling:
- Take our self-paced 3EO/Rendanehyi training
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