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The Future of Business is Modular

Nobody can manage what they cannot understand. It is a common principle, enshrined in many business aphorisms. “Stick to the knitting”. “You get what you measure”. “Keep it simple, stupid”. The list goes on, but the underlying idea is the same. At the same time, the world grows more complex. Supply chains are ever more international, and so is finance. New layers of technology sit upon older layers of technology, creating pyramids that nobody understands from top to bottom. Training and education can deliver staff with increasingly niche and specialist skillsets. In the midst of this, businesses still pursue universal goals, whether delivering profits to owners, pleasing products and services to customers, or motivation and satisfaction to workers. The trick to handling complexity, in order to keep businesses understandable and hence manageable, is to break businesses down into units, and to understand how these units fit together and affect each other. This is the essence of modularity.

Modularity may seem so straightforward that it is obvious, but it is rarely obvious in practice. Employees may only know about their department, and know little of what the rest of the business does. They may be completely divorced from the customer’s experience. Managers may have an idea of how things fit together, but are rewarded for fighting their individual corner, not for doing what best helps the whole organization. An outsourced function is not part of your company, but it may be just as integral to business success as any function performed in-house. Suppliers may be separate companies, but their failure may cause the failure of your business. Long-term business success will often depend on relationships within the company, and between the company and others. These relationships may change over time, but will greatly influence the health of the business.

Teaching managers to think of business in modular terms is not simple. The biggest obstacle is the time and effort spent working out what each part of the business does and all the interactions between the modules, including those that sit in other companies. Working out the model for an individual business is time-consuming, and the benefits are all indirect, so it would be hard to spend the time and resources needed to do it well. In contrast, generic industry models are abstract. They need to be tailored to the relevant circumstances of individual businesses. There is also the challenge of getting rival businesses to pool efforts and devise a common model; some may prefer not to contribute but merely to wait and see if they can use the finished work. Despite the obstacles, there have been successes. In software development, frameworks like the Software Engineering Institute’s Capability Maturity Model Integration have gained popularity. For telecommunications providers, the TM Forum’s Solution Frameworks are the de facto standard for planning major business-wide transformation. One difficulty with frameworks is that they can end up seeming just as complicated as the businesses they try to describe. However, they do help management in several important ways, which are briefly described below.

Distinguish the success of a part with the success of the whole

Poorly chosen targets, corporate politics and poor data can all conspire to encourage the business to reward units that act ‘selfishly’. A selfish approach may seem natural, because businesses compete with each other. But the IT department should not be competing with the Sales team or the people who work in Customer Service. Targets and performance criteria for every module should be based on the benefits to the business as a whole. That means understanding how the modules connect and complement each other.

Measure the performance of a module based on what it controls

You would not blame customer-facing staff for spending a lot of time on refunds, if products are faulty because of poor quality control on the production line. Even so, it is sometimes difficult to link measures back to root causes. Modularity encourages a better understanding of what each module controls and does not control. This in turn encourages performance to be linked back to root causes, so improvement is focused where really needed. The correct approach is to measure the performance of each module based on the value it adds, and to set targets accordingly. Where the failure of one part of the business causes issues downstream, ensure that there is accountability and the resolution is taken right back to the source. Understanding the performance of each module, and relating this to the products and services supplied, will identify those activities that drive profits and customer satisfaction, and where there is the potential to cut costs.

Standards help everybody

Standards are an aspect of modularity. To define how modules interact, it is necessary to set standards. Standards can be limiting, but in large businesses the loss of freedom is offset by the vital improvement in the consistency of how the business works. Adopting broad standards in the performance of work is a good way to train people and make them feel part of a team. It is common to adopt technical standards, but many other activities can be standardized. Idiosyncrasy in how people work can be discouraged by having staff change around and do different jobs, at least on an occasional basis. Giving everyone an overview of what the business does will help to foster a sense of team spirit that reaches beyond departmental boundaries. If tasks are performed in a standard way, it is easier to cope with staff turnover. If staff have some familiarity with performing a variety of jobs, they will be better able to cope with new requirements at short notice.

The more standardized a business, at every level, the easier it is for suppliers to meet its needs. Standardization also makes it easier to shop around and find alternate suppliers. A modular approach works for services just like manufactured goods. The ease of swapping in new parts for old parts makes a business more flexible. Bringing in temporary staff or a new source of components may be vital for handling a surge in demand. The same kind of flexibility also helps with managing reductions in capacity when sales are poor. Suppliers are an extension of the business, performing modular roles per expectations defined in a contract. The supplier’s service levels can be monitored by extension.

Focus on what you do best, give fair rewards for the rest

The driving force behind outsourcing is that some tasks can be more efficiently handled by letting an outside, specialist business perform them. The best known examples are inherently modular. For example, the payroll of a manufacturer has a lot in common with the payroll of a bank. In contrast, managing payroll has very little in common with the core business of a manufacturer or of a bank. Common and regularly recurring tasks are obvious candidates for outsourcing. However, there may be ways to incentivize and engage outside suppliers for more risky or creative challenges. Take Apple’s iPhone Apps Store. Apple created an environment that ensures third parties get a transparent share of reward in exchange for the risk they take. In doing so, they handed over the risky task of developing new content for the iPhone, whilst creating a new feature that attracts more customers for their product. By giving a reasonable return to the modules outside of Apple’s company – the third party apps developers – they both outsourced risk and reaped a greater reward for their own business.

Summary: recognizing limits

For an intelligent, successful, and confident executive, the hardest challenge may be to recognize his or her own limits. But the human mind has limits. Even the versatile minds of a Benjamin Franklin or Leonardo da Vinci would be overwhelmed by trying to understand the intertwined complexities of money, machines, markets, laws and human behaviour that determine the success of a modern large corporation. Failures of big businesses show that risks can be underestimated and circumstances can outrun the company’s ability to change. To solve complex problems, it is necessary to break it down. There must be trust to recruit and delegate to managers who handle their individual part of the puzzle. Top level management is there to ensure the parts fit together to form the whole. By being modular, businesses become more adaptable. Identifying the important relationships between each module, establishes the key criteria for the success and profitability of the business. Knowing limits drives businesses to acquire the data needed to make effective decisions and plan ahead, instead of just responding to short-term variations from expectations without understanding what has caused them or if they represent more fundamental problems. Modularity keeps business intelligible, and by keeping the business intelligible, managers can manage even the most complex businesses with confidence.

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