Leadership Series: THE NEW BOARDROOM IMPERATIVE

FROM AGILITY TO RESILIENCE

Julian Birkinshaw, London Business School

Over the last twenty years, agile has evolved from a niche software development methodology to a worldwide business trend.  While the concept is used in a variety of ways, it is always seen as a good thing. We picture lean and hungry start-ups, highly responsive to emerging trends, with the capacity to pivot quickly when circumstances require it.  And we are aware of the cautionary tales, the non-agile corporate dinosaurs like Kodak and Blockbuster that were unable to redeploy their resources towards the new opportunities before it was too late.

But there is a problem with agile. It rhymes with fragile, and for good reasons. Lean and hungry start-ups can shift direction quickly, but they have no heft, no loyal customers to fall back on, no predictable reserves, and no capacity to withstand shocks.  When times are tough – as they are now – being agile is not enough.

Boardrooms and executives need a different framing, and as a result of the economic uncertainty facing us as a result of the ongoing COVID-19 pandemic, we shift our focus from agility to resilience, defined as the capacity to bounce back from external shocks. Agility helps you to maximise upside potential, resilience is preferred if you want to minimize downside risk.  Both of them are appropriate for leading through uncertainty, but when uncertainty isn’t just new technologies – when it involves pandemics, currency devaluations and terrorist attacks – resilience is what we need.  

Consider the global financial crisis. Before 2007, the likes of Goldman Sachs and Merrill Lynch took advantage of their broker-dealers status to make risky and leveraged investments. They were far more fleet-footed than the universal banks like Citi and Chase Manhattan. But as soon as the crisis came along, their weak balance sheets and lack of government backing exposed their lack of resilience. Lehman went bankrupt; Merrill and Bear Stearns were sold; Goldman Sachs and Morgan Stanley only survived by converting themselves into bank holding companies, and accepting all the regulatory consequences of this new arrangement. 

Every time there is an external shock to the economic system, we find out who is exposed to risk.  The UK energy industry saw five of the ‘challenger’ energy providers operating with new business models collapse into bankruptcy in 2019 when oil prices fell, while the ‘big six’ stalwarts survived relatively unscathed.  

So resilience is the order of the day.  Right now, many companies are worried simply about survival. But with luck, and with government help, most will find their way through the current crisis and will then start thinking very differently about their strategic and organizational priorities.  And to provide a partial agenda for what this new direction might look like, the concept of resilience can be useful.  

Resilience isn’t a new concept by any means. But as soon as a crisis is over, people forget about resilience and they go back to assuming everything is going to be plain sailing again – until it isn’t. Maybe this time the lessons will be a bit more enduring. 

Four principles of resilience

So what are the key features of resilience in the business world?  Some aspects of resilience are very obvious – a strong balance sheet with liquid reserves helps you through a sharp downturn, a supply chain with multiple sources of components reduces the dependency on any one supplier. Over the last few months companies have rightly focused on these operational aspects of resilience.

But looking forward, there are other dimensions to resilience as well – there is strategic resilience, the ability to make smart choices about the scope of business activities in the face of uncertainty; there is organizational resilience, the capacity of an operation to keep functioning through turbulence and crises; and there is behavioural resilience, the qualities that help individuals to keep going when times are tough. Below are some of the key principles that cut across all these different levels of analysis.

From Bureaucracy to Emergence 

The traditional bureaucratic structure – with work broken down into discrete tasks, and everyone conforming to a standardised set of procedures – works fine when demand and supply are predictable. But it is hopeless at responding to external shocks, because its only the people at the top who see the whole picture – everyone else is focusing on their own narrow area of responsibility.

What’s the alternative?   A classic study by Shell executive Arie de Geus suggested two hallmarks of resilient companies are their sensitivity to the world around them, and a tolerance of new ideas. These companies, in other words, operate in a more organic way, with those on the fringes encouraged to be alert and responsive to external stimuli.  We often think of this in terms of openness to new opportunities, but it applies equally to external threats.

Resilient organisations, in other words, build leadership at all levels, with those on the front line having the competence and the authority to act. Coordination happens in an emergent and fluid way, not purely according to standardized rules and procedures. (Of course, the current crisis reminds us there is an important role for top-down authority in mobilising a joined-up effort, but a fast initial response needs front-line freedom to act). 

From Formalisation to Personalisation 

Linked to the first point, how individuals view their roles and responsibilities is key. There were many linked reasons why the global financial crisis occurred, but in my view the heart of the problem was a body of bankers, risk managers and regulators who complied with the formal rules they had been given, but without taking responsibility -or even thinking about- the bigger picture consequences of their actions.

There are essentially three ways of managing downside risk – through stringent rules (formalisation), by bringing in third-party oversight (externalisation), or by getting people to feel ownership of the consequences of their actions (personalisation).  The financial crisis suggests that true resilience requires a combination of all three. And plenty of research has been done to back up this logic. Karl Weick and Kathleen Sutcliffe did the definitive study on “high reliability organisations” (HROs) like power plants and aircraft carriers where the consequences of failure are catastrophic. Two of the key HRO attributes they identified were a ‘preoccupation with failure” and a “reluctance to simplify operations”.  People working in HROs, they observed, “continuously assess their procedures, rejecting some and adjusting others, to fight complacency and rigidity” and they use reviews, job rotations and training to keep people focused on the big picture. 

Resilient organisations, in other words, take personal accountability very seriously, and they find creative ways to ensure people draw from the learning of others (through formal rules) while continuing to feel ownership themselves.  Consider the humble checklist, filled out by pilots before embarking on a flight and by surgeons before starting an operation – it provides formal and systematic guidance to the individual without taking away their freedom to act, or their feeling of personal ownership.

From Efficiency to Reliability 

The techniques of lean production, such as just-in-time manufacturing and zero inventory, have been with us since the 1970s, and have led to dramatic improvements in speed and efficiency in supply chains across the world.  They work beautifully in a free-trade world with competitive markets and predictable demand. Which is all fine – until suddenly it isn’t. Remember the Icelandic volcano in 2010? It only closed European air-space for five days, but that was long enough to disrupt these finely-tuned supply chains. The current hiatus, three months at least, will take years to recover from. 

It seems clear we have passed the high watermark for supply chain hyper-efficiency, and this is partly because of rising protectionism (e.g. Brexit and the US-China trade war) as well as the Pandemic.  In the years ahead, we need to rebalance away from efficiency and towards reliability, by using multiple suppliers and matching supply to demand on a local basis. 

At a strategy level, those corporations with diversified holdings weather the storm better than their more focused competitors. Kodak’s arch-rival Fuji survived the demise of the film industry in large part because it had retained its underlying chemical business (whereas Kodak had sold its subsidiary, Eastman Chemicals in 1994). 

High reliability organisations, such as governments and military contractors, have always been suspicious of agile development, because it privileges speed and user acceptance over security and compliance. The shift towards greater resilience will lead to a rebalancing here as well. 

Finally, the shift from efficiency to reliability will affect individual jobs as well.  As we saw after the financial crisis, we can expect organisations to start beefing up their investments in many of the supporting, planning and assurance functions that surround their core activities.  

From Profit to Meaning 

The shift from profit to meaning should not surprise anyone – it is consistent with much of the thinking about the role of business in society today. 

Consider the strategic level first, where there is solid evidence that a clear corporate purpose is helpful in harnessing discretionary effort from employees and providing clarity about priorities.  This is arguably even more so in times of economic crisis. 

One of the most discomforting aspects of the current crisis is that we have no sense how long it will last. Humans like to feel they are in control of their destiny, and it is much easier to endure a difficult period if you know when it will finish. Individuals therefore have to develop a different outlook on life when facing extreme levels of uncertainty.  And it turns out that optimism isn’t the answer – we need to be both optimistic and realistic at the same time.

Along with this staunch acceptance of reality, individual resilience also depends on us finding meaning in our own lives. 

Personal resilience, is enhanced by moving away from narrow self-interest towards meaning-based behaviours such as concern for family, colleagues or society. Many companies have already taken this thinking on-board in their training and development activities.  

Of course, there are similarities between agile and resilient organisations. For example, resilient organisations have a clear sense of purpose, they help employees find meaning in their work, and they push personal responsibility down to those operating on the front lines.  

But resilience and agility are fundamentally different in some vital ways. Resilient organisations put much greater emphasis on reliability, and they accept the additional costs involved in ensuring that.  Resilient organisations are far less tolerant of things like test-and-learn, pivoting, iterative development and failure of any sort. 

The current crisis helps to put a lot of our thinking about organisation and management into perspective. It is a reminder of how shallow the profit-for-profit’s sake mentality is, and how important that we rise above it to help ensure the resilience of ourselves, our companies, and the planet as a whole.