Rightsizing organizational governance

Lars Vollmer made me think with his latest book about self organization. There is some sort of a chicken and egg problem – as soon as there is a rule or policy there needs to be some governance to verify its adherence.

“Governance is the way the rules, norms and actions are structured, sustained, regulated and held accountable.”

Many organizations have developed tons of rules and policies. I don’t think that this was planned upfront – it happened over time. Let’s rock an idea and think about what would happen if those rules and policies would be deleted? Would this lead to chaos?

This depends I guess on the organization. If the organization is driven by an external purpose and a mission, then the members of the organizations would continue to do the best to move the organization towards the vision. In a healthy organizations mistakes made by individuals would be corrected by the others on the base of common sense and shared principles. The organization learns by example how to act. It walks the talk.

In some organizations the members must sign that they have read and understood all rules and policies. In a healthy organization this is no issue – there are a few rules only and it is not a problem to keep them consistent and contradiction free. In large bureaucratic organizations such behavior can only have the purpose of ‘backside covering’. Somebody needs arguments he can use in case something goes wrong – look, it was clearly stated in the policy.

An organization which has many rules needs a lot of governance. Somebody needs to train the people on the rules, and track that all the rules have been followed. For the members of the organizations this reduces the amount of personal responsibility – it’s not intended to do what’s outside of policy even if it would make a lot of sense and it is fine to do things which don’t make sense as long as they comply to the rules.

Complexity is one of the key aspects in a world of VUCA (see Dance on the VUCAno) – it is not so difficult for a common sense based organization with a clear purpose and healthy structures to adapt to the increasingly fast changes. But it is impossible for a governance dominated organizations to do so for at least the following reasons.

  • Policies cannot be changed and adapted fast enough and keeping them free of conflict is impossible.
  • Members as a consequence have to react according to policy and will miss important developments and client needs.
  • The ones who define the policies will try to embed all eventualities to be on the safe side – the amount of rules grows.
  • Every mistake tends to result in new or changed rules.

It would be much better to have a small set of principles. Please note that a principle is not a rule – it is a meta rule which helps to identify the right decision. Many organizations have such principles in addition to the rules and policies. Just be careful to really stick to principles and avoid to state the obvious.

So what would be a good approach.

  • Clear vision and external purpose everybody in the organization shares (see Giving Direction)
  • A few guiding principles which help to channel the activities
  • The minimal set of rules and policies required to allow the organization to operate safely

Then let the people create the social structures and norms based on this.

The challenge of (financial) mobility of the future

I had the great pleasure to join the “Impulse Apero” on Feb 6th organized by Kellerhals Carrard and Implement Consulting Group featuring the head of the SBB’s board of directors Monika Ribar. Monika walked the audience in her inspiring presentation through the challenges and opportunities of mobility of the future.
  • Transparency is the new currency – people estimate transparency. Its about enabling people to reach their goals independent of the provider and about being informed in good and in bad times.
  • Openness is the new norm – we are living in a network economy. Openness is the key to unleash the combined potential of all services in the network. Closed and monolithic systems are relicts of the past.
  • Holistic services – users want to have an end to end service and an broad overview. There is just the choice of providing it or let somebody else do it.
  • Simplicity  – the different pricing schemes used by the various service providers are hard to understand for the consumer. But all this complexity can be hidden using smart technology – either by offering a flat rate scheme which enables general usage or by simply billing the actual consumption with the optimal price for the consumer.
These points are very true for a mobility provider and also for financial services and other industries as the relate to big shifts in society. There is one huge difference – the SBB has a huge logistic challenge with a lot of infrastructure which is required to realize the desired degree of mobility. Financial services companies in essence just deal with information and have a simpler problem to solve.
I also would like to highlight a few other aspects which I found very interesting:
  • Empowerment – the people who are in contact with the users must be empowered to solve problems in creative ways.  They see the problem and they can directly engage and solve them with  their creativity. The SBB has allocated a budget at discretion for the ‘railway companions’ – this are the people in the train who make sure that the travelers have a smooth journey. This empowerment of employees at the point where the company engages with the clients is just cool.
  • Team – the rail clean organization is now a part of SBB again and wears he SBB logo. In more an more automated railway stations they are often the only people. Now the wear an SBB logo again and can help support travelers in case of problems. This is a win-win situation as the job has become more interesting and as clients have a further human touchpoint with the brannd.
  • Development –  all roles are changing due to the evolution of the environment and the technology. It is of strategic importance to think about the roles and their evolution paths. SBB grows and moves together with its employees into the future of mobility.
  • Data – SBB as a provider collects a lot of data about its users. Monika stressed that the data belongs to the client and not SBB. So the client decides when and how this information is used.
Again four aspects which can be translated very well into financial services. The empowerment of the staff is key, every employee is a part of the brand management and client data belongs to the client and not the service providers.

NIST Blockchain Technology Overview

The National Institute of Standards and Technology (NIST) hast published a draft report on blockchain. This report is an excellent summary and overview of the technology, its key characteristics and use cases.

“Blockchains are immutable digital ledger systems implemented in a distributed fashion (i.e., without a central repository) and usually without a central authority. At their most basic level, they enable a community of users to record transactions in a ledger that is public to that community, such that no transaction can be changed once published.”

This has the following implications on organizations:

“However, on a blockchain, it is much more difficult to change data or update the ‘database’ software. Organizations need to understand the extreme difficulty in changing anything that is already on the blockchain, and that changes to the blockchain software may cause forking of the blockchain. Another critical aspect of blockchain technology is how the participants agree that a transaction is valid. This is called “reaching consensus”, and there are many models for doing so, each with positives and negatives for a specific business case.”<

Indeed – this highlights a few foundational aspects – blockchain realizes high data integrity and immutability based on a certain level of transparency required to reach a consensus on the validity of transactions. The report outlines the most important consensus algorithms – each with its drawbacks and advantages.

  • “In the proof of work model, a user gets the right to publish the next block by solving a computationally intensive puzzle.”
  • “The proof of stake model is based on the idea that the more stake a user has in the system, the more likely it will want the system to succeed, and the less likely it will want to subvert it.”
  • “In some blockchain systems there does exist some level of trust between mining nodes. In this case, there is no need for a complicated consensus mechanisms to determine which participant adds the next block to the chain.”

The report also explores the most important types of blockchains :

  • If anyone can read and write to a blockchain, it is permissionless.
  • If only particular users can read and write to it, it is permissioned.

The permissioned blockchains are similar to an intranet only visible to the nodes on this network while a permissionless blockchain mimics the characteristics of the Internet.

“The use of blockchain technology is not a silver bullet, and there are issues that must be considered such as how to deal with malicious users, how controls are applied, and the limitations of any blockchain implementation. That said, blockchain technology is an important concept that will be a basis for many new solutions.”

The technology is indeed no silver bullet but is has huge potential for all applications which require a shared agreement and a high level of security.

“Blockchain technologies have the power to disrupt many industries. To avoid missed opportunities and undesirable surprises, organizations should start investigating whether or not a blockchain can help them.”

NIST asks for comments and feedback until February 23, 2018.

 

In a world of VUCA seek anti fragility

Fragility is the quality of being easily broken, delicate or vulnerable. A fragile system, similar to a vase, are easily impacted by a slight shock. Vases are fragile – and broken when hit. Once they break, it may be possible to glue them together again but will never look and function the same from its original state.

What is the opposite of fragility? Durability and adaptability. A system which adapts and gains strength from the impact of a shock(s) –  vases getting more robust with each stone hitting them.

Nature shows many examples of anti fragile systems. The human immune system is anti fragile. Each infection is overcomed further strengthening it. The immune system is especially design with the need of “shocks” / intruders in order to evolve and remain strong.

Currently we typically aim to protect systems from a set of expected events. In the world of VUCA (Dance on the VUCAno) the aim must be making environment and its systems anti-fragile. Why not expose a system continuously to shock events and train it to handle them? Expect the unexpected, make the unexpected to anticipated.

Related:

Dance on the VUCAno

The notion of VUCA was introduced by the U.S. Army War College to describe a volatile, uncertain, complex and ambiguous multilateral world which resulted after the end of the Cold War. This applies well to the world we see today where a lot of things evolve in parallel influencing each other. VUCA stands for:

  • Volatility – fast rate of change
  • Uncertainty – as things change fast we seem to live in a world of uncertainty
  • Complexity – small things can develop huge effects, nothing seems linear anymore
  • Ambiguity – things can be interpreted differently, context matters, answers depend

People like stability and simple situations – but in reality is different. The elements of VUCA can be seen as a threat or an opportunity. I prefer the opportunistic view with observable developments within each elements of VUCA

  • Volatility – opportunity for those who can adapt, are agile and have access to resources
  • Uncertainty – opportunity for those who look at the bigger picture
  • Complexity – opportunity for those who can adapt and influence
  • Ambiguity – opportunity for those who live and breath diversity

Here are some thoughts triggered by VUCA

  • Having a vision or a longer term purpose is key to channeling activities towards a common goal. It enables all to make the right decisions at any time (giving direction)
  • Projects or initiatives must be structured as small steps each leading to a stable and beneficial state.
  • Approaches may look promising upfront but may become unattractive or even unpractical when being implemented. It s key to acknowledge, learn and move on (never fail to fail).
  • Try to travel light – adjusting direction and acting quickly does not work when we have lots of baggage.
  • Avoiding technical and business debt becomes instrumental in enabling the ability to renew systems and organizations.
  • Old patterns and theories become stumbling blocks. Be creative and innovative to develop patterns and tools which match the new reality.
  • Best practices are good to learn. They are for a specific situation – yours is different.
  • We live in a world of networks and network effects matter. Its about connections and influence not about hierarchy.
  • If one acts to isolated he loses influence which lacks the stimuli and interactions in order to drive innovation and creativity.
  • Try new things if you expect something new. Be curious and open for surprises – there is always something positive in it which can be used to build on.

In the world of ambiguity it may sound promising to try to keep and defend one’s current strong position. Why try to be creative and innovate? Why not just wait, optimize the current state and buy what turns out to be a success. This does not work well in a networked world. Such strategy typically leads to a limited time success followed by a serious threat.

How to explain ‘new’ things like bitcoin …

Let’s assume for a moment around year 1860 you are horse rider working for the Pony Express. You and your colleagues are doing, on a daily basis, a fantastic job delivering messages between the Atlantic and Pacific coasts ( it takes approximately 10 days). During a ride you start to see placement of wires on poles. You try to understand and to explain to your partner of this. What would you say? “ they are building a continental fence high up in the air” or at some point you understand some aspects of what this new thing does. At the moment of realisation would you still be convinced that only people on horses working for solid companies can reliably deliver messages over such a long distance. Eventually working in this paradigm will no longer be valid as you notice the decrease in demand for horses and riders.

Now let’s switch back to crypto currencies with Bitcoin as the prominent example and have a look at some of the arguments discussed on various media these days. It is very difficult to explain cryptocurrencies, such as Bitcoin, with a simple comparison to something else.

“Bitcoin has no value” – this is somehow the wrong discussion. Most currencies don’t have one – fiat currencies have declared value by authorities and maintain it as long as people trust the system. The latin word ‘fiat’ simply means “it shall be’ – an authority declares something to be a currency. Bitcoin was created in the last financial crisis. The genesis block contains the message “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”. It is an attempt to create a decentral form of money where no central authorities have an influence. So the key question is not the ‘value’ – it is about how trust is built. What’s better – the declaration of an authority or the community?

“Bitcoin is a currency” – sounds reasonable as we all deal with one or more currencies each day and as Bitcoin started to become an aspect in our daily life. But what is a currency? It turns out that currency definitions like the one on Investopedia are not so helpful.

“Currency is a generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, currency is the basis for trade. ”

If this definition is true, then Bitcoin is not a currency as it is not issued by a governmental authority. Also, the definition of money is linked to a government. Hence Bitcoin is also not money, if the definitions are considered to be valid.

“Bitcoin is not a medium of exchange” – as transaction costs and volatility are high and making small transactions unattractive to mine. Although Bitcoin is currently not an option for small amounts but could well be used for large ones.

“Bitcoin is made of thin air” – on the basis that there is no underlying physical resource. But what does this mean? Bitcoin is itself a resource on a strict mathematical base. It is not created out of thin air – its creation is the result of a well-defined and completely transparent algorithm which we all can verify and decide to trust or not to trust. Comparing this to ‘fiat currencies’  do you know how ‘fiat currencies’ are created? Do you know who decides to increase the amount of currency or to adjust the value of one against another currency? Is this done in a transparent way?

“Bitcoin is fraud” – what is the basis and evidence of such statement?. Looking at the original whitepaper of Satoshi Nakamoto this is simply wrong. Sure, there are fraudulent use cases, but this is also the case with all other currencies or assets. It turns out that Bitcoin is not really a good medium to be used e.g. in ransomware. All transactions in Bitcoin are publicly observable – we do not know the individual owning an address but that does not hinder to monitor target addresses and intervene at exchanges when they are used. In other words – using Bitcoin always leaves traces while using e.g. cash does not.

“Bitcoin needs regulation” – sounds also great as rules are essential to create trust. A system which is weak needs a lot of surrounding rules and interventions while there are systems which contain the rules transparently in their core. Bitcoin itself is regulated by the maths embedded in the system itself but not by the traditional financial services regulators or national banks. What authorities can and should do, is to think about the exchange of Bitcoin against the fiat currency they oversee and the implications.

“Bitcoin is the mother of pyramids” – sounds also somehow true as the ones who bought Bitcoins early now profit from those who come late. But what is a Pyramid Scheme?

“A pyramid scheme (commonly known as pyramid scams) is a business model that recruits members via a promise of payments or services for enrolling others into the scheme, rather than supplying investments or sale of products or services. As recruiting multiplies, recruiting becomes quickly impossible, and most members are unable to profit; as such, pyramid schemes are unsustainable and often illegal.”

At least I’m not aware somebody recruits members in a multiplier scheme. And anybody can decide at any time to get buy or sell Bitcoins. Hence the comparison seems also to be misleading.

“Bitcoin is a bubble” – looking at the price evolution is 2017 suggests that this could be a bubble. But what is a bubble?

“A bubble is an economic cycle characterized by rapid escalation of asset prices followed by a contraction. It is created by a surge in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behavior. When no more investors are willing to buy at the elevated price, a massive selloff occurs, causing the bubble to deflate.”

Well, it is most likely some sort of a bubble – there will be price corrections and at some point in time Bitcoins will be super-seeded by a technology eliminating its constraints in terms of fairness, transaction rate and energy consumption.

“Bitcoin uses enormous amounts of energy” – this seems to be one of the concerns people love to make comparisons and also promote the idea that more transactions results in more energy consumption. Yes, it uses a lot of energy but this energy is what makes the network safe in the current proof of work- mining. An attacker would need to invest a substantial amount of these resources to destabilize the bitcoin network. The amount of energy used does however not correlate with the number transactions processed.

“Bitcoin is the new gold” – this seems to sound right when thinking about mining Bitcoins. There are the miners who produce gold and the limited supply makes gold valuable. The amount of natural gold on the planet is limited like the total amount of Bitcoins. But astro mining will change this for gold not too far in the future – experts talk about 20 years from now. Bitcoin’s mathematical foundation stays.

These points are properly summed up in Steve Wozniak’s statement “Bitcoin is mathematical. I am a mathematician. There are only 21 million. It is more legitimate than other systems”.

The following is a pretty good description:

  • It says that it is a limited resource currently slowly increasing day by day peaking at 21 million. So far, all resources which are limited and of interest, increased in value. While Bitcoin was rather unknown even 2 years ago it is now a hot topic in all media with people making harsh statements primarily defending their own interests.
  • Steve also calls it a system – there is neither a government nor a company with management nor an individual running Bitcoin. The system is very cleverly built – it is an amalgamation of many disciplines and was so far self-balancing gravitating towards a stable state where all the participants jointly benefit.

Maybe we add the following characteristics

  • The system is transparent – everybody can observe all transactions.
  • The system is democratic – everybody can use it or become a miner.
  • The system is self-balancing – no government or company decides its direction
  • The system is energy inefficient – a result of the proof of work mining approach
  • The system is not completely fair –  miners can prefer juicy transactions
  • The system is open – all technology is freely available

A hyperconnected digital economy needs inherently digital media of exchange. Bitcoin is most likely the first step into such a direction. It’s ten years history demonstrates that such a system is possible and triggered a whole new set of echnology innovations. Crypto currencies represent a fundamental upgrade to the economic systems of the world. Once they have matured and are integrated into the mesh economy, the world will look very, very different.

Links:

Self Sovereign Identity – Approaches

We think that Self Sovereign Digital Identity is one of the key elements in the shift towards a distributed decentralized financial system (see also FINthinker’s Predictions for 2018). Below are examples of organizations which engage on this topic each with a different approach:

There are more … comments  with links welcome.