Traditional vs. Agile Organizations

Traditional Organization

Agile Organization

In a traditional firm the organisation is seen as a number of separate departments, each of which is either a cost centre, like IT or HR, or a profit centre like Sales. The difference is that a cost centre doesn’t contribute directly to revenue. Costs are allocated to each cost centre, and cost efficiencies come from reducing the operating costs in the cost centres and maximising the revenue from the profit centres. Common strategies for reducing costs, especially towards the end of the financial year, are limiting travel, reducing variable headcount by laying off contractors and other temporary staff, shifting work to cheaper countries or locations (“moving the work to the people”), repurposing legacy hardware and equipment, and forcing teams to use standard components to minimise “cost per use”. Common strategies for maximising revenue are offering commissions on sales, setting aggressive quarterly targets, and offering incentives and rewards for achieving specific goals. Gains come from maximising resource utilisation, i.e. keeping people busy.

In an agile organisation—in the broader sense of business agility—the organisation is seen as an interconnected system where all departments are value-generating, either directly contributing to the final product or indirectly enabling the organisation to work more effectively. Value chains map the creation of value through the organisation, ending with meeting a specific customer need. Costs and revenues are allocated holistically across the whole value chain, and cost efficiencies come from optimising the flow of value. Common strategies for reducing costs are identifying and eliminating non-value adding activities, limiting the amount of work in process to reduce hidden inventory of work, and assembling multi-disciplinary teams to reduce handoffs and other delays (“moving the people to the work”). Common strategies for maximising revenue are working iteratively and incrementally in small batches to realise value sooner and improve Risk-adjusted Return on Capital, frequent testing of product ideas with customers to identify which work not to do, and enabling teams to choose the most effective tools to reduce their time to market. Gains come from optimising flow efficiency, i.e. keeping work moving.