Do you ever feel like a different version of the same problem keeps happening over and over? That every time you think you’ve finally won the game of whack-a-mole, another mole pops up?
One common reason for this is that you are solving problems at the wrong level of the organization. Until you start to solve them at the right level, you’re going to continue to have an underperforming and stressful organization.
If you solve them at the right level, you’ll find that many issues are “downstream” and seem to resolve themselves.
So what is the right level to solve a given problem at?
In the The Cynefin Framework for Making Better Decisions, I looked at a framework for evaluating what’s going on in a business that divided what a business does into four categories: simple, complicated, complex and chaotic.
These terms reflect different system dynamics and how to respond to them.
- Simple: Where the relationships between cause and effect are obvious. Anyone can apply a best practice to solve a simple problem. It’s something like putting together an Ikea table or a set of legos.
- Complicated: When the relationship between cause and effect requires analysis and investigation but is ultimately discoverable. Operating in the complicated domain requires investigation and the application of expert knowledge, but getting it done can be handled by utilizing existing expertise. Repairing your car would be something that is complicated.
- Complex: Where cause and effect are impossible to disentangle. It’s based on emergent practices. It is one where there are no right answers. It is the domain of unknown unknowns, where entrepreneurial skills are required. An environmental ecosystem like a rain forest would be considered complex.
- Chaotic: Where there is no way to go on and you just have to do something to try and get things to a place where they can be better analyzed and handled. Responding to 9/11 or a similarly huge, unexpected event would be a chaotic situation.
The lesson from The Cynefin Framework is that you must diagnose at what level in an organization that the problem is happening and respond at the appropriate level(s).
The Four Levels of Organization
There are Four Levels of Organization:
- Culture – the right principles
- Expertise – the right people in the right seats
- SOPs – the right processes
- Machines – the right automations and code
Culture is at the bottom because it is the foundation, the bedrock on which everything else is built. Airbnb Founder Brian Chesky asked Peter Thiel’s single most important piece of advice following Peter’s $150mm investment into the company. He replied, “Don’t fuck up the culture.”
Above Culture is Expertise, figuring out who the right people with the right expertise are that also fit into the culture.
Above that are Standard Operating Procedures (SOPs), the processes by which people do the recurring tasks in the business.
And at the top level are machines, effectively those SOPs which can be converted into computer code so no person has to do them.
This framework applies to organizations as a whole and all parts of the organization: sales, marketing, product, engineering, and everything else.
There are three important rules for using this framework to solve problems and grow a business.
- Evaluate the level at which a problem exists.
- Solve the problem at the level(s) where it exists: no more, no less.
- Make systems as simple as possible but no simpler.
1. Evaluate the level at which a problem exists
The lines between these levels are blurry and most roles are going to deal with various pieces of them. For example, the process of getting sales and expense information into an accounting software is probably fairly simple: you can connect your accounting software via APIs to your payment processor and computer code (AKA machines in this framework) will pass the data along.
The question of how to organize that information gets more complicated. You probably don’t just want a huge list of transactions, you want to group them in some way on your profit and loss statement. Money spent on books, courses, and conferences may all get put under a category for “training and education.”
However, it could be equally correct to put a conference expense under “marketing” if the conference was more about networking and finding potential partners or customers than it was learning from the content.
There are a number of “right” ways to do this but some are clearly wrong. You wouldn’t label a conference as a legal expense. This is the realm where a more complicated SOP with some decision trees along with expert guidance can be effective. A good accountant that understands the business should be able to structure this appropriately.
At another level, how to structure a Profit and Loss statement gets to be complex. There are a number of viable ways to do it, but what way of doing it allows the business to best understand the overall health of the business? As the business model changes, what may have worked in the past may become counterproductive.
The biggest breakthroughs tend to happen when you realize that a lot of simple or complicated problems actually have a complex root cause that can solve everything else downstream of it.
One famous example of re-imagining a Profit and Loss Statement is the creation of Amazon Web Services (AWS). AWS was produced by Amazon taking the internal infrastructure it built for its ecommerce business and offering it externally as a service.
Amazon effectively turned something from a cost center (the cost of supporting their eCommerce sales) into what is probably their most profitable business unit. In a sense, they just moved it around on their Profit and Loss Statement. If Amazon had continued to think about it as a cost center rather than a profit center, they would have approached re-investing in it very differently.
A helpful tool for this is the “5 Whys” rule of thumb developed by Toyota. It predicts that the root of a problem is usually 5 Whys away from the first thing you say. For example:
Your car won’t start. (the problem)
- Why? — The battery is dead.
- Why? — The alternator is not functioning.
- Why? — The alternator belt has broken.
- Why? — The alternator belt was well beyond its useful service life and not replaced.
- Why? — The vehicle was not maintained according to the recommended service schedule. (fifth why, a root cause from which many other problems are likely to spring)
If you just solve the problem at the first level by replacing the battery, then everything below it is going to cause the problem to just happen again. To truly solve the problem, you have to get to the root cause.
This is why “toxic culture” is the most destructive problem a business can have. Anything done at the other levels will ultimately get destroyed or undermined.
2. Solve the Problem at the Level(s) where it Exists: No more, No less
Some pieces of the work are fairly simple and can be fully automated by machines. Some are complicated and require human judgment but have a generally accepted way of doing them. Some are complex and emergent. There’s no reason to take a simple problem and make it complicated where it requires an expert to do it: just write the code or SOP.
If customer orders are going out to the wrong address, you don’t (necessarily) need to re-evaluate your company culture or encourage entrepreneurial problem solving. You need to fix the bug in your fulfillment software or standard operating procedure and make sure people are following it. It’s a simple problem that needs a simple solution.
Sometimes problems are limited to a single level: maybe the fulfillment process has been running super smoothly and someone changed a setting in the fulfillment software that created an issue. There’s no root cause, just fix the setting and carry on, no further action is needed.
However, one “problem” can also exist at multiple levels. If the error in the fulfillment SOP is one of many errors due to people not keeping documentation up to date and following it, then you need to address the proximate cause (the error) at the simple level by fixing the bug.
But you also need to address the root cause (the lack of documentation and resistance to creating it) at the complex level by creating a culture of effective documentation.
3. Make systems as simple as possible but no simpler
The goal for most businesses is to make the complicated into the simple and the complex into the complicated. When you start an outsourced accounting agency then you probably want to try and come up with some “best practices” for how someone’s books are organized.
Maybe you come up with a different set of best practices for each industry you work with (e.g. physical products vs. software vs. professional services, etc.). Once you’ve done this, you have a set of standards that you can then hire people to use. When you have a new software client, you have some templates you can pull off the shelf and use. You have taken a complex task and made it complicated.
Similarly, is there something which is complicated that can be made simple? A process that a person has to do now that can be turned into code? Instead of having a physical person do data entry from one system into another, can they be connected by Zapier or similar tools?
David Allens’ book Getting Things Done made this point using computer RAM as a metaphor for how the human mind works:
The short-term memory part of your mind—the part that tends to hold all of the incomplete, undecided, and unorganized stuff—functions much like RAM (random-access memory) on a computer. Your conscious mind, like the computer screen, is a focusing tool, not a storage place. You can think about only two or three things at once. But the incomplete items are still being stored in the short-term memory space.
And as with RAM, there’s limited capacity; there’s only so much stuff you can store in there and still have that part of your brain function at a high level. Most people walk around with their RAM bursting at the seams. They’re constantly distracted, their focus disturbed and performance diminished by their own internal mental overload.
Recent research in the cognitive sciences has now validated this conclusion. Studies have demonstrated that our mental processes are hampered by the burden put on the mind to keep track of things we’re committed to finish, without a trusted plan or system in place to handle them.
Compared to machines, humans are bad at remembering long checklists or performing calculations. But, they are good at complex problem-solving.
This means it makes sense to “outsource” or “delegate” these types of simple or complicated tasks to either machines or SOPs so the human energy is spent where it is most valuable.
The book of Taylor 12:17 states:
Render unto machines the things that are simple, unto SOPs and expertise the things that are complicated, and unto human creativity the things that are complex.
Take a pilot as another example. Certain parts of the job of flying a plane can be done automatically and computers in the plane handle them. Some parts of their job (like parts of the takeoff and landing procedure) can be distilled down into a SOP (AKA checklist). It is a waste of time and energy for the pilot to try and remember these things when they can be written in a checklist.
This is generally the path that businesses go down which increases their efficiency and profitability in the long run. When a task that is simple for one business but complicated for another, then it often makes sense to outsource that. If you’re running a fashion brand, you don’t want to reinvent the wheel for how your profit and loss statements are organized. That might be a complex problem for you if you’ve never solved, but you can hire a CFO to bring in their expertise and best practices.
Of course, it’s important to remember that this is changing over time. The process by which something goes from complex to complicated then simple also makes it more rigid and prone to disruption.
Amazon didn’t simply forget about how they were doing the accounting for AWS and ignore it, they realized that it could be viewed in a different way and reimagined it.
So, ultimately, you have to see the business at all of these levels somewhat simultaneously, constantly re-evaluating the appropriate framing for every business issue, knowing that an issue which appeared simple may become complex. When you have an issue, it’s an opportunity to do the 5 Whys exercise and re-evaluate what the lowest level is at which the problem needs to be solved.
How to Start Using The Four Levels of Organization
The Four Levels of Organization is, like all models, oversimplified, but, I find it provides a good framing and starting point for making a company’s operations more effective and robust. Businesses exist on multiple levels and by solving a problem at the root level it exists, you’ll most efficiently grow and improve the organization over time.
I will be the first to admit that, in the long run, the bottom layers (the right culture and the right people/expertise) are the most important pieces. However, it’s also my experience that companies struggling operationally are best served by starting at the top of the stack (Machines and SOPs) and then working their way down. When your house is on fire, the first step is to put out the fire and then you have some time to think about preventing the next one.
Similarly, if a business is operating sub-optimally, getting proper SOPs written and organized and repetitive tasks automated can buy the time and profitability it needs to solve problems further up the stack.
Last Updated on March 3, 2022 by Taylor Pearson