The Cross-Functional Enterprise: Bridging Business and IT
Authors: Clemens Bauer, Xander Seeren, Alina Zimmer
Implementing cross-functional teams requires enterprises to rethink their organization on multiple levels, including approaches to strategy, portfolios, finance and delivery.
- We predict that the transformation towards a truly cross-functional enterprise will happen in 4 major transformative waves.
- The traditional organizational setup will evolve from a functional orientation into a network of interdisciplinary teams with end-to-end responsibility for products.
- While the core delivery in organizations will shift towards such network of teams, conventional organizational functions that are driven by regulatory or legal demands will likely remain as they are.
- The right mix of complementary skills in teams, not the choice of an agile method or framework, is the determining factor for success.
- Leaders will need to adopt new behaviors to foster an environment in which people can learn and grow.
- In the longer term, we expect that some cross-functional enterprises will evolve into teal organizations consisting of a network of ecosystems with a bare minimum of supporting functions.
The complexity and volatility introduced by digitalization are pushing organizations to fundamentally rethink how they operate. Functional separation between business and IT units is still very common but results in a lack of common responsibility, inefficient information flow and slow decision-making. To cope with these challenges, firms have recently begun to successfully experiment with agile ways of working. Some organizations have started to design organizational structures and large-scale operating models that facilitate agile ways of working. The key to exploiting the most value from an agile enterprise and maintaining its competitive edge lies in the right composition and utilization of skills within these structures. Applying state-of-the-art agile practices in a product-centric system enables firms to actively utilize cross-functionality to gain a competitive advantage. The right mix of skills among multi-disciplinary employees is pivotal to unlocking the fullest potential of every organization. Organizational challenges can no longer be tackled by siloed business units with scattered responsibilities. Rather, they need to be approached holistically by interdisciplinary teams that have end-to-end responsibility for dedicated products. We believe that scaling cross-functionality has significant implications that go beyond the implementation of scaled agile frameworks. Hence, we will evaluate the effects of scaled cross-functionality on three major dimensions: (1) strategy and planning, (2) organizational design, and (3) teams and leadership.
(1) Strategy and Planning
From a corporate strategy perspective, product-based approaches will take on a more dominant role in the alignment between business and IT. Being able to meet changing customer demands more quickly and precisely is the core driver for organizations to rethink how they deliver their products and move towards delivery based on cross-functional teams. Strategies and teams sliced by product are more effective since dedicated teams with end-to-end responsibilities are more flexible and can be more responsive to changing customer demands. Strategy development may change on all levels with an increased focus on delivery in a cross-functional organization, whether delivery is solely product-centric, uses a customer journey or is based on a value stream.
As the focus of strategy development shifts, organizations are already implementing shorter strategic cycles so they have the flexibility to address disruptions in the market. To manage their portfolios while staying aligned with strategy cycles and shorter delivery iterations, we believe portfolio planning cycles will reduce to 1 to 2 months. This would allow portfolio managers to frequently compare their goals with business outcomes and refine portfolio backlogs when needed. Product cycles of 2 to 4 weeks can then be steered to create optimal business value. When new opportunities arise or ventures prove to be non-valuable, this would enable more flexible delivery and speedy ramp-up or ramp-down teams.
As organizational focus moves towards the delivery of products and features, the logic behind financial planning and budget allocation is also changing significantly. Organizations will refrain from yearly budget planning cycles in which budgets are allocated to departments. In a cross-functional enterprise, budgets will be planned through incremental seed funding that supports new products functionalities or MVPs. That way, funding is validated much earlier through regular reviews of value delivery after every iteration. Instead of long projects with a set of milestones that stretch benefit realization over an extensive period of time, value is now delivered comparatively early. This reduces the risk of false or flawed investments.
Finally, in a truly agile and cross-functional enterprise, the delivery of overall value will move away from releasing large “chunks” of outcome at certain points in time towards a continuous flow of value. Cross-functional teams will be responsible for a target (product) during a defined iteration. Business and IT will prioritize, plan ahead and estimate the effort and cost together. Interdisciplinary teams will then assign and do the work on their own and release the value when they see fit. This ensures that the defined scope remains flexible enough to reprioritize if needed. This change in approach results in less project management overhead, enables detailed understanding of products within teams and enables teams to initialize and implement changes more quickly (for more information see #noprojects).
(2) Organizational Design
A functional separation between business and IT departments – with IT simply fulfilling business requirements – is very common in today’s organizations. Business and IT units are split into dedicated, specialized units. This setup usually results in a lack of shared responsibilities and loss of information due to many handovers. As a result, firms struggle with low market responsiveness and failure to meet customer demands. Firms driven by highly dynamic environments will find themselves forced to dissolve strictly separated business and IT units, replacing them with alternative cross-functional organizational models. We predict that this transformation of organizational design into true cross-functionalism will happen in 4 major waves. Depending on factors such as firm size, industry dynamics and technological enablement, most firms will reach a notable level of enterprise-wide cross-functionality within 20 to 25 years – or even earlier. Driven by IT functions, this transformation will start with project-based, ad-hoc cross-functional work, expand to cross-functional department-level delivery and ultimately spread throughout the organization.
In more detail, these waves will occur as follows:
Wave 1: First, teams – across or within IT departments – start experimenting as agile, cross-functional teams. Daily business supporting those teams continues as usual, and overall decision-making power and responsibility remain with the line organization.
Wave 2: Once some cross-functional experiments have proven successful, the number of teams grows. Senior IT management starts to notice the advantage of faster time to market and cross-functional teams are scaled across the previously functionally oriented IT area. Project-based work starts to shift towards a continuous, product-centric flow with incremental delivery. Team autonomy increases as core value delivery to the business begins to come from cross-functional, agile teams.
Wave 3: As the teams mature, their prime focus becomes the delivery of end-to-end customer value. This requires experts across departments to work together, driving expansion of the model outside IT. When project scope and responsibilities cross departments, it quickly becomes clear that existing organizational structures and processes inhibit progress and that value-centric teams drive decisions and deliver value more autonomously across department boundaries. Business and IT grow more intertwined as complementary skill sets are needed in teams, depending on the technical depth of the product.
Wave 4: Once executive management has fully understood the value of cross-functionality at scale, these principles are reinforced on strategic levels. New organizational structures emerge; teams form around products based on the required skills. The organization’s middle management disappears as line managers become redundant to entirely decentralized, collective decision mechanisms. Interdisciplinary teams change their configurations when needed to respond to changing customer or market demands.
Even though the core of organizational delivery will change fundamentally, not all decisions can be made by these cross-functional teams. Like agile ways of working, cross-functionality is not the “silver bullet” that solves all future organizational challenges. Firms need to carefully consider the fit of a cross-functional team for each product and implement this transformation case by case. Cross-functional teams may perform better in highly dynamic, technology-driven environments. In line with the well-known Stacey matrix, cross-functional teams reach their fullest potential in complex environments where future requirements, methods and technologies are far from certain. In other situations, however, the conventional structure of teams as specialized functional units may prove more effective. Companies will have to experiment with different models to find the best structure. Central corporate strategy, governance and overall orchestration among teams will still be required. Furthermore, units that are highly driven by regulatory requirements and legal policies will be difficult to transform and will likely remain as they are today. Finally, depending on the maturity of the cross-functional teams, dedicated specialist services and (central) support functions may still be required; these can be pooled, deployed or integrated into existing cross-functional teams as needed.
(3) People and Leadership
In a traditional organization, the composition of teams within certain functional units tends to be rather homogeneous; however, the cross-functional enterprise demands interdisciplinary teams whose members possess heterogeneous skills. Since teams need the flexibility to quickly respond to changing customer needs, individual members need “T-shaped” skill profiles. Such teams are not composed of individuals who bring one specific skill and are solely responsible for related tasks. Rather, in cross-functional teams, employees with complementary skills (business as well as IT) are matched. This allows teams to shift focus easily if needed. The optimal skill mix may depend on factors such as product type, complexity or technical depth. This fit needs to be reviewed regularly to ensure it remains optimal.
Leaders need to design environments where individuals can learn, grow, collaborate and adapt quickly by flexing new skills when needed. Leadership’s key responsibilities are emphasizing a common purpose, empowering employees, enabling them to create new connections and creating an energizing atmosphere. These goals can be reinforced through various cognitive, behavioral and emotional transformation techniques and through continuous coaching.
An environment where teams receive support for personal development and for any challenges they face is important for the success of any transformation. Hence, it is critical to empower and continuously coach individuals to optimally leverage their potential in interdisciplinary teams. Leaders should be able to switch between different roles, including sparring partner, reflective watcher, facilitator or expert advisor, depending on the situation.
Summary and Future Outlook
The cross-functional enterprise brings many changes to organizations. Business and IT will embrace a more bottom-up strategic approach that embraces product strategies. Portfolio planning will shift to a cyclic approach in which shorter iterations are key. Financial planning will no longer be departmental; product teams will receive short-term budgets to deliver specific MVPs or features. Portfolios that used to rely on project organization will be delivered through a continuous flow of outcomes, and traditional organizational design will evolve from functional silos into a cross-functional network of interdisciplinary teams with end-to-end responsibility for products, customer journeys or value streams.
We conclude that including the right skills in interdisciplinary teams is the determining factor for success. Leaders need to learn to foster environments in which employees can learn and grow. Active individual coaching will enable teams to leverage the full potential of all members. The right governance mechanisms will further ensure value-generating exchanges among teams.
In the even longer term, we foresee a further step after the development of cross-functional enterprises: Organizations will evolve into even more loosely coupled ecosystems of teams. Such corporate ecosystems operate with the bare minimum of supporting functions and are almost entirely made up of self-managed teams. Most teal organizations, as such companies are called, believe that common rationality matters above all and are guided by an evolutionary purpose that manifests the deeper reason why an organization needs to continuously reinvent itself and adapt accordingly. Teams are held together by their common vision of the difference they want to make in the communities where they operate or the markets they serve. Some companies that are already beginning to show traits of teal organizations today are Patagonia, Morningstar and the Dutch healthcare company Buurtzorg.