The Digital Operating Model: Building a Componentized Organization

In the spring of 2020, impelled by a global pandemic, many established businesses quickly moved workers from office buildings to home offices—often without a hitch. Through that remarkable transformation, many leaders gained a glimpse of the power of digital technologies. But these new distributed workplaces represent only the tip of the iceberg in terms of the changes digital technologies will inspire going forward. For most companies, the digital transformation journey has barely begun.

Already, some companies are identifying new customer value propositions that digital technologies make possible. But as they quickly learn, this requires changes in people’s roles and work processes, not just their locations. Whereas the shift to working from home created a need for collaboration technology, new customer value propositions create demand for extraordinary access to data coupled with new functionality. These changes are more complex than a shift to working from home. Nonetheless, the competitive pressure for speed will be intense.

Here’s the problem: established companies were not designed to operate at this accelerated tempo. Most big companies were built as business and functional silos that rely on hierarchical decision-making processes and messy legacy systems to get work done. These historical remnants impede efforts to rapidly respond to new technologies, data, and customer demands.

A digital transformation, therefore, requires fundamentally redesigning a company (or at least some parts of the company) for speed and agility. The redesign decomposes critical processes and offerings into sets and subsets of distinct outcomes—business components—so that individuals can quickly take action to help the company achieve strategic goals.[foot]Components can range in scope. For example, the people, process, data, and technology that constitute an online search can be a component, as can those that result in the hiring of an employee. Part of the componentization challenge is establishing the boundaries of individual components so that accountability for them is meaningful.[/foot] Quick action depends on assigning accountability for each component to an individual or team. Clear accountability releases the owner from layers of approvals and coordination, thus facilitating intense focus and rapid response.

Implementing a componentized architecture while simultaneously abandoning old ways of doing things is an evolutionary journey. This briefing explores that journey.

Components of People, Process, Data, and Technology

To understand componentized design, it’s useful to distinguish business components, which we believe are essential to the design of digital companies, from two related concepts: agile methodologies and technology components. Many companies are adopting agile methodologies to accelerate delivery of new systems capabilities. This is a valuable tool in a digital transformation. However, agile methodologies merely accelerate delivery of a new capability—they do not componentize a company or even require that a company be componentized.

A technology component is software that executes specific automated instructions. Companies build, buy, and use a huge array of technology components to automate tasks. In contrast, a business component is a unit of accountability for a specified mission. It consists of people, process, data, and technology. Business componentization has become a feasible organization design because digital technologies allow modular design of software functionality, often facilitated by APIs.[foot]Technically, an API is the interface by which software modules exchange data, but the term API is often used to describe the modules themselves.[/foot] Despite the enabling role of technology, componentization is more than a technical effort: componentization is an operating model specifying critical outcomes and who owns responsibility for their design and execution.

Componentization succeeds when a company effectively balances autonomy and alignment. The autonomy, a function of empowered teams, allows independent action by a team or individual (and thus rapid response). The alignment, a function of converting strategic goals into distinct team missions, ensures that the set of (rapid) autonomous actions addresses business priorities. In defining accountabilities, business leaders iteratively cultivate both autonomy and alignment. The design is never complete—it evolves as accountabilities become more distinct and new customer demands and opportunities emerge.

For an established organization, existing organizational structures, legacy systems, and embedded habits are significant obstacles to componentization. This is why a digital transformation is a long journey. While the near-term goal is to adapt quickly to changes in technology and customer demands, it is important to start small and grow into this new skin at a pace the company can absorb.

CarMax offers a useful example of a company that is benefiting from gradual, but radical, redesign of its systems, processes, and people.

Accountability and Componentization at CarMax

Founded in 1993, CarMax is a $20 billion retailer and wholesaler of used cars that has, from its inception, focused on delivering an exceptional customer experience.[foot]This description of CarMax draws from the full case study: J. W. Ross, C. M. Beath, and R. R. Nelson, “Redesigning CarMax to Deliver an Omni-Channel Customer Experience,” MIT Sloan CISR Working Paper No. 442, June 2020, https://cisr-mit-edu.ezproxy.canberra.edu.au/publication/MIT_CISRwp442_CarMax_RossBeathNelson.[/foot] Around 2015, as the market leader in a highly fragmented industry, CarMax initiated an enterprise-wide transformation intended to take advantage of the capabilities of digital technologies. The CEO’s vision of meeting customers on their terms—combining online, in-store, and at-home service offerings to ensure a convenient, personalized customer experience—has evolved into the pursuit of an omni-channel business model.

Over the course of the transformation, CarMax has consistently met key goals. Recently, CarMax surpassed a goal of making omni-channel services available to more than 50% of customers by February 29, 2020 (the end of the company’s fiscal year). Just as significant to management has been the company’s responsiveness to the COVID-19 crisis. CarMax could do little to stimulate flagging demand from social distancing. But CarMax wanted to make it possible for people to purchase a used car from the safety of their homes. Leveraging its omni-channel platform and componentized architecture, the company needed just two weeks to roll out CarMax Curbside, a contactless buying experience.

Early in the company’s transformation, CarMax leaders recognized the potential value of tapping the creativity of its people through the formation of product teams with accountability for specified components of the omni-channel business model. To test the product team model, CarMax created just three teams:

When leaders were able to document a positive impact of those teams on sales, CarMax started adding more teams. Today CarMax relies on the efforts of over 30 cross-functional product teams to fulfill its digital vision. By specifying accountabilities of these teams, CarMax has started the journey toward componentization. CarMax took four actions that the MIT CISR research team found particularly striking and that could be valuable to other companies trying to redesign for digital (i.e., componentize).

1. Built a core foundation

Like most big, established companies, CarMax’s core operational systems in 2015 were siloed and fragmented. Leaders suspected that the limitations of their legacy systems and processes would limit the success of omni-channel initiatives. So one of the company’s top priorities was implementing a new CRM so that customer data and sales transactions could provide a reliable base for omni-channel interactions. Although other legacy systems also had issues, the company focused on implementation of the CRM to maximize the impact of early transformation initiatives. Subsequent modernization of the core has been more incremental.

2. Distinguished customer-facing from customer-enabling components

Technology and product leaders recognized that they could readily componentize customer-facing systems and processes related to online and mobile customer self-service. So product teams now own accountability for components like search engine optimization, vehicle photograph/merchandising, and financing. Legacy systems rarely hinder their efforts and customer-facing teams rapidly deliver new functionality.

On the other hand, customer-enabling processes—those used by employees to support customers—are more complex, often supported by major enterprise systems. New functionality invariably involves connecting to or replacing legacy systems, addressing interdependencies, and changing employee behaviors. Delivery of new functionality is more episodic.

Figure 1 depicts the CarMax systems and process environment. Although both customer-facing and customer-enabling processes leverage the CRM core, they each pose different kinds of challenges to product teams. Specifically, pure customer-facing teams can release something to .com whenever they want, while customer-enabling teams, because they must address change management issues, have a more regimented release cadence. Both kinds of components are essential to delivering an exceptional customer experience.

3. Adopted two-in-a-box management

Like all digital solutions, an omni-channel experience applies technology to serve customer needs. To ensure they provide powerful, easy-to-use solutions that their customers will value, every CarMax product team has three core members: a product manager, a product designer, and a lead developer.[foot]Other members, which vary according to team needs, might include functional experts, developers, marketing creatives, visual designers, data scientists, field associates, and operations or QA experts.[/foot] Product managers and designers report in to CMO Jim Lyski’s organization, while the lead developer is part of CIO Shamim Mohammad’s organization. Lyski and Mohammad have adopted what they call two-in-a-box accountability for the success of the product teams.

In addition, one of Mohammad’s direct reports, Steve Allocco, VP of Product Engineering, is “in a box” with Bryan Ennis, VP of Product, a direct report to Lyski. Ennis is primarily responsible for coaching and developing product managers and product designers. Allocco is primarily responsible for coaching and developing the engineering arm of the product organization, including the lead developers. Despite their different job descriptions, Ennis and Allocco see themselves as interchangeable support for product teams, which helps blur the distinction between product and technology.

4. Aligned accountability with strategic objectives

Product teams are durable in that membership is generally stable throughout the life of a product, particularly among the three core members. To maintain teams at around seven members, missions that expand beyond the capabilities of seven people can be divided. For example, merchandising was split into two distinct missions as demands for functionality expanded. Teams establish metrics and test hypotheses in two-week sprints. CarMax tracks alignment and progress in biweekly open houses where, in fifteen-minute time slots, teams share their objectives and key results (OKRs) and receive feedback from one another and interested leaders.

CarMax leaders regularly review the alignment of the individual missions with the company’s strategic goals and, as needed, add teams and change team missions. For example, to devote more attention to the omni-channel rollout in 2019, leaders pivoted the missions of four teams:

The Componentization Journey

Although CarMax has come a long way in its transformation, in many respects the journey will never end. Empowered teams accountable for achieving critical outcomes will be the key to the company’s success going forward.