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Thoughts on Agility
07/09/2007

The more I write about agile software development, Key Agility Indicators, and users seeing an environment of rapid change as their most worrisome business pressure, the more I wonder why agility, or flexibility, is not a standard way of assessing how a business is doing. Here's my argument:

Agility is a different measure and target from costs or revenues or risks. It's really about the ability of the organization to respond to significant changes in its normal functioning or new demands from outside, rapidly and effectively. It's not just costs, because a more agile organization will reap added revenues by beating out its competitors for business and creating new markets. It's not just profits or revenues, because a more agile organization can also be more costly, just as an engine tuned for one speed can perform better at that speed than one tuned to minimize the cost of changing speeds; and bad changes, such as a downturn in the economy, may decrese your revenues no matter how agile you are. It's not just risk, because agility should involve responding well to positive risks and changes as well as negative ones, and often can involve generating changes in the organization without or before any pressures or risks.

That said, we should understand how increased or decreased agility impacts other business measures, just as we should understand how increased costs affect cash flow, profits, and business risks, or increased revenues affect costs (e.g., are we past the point where marginal revenue = marginal cost?), or the likelihood that computer failures will croak the business. My conjecture is that increased agility will always decrease downside risk, but should increase upside risk. Likewise, increased agility that exceeds the competition's rate of agility improvement will always have a positive effect on gross margin over time, whether through more rapid implementation of cost-decreasing measures or an effective competitive edge in implementing new products that increase revenues and margins. And, of course, decreased agility will operate in the opposite direction. However, the profit effects will in many cases be hard to detect, both because of stronger trends from the economy and from unavoidable disasters, and because the rate of change in the environment may vary.

How to measure agility? At the product-development level, the answer seems faily easy: lob a major change at the process and see how it reacts. Major changes happen all the time, so it's not as if we can't come up with some baseline and some way of telling whether our organization is doing better or worse than before.

At the financial-statement level, the answer isn't as obvious. Iirc, IBM suggested a measure like inventory turnover. Yes, if you speed up production, certainly you can react to an increase in sales better; but what I believe we're really talking about is a derivative effect: for example, a change in the level of sales OVER a change in cost of goods sold, or a percent change in product mix over the percent change in cost of goods sold, or change in financial leverage over change in revenues (a proxy for the ability to introduce better new products faster?).

So I wonder if financial analysts shouldn't take a crack at the problem of measuring a firm's agility. It would certainly be interesting to figure out if some earnings surprises could have been partially preducted by a company's relative agility, or lack of it.

At the level of the economy, I guess I don't see an obvious application so far. Measures of frictional unemployment over total employment, I would think, would serve as a interesting take both on how much economic change is going on and to what extent comparative advantage is shifting. But I'm not sure that they would also serve to get at how well and how quickly a nation's economy is responding to these changes. I suppose we could look at companies' gross margin changes over the short term in a particular industry compared to overall industry gross margin changes to guess at each company's relative agility in responding to changes in the industry. However, that's not a good cross-industry yardstick...

And finally, is this something where unforeseen factors make any measurement iffy? If what drives long-term success is innovation, which is driven by luck, then you can be very agile and still lose out to a competitor who is moderately agile and comes up with a couple of once-in-a-genertion market-defining good new products.

Everyone talks about the weather, Mark Twain said, but nobody does anything about it. Well, everyone's talking about agility, and lots of people are doing something about it; but I don't think anybody really knows how effective their efforts are. Ideas, anyone?

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Wayne Kernochan