EIASM 2009

A Balanced Architectural Approach to

Develop Dynamic Capabilities

A paper presented to the

EIASM WORKSHOP ON INFORMATION AND
ORGANIZATIONAL DESIGN

by
Ira Sack, Stevens Institute of Technology, isack@stevens.edu
Richard J. Balicki, Johnson & Johnson, rbalick@its.jnj.com
Albert Lejeune, ESG-UQAM, lejeune.albert@uqam.ca

Brussels, April 20-21

 Introduction
In the field of strategic management the hard-soft distinction is a tradition since 1981
[PA1981]. The first three of the 7 S's (Strategy, Structure, Systems) defined by Pascale
and Athos - called hard factors - were the hallmark of American management. They
became in the 90‘s a departure point for a transformational journey towards Purpose,
Process, and People [BG1994, 1995a, 1995b]. The remaining four factors (Skills, Staff,
Style, and Shared Values) were called soft factors and still characterize an organizational
culture of learning and sharing. The goal of this paper is to actualize this hard-soft
distinction in the new architectural context that sometimes makes enterprise architecture
a substitute for strategy, enabling the development of new competences and dynamic
capabilities [RWR2006].

Dynamic capabilities are defined as ‗the ability to integrate, build, and reconfigure
internal and external competencies to address rapidly-changing environments‘
[TPS1997]. This paper shows how a balanced hard/soft architecture is key to reconfigure
both internal and external competencies through dynamic capabilities. This was the case
when the large Canadian traditional banks had to compete with the Internet banks.
Quickly, the bank became available where the customer business was. As the number of
branches quickly diminished, the integration level of the traditional, automated branches,
and ATMs was completed. The precision of the market data made the manned or
electronic «doors» adequately positioned. The network was rationalized and each entry
point contributed to the profits by building transactions volume. To the contrary, the new
Internet banks didn‘t experience the same degree of success.

This paper is organized this way: We first propose our definition of a balanced hard/soft
architecture and expose the Hierarchical Layered Approach to Organizational Design. We
then go further in explaining the balanced hard/soft architecture and finally illustrate that
balanced architecture as an organizational pattern of dynamic capabilities enabling the
reconfiguration of both internal and external competencies.

Hard and Soft Contracts and Architectures

Routine workflows as well as routine job skills, roles, and behaviors of people and
structure in processes may and should be specified as precisely as possible—otherwise,
we may not know how to implement them (i.e., their semantics) or exactly what their
implementations are supposed to do (i.e., their functionality). Such precise specifications
may take the form of hard (aka traditional) contracts: precise formal contracts as, for

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example, defined in approaches to business and organization modeling [MSSB2008,
MSB1999, K2003, and KR1994, SB2002]1. The collection of these contracts and the way
they are ―connected‖ constitutes the hard architecture2 of an organization [MSSB2008,
MSB1999].

Hard (traditional) architecture is the focus of classical theory: the rational-technical

―school of thought‖ about organizational design. The core premise of this school is that
the organization and decision-making should be treated as a machine. Components of
hard architecture always have explicit properties. Hard architecture and hard contracts are
prevalent within the realm of information technology in software and hardware
development, database design, network design, business applications, IT infrastructure,
and elsewhere. They are also commonplace within economics in dealing with so-called
discrete transactions and the discrete aspects of ongoing contractual relations [MG2001].
Numerous other excellent examples of hard architecture are presented and elaborated
upon in Business Models [K2003].

External relationships between an organization and its customers as well as the so-
called modern employment contract between an employer and employee (which is not a
traditional contract written in ―black and white‖ but rather an unwritten (type of)
psychological contract) have semantic associations that cannot be precisely stated or
completely identified [R2000, R1995]. Although they may have explicit properties, they
are principally ―understood‖ in terms of tacit knowledge, implicit understanding, and
hidden behaviors. Their ―specifications‖ take the form of relational contracts as defined
in noted economist John Kay‘s approach to organizational architecture presented in
[K1995] as well as in economic exchanges based on ongoing contractual relationships
(e.g., franchising) presented in [MG2001] or the form of knowledge contracts as defined
in Morabito, Sack, & Bhate‘s approach to the modeling of knowledge work [MSB1999].
Such contracts are not entirely written, or not written at all, but understood in terms of
beliefs, expectations, justifications, and other human dispositions. Within the realm of IT,
soft contracts are prevalent in ―soft high tech.‖ Henceforth, we shall use the term soft
contract to refer to either a psychological, relational, or knowledge contract. The
collection of soft contracts and their interrelationships constitutes the soft architecture of
an organization [MSB1999]. For a more thorough description of the various types of soft
contracts (as well as hard contracts), refer to [MSSB2008, MSB1999, and SB2002].

Soft architecture is the focus of various modern theories of the organization that derive
from the ―school of thought‖ stemming from ―neo-classical theory‖ (which emphasizes
motivation and employee involvement) as well as more recent approaches to information
theory (which adopts the core premise that the organization and decision-making should
be seen in terms of ―information flows‖ [SB2001].) In fact, many different models of the

Page 3
organization have been put forth using an information theory metaphor. Frequently, these
models combine aspects of both the classical and neo-classical schools.

enables

Hard Soft
Architecture Architecture

promotes effective application

Interdependence / Alignment Between Hard and Soft Architectures

Figure 1: A Balanced Organizational Architecture—Adapted from [MSB1999]

To be, and remain, competitive it is imperative that the knowledge-based organization

of the 21st century deal with the analysis and design of both hard and soft contracts and
architectures and their interdependence/alignment. This results in a balanced
organizational architecture as depicted in Figure 1.

The Hierarchical Layered Approach to Organizational

Design
There are innumerable approaches to organizational design. From the logical design
perspective, they are little more than incomplete lists and pictures in vague or inadequate
frameworks; i.e., they do not have clear semantics. Examples include design by executive
bullet or summary lists, critical success factors, the ever-present management matrices, a
few beautiful PowerPoint graphics, and so on. To simplify and make organizational
design and managerial practice more disciplined we may describe the organization in
terms of consciously employed levels of abstraction. This same approach has been
profitably used in such diverse areas as information technology, IT-enabled business
transformation, and elsewhere.

The hierarchical layered organizational model (HLOM) is used to represent an

organization in the historical context of organization theory (OT). It is motivated by a
desire to give a proper account for the complexity3 of organizational design contexts and
enable the manager-designer4 (aka manager-architect) to use it to think about a variety
of organizational characteristics. The choice of layers of abstraction is informed by OT
(as defined for example in D2006 or R1990) and the preferences and needs of the
manager-architect who selects an appropriate set of ordered layers and subsequently
adapts a set of explicit assumptions about each layer and the interrelationships between
layers. Each layer is an organizational construct that denotes all aspects of a

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(organizational) contextual dimension that has been conspicuously identified by OT and
design literature as well as long-range managerial practice. These contextual dimensions
are chosen by a given manager-architect in light of the scope and purpose of his or her
intended design goals. By using layering the manager effectively implements the
principle of separation of concerns and thus helps assure design correctness.

A core assumption of our approach to organization design is that the layers of

abstraction help the designer (manager-architect) define, integrate, and operationalize
relevant organizational domains in terms of their behaviors as specified by means of
organizational contracts.

Examples of classical OT contextual dimensions (aka organizational contexts) include

strategy, structure, and technology whereas modern OT contextual dimensions include
information and process.

Major principles and assumptions of HLOM

An HLOM is a logical representation of abstract layers that is characterized by the

following principles and assumptions [MSB1999]:

-There are a finite number of organizational constructs (i.e., distinct layers (types)
differentiated by their corresponding behaviors) each of which denotes a significant
organizational context identified with the help of OT or over some long period of
managerial practice (say, at least a decade).

-The highest layer in the hierarchy is known as the Environment Layer. The organization
is regarded as an element (―component‖) of the environment.

-Each layer may be characterized in terms of the systematic behavior of its elements
(“components”).

-An organization‟s behavior has both deliberate and emergent properties. (Indeed,
without the ability to identify/name emergent properties there would be little, if any need
for representing the organization in terms of (a hierarchy of) layers. For example, some
(but not all) schools of organizational theorists consider size to be an emergent
characteristic of structure. Emergent properties move design away from the machine
metaphor towards a systems metaphor.)

-Though each layer may be specified independently, upper layers of the framework are
regarded as higher-level abstractions (types) of lower layers.

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-Lower layers may be regarded as nested in higher layers.

-The scope of each layer consists of elements that may be modeled to any degree of
granularity. For example, task, activity, work cycle, and process are increasingly higher
degrees of granularity that may be selected in the Process Layer.

-If desired, any layer may be “hierarchically” decomposed into further sublayers. See
Figure 2 for an example of an organizational type referred to as the Process View (Fig.
2c) that is formed by decomposing the technology layer in the organizational type
referred to as the Systems View (Fig. 2b) into the human, information, and tool layers (in
descending order as listed).

-Reuse of any behavior specification at any level implies reuse of all its lower layer
constituents.

-There is no need to distinguish between specification and implementation. Each layer

represents a specification of the layers below it and an implementation of the layers
above it.

-Although layers are specified solely by their behavior, they may be afterward
operationalized by structural properties.

-Behavior is an integrating mechanism that is specifiable by means of contracts.

-Contracts are specified both within and between layers.

In Figure 2 we depict illustrative examples of layered organizational types. Note that

either a different choice or different ordering of layers will result in a different
organizational type. For the definition and rationale of each of the layers shown as well as
historical background and insight concerning these and other important layers and
organizational types, the reader may consult [MSB1999].

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 Environment

Strategy

Environment Environment Process

Strategy Strategy Structure

Function Process Human

Structure Structure Information

Technology Technology Tool

Classical View Systems View Process View

(a) (b) (c)

Figure 2: Different Organizational Types —Adapted from [MSB1999]

Organizational domains: hard (traditional)

A hard behavior at a given level, or involving several levels of our nested hierarchy,
can be specified via a design schema known as an organizational molecule. An
organizational molecule serves as the fundamental building block of organizational
architecture. It embodies architectural principles (e.g., modularity, reusability, separation
of concerns, etc.) that can promote design goals. Intuitively, an organization molecule is a
schema that can be used to frame organizational design decisions about a ―whole‖
(known more formally as the composite) and each of its ―parts‖ (known more formally as
the components). In organizational design based on a hard architecture, it is necessary to
give a precise and complete (at a given level of abstraction) form to our intuition. In our
approach to organization design, the hard molecule arises from the more general notion
of a behavioral category known as a managed collection: a group of elements and their
relationships constrained as a group. It is thus a behavioral category where the
relationships between the elements are predefined and, in addition, the group is
identifiable as a single element. The relationships may apply to a single situation or to a
generalization of similar situations. Elements and situations are classified and considered
―to exist‖ at a certain level(s) of abstraction. With respect to high-level organizational
design, the most important form of a hard molecule is given by the following managed
collection (in which elements are identified with organizational components and the
situation with an organizational domain):

fit: Composition (org. domain, {org. component1,…, org. componentn})

In the above schema, the name of the association appears first—fit. ―Composition‖ is
the composition association as defined in business modeling and organization modeling.
(For a thorough description and implications of composition in organization modeling
consult [MSB1999].) In our linear formula for fit, ―org. domain‖ (the composite)
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represents an organizational domain and all the ―org. components‖ represent the
components of that domain). Note that as a result of composition there must be at least
one emergent property of ―org. domain‖; i.e., a property possessed by ―org. domain‖ but
not by any of its ―org. components‖.

Using the notion of composition, we have thus characterized a given organizational

domain through its behavior. This is tantamount to regarding a given ―org. domain‖ as a
set of behaviors, each of which corresponds to a particular interaction of its components.
Thus, for example, a hard process molecule can be given in linear notation as follows:

work: Composition (process, {human, structure, information, tool})

Thus, as shown below, a Performance Review may be regarded as an organization

specific process that is an instantiation of the more generic ―work" specification (a
composition between the process domain and the set of its components: human, structure,
information, and tool).

Pro ce ssTaskC om pon en t

Proce ssDo main Stru cture Huma n Info rm ation Too l
Perform anceR eview La teral Employe eG o a ls&O bjectives Perfo rmanceRe viewdocument
Supervisor Deve lopmentPlan

Figure 3. Performance Review Process Components

The iterative process of successively adding information to a design (e.g., a process

specification) sufficient to make an implementation (choice) is known as refinement. As
discussed in [MSSB2008] refinement is a series of design decisions where each decision
adds information to a prior, higher level decision such that managerial choice is
facilitated. Through the refinement process a managerial style emerges. As an illustration
many organizations rely on standards at various refinement levels to help reduce
managerial choice. In effect, the table above only reflects a first step in the refinement
process.

Organizational domains: soft (nontraditional)

In organizational design of soft domains we do not focus on creating and satisfying a

formal logical specification. Instead our motivation is to arrive at an acceptable
agreement (with a relational or psychological contract) or to satisfy a task requirement
(knowledge contract). For soft architectural design purposes, we may think of a soft
molecule as being a design construct with a loose emphasis on logic but a heavy

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emphasis on commitment. It is used to describe management intention or
implementation. Although a ―soft domain‖5 cannot be designed by a progressive
refinement process, it may be framed at a higher level of abstract in the same manner as a
―hard molecule‖ and its design can be subject to a limited amount of refinement.

The process of establishing an employment contract as shown in Figure 4 may be

understood as an interaction over time between structure, human, information, and tool
components. Figure 4 reveals an initial refinement of the process molecule to establish an
employment contract. Our soft molecule helps us to investigate the situational ―facts‖ as
they develop and unfold through psychological, social, or cognitive ―processes‖ that
underlie the establishment, maintenance, and evolution of soft contracts.

The information component in this example represents interpretative information or

―what is in the heads‖ of the persons involved in the process as well as explicit job
requirements.

Process Task Component

Process Domain Structure Human Information Tool
Establishing an Lateral Employee Job requirements Mission statement
Employment Contract Employer Job demands Company cultural statements
Past experiences Employee training programs
Figure 4. Interaction for Establishing Employment Contract

Comparison of Contracts for Hard and Soft Domains

In Table 1 we provide a selected set of distinguishing characteristics between hard and
soft contracts. The specifics of the table are based on the works of ([MSB1999],
[R1995], and [MG2001]). The characteristics shown in the table should not be interpreted
as exact, but rather as guides for helping the manager-architect make a judgment as to the
type of contract to be considered. (According to both [MG2001] and [MSSB2008] there
is a hardness-softness contract continuum.) Certain terms used in the table are explained
in the text following the table and in endnotes 6-12.

To begin, hard contracts are precise, explicitly defined relationships arrived at using
early knowledge binding6. Soft contracts, on the other hand, are imprecise, tacit in nature
and are arrived at using late knowledge binding7. Hard contracts tend to be transactional
perhaps being embedded within a relational context. Soft contracts are predominantly
relational with perhaps some degree of hardness. Hard contracts tend to be finite, that is,
they have a specified end while having a wide range of duration. Soft contracts tend to be

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open-ended and long in duration. Hard contracts usually assume transactions are discrete
and presentiated8. Soft contracts typically rely on future cooperative efforts of the parties
involved. They also focus on human relations, along with a high degree of loyalty,
dynamism, commitment, and promise to another party(ies). Hard contracts are oriented
towards logic and economics, with a low degree of loyalty, have a high degree of
stability, and a sense of obligation. Hard contracts are easy to measure and test for
correctness without reference to human values. Soft contracts are about people relations
and thus are difficult to measure; they involve the whole person or organization. These
relationships are not transferable. Contract fulfillment of soft contracts is more subjective
and therefore difficult to verify. Soft contracts are emic9 in nature. They tend to define the
analytical side of human relationships. Hard contracts, are etic10 in nature. They are based
on external conditions and are characterized by discrete and possibly repeating
exchanges. Soft contracts are based on norms11, trust, and personal relationships. Soft
contracts are also enduring and interimistic12. If parties are involved, hard contracts
typically have a clear separation of roles. Soft contracts may, or may not, have a clear
separation. In some cases there may be overlapping roles. Both hard and soft contracts
produce positive exchanges but hard contracts produce outcomes with each exchange
while soft contracts produce outcomes over an extended period of time. Soft contracts
maintain flexibility through constant re-negotiation and dialogue or ―voice.‖ Hard
contracts maintain flexibility by providing exit options for the parties. Hard contracts
achieve solidarity through formal bargaining and legal enforcement.

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 Characteristic Soft Contract Pole Hard Contract Pole
Degree of Formalism Imprecise Precise
Knowledge Binding Late Early
Knowledge Characteristic Tacit Explicit
Basis for behavior Predominantly relational Transactional
Some transactional
Termination Open-ended Close-ended
Context dimensions Behavioral norms Logical
Economic
Other dimensions
Stability Dynamic Stable
Loyalty High Low
Duration Long Short
Long
Time projection Typically relies on future cooperative Usually considers transactions as
effort discrete and presentiated
Assurance Promise Obligation
Commitment
Measurability Difficult to monetize or measure Easy to measure
Degree of Involvement Whole person or organization; Specific individual or organization
Non-transferable
Type of Modeling Emic Etic
Type of Exchange Enduring Discrete
Interimistic Repeated
Adaptation based on Norms External conditions
Trust
Personal relationships
Role Integrity Overlapping Clear separation
Mutuality Positive outcomes from exchanges over Positive outcomes from each exchange
time
Flexibility By re-negotiation By the potential use of ―exit‖
Use of ―voice‖
Solidarity Commitment Arm‘s-length bargaining
Bonding Legal enforcement
Restraint of Power Voluntary Subject to limitations by the law
Conflict Resolution Informal Formal
Internal processes External processes

Table 1. Hard and Soft Contract Characteristics

They are also constrained by the limitations of the law or traditional invariants. Soft
contracts are achieved through commitment, bonding, and voluntary restraint of power.
Soft contracts typically resolve conflicts through informal and internal processes. Hard
contracts resolve conflicts through formal external processes. According to the noted
legal scholar MacNeil, all economic contracts are relational (i.e., may be embedded in a
relational contract), but for analytical purposes we may ignore the social and
psychological context in which traditional discrete economic contracts are developed
[MG2001].

Traditional Banks vs. Internet Banks in the Canadian

Financial Services Industry
Hard and soft organizational behaviors are interdependent. Appropriate soft contracts
establish and maintain social relations and promote shared ideals and beliefs that enable

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the effective application of hard contracts. On the other hand, inappropriate soft contracts
will terminate or undermine productive social relations necessary to enable the effective
applications of hard contracts. Conversely, appropriate hard contracts help make possible
the establishment of trust and performance that, in effect, create or reinforce soft
contracts. Within the organization, this creates an atmosphere and culture in which
additional new and beneficial hard contracts may be created and implemented.

Behaviors that result from implemented contracts result in organizational patterns that
are associated with organizational domains, or collections of domains. These behavior
patterns are responsible for emergent properties (e.g., new knowledge creation,
adaptability, responsiveness, growth, profitability, etc.) that result in organizational
success or failure. The patterns of a well-conceived and implemented hard architecture
result in predictability and rigor while the patterns due to a well conceived and
implemented soft architecture will not be easy to duplicate since a competitor will
recognize the emergent properties of the pattern but not the underlying pattern itself. We
thus hypothesize that a balanced architecture will produce competitive advantage since
the number of alignment threads (i.e., the ―nexus‖ of contracts), complexity, and hidden
dimensions of a balanced architecture are too difficult to duplicate.

Recently, an extensive empirical study of the Canadian financial services industry was
undertaken by Lejeune and Roehl (2003). They studied large (even bureaucratic)
Canadian financial institutions during the decade of the 1990s that focused on the
creation and implementation of the key elements of a balanced architecture [LR2003].
Specific organizational patterns and emerging characteristics of internal and external
―information flows‖ and the resulting organizational benefits (emergent characteristics)
were carefully examined. Their results support our balanced architecture hypothesis.
Contrary to common expectations in the e-industry at that time, large financial
institutions that undertook an extensive alignment of their soft and hard architectures
heavily outperformed the ―pure players‖ (virtual banks) that were only reliant on the
Internet (i.e., hard architecture).

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 Transaction Transaction Transaction
preparation completion support
Bank-environment Environment-bank Bank-bank
information flow information flow information flow

Bank Environment Bank

Improving
Speed, quality Building on
corporate
and agility the Knowledge
image

Environment Bank Bank

Figure 5. The Transaction Process as Information Flows

In July 2002, 14 domestic banks, 33 foreign bank subsidiaries, and 20 foreign bank
branches were operating in Canada (Department of Finance, 2002). Highly digitalized,
the transaction process is conceptually similar for both the bricks and mortar and the
virtual banks. The transaction process is a dynamic system which is composed of the
interplay of the three information flows. The process has three parts. The transaction
preparation (ATMs deployment, portals, advertising, merchants management, etc.)
generates corporate information (where, when, how to operate an ABM, what services are
available, etc.) to offer transaction opportunities to the customer. Using those
opportunities, a customer making, for example, a deposit at an ATM will trigger the
completion of the transaction process. The transaction support (data cleansing and
structuring, data processing, CIF updating, data warehousing, analytical tools, reports
creation, etc.) is essential for effective organizational response to new information flows.

The transaction process displays hard and soft properties. The soft dimensions refer to
informal and imprecise and/or hidden arrangements that will permit the creation of new
routines, new knowledge, more flexibility, and open information exchanges by intelligent
delivery channels supported by the local IT platform. The hard dimensions refer to the
formal, precise, and visible arrangements that must be aligned with the soft dimensions.

From our data on 5 large banks, we will present – for each information flow – three
patterns and the resulting characteristic(s) in the order of the transaction process: 1. The
transaction preparation 2. The transaction completion 3. The transaction support.

For each information flow, we will present only one pattern by summarizing the
combination of hard and soft elements. Each pattern and its observable characteristics

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will be presented using a table: On the left side, we will enter the key elements of the
hard architecture; on the right side, the key elements of the soft architecture.

Transaction preparation
In order to give customers the opportunity to provide the appropriate amount of high
quality information to the bank, the bank needs to provide a system for the customer to
provide that flow and stimulate the flow from the customer. This requires both the
physical elements like ATMs and the soft elements that present the bank‘s services to the
customer in an effective manner. The role of the external information flow is to create
both visible and invisible assets. Visible assets are in this case an electronic belt of
ATMs, POS etc. connecting the client with the bank. The invisible assets are the image
and the reputation of the bank stored in the client‘s head. From the data, we can define
the following characteristics and patterns: 1. Using customer behavior to lower costs. 2.
Improving corporate image. 3. Improving the human/machine interface. 4. The
importance of alliances. 5. Information flows targeted to appropriate consumers.

Improving corporate image

Banks can increase their visibility and their reputation by using the new technologies,
thereby distinguishing themselves in the marketplace. The bank that is now dominating
the Canadian market has been making significant investments in its electronic presence
and started the Canadian Interac network idea. The following quote from a manager at
that bank indicates how hard it was initially to see the value of these wider connections.

―The Interac idea belongs to the Bank A. The same gentleman (who initiated the ATMs
massive deployment) put forward the idea of interlinking all the bank's machines through
Interac (a shared industry network); we all thought this was crazy. Why would you give
up this natural advantage, having this very robust network, in favour of letting the
competition virtually catch up to us?” (V.-P., Network Management at the Bank A,
Toronto) Few banks made a priority of becoming a selling organization in the financial
services market. They did not see the impact of the ATMs deployment on the corporate
image. The following quote was typical: ―And then there were periods when Bank B
neglected that (electronic network) development. Others expanded successfully, to the
point where when you get ahead in that area the image is very strong and you see the
banking machines of a given financial institution everywhere” (Marketing Director at the
Bank B, Toronto). Yet when the bank sees the potential combinations that come from the
deployment of the hard and soft elements, the strategic value in additional reputation can
be significantly higher than ATM‘s alone. ―Our senior executive would love to say things
like we‟ll have 1,000 branches in the year 2000. But my notion is that until I get my
model applied against each market, maybe the number is 5,000, but they aren‟t branches,
as we understand them today. There are 5,000 doors, some electronic, some manned,
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some unmanned, some small boutiques for specialists, and some are full service flagship
heavy footprint.” (V.-P., Network Management at the Bank A, Toronto). The best
bankers have learned that the customer is no longer looking for a branch but for a
relationship supported by many ―doors‖ or delivery channels.

Contract: Improving corporate image

Hard elements Soft elements

• Multiplication of • Corporate image
the ATMs and the Enables -> of a modern and
bank logo in the progressive bank
environment, the <-Ensure
INTERAC network, effective
the automated application of
branch etc.

Figure 6. Information Flow for Transaction Preparation:

Improving Corporate Image

Transaction completion
The Canadian banks have taken advantage of the new technologies and systems to get
a flow of much richer and more reliable information about their customer base. They take
advantage of the flow of information that comes as part of the day to day use of the new
technologies by customers. But they have achieved more than the utilization of the new
individual technologies. Rather they have used them to channel the various flows into a
single conduit that allows them to receive information from a wider variety of sources
that include both traditional and new technology methods of service delivery. That
delivery network is the conduit that enables the banks to serve the entirety of the desires
of all of their customers. It is the various digital (ATMs, POS, EFT, etc.) and the physical
(branches, trust or insurance offices, regional and provincial headquarters, etc.) that
combine to form the conduit. The environmental information flows, from the
environment to the bank, are coming from the customers, the merchants, the competitors,
the regulators, and the technology suppliers. That environmental flow enables the bank to

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understand the precise nature of market segments, the products and services desired by
customers, the technology changes and competitor positions in the market. Our research
identifies the following characteristics and patterns when environmental flow is utilized
effectively: 1. Increasing knowledge of the customer. 2. Using IT to increase
responsiveness. 3. Improving service quality. 4. Speed, quality, and agility.

Speed, quality, and agility

The full utilization of the environmental information flow requires integration with the
wider IT platforms of the bank at the branch level. Combinations of CIF and other hard
and soft elements at the branch level lead to competitive advantage. As one banker put it,
―The local platform is really the lifeblood of how a bank serves their clients. Information
technology investments can‟t be limited to the CIF. Even if the banks didn't have CIF they
would need a computer platform to access their service systems. What kind of network
capability you need in terms of platforms and for decision support systems? What
emerging tools, personal computing tools do we need to develop and provide to bankers
to help them in this complex environment to deal with clients? That, I would say, raises
the need for a network is beyond the CIF.” (V.-P. Information Systems, Bank B,
Toronto)

The massive deployment of ATMs exchanging data with the CIF led to a new scenario
regarding selling techniques. Once a banker has predicted the customer's need, he has
identified a gap that the bank can fill. He may then blend the use of the CIF with the 32
self-service delivery and merchandising techniques and perhaps some very useable
graphics to present the new opportunity to the customer. The main soft element
sustaining the environmental flow is the customer relationship strategy. That strategy is
not a matter of IT investments but a matter of culture, values, and soft contracts. Another
key soft dimension is the learning capability at the organization level. In the 90‘s a bank
had to learn and to change some routines and decisions processes. The hard elements are
largely IT-based and cannot differentiate the banks in the Canadian market. But not all
the hard elements are digital: the branch redesign requires a thread of hard contracts. The
vision, the quality and the new concept deployment speed will all impact the bank image.

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 Contract: Speed, quality and agility

Hard Soft
elements Enables -> elements
• IT platforms <-Ensure • Better
and analytical effective choices,
software application decisions
processes and
of coordination

Figure 7. Information Flow for the Transaction Completion Process:

Speed, Quality, and Agility

Transaction support: The architecture of the internal information

flow
The banks‘ initial response to the new technologies and systems was to focus on
making these hard elements as effective as possible. IT people within the banks
concentrated on delivering functionality. They thought that this alone would lead to an
advantage of better data and smoother internal information flow. Yet in reality, as the
interview quotes will show, the strategy only became successful when they changed the
soft elements in their information processing architecture to work with these hard
elements. Management had an initial focus on the machine and the client card. The
bankers had not taken a product or business orientation focus before the 90‘s. Once they
realized that only the combination of hard and soft elements have value, several new
strategic questions had to be addressed in structuring the internal information flow: How
can we implement and manage the customer relationship philosophy? What will be the
most 33 successful areas for product innovation? What processes can we implement to
improve our systems both in the front and in back office? We found the following
patterns and characteristics to when we asked respondents to describe the internal
information flow: 1. Focused innovation. 2. Working together within the branch. 3.
Achieving high quality service and responsiveness. 4. Building on the knowledge using
the information flows.

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 Building on the knowledge using the information flows

In the Canadian banking industry, the growth of the internal information flow has
required all members and units to take on new roles. Take the back office, for example. It
has become a processor and router of information instead of a mere processor of
transactions. This provides an ease of connectivity between the various units that supply
information and those that use it. This organizational resource is necessary for the 37
efficient internal flows and the effective utilization of the flows that come into the
organization..

It is an essential part of the corporate software of the firm. This requires continuous
improvement and evolution of this function. As one manager put it, ―Over the next ten
years, there will be technological changes in financial institutions. Centers like this one
will be significantly reduced by, say, three quarters. A lot of manual work will eventually
be done either by the banking machine, phone services, or home computers. That said,
there will always be a small part at central operations such as this, but, there is still
going to be a major reduction that is going to happen. The branch will absorb a part of
it, banking machines will absorb a part and finally the user is going to absorb a part
too”. (Director, Processing Center, Bank B, Montreal) The system encourages employees
to create new information as well. The employees have to be continuously trained to
follow-up on the changes to operations and procedures.

Contract: Building on the Knowledge

Hard Soft
elements Enables -> elements
• Information <-Ensure • Learning and
systems and training,
technology;
effective knowledge
back-office and application creation in the
branches of back-office as
redesign in the branches

Figure 8. Information Flow for the Transaction Support Process: Building on the Knowledge

Page 18
 They also have to improve their knowledge of the customers and the new products. As
one manager put it: ―The banking machine allows us to have the employees do work that
is much more interesting for them, especially for our tellers. It‟s a way of enhancing the
value of their job behind the counter. We‟re at the stage where they‟ve gone back to
school, I have 25% of my working population that has gone back to university, at night,
on BIC (Bankers Institute of Canada) programs or whatever, in order to increase their
knowledge of certain products, because they want to get ahead in personal banking here.
All this is created because they‟ve been successful - my employees have been successful -
in directing customers to the machines”. (Regional V.-P., Bank A, Montreal) The new
information flows that are generated by IT allow units and individuals to create new
knowledge, making a kind of knowledge spiral [NT1995], once organizations are in place
to utilize all the IT technology.

Conclusion

We have presented three organizational patterns characterizing each of the three steps
of the transaction process: transaction preparation, transaction completion and transaction
support (see Figure 5). How do these patterns connect with the dynamic capabilities
story? Following Schreyögg and Kliesch (2007): ‗Capabilities are developed in the
context of organizational resource allocation which is embedded in idiosyncratic social
structures. On this basis capabilities are conceived as distinct behavioral patterns, which
are complex in nature involving both formal and informal processes‟ [SK2007]. Let us
revisit the first pattern ‗Improving Corporate Image‘. In the Bank A, the Bank with the
best corporate image, a gentleman - who also initiated the ATMs massive deployment -
put forward the idea of interlinking all the bank's machines through a shared network.
That innovation could not have happen elsewhere. Bank A is well known for its IT-
business integration enabling product and process innovation. So the reconfiguration of
its Bank-Environment information flow is idiosyncratic and involves both formal and
informal processes. Those processes can be located within the Hierarchical Layered
Approach to Organizational Design. Using the Process View (c) in Figure 2, we see
them between Strategy and Structure. In fact, the decision rights about the ATMs
investments, and locations were pushed down in the structure within the hands of the
regional directors (responsible for 3 or 4 branches) as they became also responsible for
choosing one of four generic strategies. As Teece, Pisano and Shuen wrote: ‗Change is
costly and firms must develop processes to minimize low pay-off change./…/
Decentralization and local autonomy assist these processes. Firms that have honed these
capabilities are sometimes referred to as „high-flex‟‟ [TPS1997]. That configuration of
resources allocation, planning activity, and decisions making processes can only happen
in a culture of innovation, discipline, and mutual trust.

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 Our approach offers new insights on the representation and modeling of organizational
design and strategic capabilities. The Hierarchical Layered Approach to Organizational
Design gives managers and researchers powerful tools to detect and decompose
observable patterns. The discipline of strategic management helps us to understand the
consequences of key idiosyncratic patterns on performance and competitive advantage.
Dynamic capabilities are characterized by problem-solving and complexity, practicing
and success, reliability, and time [SK2007]; they are used to describe new production
models (like the Toyota Way) and are in fact at the heart of some new concepts, like lean
construction [KV2000] where the soft contracts are key. In that sense, the Hierarchical
Layered Approach to Organizational Design contributes more to a (yet missing)
production theory than to a social theory of the organization [KV2000]. It captures the
configuration changes towards ‗highflex‘ organizations without making (information)
technology the ultimate focus.

In the end, any advances in IT technology, whether it is something as mundane as an

ATM or as pathbreaking as internet banking, can only be of strategic value if
firms are able to create distinct behavioral patterns, which are complex in nature
involving both formal and informal processes [SK2007].

1
A hard contract is a self-contained logical construct in the form of a set of explicit assertions that
precisely specify or describe a given behavior. Specifically, it is made up of four categories of assertions:
invariant, precondition, post-condition and trigger. For definitions of the preceding terms and further detail
see [K2003].
2
According to Yolles, hardness of an entity (i.e., element, situation, domain, organizational setting,
etc.) is related to the viewpoint of the manager. Entities that are classified as hard are frequently tangible;
i.e., they can be objectively defined and measured or assessed without direct reference to personal values or
human dispositions. On the other hand, softness of an entity is relative to the subjective mentality and
emotional disposition of people. Such properties as personal values, emotions, weltanshauung (i.e.,
―subjective world view‖) cannot be measured in an objective fashion. We may postulate a hard-soft
continuum to judge the degree of hardness or softness of a design element [MSSB2008].
3
Complexity of an element, situation, etc. is largely dependent on three orthogonal properties:
degree of hardness, degree of structure, and degree of certainty [Y1999].
4
As pointed out in [MSB1999, BC2004 and MSSB2008] managers are increasingly assuming the
important role of designer (or architect) as well as there more traditional roles of problem solver and
decision-maker. In this role we refer to the manager as a manager-designer or manager-architect.
5
For more complete treatment of organizational molecules (hard and soft) refer to [MSSB2008] and
[MSB1999].
6
The notions of specification and implementation characterize every system ever built. A concept
specification may assume the form of a simple goal, a complex set of criteria, a hard contract, or an implicit
understanding (soft contract). Knowledge binding refers to the degree of ―separation‖ between a
specification and its implementation. It refers to the creation and application of knowledge in a
development process. A specification is typically followed by some corresponding behavior. There may be
occasions where it is advantageous, even necessary, to maintain a long lead-time between specification and
implementation (early knowledge binding). At other times, it may be the reverse (late knowledge binding).
The dynamicity of the twenty-first century business environment necessitates that organizational designers
increasingly employ late knowledge binding in the design process. To do so they must give considerable
attention to soft domains and soft contracts.—adapted from [MSB1999, p. 236].
7
See endnote 6.

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8
To presentiate: ―to make or render present in place or time; to cause to be perceived or realized as
present.‖ 8 OED 1306 (1933). Whereas hard contracts have a time sense of presentiating the future, soft
contracts futurize the present; i.e., to the extent past, present, and future are viewed as separate, the present
is viewed in terms of planning and preparation for a future not yet arrived. Reference: [MG2001].
9
The terms emic and etic are due to noted cultural anthropologist Clifford Geertz [G1973]. Emic
(a.k.a. ―thick‖) models are complex and multidimensional; they address the ―cognitive architecture‖ of a
culture and try to ―frame‖; i.e., represent the point of view of a member of that culture. Thus, they are
suitable to be modeled by soft contracts that are relational or psychological. Etic models (a.k.a. ―thin‖)
describe and define specific human relations within a culture that define; they describe specific
relationships from the point of view of an external observer external to that society. Thus, they are suitable
to be modeled by hard contracts — [MSSB2008].
10
See endnote 9.
11
A norm may be thought of as a soft ―analog‖ for a (hard) invariant.
12
―Interimistic refers to a relational exchange that is defined as a close, collaborative, fast-
developing, short-lived exchange relationship in which companies pool their skills and/or resources to
address a transient, albeit important, business opportunity and/or threat‖—[LSH2000].

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