About the VSM

The Viable System Model was developed in the early 1970s by British cyberneticist Stafford Beer, and had an important first application to the socialist government of Salvador Allende in Chile. Allende wanted to develop a functional control for nationalized mining and banking industries of the country.

When Allende’s government came to a tragic end in 1973 with a U.S.-directed coup, acceptance of the model was limited to niches. Stafford Beer, however, continued to work on the model and systems theory modeling of organizations and, based on that, on innovative facilitation techniques, especially syntegration.

We will find in the VSM a lot of the terms that play a role in the Lean and Agile environment.

We will also find a parallel world: the VSM emerged in the early 1970s in the context of cybernetics. It anticipates a lot of the principles that have been (re)developed in agile development. As we will see, it has a broader basis and some scientific foundation.

Our journey also takes us into the field of systems theory, particularly cybernetics. While there are many different variants of systems theory, cybernetics is sort of the origin, the root of the tree. Cybernetics in general is the study of command and control. The key element to this is feedback and since its development in the 1940s it has gained widespread use in fields ranging from biology to psychology, sociology to military engineering.

Stafford Beer came up with the idea of applying the principles of direction, feedback, and control to organizations. In the process, the VSM was created.

## Talking about systems

We talk a lot about systems here – occurring in different contexts and representing different focalizations:

• System as a non-decomposable unit, i.e. the system can only be understood as a unit and is more than the sum of the components
• system in interaction with its environment, or if you will, its ecological niche.

One such model that applies cybernetic principles of governance to organizations and improves organizational sustainability and viability is the Viable System Model (VSM). Developed by Stafford Beer, VSM provides a comprehensive framework that enables organizations to understand and optimize their internal decision-making and information processes.

Viable – Survival and Identity

Viable literally means viable. In the context of cybernetics, however, more is meant by it.

What is meant is that the organization (or organism) as a whole retains its identity. An example of the opposite would be a nation that disintegrates, leaving only a loose collection of gangs and refugees.

Therefore, conversely, we can say that a system wants to preserve its identity – and that in the case of organizations, we need to find a place to deal with preservation as well as evolve it as the environment (or niche) changes.

Viable – viable and sustainable

We said at the beginning that you have to look at a system and its relevant environment – or niche – as a whole.

That is, a system is only viable if its environment persists. By taking an integrated view of the environment (or business ecosystem), the term “viable” becomes synonymous with “sustainable.”

This brings us strongly into the sustainability debate. That’s not just true of the focus we’re traveling in here – it doesn’t get much clearer when we look at applications in public domains like healthcare or education system design

As a consequence, we will see that we closely integrate the consideration of the environment, especially the customers, but also the other stakeholders.

Viable – Adaptive and resilient

Viable is found in a term field that includes several similar terms:

• Resilient: can handle disruptions and maintain its function
• Adaptive: can adapt its function to new circumstances
• two sides of the same coin, in practice in organizations a constant challenge: translate this into operations and innovation and it immediately becomes clear that we are dealing with goals (and to some extent people / functions) which on the one hand are both necessary for survival, but which on the other hand constantly produce options for action which are in conflict with each other
• both are part of a bigger picture: learning ability
• we will further illuminate these two functions (and their interaction)
• Adaptation and resilience are the prerequisites for self-organization, self-organization ensures adaptivity and resilience

What does a viable organization need

A learning organization is a co-evolving configuration of roles and tasks, which is mutually agreed upon and revised each time it is required, by its members, to adapt to a continuously changing environment
— Angela Espinosa

Now we have opened a huge barrel: adaptive and resilient, self-organization, stability and identity: – we need an operational system and responsibilities to deal with the environment and its variety – and we need – To be able to reconcile all this, we introduce the subsystems of the VSM system right away. Before that, let’s dwell a bit on the requirements that arise for a viable organization.

• Operational roles that are able to deal with the diversity of their local niches
• Roles in a metasystem (or management) that are capable of handling the diversity of operations
• the adaptive and resilient organization as a whole, capable of dealing with the diversity of the environment

VSM Vocabulary

Systems and channels

In the VSM vocabulary there are different systems – systems 1 to 5 – and a number of channels or types of channels between these systems. The notation is confusing at first, because individual systems do not always mean parts of the organization; they can also denote points of view or perspectives.

There is also more to the channels than first appears, we will elaborate on that as well.

The different systems are:

• System 1: The operational system, productive work, i.e. in our case the delivery of batteries and solar cells.
• System 2: daily coordination
• System 3: “Inside and Now”. Planning and organization of work
• System 4: “Outside and Then”: New development, market research, new developments
• System 5: Identity, Prioritization: the ultimate Boss

In addition

• System 3*(three star): Interventions

The most important system is system 1 – in Lean this corresponds to the value creation process. We will therefore start by looking at system 1.

To make the consideration complete, it is necessary to add other aspects and plan the communication channels to them, i.e.

• Coordination between parallel units (2). That includes things as diverse as secretarial services, standards of conduct
• The stabilizing aspects (3, in VSM-speak: “inside and now”) such as controlling, compliance, marketing, which ensure an effective and stable organization
• The future-oriented aspects (4, in VSM-speak “outward and future”) that help the organization prepare for future challenges
• Maintaining identity (5), moderating between the conflicting demands of the above aspects and keeping the overall system in mind.

Systems 1 and two represent the operational work, while systems 3 through 5 form the meta-system or senior management. It is important to keep in mind when looking at each system that we are talking about functions, not roles or people. The VSM diagram should not be read as an organizational chart, but instead as a network of decision-making and communication paths.A better metaphor than organizational chart would be to compare the VSM diagram to a nervous system.

The channels include

• Vertical channels
• Horizontal channels
• the algedonian canal

Fig. 1: VSM complete

In focus

The focus is now on the company as a whole and we want to look at how it needs to be structured in order to function as a viable system like the old team.

This means that the three areas must each be viable individually as well as the overall system (connoisseurs of Lean will easily recognize the pattern and draw the parallel to three value streams).

Added are some new areas that are part of a complete viable system.

We are now concentrating on the new overall system, our System in Focus. For some purposes, we also need to consider the subsystems (S-1) and the parent system (S+1).

System in Focus (SiF): the system or level of abstraction we are designing. S(-1): the contained sub-organizations S(+1): the parent organization

Only systems 1 must be viable

An important note is in order here: only systems 1 must be viable and consequently can be shown again as a complete VSM in an “exploded view”. In particular, this does not apply to systems 3 to 5 or their functional elements such as marketing or controlling. On the contrary, if these functions develop a life of their own and their own objectives, this is a dysfunction in the organization and the various objectives will sooner or later come into conflict with each other.

VSM is fractal

Consequently, VSM can be used to describe the different levels of an organization using the same methods and to gain insights from them. This opens up an immense potential of in-depth analysis and design opportunities.

System 1: Environment, Operation, Management

The operational system (System 1)

The most important aspect of a system is what it does. It is roughly equivalent to what the value stream or value chain is in Lean.

The system is what it does. Stafford Beer

In VSM we call this aspect the system 1, the operational system. It describes the direct responsibility for the delivery of a specific service or product.

System 1 is related to its environment and system 1 needs some method of organizing itself: its control system (or metasystem or management). We describe the connection between system 1 and the environment or its control system using communication channels.

Understanding and properly designing communication channels is almost more important than the individual systems, as they essentially determine the functioning of the system.

The products or services – or target groups, markets or other segmentations may each require their own operational system. Multiple operational systems can – and typically will – exist in an organization.

In the illustrations, one can also already observe the beginning of its own graphic language: in fact, the operational system is represented as an oval, the control, meta or management system as a rectangle, and the relevant environment – or the niche of the ecosystem – as an amoeba-like shape.

First insights

A first consideration would be the following diagram:

fig(vsm-0)

The elements in it are – The environment, e.g., customers, competition, or government regulations – The operational system as the defining view (“the system is what it does”) – The control system or local organization. It means preferably self-organization, as far as that is possible, but in principle includes any kind of organization.

It shows besides the relations – between the environment and the operative system, as two directed communication channels – between the operative system and the control system, also as two communication channels.

fig(vsm-1)

System 2: Information and coordination

System 2: Daily coordination

The tasks of system 2 include coordination, i.e. avoiding (“damping”) oscillations, ensuring coherence and settling, or better avoiding, conflicts while preserving the autonomy of the operational systems as best as possible.

System 2 is also committed to the goal of strengthening the individual operating units. Specifically, this includes the task of strengthening them in their ability to organize themselves.

System 2 is not an entity in the company, it is a whole set of things that support the operational units and ensure stability, for example:

Software systems

• Room booking

• Software version management

Roles of groups and individuals

• Secretariat

• Steering Committees
• Moderators and coaches

Documents

• Guidelines
• Corporate design standards and templates

Meetings

• Planning and review meeting
• Retrospectives

Culture

• Language and manners
• Standards

System 3: Optimization and auditing

Reflection, improvement, synergies

System 3 can best be described as operational management. It is based on the ability of each system 1 to self-organize and coordinate with the support of the mechanisms of system 2.

System 3 has the task of providing an overarching view and initiating improvements from this overall view. To do this, it must communicate with system 2 and with the local control functions of each system 1.

Stafford Beer describes this system as “Inside an Now”: it takes care of the inner workings and functioning of the organization and drives improvements.

System 3 thus creates the environment and context for effective collaboration between the individual operational systeme.

The channels between system 3 and systems 1

Operational systems organize themselves as much as possible and use System 2 services for coordination. This is the most effective way and you can derive this priority directly from Ashby’s law. One may ask why an overarching operational management is then still necessary.

System 3 is necessary because pure self-organization between operational systems is not always sufficient. When conflicts over resources arise or general policies need to be implemented, intervention may be necessary. To this end, system 3 has two vertical channels to systems 1: first, the resource negotiation and accountability channel, and second, the intervention channel.

Resource Bargaining and Accountability. Through this channel, goals are discussed and planning is coordinated, and the appropriate budgets or resources are allocated. It also serves to claim accountability over the resources used.

Corporate Intervention – Central Interventions. This channel can be used to limit the autonomy of operational systems. In other words, it is a channel for explicit instructions that is used only in exceptional cases – but it must be present for emergencies.

The functional organization of the company

In an organization there are many functions that strengthen the synergy in the organization and that embody a concrete implementation of the company’s System 3:

• Finance
• Marketing Management
• Finance
• Controlling.

It is obvious to classify these functions as a whole in system 3. However, if you take a closer look, the picture becomes more differentiated. For example, for marketing we will find functions in different places: in system 3, system 2, the communication channel with the customer and more.

This is based on the fact that the cybernetic view with decisions, control and communication brings other structures to the fore than business administration with the organizational structure and process organization. This orthogonal view is an essential element for the strength that lies in the use of VSM.

We will explore the relationships in the chapter (organigram) in more detail and make intensive use of the mapping between VSM and SAFe – structures….

Research and auditing: the system 3*

Another mechanism is the system 3* (“three star”). System 3* is a pure research mechanism by which System 3 collects direct unfiltered information about operational Systems 1 in as timely a manner as possible.

Examples of System 3* mechanisms include:

• Gemba or “managing by walking around
• Revision
• Direct contact with customers
• Surveys

The function of this system is twofold: first, it prevents blind spots in central operational management caused by conscious or unconscious omission of information in reports. Second, it provides a richer context for interpreting facts when management has direct ground contact and a view out of their own silo.

System 4: Reconnaissance

The function of the System 4

With the control systems discussed so far, we have a functioning organization – if there were no changes in the environment. Systems 1-3 provide the mechanisms to stabilize a company and keep it running. But we have yet to see a provision that responds to, or even anticipates and nudges, deep change.

We find these provisions in system 4.

While system 3 turns inward and has as its focus the current activities and the existing organization, system 4 turns its gaze outward and into the future – in the words of Stafford Beer, it is the system “Outside and Then“.

Examples of System 4 functions include

• Research and development
• Observation of the competition
• Strategic personnel planning
• Working in associations and networks
• Strategy development

At this point, at the latest, it becomes clear that each of these examples has both professional and financial consequences and thus represents a cross-cutting function through the typical division of labor in traditional organizations.

Possible futures

One specific concept is still worth mentioning: one talks about a specific extension of the environment, the “possible futures”. This is similar to working in scenarios, but it is a useful perspective to explicitly place these futures in the context of the environment or ecosystem….

Conflicts and complementary views: System 3 and 4

The diagram shows the strong interactions between systems 3 and 4, which in a way represent complementary views: on the one hand, the forces of the existing that want to keep the organization running – that is the core function of the company and, on the other hand, the admonishers that something has to change because otherwise there is a threat of standstill and loss of significance.

The operational side – System 3 – points out that, after all, they make the money, and the side of the change agents warns that the others are sleeping through the future. Both have valid points, and the productive tension results in a healthy mix of stability and advancement.

But it can also be that this conflict escalates or that factions form that dig in and no longer communicate with each other. Then a moderator becomes necessary to balance the different interests. This is where System 5 comes into play.

System 5: Identity

The System 5 is the ultimate moderator, boss, decision maker.

Its function is to represent a north star, a general direction, an identity.

This then provides a basis for moderating conflicts, for example, between short-term goals of operational management, System 3, and longer-term goals, System 4.

If you look at the VSM diagram, you can see that system 5 has access to systems 3 and 4, plus the channels that connect them. It represents the logical fact that identity must resonate in all decisions.

The system also has an ultimate veto or directive function to ensure that the global purpose is not thwarted by local decisions and actions. For it to perform this function safely, another channel is needed: the Algedonian channel.

The Algedonian Canal

Algedonic is an artificial word of the VSM and it is a mixture of pain and reward.

It ensures that threatening situations or extraordinary opportunities reach senior management in real time and that they can respond accordingly.

Dealing with options

• In cybernetics, the central insight of Ashby’s law[^1] of required variety: “The greater the variety (or options) of a system, the more it can reduce the variety (or amount of surprises) of its environment by control.”
• that is: fast enough and enough options
• Self-organization locally and on site

Variety and Ashby’s Law

In cybernetics, the concept of variety by W.Ross Ashby refers to the set of different elements of a system, e.g., states or messages. It is, casually speaking, a measure of how many different “surprises” can be expected. The higher this number is, the larger the recipient’s repertoire of responses must be. In cybernetics speak this means: the inherent variety of the receiver, i.e. the set of its components and resources, must be large enough to handle the variety of the communication channel.

The greater the variety of a system, the more it can reduce the variety of its environment by control. Ashby’s Law

In VSM, we talk about the regulation of variety. This means, for example, filtering messages in a channel to limit the variety from a level that the receiver can handle.

Variety plays an important role in cybernetics, both as a theoretical concept for understanding complexity, organization, and regulation in systems and as a useful tool for conceptualizing systems.

The VSM for Agilists

A new view of a team

The first team

We start with a first team and will guide step by step the reflection on the design of its work and its organization.

Those familiar with agile methods will find themselves in familiar territory at some points. However, in some places we will disappoint them: we will introduce practices step by step, but we will introduce them one by one, not using the known packages (aka methods) – and will make some unexpected detours.

We will also introduce in the course of this introduction a specific vocabulary that comes from systems theory, more specifically organizational cybernetics. This is richer and more precise than the agile terms and has a solid theoretical foundation. It also has the advantage that it helps to distinguish very clearly between the function in the system (e.g. coordination) and a concrete implementation (e.g. as a role like Team Manager).

Don’t worry, we’ll also provide a mapping to both the agile world and the world of organizational development and design later.

The first mission

Kenzo, one of our founders was involved in the development of a groundbreaking new battery at university. It is a battery in which the energy is stored in a liquid, therefore the battery can be scaled quite easily and reach quite high capacities. It is true that it is not as powerful per kilo of liquid as, for example, lithium batteries used in cars. But on the other hand, it is much cheaper, more robust and durable. It is ideal for storing energy from wind turbines or solar panels and would improve the availability and overall price of green electricity.

This is our first mission: we want to build and sell such flow batteries.

Customers and other stakeholders

Before we frantically start building the first batteries or planning our work, we first want to learn more about the environment:

• who are possible customers
• what is the “job to be done”, i.e. the need of these customers, what problem should the product solve
• who is already in this field, i.e. who is direct competition
• what alternatives are there – what other stakeholders are involved, e.g. licensing authorities

fig(vam1)

You can see several things in this illustration:

• the beginnings of a description of our environment into a kind of cloud form. This is to indicate that we can only ever try to grasp this environment, but that this must always remain incomplete
• our so far still very unspecified team, simply drawn as a circle. In the course of the description, this becomes the operational system.
• the communication channel as a double arrow in both directions: in the direction of our team go e.g. orders (and much more), in the other direction reach the customers e.g. deliveries, ads, social media posts (and much more).

Operational chaos

So, we put out the first posts on social media and Kenzo called some old colleagues from college and it looks like we hit a nerve. The first requests for prototypes trickle in, inquiries from the media pile up, and communication on social media quickly becomes unmanageable. At the same time, it is clear that along with high expectations, there are also some misconceptions about our capabilities and products going around in the world.

Our team is stressed: everyone feels responsible for everything and talks everywhere, literally tearing themselves apart between productive work, trying out new ideas, customer calls and coordinating with other colleagues.

Time for some organization.

fig(vam2)

First, we need to do something about being inundated with requests of every kind. To do this, we need to build some kind of filter into the communication channel that reduces the number of unwanted inputs. This is the zigzag line on the input side of the communication channel.

Conversely, we do not need a filter for the output side – we can control which messages we put into the channel ourselves. Rather, we need some kind of amplifier to ensure that the important messages are better received by customers. The amplifier is symbolized by the triangle in the output channel.

And third, the team needs to get some kind of management – well understood a management, that doesn’t have to be synonymous with a manager. On the contrary, it can also mean that the team has to organize itself. As above, we are talking first about the function and not yet about a particular way to implement it. We will see later which parameters determine the best solution.

Our team is not yet ready to name or hire a manager. Instead, they first examine what types of tasks occur over time. They collect and document the task over two weeks (on slips of paper they did their agile homework) and then come together, cluster similar tasks, and then create a slip box for each cluster.

The following note boxes were created:

1. Operational, productive work, i.e. the delivery of batteries
2. Organization and daily coordination of work
3. Improvement and optimization
4. Provide orientation, direction
5. Set standards, prioritization

In addition, there are still some tasks left for which the team has not yet found a suitable box – but they postpone the solution of these puzzles until the time when it becomes urgent:

• Write invoices
• Monitor and respond to social media posts
• Accounting
• Human resources, e.g. hiring and salaries

So far, we have found some concepts that are fundamental to the VSM:

• The team as a producing unit
  • in its environment
  • with any kind of management
• Communication channels with
  • Filter
  • Amplifier

We will look at the first group of terms in more detail. The team’s note boxes are a great help here: they help focus on task types and avoid assigning certain tasks to a person or role too early.

VSM describes five systems with specific tasks – this is the motivation behind the metaphor of slip boxes, four levels of management and various specific communication channels. We are introducing these concepts step by step.

VSM Vocabulary

The first team stands

Now we have a team that works, is embedded in its environment, with a defined purpose, and that can secure its future. It is a “viable system.”

Viable: can survive sustainably and secure its identity, i.e. its raison d’être

There are still some components missing from the diagram – but these are easier to assign if we consider a larger organization with several areas, and we defer these aspects to the next chapter.

We also haven’t yet talked about specific implementations of the features, and we haven’t yet tested whether these note boxes are still a viable structuring when we scale the structures.

We scale

To check how far the clusters of tasks carry, we revisit our team after a year. They have been successful, they have become a real company and a lot has happened – battery production has expanded, there are now 80 people involved in production and delivery. – Two separate markets have now emerged: – One is the use as stabilizers for the grid, as intermediate storage for solar and wind plants – Private investors such as real estate operators or companies that want to secure their own power supply – Another 10 are working on new developments and improvements. – In addition to batteries, the company has begun to work on solar cells. As with the batteries, they found an innovative approach at a university and brought the inventors on board as new colleagues – Some new colleagues work in the other areas that were not structured at the beginning. This has become a real problem and a risk because of the growth. Structures are created without a plan and the proliferation is now seriously hindering not only further growth, but the proper functioning of the company.

Therefore, we will try to present the structures with the task clusters of the team from the previous section once again.

This time we use the vocabulary from the Viable System Model and add the elements that the VSM provides for a complete scaled system.

The systems 1

Back to our company.

The picture has become more complex. On the one hand, we now find three “Systems 1”: – Produce batteries for grid stabilization – Produce batteries for private investors – Produce solar cells

Each of these systems 1 has a specific environment, an operational part, and a meta-function or management function that organizes it.

The question arises why there are three such systems and whether a division into two areas would not achieve better efficiency. We can assume that the requirements of different customers are so different that life will be easier if the different battery variants, delivery times, order forms, certifications, etc. are realized in different organizational units. In VSM-speak one would say: the variety of the environment is lower and therefore also the necessary variety of the system1.

Cutting the individual systems “S-1” is an important step in the analysis or design of a system. The inclusion of the environment and its variety are an important criterion for the design.

Loose coupling, but coupling

If all operational units (systems 1) are to be viable systems, this means they operate as autonomously as possible.

This has many advantages: the units can work in a more focused manner, make decisions more quickly and develop their competencies. In VSM-speak: they have to contend with a lower variety of their environment.

In practice, however, this autonomy is not limitless:

• Conflicts. the environments overlap: dealing with common customers has to be coordinated and approval authorities like the German TÜV may react humorlessly when they receive different inconsistent documents.
• Incoherence. the units optimize for themselves, they take their own direction for working methods and product developments – but this need not always be in the interest of the other units. As a result, the coherence of the company suffers.
• Oscillations. In the event of unforeseen events such as parts shortages following a supplier failure, the response must be coordinated. For example, if one department hastily redesigns a product to incorporate alternative components, the product may become incompatible with services or products from another department. This affects the stability of the overall system – in VSM we speak of oscillations.

One speaks of the dilemma of autonomy versus cohesion. To manage this dilemma, mechanisms are needed to ensure this balance between autonomy and coherence. These mechanisms are called System 2 in VSM.