Many CEOs treat organizational design as an adjunct to strategy. But, as these authors argue, the CEOs who consider organizational design as the heart of a company’s strategy greatly increase their company’s returns and competitive advantage. The authors, whose recent book describes the CEO challenge as one of mobilizing minds, describe a new organizational model especially suited to pay high dividends in the digital age.
Corporate strategy, according to the classic definition, is the action you take to gain competitive advantage. Executives invest enormous energy in product designs and long-range strategic plans, many of which become obsolete as markets and competitors adapt, as social norms and regulations evolve, and as technology advances. Yet most corporate leaders overlook a golden opportunity to create durable competitive advantage and high returns for less money and at less risk. This opportunity lies in treating organizational design as the heart of a company’s strategy.
Organizational design work is hard and time consuming, and any meaningful change usually involves difficult personality issues and corporate politics. Yet corporate leaders should devote time and energy to organizational design. Executives must think holistically about designs that nurture talent and knowledge, governance structures to undo unproductive complexity, and new performance metrics, notably measuring profit per employee, that are better suited to a business environment where talent, rather than capital, is the scarce resource. The work will often take years of sustained effort to put in place but will pay off in terms of competitive advantage that rivals cannot easily copy.
If the common enemy in today’s corporation is unproductive complexity, the trick is to design the company to enable collaboration to work efficiently and effectively within the hierarchy. Our answer to this challenge involves re-designing the nuts and bolts of the organization to free up the wealth-creating power of a company’s talented, self-directed employees.
In its essence, this will require streamlining an organization’s hierarchy and learning how to grow capabilities horizontally, rather than by adding vertical layers. Workers closest to the company’s business opportunities will need to collaborate easily with one another in exchanging knowledge throughout the enterprise, and to find jobs that match their skills and development needs. And companies will need to become much better at measuring performance to be able to hold all of these people accountable and motivate them. Our recommended model has three key groups of ideas.
Ideas to manage better. The starting point is to create “one company” governance structures by establishing a “partnership” at the organization’s top ranks to run the company, while using enterprise-wide standards, protocols, and values to create an effective “one company” culture. This partnership also needs to prioritize and lead the strategic initiatives that enable the company to adapt to the continuously changing external environment.
To prevent line and support structures from becoming “silos” that prevent enterprise-wide collaboration, other design changes are required. Chief among these is streamlining the organization so that hierarchy can be used efficiently and effectively. This streamlining involves creating a simple, single backbone line that places authority at the frontline, where a company comes in direct contact with its business opportunity. This will require eliminating any matrix reporting structures. Another key in such design is to create enterprise-wide support structures that capture scale economies while maintaining or improving service levels.
Ideas to improve the flow of intangibles. Once such a streamlined, one-company organization is in place, it is possible to then introduce market mechanisms that enable the flow of intangible assets across the enterprise. These mechanisms include not just formal networks, but also talent marketplaces and knowledge marketplaces. All of these approaches are designed to enable self-directed people to work more effectively with one another across the hierarchical structures of the company.
Formal networks provide the organizational structure to harness the power of the natural communities of mutual interest. Investing in and formalizing the roles of these networks within organizations can encourage people with common interests to collaborate. Knowledge marketplaces enable a company to motivate those who create knowledge and those who seek it to exchange knowledge out of mutual self-interest. Talent marketplaces can create efficiencies by helping employees explore alternative assignments within a single organizational unit or across a vast enterprise. Talent markets enable managers to “pull” the best talent from large pools of talent, while simultaneously giving talented employees greater choice to find the job that best fits their skills and development needs.
Ideas to motivate better behaviors. The final set of ideas is aimed at modifying internal financial performance metrics and the evaluation of individuals in order to change behaviors of all the company’s professionals and managers. We believe that almost all companies are far too focused on producing accounting earnings versus creating increasing a foundation for the 21st century organization.
Foundation for the 21st Century Model
There is no question that such comprehensive design work will require a significant investment in energy and in the focus of the company’s leadership. Yet we are convinced that the opportunities to create better organizations, better aligned with the fundamentals of today’s global business environment, have never been greater. At stake are the opportunities to increase profit-per-employee and the number of employees who can work profitably together. For a large company, the value of doing so is literally in the tens of billions of dollars in increased market value.
The starting point for designing a 21st century firm is to organize the enterprise so that talented people behave as if the entire firm was a single profit center. Implicit in this statement is our belief that, going forward, the lion’s share of future profits will go to firms who can mobilize talent, and the intangibles they create, across the entire firm. If there is little opportunity (or desire) to share intangibles, and most of your employees are fungible labour whose work can be organized into “factories,” there is little need to migrate from a 20th century organizing model to the model we are proposing.
However, we believe that there are usually enormous opportunities for capturing intangibles-based economies of scope across seemingly unrelated businesses. We believe almost all large companies in almost all industries have abundant, latent opportunities to create value from talent. We believe that all large companies today have many intrinsically talented people who have knowledge, relationships, reputations, or skills that have the potential to differentiate the firm from competitors. Many of these intangibles are unique to individual firms, which provide opportunities to differentiate the goods and services they offer from the competition. Moreover, global markets are sufficiently large today that any significant, differentiating, intangible-based competitive advantages can produce large returns.
But, capturing these returns requires mobilizing the raw intangible assets in the minds of people throughout the firm and converting them into valuable networks, intellectual property, brands, and new or improved business models. In fact, making this happen will require extensive collaboration among talented professionals who work in different organizational units.
Once you accept the premise that the future profitability of winning firms relies upon extensive enterprise-wide collaboration, the corollary is that the company needs to be led as “one company.”
By one company leadership, we mean a firm whose leaders are held both individually and mutually accountable for performing in the interests of shareholders and co-workers rather than being motivated to maximize results of their own units at the expense of other units. In other words, one-company leadership is the antithesis of a silo-based organization.
Achieving “one company” leadership will require fundamentally rethinking how the senior leadership interacts. Specifically, it requires moving from an executive committee composed of senior leaders who are focused on furthering the interests of their particular lines of service, to a top team who truly shares mutual accountability for the performance of the entire company. Achieving this goal will require rethinking: 1) top team “contract” or magna carta; 2) top team as a partnership and 3) top team governance processes.
Partnership at the top
What we are proposing, in addition to having a powerful CEO and establishing firm-wide management protocols, standards, and values, is the organization of the senior people needed for the firm’s performance into a “partnership at the top.” In a large, mega-institution this may involve ten, twenty, or even thirty people.
The notion of a “team at the top” is not new. Many firms have “executive committees” or “managing committees” or “operating committees.” What is new, though, is the creation of a “partnership at the top” that can work to ensure the integrated leadership and cohesive management of “one company” while simultaneously increasing top management’s collaborative capacity.
Specifically, we propose that the top twenty or so senior leaders and managers be organized into a firm-wide governance committee that becomes accountable for driving the company’s short- and long-term performance. Many firms have senior management forums, but most often they have served as places to exchange senior management information and knowledge while decision making takes place through normal line structures. We are proposing a different kind of committee which makes its members into partners who are accountable for earnings performance and for establishing the firm’s direction.
While the concept may be adapted from a professional services partnership (e.g., law firm), this “partnership at the top” is a significantly different kind of structure. For example, the CEO will have far more direct, personal power than most “managing partners” have, since CEOs are selected by the board, not elected by partners. For example, few CEOs will need to ask for formal votes to make decisions. The CEO has more direct, personal accountability to more stakeholders than does a “managing partner.”
The need for a different, strong role for the CEO and a different approach to top-management governance is rooted in the public ownership of the company by shareholders and by differences between mega-institutions and professional firms. In a public, mega-institution, the board of directors, not the “partnership at the top,” is the top governance structure and is responsible for protecting the shareholders’ interest.
Moreover, mega-institutions not only have large numbers of self-directed professionals, but also large numbers of workers who require strong management. In a typical large professional firm, there is usually one dominant profession, and since the community of interests is often self-evident, it is relatively easy for the members of that one profession to collaborate. In contrast, a typical mega-institution, such as Citigroup, or Samsung, or Pfizer, employs large populations of diverse professionals, including software engineers, brand managers, research scientists, product managers, industrial engineers, accountants, lawyers, risk managers, strategic planners, and so forth.
Tellingly, even most very large private professional firms that have been organized as partnerships find they must become much more line managed as they grow their scale and scope and as the number of “partners” now sometimes number in the thousands. The biggest mega-institutions not only have far more professionals than even the biggest professional firms, they are usually bigger in every dimension (i.e., more revenues, more employees, more capital invested, etc.) and are far more diverse. They thereby require far greater top-down, hierarchical direction than professional firms. As a result, most members of a “partnership at the top” will have far more direct, hierarchical, personal control over their respective areas of responsibility than would partners on a management committee in a professional firm.
However, even with full recognition of these differences, we believe a “partnership at the top” approach modeled on the best practices of professional firms can have powerful advantages in organizing a mega-institution.
Top team “contract”: the Magna Carta
In 1215, King John of England was forced by his barons to create the Magna Carta, which defined the relative roles, responsibilities, and privileges of the king versus the barons and laid the foundation for the modern English nation. In effect, the barons were defining the power they could exercise within their “silos.”
What we are proposing turns this approach on its head by having the CEO bring the “barons” to the table to define and document how they are going to work together with the CEO and with each other. The difference from King John’s situation is that the board of directors and the CEO have the real power, not the barons. King John couldn’t fire a baron, but the CEO can. Moreover, the CEO has something the barons all want – they can become members of top management. But, to increase their voice over the entire firm’s direction, they must be willing to let others have a greater say on what goes on within their arena of responsibility.
To make such an approach work, the people at the top must contract with one another and define how such a “partnership at the top” is to work. In most firms where we’ve worked, ambiguity about the roles and decision-making authorities winds up creating unproductive complexity (e.g., corporate politics), which permeates the entire firm. When different leaders pursue their own, different approaches to organizing work, there are no enterprise-wide standards of “how we work around here.”
This is particularly true in a “partnership-at-the-top” approach, since most people who grew up in a 20th century firm have no experience operating in such a manner. If badly implemented, an attempt to create a “partnership-at-the-top” can make an already dysfunctional organization worse. Without very clear, detailed definitions of how a top-of-the-house collaborative organization is to work, it will not be effective because the people in the room will have different models of how to behave with one another. Without clarity of purpose, and definitions of the behaviors expected, efforts to create a group governance approach have the potential to render accountability irrelevant or meaningless, as decisions become “made by committee” where no one takes ownership for results or create chaos as different managers exercise personal power to undercut “one company” governance decisions. Or, confusion over decision-making roles and accountabilities can cause enormous amounts of wasted time in endless meetings with no resolution of the issues. Such ambiguity over how the organization is to work creates ample room for everyone to make up their own rules, which breaks down trust.
Another problem is that top managers other than the CEO, such as the president or the vice-chairman, may not like the notion of expanding the size of the top management group. In our experience, senior leaders who are not a part of top management generally like the idea of a “partnership-at-the-top” because it will increase their own say in how the firm is run. However, existing top managers other than the CEO may not like diluting their own power. If they feel they can get away with it, they may well use the ambiguity over how the organization is to work to either actively or passively undermine the effectiveness of a “partnership at the top” approach by simply “backdooring” decisions through the normal line structure, rather than having them surfaced to the newly formed governance committee
Top team governance process
A “partnership-at-the-top” starts with a parent governance committee, chaired by the CEO, and which has overall responsibility for all of the major firm-wide decisions that cross over the responsibilities of individual managers. In particular, we believe such a parent governance committee should take on mutual accountability for the continuous delivery of current and future earnings, the sponsorship of corporate-wide strategic initiatives, and the allocation of resources. Some companies may choose to divide the top committee into two committees in order to keep the number of people in the room to a smaller number. For example, you could have one committee focus on operations and the other on strategy under the leadership of the CEO. To make such a dual-committee approach work, the key backbone line top executives and the CEO and president usually will need to be on both committees to ensure seamless integration at the top.
One element of design that requires particular attention is the creation of a detailed corporate calendar (perhaps on a rolling 18-month basis) to ensure that the time of this top management group is well spent. Such a calendar serves both to ensure that everyone who needs to be in the room makes the meetings, but also frees members to spend the rest of their time as they see fit. Most large, well-run firms usually have some form of corporate calendar, particularly for the budgeting and strategic planning processes, but what we are advocating is somewhat different.
Putting pressure on hierarchical leaders to change their mindset to one of mutual accountability is critical to ensuring the success of all the elements in our recommended model. For this reason, we believe that one-company governance is the critical first step in redesigning the organization for the digital age.
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