Traditional management implies someone higher in the hierarchy is managing my performance. People can only manage their own performance. The empowered and adaptive management model requires moving from traditional command-and-control to a much more self-regulating and self-organizing model. Authority, responsibility and decision-making should be transferred to front line units that become value centers with ideally responsibility for their own P&L accounts.
This means abandoning centralizing and divisive acts such as the annual budget process and individual incentives. Targets should change from short-term and fixed to medium-term and aspirational relative to the competition and the markets. Resources should be allocated as and when needed, not once a year. Performance would be reviewed by monitoring the few key performance indicators from each value center.
The traditional organization model views the organization as an obedient machine or a mechanical system which is made up of replaceable parts with predictable “cause-and-effect” relationships. This view has led to the traditional management model, commonly known as ‘command and control’, where strategy is translated into targets, budgets and incentives that are cascaded down the organization and direct and dictate what people do. Each division, function and department is then accountable for meeting their numbers and must explain any variances from plan to a higher authority. Johnson and Bröms describe this as “managing by results”, driving work with financial goals[i].
The command and control model is under pressure for many reasons. The switch in power from the supply chain to the demand chain (including marketers, consumers, designers, and retailers) is forcing all suppliers of goods and services to be more innovative in order to meet changing customer needs. The life cycles of products, strategies and business models are shrinking thus placing greater pressure on the speed of response and continuous renewal of strategies. Entry costs into many different markets are falling as more products and services are delivered digitally. And innovation has moved from the exclusivity of the R&D department to anyone, anywhere, anytime.
Conventional wisdom states that shareholders own the public companies in which they invest. However, Cornell Law School's Prof Lynn Stout maintains that shareholders do not own corporations, they own a security commonly called stock. Therefore the notion that directors must strive to always maximize shareholder value is wrong[ii]. The command-and-control model is failing because short-term shareholder value as a sole objective has become an obsession; aggressive targets and incentives encourage wrong behaviors; central control is more difficult, expensive and slow to respond; trust has declined and employees are neither engaged nor empowered.
Centralized, inflexible (command and control) organizations find it difficult to compete in this world of fast adaptation, continuous innovation and customer participation. They were designed for producing affordable products and services through standard processes as efficiently as possible. But being efficient on its own is no longer a sustainable competitive position in the global economy. Everyone now works in a global labor force and there will always be someone cheaper than you. So the key to competitive advantage is adaptability, flexibility and differentiation.
In the wake of the recent economic crisis most organizations acted immediately by cutting discretionary spending, aggressively managing cash flows, laying off employees, etc. While seemingly prudent these actions have not led to the short-term earnings expected by the analysts. Organizations can no longer reliably deliver predicted earnings, events change too fast and unpredictably for this. The objective must now be to ensure the long-term survival and health of the organization, not quarterly earnings.
[i] Johnson, H.T., Bröms, A., (2000) Profit Beyond Measure, London, Nicholas Brealey Publishing. p. 2
[ii] Stout, L. (2012) Whose Company Is It?, CFO Magazine, November 2012
Instead of seeing organizations as mechanical systems with simple cause-and-effect relationships we should view them as complex adaptive systems. The traditional command-and-control model cannot be effective, except in a very stable environment which rarely exists in today’s fast changing, turbulent environment. The only way that complex adaptive organizations can be managed is through exploiting the capacity of a system for self-organization and self-regulation – we need to adopt an organic model. Johnson and Bröms[i] describe this as “managing by means”; organizing the work systematically and they state that this was framed many years ago by W. Edwards Deming as follows: “If you have a stable system, then there is no use to specify a goal. You will get whatever the system will deliver. A goal beyond the capability of the system will not be reached. If you have not a stable system, then there is … no point in setting a goal. There is no way to know what the system will produce: it has no capability”[ii]. There are four principles that can be used as the foundation stones of an empowered and adaptive organization model:
- Organizations are whole systems (the whole system rather than the parts determines performance)
- Organizations are webs of relationships that are unpredictable (rather than cause-and-effect relationships that we think are predictable)
- Organizations are self-organizing and self-regulating (they don’t require central coordination and control)
- Change is best seen as integrative and adaptive rather than project-driven and reactive
This in turn leads to an adaptive management model. Figure 1 shows how contrasts the two organization and management models:
The organization as an obedient machine takes us down the pathway of shareholder value maximization; short-term targets; individual financial incentives; employee contracts; central planning, coordination and control; central resource allocations and budgetary control – managing by results.
The alternative view that organizations are complex adaptive systems takes us down a different pathway in which the organization has a noble purpose above and beyond shareholder value. The goal is to adapt and endure and even thrive and grow by addressing the needs and desires of all the stakeholders. This creates value for the shareholders, but also provides meaningful benefits to employees, customers and society. In the empowered and adaptive model people are motivated by self-fulfillment rather than money; people work best in self-managed teams; information is unbounded and transparent; and control comes from fast, frequent feedback – managing by means.
[i] Johnson, H.T., Bröms, A., (2000) Profit Beyond Measure, London, Nicholas Brealey Publishing. p. 2
[ii] Deming, W.E., (2000) Out of the Crisis. Cambridge, MA; MIT Press. P. 76
The major change is that the traditional organizational pyramid is turned on its side to face the customer figure 2:
After all it is the customers that produce the income that hopefully generates sustainable profits and shareholder returns. Accountability flows from left to right across three teams: The executive team is the C-level suite responsible for setting business purpose, high-level goals and strategic direction as well as challenging other teams to maximize their performance. Support services teams such as design, production, logistics, supply chain, finance, human resources, marketing and information technology are responsible for servicing and supporting value centers. Value center teams are responsible for formulating and executing strategy and for continuous improving their performance against peers. They invariably have their own profit and loss accounts and are typically created around businesses/markets, brands/product groups and regions/countries. In knowledge- and service-based organizations value is no longer created in the R&D department or head office suite. It is created in the ‘value zone’, the interface between a company and its customers.[i]
The traditional model focuses almost exclusively on the shareholder. The empowered and adaptive model instead focuses on the customers, employees and shareholders as well as the other stakeholders.
[i] Hope, J., Bunce, P., and Röösli, F. (2011) The Leader’s Dilemma: How to build and empowered organization without losing control. San Francisco, Jossey -Bass
The management culture of too many organizations is trapped in a time warp of Industrial Age thinking. However, business leaders can transform their organizations reasonably quickly if they replace the greed-induced “win-at-all-costs” management culture with one that promotes accountability, transparency, trust, collaboration and fairness. But how do you change a management culture? It certainly doesn’t exist in a vacuum. Nor can you buy a new “culture” from a consulting firm or even change it easily by introducing a new CEO. While there is no “blueprint”, “recipe” or “roadmap” that you can implement; there are a number of key points that should help move you along a transformation path[i]:
- Start a debate about performance. Talk to all stakeholders. Organize a survey and hold some workshops. Build a case for change around a clear consensus of opinion.
- Gather together a core group of people to act as a ‘guiding coalition’. Include people from different functions and backgrounds. Give them the scope and authority to supervise the key changes (but be careful not to ‘project manage’ the changes from the center.
- Don’t waste too much time on detailed visions. Agree an outline vision, set some directional goals and get started. Act on the system (the “whole”), rather than within the system (the “parts”). Learn as you go.
- Post a number of challenging questions and invite transformational ideas from anyone, anywhere. Select the best ones and try them out
- Don’t alienate managers most impacted by the changes. Involve them in the change process. They often have the best (and most practical) ideas for improvement
- Whatever you do don’t make management life most complex! Avoid complex systems. Aim to simplify everything at every level
- Build confidence by showing some early wins. Don’t assume they will be self-evident. Point them out and celebrate your success.
- Recognize at the outset that this is a long-term journey. You need perseverance and patience. So take your time but maintain the momentum
- Don’t waste time trying to persuade the blockers. Work around them. They will follow once they see that others are embracing the changes
- Don’t declare victory too soon. This is a long-term journey
How can an organization be self-organizing and empowering its people if it still adheres to the idea of the annual budgeting process? Budgets are a great centralizing act that concentrates power and decision-making at the top of the organization, not at the customer interface. We need to first understand what a budget does now and how we can do these elements better and in a more empowered and adaptive manner. The budget in its traditional form involves targets and rewards, planning and forecasting and resource allocation. It ends up with the same number but conflicting purposes. Step one separates out these three purposes and step two improves on each of them with new and better tools and techniques:
- Target – what we want to happen. Ambitious, relative KPIs where possible, holistic performance evaluation
- Forecast – what we think will happen. Unbiased, expected outcome, limited detail
- Resource allocation – event driven, not calendar driven
This in itself does not create the empowered and adaptive organization, but it impacts other aspects of command-and-control, such as individual incentives, trust and transparency. This first step starts to separate targets, forecasts and resource allocation. Targets need to move from being fixed with individual incentives linked to them to being aspirational and relative to the market and competitors with team, group and company rewards being paid with hindsight on the success achieved. This means an end to individual incentives linked to a myriad of fixed targets. Then target setting ceases to be a big and acrimonious activity, but instead the focus moves to establishing and agreeing on the purpose of the organization and the goals it seeks to achieve over time.
Forecasts should be light and roll beyond the year-end. They should not show that the goals or targets will be achieved, instead they just indicated what the expected outcome might be based on what we know today. They will indicate the gap between the expected outcome and the goals and targets. The planning cycle should then work out what steps have to be taken to close the gaps. This may require changes in plans, maybe adjustment of goals and possibly more resources. Hence resources should be allocated as and when required, not once a year.
[i] Hope, J., Bunce, P., and Röösli, F. (2011) The Leader’s Dilemma: How to build and empowered organization without losing control. San Francisco, Jossey –Bass. pp 283-304