The Powerful Alternative to the Way Organizations are Typically Managed

Many of the growth strategies pursued by organizations have failed to generate the expected benefits.

Managers have found out that creating high-performance teams doesn’t necessarily produce a growth spurt. They’ve discovered that the hot pursuit of Six Sigma or Lean doesn’t inevitably result in excellent processes. They’ve seen that redesigned processes don’t make much difference when they aren’t hardwired to strategy and implemented through redesigned jobs.

In spite of the money, commitment, and effort that have gone into growth initiatives, the results have been generally disappointing. As sweeping as these growth strategies appear to be, they aren’t broad or deep enough.

Any organization – a department, a division, a huge multinational corporation – is more than its structure, more than its strategy, more than its work processes, and more than its culture. An organization is a complete system in which every part is dependent on and affected by every other part.

An organization is a system like the human body. When when you treat one symptom you may risk masking underlying diseases and producing undesirable side effects. In any system, the whole is greater than the sum of its parts. You can’t tinker with the structure or the procedures or any single dimension without causing disruptions and dislocations in other parts of the system. An improvement in one area can’t be counted on to improve the whole.

The piecemeal approaches that are assumed to be answer are as dangerous as no response at all.

The piecemeal approaches that are assumed to be answer are as dangerous as no response at all. These efforts can absorb vast reserves as they lull an organization into thinking that it is addressing its needs.

What’s The Alternative?

Organizations which use systemic analysis, systemic solutions, and systemic implementation to run their business have definite competitive advantages. They are extremely well positioned to serve and satisfy customers. These are the characteristics they share:

• Strategic alignment. Everything – information systems, policies, financial reporting, functional missions, reward systems – supports the organizational strategy. The company’s priorities are built into the design of every process and every job.
• Adaptivity. The organization can turn on a dime in response to changes in customer preferences, competition, technology, and internal operations. Business processes are designed for fast response. One reason systemically managed organizations are so nimble is that they routinely measure much more than revenues and profits. Customer satisfaction, competitiveness, safety, and the whole array of dimensions of corporate health are monitored. A dip in any area is a trigger for investigation and action.
• Reality-based decisions. Bad decisions are virtually the trademark of organizations that aren’t managed holistically. In the first place, executives miss opportunities. There may be a cost-saving opportunity in the supply chain, for example, but if all relevant departments are within their budgets, the opportunity is ignored. Second, executives make decisions without critical information. A manager decides to reduce billing rework costs by improving the quality of invoices, for instance, but doesn’t know anything about the costs of billing or whether customers are satisfied with the billing procedure. The vital information is always in somebody else’s department. Third, managers make decisions that benefit one area but create havoc in others. The classic example is the manufacturing manager who decides to increase throughput without considering the impact on the cost of inventory. The whole system approach surfaces decisions that need to be made and the information needed to make them wisely, without unexpected and unwanted consequences.
• Integrated improvement efforts. Many organizations today are finding out how draining it is to have several unconnected improvement efforts going on simultaneously. The aggregate effort is a crippling strain on human and other resources and general confusion about priorities – to the detriment of customers. In systemically managed companies, the management team periodically develops a plan for short and long-term organizational improvements based on the business strategy. The plan prioritizes, links, and sequences improvement efforts, so that you don’t have the new marketing program, for example, making promises to customers that the new distribution system can’t deliver.
• Whole system performance. In traditionally managed organizations, it’s not only possible, but customary, to recognize and reward individual, team, or departmental performance that has a negative effect on the whole system. A product development department, for instance, can look very good based on the number of its new products or patents, in spite of the fact that customers don’t want the products and the company can’t actually deliver them.

Linking it All Together

Above all, an organization that is managed as a system can be recognized by the way everything is connected to everything else. Some questions will help you understand where the missing links are in your organization.

• Integration through the hierarchy. All reporting structures – even “flat,” team-based, and process-based structures – have levels that must be aligned. How do the missions of each level in your organizational pecking order link up with missions of the levels above and below? How appropriate, fast, and streamlined is the flow of information between levels?
• Integration among the three levels of performance. Strategies, policies, and structure are based at the organizational level. Workflow and support infrastructure come from the process level. How well is your organizational strategy reflected in the design of work processes and jobs? How well do your improvement efforts address all three levels of performance?
• Integration among departments. Most companies are organized by functional specialties. There will be a marketing department, a finance department, a research and development department, and so forth. The organization’s highest priorities – increasing productivity, improving quality and service, and the like, are cross-functional. Work really gets done through processes, not just within functions, and the steps within each function are not more important than the “handoffs” from one function to the next. Have you intelligently designed the cross-functional processes to carry out your organization’s highest priorities? Do each department’s roles and incentives reflect the contributions it should be making to the processes that flow through it?
• Integration among processes. Processes are never designed or operated in isolation. There are no functional “silos” acting as barriers to cross-functional performance. There are no process “tunnels” in which the performance of one process undermines another. Have you documented the links among your processes? Does each process contribute to optimizing the performance of the whole organization?
• Integration among business units. Many large companies have broken themselves up into autonomous, or nearly autonomous, business units, on that theory that small organizations foster nimbleness, entrepreneurial zeal, and employee commitment. The danger is that the organization can become so compartmentalized that its units see no value in belonging to the larger organization. How well does your organization share lessons learned across business units? To what extent does each unit benefit from relationships with the others and with the parent company?
• Integration among geographic areas. Multiregional and multinational corporations often find that their greatest challenge is managing among territories. Even when there are no conflicts, the organization may be less “global” than “multilocal.” How do you leverage your geographic breadth? How well do you share lessons learned across geographic boundaries? In what ways does each area benefit from being part of a geographically dispersed corporation?
• Integration among goals. Goals are what we measure and monitor. Goals form the basis for our reward systems, feedback, and corrective action. Getting the goals straight is what determines how well integrated we can be in any area. It isn’t enough to have goals that aren’t in conflict; they need to be meshed in a way that shows us which levers to pull to influence every measure of our organization’s performance. How well have you articulated the financial and non-financial goals that define the success of your enterprise? How well have you integrated your strategic goals throughout the levels of the hierarchy, across the three levels of performance, across functions within a process, across business units, and the geographic units?

How to Get There

Managing an organization as a system is a step-by-step process:

1. Establish a business strategy that answers these questions:
   • What are the external variables that will affect our growth?
   • What do we want to grow into? And how much growth do we want, and within what business boundaries?
   • Where will our growth come from?
   • How will we win?
   • What will we do?
   • How will we measure our progress?
2. See where you stand. How well is your strategy supported by your current processes, your reporting structure, departmental relationships, what you measure, and your organizational culture? Process analysis, problem analysis, and other assessment techniques are helpful in this step.
3. Document the measurement system. Include all financial and non-financial measures that are either spelled out or implied in your business strategy. Examples of strategic financial measures would include return on capital employed (ROCE), return on investment (ROI), return on net assets (RONA), and newer measures such as economic value added (EVA). Document the way some measures feed and influence others. For example, Return on Net Assets is influenced by order volume, which is also influenced by customer satisfaction. When this process is complete, you will have documented a performance logic that shows how each strategic measure is affected by other financial and non-financial measures.
4. Identify core processes and develop a performance improvement plan. Based on your strategy and measurement documentation, identify your core processes, the improvements each needs, and the plan for making those improvements. For each core process you will either create a process (if one doesn’t exist) or improve it incrementally (if the process needs fine-tuning), or reengineer it (if the process needs radical redesign), or manage it (if the process is healthy). In creating, improving or reengineering, your plan must include doing whatever is necessary to make sure that information systems, jobs, and work environments all support optimum performance. The goal is to get all core processes, and ultimately all processes, into the “manage” category.
5. Develop and implement a performance measurement and management system. Based on the measurement hierarchy you have mapped out and the core processes you have identified, create a system that wires together performance planning, execution, and management. This hardwires your organizational strategy development and goal setting to the way the work actually gets done, and to monitoring and correcting of that work.
6. Redo the organization chart. . . maybe. Your reporting structure obviously has to support your strategy, your measurement system, and your core process relationships. If your present structure doesn’t meet these requirements you will need to change it. But there is no need to put your organization through a timeconsuming, productivity-draining restructuring just to follow a trend.

What Changes?

When you move to managing the organization as a whole system, the reporting structure, the culture, and the power bases may, or may not change. Your functional department will not disappear or be diminished; their role is usually enhanced by systemic management. Th e changes may not be reflected in the organization chart but you will fi nd them in the daily performance of people and in value to customers and shareholders.

Here is what you will see changing when you manage the system:

• The mental model of what needs to be managed and what needs to be done
• Alignment with and understanding of customer needs
• What is measured
• The nature of decisions
• The information on which decisions are based
• What kind of performance is, and is not, rewarded
• Executive and management roles and behavior