How to Transform Your Organization
(A Note to CEOs and Boards of Directors)
The opinions in the following article are my own. They do not necessarily represent my employer’s—or any other organization’s—official position.
The Holy Grail of Management
I check my look in the mirror
Wanna change my clothes, my hair, my face.
— Bruce Springsteen, Dancing in the Dark
“Organizational transformation” is one of the most enduring phrases in management-speak. Hiring managers lure new employees to drive org transformation. Executives regularly tout transformation in Board/investor presentations, conferences, and every other venue.?
Yet it is vanishingly rare. Most “organizationally transformed” organizations are, well, not. They simply include cosmetic changes based on the buzzwords of the day.?
In this article, I want to provide a playbook for how an organization can transform itself. It requires, more than anything, courage.
How to Start
You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.
— Buckminster Fuller
We hear the term “transformation” and the first instinct is to start changing things. After all, the journey of a thousand miles begins ... etc., etc.
But this instinct only works for incremental transformation, where the value proposition and key capabilities are similar to what an organization already processes. It is guaranteed to fail for transformation.
The first, counter-intuitive, step in transforming your organization is to leave the current org alone. It will still need minor/reasonable investment and caretaking to stay relevant, but that is about it. It is likely to become irrelevant in a few years, and that is OK.
The insight of transformation is to use a subset of current profits, customer relations, and industry knowledge (but rarely products and the team) to fund and create a NewCo, a de novo organization.
But what type of a new organization? Is there a pattern to high-performing market leader organizations? Yes, there is.
True North: The Discipline of Market Leaders
First say to yourself what you would be;?and then do what you have to do.
— Epictetus
Decades ago, Michael Treacy and Fred Wiersema wrote The Discipline of Market Leaders. The central thesis of the book was that market leaders across industries focus on one and only one value discipline. The discipline must be one out of:
This is a remarkable insight. It is counter-intuitive that 1) the list of value disciplines has only three items, 2) market leaders pick only one, and 3) this choice precedes strategy.
Yet is has been proven in company after company: Apple (differentiated products), Walmart (operational excellence), and McKinsey (customer intimacy) readily come to mind. It is difficult to find a counterexample.
CEOs routinely ignore this advice. It is common for a company’s strategic priorities to include “industry-leading products” and “world-class operations” and “client focus.”
A necessary first step for organizational transformation is for the organization to pick its value discipline. This will drive all subsequent decisions, most notably the overall organizational structure.
The Work of Transformation: Creating an Operating Model that Enables Small, Empowered Teams
Never doubt that a small group of thoughtful committed individuals can change the world. In fact, it is the only that ever has.
— Margaret Mead
The key to a transformed organization is the company’s operating model. It converts vision into execution. With the exception of the high-level organizational structure, elements of creating a first-principles-driven 21st century company are the same across different chosen value disciplines. Here are the six key elements.
1. An organizational structure with minimal middle management, matrices, or dual reporting
The best high-level organizational structure depends on the chosen value discipline:
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What to do after picking the best structure? Eliminating most middle management.
Every layer of management adds slowness, complexity, expense, and politics to the organization’s work. A digital/twenty-first-century organization does not need the translation/interpretation or “people management” that middle managers perform. Employees—especially young employees—detest deeply-layered organizations. “I want more layers between the CEO and me,” said no one, ever.
A high-performing company should consist almost entirely of “doers,” i.e., individual contributors and first-line managers. The simplest and most effective way to accomplish this goal is to keep the CEO’s and first-line managers’ span of control at 9, a common number for span of control. Every other manager’s span of control should be 25 (yes, you read that right). This large SOC will eliminate even an attempt at people management or interpretation. Managers with 25 direct reports have to function like area developers at a franchisor, where they interact with business owners—in this case, managers with clear success criteria—in an efficient manner.
With this single change, even a large company needs only one middle management layer. Problem solved.
Here is what good looks like, for a company of up to 56,000 employees. In other words, almost all organizations on Earth.
For super-large organizations, adding one more middle management layer—with a span of control of 25—will enable an organization of more than a million employees.
What about dual/dotted-line reporting, “liaison” roles, etc.? Most of them are unnecessary and damaging. Get rid of all of them.
An indispensable part of this design is a clear “fitness function” (an Amazon term) for every single team in the company. ELT members and middle management usually already have fitness functions. The major change here is creating this metric for “doer” teams (individual contributors and their first-line managers). Middle managers should spend their time not on repeating executive bromides, but on developing and tracking fitness functions for the 25 teams reporting to each one of them.
2. Market-driven initiative funding, accurate cost tracking
Funding is integral to fitness function. It is impossible to evaluate a result, e.g., a certain sales volume, or new product functionality, unless there is clarity around the organization’s investment in the effort.
The funding for projects is usually opaque and political in companies. Making this process transparent/market-driven is a major competitive advantage and simplifier.
There are two approaches that can accommodate most funding:
The difficult part of evaluating internal initiatives is tracking cost. A high-performing company needs a clean and continuously-enforced WBS (work breakdown structure) account set. Every team needs to track its expenses to the penny.
The biggest “spend” in companies is people’s time. Surprisingly, most companies have no checks, balances, or accounting when it comes to meetings and other instruments that use employee time. A next-gen WBS needs to “charge” teams the fully-loaded costs of all non-team members who attend any meetings that the team creates. At the same time, employees should not be able to “earn” money by participating in meetings. (This topic is important and multi-layered enough that it deserves a separate article.)
3. Transparent employee compensation
This topic has gotten a lot of ink lately, especially with government-driven legislation to force a modicum of transparency into salaries (the fixed component of compensation).
A “transformed” company would not hesitate one moment to implement true transparency: Every employee should know every other employee’s total compensation (salary, commission, bonus, profit sharing, any stock option/stock grant). The upsides go beyond increased fairness; salary transparency will force a company to clarify the value of every role. The only downside: some managers are uncomfortable with it. A manager who can’t justify his/her employees’ compensation should not be a people manager.
The best way to implement compensation transparency is to set fixed salaries for every role. Yes: get rid of merit and cost-of-living increases. Every two or three years, have an external company re-baseline salaries based on market conditions. An unexpected bonus of this practice: You can get rid of annual performance reviews, which are a colossal waste of time and money.
This begs the question: How will a company reward high performers? Two-part answer: 1) Variable employee compensation will reward high-performing teams, not individuals (more on that in the next paragraph), and 2) High performers will rise faster to higher-paying roles than low performers. Strategy consulting companies use the latter approach effectively.
4. Variable employee compensation tied to team performance
Every company pays lip service to “teamwork” and extols its importance. The unfunny part is: No company means it. If you doubt my assertion, look at your variable compensation: It is largely driven by individual performance.
There are a few companies where maximizing individual performance will lead to the best company. However, most impactful work requires team performance to be maximized. Shouldn’t variable compensation then be driven by team performance? It should.
How would this work? Simply put, every team member has a pre-determined percent of variable compensation. Every quarter or year, when the team’s fitness function performance is evaluated, team members get variable compensation in this pre-determined percentages, irrespective of individual performance.
What? you say. A low-performer and a high performer will get paid the same multiple of their pre-determined portion? Wouldn’t this create a free rider effect? Won’t people stop hustling?
No, at least not broadly. A few people will behave badly. The team leader should fire them. Most humans, though, perform their best when they are not being stack-ranked against their peers. With team compensation, they have a financial incentive to help team members. This is how you create the “small, thoughtful group of committed individuals” that Ms. Mead spoke about.
5. Top 10–15 business processes documented and managed centrally
As Aristotle reminded us, excellence is a habit, not an act. But most companies do not invest nearly enough in creating rational, simple, effective, and well-documented processes. New employees are baffled at how immature, opaque, and highly variable the company’s processes are. To add insult to injury, most companies also have a mind-numbing amount of bureaucracy that masquerades as process rigor. It is the worst of both the worlds.
The solution is simple: The CEO, in collaboration with the executive leadership team, should compile the 10–15 most important processes in the company. Then, with the help of process expert help (internal or external), the ELT and appropriate subject matter experts should create each process, review and critique it until it looks as simple and rational as possible, document it centrally, train involved employees in it, and implement it strictly.
Once a process is in place and ruthlessly enforced, people will come up with improvements. There should be a mechanism to evaluate and fine-tune every process periodically.
This approach can be extended beyond the top 10–15 processes over time.
The impact on the company will be magical.
6. Radical steps (for first-principles acolytes)
Thoughts? Reactions?
These are my principles. If you don’t like them, I have others.
— Groucho Marx
I welcome your thoughts, reactions, and suggestions related to the topic of transforming organizations.