Organizations and the People Equation

Imagine being the manager who has to look into the eyes of an employee that he or she has worked with for years and tell that employee that his or her job has been eliminated, that they are no longer required, and that their working future has been thrown into disarray. Envision this happening in a world where 45 percent of the people you work with have been replaced by automation. That is the percentage of jobs that McKinsey & Company estimates could be displaced by currently available automation technology.

Given this prospect, where millions will have their jobs displaced, why is it that we are so optimistic about the future? Why do we think that the world will offer more fulfilling work, not less? In the future, the uniquely human capability of innovation will consume more of our work lives. And what’s more, because the world is changing faster than ever, the need to innovate will be greater, not less than today; the speed with which companies have to innovate will increase not decrease; and the number of people that companies will need in innovative roles will be greater than they are today. In this future society, companies will have to adapt to harness the passions and interests that drive their people.

However, because the modern hierarchical company is organized principally to get many tasks done, rather than to generate new thinking, companies will have to organize differently — they will have to have different business processes and a different mindset about how they treat their people. It is certain that companies that are not able to change the way they operate will disappear, just like companies that failed to make the leap during other periods of rapid change.

WHERE OUR OBSESSION WITH THE ORGANIZATIONAL PYRAMID COMES FROM

In 1911, during the later stages of the industrial revolution, Frederick Winslow Taylor, a mechanical engineer who had a passion for organizational efficiency, published The Principles of Scientific Management. His book encouraged managers to think of their employees as specialized, replaceable components, like cogs on a wheel. By studying processes and the way people spend time, Taylor created Taylorism, an approach by which managers could “secure the maximum prosperity for the employer.” Treating employees like a capital asset had a certain attraction, as it provided a clear role for management. In the mass-production era, where the principal method of doing more revolved around deploying more capital and more bodies, Taylorism seemed to fit the world that executives envisioned. Taylorism paid little attention to the thoughts, feelings, and desires of employees, and set the tone of American management practice for the better part of a century and beyond.

At the time, Taylorism was a fantastically successful model, in part because it caused fear — anxiety over losing one’s job is a powerful motivation to get things done. Yet in 1924–32, the National Research Council conducted the Hawthorne Experiments, countering Taylorism and asserting that workers are not just machines but people who have feelings and motivations, where wages were just one piece of the pie that encouraged workers to give their best. But despite this new insight, many companies maintained a classic command-and-control structure.

QUALITY IS JOY AT WORK

In 1950, W. Edwards Deming, an engineer and management consultant, addressed the Union of Japanese Scientists and Engineers and preached the concept of “quality management,” where the basic principle is that profit comes from repeat customers. Therefore, employees should concentrate on making the best possible product instead of focusing on management-mandated sales quotas. Deming’s concept that “quality is joy at work” implied that productivity would increase when individuals’ thoughts, feelings, and desires were respected and taken into consideration. It is perhaps an accident of history that Deming spent most of his career improving Japanese industry as part of post–World War II reconstruction. Simultaneously, in America, Marvin Bower, of the management consulting firm McKinsey & Company, lamented the difficulty of enabling alternatives to traditional hierarchical models.

But despite the fact that many of the underlying assumptions of Taylorism have been thoroughly debunked, it remains an organizing standard that has proved difficult to change. Those who lead hierarchies are more likely to stick with habitual convention and the command-and-control processes of twentieth-century management. In some industries, when the specialized cogs — people — in an organization have been tuned to the needs of a precise business topic, those businesses can run rather well, but only when serving the needs of that particular business process. This means that the hierarchical, fear-oriented, and control-based organization can maintain its position because it can execute on what it does right now. But the world has changed.

THE FLUID ECONOMY: FROM THE LINEAR TO THE EXPONENTIAL

Just as the variability and abundance of the world today was likely implausible a thousand, a hundred, or even twenty years ago, the future of the world will be inconceivably more fluid and more dynamic than the world we know today. In this book, we describe this pace of rapid change — or perhaps even constant disruption—as “the fluid economy.”

Research on the nature of corporate growth indicates that its primary driver is expansion into new and growing markets rather than the market share growth of core markets. In the fluid economy, where every economic domain is ripe for disruption, sustaining a company in the long run requires continually claiming new economic domains.

There is now a considerable disconnection between traditional pyramid-management style and an innovation economy with knowledge workers. By definition, knowledge workers have knowledge that management doesn’t and are usually employed to generate new wisdom—making this wisdom useful for the company. Therefore, management must inspire the organization to move to new, often uncharted territory, where people have to be treated better than as cogs in a machine.

As we move from linear to exponential speed in technological advancement, it’s clear that the type of work that people do will change. Individuals such as IDEO CEO Tim Brown and University of Michigan professor Jeffrey Liker have started to discuss some of the organizational requirements needed to respond to rapid change and have proposed tactics for doing so. In this fluid economy, having capable, intelligent people who respond quickly to changes in the marketplace is going to be more important than having carved out a market. In a world where information flows freely and start-ups can be formed at practically no cost, it is much easier for an upstart competitor to disrupt whatever market you think you own.

WHY GROWTH IS HARD TO ACHIEVE

Surveys of senior executives by McKinsey & Company indicate that the growth of an organization remains the preeminent challenge, often ranking higher than the combination of many other considerations, such as strategic planning, operational effectiveness, and marketing and branding. This same research indicates that companies that prioritize innovation are able to grow, innovate better, and generate superior shareholder returns. In addition, companies with superior returns are not only better able to return money to shareholders, they are better able to invest in employee support and satisfaction. This difference in company performance and the consequent ability to compensate workers is so pronounced that it has been used by Jason Furman of the President’s Council of Economic Advisers and Peter Orszag, nonresident senior fellow at the Brookings Institution, to explain most of the much-storied increases in the income-inequality gap of the last thirty years. Finally, only a small number of companies manage to generate significant revenue from new businesses, and surveys of senior executives indicate that only 6 percent are satisfied with their company’s innovation performance. These facts point to a separation between companies that are innovating, growing, and providing for their employees and those that are not. According to Furman and Orszag, since 1990, the performance of publically traded nonfinancial firms has seen a dramatic improvement relative to the average firm. These top performers—those with a return on invested capital (ROIC), excluding goodwill, in the top 10 percentile—perform ten times better than the median firms, compared with three times better only a few decades ago. So some companies seem to be responding to the world we live in now and genuinely profiting from it. This same dramatic separation is not as pronounced when goodwill is included. Some companies seem to be trying to use mergers and acquisitions to respond to these challenges, but while buying innovation does work, it is not as effective as growing it internally.

The point here is that you can get yourself into a virtuous circle or a vicious one. If you are able to grow and innovate, you’ll be able to take better care of your employees and recruit the best talent, which will further help you innovate. If you aren’t, your organization is likely doomed to a long, slow decline.

THE WORLD HAS CHANGED, SO WHY HASN’T MANAGEMENT?

The ugly truth is that irrespective of all the great ideas in leadership and business management—about a century’s worth of ideas and initiatives—the lasting impact on true revolutionary thinking in general-management practice has been limited. Even initiatives that were dramatically successful at one time, such as the results-only work environment (ROWE) at Best Buy from 2005–12, have often been discarded by the organization that introduced them. Sooner or later, bureaucratic institutions revert back to what they know best—being bureaucratic. It is this autopilot mentality that prohibits organizations from growing. You have to wonder, what is the fear about evolving beyond command and control and allowing people to be more free, creative, and able to bring forth new ideas? An even more nagging question is, why is it so difficult to change?

According to an email exchange with Steve Denning, the author of The Leader’s Guide to Radical Management:

Achieving sustainable innovation has thus turned out to be a much more intractable problem than most leaders expected it to be. Hierarchical bureaucracy is not a set of linear mechanisms, that can be improved one-by-one through implementing proven remedial measures. . . . Hierarchical bureaucracy operates more like an ingeniously morphing virus that steadily adapts itself to, and ultimately defeats, intended fixes and returns to its original state, sometimes more virulent than before.

Denning’s view reminds us how we deal with many social, economic, and financial ills in our society: when problems are seemingly gargantuan in nature, they are ostensibly impossible to solve, so we do little about them. A simpleminded metaphor may be when you sign your child up for piano lessons, and after six months you discover that your child is not a much better piano player than when she started. Who do you blame? Do you blame the piano teacher who is highly regarded and has many talented and proficient students under her belt? Do you blame your child for not practicing thirty minutes a day as the teacher instructed? Is the piano out of tune or the keys difficult to stroke? Is your child not as focused and disciplined as she should be? Do you blame the music that has been selected for your child, which is perhaps too difficult or uninspiring? Or does the time of day when the lessons occur make it difficult for your child to focus? Often, you can identify the problem but have great difficulty in prescribing the appropriate remedy.

The reality is that we are living in a world where automation is going to displace the day to day. We’ve already mentioned that 45 percent of activities that people are paid to perform could be automated with technologies that are available today. In this world, it is people and their ideas that matter, not execution of the leaders’ plan. This calls for a very different organization, where it is the frontline people who are at the center of everything the organization does, not the execution of the will of those high in the hierarchy.