The keys to organizational agility
The leaders behind
McKinsey’s work on organization design explain the importance of agility and
how established companies can become more dynamic.
Established companies often struggle to become more dynamic—but it’s not impossible. In
these interviews, the leaders of organization design at McKinsey, principals
Wouter Aghina and Aaron De Smet, explain what agility means and how
organizations can evolve to thrive in an environment that demands constant
change. Aghina was interviewed by Monica Murarka, a senior expert in
organization design at McKinsey, while De Smet was interviewed by Luke Collins,
an editor with McKinsey Publishing. An extended and edited transcript of Aghina’s
and De Smet’s comments follows.
Interview
transcript
Defining organizational
agility
Aaron De Smet: Agility is the ability of an organization to renew itself, adapt,
change quickly, and succeed in a rapidly changing, ambiguous, turbulent
environment. Agility is not incompatible with stability—quite the contrary.
Agility requires stability for most companies.
Agility needs two things. One is a dynamic
capability, the ability to move fast—speed, nimbleness, responsiveness. And
agility requires stability, a stable foundation—a platform, if you will—of
things that don’t change. It’s this stable backbone that becomes a springboard
for the company, an anchor point that doesn’t change while a whole bunch of
other things are changing constantly.
In really small start-ups, stability is typically embodied in the
founder, and you have a few people around a founder. The start-up out of
someone’s garage can be just fast and agile without a lot of stability. But as
soon as you get any sense of size or scale, you cannot be agile without some
sense of stability.
Wouter Aghina: What do we mean by agility? Let me answer that question
indirectly. Consider things that are fragile. What’s fragile? Fragile is a
crystal glass. When we put stress on it, when we exert force on it, it gets
weaker or even breaks. So what’s the opposite of fragile? We immediately think
of words like resilient, strong, robust,
maybe even flexible, so that it bends and it gets back to the
original condition. But is that really the opposite? Something that stays the
same?
The opposite of fragile is something that gets stronger when I exert
force or stress on it. In today’s environment—with enormous changes coming from
both inside and outside of the organization—that’s what we think the aspiration
should be. That’s what I call agility: when you thrive on change and get
stronger and it becomes a source of real competitive advantage.
The agility challenge
Wouter Aghina: Agility has always been important for companies. Take the
high-tech sector, where I’ve done most of my work. In that sector, you’re often
only as good as your last product. That means you have to be agile. Now, having
said that, you could think, “I’m not in the high-tech sector, so that’s less
relevant for me.” But with today’s levels of uncertainty, ambiguity, volatility
in the markets, and globalization, this is starting to be true for any company.
It’s critical to be agile and quickly respond to change and actually benefit
from change. And if you think that you’re still in a corner where this doesn’t
hold true, wait for the disruption to come. Tomorrow it will be relevant for
you.
But for big, successful companies—now or in the past—it’s very difficult
to get agile. Those companies have a legacy. They have grown, and most of them
have been successful by actually using what we call a managerial hierarchy—a
classical way of managing from the top down, with jobs, with boxes and lines
and structures and process descriptions, running and controlling the company
from the top. And now, when they try and put some experiments in place to be
more agile, to give more space to people, to allow them to be more flexible,
what happens? Well, when you are a leader and for 20 years you have been in a
managerial hierarchy, what do you do when you really get fearful and uncertain?
You go back to what’s worked in the past. You exert control, add things, add
rules, add processes, add structure.
What you should do is actually a real act of leadership: you have to
take things away. You have to reduce the structure, the processes. But that’s
really difficult. It’s much easier and more comfortable to add things because
that gives you a, maybe false, sense of control.
Aaron De Smet: Imagine a spectrum: on one end, fast, nimble, agile; on the other
end, stable, slow, efficient, more centralized. Many large companies try to
find where they want to be on the spectrum. And that’s the wrong way to think
about it. You need to be both. You need stability and this
dynamic capability.
If you just move fast and you go away from stability—losing any sense of
centralization or quality control or risk management or the ability to capture
economics of scale—what you find are these $10 billion or $20 billion companies
that are trying to act like a start-up. And it doesn’t work. They get into all
kinds of problems. They don’t take advantage of their scale. They take
unnecessary risks. Way too many decisions are decentralized. People are
reinventing the wheel. Now, it could work if you’ve got 20 people in a garage,
but, without that stability, it will not work on a global scale.
On the other hand, you have people who swing the pendulum the other way
and they become very slow, very rigid, very bureaucratic. And they quickly get
stuck because they can’t move fast enough to keep up with changes in their
external environment.
The critical thing is to have an organization and, importantly, leaders
who can think about that backbone of the organization—the few critical things
that won’t change, at least not very much, not very quickly—that the company
can use as stable foundation and springboard. A hardware and operating system,
if you will.
The keys to greater agility
Aaron De Smet: There are lots of great, creative, cutting-edge high-tech
companies that are agile. Most aren’t, but there are few. And those are always
held up, and people say, “Well, we can’t be like Apple.” Well, you don’t need
to be. The research we’ve done shows that there are lots of agile
companies—large, medium, and small—in all industries, some of them very
traditional.
So, a few principles for how to be agile. The first is, set the company
up in a way that acknowledges both stability and dynamic capability, including
some things that we may not yet know that we need. And do that across three
dimensions of how you set up the organization: be both stable and dynamic on
structure, process, and people.
A lot of people, when they think of how they design the organization,
immediately gravitate toward the management hierarchy—the lines and boxes. But
that’s just one small element of how you set up the organization. Structure
also includes governance and how you set up which committees can approve things
and make which decisions and which authorities get delegated and what is
contained in a role and what people get to decide. This is all part of the
structure.
Processes are extremely important, which is: How does it work? What are
the activities that, when you string them together in a particular way, add
value? And what are the decisions that are made along that chain of activities?
Who makes them? How do they get measured? This is one of the most important
things.
When we develop metrics for an organization and set targets and
objectives, we find that most organizations—if they think they do it well—the
way they do it is they cascade it down the management hierarchy. That’s OK, but
if that’s all you do, you will reinforce whatever silos you’ve set up in the
structure. The structural silos will get worse because at lower levels
everybody’s working on different objectives.
A better way to do it, or at least a way to complement that approach, is
to make sure you’ve identified key metrics in a process and to make sure all
the different functions or business units or geographies that are touching that
decision or activity share the same metrics and targets. That helps immensely
with collaboration.
It’s a simple thing to say; it’s not an easy thing to do. Most systems
aren’t set up to do it. But if you can identify the key value-adding activities
and decisions—end-to-end, all the way to the customer—line up decision
processes separate from the management hierarchy, make sure those are measured
in the right way and that whoever is participating in those activities and
decisions share in the objectives and metrics, the problem of silos, which most
companies struggle with, gets a lot easier.
And the last principle is around people. You have to think about what’s
stable and what’s dynamic when it comes to people. Now, one of the things that
can be very dynamic with people is reallocating resources—using flexible labor
or temporary labor. There are lots of things you can do that are very fast. But
there are a few things that are often very stable in how you set up your
people.
One of them is culture. Culture takes a long time to change; it takes a
long time to build up a healthy culture. And it requires a lot of thought. So
an organization’s culture and some of the key competencies and capabilities
that are sources of distinctiveness and competitive advantage are things that
typically don’t change quickly. And when you see companies that are very agile,
they typically have something very special about the people and the culture
that they’ve built.
Wouter Aghina: A question on the mind of many is what they can do to become more
agile. There are three domains in the operating model that we have found are
very important for that: process, structure, and governance.
Governance, for us, is about decision making. We need speed in decision
making, but why do we need stability? Well, we need stability to make good
decisions but also to get fast decision making. What has to be stable, for
instance, is that you have empowered the people lower down in your organization
with a clear mandate that they can take the decisions that they should be
taking close to the customer. That has to be clear and it has to be a stable
element of your operating model.
Now, let’s have a look at structure. What we see agile companies do is
they don’t change at all very much the main way they structure their company.
Agile companies tend to keep the primary and secondary axis of their
organization structure pretty constant so that people have a clear home—it’s
clear to them where they belong, where they build up expertise. On top of that,
they provide mechanisms for quickly assembling teams with the right talent to
address the challenges and opportunities that are coming up.
They’ve found a way to very quickly reallocate their people while
keeping the structure—the main structure—quite constant. So, again, it’s this
combination of speed, flexibility, a dynamic model in a stable frame that
actually gives you true agility.
About
the authors
Wouter Aghina is a principal in
McKinsey’s Amsterdam office, and Aaron De Smet is a principal
in the Houston office. They colead the Organization Design service line within
McKinsey’s Organization Practice. Monica Murarka is a senior
expert in the Chicago office; Luke Collins is an editor with
McKinsey Publishing and is based in the Stamford office.
http://www.mckinsey.com/insights/organization/The_keys_to_organizational_agility?cid=orgfuture-eml-alt-mip-mck-oth-1512
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