The yin and
yang of organizational health
Sustained
performance over the long term and successful transformation in the near term
require many of the same ingredients.
Actions necessary to support longer-term
corporate-performance objectives, on the one hand, and a rapid performance
transformation, on the other, might seem at odds. But our research paints a
different picture. When coupled with organizational health, long- and
short-term performance can become interdependent and complementary—just as yin
and yang in Chinese philosophy are inseparable, unable to exist without each
other, despite their apparent opposition.
Simply put, healthy organizations are more likely to
orient themselves toward the long
term. And companies in the midst of a rapid performance
transformation boost the odds of sustaining those efforts when they improve
their health. The evidence for these propositions is substantial, and it
underscores the fundamental link between organizational health and performance.
Health and the long
term
Renewal has always been central to our definition of
organizational health, which emphasizes a company’s ability to deliver superior
financial and operating performance over the long term. Our
conviction that there is a link between organizational health and a long-term
orientation was reinforced recently when we analyzed a set of 51 companies for
which we have rich proprietary data on both characteristics.
Our health data come from McKinsey’s Organizational Health Index (OHI),
which aggregates the views of employees and managers on a set of nine key
organizational dimensions that have proved critical to health. For
long-termism, we drew on a metric created by the McKinsey Global Institute and
McKinsey’s Strategy and Corporate Finance Practice that differentiates those companies
with a long-term orientation from others. Known as the Corporate Horizon Index
(CHI), it assesses five factors, including consistency of investment patterns,
earnings quality, and the extent to which companies focus on value-creation
fundamentals rather than the targets emphasized by Wall Street analysts.
When we compared the 51 companies for which we have both
CHI and OHI data, we found a strong, two-way correlation between health and
long-term performance . On the one hand, the healthiest organizations are the
ones that focus more on long-term value creation. On the other hand, companies
focusing on long-term performance tend to have higher organizational-health
scores. What’s more, companies focusing on long-term value creation outperform
their peers on all nine of the key organizational outcomes that contribute to
organizational health. These are early findings; our next step is to identify
specific management practices that simultaneously boost health and contribute
to a long-term orientation.
Health and
transformations
Transformations, as anyone who has lived through one
well knows, are tough, emotional, and even searing experiences. Leaders of
these efforts sometimes worry that the decisive, short-term actions needed to
improve financial results will undermine their organization’s health. However,
our work suggests it’s quite possible to improve organizational
health during transformation efforts—helping to
achieve and sustain the transformational gains, while further strengthening the
fabric of the company.
What’s more, by analyzing OHI data from a statistically
significant sample of organizations that have worked with McKinsey’s Recovery
& Transformation Services unit, we have hit on a list of “power” practices,
which increase a company’s odds of sustaining top-quartile health. Companies
using them during the first year of the transformation effort improve their
health by twice as much as companies that don’t. These practices are only one
piece of the organizational-health puzzle (for more on the whole puzzle, see “Organizational health: A fast track to performance
improvement”), but especially during the early stages of
transformational change, they pack a particular punch, as we will describe in
the remainder of this article.
Set
a clear direction
Health in a transformation starts with strategic clarity
and a shared vision that has been translated into crisp goals and milestones.
The translation process helps the company decide what it will and will not do
(including where it will and will not compete). And the broad communication of
it to leaders and employees helps them avoid working on initiatives that are
not germane to the strategy or that might even send mixed signals about what
the strategy is.
One public utility drove strategic clarity by taking its
“bankable plan” on a road show, visiting different sites and departments to
state the case for change and to discuss ways to realize it. This company
created simple communication devices, such as a vision “one-pager,” which
brought the strategy to life for employees by visually depicting how it would
play out across the value chain, including where there would be new investments
and what would change. In another example, a mining company produced banners
and commitment cards with the performance and health goals of the
transformation clearly stated as a visual reminder.
Make
it meaningful to employees
The companies that made the biggest gains on health in a
transformation took the extra, critical step of ensuring that their employees’
day-to-day behavior was guided by the company’s vision and strategy. This
requires thinking through how to match the personal goals of employees with the
company’s goals—going beyond “cascading” the strategy into key performance
indicators and targets to involving employees up front in setting the company’s
strategic objectives, ensuring that the right talent is in place to achieve
those objectives, and making sure that each individual’s “stake” in the
strategy reflects his or her aspirations.
At an industrial company, the top team made a concerted
effort to engage every employee so as to generate ideas that would improve the
top and bottom lines. As a result, roughly 1,500 of the more than 5,000-strong
workforce owned at least one of the more than 2,000 “transformation”
initiatives, with many more owning important activities that were part of these
initiatives.
Spark
ideas and innovation
Organizational health improves during a transformation
when companies embrace fresh ideas. Sometimes this means looking outside for
best practices to help innovate and invigorate the business. Leaders should
rightly be wary of the cookie-cutter approach, but there are proven ways to
increase the flow of ideas and challenge incremental thinking. The industrial
company mentioned above consciously set out to address the “not invented here”
syndrome that had prevailed in the organization. Employees were encouraged to
start working more closely with customers, for example, to enhance support
services, and similarly with vendors to change product specifications to drive
higher utilization in their processes. It even tapped recent hires to find out
how competitors managed their supply chain, improving importing and exporting processes
in emerging markets. These efforts sparked fresh ideas and created a deep sense
of ownership among employees. Encouraging “bottom-up” innovation also generates
such ownership—and it, too, showed up in our data as a transformation
accelerant.
Build
strong operational discipline, in a supportive way
Organizations seldom get fit without strong operational
discipline. It’s important to start at the top, with explicit targets for
operating performance that are then replicated at other levels. Operational
discipline requires the communication of clear standards of work so that
employees understand how to achieve goals and metrics consistently. This also
helps leaders ensure that the day-to-day work complies with those standards,
and it allows leaders to emphasize the core values of efficiency and
productivity. Maintaining operational discipline puts a premium on another
management practice: supportive leadership, which includes creating a sense of
teamwork and mutual support throughout the organization and demonstrating
concern for the welfare of employees.
Boosting operational discipline sometimes demands
financial incentives or recognition that rewards new forms of behavior. A
consumer-goods company in Asia−Pacific set aside a discretionary fund for employees
who embodied the new way of working and who went above and beyond their routine
jobs to help the company achieve the objectives of the transformation. Managers
also formally recognized this extra effort, thanking fellow colleagues publicly
on a near-daily basis and following up constructively with employees who were
struggling. This approach helped to sustain momentum long after the initial
impetus had begun to wane.
The common thread running through these findings and
examples is sustainability. Healthy organizations are better at sustaining
themselves over the long haul. And transformations are more sustainable when
companies prioritize improving their organizational health—which, as our
research suggests, isn’t just desirable, it’s quite feasible. By enhancing
sustainability, stronger organizational health connects the yin of long-termism
with the yang of aggressive performance improvement, making it a worthy goal
for any leader worried about his or her legacy.
By
Lili Duan, Rajesh Krishnan, and Brooke Weddle McKinsey
QuarterlyNovember 2017
https://www.mckinsey.com/global-themes/performance-transformation/the-yin-and-yang-of-organizational-health?cid=other-eml-alt-mkq-mck-oth-1711
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