Six Simple Rules

by Yves Morieux

  A Linear Sequence That Ties Us into Knots

  Often when companies follow the “from strategy to structure” mantra, they use a linear sequence. They start with strategy, then align the structures, then align processes within the structures, and then align various systems (IT, performance monitoring, human resource management, and so on) to make the processes work. At each step of the sequence, however, it becomes increasingly difficult to address the right issues or to provide useful answers.

  For example, once you create a middle office—between the back office, which is dedicated to standardization, and the front office, which is dedicated to customization—the next step in the sequence is to align the systems to the structure you have created. So you ask the IT department to design management information systems for the managers in the middle office, and you give the HR department the task of providing recruitment, training, incentives, and career paths for all the middle-office employees. Functions such as IT and HR are under pressure to create value and behave like “business partners,” so they do what they can to deliver. They are not allowed to ask the most important questions, however: “Why do we need a middle office in the first place? Can’t we get the front and back offices to cooperate and have them reconcile the issues of standardization and customization?”

  In such situations, the talent and expertise of IT and HR managers will only be applied to make the wrong solution even more sophisticated. The HR function, for example, is best positioned to see the ways that complicated mechanisms cause suffering at work and help develop solutions, but it is forced into aiding and abetting the old obsolete approaches. HR managers scurry around trying to find ways to improve the leadership style of the disengaged middle-office manager (but how can he or she get engaged, given that he or she is powerless in the role and just an interface?). The same is true of other functions and systems. The strategic alignment sequence prevents companies from fully leveraging the real potential of information technologies.3

  Bad Organization Drives Bad Strategy

  Yes, the organization must be in the service of the strategy, but it is also true that the organization—because of its design and way of working—determines the very content of strategic choices, not only their execution. This is why the line that separates strategy from organization has become increasingly blurry, especially as competitive advantage derives more and more from agility, flexibility, and adaptiveness. Indeed, all these capabilities are rooted in the combination of autonomy and cooperation that we described at the beginning of the book.

  The problem is that the kind of complicated organization that results from strategic alignment always comes up with bad strategies.4 This is because a complicated organization cannot help but have a fragmented view of its competitive landscape. The information it gathers about customers, suppliers, competitors, and regulators remains scattered across functions, business lines, and geographies. The organization is unable to accumulate and link these various inputs into a holistic understanding of the opportunities and threats the strategy needs to address. At the robotics company we discussed in chapter 4, for example, because the R&D units did not cooperate, they were unable to connect the dots and thus could not detect the real opportunities for innovation in their markets.

  In some cases, the bad strategy will drive the overcomplicated company to take on new performance requirements—such as a wider product portfolio or more service features—that it is not prepared to handle. Almost without fail, it will produce the new products at extra cost or with high levels of defects, or be unable to deliver them on time. Then, to stay competitive and retain customers, the company will be forced to take remedial steps, such as lowering prices or adding product features.

  When this happens, the company eventually becomes unable to distinguish between the performance requirements that really could create value (such as a wider product selection) and the actions that have been taken as concessions to customers, suppliers, or distributors (such as piling on extra features) because of the declining bargaining power that results from poor performance. The less effective the company is in addressing business complexity, the more complexity it ends up having to assimilate, with declining results. It not only does things wrong, it does the wrong things. Beyond inflating the quantity of input, complicatedness deflates the quality of outputs.

  Examples abound. A high-tech manufacturer we know hired three thousand people (20 percent of its workforce) over a four-year period. Two thousand of them went into coordination or interface roles. One result was that the company, which had about twenty-five customers, made about thirty different products. This amount of customization was not required to be competitive in this market. When the company removed all the coordination and interface roles, and instead made marketing, R&D, and sales people act as integrators, their cooperation allowed it to detect commonalities across customer needs and to better standardize systems, platforms, and components. Market share and profitability grew. (See the sidebar “Avoid the Trap of Strategic Alignment.”)

  SIMPLE RULES TOOLKIT

  Avoid the Trap of Strategic Alignment

  When a new performance requirement emerges, do not follow the traditional sequence: from strategy to structures, to processes, to systems, to metrics, to incentives, to career paths. If you do, you will only add many complicating elements and are bound to miss the smart simplicity solution. Instead, link the new requirement to what people do today using feedback loops. Using simple rule five, you can ensure that the results you want to see in the future are already embedded in people’s choice of action today.

  Four Ways to Extend the Shadow of the Future

  How can you avoid following the path of strategic alignment but still ensure that the organization produces good strategies and implements them well? By using the simple rules and, in particular, simple rule five. There are four ways to extend the shadow of the future: tightening the feedback loop by increasing the frequency of interactions, bringing the end point forward, tying futures together, and making people walk in the shoes they make for others.

  Tighten the Feedback Loops

  One way is to tighten feedback loops by having people interact more frequently with others whose work is affected by their actions. Ideally, these interactions should be direct encounters that make it impossible for people to ignore facts about how well they have dealt with the multiple requirements of performance.

  For example, you can increase the frequency with which your people review collective results. At the robotics company with the innovation problem (“Our engineers aren’t creative enough”), in addition to removing internal monopolies, management also decided that the company should hold progress reviews, not once every six months, the practice in the past, but once every two weeks. This change had an immediate and dramatic impact on the two engineering groups. When the review was conducted at six-month intervals, the engineers could avoid delivering on their commitments, could fail to cooperate, and could ignore their colleagues for as long as five months and twenty-nine days. Now, the engineers could avoid facing the consequences of their actions for only thirteen days.

  Lack of cooperation backfires faster when the feedback loop is tighter. The net present value of doing well increases for the individual because the future consequences—the pain of facing a difficult moment when your failure to stick to your commitment becomes obvious—are discounted over a shorter period. At the robotics company, cooperation between the hardware and software engineers immediately increased, and so, therefore, did innovativeness.

  Bring the End Point Forward

  The shadow of the future can be extended by making sure people’s involvement in the work continues to the end point of the activity—the point at which the consequences of their actions show up in collective results. This can be achieved by bringing the end point forward in time or by making sure people cannot leave their role until they reach the end point and experience the consequences of their actions themselves.

&nb
sp; One way to bring the end point forward is to shorten the duration of a project. Suppose that a company embarks on a three-year project. If you are involved, you can be fairly sure you will no longer be around when it is completed. You will have moved to another job or location within the company, been promoted out of operations, retired, or gone to a different company. As a result, you can be reasonably sure you won’t be directly affected by the consequences of the actions you take now or how well you cooperate during the time you are involved.

  If, instead, the company launches a project designed to deliver meaningful results—with clear milestones, reviews, and deliverables—within nine months, your sense of the future is dramatically altered. Now, as a member of the original project team, you are no longer so sure that you’ll be out of the picture when the project delivers its results, if it does deliver. You have little choice but to assume you will be exposed to the outcomes and to act accordingly.

  Axelrod advocates an increase in duration (the period during which interactions take place and people bear the consequences of their cooperation or lack thereof) as a way to enhance cooperation. On the contrary, we advocate shorter timelines. However, there is no contradiction if you bear in mind the real issue. By shortening the objective duration of a project, you extend the subjective duration for the individual: “I am in this from the beginning to the end.”

  Tie Futures Together

  A third way to extend the shadow of the future is by tying futures together. A mining company, operating in developing economies, did this to deal with an issue very common to these countries—the competition for talent.

  The mining company had to satisfy seven major performance requirements in order to gain competitive advantage. These requirements related to revenues, discoveries and reserves, safety, cost, operational excellence, sustainability, and working capital optimization. The requirements were further broken down into KPIs customized for each major function and job level. For instance, the site managers—those directly in charge of looking after the mines—had a scorecard with fifteen metrics and related incentives, all of which pertained to the seven performance requirements. Those dispatching mined material, for example, had indicators on productivity and service levels designed to ensure operational excellence. Each metric was weighted to line up behaviors with the relative importance of the performance requirements.

  It became very important for the company to develop its next generation of site managers, because there were not enough qualified and experienced candidates in the local job market to fill the site manager positions. The company decided, therefore, it would have to develop talent internally rather than recruit managers from the outside.

  You can guess what happened next. Following the strategic alignment sequence, the central HR department added a new KPI to the site manager’s scorecard: talent development. This KPI was broken down into four sub-metrics:

  The spread in the marks the site managers gave to their direct reports, which had to comply with a forced ranking.

  The upward feedback they were receiving from their subordinates.

  The number of training events they were facilitating.

  The new skills acquired by their reports as the result of on-the-job learning.

  Rules, metrics, and processes! As it turned out, none of these had any positive impact and site managers continued to do a poor job of developing talent. The main reason was that these solutions missed the central issue of complexity; they did not help reconcile the contradictory requirements of productivity and learning.

  Here’s why. To achieve any results on the productivity requirement, the site managers knew it was best to assign people to tasks they were familiar with and could perform effectively, even though they wouldn’t gain new knowledge or further develop their skills. To succeed on the learning requirement, however, the site managers had to conduct on-the-job training, which required them to assign people to unfamiliar tasks they needed to learn. This had a negative effect on productivity. No wonder the site managers almost always opted for short-term productivity—which is easier to effect and to measure—at the expense of longer-term development of their teams.

  Seeing that the competition for talent could not be won through the addition of new metrics, the mining company took a different tack. It found a way to make the site managers directly experience the consequence of not developing the next generation of managers: the company announced that a manager would be promoted only if he or she could propose at least two qualified candidates to take over the job.

  This new criterion for promotion embedded a feedback loop that exposed the site managers to the consequences of the trade-off they achieved in reconciling productivity and talent development. The future for a manager was tied to that of his or her replacement, and the futures of both were tied to performance requirements that were contradictory in the short-term.

  The feedback loop impelled the site managers to think and behave differently because the shadow of the future had been cast upon them. They realized they had to alter what they had to do to achieve productivity and to develop staff. They began to staff some projects with less experienced subordinates, even when more productive colleagues were available, so the former would have more opportunities to learn and improve their skills.

  This was not as easy as it might sound. Each project has its specific constraints (such as risks, urgencies, and challenges), and each subordinate has his or her own characteristics (areas for improvement, experience, and strengths). The site manager had to take all these elements into account and make the best decision for each situation. There were some projects in which a subordinate could take on new tasks without the risk of putting a huge dent in productivity. There were other projects, however, where productivity was the paramount concern and on-the-job learning had to take a backseat. Nobody was better positioned than the site managers to assess the unique circumstances in the here and now of each situation. The new feedback loop impelled them to use all this information and their judgment to come to superior solutions in reconciling the requirements of talent development with short-term productivity. These solutions could not be attained in the previous arrangement, no matter how exhaustive the predefined procedures were or the sophistication of the balanced scorecards and incentives that were meant to align behaviors with the performance requirements.

  Make People Walk in the Shoes They Have Made for Others

  The fourth way to extend the shadow of the future is to make people take on the role that others play, if only temporarily. This is particularly effective when there are long time lags between related decisions or when the outcomes of people’s decisions will not be evident until so far in the future that they may never encounter those who are affected. By causing people to walk in the shoes they have made for others—that is, people they don’t work directly with and might not otherwise meet—they are exposed to the problems their present behaviors could pose for them in the future.

  MotorFleet: Making the Engineers Understand the Issue of Reparability

  Consider the case of MotorFleet, a vehicle manufacturer that was laboring to meet several performance requirements, including cost, safety, product compactness, energy consumption, and anticorrosion performance.

  To meet these requirements, the organization had rigorously applied the strategic alignment sequence. Different functions standardized product platforms to achieve scale economies. Project units customized products to satisfy distinct customer segments. Engineering divisions were organized according to specific requirements defined by marketing and also by technical specialization. There was a rampancy of roles, processes, KPIs, and incentives for each requirement.

  Then MotorFleet’s key competitor added to the new business complexity that the vehicle manufacturer had to face. The competitor announced it would extend its warranty period to five years, during which major repairs for products that were similar to MotorFleet’s would be covered. MotorFleet’s standard warranty was just two years
. The manufacturer had to respond by matching the five-year warranty or better.

  Mr. Reparability Cannot Fix the Problem …

  To any manufacturer, the cost of a warranty period depends to a large extent on how quickly the product can be serviced or repaired. Suppose, for example, that the engine has to be removed to fix the headlights. The repair could take at least three days, with a disastrous effect on the warranty budget. So MotorFleet’s ability to offer a warranty period similar to that of its competition came down to the reparability of its vehicles, which is, of course, determined by its design team.

  MotorFleet knew very well that its vehicles were not easy to repair, but no one really knew who was accountable for this phenomenon called reparability. Nobody was. Everybody was. The management team decided something had to be done: “Reparability is of the upmost importance to our ability to compete. We must have accountability!” You see how easy it is to fall into the strategic alignment trap: “Since there is a new requirement, let’s create a new function to be in charge of it.”

  A reparability function was duly established to coordinate all the decisions that affected reparability across all the engineering specialties—notably, the mechanical and electrical groups. Management also defined a reparability process and a set of performance indicators and incentives to go with it. At the top of this unit was a uniquely accountable role that we call Mr. Reparability.

  The reparability challenge was particularly difficult for the mechanical and electrical engineers who worked on the smaller vehicles. To create a competitively compact product, design engineers had come up with a housing that left less room than the mechanical engineers would have liked to fit an engine. The mechanical engineers’ solution was to encroach just a tiny bit on the space left to the electrical engineers for their wiring and other components. The electrical engineers then had to find a way to squeeze it all in, which they did by placing some of the wiring in hard-to-access areas. This, in turn, meant that their after-sales service colleagues had to perform lengthy and costly repair operations. Some of these compromises could have been avoided with the use of more expensive components, which would have made repair less likely and less necessary, but that would have made the product’s cost uncompetitively high.