The Productivity Gap: Why Organisations Need To Rethink Hierarchy
Optimising for efficiency but losing productivity and market share?
Open any broadsheet newspaper and you will find at least one reference to the fact that we are in a productivity crisis. Organisations are not keeping up with what is possible and the gap is worsening. So what is causing this gap? Will the growing capabilities in Artificial Intelligence and Machine Learning help or hinder and how can we as the leaders of organisations help to close it?
There are many contributing factors, but for me one stands out; the organisational hierarchy. A number of variations exist, but the hierarchy is still the most ubiquitous way of organising a company. These formal structures bring a number of advantages – they optimise for efficiency ensuring teams and individuals are clear on what is expected of them. However, optimising for efficiency is only sensible when market conditions are stable, and when economies of scale are the factor which gives the business a competitive advantage.
This is no longer the case. The internet has lowered the barrier to entry for new companies to spring up quickly, with laser focus on customer needs and the nimble ability to pivot quickly to fulfill them. Horizontal functions within more traditional businesses are not close to the customer or problems that need solving. Instead these functions (of which my own, HR, can be one of the worst) drive their own agendas which are often far removed from customer needs. Most large companies are structured to keep people who work in the same discipline together; it may be convenient to have people who do the same job sit together – they can share best practice, their manager can call them all together quickly to communicate – but these are all internal factors. The customer doesn’t care! And these companies are slow. With hand offs between different departments it may take a year to take a new customer proposition from idea to shelf.
The gulf will only increase
If organisations who optimise for efficiency are losing productivity and market share now, this gulf will only increase. Artificial Intelligence and Machine Learning are making some incredible advances in replacing repetitive and frequent tasks, from grading essays to diagnosing disease. As algorithms improve and costs fall, these technologies will automate more of the tasks which traditional organisations have worked so hard to complete more efficiently than their competitors. Therefore the playing field will level when it comes to efficiency and companies will no longer be able to compete on this basis. The factors that will matter in the race to gain market share will be those which algorithms are less good at – understanding the psychology of the customer and innovating to meet the need. The very attributes that nimble start-ups have in spades.
Companies are increasingly aware that their structures are not fit for purpose. The Deloitte Global Human Capital Trends Survey, one of the largest in this space with over 10,500 global participants, has for both of the last two years identified “redesigning the organisation to be more agile” as the number 1 strategic priority. This is not to say that these organisations are acting on the impulse – whilst 89% of leaders identified this priority as critical, only 11% said that they were confident in how to execute it.
Building networks of teams
Smaller teams are a natural way for humans to work. Real day-to-day work occurs in networks – people spend twice as much time with people near their desk than those just 50m away. Some of the most successful engineering companies of our times, including Spotify and Facebook, are built around small teams focused on problems that are important to the customer. These teams are cross functional and organised around what the customer values. They have colleagues from all disciplines that they need within them so that they are empowered to act not wait for another department to sign something off. This structure is more nimble and able to pivot – like a flotilla of smaller ships rather than huge tanker.
Fig 1. The reality is that effective organisations align as networks
Employees in network enabled teams are also more likely to be engaged. Creating value for the customer means that work has greater meaning and employees better understand how their skills fits in with their team. Such individuals are more likely to have a sense of belonging to their team and to feel empowered to make decisions. These factors will grow in importance in motivating and engaging the workforces of the future with millennials, older employees and virtual colleagues changing the make-up of the organisational workforce.
For a larger company to bring about organisational productivity the efforts of these teams need to add up to achieve the business plan. If we are going to truly empower cross-functional teams we need to ensure that their efforts are aligned at the macro level.
In his keynote at the Agile Africa conference in 2016, Henrik Kniberg talked about the ingredients essential to achieving the alignment of cross functional teams at scale. Transparency, feedback loops and clear company priorities are key if an organisation wants to give it’s empowered teams the context that they need to achieve alignment. For example Lego gets the whole digital department of 150 people together once every other month for a day of alignment activities. Henrik also talks about the importance of ranking company goals into priorities, even when different goals do not have dependencies. The senior team can not anticipate every micro level decision which gets made, and so having clear priorities understood by all is important for decision making to be aligned.
Addressing these issues with software
OVO Energy, a green utility company founded in 2009 (I joined in 2012), scaled rapidly. By 2017 the company was 1,500 employees spread over 6 offices. Productivity and innovation were on the decline as the organisation matured, forcing the company to restructure into cross functional squads set up around customer value. However this restructure bought with it new problems, mainly because the issue of transparency had not been adequately thought through. The organisational chart now didn’t reflect who was in which cross functional team; managers felt disenfranchised because if they didn’t set or monitor the goals of their direct reports how could they be effective coaches? And the Leadership Team were struggling to empower the teams to make decisions without the reassurance that effort was aligned.
To solve these issues, the company built a software platform just3things. The platform allows employees to set up cross functional teams, set out a customer related purpose and set goals which relate directly to the companies top three priorities. They keep their progress up to date by integrating their goals with data sources and pushing out status updates. The whole platform is transparent (insofar as confidentiality allows) and teams can view all activity across the company, including any changes to company priorities. And most importantly the transparency means that the system is self governing; teams can consume the information that they need to inform their decision making. This means that OVO can empower their teams whilst retaining an oversight.
Employees estimate that the system saves them over 3 hours per week in stakeholder update meetings and writing status reports as well as the ease at which they can find any KPI in the whole business. Employee engagement has increased and OVO are now 20th in the Sunday Times best places to work. And most importantly, the company have seen innovations that would not have previously been possible with a more ‘command and control’ structure. The platform’s success has meant that OVO have spun it out as a separate business venture to help other organisations unsure on how to embed a ‘network of teams’ structure.
The factors which once gave large organisations competitive advantage are now hindering them. The productivity gap is only set to increase unless companies act now to restructure and optimise for agility, innovation and true customer focus . David Rose, sums this problem up succinctly: “Any company designed for success in the 20th century is doomed to failure in the 21st”.
We’ll be discussing organisational hierarchy and many other key issues around the future of work at our upcoming D/SRUPTION dinner on 1st May. Further Info
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