The building blocks for an agile ecosystem in an organization are complex, and recent research also indicates that speed plays a role. Industry experts Carla Arellano, Vice President and Global Client Leader of Organization Solutions of McKinsey & Co, and Charlotte Relyea, Partner and Global Leader of McKinsey Academy, discuss the critical issue of agility in the context of business performance
By Nan-Hie In
According to AmCham’s 2015 annual survey, Hong Kong’s pool of talent from which employers can draw to meet their needs in human resources remains a key issue among
In the current age of rapid changes driven by technological innovations, demographic shifts, and globalization, among other forces, it has never been more crucial for businesses to remain agile. Agility is generally defined as the ability to be flexible and to adapt quickly – it is not only one of the top trends in business management today in a competitive environment where speed is key but, more importantly, a key attribute to business performance.
“It’s never been more important for human resources leaders to have a real grasp on how organizations can create value, drive performance and link that back to what it means to people whom you are leading, hiring, training and developing within your organization,” says Carla Arellano, Vice President and Global Client Leader of Organization Solutions at McKinsey & Co, speaking at an AmCham seminar in a panel with Charlotte Relyea, Partner and Global Leader of McKinsey Academy.
What are the key ingredients businesses must embed in their offices to achieve this competitive advantage? And how can companies assess their organizational health to identify areas where changes are needed? Over a decade ago, McKinsey embarked on extensive research to find out the answers by analyzing differentiators of well-functioning companies from those seen as dysfunctional.
A diagnostic framework
McKinsey’s Organizational Health Index (OHI) is a result of years of data-mining by tracking the elements closely correlated to company performance, and 37 “behaviors, actions and processes” are identified to be relevant to the measuring process. These 37 management practices (see chart) are grouped into nine parameters, namely a company’s direction, accountability, coordination and control, external orientation, leadership, innovation and learning, capability, motivation, plus culture and climate.
“We’ve not just created norms around those nine elements, but we’ve created norms around 37 management practices or behaviors you would want to see at an organization that is high-performing,” explains Arellano.
A large number of CEOs, staff and scholars are interviewed, and concrete data including financial metrics of those sampled are examined. Staff of companies worldwide are asked to rank how well each of these dimensions operate in their respective firm. The composite score – an average of these nine elements – is a measure of an organization’s health. To date, it has generated a database with over two million in user responses from over 1,500 organizations, thus establishing a pattern of norms on what a healthy organization should look like.
According to the data, there is a strong relationship between how well a firm is run and its business performance. Those considered “healthy” outperformed their “unhealthy” peers by three times in terms of their stock value in the market, Arellano points out. Companies which have successfully adopted ways to improve on their organizational health also generated a nine percent annual increase in EBITA (earnings before interest, taxes, depreciation, and amortization).
The surveys also reveal three key factors commonly found in a healthy organization: staff are aligned to the company’s vision and strategy; employees can execute according to the overall goal; and the organization can swiftly respond – and adapt – to changes in the external environment.
In the China sample of 80,068 respondents in 2015, for example, McKinsey’s analysis uncovered that Chinese companies most often struggled with motivation and that Chinese firms with a low score of organizational health had a tendency to resort to throwing money at a problem. “At a certain point in time, financial incentives can only go so far to get you additional motivation and enthusiasm from your employees,” Arellano says.
Arellano advises using other levers in the “motivation” cluster within its 37 management practices with which high-performing companies are associated. That includes “Meaningful Values” (whether people are connected to what you are doing), “Inspirational Leaders” (whether staff are led and encouraged for high performance) and “Rewards and Recognition” (whether the efforts of employees are acknowledged and rewarded).
Speed vs stability
In the research on organizational health, agility is found to be a significant challenge among companies looking to drive performance, largely because of the stability and scale inherent in fixed organizational structures and processes, Arellano notes. “One thing that frequently comes up with agility is the notion of speed and the notion of control or stability.”
McKinsey’s report Why Agility Pays, released in December, reveals that organizations anchored purely on speed can sometimes be trapped in what Arellano dubs a “startup leap space” where too much speed with little foundation leads to diminishing momentum beyond a certain point. The phenomenon is showcased in a matrix featuring a “speed axis” and a “stability axis,” where different companies tracked in the OHI can land differently along these two indices.
Around eight percent are dotted in the “startup” box (healthy companies with speed but a lack of stability); 14 percent are “trapped” (slow and unstable firms with poor organizational health); eight percent are in “bureaucratic” box (slow and stable firms in poor organizational health); and only 12 percent are in the most coveted section of the “agile” – these companies had high scores in speed, stability and overall organizational health. The results also show that few companies could grasp speed or stability.
“Our goal is to get the companies in the ‘agile’ box, which means you have enough control and process foundation in place so that you can be fast in certain areas and not have to reinvent the wheel or fall into chaos of everything in every direction,” Arellano says.
The research also finds that 70 percent of firms that were found to be agile are very likely to be at the top quartile of organizational health and, therefore, business performance. “[That means] it is hard to be agile if you aren’t healthy as an organization,” explains Arellano, adding that organizational health is not just a trend but a key force that relates back to business performance.
Skills & behaviors
Today, agility in businesses means management and leadership capabilities are required deeper within the organizations. “The world is changing so fast that you not only need leaders in C-suite and executive teams, but all the way down to the frontline for people to be able to think on their feet and be more agile on things like problem-solving, based on the studies we have seen,” says Relyea.
According to McKinsey’s research, differences between top-quartile performers versus the others in leadership effectiveness are directly influenced by four sets of behavior: support is essential in making decisions and changes; a strong result-orientated approach helps faster decisions; a difference of perspectives allows for closer collaboration; and effective problem-solving brings about better results.
It is also noted in the research that 40 percent of executives are not satisfied with the existing level of training and development of staff, particularly further down to the frontlines, Relyea notes. China, for example, is a case where there is much demand for highly skilled labor, and by 2020 there will be a shortage by 23 million, according to China’s National Bureau of Statistics and McKinsey’s Global Institute Analysis.
“What we are seeing globally and in places like China is that other technical skills such as those in design, computer science and programming are needed as much as skills in problem-solving and leadership,” says Relyea.
Modes of learning
As learning is an integral part of building company agility, companies are also evolving in the way they train and build capabilities in staff, particularly in the digital era combined with a trend driven by the rise of tech-savvy millennials in the workforce. With advancing technology, along with a shift in employee behavior, e-learning has become a cost-effective way of providing training and spurred the delivery of business and tech courses in virtual classrooms.
General Electric, for instance, has launched an online education catalogue that was curated by top online education providers, and around 180,000 staff were able to self-select their learning pathways. Recommendation for courses were made based on the stage of an employee’s career development, Relyea points out. Other companies use similar platforms such as e-libraries, giving their staff access to on-demand content on a digital education platform.
Similarly, McKinsey Academy has developed “EdX” with Harvard University, Stanford University and Massachusetts Institute of Technology, a digital platform of capability-building based on the latest research for “blended learning journeys.” The learning experience can be anchored on a company’s business context, and be embedded in the day-to-day schedule of employees, Relyea notes.
She adds that true behavioral change requires multiple modes of learning, including in-person workshops, digital courses, or group projects plotted on real world issues. “Using a whole different range and modes of learning can be most effective,” she says.
And the multiple modes of learning apply to top leaders as well as every employee within an organization. “A lot of these courses, in our case, are based on McKinsey’s tool kit; it is on how we train our consultants throughout their careers to become leaders,” Relyea points out. “Externally, courses are shaped by the needs of our clients in training their staff on communications, problem-solving, and being nimble – skills that are required for an organization to be agile.”