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The 21st-century organization
Big corporations must make sweeping organizational changes to get the best from their professionals.
Lowell L. Bryan and Claudia Joyce
About half a century ago, Peter Drucker coined the term "knowledge worker" to describe a new class of employee whose basic means of production was no longer capital, land, or labor but, rather, the productive use of knowledge. Today, these knowledge workers, who might better be called professionals, represent a large and growing percentage of the employees of the world's biggest corporations. In industries such as financial services, health care, high tech, pharmaceuticals, and media and entertainment, professionals now account for 25 percent or more of the workforce and, in some cases, undertake most typical key line activities. These talented people are the innovators of new business ideas. They make it possible for companies to deal with today's rapidly changing and uncertain business environment, and they produce and manage the intangible assets that are the primary way companies in a wide array of industries create value.
Productive professionals make big enterprises competitive, yet these employees now increasingly find their work obstructed. Creating and exchanging knowledge and intangibles through interaction with their professional peers is the very heart of what they do. Yet most of them squander endless hours searching for the knowledge they need—even if it resides in their own companies—and coordinating their work with others.
The inefficiency of these professionals has increased along with their prominence. Consider the act of collaboration. Each upsurge in the number of professionals who work in a company leads to an almost exponential—not linear—increase in the number of potential collaborators and unproductive interactions. Many leading companies now employ 10,000 or more professionals, who have some 50 million potential bilateral relationships. The same holds true for knowledge: searching for it means trying to find the person in whose head it resides, because most companies lack working "knowledge markets." One measure of the difficulty of this quest is the volume of global corporate e-mail, up from about 1.8 billion a day in 1998 to more than 17 billion a day in 2004. As finding people and knowledge becomes more difficult, social cohesion and trust among professional colleagues decline, further reducing productivity.
A flawed organizational design
Today's big companies do very little to enhance the productivity of their professionals. In fact, their vertically oriented organizational structures, retrofitted with ad hoc and matrix overlays, nearly always make professional work more complex and inefficient. These vertical structures—relics of the industrial age—are singularly ill-suited to the professional work process. Professionals cooperate horizontally with one another throughout a company, yet vertical structures force such men and women to search across poorly connected organizational silos to find knowledge and collaborators and to gain their cooperation once they have been found.
Worse yet, matrix structures, designed to accommodate the "secondary" management axes that cut across vertical silos, frequently burden professionals with two bosses—one responsible for the sales force, say, and another for a product line. Professionals seeking to collaborate thus need to go up the organization before they can go across it. Effective collaboration often takes place only when the would-be collaborators enlist hierarchical line managers to resolve conflicts between competing organizational silos. Much time is lost reconciling divergent agendas and finding common solutions.
A new organizational model
To raise the productivity of professionals, big corporations must change their organizational structures dramatically, retaining the best of the traditional hierarchy while acknowledging the heightened value of the people who hatch ideas, innovate, and collaborate with peers to generate revenues and create value through intangible assets such as brands and networks. Companies can achieve these goals by modifying their vertical structures to let different groups of professionals focus on clearly defined tasks—line managers on earnings, for instance, and off-line teams on longer-term growth initiatives—with clear accountability. Then these companies should create new, overlaid networks and marketplaces that make it easier for professionals to interact collaboratively and to find the knowledge they need.
Companies can not only build this new kind of organization but also reduce the complexity of their interactions and improve the quality of internal collaboration by implementing four interrelated organizational-design principles:
1. Streamlining and simplifying vertical and line-management structures by discarding failed matrix and ad hoc approaches and narrowing the scope of the line manager's role to the creation of current earnings
2. Deploying off-line teams to discover new wealth-creating opportunities while using a dynamic management process to resolve short- and long-term trade-offs
3. Developing knowledge marketplaces, talent marketplaces, and formal networks to stimulate the creation and exchange of intangibles
4. Relying on measurements of performance rather than supervision to get the most from self-directed professionals
The ideas underlying each of these policies may not be entirely new, but we don't know of any company that applies all of them holistically—and this failure limits the ability to perform up to potential. A company that tries to simplify its vertical organizational structure without helping large numbers of self-directed professionals to collaborate more easily might increase its efficiency, for example. But that would be more than offset by a decrease in its effectiveness.
Simplify the line structure
The first design principle is to clarify the reporting relationships, accountability, and responsibilities of the line managers, who make good on a company's earnings targets, for all other considerations will get short shrift until short-term expectations are met. To achieve this goal, a company must establish a clearly dominant axis of management—product, functional, geographic, or customer—and eliminate the matrix and ad hoc organizational structures that often muddle decision-making authority and accountability. Dynamic management and improved collaboration, as we show later, are better ways of accomplishing the purposes of these ad hoc structures.
A company that aims to streamline its line-management structures should create an effective enterprise-wide governance mechanism for decisions that cross them, such as the choices involved in managing shared IT costs. These mechanisms are typically created by defining and clarifying the decision-making authority of each member of the senior leadership team and establishing enterprise-wide governance committees as required. It may also be necessary to take important support functions, which demand focused management, out of the line structure so that specialized professionals (rather than line managers, who are often, at best, gifted amateurs) can run these functions as shared utilities.
Finally, to promote the creation of enterprise-wide formal networks, parallel structures and parallel roles should be established across the whole extent of the company. Defining the role of the comptroller or the country manager consistently throughout it, for example, helps the people in those roles to interact and collaborate.
Manage dynamically
Once the newly simplified vertical structure allows line managers to limit their attention to meeting the near-term earnings expectations of the company, it has the luxury of focusing other professionals on the long-term creation of wealth. The advantages of such a separation are obvious. As one executive we know put it, you don't want people who are engaged in hand-to-hand combat to design a long-term weapons program.
Ongoing multiyear tasks such as launching new products, building new businesses, or fundamentally redesigning a company's technology platform usually call for small groups of full-time, focused professionals with the freedom "to wander in the woods," discovering new, winning value propositions by trial and error and deductive tinkering. Few down-the-line managers, who must live day to day in an intensely competitive marketplace, have the time or resources for such a discovery process.
Not that companies should forgo discipline while undertaking such a project. In fact, the portfolio-of-initiatives approach to strategy enables them to "plan on being lucky" by using the staged-investment processes of venture capital and principal investing firms, as well as the R&D processes of leading industrial corporations. Companies that take this approach devote a fixed part of their budgets (say, 2 to 4 percent of all spending) and some of their best talent to finding and developing longer-term strategic initiatives. Each major one usually has a senior manager as its sponsor to ensure that resources are well invested. Once an initiative is ready to be scaled up—when revenues and cost projections become clear enough to appear in the budget—it can be placed in the line structure.
How can managers translate the concept of corporate performance into an operational reality? See "Managing for improved corporate performance."
Of course, at the enterprise level, companies must manage their short- and long-term earnings in a way that integrates their spending on strategic initiatives with the overall budget, so they will need to adopt a systemic, effective way of making the necessary trade-offs. What we call dynamic management can help: a combination of disciplined processes, decision-making protocols, rolling budgets, and calendar-management procedures makes it possible for companies to manage the portfolio of initiatives as part of an integrated senior-management approach to running the entire enterprise. Dynamic management forces companies to make resource allocation trade-offs, explicitly, at the top of the house rather than allowing them to be made, implicitly, by down-the-line managers struggling to make their budgets. This change further simplifies the line managers' role.
Develop organizational overlays
Having stripped away unproductive matrix and ad hoc structures from the vertical organization and clarified the line structure, a company must develop organizational overlays in the form of markets and networks that help its professionals work horizontally across its whole extent. These overlays make it easier for them to exchange knowledge, to find and collaborate with other professionals, and to develop communities that create intangible assets.
Because these market and network overlays help professionals to interact horizontally across the organization without having to go up or down the vertical chain of command, they boost rather than hinder productivity. Companies that establish such overlays are making investments not only to minimize the search and coordination costs of professionals who exchange knowledge and other valuable intangibles among themselves but also to maximize the opportunities for all sorts of cost-effective, productive interactions among them.
We believe that moving simultaneously into knowledge marketplaces, talent marketplaces, and formal networks will
From India, Madras
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2Find the article on ORGANIZATION, sourced while surfing the net.
The 21st-century organization
Big corporations must make sweeping organizational changes to get the best from their professionals.
Lowell L. Bryan and Claudia Joyce
About half a century ago, Peter Drucker coined the term "knowledge worker" to describe a new class of employee whose basic means of production was no longer capital, land, or labor but, rather, the productive use of knowledge. Today, these knowledge workers, who might better be called professionals, represent a large and growing percentage of the employees of the world's biggest corporations. In industries such as financial services, health care, high tech, pharmaceuticals, and media and entertainment, professionals now account for 25 percent or more of the workforce and, in some cases, undertake most typical key line activities. These talented people are the innovators of new business ideas. They make it possible for companies to deal with today's rapidly changing and uncertain business environment, and they produce and manage the intangible assets that are the primary way companies in a wide array of industries create value.
Productive professionals make big enterprises competitive, yet these employees now increasingly find their work obstructed. Creating and exchanging knowledge and intangibles through interaction with their professional peers is the very heart of what they do. Yet most of them squander endless hours searching for the knowledge they need—even if it resides in their own companies—and coordinating their work with others.
The inefficiency of these professionals has increased along with their prominence. Consider the act of collaboration. Each upsurge in the number of professionals who work in a company leads to an almost exponential—not linear—increase in the number of potential collaborators and unproductive interactions. Many leading companies now employ 10,000 or more professionals, who have some 50 million potential bilateral relationships. The same holds true for knowledge: searching for it means trying to find the person in whose head it resides, because most companies lack working "knowledge markets." One measure of the difficulty of this quest is the volume of global corporate e-mail, up from about 1.8 billion a day in 1998 to more than 17 billion a day in 2004. As finding people and knowledge becomes more difficult, social cohesion and trust among professional colleagues decline, further reducing productivity.
A flawed organizational design
Today's big companies do very little to enhance the productivity of their professionals. In fact, their vertically oriented organizational structures, retrofitted with ad hoc and matrix overlays, nearly always make professional work more complex and inefficient. These vertical structures—relics of the industrial age—are singularly ill-suited to the professional work process. Professionals cooperate horizontally with one another throughout a company, yet vertical structures force such men and women to search across poorly connected organizational silos to find knowledge and collaborators and to gain their cooperation once they have been found.
Worse yet, matrix structures, designed to accommodate the "secondary" management axes that cut across vertical silos, frequently burden professionals with two bosses—one responsible for the sales force, say, and another for a product line. Professionals seeking to collaborate thus need to go up the organization before they can go across it. Effective collaboration often takes place only when the would-be collaborators enlist hierarchical line managers to resolve conflicts between competing organizational silos. Much time is lost reconciling divergent agendas and finding common solutions.
A new organizational model
To raise the productivity of professionals, big corporations must change their organizational structures dramatically, retaining the best of the traditional hierarchy while acknowledging the heightened value of the people who hatch ideas, innovate, and collaborate with peers to generate revenues and create value through intangible assets such as brands and networks. Companies can achieve these goals by modifying their vertical structures to let different groups of professionals focus on clearly defined tasks—line managers on earnings, for instance, and off-line teams on longer-term growth initiatives—with clear accountability. Then these companies should create new, overlaid networks and marketplaces that make it easier for professionals to interact collaboratively and to find the knowledge they need.
Companies can not only build this new kind of organization but also reduce the complexity of their interactions and improve the quality of internal collaboration by implementing four interrelated organizational-design principles:
1. Streamlining and simplifying vertical and line-management structures by discarding failed matrix and ad hoc approaches and narrowing the scope of the line manager's role to the creation of current earnings
2. Deploying off-line teams to discover new wealth-creating opportunities while using a dynamic management process to resolve short- and long-term trade-offs
3. Developing knowledge marketplaces, talent marketplaces, and formal networks to stimulate the creation and exchange of intangibles
4. Relying on measurements of performance rather than supervision to get the most from self-directed professionals
The ideas underlying each of these policies may not be entirely new, but we don't know of any company that applies all of them holistically—and this failure limits the ability to perform up to potential. A company that tries to simplify its vertical organizational structure without helping large numbers of self-directed professionals to collaborate more easily might increase its efficiency, for example. But that would be more than offset by a decrease in its effectiveness.
Simplify the line structure
The first design principle is to clarify the reporting relationships, accountability, and responsibilities of the line managers, who make good on a company's earnings targets, for all other considerations will get short shrift until short-term expectations are met. To achieve this goal, a company must establish a clearly dominant axis of management—product, functional, geographic, or customer—and eliminate the matrix and ad hoc organizational structures that often muddle decision-making authority and accountability. Dynamic management and improved collaboration, as we show later, are better ways of accomplishing the purposes of these ad hoc structures.
A company that aims to streamline its line-management structures should create an effective enterprise-wide governance mechanism for decisions that cross them, such as the choices involved in managing shared IT costs. These mechanisms are typically created by defining and clarifying the decision-making authority of each member of the senior leadership team and establishing enterprise-wide governance committees as required. It may also be necessary to take important support functions, which demand focused management, out of the line structure so that specialized professionals (rather than line managers, who are often, at best, gifted amateurs) can run these functions as shared utilities.
Finally, to promote the creation of enterprise-wide formal networks, parallel structures and parallel roles should be established across the whole extent of the company. Defining the role of the comptroller or the country manager consistently throughout it, for example, helps the people in those roles to interact and collaborate.
Manage dynamically
Once the newly simplified vertical structure allows line managers to limit their attention to meeting the near-term earnings expectations of the company, it has the luxury of focusing other professionals on the long-term creation of wealth. The advantages of such a separation are obvious. As one executive we know put it, you don't want people who are engaged in hand-to-hand combat to design a long-term weapons program.
Ongoing multiyear tasks such as launching new products, building new businesses, or fundamentally redesigning a company's technology platform usually call for small groups of full-time, focused professionals with the freedom "to wander in the woods," discovering new, winning value propositions by trial and error and deductive tinkering. Few down-the-line managers, who must live day to day in an intensely competitive marketplace, have the time or resources for such a discovery process.
Not that companies should forgo discipline while undertaking such a project. In fact, the portfolio-of-initiatives approach to strategy enables them to "plan on being lucky" by using the staged-investment processes of venture capital and principal investing firms, as well as the R&D processes of leading industrial corporations. Companies that take this approach devote a fixed part of their budgets (say, 2 to 4 percent of all spending) and some of their best talent to finding and developing longer-term strategic initiatives. Each major one usually has a senior manager as its sponsor to ensure that resources are well invested. Once an initiative is ready to be scaled up—when revenues and cost projections become clear enough to appear in the budget—it can be placed in the line structure.
How can managers translate the concept of corporate performance into an operational reality? See "Managing for improved corporate performance."
Of course, at the enterprise level, companies must manage their short- and long-term earnings in a way that integrates their spending on strategic initiatives with the overall budget, so they will need to adopt a systemic, effective way of making the necessary trade-offs. What we call dynamic management can help: a combination of disciplined processes, decision-making protocols, rolling budgets, and calendar-management procedures makes it possible for companies to manage the portfolio of initiatives as part of an integrated senior-management approach to running the entire enterprise. Dynamic management forces companies to make resource allocation trade-offs, explicitly, at the top of the house rather than allowing them to be made, implicitly, by down-the-line managers struggling to make their budgets. This change further simplifies the line managers' role.
Develop organizational overlays
Having stripped away unproductive matrix and ad hoc structures from the vertical organization and clarified the line structure, a company must develop organizational overlays in the form of markets and networks that help its professionals work horizontally across its whole extent. These overlays make it easier for them to exchange knowledge, to find and collaborate with other professionals, and to develop communities that create intangible assets.
Because these market and network overlays help professionals to interact horizontally across the organization without having to go up or down the vertical chain of command, they boost rather than hinder productivity. Companies that establish such overlays are making investments not only to minimize the search and coordination costs of professionals who exchange knowledge and other valuable intangibles among themselves but also to maximize the opportunities for all sorts of cost-effective, productive interactions among them.
We believe that moving simultaneously into knowledge marketplaces, talent marketplaces, and formal networks will
From India, Madras
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