Claudia Joyce is a Principal at McKinsey & Company and a core member of the Financial Services and Strategy Practices groups. She has recently co-authored the book “Mobilizing Minds - Creating Wealth from Talent in the 21st Century.” In addition, her work has been extensively published on McKinsey’s Knowledge Web and in the McKinsey Quarterly. She is a graduate of the Kellogg School of Management at Northwestern University and of the University of Chicago.
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KE: Why write a book about mobilizing minds?
CJ: We believe that talent has become the true source of differentiation among institutions but that organizations do not have the appropriate reinforcing mechanisms or the right structures to realize the highest value from their people.
KE: What prompted this conclusion?
CJ: Over the last decade we analyzed the top 150 companies by market capitalization. The profit of the largest 150 companies has grown at a tremendous pace. This is unexpected because economists typically believe that the larger and more complex a company gets, the slower the rate of its profitability growth. We were intrigued and wanted to find out what was driving these results. When we looked at it further, we found that it was being driven by 30 of the very largest companies, which have been able to create a tremendous amount of wealth over time.
To understand what was happening with these companies we used the number of employees as a measure of complexity, and net income per employee as a measure of profitability. We analyzed the results of these two measures from 150 companies in 1984 as compared to 2004. What we saw was that in 1984, as the number of employees increased, the income decreased per employee. Companies were not able to handle the complexity, and therefore had less profitability per employee. When we looked at these same measures based on 2004 data, the relationship seemed to have changed, at least for some of the companies. There was more dispersion of the results. Some very large companies outperformed smaller companies in terms of net income per employee.
KE: What type of company was able to achieve higher net income per employee?
CJ: We split the companies into two groups: Thinking-Intensive and Labor-Intensive. Thinking-intensive companies have a large fraction, more than 35%, of the workforce made up of thinking-intensive workers whose jobs require subjective thinking and problem solving. Labor-intensive companies have the bulk of employees focused on production related functions. On the labor-intensive side, the relationship holds where the larger the company, the lower the net income per employee, with the exception of Toyota. The thinking-intensive side is where the dispersion has occurred. Some companies have figured out how to create wealth by employing even larger numbers of workers.
KE: What else did you notice when looking at these top-performing companies in the thinking-intensive factor?
CJ: Beyond a certain point there was a complexity frontier, a border that limited profit per employee that even the best-performing companies could achieve. We expect this may change over time but there does seem to be an absolute limit in terms of net income per employee that companies can achieve.
KE: Could it simply be said that some industries lend themselves to higher profits per employee, versus others?
CJ: In 2004 we compared the top 30 companies, with an average number of employees of about 198,000, to the next 30 companies in the same industry with an average of 117,000 employees. What was startling was the difference in net income per employee for those two groups: from $83,000 net income per employee to $53,000 respectively. To us, that implies that the differences were in the companies, not in the industry.
KE: Now that we have reviewed your research findings, please summarize your overarching conclusion.
CJ: We believe that it’s time for corporate leaders to think about organizational design as a strategic imperative. We think there is a real opportunity to create wealth by doing so. If a company with 100,000 employees can make the internal organization work better and design changes that add $30,000 and more profit per employee, it would add about $3 billion in profit. The lesson is not to imitate the performance of the top 30 companies, but rather that it is possible to find a way to design the organization internally to be more effective.
KE: You suggest that organizational design has a lot to do with the disparity between the results of different companies. Can you describe the typical environment for an employee today?
CJ: I don’t think that anyone needs reminding of what the corporate world has become. You can pick up any Dilbert cartoon or speak to anyone who works in large corporate America and you will hear of the frustration, the seemingly pointless work, endless task forces, the complexity of matrixed reporting and the politics that people have to work through on a daily basis.
KE: What are the leaders of today focused on? What’s keeping them up at night?
CJ: Regardless of the industry or type of company, the same things are keeping people up at night. Why does it take so long to make decisions? Why can’t senior leadership work together more effectively? Why is it so hard to manage this company? Why can't we improve collaboration across the silos? These are the images and scenarios that really resonate with our clients.
KE: What does your work tell you about how managers are dealing with the complexity present in business today?
CJ: It reinforces that managers are overwhelmed. We did a survey of McKinsey Quarterly readers to try and understand how managers are coping. It confirmed that the volume of interactions by e-mail, voice mail, or meetings has increased significantly from five years ago. In some cases, over 50% of those surveyed said they spend half a day on those per week. They seem to believe that communication overload is becoming unmanageable. It leads to the sharing of information and knowledge but it’s not effective since it is very difficult to find the information and knowledge that you need.
Many predicted that the advent of the digital age would result in the decline of interaction and transaction costs. What you see is that the transactional cost has declined, but the volume of these interactions has exploded.
When you look at how people are overwhelmed by the sheer volume of interactions, the first thing you want to do is minimize these exchanges. We believe that interactions and collaborations are necessary. They translate knowledge, relationships, and reputations into intangible intellectual property in networks and brands and talent. We believe that the companies that outperform are getting the right form of collaborations, but today’s organizational models are not designed to facilitate collaborations.
KE: You refer to the way most organizations today are designed as the 20th century model. Summarize the problems with that model.
CJ: What we call the 20th century approach is just a more traditional organizational model. In our view, the management approach, how the model handles collaboration, performance measurement, and accountability all to need to be re-thought. From a structural approach there is a standalone manager of a silo that has replicated the entire corporation several times. This hierarchical structure leads to a lot of bureaucracy and inefficiencies in a corporation. The same goes for the strategy and the resource allocation approach. The traditional predictive planning cycle relies on the ability to have a great degree of predictability, which is difficult for companies in this day and age.
Collaboration is critical to achieving the unrealized value of many companies. With the traditional model, collaboration is achieved through task forces and is based on a matrixed management approach, which results in high coordination costs. Performance measurement has a traditional approach of the budget being your contract. If you achieve budget then everything is good. If you are responsible for your own budget and there is no aspect of mutual accountability as part of the performance measurement, it’s not going to lead to the desired results.
KE: What are some of your ideas and recommendations?
CJ: There are nine ideas that we suggest. The three ideas around how to manage better include: streamlining the hierarchy, creating a governance approach and a different approach to strategy. The three ideas around improving the flow of intangibles include: formal networks, talent marketplaces and knowledge marketplaces. These are explicitly around trying to create collaboration across the company and across traditional silos, trying to break down those silo walls.
The third set of ideas is around motivating better behavior. The first aspect is taking the financial performance measurement and broadening things out from the traditional budget approach. The second aspect is what we call role-specific performance evaluation. Finally, we will discuss putting this into action. This is a lot to take on so we have some specific thoughts on how an organization can put them into action.
KE: Let’s start with this first one that you call backbone line hierarchy.
CJ: This idea is aimed at companies that are struggling with the complexity of managing their organization. Within it are five ideas. One is around empowering a front line manager to have the accountability to make decisions at that front line. The second is identifying some of the vital utilities and centralizing them. The third idea is to limit the number of layers between the CEO and the front line managers making sure that you have people accountable on the front line. The fourth idea is around standardizing goals and creating a parallel structure.
If you want to make it easier for people to collaborate across silos, you have to have some parallel approaches to how they are organized so that people can find each other. The final idea targets the decision-making process by identifying the systematic way that decisions should be made.
KE: Is your recommended approach vastly different from what you see in your clients today?
CJ: While I focus on financial services, I have done work across the industry sectors and I would say the typical problems these recommendations address include: too many layers, not enough of accountability at the front line, decisions being made in a haphazard way, and replicating support functions throughout the organization. These seem to be inherent problems in most organizations.
KE: What is “One Company Governance”?
CJ: It has three elements to it. One is a powerful CEO that is thinking with more of a leadership versus a management mindset. Another is to create a culture, which embodies the standards, values and protocols that dictate how the individuals in the firm work together. It would include the committee structure and decision-making structure. The final idea is around broadening partnership at the top by trying to create a broader sense of ownership which will help drive the necessary collaboration, and break down barriers between the silos.
KE: In your book you talk about the dynamic management of strategy. How does this work?
CJ: Think about your strategy as a portfolio. We call it a ‘portfolio of initiatives’ where you determine what the initiatives are and then plot them in terms of how easy they are to implement. Just make sure that you are thinking about all of the different strategic elements that you are pursuing. Think holistically about how to integrate the strategy management process with the budgeting process with the resource allocation process, because unless all of these things are integrated, you can’t manage it as a portfolio.
KE: Does this include some kind of scenario planning in case the future doesn’t look the way you thought it might?
CJ: It is implicit that as you manage a portfolio you are doing scenario planning because you are revisiting the investment decisions you have made and adjusting them in a real-time way. That’s the dynamic nature that we are aiming for.
KE: As opposed to having a strategy session and creating a binder and then leaving it on the shelf for a year, you are suggesting this be a very active discussion that happens with senior leadership on a regular basis?
CJ: Exactly. It is an active discussion where your initiatives are revisited on a quarterly basis and adjustments are made to the portfolio as you learn more information. Both your processes and systems must be nimble enough to make changes as you gain more information. In this fast-moving world, companies that are able to move with this degree of flexibility are going to win.
KE: Regarding your next suggestion; I have heard of social networks and communities of practice, but what are formal networks?
CJ: Formal networks are very exciting in that they take communities of practice to the next level. They are a way of creating a community that has some teeth to it and has a formal leader with a formal role in the company. It has a clearly defined membership. It might even have some staff that coordinates how the network gets together. It has a budget. It has a role in the evaluation of the members of the network. It doesn’t have a traditional reporting line, but it can be a place where knowledge is shared.
KE: You aren’t keen on matrix organizations. What are their disadvantages?
CJ: The real trouble with a matrix is that in order to get work done, you quite often have to go up and over an organization. The second is that it puts the employee in the difficult spot of having to arbitrate between two bosses, as opposed to allowing that to happen at a more fluid level. We find that it confuses the accountability and stymies the organization from making progress.
KE: What do you recommend in terms of talent acquisition and allocation?
CJ: I think most companies struggle with how to get the right people in the right jobs at the right time, and then develop them in the best way. The underlying principle is to leverage off the natural self-interest of managers seeking talent and the self-interest of job seekers to find the best job, making it more of a marketplace. In this scenario, HR professionals still serve as the core brokers, but the intent is to make it easier for individuals to find the jobs that they want, and to put a greater burden on managers to make jobs more appealing.
In order for the marketplace to work, there are about eight things that we find necessary. Having the right profiles of the talent is necessary so that the managers can understand who is out there. Managers need to create job descriptions that provide a clear sense of what they are looking for. There needs to be a matching process with the HR professional enabling them to make sure the applications are being screened appropriately and that the marketplace is working. Performance evaluations that are standardized enterprise-wide are necessary so that everyone can look at a talent profile and understand what it means.
There needs to be series of protocols in terms of culture so that the talent doesn’t feel trapped and that a manager feels like their employees are not constantly searching the market to find the next job. The final thing is determining whether you need one or two different marketplaces for permanent versus temporary assignments. Finding the right talent for a temporary assignment is almost harder than finding talent for the permanent assignments. There needs to be a good mechanism in the company to identify the right people for those assignments and to create the right fluidity so that if someone wants to come in and do a temporary assignment, it is possible for them to do so.
KE: This marketplace enables individuals to take ownership for their career paths and seek opportunities inside their current company. There’s also the benefit to the organization of hiring across silos, rather than sticking to promotions within a geography or function.
CJ: Exactly. To create movement across silos helps to break down some of the walls.
KE: There are vendors who have the technology to support this practice with automated online performance management, talent profiles and succession management. Technology has enabled this type of efficient solution.
CJ: We are still in the early days of seeing this in action. Until technology evolved to where it is today, these weren’t as possible. Formal networks, talent marketplaces and knowledge marketplaces all rely on a certain degree of technological enablement, which is what makes these ideas so new and exciting.
KE: What will happen to the wealth of knowledge and experience of the many seasoned workers who will retire in the coming years?
CJ: Knowledge marketplaces could play a role in this area by sharing knowledge more effectively either within or across silos. A lot has been written about knowledge marketplaces and knowledge management over the years. A lot of the material is about thinking through the technological solution to shared knowledge, rather than focusing on the human dynamic. What is the nature of the knowledge that people are looking for? On the supply side, that knowledge is probably in the heads of a relatively small number of people.
We have to create the incentives to drive people to codify and share that knowledge and we have to figure out an enablement system that will allow the knowledge seekers and knowledge providers to exchange information – perhaps through knowledge brokers.
KE: What are some incentives that you have seen work with companies to get people to participate?
CJ: You can put all the money in the world into a system, but if you can't drive people to contribute to it, it is not going to work. Some companies fast track those who contribute a lot of knowledge; others have contests or other incentives. Companies need to think through some practical ways to encourage knowledge sharing in their performance evaluation process.
KE: How should an organization measure its success, in your view?
CJ: We think about performance measurement in two areas. First is around financial performance measurement, which is mostly focused on GAAP, the accounting practices that are used to report earnings. This will always be a pillar of financial performance measurement, but it should not be the only part of it. One metric is to incorporate profit per employee and the number of employees. This is relatively easy to calculate. The second idea is to think of the business units as contribution centers rather than profit centers.
The idea here is to measure people on what they are directly responsible for and what they have control over. The third idea is to create more shared utilities. Measuring the financial performance of these utilities is different than for a business unit.
KE: How would you like to see performance management changed?
CJ: One aspect of this is to have standardized roles across the organization. Each standardized role would have an evaluation and a set of guidelines that are commensurate with each role. Individuals would be evaluated on the criteria that are tailored to their role in particular. Companies should also incorporate more mutual accountability metrics to help drive collaboration across the organization and then reinforce company culture.
KE: How might an organization take these ideas you’ve provided and proceed?
CJ: The master plan or vision requires thinking through each of the nine ideas and becoming familiar with what they are and what the priorities might be for your organization. The master plan is the mental model of how the organization could work two or three years in the future and should be used as a starting point. Then you can incorporate some detail around what that portfolio of organizational initiatives might look like.
KE: Can you make some final recommendations for our audience to take forward and implement?
CJ: There are a couple of areas where HR is very well positioned to drive these changes. Engage the leadership into using the nine ideas that you think are most appropriate. Have a discussion of which ideas are most relevant and whether or not your company is doing all they can on each of those dimensions. Build a business case for your recommendations. Start measuring profit per employee.
If you’ve enjoyed this interview with Claudia Joyce, we encourage you to purchase the new book, co-authored by Claudia called, “Mobilizing Minds - Creating Wealth from Talent in the 21st Century.”
