WINNING THROUGH BETTER ORGANIZATIONAL PERFORMANCEAugust Whitepaper

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“Developing organizational performance has been one of August’s key areas of expertise since its founding. We have helped a variety of companies to design and implement processes and tools to manage their busi-ness better. To enhance our capacities in this area, we recently initiated a research partnership with a leading strategy expert, Aalto Univer-sity professor Timo Vuori.”

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TO IMPROVE PERFORMANCE, START WITH THE FACTS

One of management’s key tasks is to keep improving the per-formance of their organization. This is particularly important, as markets expect continuous improvement in profitability and growth, but delivering such results is difficult in today’s stagnant economy. No wonder so many Finnish companies have told us that building a high-performing organization is at the top of their list of strategic priorities.

But how should you go about it? Many people have a theory, but we think it’s better to start with the facts. Just as the biggest advances in medicine took place after physicians started to take a closer look at the patient’s symptoms and then prescribe a treat-ment, in our experience, corporate strategists are much more likely to cure what ails their company after a thorough examination.

This takes more discipline than you would think. Often, past experience and familiarity with the company make it easy for managers to think they know the source of the problems when in fact the root causes may be something else entirely. Just as no doctor would recommend treating only the pain without also identifying and treating the underlying illness, we believe that remedies prescribed to organizational problems should be based on careful diagnostics, a fact-based holistic under-standing of the organization, and clearly identified cause and effect relationships.

“Often, managers may think they know the source of the problem when in fact the root cause may be some-thing else entirely.”

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WHEN CONVENTIONAL APPROACH JUST ISN’T ENOUGH

Intuition and experience are valuable tools when the situation is familiar and available information is reliable. But this is seldom the case. People’s behavior is driven by multiple factors, many of which are impossible to identify from the outside. For example, a person who is having trouble changing his diet to a healthier one might be easy to dismiss as unmotivated or ignorant. In fact, the real reason may simply be the person’s belief that making healthy food is too time-consuming. Once the drivers behind his or her behavior are clear, the suitable and effective means to improve the situation are much easier to find.

Past experiences may also lead to confirmation bias, the human tendency to interpret information in a way (or even search for such information) that supports our previous understanding and preexisting beliefs – which may guide management in the wrong direction. In addition, gathering correct and sufficient information about organizational problems can be challenging because of internal obstruction: senior managers may censor communica-tion or make sure the perspectives of important stakeholders are overlooked. Seeing and understanding non-obvious patterns of dysfunction within the organization requires access to all these facts, deeper analysis – and, as with a medical diagnosis, the view of a trained, dispassionate observer.

In a business context, normative problem-solving could, for example, conclude that the best way to improve the performance

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of a local business unit would be to increase the local unit’s accountability by redefining its performance metrics or changing organizational structure. Both suggestions may be apt, but they tend to view the situation from a narrow angle. They don’t necessarily identify or address the root cause of the problem and as a result, may not utilize all the levers that the top man-agement has at its disposal.

In fact, the real problem might be that the local business unit just does not see or understand the big picture from the perspective of the whole organization. For the unit, local customers’ issues are much more concrete than group policies or functions, which may feel very abstract and even irrational. Thus, the solution may be much more about improving internal communications and creating incentives to work towards the whole organiza-tion’s common good, rather than optimizing local performance. If that is the underlying problem, simply aiming for a stronger sense of accountability on a local level would probably not lead to any better results – in fact, such actions may actually turn out to be counterproductive.

“Once the drivers behind employees’ behavior are clear, the effective means to improve the situation are much easier to find.”

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“By using a disciplined framework of structured analysis and in-depth interviews, managers can make a decision based on the facts rather than models that are either fashion-able or just happen to be favored by someone in the executive suite.”

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ORGANIZATIONAL PERFORMANCE DIAGNOSTICS TO THE RESCUE

One of the best analytical tools we know for getting at the root causes of operational inefficiency is to apply the grounded theory approach used in organizational research and the social sciences, an applied approach to fact-gathering we call Organi-zational Performance Diagnostics. By using a disciplined frame-work of structured analysis and in-depth interviews, managers can make a decision based on the facts rather than models that are either fashionable or just happen to be favored by someone in the executive suite. In academia, many prominent scholars use this research approach to explain the organizational successes and failures of companies,1 and we have further developed the methodology into a form suitable to the needs of clients who are looking to improve their organization’s’ performance.

Organizational Performance Diagnostics, as we apply it in our client engagements, is a four-step process:

1Study the management system. First, we review the formal and documented parts of the management system, such as the communicated vision and strategy, the organ-

ization’s structure, KPIs, and reward systems. We then look at other elements that are not explicit but still taken for granted, such as routines (e.g. ways of celebrating success) and the way leaders direct assignments.1 The Grounded Theory method was used by Professors Timo Vuori (Aalto University) and Quy Huy (INSEAD) in their recent well-publicized study of Nokia’s decline. The re-search found that a significant reason for Nokia’s failure was a culture of fear among top and middle management. Read the full article here and one interpretation by Professor Herminia Ibarra in the Financial Times here.

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2 Interview the employees. Next, we conduct in-depth interviews with company employees. The informants are selected to reflect all relevant groups across functions,

geographies, and organizational levels. The interviews are conducted anonymously, stressing the importance of speaking freely without fear of consequences (and the rarity of opportu-nities to do so). The goal is to build trust with the interviewees to enable an uncensored conversation in order to understand why individuals in the organization do what they do. We ask each interviewee open-ended questions and then probe for fur-ther details and concrete examples to build the best possible picture of what drives the organization’s behavior. We ask such questions as: What were the key things you did yesterday? What went well? What things were difficult for you? Why? Can you give an example?

Such open-ended questions help us to understand employees’ daily work and interactions, which makes it easier for us to see the situation from the employee’s point of view and better iden-tify the deepest drivers of behavior.

3 Code interviews line by line. Next we analyze tran-scribed interviews line by line. Our structured coding process identifies patterns and relationships between

the management system, challenges and strengths, and the behavior of individuals and teams. Such preliminary codes are then grouped into categories that describe what the informant is

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speaking about and how they speak about it. This enables us to note relevant nuances that would easily be missed with a more straightforward approach and makes it possible to trace later conclusions to their source in the data. This iterative approach makes it possible to validate findings and form a detailed pic-ture of the different issues influencing the organization’s perfor-mance. While we developed our coding model in past cases and through hundreds of published academic articles, we always take care to treat the informant’s statement as unique rather than forcing it into a predetermined framework.

4 Analyze statements and determine the performance drivers. Now we compare similarities and discrepancies between the employees’ statements. This enables us to

pinpoint relevant differences and their antecedents between people’s viewpoints and behaviors and management’s expec-tations. This information helps us categorize and organize their statements into relevant themes. By taking this analytically driven approach to understanding the underlying dynamics of the organization, we form a deeper and more nuanced view of what is hap-pening in the company, what drives performance on individual and team levels and what should be changed to “make the organization tick”.

Once the overall picture is validated, we usually see important causal links – which aspects of the environment, history, and management system have been driving problematic behavior and which actions will nudge that behavior in the right direction. Next, we visualize the overall model of performance drivers so that the key issues and causal relationships between them are easy to interpret.

“Once the overall picture is validated, we usually see important causal links.”

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WITH RIGOR TOWARDS THE TOP

It can be tempting to address an organization’s performance issues simply by looking through the lens of one of the many popular normative management theories or by benchmarking a similar company. We believe, however, that this is seldom enough to make a meaningful and lasting impact on performance. True impact requires developing an understanding of the unique situation, history and ways of working in each organization and tailor our response accordingly. Intuition and gut feelings may make sense for smaller decisions, but in a case that may well determine a company’s future, applying a rigorous, fact-based approach is crucially important.

CASE

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Setting the scene

A new managing director faced a challenge: in recent years, his company had lost market share to competitors. Profits were modest, and customer satisfaction and employee engagement were declining. This was particularly worrisome as the company had a successful history and a strong tradition of customer ori-entation.

The company had been implementing its new “One Company” strategy at this time and the organization had undergone several changes. The biggest changes included the implementation of a new ERP system and the establishment of a centralized supply chain function. The intent was to create an integrated operating model which would have led to increased synergy and thus, increased cost efficiency of the whole organization. But a plan that made sense on paper was turning out to be a disappointment when it began to be implemented.

Analysis phase

Using Organizational Performance Diagnostics we were able to form a holistic picture of the true pain points and the distinct root causes of the problems and understand what remedies would actually correct the situation.

We found that the new operating model was not yet embedded in the organization. Local units still focused on optimizing their own

CASE: Tackling operational challenges through changing organization’s culture

CASE

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performance by directly violating the new integrated way of working. As the evidence accumulated, our team was able to identify a set of operational challenges and an interlinked set of cultural challenges.

On the operational side, we found that while employees were motivated to serve their customers well, they indicated that internal processes felt bureaucratic and were taking time and energy away from customer-facing work. These challenges were causing sales and delivery process hiccups, such as unreliable customer deliveries.

On the cultural side, the challenges stemmed from the company’s his-tory of acquiring local players. Many interviewees described the compa-ny’s situation in a way that helped us conclude that the company had no group-level cultural identity but rather several local cultures. This was natural, as people identified themselves mainly with their local unit, and not with the whole company. Thus, our diagnosis was that the new centralized operating model would have met resistance regardless of how well it actually functioned.

Digging deeper, we were able to figure out the vicious circle between operational and cultural challenges. Problems in oper-ations were pushing the local units to focus even more on their own business at the expense of cooperation, which in turn ampli-fied the cultural challenges, further worsening the operational problems as people began to resist the new ways of working

“The diagnosis was that the new centralized operating model would have met resistance regardless of how well it actually functioned.”

CASE

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even more strongly. It was clear that the managing director would not be able to break this pattern without addressing both the operational and cultural challenges at the same time.

Recommendations based on the analysis

After our research, we recommended three major actions:

1Launch a fresh “One Company” campaign. We believed the managing director needed to make the case for change in a more positive way and to

ensure that the new way of working was understood at all levels of the company. The campaign also included a simulation game to let people get an experience of how the new operating model actually works. We also suggested increasing cross-unit job rotation.

Viciouscircle

Overly heavy sales process

Feeling ofbureaucracy

Unreliable deliveryfor customer

Problems in managingcentralized functions

OPERATIONAL CHALLENGES CULTURAL CHALLENGES

Difficulties to match supply with the market demand

Local (rather than company)identification

Limited understandingof the big picture

No single culture

Lack of commitment to the company

CASE

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2 Shift the focus of performance monitoring towards larger units. As the new integrated operating model required business units to

optimize the whole entity and increase collaboration, the executive team needed to focus on managing performance of larger entities that would encompass all key functions. Local optimization needed to be dis-couraged.

3 Communicate more. Insufficient communica-tion and change management had contributed to the pain the organization had experienced

when ramping up the new operating model. Our anal-ysis revealed the precise bottlenecks in communica-tion, which enabled us to design specific remedies. For example, we thought the company needed more communication on the results and progress of the new operating model implementation. We also proposed to introduce regular management Q&A sessions, bot-tom-up feedback loops, as well as new types of digital and visual tools (such as webcams) to facilitate rich communication across the units.

Tackling the operational problems alone would not have been sufficient to change behavior. However, by taking a long, thor-ough look at the operational and the cultural challenges the company faced, we were able to help the new managing director achieve a meaningful impact on organizational performance.