Managing The Forces For Organizational Change

Speaker A So our next speaker is Ron Nicholson, who is Senior Partner and Managing Director at BCG. This is an extensive resume, so I'll keep it short, but he has served as, among other things, worldwide, head of BCG's Global Practices, the head of their organizational practice, as well as the head of their technology, media and telco practice. He was actually named Top 25 Global Consultants by consulting magazine team. He's also PUCO MBA. And so I'd like to welcome ryan McGregor.

Speaker B Thank you, John. I want to thank John for inviting me. But also I want to particularly thank Rich Burton, who was my professor 30 years ago, and he really inspired the love of organization. So I've been doing it for 30 years. What I want to talk about today is really a process, and so I'm going to do it in a somewhat context and content free way. But I want to describe the uses of this process. This is something I've been developing for literally decades, and it's been used now. We're using it in change management in general, but very specifically in organization ways. So the first and most simple use case, and this is what we started with, was taking an existing organization and changing it to reduce cost, reduce the number of layers in the organization, and to increase the span of control. Very traditional view of organization. The second use case is actually to take a new organizational design and use this process to implement a new organizational design. The third case is one that I'm very excited about because we're doing this now. If you've read any of our current work on adaptive strategy, what you see is that we actually have to create organizations that are much more adaptive to be able to work with the agility they need to work in this environment. So the way to think about that spectrum is entropy at one end of the spectrum. The example I'll use today is a very low entropy organization. It's january 5, 1914. Henry Ford announced the $5 workday, and it started the moving assembly line. Everybody was optimizing on the process and what specifically be done on the other end of the spectrum. These organizations that we're seeing today have very high entropy, but they're less efficient and less effective. So I want to talk about the process. So the statement of the problem is as follows. So what we're going to do is move from one organization to another. And the key to this is this is what my clients were asking for. Most of our clients, by the way, are Fortune 100 or their equivalent around the world. So these are companies that typically have 100,000, 200,000 people in them. And they came to us and said, we need to figure out how to change. And so this process is scalable. So I've done this process, and I don't recommend my clients do this with something less than 20,000 people, but anywhere between 50 and 300,000 people. We use this to change organizations. So what we're really going to do is move to this as rapidly as possible. As you can imagine, large organizations need to move from one state to the other very quickly. Second, make sure everybody has ownership. This is really critical because when you make change to organization, if the people in the organization don't own it, it doesn't work. Efficient, effective, of course, retain the highest count individuals and minimize the number of layers of management and span of control. So I'm going to talk specifically about delayering today. At that first example or use case I mentioned the interesting thing about this. Most of the clients have come to us over the years and say we need to reduce cost. Our costs are out of control. We want to lower our overhead cost. So the objective they start with is this the value is in this order that actually much faster decision making. You end up with better accountability, so forth. Once organizations have been through this process and I've actually had the pleasure of doing this in many different types of organizations, from large industrial companies to large telcos to technology companies. Actually last year had the opportunity to do this with one of the headquarters of the services within the Pentagon, which was fascinating because the culture is very different there. But the process worked. So let me be a little pedantic here and just go through a few definitions. I'm going to show some slides that are going to hinge off these definitions. So first layer, when I talk about layer of an organization, it starts with the CEO at the top and the people that report to the CEO are layer two. The people report to them are layer three. So layer is a structural dimension of the organization level. When I talk about level, I'm talking about pay grade. So level one in this case will be the CEO and his equivalents or her equivalents and so forth down the pay scale. So if you look at this simple diagram, level two are the two people in the boxes on the second row. There's another person over here that happens to be a level three, but a layer two person that might be in a large corporation that might be the public relations people or investor relations, something like that. The reason we do this, by the way, and then we talk about, just to finish the definition, a supervisor is anyone that has people reporting to them. So they're people that manage other people, while individual contributors are people who are doers, not managers. I know that's a fairly binary definition, but we found it to be quite useful. Now why do I do all this? To basically do a diagnostic to show the client what they're really operating as. And I apologize for the complexity of this chart. This happens to be a sanitized data slide of a very large US telco okay? And the numbers are 50,000 because I've rounded them. But this is what I call the layer level diagram. So the top left is the CEO of this company. And what is on this on the Y axis are the layers. So these are the layers of the organization, and these are the levels of the pay grades. So these are the senior executives. So when you show this but I've now seen enough of these pictures, I can look at them and see problems right away. So I showed this to the CEO and I said, Dave, who are those 20 people? He didn't know you knew a few of them. So he had 20 people, very highly paid at layer five in the organization that he didn't even know. The second thing, I actually interviewed these eight people. These eight people were fantastic workers. They had no clue what the people above them did. And you can see when I asked them, who are these managers above you? They said, I have no clue, don't know the other thing. And I'm going to come back to this a minute. Organization structures should be geometrically, should expand geometrically. But I almost always see somewhat of a normal distribution here. And when you see that, it's because they have very inefficient structures. And one of the problems, by the way, in getting to organizations like this, one of the reasons this process we're going to talk about is so critical is because most large corporate organizations have what I call the frozen middle. And what do I mean by that? Well, my first career was at nuclear submarines. So when you're a nuclear submarine and you go down to 200ft or 300ft, you can be in sea State five and you don't feel a thing. You're on the surface in sea state five, everybody's getting sick, you're tossing on top of the ocean. Most middle management is at 200ft. So we had to have a process to penetrate through that organization. So there are two things I already mentioned. One of these, the geometric nature of organizations, that organizations expand geometrically. One of the insights that I think we have here is that we needed a process that expanded geometrically, not linearly. Most other practitioners had tried to redesign organizations with a linear process or by providing more and more consultants. Well, that was failing. It doesn't work. The second one. And there's a concept in chemical engineering which I love called Le Chapgier's Principle. Le Chapgier's Principle says if you take a system in equilibrium and you apply a force, the system will rearrange itself to relieve the force. So this whole concept is based on these two things. So this is the point, by the way, if you think about the geometry of organizations, if you had a span of control of nine, you could manage 600,000 people with seven layers. Most organizations, I find, have ten to twelve layers and medium span of four to five where the optimal would be eight to ten. Or in some cases, like some companies are using technology effectively, they get the span of controls of 15 to 20. And we rarely see organizations that are of course this small. Now, this is the Lashati's principle point. So the idea of the process is to design a set of forces on the organization and think about it as a differential equation. So you're setting up this differential equations. What you're really doing is setting the initial conditions and just pushing go. And if you do it properly, everything will happen appropriately. So one of those, and the top one is the most important, is CEO direct involvement. Two thirds of the time that I do this diagnostic, I do not do the process. And the reason is because the CEO is not willing to make tough decisions. Others, transparency, everybody sees everything, peer pressure. So I'll describe a bit of how the process actually works. Principles, I'm going to come back to that in a minute as a mechanism. Visibility to results, fact based analysis and all these others. So over time, we've defined these processes to be very specific. Now, so what is this? This is important. There's two roles that a consultant can play, I find can play effectively in an organization. One is an analyst to put the facts in front of the client and show them the truth. The second is a catalyst. And just as in the sense of a catalyst, which is something that accelerates a reaction but doesn't take part, and that's the key thing. It's actually one of the things we've done at BCG over the years is move to a model of enablement as opposed to direct engagement. It's very related to some of the things that we were discussing earlier around visible and invisible forces. So this is a cascading process and this is where the geometry comes in. So it starts at the top cascades a layer at a time through the organization. And that's how the organization is redesigned. And I'll show you some of the specifics in a second here. So this process, by the way, takes about six months to do. And when I talk to my clients and they say, well, how long is it going to take me to do this? I say six months. Well, we can't possibly wait that long. I said, you can't afford not to. And so they all want to do it within a weekend or it just doesn't work. Another concept I use a lot is organizational momentum. Organizations have a mass and a velocity and the momentum of the organization. Most large companies are like oil tankers in the water and a lot of CEOs would like to believe they're on a speedboat. So they're left full rudder, right full rudder. And by the way, the crew standing behind said, what's this guy doing or Gal doing? Because the ship just keeps doing this. So again, another concept to think about is how do you change momentum of an organization? You take the first derivative with respect to time. So you have a change of mass with respect to time times velocity plus the change of velocity with respect to time times mass. That strategy. The first one is changing organization. So anyway, we start with a fact base to find out what the picture looked like. A lot more like more than I showed you earlier. Then we develop a new operating model for the company. And this typically involves a new design. So in one case, we took an organization from a very functional organization. This is an It services organization of about 130,000 people. And we went from a functional organization to a matrix organization over this period of time, which became very different. It was a challenge, but it worked very well. Then we outlined the process, everyone to buy into it. And then we start the cascade top down. And it's very lonely. One of the clients I did this with about 25 years ago was a major airline. And my client I'll mention was Bob Crandall at American Airlines. And Bob is one of the smartest CEOs I've ever met. But he and I sat for literally a month going back and forth with designs of his layer two. And he's a very decisive guy. So he makes decisions and then the layer two then does the next layer and so on. And so this is a typical process. Now, I mentioned earlier this was the telco situation. This was a large, greater than $50 billion market cap company revealed the picture I showed you earlier. Multiple layers, low spans. We worked with senior executives to redesign the structure. And then we did this cascade. So I'll show you now the before and after picture. Not yet. The other thing that's really helpful in this process is using a set of principles and a set of guidelines. So think about it as the constitution and the laws. So we begin by with the senior executives setting up the principles for the process. It's one of these forces I mentioned. And then we have a set of rules and any violation of the rules, any exceptions to the rules, and there are many exceptions, by the way, because we want to make the right decisions for the organization, not just some algorithm. But any exception has to get surfaced up to the senior management team, typically the CEO and his layer two. And so there's a natural force that nobody wants to ask for exceptions from their boss. And so it has a tendency to stop a lot of the exceptions. So this is an example set of principles. And again, I'll just pick a couple of these. These are very high level, so things like all decisions are subject to senior management approval. That's why this exception process coming up. We'll deal in open and direct fashion. These are about cultural change. I should mention we talked earlier about culture. One client we did this with, we did a cultural diagnostic before we started the process. And what we found is that they had a passive aggressive culture. So the management in meetings, they'd all be really nice to each other and the meeting would break up and then they all talk behind everybody's back. And so we saw that, we recognized, we took it to the CEO and said, look, you have a real culture problem here with passive aggressive behavior. So one of the things we did in terms of this cascade is filtered out the people that were extremely passive aggressive and it changed the culture after the process is finished. The last point, by the way, is really important is any violation of these principles will require a change in the principles to proceed. So the only way you can violate these is to change them. And so for somebody and by the way, sometimes people do come back and say, well we didn't add one or we need one. And if the group agrees, we add the principal to the group. These are the design lists. You'll see, these are much more specific things like managers will have a minimum direct span of seven, VPs will have direct reports, so on and so forth. These are things where at the design level, when someone's designing their organization, they actually can ensure they're hitting these criteria. So now I mentioned this cascade. So here's what happens in a cascade. In a cascade, one cascade typically takes five to six weeks. It starts on Monday morning of the first day with a leader coming in and saying, okay, you are my team. I've chosen you. Here are your roles. Now your job is to design the next layer of the organization. So the first thing they do is structure first. Because what I found over the years, people want to design organization around personalities and individuals. So we start with structure first boxes on the chart. So that takes about a week and a half. They come in and perfect example, that telco example, the head of network came in to the CEO and said, well you don't understand our organization. It's highly technical. I only really can have four direct reports. Now the CEO basically said, well I'll tell you what, let's meet next week and if you can't have seven to ten direct reports, I'll find somebody that can. Now why is that important? Because let me just give you the example. I'm old enough to remember the Ed Sullivan Show. I assume some of you are as well. So there was a great act that people spun plates on a stick. And watch these guys and they are good managers. This is very binary, but they're managers and they're doers. So managers are the people that know how to spin plates. And you watch, the guys are really good at this. They get the plates up, they step back, wait till nobody's Wobling, and they put another plate up. And they do that until they're only running back and forth, keeping the plates up. Well, that's why leadership and management is about having a high span of control. Because by the way, if you go too far, plates fall. And the worst thing though is when somebody has only two plates, the manager's doing this and how does the plate feel? Over managed. So you got to have this larger span of control. So the second part of that so then we decide, okay, here's the structure, it gets approved. Then we have people choose the candidates. Typically like to see three candidates for every box on the chart, rank them and then choose who is in that organization. Now the challenge here is if you don't take a slice off the pyramid, all you effectively do is push everything down. And so in union organizations, you have no choice but to do that. So you have what I call a bump and hole, which is if somebody doesn't make it this layer, they're automatically going to get a job below them and that's going to cascade all the way down till people, the junior people, leave the organization. That's not optimal. The other thing that's not optimal is what I would call bump and out, which is nobody at this layer gets a job at the next layer down. But generally speaking, this requires a lot of tough decisions by management is you have to outplace people through the slice of the pyramid, which means very senior people are leaving and back to that middle management problem. Middle management is leaving too, because otherwise frankly, one of the things I found over the years is if people promote more of the junior people and give them more of a challenge, the organization becomes much more dynamic and much more effective. Okay, so this is the picture, by the way. This is the one I showed you earlier. And that's the after picture after the process. So you can see lot fewer Spanic control. You can't see the Spanish troll in here very well, but you see many fewer layers. It started with 14, we ended with eight. And this now is more of a triangular distribution as opposed to a normal distribution. And this is an important point. This was the point I was making earlier about the fact that this organization was able to make a decision very quickly. It would have taken a lot longer if they had the previous structure. Common pitfalls. Okay, I already mentioned one, not getting buy in by the CEO. Got to have leadership on board. People try to attempt to put a lot of process and systems in this fact, one of the things I've learned about this when I first started doing this 25 years ago or whatever, I did an extensive diagnostic of figuring out what all the activities in the organization were. I created a relational database of customer, supplier and product internal products and external products. I could create de average targets. And when I realized you don't need it, the people in the organization already know what's valuable, not valuable. And so I've gotten to the point where now I just have the organization make the decisions. So that's it. Let me stop there and open it up for any questions.

Speaker A You said that this only works for 50 to 30,000.

Speaker B If that's what I said. I just spoke it does scale. In fact, one of the reasons I divide this process is because it scales geometrically. So I've been able to do this with organizations up to 300,000 people. One of the things that's important though is having these forces in place is really critical all the way down and you do get some attenuation. So it's very important to start at the top and really make sure. So when you start at the top, by the way, some of the leadership team small groups is why do we have to go through this rigorous process? The answer is because once they go through it, they force everybody else to go through it. So your point is good. It is very scalable and it scales to fairly large organizations. Is there a minimum? The minimum to me is setting up a process like this requires a lot of tension, it requires data analysis and so on. So I would say anything above 20,000, I would use this process. The way I think about it is anything I could do in a spreadsheet I wouldn't probably use this process. I was saying you use the phrase or the term operating model. I just wanted to check what components you're thinking about when you're talking about operating model. Okay, good question. So when I say operating model, I encompass a couple of things. Basically the strategy of the organization. And so that's why I mentioned adaptive strategy and so forth. So it's the intersection essentially of strategy, organization and how the company operates. So the way we think about strategy is there are position advantages and capability advantages. And so we look at what those position and capability advantages are for an organization and then we try to optimize the strategy for competitive advantage and then organize around that.

Speaker C John, question up here. Yes, thank you for the presentation. We talked about no individual contributors above level four. And then one of the reasons for forcing a larger spend of control was if you only had two reports you would drive them nuts with micromanagement. Is there not in many corporations really important work at senior level special projects where the manager himself 80% of their time needs to be doing that thing with no reports and actually two reports may be too many for that person. So I'm wondering about the rule no individual contributors because I know many corporations have used very senior EVPs for these special assignments which are really time consuming. So I just wondered if you'd comment on that. Because in our system we will allow individual contributors all the way up to direct report to the CEO.

Speaker B If there are these special projects, it's a great question. And what I almost always get from clients and they couch it this way, they say but we have player coach models, so we have managers who also do. And what we found, and we've done exhaustive analysis of this over the years is generally speaking and I have to care because I'm talking somewhat in absolutes, which I don't mean to, but generally speaking the player coach's model is about as effective as it was in basketball. Doesn't work. Now, there are examples to your point where, yes, you need individual contributors very high in the organization. That's why if you think about those principles, those exceptions get made. So when you have a principal scientist, for example, or you have someone who is really critical in salesforce, maybe that would go up as an exception because everybody recognizes that role, that person is critical. What happens? However, I'll give you the downside of the individual contributor problem. So that picture I showed you this, imagine this picture that started with 14 layers and had median spans of control of twelve. Why? Because they had individual contributors everywhere. It stopped the cascade of the organization. So you didn't have people managing, you had everybody getting highly paid and just filling up the organization. And so one of the things we found is important point by the way, the metrics really matter. During the financial cris, I got a call from one of the large Wall Street banks. They said, Ron, we want you to come in and do this process with us, but we want to do a pilot on one organization first. And so surprising to me, an organization volunteered. I'd never have anybody volunteer to do this, by the way. So I go in and I'm talking to the CEO of this business. I said wow, so why'd you volunteer? You're not going to find anything with us. We're the best in the world. I said really? That'll be great because I've never seen this before. And he said, well, we have average span of control of 16. I said, okay, what's your median span of control? It was three because he had call centers. He had call centers with 80 people sitting out here and they're using the average instead of the median. He got a lot of opportunity. Anyway, any other questions? Yes.

Speaker D Just think about some areas with technical expertise. And so with the assumption of a pyramid and the nature of the work, one of the things we found is in some organizations that have smart analysts that would use and that's kind of where some of the middle came from, where they really didn't need some of the lower task positions, they needed fewer the very low skill tasks. So I wasn't sure how that worked in different organizations. There might be some that would have very highly they're not managing people. They're managing projects, processes and many other things.

Speaker B A couple of things. One is that when I and again, I'm speaking in absolutes I'll show you a chart which it's in the appendix here. But the span control depends on the activity. So if you're doing something which is simple, repetitive tasks like manufacturing or call centers you could have spans of control of 15 to 20. But when you come over here to places like this gets to your point things like treasury or where you have really need deep expertise tax, for example, you have much lower span of control. So there's not a one size fits all thing. I did this, actually in an organization, one of the large defense contractors that had a matrix structure. So it had large programs for large aircraft or ships and so forth. And so we had to do this process simultaneously like that. It's really, really quite interesting. Okay, I think I'm out of time. So, John.