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Christopher G. Worley and Edward E. Lawler III

Designing Organizations That Are Built to Change

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IN CONTEXT

Designing Organizations That Are Built to Change
As the pace of globalization and social change quickens, executives are correctly calling for greater agilit y, flexibilit y and innovation from their companies. Largely ignored in these pleas, however, is the simple fact that organizations have been designed to seek sustainable competitive advantages and stability. Indeed, buried deep in the managerial psyche, and bolstered by decades of theory and practice, is the assumption that stability is not only desirable and effective but also attainable. In their classic book The Social Psychology of Organizations, Daniel Katz and Robert L. Kahn note, “One can define the core problem of any social system as reducing the variability and instability of human actions to uniform and dependable patterns.” The popularity of process improvement efforts, from total quality management to Six Sigma programs, provides ample evidence of the consuming desire for stability and predictability in today’s organizations. In fact, those are the very qualities rewarded by the financial markets. It is not surprising, then, that most large-scale change efforts fail to meet their expectations. A major problem is that many of those efforts have focused primarily on developing more effective change models or seeking the latest approach for overcoming resistance to change. But even the most advanced change models will stumble when they face organizational designs and management practices that are inherently anti-change. The truth is that the effectiveness of change efforts is largely determined by organizational design, or how a company’s structure, processes, reward systems and other features are orchestrated over
Illustration: Jud Guitteau/theispot.com

time to support one another as well as the company’s strategic intent, identity and capabilities. In a world that is perpetually changing, an organization’s design must support the idea that the implementation and re-implementation of a strategy is a continuous process. However, a number of traditional organizational design features tend to discourage — and not encourage — change. Thus, to transform themselves into organizations that are “built to change,” companies need to rethink a number of these basic design assumptions. Managing Talent Job descriptions are emblematic of stability and as a result are a poor fit for any builtto-change organization. Of course, job descriptions can be updated (although companies tend to be slow in doing that), but why go to the trouble of specifying job responsibilities in the first place only to have to tell employees that their latest assignment comes under the rubric “other duties as assigned”? Instead of telling employees what their jobs are, built-to-change organizations encourage people to find out what needs to be done. In lieu of job descriptions, frequent goal-setting reviews help establish what individuals and teams are expected to accomplish in the near future. Cascading throughout the organization, this process can be facilitated by an intranet-based performance management system. When hiring people, built-to-change organizations seek individuals who like change and are quick learners. That’s why companies like Southwest Airlines, Nike and W.L. Gore & Associates specifically look for people with initiative and the right attitude, including the desire for professional growth. Built-to-change companies need to have an employment contract that states that change is to be expected and that support for change is a condition of long-term employment. One of the best things that former CEO Lou Gerstner did when he began IBM Corp.’s massive
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Many executives talk about the need for greater flexibility and adaptability from their companies. But the truth is that most businesses have organized themselves in ways that inherently discourage change.
CHRISTOPHER G. WORLEY AND EDWARD E. LAWLER III

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IN CONTEXT

technology team that hits key milestones in a project for installing a new system. In comparison to bonuses, stock plans are likely to be less effective in motivating change because the line of sight between the desired behavior and reward is less clear. But broad-based stock ownership can provide executives with a better platform on which to stand and talk about the advantages of change than a stock program that includes just those people in the corner offices. When only senior managers have stock options, employees cannot be In work environments that call for changing task assignments, faulted for thinking, “Why should I listen to calls for paying the person — as opposed to paying the job — is a much change that benefit those only more effective approach. People have a market value; jobs do not. at the top?” Finally, companies should consider shifting the basis of pay from the job (and seniority) to the individual focused on the skills and knowledge necessary to (and what he or she can do). In work environments support change and other organizational capabilithat call for changing task assignments, paying the ties, and aimed at the competencies that will help person — as opposed to paying the job — is a much the company add value both now and in the future. more effective approach, particularly when it Much of that training can be delivered “just in comes to retaining the right people. After all, peotime” over an intranet. ple have a market value; jobs do not. People can change companies for higher pay; jobs cannot. Reward System Pay and other rewards that are based Perhaps the most important benefit of personon seniority stifle change. They do little but reward based pay is the effect it has on organizational people for surviving. Built-to-change organizaculture and on employees’ motivation to change. tions utilize a variety of reward practices Instead of the company rewarding people for ex— including bonuses, stock and “person-based panding their jobs or for moving up the hierarchy, pay” — that encourage both current performance it recognizes them for increasing their skills and for and change. Bonus systems can be particularly eftheir added expertise. That reinforces a culture that fective motivators during periods of change by values growth and personal development; the reestablishing a clear line of sight between results and sult is a highly talented work force that is receptive rewards. Individual plans that offer relatively large to change. Those characteristics are particularly bonuses can provide powerful incentives for emvaluable when an organization needs to improve ployees to perform well and to alter their behaviors its competencies and capabilities, because the comwhen a new element of strategic intent calls for it. pany can adjust its reward system to encourage Group and business-unit bonuses can be very helpindividuals to develop the necessary skills. ful in focusing team performance and in creating a The implementation of a person-based pay sysshared need for change. tem must star t w ith a clear model of the In some circumstances, companies should concompetencies required to meet current customer sider one-time bonuses awarded at the completion and environmental demands, as well as a notion of of a strategic change effort. Members of a newthe kinds of skills and knowledge that employees product development team, for example, could be will need in the future. This information can guide given bonuses when the product ships. In other professional development activities that are tied to tactical change situations, short-cycle bonus perithe reward system. One indirect effect of personods (perhaps every three months) that target phases based pay is a decreased emphasis on hierarchy, in the “implementation” of change often make because individuals don’t need to be promoted to more sense, for example, to reward an information transformation was to redefine the relationship between company and worker. Previously, IBM had a policy of lifetime employment, but Gerstner changed that to employment for as long as an individual has the required skills and knowledge. Of course, people should be made aware of this type of employment deal before they’re hired, so they can make an informed decision about whether they want to work in such an environment. Once they join, training should be a normal, ongoing process,
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receive a significant raise. Instead, they can develop a new expertise. Among the positive results of that change are fewer individuals jostling for promotions merely because they want higher salaries.

Organization Structure Built-to-change organizations must be in close touch with market and other environmental demands to define and redefine continually a series of short-term competitive advantages. To achieve that, all employees — not just senior managers — must observe and report on market trends and identify competitive opportunities. They need to think constantly about potential alternative futures, creating a variety of short- and long-term scenarios. Instead of scheduling static annual reviews of the environment, built-tochange companies must adopt flexible and reconfigurable organizational structures. The key design principle here is to maximize the “surface area” of the organization by connecting as many employees as possible with the external environment. Structures that accomplish this increase the external focus of its members; bring in critical information about trends, opportunities and issues; and prevent people from becoming ossified in their roles. Thus, as many employees as possible should have contact with regulators, suppliers, the local community, watchdog groups and, most importantly, customers. Built-to-change companies are concerned about being caught offguard, so they place everyone close to customers and the environment. That way, when the time comes to alter the direction of the orgaThe key design principle is to maximize the “surface area” of the nization, ever yone moves organization by connecting as many employees as possible with together based on a common understanding and felt need customers and others in the external environment. for the change. A variety of companies, inganizations with large surface areas because of all cluding IBM, Nokia, health care corporation the alliance relationships that managers and emHealthways, based in Nashville, Tennessee, and ployees must address. Lord, an adhesives manufacturer in Cary, North Other companies have maximized their surface Carolina, have increased their surface area by area by deploying multiple independent business adopting front-back, process-based or network units, outsourcing and matrix relationships. For structures that increase the centrality of customer instance, Berkshire Hathaway Inc., with its wide and other external demands. In addition to coordirange of autonomous business units in multiple nating functional, product, service and geographic markets, can adjust its corporate portfolio relaissues, these multidimensional structures continutively easily without the angst and grief associated ally ask employees to consider the interests of with traditional downsizings and re-sizings of incustomers and other outsiders in the decisionFALL 2006 MIT SLOAN MANAGEMENT REVIEW

making process. For example, the “front end” of a front-back organization creates flexible, crossfunctional and customer-facing teams to configure and sell unique products, services and systems. The “back end” develops new technologies, products and systems; maintains the supply chain; and conducts other activities that support the front end. As a result, customer requirements, supplier relationships and other environmental demands have an ever-present influence (either directly or indirectly) on nearly everyone in the organization. In a process-based structure, cross-functional teams address the requirements of both internal and external customers. At Healthways Inc., for instance, each core process — understanding the market, developing new businesses, building solutions or delivering value — must balance current demands for efficiency with future market needs. Although each process within the organization might have a slightly different focus, successful execution requires the application and coordination of each function in service of customer requirements and corporate objectives. Network structures consist of individual organizations (or units within a company) that have been pulled together to exploit specific opportunities. An integrating entity coordinates the activities of the different parts, much as a studio assembles and coordinates the work of actors, screenwriters, camera crews and others necessary to create a movie. In general, a network structure leads to or-

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Leaders Executives in built-to-change organizations need to practice shared leadership — what Mark Hurd, the CEO of Hewlett-Packard Co., has described as, “leadership as a team sport.” Viewing Information and Decision Processes Annual budgets are CEOs at the helm of a big ship setting direction and a poor fit for a built-to-change organization because ordering people around is the wrong image. It might they are typically inflexible and frequently outdated be appropriate for traditional hierarchical organizaeven before they can be put in place. There is no rea- tions, but it does not fit a built-to-change organizason why the setting of spending patterns should be tion. A better metaphor is to think of the corporation based on the time it takes for the earth to revolve as a community of people spread over miles of hills, around the sun. Instead of relying on annual bud- fields and forests. To get everyone moving in a new gets to control costs, built-to-change companies direction, competent leaders need to be dispersed should deploy profit centers and activity-based across the countryside, all connected by a shared costing. Whenever possible, a profit and loss should sense of identity and purpose. Shared leadership has three advantages. First, it govern each business unit. To ensure good decision making, information needs to be transparent and effectively substitutes for hierarchy. Spreading up-to-date, indicating the current condition of the knowledge and power across many people allows the organization to process and respond to information Think of the corporation as a community of people spread over quickly without requiring a tremendous amount of topmiles of hills, fields and forests. To get everyone moving in a new down direction. Second, a shared approach builds a direction, leaders need to be dispersed across the countryside. deep cadre of leadership talent. By involving everyone in organization’s capabilities and providing a clear strategizing, creating value and other activities view of how the company is performing relative to typically performed mainly by senior execs, a company can develop leadership and management its competitors and its strategy. Performance-based information systems are a skills among a broad audience. Third, multiple particularly effective way to motivate and empower leaders at all levels who understand the external employees in a built-to-change organization be- environment and the internal capabilities of the cause they facilitate moving decision making to organization often see important trends that call wherever decisions can best be made and imple- for corporate change before senior management mented. A good example is mySiebel, a personalized does. Most importantly, shared leadership supinformation system created by Siebel Systems Inc. ports more effective change management. In any before its acquisition by Oracle Corp. Each em- change effort, there is typically more to do than a ployee could log onto mySiebel and gain access to single person or a few leaders can handle. Shared corporate, market and competitor information; leadership helps to solve that problem. Also, data on current projects; and quarterly objectives change efforts that are led by a single hero leader for any individual in the organization (including are fragile entities; if that individual falters or Tom Siebel, the CEO). This widely available infor- leaves, the change effort stalls. With shared leaderm a t i o n a l l owe d e ve r yon e t h ro u g h o u t t h e ship, competent personnel are always available to organization to make customer-related decisions keep the momentum going. To develop a shared leadership capability, a comwith the most up-to-the-minute data available, and
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tegrated divisions. Similarly, W.L. Gore & Associates Inc.’s small, interrelated divisions ensure that each unit is maximally exposed to its relevant market. Internal matrix relationships can also increase an organization’s surface area because, when employees from different functions or programs interact, they often must deal with a variety of alternative market perspectives.

it helped people to align their individual behaviors with corporate objectives. The system thus facilitated the goal-setting, performance review and reward process.

pany has to implement a program for leadership development that involves many employees and not just a few “stars.” It also needs to share strategy information and business results with managers at all levels. Finally, it needs to obtain input continually from employees to develop and evolve its business strategy. When former CEO Lou Gerstner was implementing a massive change effort at IBM, for instance, he regularly led Web-based discussions to solicit feedback from employees.
IT’S EASY TO UNDERSTAND WHY MOST MODELS of

organizational design tend to stress stability — they were born in an age when environments were relatively stable or at least predictable. When the environment changed slowly or predictably, those models worked well. But the pace and uncertainty of change in today’s world, spurred by increased globalization and technological innovation, among other factors, strongly argues for a new approach. What is needed is an organizational effectiveness model built on the assumption that continuous change is simply business as usual. Such a model requires the right approach to strategy. Instead of seeking a single sustainable advantage, built-to-change companies must continually pursue a series of short-term competitive advantages. Moreover, to create value over time, they must constantly ask themselves the right questions. Instead of “What do we do well?” they must ask “What do we need to learn?”; “How do our current capabilities need to evolve?”; and “What new capabilities do we need to develop?” In answering those questions, built-to-change companies must constantly balance resource allocations for present performance against investments that will create future fitness. These trade-offs will be made through make-or-buy decisions to add, modify or eliminate certain capabilities. And the execution of those decisions will be greatly aided — or hampered — by a company’s organizational design. Simply put, corporations with the right structure, employees, rewards, leaders and information systems will be equipped to implement the necessary changes while those that lack them will tend to stumble.

Christopher G. Worley is a research scientist at the Center for Effective Organizations at the University of Southern California Marshall School of Business and an assistant professor in Pepperdine University’s Master of Science in Organization Development program. Edward E. Lawler III is the director of the Center for Effective Organizations and distinguished professor of business, also at the Marshall School. Their book, Built to Change: How to Achieve Sustained Organizational Effectiveness, was published by Jossey-Bass this year. The authors can be reached at cworley@marshall.usc.edu and elawler@marshall.usc.edu.

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