Six Simple Rules

by Yves Morieux

  Six

  Simple

  Rules

  How to Manage Complexity without Getting Complicated

  YVES MORIEUX

  PETER TOLLMAN

  HARVARD BUSINESS REVIEW PRESS

  BOSTON, MASSACHUSETTS

  Copyright 2014 The Boston Consulting Group, Inc.

  All rights reserved

  Printed in the United States of America

  10 9 8 7 6 5 4 3 2 1

  No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior permission of the publisher. Requests for permission should be directed to permissions@hbsp.harvard.edu, or mailed to Permissions, Harvard Business School Publishing, 60 Harvard Way, Boston, Massachusetts 02163.

  The web addresses referenced in this book were live and correct at the time of the book’s publication but may be subject to change.

  Library of Congress Cataloging-in-Publication Data

  Morieux, Yves, 1960-

  Six simple rules : how to manage complexity without getting complicated / Yves Morieux, Peter Tollman.

  pages cm

  ISBN 978-1-4221-9055-5 (alk. paper)

  1. Complex organizations—Management. 2. Organizational effectiveness. 3. Organizational behavior. 4. Management. I. Tollman, Peter. II. Title.

  HD31.M6292 2014

  658—dc23

  2013045502

  Contents

  INTRODUCTION

  Why Managers Need the Six Simple Rules

  1. SIMPLE RULE ONE

  Understand What Your People Do

  2. SIMPLE RULE TWO

  Reinforce Integrators

  3. SIMPLE RULE THREE

  Increase the Total Quantity of Power

  4. SIMPLE RULE FOUR

  Increase Reciprocity

  5. SIMPLE RULE FIVE

  Extend the Shadow of the Future

  6. SIMPLE RULE SIX

  Reward Those Who Cooperate

  CONCLUSION

  Notes

  Acknowledgments

  About the Authors

  Introduction

  Why Managers Need the Six Simple Rules

  How do companies create value and achieve competitive advantage in an age of great complexity? This is a question we constantly ask ourselves as we go about our work of helping chief executives and their leadership teams build successful businesses.

  When we reflect on our work with the companies we have helped over the years—five hundred or more in all kinds of industries in more than forty countries—what we remember most vividly is rarely the specific problem that caused a business leader to call us in. Rather what comes to mind is the people—an airline maintenance worker, a head of R&D, a hotel receptionist, a sales director, a train driver, a CEO—all of whom were facing more or less the same situation. They confronted a challenge that seemed impossible: increased complexity in their business. We’ll discuss complexity in greater detail further along, but briefly, we mean that companies face an increasing number of performance requirements; the number can be in the range of twenty-five to forty different requirements, far more than twenty or even ten years ago. Often the requirements are contradictory in nature, such as the need to produce goods of high quality that can sell at low prices, or for services to be globally consistent yet also responsive to local demands (see the sidebar “The Complexity Challenge and Opportunity”).

  To meet the challenges of complexity, the people we remember so well had tried applying the “best” management thinking and following the “best practices” of the day—including, as we’ll see, both structural fixes and people-oriented approaches—and those practices had failed to bring them success in their efforts in creating value. They were working hard and, when they failed to achieve the results they wanted, they worked harder. But they didn’t have much hope the outcome would be any different. They felt overwhelmed, trapped, and often misunderstood and unsupported by their teams, bosses, and boards.

  What’s striking is how poorly served these people were by the conventional wisdom in management—the management theories, models, and practices developed over the past one hundred years. Instead of helping these people manage the growing complexity of business, all the supposed solutions only seemed to make things worse. There had to be a better way, and through on-the-ground work with these people and their organizations, we have battle tested the approach that we describe in this book. We call this approach smart simplicity and it hinges on the six simple rules.1

  Yves comes at the issue as director of the Institute for Organization at The Boston Consulting Group (BCG), where he brings economics and social sciences to bear on the strategic and organizational challenges of companies and their executive teams—especially as they relate to complexity. Yves formulated the smart simplicity approach to managing complexity, based on his background in research and theoretical inquiry, as well as his extensive work with clients in the United States, Europe, and Asia-Pacific. As head of the firm’s People and Organization Practice in North America, Peter has partnered with Yves to implement the six rules of the smart simplicity approach, drawing on his long experience working with some of the world’s most prominent companies.

  Through our client work and continued research, we have continuously refined the rules so that they offer a theoretical framework and a set of practicable management tools. We are actively working together, and with our BCG colleagues, to successfully apply the simple rules—helping companies around the world grow, create enduring value, and achieve competitive advantage.

  How Complexity Leads to Complicatedness

  To understand the power of the simple rules and why they are so essential in business, let’s start by defining the problem. Today, companies have to deal with greater business complexity than ever before. This complexity arises from the requirements companies must meet to create value for their stakeholders. These requirements have become more numerous, are changing faster, and, what’s more, are often in conflict with one another. We have actually measured this evolution and created what we call the BCG Complexity Index. It shows that business complexity has multiplied sixfold since 1955.2

  THE COMPLEXITY CHALLENGE AND OPPORTUNITY

  Performing on Everything for Everyone

  The BCG Institute for Organization created the Complexity Index by tracking the evolution of the number of performance requirements at a representative sample of companies in the United States and Europe over a period of fifty-five years—from 1955 (the year the Fortune 500 list was created) through 2010. In 1955, companies typically committed to between four and seven performance imperatives; today they commit to between twenty-five and forty.

  Between 15 percent and 50 percent of those performance requirements are contradictory. Around 1955, hardly any were. Companies currently may have to offer high-quality products and sell them at rock-bottom prices; goods have to be innovative and also produced efficiently; supply chains must be fast and reliable; service must be globally consistent and, at the same time, highly responsive locally. When a company is able to reconcile valuable yet contradictory requirements, it breaks a compromise and, in so doing, unleashes new value for customers. This new value creates advantage and fuels profitable growth.

  We see two important causes for the growth of complexity. First, shifting trade barriers and advances in technology have provided customers with an abundance of choices. With so many options available, customers are harder to please than ever and less willing to accept compromises.

  A second factor is an increase in the number of relevant stakeholders. Companies must answer to customers, share
holders, and employees as well as to any number of political, regulatory, and compliance authorities. Each of these groups has specific demands, and it has become penalizing for companies to satisfy one at the expense of any other.

  Some observers think increasing business complexity is the problem. We disagree. We believe that while complexity brings immense challenges, it also offers a tremendous opportunity for companies. Increasingly, the winners in today’s business environment are those companies that know how to leverage complexity and exploit it to create competitive advantage.

  The real curse is not complexity so much as “complicatedness,” by which we mean the proliferation of cumbersome organizational mechanisms—structures, procedures, rules, and roles—that companies put in place in an effort to deal with the mounting complexity of modern business (see the sidebar “The Complicatedness Trap”). It is this internal complicatedness, with its attendant bureaucracy, that destroys a company’s ability to leverage complexity for competitive advantage. Even worse, this organizational complicatedness destroys a company’s ability to get anything done. However, although complicatedness is a curse, it is not the fundamental root cause of the problem; it is, as we shall see, only a by-product of outdated, ineffectual, and irrelevant management thinking and practices.

  THE COMPLICATEDNESS TRAP

  Fewer Value-Adding Activities, More Useless Work on Work

  The BCG Institute for Organization created an index of the number of procedures, vertical layers, interface structures, coordination bodies, scorecards, and decision approvals over the past fifteen years. Across our sample of companies, this index has increased annually by 6.7 percent, which, over the fifty-five years we studied, yields a thirty-five-fold increase.

  Managers in the top quintile of the most complicated organizations spend more than 40 percent of their time writing reports and between 30 percent and 60 percent of their total work hours in coordination meetings—work on work. That doesn’t leave much time for them to work with their teams, which, as a result, are often misdirected and therefore expend a lot of effort in vain. Our analysis shows that in the top quintile of complicated organizations, teams spend between 40 percent and 80 percent of their time wasting their time. It is not that teams are idle. On the contrary, they often work harder and harder but on non-value-adding activities. It means they have to do, undo, and redo, and when their efforts seem to make less and less of a difference, people lose their sense of meaning. It’s hardly surprising that, based on our analysis, employees of these organizations are three times as likely to be disengaged as employees of the other companies we studied. (See figure I-1.)

  FIGURE I-1

  The response to complexity

  Source: BCG analysis.

  But first it’s necessary to understand just how pervasive and troubling the phenomenon of organizational complicatedness really is. We have done research into the rise of complicatedness, and the findings are striking. Over the past fifteen years, the number of procedures, vertical layers, interface structures, coordination bodies, scorecards, and decision approvals has increased dramatically—between 50 percent and 350 percent, depending on the company.3

  This rapid rise in complicatedness is shocking. What also surprised us is that our analysis shows absolutely no correlation between the size of companies and their degree of complicatedness. A big company is just as likely to be relatively uncomplicated (compared to the average index) as a small company is to be very complicated. Nor is there any correlation between complicatedness and the degree of diversification. The diversity of the business portfolio does not automatically increase complicatedness. What matters, then, is not the size of the company or the number of businesses in which it competes; what matters is how the resulting business complexity is managed.4

  Complicatedness spells trouble for a company’s performance and productivity, trapping people in non-value-adding activities and causing waste and overconsumption of resources of all kinds: equipment, systems, inventories, committees, and teams. Complicatedness also has a pronounced negative effect on a company’s ability to formulate a winning business strategy, causing it to miss new opportunities and fail to meet new challenges. As we have witnessed firsthand, complicatedness has deleterious effects on the human beings who are trapped in such organizations, inevitably leading to frustration, dissatisfaction, and disengagement.5

  Indeed, we think that organizational complicatedness is the primary reason that disengagement and dissatisfaction at work have become so damaging. Surveys by The Conference Board show that the percentage of Americans who are satisfied at work declined from 61 percent in 1987 to 47 percent in 2011.6 Studies abound on stress, burnout, work-related suicide, even death from exhaustion (the Japanese have a word for it: karoshi).7

  Some argue that declining engagement is a cause of the stagnant productivity that afflicts companies, industries, and socie-ties in many parts of the world.8 Is it poor engagement that saps productivity?9 Or is it the pressure to improve productivity and the discouragement people feel when efforts fail that undermine engagement at work?10 This chicken-and-egg discussion is irrelevant; whenever we have intervened on such issues, we have always found that employee disengagement and stagnant productivity are triggered by a common factor: organizational complicatedness.

  The Root Causes of Complicatedness

  But, as we have hinted, complicatedness is itself only a by-product, a symptom, of the real problem. To understand the root causes of complicatedness, we must go deeper to explore a set of deeply engrained assumptions that guide how companies have responded to complexity. In struggling with the problem, most organizations have relied on two approaches with a long history in management theory and practice. We refer to them as the “hard” approach and the “soft” approach, and they are the product of two major revolutions in management theory and practice during the twentieth century and, unfortunately, remain to this day the two basic pillars of modern management. Almost all management thinking and best practice today is based on one of these two approaches, and usually a combination of the two—be it for restructuring, reorganizing, cultural transformation, reengineering, or improving engagement or motivation.

  The “Hard” Approach to Management

  The hard approach is the product of more than a century of managerial thinking that began with Frederick W. Taylor’s work on scientific management. It was further developed in the discipline of industrial engineering and continues to this day in practices such as reengineering, restructuring, and business process design.11

  The hard approach rests on two fundamental assumptions. The first is the belief that structures, processes, and systems have a direct and predictable effect on performance, and as long as managers pick the right ones, they will get the performance they want. So, for example, if you want your employees to customize your offering to local market demands, you choose a decentralized organizational structure; if you want to leverage economies of scale, you choose a centralized structure, and so on. The second assumption is that the human factor is the weakest and least reliable link of the organization and that it is essential to control people’s behavior through the proliferation of rules to specify their actions and through financial incentives linked to carefully designed metrics and key performance indicators (KPIs) to motivate them to perform in the way the organization wants them to.

  Perhaps the hard approach made sense in the past, but it is dangerously counterproductive in today’s complex business environment. When the company needs to meet new performance requirements, the hard response is to add new structures, processes, and systems to help satisfy those requirements, hence, the introduction of the innovation czar, the risk management team, the compliance unit, the customer-centricity leader, Mr. Quality-in-Chief, and the cohort of coordinators and interfaces that have become so common in companies. (See the sidebar “Beyond the Org Chart.”)

  KEEP IN MIND

  Beyond the Org Chart

  Whether to organize a company
by function, geography, product, customer segment, technology, or some other dimension is an issue that companies face continually. Often, an organization will cycle through various options over time.

  But in an environment of complexity, whether a particular task is contained in this or that box in the org chart has become less important. Performance increasingly depends on the cooperation between the boxes. If you organize by function, you will have to make people cooperate to satisfy varying local customer needs. If, on the other hand, you organize by geography, you will need to make people cooperate to develop functional expertise, and so too whether you organize by product, technology, or customer segment. No matter how you arrange the boxes, there will always be performance requirements that fall between them requiring cooperation.

  Even the question “Where does the P&L sit—in the regions, or the business units?” that is often at the center of discussions about organization design has little relevance any more. The proof is that companies that make the profit-and-loss statement (P&L) the cornerstone of accountability end up with multiple P&Ls—a P&L per region, per business unit, per key customer account, per product, and even sometimes per product component—in short, more complicatedness. We are not saying that organization design is unimportant. Organization design is critical. But, as we will see, it must be performed in a way very different from the current practices.

  The “Soft” Approach to Management

  But the hard fixes have some squeaky wheels that need greasing, and to do that companies turn to what we call the soft approach—practices such as team building, people initiatives, affiliation events, off-site retreats, and the like (all added on top of the work itself)—so that people will feel better at work and work better together. The soft approach has its main origins in the work of Elton Mayo in the 1920s, which led to the development of the human relations school of management. According to this perspective, an organization is a set of interpersonal relationships and the sentiments that govern them.12 Good performance is the by-product of good interpersonal relationships. What people do is predetermined by personal traits, so-called psychological needs and mind-sets. In other words, to change behavior at work, change the mind-set (or change the people).