Rethinking a company’s structure

Considering that so many of us are supposed to be working in something called the “knowledge economy,” it is absurd how stupidly designed so many businesses and organizations are.

Matrix structures are piled on ad hoc reorganizations, divisions are divided, parceled up and then redivided all over again. No wonder accountabilities get blurred, employees are confused and performance suffers.

A key problem in this digital age has been the failure to change the way businesses are organized.

Few leaders see their company as a complete system. Instead, they try to carry out partial repairs, leaving a fundamentally outdated structure in place.

This is the argument put forward by Lowell Bryan and Claudia Joyce of management consulting firm McKinsey & Co. in their ambitious book, “Mobilizing Minds: Creating Wealth From Talent in the 21st Century Organization.”

The authors believe that the most businesses are underperforming because their most important intangible assets -- the ideas and creativity of their workers -- are unwittingly suppressed by the way these businesses are set up to operate.

“Trying to run a company in the 21st century with an organizing model designed for the 20th century places limits on how well a company performs,” they write. “The plagues of the modern company are hard-to-manage workforce structures, thick silo walls, confusing matrix structures, e-mail overload and ‘undoable jobs.’ ”

Having studied the performance of the most successful businesses, Bryan and Joyce conclude that “thinking-intensive” companies do best when they unleash talent rather than constrain it.

And looking at a new measure, profitability per employee, is a useful tool toward raising overall levels of performance. “Profit per employee is a good proxy for earnings on intangibles,” the authors say.

It should become the most important measure of success, ahead even of returns on capital. That should be looked at “just to ensure that they are sufficient to cover the costs of capital,” Bryan and Joyce say.

The authors know what success looks like. It involves a circle of productive activity: knowledge being exchanged, reputations being built, relationships being established and developed, “competencies” growing stronger. And all the while, profit per employee climbs.

The numbers involved are not trivial.

“If a company with 300,000 employees can add $13,333 of ‘rents’ per employee (that is, earnings requiring no additional employment of capital or labor) by reducing unproductive complexity, it can add $4 billion in additional earnings,” the authors argue. They estimate that this could add as much as $40 billion in market capitalization.

Leaders have failed to grasp the possibilities of the digital era.

“The trial-and-error period of discovery has been underway for over a decade now,” Bryan and Joyce say. (At which point you have to ask, so what have the strategy consultants been doing all this time?)

Business has botched the introduction of new technology.

“In cities the problem is congestion. In companies, the problem is unproductive complexity,” the authors say.

So much for the extremely good diagnosis. What about the cure? Bryan and Joyce advocate a radical overhaul of the way organizations are designed.

For example, even the largest organizations need no more than four layers of management from top to bottom. Front-line managers, like military captains, should be free “to make tactical decisions close to the front line” -- within the context of a strategy set by top management.

There should be “one company governance and culture,” supported by a partnership ethos at the top. And a “portfolio of initiatives” approach would lead to more dynamic management while maintaining the discipline of meeting earnings targets.

There are other, more radical suggestions concerning the management of people.

Formal networks will help spread good ideas. There should be “talent marketplaces,” with capable employees free to plot their own career path within the company. A new performance measurement is required to reward people’s contribution to the team as well as individual success.

This is a densely written, powerfully argued book. Cynics will interpret the call for organizational redesign as a make-work scheme for management consultants.

But even they would have to acknowledge that this critique of organizational stasis is very well done.

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Stefan Stern is a columnist for the Financial Times of London, in which this review first appeared.