DIAGRAMS

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TOP 20 INSIGHTS

1) Workers in the U.S. spend 16% of their working lives on internal compliance activities such as planning and budgeting. The Taylor Principles developed 100 years ago have morphed into a stifling bureaucracy, leaving us with the burden of organizational debt, that is, structures and policies that no longer serve the organization.

2) The most widely used systems don’t necessarily have the best quality. For example, in the U.S. there is only one roundabout for every 1,118 signal intersections. But roundabouts are actually safer, move traffic more quickly, cheaper to build and maintain, and still function when the power goes out.

3) Many firms are trying to be agile by doing agile, adopting the methods but not the theory behind them. Certifying project managers in Scrum does not upend bureaucracy. Agile is a mindset, not a toolset.

4) The organization’s activities may be complicated—like a car engine, something that can be controlled, and its problems solved. However, the organization itself is complex—like traffic, we can only make informed guesses about its behavior based on the relationships between its components, not the components themselves.

5) Mergers and acquisitions are creating “too big to fail” mega-firms even as research from McKinsey has shown that almost 70% of mergers fail to produce the promised revenue synergies. In response, firms are cutting R&D costs, outsourcing, and laying off workers.

6) The 100-year-old Swedish bank Svenska Handelsbanken deploys its various resources around the notion that “The branch is the bank.” Each of the 800+ branches is free to make their own decisions about resource allocations, including lending decisions, marketing, and services.

7) Psychologists Maslow and Rogers showed that people are naturally motivated and capable of self-direction. Similarly, Deci and Ryan’s Self Determination Theory found that people have an innate psychological need for autonomy, competence, and relatedness.

8) Email is a context-free information sinkhole. The average employee checks their email 36 times an hour and receives 304 emails a week. Ban internal email in favor of a messaging app like Slack.

9) Spotify ensures that teams are “loosely coupled but tightly aligned.” The company’s approach to workflow looks like a regatta of speedboats heading in the same general direction rather than one massive ocean liner trying to wend its way through a series of functions.

10) Ensure the organization gets more interesting over time. A recent McKinsey study found that companies in the top quartile for gender and ethnic diversity are, respectively, 15% and 35% more likely to outperform those in the bottom quartile.

11) The average employee attends 62 meetings a month and thinks that more than half of them are a waste of time. For U.S. businesses, that adds up to $37 billion in salary costs spent on unnecessary meetings. Cancel all meetings for two weeks, so you can find out which ones you really need.

12) Ditch time-wasting status update meetings in favor of a monthly governance meeting where everyone voices concerns and proposes changes. Hold periodic retrospective meetings for people to share perspectives on what happened and what they learned.

13) The average manager spends up to 210 hours preparing for and doing annual appraisals, a process that makes employees spectators in their development. Instead, let them solicit and guide their own feedback, with periodic updates and input from team members.

14) Get away from the traditional budgeting process, which is unresponsive to changing conditions. Ditch fixed targets in favor of relative ones, company to company, and team to team.

15) Higher pay decreases job dissatisfaction but doesn’t meaningfully increase satisfaction. Compensation should be fair and generous enough to not matter. Use profit sharing to connect everyone to the organization’s success. Eliminate bonuses and instead pay above market for the best talent you can find.

16) Innovation often happens unintentionally. Play-Doh was supposed to be a cleaning product for wallpaper until kids started misusing it. Let innovation happen across the organization. People are inherently creative, so trust them to sense and pursue opportunities.

17) Culture cannot be designed; it has to emerge. You cannot change hearts and minds with a haiku. Instead, we have to focus on changing the system, and we have to recognize that change is not a finite journey.

18) Six patterns set the conditions for change: the commitment of leaders; setting boundaries; priming a catalyst team; practicing looping; recognizing criticality; and allowing and protecting continuity.

19) Looping is the continual three-stage process where change is decentralized, and self-management begins: identify tensions; propose practices; and conduct experiments.

20) The most significant barrier to change is the leader. Leadership has to recognize the importance of creating the space for change and then stepping out of the way.

SUMMARY

• Legacy organizations carry a burden of organizational debt that does not serve the needs of a complex organization trying to navigate through a rapidly changing world. Shifting to an evolutionary organization requires us to question and reinvent our approach across the twelve domains that make up the organization’s operating system.

• The organization needs a strong sense of collective purpose, decentralized authority, and a dynamic network of small, self-sufficient teams whose members are free to organize around projects and programs. Each team should be able to learn and change course, have control over its resources, and innovate using local methods and tools. Minimize meetings and make sure all information is readily available to all participants. Allow teams to reinvent themselves continually and to learn from each other. Start with a small group and give them the space to practice looping: identify tensions, propose practices, and conduct experiments. Start with smaller, shorter experiments and gradually expand to the wider organization. Eventually, the change reaches a tipping point where you can focus on sustaining a more autonomous and evolutionary organization.

THE LEGACY ORGANIZATION

• Everywhere, leaders and teams are frustrated. The scale and bureaucracy of our organizations are liabilities in the contemporary era of constant change. People insist on doing everything through channels, refer everything to committees, or haggle over the precise wording of communications and minutes. Faced with rapid changes, they ask for caution, hold conferences, and add more procedures and clearances. All this happens because within our organizations, there is a hidden set of inherited assumptions, essentially an operating system running unnoticed in the background.

TRAFFIC SIGNALS VS. ROUNDABOUTS

• Consider two ways to control traffic where two roads cross: a signal-controlled intersection and a roundabout. In the U.S. there is only one roundabout for every 1,118 signal intersections. While signal-controlled intersections are overwhelmingly popular, roundabouts are actually safer, move traffic more quickly, cheaper to build and maintain, and still function when the power goes out. This goes to show that just because one system is more widely used does not mean it is of better quality.

• Legacy organizations are like the signal-controlled intersections, the default setting that everyone uses because everyone else has been using it. Roundabouts are akin to evolutionary organizations, a better way of doing things that requires adopting a shift in mindset and a new operating system.

HOW WE GOT HERE

• The operating system of legacy organization started on the factory floors of the Industrial Revolution over 100 years ago, when F. W. Taylor broke the work down into its smallest possible components and found the one best way to complete each step. His 1911 book Principles of Scientific Management separated thinking from doing and became the foundational text for the factory operating system. Around the same time, Henry Gantt produced the Gannt chart that illustrates dependencies within complicated processes and projects. Over time, meeting the steps of the plan became the goal, instead of being a means to an end.

• Today, the legacy organization separates thinking from doing, demands detailed plans before every initiative, focuses on a chain of command, and works around an ironclad budget. U.S. workers spend 16% of their working lives on internal compliance activities like planning and budgeting. The Taylor Principles have morphed into a stifling bureaucracy, leaving us with a burden of organizational debt—structures and policies that no longer serve the organization.

LEGACY LIMITATIONS

• Corporate longevity has plummeted—the half-life of all firms is now just 10.5 years—and the average stock holding time has fallen from 8 years to 5 days. Corporations are getting bigger but their return on assets, the ratio of their profits to what they own and owe, is trending steadily downward. Mergers and acquisitions are creating “too big to fail” megafirms even as research from McKinsey has shown that almost 70% of mergers fail to produce the promised revenue synergies. In response, firms are cutting R&D costs, outsourcing, and laying off workers. Labor productivity growth has turned negative in recent years, while the pay ratio between CEOs and workers has jumped from 22: 3.1 in 1973 to 271:1 in 2016. Meanwhile, innovation is coming from elsewhere; small businesses, for example, now produce 16 times more patents than big ones.

• The legacy organization views its workers mechanistically, seeing them as motivated by rewards and punishments and in need of precise instructions. However, the work of psychologists Maslow and Rogers has shown that people are naturally motivated and capable of self-direction. Similarly, Deci and Ryan’s work found that people have an innate psychological need for autonomy, competence, and relatedness.

COMPLEXITY VS. COMPLICATED

• We assume that complexity and complicated are the same things, when in fact they are not. A complicated system is something like a car engine: it is subject to cause and effect, any problems have solutions and can be fixed, and it can be controlled. A complex system, on the other hand, is more like traffic: it is dispositional, meaning we can only make informed guesses about how it will behave, it is made up of a large number of components whose interactions can surprise you, and it is based around the relationships between its components, not the components themselves.

• While the activities of an organization might be complicated, the organization itself is complex. Faced with this complexity, the legacy organization sees performance as a function of compliance: get everyone to do what we say, and we will surely achieve our goals. The evolutionary organization recognizes that performance is the result of collective intelligence and self-regulation: if we create the right conditions, everyone will continually find ways to achieve the goals.

• The next section describes the principles and practices of the evolutionary organization.

THE EVOLUTIONARY ORGANIZATION

• An organization’s Operating System is made up of 12 domains. We need to question and reinvent our approach in each domain to become a people positive and complexity conscious organization.

1. PURPOSE

• Any organization or team needs a purpose. A mission statement that defines success as making a profit lacks an inspiring purpose. Wholefoods’ “Nourish people and the planet” is much more socially positive.

• The organization’s purpose has to show up at every level, and any metrics should be guidelines for steering toward that purpose. Every team or unit should have a strong sense of their collective purpose.

2. AUTHORITY

• Legacy organizations assume you have to be given permission to do something; evolutionary organizations ensure everyone has the autonomy to do anything that serves the organization’s purpose unless it is specifically prohibited. People should have the freedom to fail so that teams and individuals can learn and grow.

• Centralized authority is too slow to respond in a rapidly changing world. Push authority to the edge of the organization, to where the information is.

3. STRUCTURE

• Evolutionary organizations should be dynamic networks where members have the freedom to organize around projects and programs. Create self-sufficient units or cells of 10-150 people. Create simple rules for how teams are formed or changed, then let people go where their skills and energy take them.

• Ensure that the organization is driven by the teams that touch the market, not the ones at the center.

4. STRATEGY

• Exercise discretion when using metrics such as Objectives and Key Results as a form of top-down control, where people focus on hitting the OKRs and not on figuring out what is best for the organization. Use scenario planning to think about what might happen, not what must happen.

• Every 90 days or so, gather the team to generate a few strategy statements and figure out what to prioritize. In areas of rapid change, your strategy is only as good as your ability to learn and adjust course.

5. RESOURCES

• People can direct their own time and attention to where they add the most value. The 100-year-old Swedish bank Svenska Handelsbanken deploys its various resources—capital, energy, space, etc.—around the notion that “The branch is the bank.” Each of the 800+ branches is free to make their own decisions about resource allocation, include lending decisions, marketing, services, and so on.

• Get away from the traditional budgeting process, which is unresponsive to changing conditions. Ditch fixed targets in favor of relative ones, company to company, and team to team. You cannot predict the future so, where appropriate, minimize long-term spending commitments in favor of discretionary funds. Allocate resources based on real-time information, not annual budget cycles.

6. INNOVATION

• Innovation usually happens when things are used in ways we didn’t intend. Play-Doh was supposed to be a cleaning product for wallpaper until kids started “misusing” it. Instead of having R&D spending as a separate line item in the accounts, let innovation happen across the organization. People are inherently creative, so trust them to sense and pursue opportunities.

• Avoid standards that say “You have to use this tool, this way” in favor of defaults that say, “If you don’t know how, then try this, but if you see a better way, do that!”

7. WORKFLOW

• Spotify’s approach to workflow ensures that teams are “loosely coupled but tightly aligned,” maximizing strategic alignment while minimizing dependencies and red tape between teams. Its workflow looks like a regatta of speedboats heading in the same general direction rather than one massive ocean liner trying to wend its way through a series of functions.

• Treat everything as a project, starting, stopping, or evolving activities with intention. Consider running every project as a series of one- or two-week sprints. Let local methods and tools flourish. Ensure every team has the capacity to do the work and to improve how they do it.

8. MEETINGS

• The average employee attends 62 meetings a month and thinks that more than half of them are a waste of time. For U.S. businesses, that adds up to $37 billion in salary costs spent on unnecessary meetings. But shared consciousness and vibrant networks mean we do have to meet sometimes.

• Avoid status updates. They become time-wasting theatrical productions that don’t move anything forward. Instead, encourage every team to have a monthly governance meeting where everyone can voice concerns and propose changes. Hold periodic retrospective meetings for people to share perspectives on what happened and what they learned. Try canceling all meetings for two weeks, so that you can discover which ones you really need.

9. INFORMATION

• In legacy organizations, information is power, hoarded to elevate one’s status, and shared on a need-to-know basis. Evolutionary organizations value and practice transparency, making all information available to all participants, because no one knows what information will prove to be critical. Instead of pushing information out to all members, which quickly becomes overwhelming, let them find the information when they need it, in a way that is accessible and searchable by everyone, any time. Work in public and share work in development together, instead of only selectively releasing “perfect” information.

• Email is a context-free information sinkhole. The average employee checks their email 36 times an hour and receives 304 emails a week. Try banning internal email in favor of a messaging app like Slack, the fastest-growing workplace software in history, with tools that organize conversations into channels by topic.

10. MEMBERSHIP

• In a complex system, the interactions matter more than the parts. Everyone needs to feel a sense of belonging within their teams and the wider organization, but don’t build walls between teams and consequently create silos. The boundaries need to be porous enough for teams to renew themselves continually.

• Hiring for culture fit makes sense early in a firm’s history, but later on, it can lead to overwhelming homogeneity and actually cause firms to underperform. Organizations should get more interesting and diverse over time. A recent McKinsey study found that companies in the top quartile for gender and ethnic diversity were, respectively, 15% and 35% more likely to outperform those in the bottom quartile.

11. MASTERY

• Taylorism views work as a place to perform, whereas the evolutionary organization sees it as a place to learn. Welcome the conditions for continuous growth, with members of different levels of knowledge and skills working together and learning from each other.

• The average manager spends up to 210 hours preparing for and doing annual appraisals, a process that makes employees spectators in their development. Instead, let them solicit and guide their feedback, with periodic updates and input from team members.

12. COMPENSATION

• Higher pay can decrease job dissatisfaction, but it won’t meaningfully increase or sustain job satisfaction. Compensation should be fair and generous enough to not matter and to support motivation, keep the focus on autonomy, mastery, and purpose. Use profit sharing to connect everyone to the organization’s success. Eliminate bonuses and instead pay above market for the best talents you can find.

• There is no formula or series of job titles that will magically capture the complexity of the modern workplace. It takes transparency, dialogue, and judgment to find what is fair. Compensation cannot be solved, it has to be tuned.

HOW TO CHANGE

• How do you unleash change in a culture that is addicted to planning and control? How can you turn tension and frustration into experiments that move the team forward? A recent McKinsey study found that only 26% of transformation efforts succeed in the eyes of the people involved, with that number dropping to 6% among frontline employees.

• The first step is to recognize that culture cannot be designed, it has to emerge. You cannot change hearts and minds with a haiku. Instead, we have to focus on changing the system and on recognizing that change is not a finite journey.

HAPPY ACCIDENTS

Change plans can become a dogma wielded from the top with little room for adapting as we go: you can’t blow up bureaucracy with a bureaucratic change process. Human innovation is often the result of happy accidents. So in place of set plans and goals, be willing to try new things, to notice and amplify positive patterns and minimize what isn’t working. Six patterns help to set the conditions for change.

• Commitment: Those with power or influence must be committed to moving beyond bureaucracy. Next, create a team of “wayfinders”, a group willing to be the first to try new things.

• Boundaries: Create a space where things will be done differently—a team, a meeting, a room. Then, gradually extend the boundary to include more teams or areas.

• Priming: Prime your team of catalysts by pulling them out of their patterns and into a learning space, where a few hours of games and exercises can open their hearts and minds and unleash epiphanies.

• Looping: Looping is the continual three-stage process where change is decentralized and self-management begins. The three stages are: identify tensions, propose practices, and conduct experiments. When people acknowledge that some system or process is not working well, they have identified a tension, a gap between how things are and how they could be. Tensions include things like decision-making bottlenecks, too many meetings, not taking risks, too many silos, unclear priorities, and so on. Once a team names its tensions, it can explore practices that might change things and then set up experiments to see what works. Start with smaller, shorter experiments that can be run over a week, eventually getting to ones that require some onboarding time and a few weeks to see them through.

• Criticality: Criticality is the tipping point where enough people are committed to the ideals of self-management that it is impractical to go back to the way things were. You’ll know you’re at this point when people start to adopt a new language for ways of working and culture, and when the practices being introduced are traveling beyond the boundary that you set.

• Continuity: When continuous participatory change is a way of life.

CONTINUOUS PARTICIPATORY CHANGE

• A successful evolutionary organization has to make it safe for people to fail. Psychological safety must play a major role in the Operating System transformation.

• The most significant barrier to change is the leader—leadership has to recognize the importance of creating the space for change and then stepping out of the way. Don’t try to control the change.

• Once teams have created a space for change, including making sure everyone agrees and has the time to try, you also have to hold onto that space. Let the teams figure things out for themselves and make sure everyone can speak up if they see something unsafe to try. People will change when it makes sense to them—so if you meet resistance, find out what people are trying to tell you. Learn by doing, you can’t improve your swing by reading Golf Digest, you have to get out on the course and practice.