Coming out of the worst recession of modern times will, for many companies, be more challenging than navigating the downturn itself. To put it simply, the human side of many businesses — the employees, the culture, and the emotional aspects of a company’s DNA — is poorly equipped for recovery. Yet harnessing the power of this “informal organization,” balancing it against the formal processes and systems that drive the operations of a company, can make the difference between eking out incremental improvement and roaring back to life.
Two of the skills companies most need in this nascent phase of the economic turnaround are speed and adaptability. However global conditions evolve — whether developing markets expand rapidly, consumers in developed nations begin to spend freely again, or something unexpected happens — organizations will have to move quickly to respond to complex and sometimes illogical or unpredictable market forces. Unfortunately, these are not strengths of the formal, rational organization, which is typified by analysis, strategies, structures, processes, and programs codified in charts, graphs, flowcharts, spreadsheets, and PowerPoint presentations. The capabilities most vital to recovery are actually embedded in the informal organization, which is emotional, highly interactive, and cross-organizational, and encompasses personal beliefs and values, peer relationships, consensus building, emerging ideas, social networks, and communities of common interest.
In most successful turnarounds and recoveries, informal activities accelerate behavior change and improved performance beyond what would have been possible through formal efforts alone. It’s no accident that in enterprises that operate at peak performance (for example, Southwest Airlines and Google) and values-driven organizations (such as the U.S. Marine Corps and Johnson & Johnson), the informal side usually exerts a relentlessly positive influence on overall operations, far more than in less flourishing enterprises.
Top managers often subconsciously draw on the informal when driving change programs; they intuitively grasp that transformation and rejuvenation cannot be diagrammed and designed. But rather than deliberately tapping into the instinctive and innovative veins of the company to achieve sustainable results, they institute their change program from the top down, through the established hierarchy. In some cases, this one-dimensional approach to bringing out a company’s informal characteristics might work fine. But when the stakes are as high and the obstacles as numerous as they are today, executives must focus purposefully on the power of the informal organization to accelerate change.
Typical of the results that informal aspects of organizations deliver are the recent series of improvements at Bell Canada Enterprises (BCE). When Michael Sabia became CEO in 2002, the telecommunications giant was in deep trouble. A spate of expensive and unwieldy acquisitions, failed strategies in its international voice and data business, and a hidebound culture had stunted the company’s performance. Worse yet, the company’s creaking bureaucracy had seriously harmed relations with its customers, who complained about poor service and slow responses to problems.
To turn around the company, Sabia initially tugged rigorously at all the formal levers: sharpening strategy, redesigning organizational structures, and realigning priorities. And although these efforts did improve the company’s financial performance somewhat, they did nothing to change the customer experience, which was obviously critical to long-term success. Sabia’s eventual solution was to target the company’s best talents on the informal side. He took a small group of high-performing supervisors who understood which front-line behaviors were critical to improving the customer experience and who were most adept at motivating employees to deliver, and tried to “clone” them.
Sabia started with a group of 40 and set them on a course of peer-to-peer sharing of best practices and motivational techniques. Within two years, almost exclusively by word of mouth, the group grew into the largest community at the company, with more than 2,000 members. More importantly, these informal interactions and knowledge-sharing mechanisms yielded gains that were quantified in pilot tests. For example, in one test call center, customer satisfaction increased by 23 percent and first-call problem resolution improved by 11 percent. By the time Sabia left BCE in 2008, he had energized the company sufficiently to make it competitive again on a number of critical measures, including wireless penetration, cash flow, and operating profits.
As critical as the informal, “soft” side of things is, it cannot become an end unto itself; it must be viewed as an approach or a tool for accelerating and enhancing hard results. In fact, when the informal and formal are in balance and aligned, the performance improvements and strategic advantages that accrue are tough to outpace. People feel emotionally satisfied when they are recognized for steps that lead to concrete goals. And concrete goals (as well as the steps that lead there) serve as motivating points for soft enablers such as sustained commitment, unleashed creativity, and collaboration across barriers. As enterprises emerge from the recession, the way they integrate their informal aspects into the operating strategies they choose for steering through this difficult period could determine the organizational outcome. Here are the five most salient challenges that companies can expect to face, and the potential impact of soft skills that management should consider.
1. Sustainable lower-cost operations. Recessionary cost cutting is typically aggressive and arbitrary, with little consideration of future needs. The cuts are mandated rather than motivated. Such one-time crash cutting often leaves companies short of the very skills they need to sustain lean performance over time. Hence, recessionary cost cuts are mostly temporary and the costs come back quickly. Two aspects of the informal organization can help avoid this insidious “cost creep.”
- The informal organization is integrated across organizational boundaries; as a result, it can sustain lasting collaboration that is hard for competitors to match.
- Informally supported commitment lasts longer. Because of the emotional power of motivation, people feel good about, and take pride in, sustaining lower costs. For example, rather than implementing formal cost-cutting goals to trim US$50 million in expenses, Texas Commerce Bank reframed its objective to adopt a more energizing theme: eliminating whatever annoys bankers and drives customers crazy. Through hundreds of focus groups with almost half of the company’s 9,000 employees, leaders identified sufficient cost-cutting opportunities to exceed their goal by 100 percent.
2. Competitive advantage. Competitive advantage is most powerful when it is based on the few distinctive capabilities that a company can sustain over time, such as Southwest’s point-to-point travel system (its alternative to a hub-and-spoke network). To drive consistent company-wide skills — indeed, to derive a company’s identity and maintain an advantage over rivals from a set of company-wide skills — objectives must be consistent across the organization as well as from top to bottom. Both formal and informal mechanisms are needed to instill the operational focus into the company culture.
3. Breakthrough innovation. Some companies, like Apple and Sony, depend on developing game-changing innovations to stay ahead of the competition. A lot of companies can come up with an innovative, winning product or service once or twice, but the few that manage to do so routinely have mastered two critical capabilities: identifying and cultivating creatively gifted individuals, and nourishing informal networks. Ideally, gifted individuals are planted in parts of the organization where they can extend their interactions with people who can enrich their creative ideas as well as with people who can ensure that there will be appropriate support and buy-in. In the well-documented story of 3M’s Post-It Notes, the inventor, Art Fry, who first used his blockbuster sticky memo paper as a temporary bookmark in his church hymnal, was not only a uniquely creative individual but also a master of informal networks. Via his many contacts throughout 3M, he amassed multiple uses for Post-Its as well as valuable internal and external support for commercialization. As Fry learned, the integration of informal creativity and formal production is the secret to innovation.
4. Superior customer service. Enterprises that excel at delighting their customers are masters of an institutional capability for customer empathy that goes well beyond the immediate sales transaction or customer interface. They are maniacally determined to make the customer experience truly unique. Not surprisingly, they are able to command a premium price as well as maintain a virtually unassailable market position. If you ask the senior executives at Four Seasons Hotels to describe their competitive advantage, many will simply say, “The company’s culture.” Four Seasons’ management mobilizes employees at all levels to view customers as kings, no matter how unmajestic they are acting or how pedestrian their requests. This is achieved through dozens if not hundreds of distinctive informal mechanisms that work from the time guests enter the hotel until after they check out — and the standard is the same at every Four Seasons hotel across the globe. Staffers remember guests’ names and preferences (without seeming mechanical) as well as anticipate their needs; state-of-the-art technology makes it possible to manage customer accounts with efficiency and aplomb, much of the management taking place via e-mail. Close personal attention to every detail is the Four Seasons mantra and, as at BCE, top-flight customer service is more informally supported than formally mandated.
5. Collaboration in a flattening world. Most enterprises today are facing some kind of new global reality — in their marketplace, in their operating model, or in their financial or human resources options. Today’s greater need for focused networks of insight and information means that informal mechanisms and interactions must be further developed, refined, and exploited. We can no longer rely on formal mandates plus instinct and chance to make the critical connections — many of those connections are emotionally rather than rationally determined. Therefore, business today cries out for integration of the formal and informal.
No organization wants to merely survive. Unfortunately, as we are climbing out of the recession, many organizations appear to be stuck in survival mode. The hunkering-down mind-set has become a norm, one that is very hard to break out of. More than ever, therefore, survivors need to cultivate a spirit that is not content to drag the workforce along in a quest for transformation in critical parts of the enterprise. Transformation can be achieved only if the informal organization is unearthed to energize and refocus cultural elements in positive ways: accelerating behavior change, promoting peer-to-peer interaction, and ensuring a positive emotional commitment to grow and win again. Just as it is important to have a vision that inspires ambitions beyond next year, it is critical to have an informal organization that supports, energizes, and challenges the formal. Both informal and formal dimensions are important influencers of behaviors that determine future performance and competitive position. We need the best of both worlds.
See “Leading Outside the Lines” by Jon Katzenbach and Zia Khan, s+b, Summer 2010.
- Jon Katzenbach is a senior partner with Booz & Company, where he leads the Katzenbach Center in New York. A cofounder of Katzenbach Partners LLC, he is the author or coauthor of eight books, including Why Pride Matters More Than Money: The Power of the World’s Greatest Motivational Force (Crown Business, 2003).
- Zia Khan is vice president of strategy and evaluation at the Rockefeller Foundation in New York, and a senior fellow at the Katzenbach Center.