Seabright had a strong incentive program; as much as 30 percent of a typical manager’s compensation came through end-of-year bonuses, but the bonuses were pegged to the margins of each business unit. This structure inadvertently devalued the new digital products, where the margins would likely take a hit for the first year or so.
The informal components, commitments, are unwritten aspirations that, when fulfilled, become part of a company’s identity and sources of pride for its employees. One classic example of a commitment was FedEx’s early slogan, “When it absolutely, positively has to be there overnight.” The company was proud to be held to that promise. Seabright had its own long-standing commitment: “We deliver must-read information.” In many industries, its publications were the first thing that executives read each morning. For commitments to be meaningful and sustainable, they must be backed by distinctive capabilities that allow the organization to deliver. This was a bedrock element for Seabright: Jill and Sanjay knew they could build on it.
The next rung involves flows of knowledge and insight. Its formal element, information, encompasses the measurement of performance (through key performance indicators and other metrics); the coordination of activities; and the flow of explicit, codified knowledge.
The informal component is mind-sets. These deeply held attitudes and beliefs affect how employees engage with customers, design and make products, and solve problems. For example, some companies collectively believe that they must serve a social purpose in addition to their commercial interests; others have a mind-set that superlative products require superb product design. This element often separates great companies from also-rans.
The remaining rung is traditionally aligned with the concept of organizational design. On the formal side is structure—the “lines and boxes” of the organization chart, defining critical roles, responsibilities, and formal relationships. Structure is especially important for large, global companies, which must carefully design the lines and boxes, no matter who occupies the various roles. Smaller firms can more easily compensate for a flawed structure with processes and talent. For this reason, and because the chart is so closely linked to traditional thinking about organizational design, many large-company redesigns start with the org chart and, all too often, stop there as well. Although a good structural design can be important, it is never sufficient by itself. It needs to be aligned with changes in other formal and informal elements. It should generally be the capstone, not the cornerstone, of a design effort.
Although Seabright had already gone through a redesign, its structure still had significant problems—but it also had some strengths. For example, a new chief digital officer (CDO) position had been created, and that executive was well placed to bring new products to market. But the current CDO lacked authority and accountability, and had only a few direct reports.
The informal counterpart of structure is networks: connections among employees that transcend the lines and boxes of the formal organization. Networks can be organized deliberately; many centers of expertise are designed to bring together individuals with shared interests and skills. Other networks emerge on their own, as groups of individuals who consult one another because of shared interests or business needs. In general, networks provide a necessary complement to the formal structure, and they can also reveal difficulties with the overall design. If a group with a mandate for influencing performance is systematically bypassed in daily decision making, that’s a clear problem.
As you put together these eight elements, the formal and informal versions of the four rungs of the ladder, your objective as senior management is to define a single strategically aligned organization. Rather than starting with the eight elements, you begin with your way to play and capabilities system. Identify the essential shared attributes of an organization that would best serve the strategy you have already defined (see Exhibit 2).