Gary Hamel: Can Big Firms Be Agile?

Can big firms be Agile? In the first part of this article, we explained at last week’s Drucker Forum how some big firms (including Microsoft, Ericsson, Riot Games, Spotify and C.H.Robinson) are already acting entrepreneurially and embracing Agile.

Now Part 2 of the article sets out the fascinating panel discussion that followed with Gary Hamel (Management Innovation eXchange), Joakim Sundén (Spotify) and Vanessa Adams (C.H.Robinson), about what this all means for management in general.

Becoming Agile is a Creative Activity

Gary Hamel: Let me try to pull some elements together. I totally agree with the idea that there is no ten-step program for doing this. Getting away from how organizations have been run for over fifty years, and becoming Agile, is a creative activity. In our research, we have been looking at organizations that have been trying to do this, and we have come up with some findings that are very consistent with what we have just heard about Agile.

Gary Hamel, Photo: Craig Ruttle/Bloomberg

I will talk in a moment about the principles, but let me begin with some numbers that show the cost of bureaucracy. Looking across the whole world, the ratio of managers to support staff is about 1 to 4.7. Basically, that’s one bureaucrat for every 4.7 employees. That seems to us on the high side. And when you look at people in their jobs, people are spending about one day a week on a bureaucratic tasks. This is internal compliance, not external compliance. And yet you can see some organizations where that ratio is double, or triple or quadruple, or even a hundred times.

For instance, GE runs a factory in North Carolina where they make jet engines. It’s not software. They have about four hundred people with one supervisor. So now GE has taken that model and is rolling it out across the other plants in its aviation division.

So we started to think: what would happen if you take that ratio of 1 to 4.7 and double it and put the non-productive bureaucratic work back into the economy in a more productive way. Our estimate is that it would raise economic output in the OECD countries by around $9 trillion. If you did that over the next ten years, we would more than double the economic growth rate that we see in most OECD countries today. It would have a bigger upside for our society and our economies than any other public policy proposal or any technology proposal that is out there.

So from our research, we have come to a very similar set of conclusions to what you are talking about. If you look at these companies that seem to be post-bureaucratic, and as Vanessa Adams rightly said, it’s very easy to get distracted by a practice, a process a technique, a method. That is not where the answer lies.

Changing Mindsets, Not Just Practices

If you start by saying, “Let’s implement a practice,” you will get to the end of it very quickly and you will have changed very little in your organization and then you will find yourself at a dead end.

As Steve Denning said, you have to start much deeper and operate with a different mindset. You have to be thinking: What are the principles that you build into the organization? If you want to reach a whole new level of human capacity, if you really want people to wake up very day, jazzed to go to work, excited to give their very best, people who are challenging conventional wisdom, what sort of management would that have to be? Then we can work backward from there.

So as we look post-bureaucratic organizations, here are a few of the things that we have found.

1. The Importance Of Transparency

One of the things we find is a very high level of financial transparency and financial viability. I think of a steel company like Nucor, the most profitable steel company in the world. It’s way more productive than its global competitors. You go into Nucor and you find that every single employee can tell you the profitability of every order that ships.  So if you want people to exercise control and you want them to operate with economy, they have to understand the business. The things that are driving financial performance have to be visible to them.

When I think of the problems we had a few months with Wells Fargo, where they were setting up all these false accounts, they were doing that in order to meet some kind of synthetic performance measurement system that wasn’t tied to a real growth of the P&L. So people were gaming the system. In firms that are successful, a level of financial literacy and people having real ownership are the factors that are driving the real P&L. Transparency is critical.

2. Investing In Competence

The second thing we find and it goes with the first principle: you have to invest in the competence of people on the front lines of your organization. Take for instance Morningstar, the world’s largest tomato processor—a billion dollar company. It has no managers at all. Employees contract with each other and monitor performance, whatever. And one of the things that makes that work is that every employee—what we might call a blue-collar employee—has an an understanding of ROI, net present value, and so on. So instead moving decisions up to where people have competence, you move competence down to where people have real-time information and they can make good decisions.

3. Disaggregation

Third: if you want people to make good decisions, people have to understand what is driving the financials and they have to have the competence to make smart decisions. If you take a 50,000 person company and you break it up into 4,000 small business units, small micro enterprises, that’s another theme: disaggregation. This is not only disaggregating work but disaggregating organizational units, so that you have 4,000 micro enterprises.

4. Tying Compensation To Performance

Fourth, variable compensation tied to growth. If if you look at compensation of those teams, they are highly inclined to be variable with incentives related to performance. The goals that they set themselves are not lashed to a particular growth rate, like 5%. There is no attempt at a kind of internal negotiation around goal setting. They look at how fast the industry around them is growing. You have a set of contracts. And as an employee, you make a good living if you grow as fast as your industry is growing. You do quite well if you grow faster. If you grow ten times faster, you do extremely well. But everyone has an incentive, a huge economic upside to be thinking about how to grow the business. That’s the upside for the employer.

5. Customer Intimacy

Fifth, customer intimacy. As Steve Denning said, one of the highest things on the list is how do you create customer intimacy. Being as close to the customer as you can. One of the other metrics they use at Haier to measure the performance of these micro enterprises—one is profitable growth—but another measure is, are you creating more intimacy with the customer? They don’t use the term, “customer.” They speak about users.  It’s all about creating a new customer ecosystem.

6. Experimentation

Sixth, all of these companies believe in experimentation. They create and try things quickly. Fail fast. Fail forward. It’s about teaching people at all levels about rapid prototyping so that they have the tools to do that.

7. Peer Accountability

Finally, peer accountability. A universal characteristic of these firms is that they believe that decisions about compensation should mostly be made by peers. I know that if your compensation is decided four levels above you, your organization isn’t going to be very innovative. For example, W.L.Gore, you are ranked by 25 of your peers in terms of your value-add to the organization. Compare that with a bureaucracy where all you have to do is please one set of eyes, the eyes of the boss. Now you have 25 sets of eyes evaluating you in terms of how much value did you add. If they think you added a lot, you are going to get paid well.

So our findings about these post-bureaucratic companies very much mirror the findings that you are coming to. Although there are many problems, I am deeply optimistic. My take is that if you are not optimistic, then you are looking at the wrong organizations.

Are Agile Organizations Hierarchical?

Steve Denning: One of the things that struck me in the site visits of the Learning Consortium is that these organizations don’t feel at all bureaucratic. They don’t feel at all rule-driven. People are not looking upwards for instruction. They feel autonomous.

On the other hand, the organizations we visited are still in a sense hierarchical. They do have managers. These are not “boss-less offices.” People are let go if they are not consistently delivering value to customers. But it’s a hierarchy of competence, not a hierarchy of authority. You don’t have people quivering and trembling before they are about to a career-changing presentation to the C-suite, desperately trying to justify their proposal with reams of data and ROI analyses that some new idea could be a winner.

Instead, you have teams that feel authorized and energized to make experiments, and then on the basis of the experiments, to go ahead. It’s a very different feel as to what is going on. There is a lot of trust. The manager is acting as an enabler. The manager asks, “How do I help the team do these experiments so that we can deliver more value to the customer?” In a sense, the customer becomes the real boss.

In the full report of the Learning Consortium, we spell out thirty different ways in which this climate of trust and enablement is created—the direct opposite of the distrust and top-down control that you find in a bureaucracy.

So our findings agree with yours that bureaucracy is the disease of our time. Agile is almost custom-made to counteract bureaucracy and in thirty different ways, it is designed to be an antidote to bureaucracy.

But these are not boss-less offices. So I wanted to ask you, Gary, about getting rid of all managers. In the boss-less organization like Morningstar, how does firm strategy happen? Suppose Morningstar is facing a threat of disruption, and the tomato processing business is falling apart; who in this boss-less office is responsible for spotting the threat and then taking the tough decision to make a basic change in direction of the organization and shift resources in a massive way from one area to another? How would that work in a boss-less organization?

Gary Hamel: That’s a very interesting question. And it goes to another issue: how do you coalesce around a different point of view anyway? My sense is that when everyone shares the same storyboard, when everyone sees what’s happening, you sense very quickly where things are going wrong. When you have open communication, people will mobilize. They will start to solve that problem before a typical organization even knows it’s a problem.

When it comes to existential threats to business models in boss-less organizations, I don’t know. When I look at a company like W.L.Gore & Associates, which really has no formal hierarchy, they went from consumer to industrial and now a huge medical business. So they are one of the most resilient organizations I know. They have never had a loss in sixty years. It is a very flat organization.

But having said that, I wanted to second one thing that you said: there will always be hierarchy. There will always be some people who know more or who are smarter or who have something more to add. But is that hierarchy? It is one thing to have a single authority-based hierarchy that is structurally and pre-emptively giving priority to the views of the few versus the views of the many. It is another to have a hierarchy that emerges naturally, decision by decision, according to who has something to say or something of value to add.

Even on the Web which is very open, there is hierarchy/. The Web is not flat at all. You see that some people have a higher Klout score. Some people have more followers on Twitter. Some people have more people reading their blog. And so on.

Leadership has to be the reciprocal of followership. If you don’t have followers, you’re not a leader. That’s one of these next-generation things. You are not a leader because someone gives you the authority. If you make decisions that people don’t believe in, you are eroding your leadership authority, particularly in the millennial working place, if you insist on doing that.

I am pretty optimistic when I see that and hear that. The rate at which Spotify has modified its services and the speed with which that happened is very impressive. Agility is not just a feature of the local teams. Agility has to be a feature of the organization itself.

Hierarchy At Spotify And Riot Games

Steve Denning: Let’s hear from Joakim how this works at Spotify and Riot Games.

Joakim Sundén: I already gave some examples from Riot Games (see Part 1 of this article). Spotify is similar to Riot Games in many ways. I don’t want to rain on the “no-manager parade,” although it’s a parade I would gladly walk in. But we do have a lot of managers at Spotify. In part, that is a function of the fact that we, like Riot Games, have been growing so fast. We are doubling in size every year. The managers play a role as coordinating recruitment and as "onboarding-ambassadors" who nurture and sustain the creative culture that we believe is so important.

But the main principle of organizational design at Spotify for development is autonomy. We want our teams to be autonomous. I work for instance within a grouping called “the user-engagement alliance.” We have some key metrics on what it means to have user-engagement. And of course, we have company bets and ideas and projects that we need to be working on. But there is also a lot of slack and extra capacity in which teams come up with their own ideas. We know that we want to drive user engagement. And we have dashboards that are accessible with enormous transparency. All the teams are continuously running experiments and try to see how they can push these metrics. But they are free in terms of what ideas they want to try, and how they want to work together, which is how Discover Weekly came about. That was an illustration of a small group of people saying, “Hey! Let’s try this!” They had immediate access to data and computing capacity and the aurhority to try it out and get user feedback. The result was a huge quick win.

Who Decides What Is A Good Idea?

Audience question: In a flat organization, how do you deal with the problem that those who succeed in selling their ideas are not always the ones with the best ideas?

Steve Denning: Two points. First, Agile organizations are not necessarily flat organizations. These are not organizations without hierarchy. But the hierarchy is a hierarchy of competence, not a hierarchy of authority. It’s a hierarchy of enablement. It’s a hierarchy focused on helping people do their job and add value to customer.

And secondly, it’s the customer who is driving the decision-making, not the boss. An idea is not being pursued because the C-suite thinks it’s is a great idea. Often the C-suite don’t have a clue as to whether it’s a great idea or not. I think it’s possible that the C-suite at Spotify would have said that the idea behind Discover Weekly was pretty implausible. I mean, how could you possibly take several billion playlists and match those to every single user’s taste in music and produce a new personalized playlist that would delight every individual customer every single week? It sounded pretty far-fetched. But the team tested it on customers and lo and behold, it was feasible and the customers said it worked. The customer, not the C-suite, is the decision-maker in the organization in these situations. Discovery Weekly didn’t get accepted because the team made a slick presentation to the C-suite with a lot of ROI analysis. It got accepted because the management environment made it very easy for the team to make a test, first on a couple of people, then on all the staff at Spotify, and then on a million people and then on the entire user population of 75 million. Spotify makes it very easy and quick for teams to do those tests without a lot of approvals and reviews. After they had done those tests, the situation is crystal clear: this is a terrific idea, even though the C-suite might have started out thinking it was a ridiculous idea. In a traditional organization, that idea would have been killed before it was even tested.

Gary Hamel: You have to have that external argument. There are people who are more eloquent and can make a better case internally. But ultimately the customer decides. And eventually the financial scoreboard tells you. So unless you have that evidence from customer feedback and financial performance, you don’t do it. In these organizations, there is no tolerance for under-performance. It’s not that these are easy-going, nice places to work for, where anything goes. If anything, the pressure to perform is even greater.

Let me go back to Haier for a moment. Each of these tiny micro-enterprises in Haier can put forward a plan. And the team itself will choose their leader. There is a leadership election every year. The team is saying: we think this is the person who will help us meet our targets. If you miss those targets a few months in a row, that automatically re-triggers an election. So you may be persuasive and you may be able to convince your peers that you can lead the effort, but if you screw up, you’re gone!

There are even hostile takeovers. If your enterprise isn’t performing, another group can move to take it over. So how complicated is that? So first, we have to have a common scoreboard, and second, we have to have consequences for under-performance.

This is not a conspiracy of mediocrity. Mediocrity of course exists. But this is about identifying it and eliminating it. Going back to the example of Morningstar, where peers contract with each other: when things don’t work, they can try to sort it out, and if that doesn’t work, they can seek a jury of their peers and get a decision. And sometimes the decision is: “You’re fired!” When six of your colleagues fire you, that’s the end. So you have to have a common scoreboard and you have to have consequences. Otherwise you do risk having a conspiracy of mediocrity.

Joakim Sundén: I would assume that in a flat organization, it would be less of a problem than in a steeply hierarchical organization, where the opinion of the highest-paid person is the opinion that always wins. So you have to convince that person to get anything done. In Spotify, we look at actual data. We are free to run experiments. We make it cheap, easy and quick to run experiments. We also try to be really inclusive. We try to give everyone a voice. One aspect of that is having small teams; we help them collaborate and put forward new ideas. We do hack weeks twice a year, where the whole company can work on whatever they want and they can showcase that to people. We have hack-days, like the “Google 20 percent time.” There are so many ways in which we try to harvest the ideas of everyone and give them an outlet.

How Do You Persuade The C-Suite To Embrace Agile?

Audience question: How do you persuade the CIO or the CEO -suite to embrace Agile?

Vanessa Adams: Our CIO is not the typical CIO. He was formerly the CFO for many years. He was willing to go on the site visits and he saw what was happening. He was then able to bring those stories back to our organization and share them with many people. So my advice is to bring the C-suite along on site visits to see and feel and experience what is like.

We also have to recognize that Agile takes time. It’s been a five year journey for us. And we have still not arrived by any means. But we can see what needs to be done and we are moving on.

Gary Hamel: Moving to an Agile organization or a flat organization, or customer-driving organization is a personalization path for the existing leaders. Not all of them get it. If you have been using power in a certain way, and you suddenly have to do things differently, it’s not easy. We are doing an experiment right now in a French company. There are 38 cells across a plant and they are basically helping the leaders understand: you’re going to have a relationship of supporting and mentoring subordinates. A lot of what those managers have been doing in the past is going to disappear into that new set of arrangements. So we have to find a way to bring people along. It’s not a matter of saying: do this or you’re fired. It means coaching them, giving them 360 degree feedback, and helping them understand how to add value in that organization when your leadership is built in different ways. It’s about connecting people, pushing back when there is resistance, finding resources for people. It’s is a huge shift for people in how they think about their competence and how they have impact. If you fail to deal with this challenge, it will haunt the organization later on. Spotify was born this way, but for other firms, it’s a big shift in terms of what this means for how leaders behave. We have to help them adapt.

Vanessa Adams: It is very much a transformation journey. Early on, we were very much focused on tools and processes. That led us to make mistakes. It led to confusion in managers as to what their roles were. These were not top down roles. If we could do that over again, we would have put much more emphasis on mindset and we are still working on getting those changes.

Steve Denning: There are several layers of conversion. There is the level of intellectual conversion: an intellectual recognition that this would be important to do. This could really make a difference. That conversion is not going to be won by data or by reasons or statistics. It is going to be won by experiences and by stories—stories that connect, stories that communicate, stories that resonate emotionally—this is something we need to look into.

But even once you have made that intellectual step, you still have the actions and the habits that relate to the actions you need to take to implement that intellectual step. . If you have been spending 20 years in a top-down command-and-control way of acting, barking out orders, you don’t suddenly, the next day, become a servant leader or act patiently like a gardener, patiently nurturing your people to grow. Your habits and your whole way of thinking and talking are the exact opposite of the way you now need to act. So there is a whole transition period from the moment you make an intellectual acceptance to the time when the different way of acting becomes second nature to you as a person. That might be short—some weeks or months—or it might be longer, even years. And in some cases, it may never happen. You might have made the intellectual transition, but you simply cannot bring your actions in line with how you know you ought to be acting.

Read Part 1 of this article: Can Big Firms Be Agile?

Read an Overview of the Drucker Forum 2016: In Search of ‘The Entrepreneurial Society’

And read also:

What is Agile?

Explaining Agile

HBR’s Embrace Of Agile

Why Do Managers Hate Agile

The Case against Agile: Ten Perennial Objections


Follow Steve Denning on Twitter at @stevedenning

Disclosure: I am an unpaid pro bono adviser and director of the SD Learning Consortium.
