Companies can become more agile by designing their organizations both to drive speed and create stability.
Why do established companies struggle to become more agile? No small part of the difficulty comes from a false trade-off: the assumption by executives that they must choose between much-needed speed and flexibility, on the one hand, and the stability and scale inherent in fixed organizational structures and processes, on the other.
Start-ups, for example, are notoriously well known for acting quickly, but once they grow beyond a certain point they struggle to maintain that early momentum. Equally, large and established companies often become bureaucratic because the rules, policies, and management layers developed to capture economies of scale ultimately hamper their ability to move fast.
In our experience, truly agile organizations, paradoxically, learn to be both stable (resilient, reliable, and efficient) and dynamic (fast, nimble, and adaptive). To master this paradox, companies must design structures, governance arrangements, and processes with a relatively unchanging set of core elements—a fixed backbone. At the same time, they must also create looser, more dynamic elements that can be adapted quickly to new challenges and opportunities. This article offers early insights from our work with large global institutions that have successfully become more agile by redesigning themselves for both stability and speed.
The power of ‘and’
Many companies have long been striving for greater agility—and many academics, consultants, and other advisers have been searching for successful ways to help them. Much of the management literature, however, has emphasized only one part of the equation: how to achieve speed and flexibility.
Companies have indeed been able to move quickly by creating a flexible ring that’s fenced off from the rest of the organization or, more recently, self-directed team structures embodied by “holacracy.”1 But our research and experience show that these ideas, on their own, are not enough. (To test your company’s current agility level, see Exhibit 1.)
A 2015 analysis of McKinsey’s Organizational Health Index showed that companies with both speed and stability have a 70 percent chance of being ranked in the top quartile by organizational health. That’s a far higher proportion than McKinsey found among companies focused only on one or the other.2 We’ve long established that organizational health is itself a predictor of strong financial performance.
These results are also consistent with an analysis by Columbia Business School professor Rita Gunther McGrath.3 From a pool of more than 2,300 large US companies, she identified ten that increased their net income by at least 5 percent annually in the ten years up to 2009. Her conclusion? These high-performing companies were both extremely stable, with certain organizational features that remained the same for long stretches, and rapid innovators that could adjust and readjust their resources quickly.
The ability to be both stable and dynamic, the essence of true organizational agility, is most easily grasped through a simple product analogy. Smartphones have become ubiquitous in part because of their design and functionality. The hardware and operating system form a stable foundation. But a dynamic application layer builds in “white space” for new apps to be added, updated, modified, and deleted over time as requirements change and new capabilities develop.
In the same way, agile companies design their organizations with a backbone of stable elements. These foundations, like a smartphone’s hardware and operating system, are likely to endure over a reasonable period. They might last a couple of years in the smartphone’s case, and more like five to ten years in a company’s. These agile companies also have more dynamic capabilities: organizational “apps” to plug and play as new opportunities arise or unexpected challenges threaten to destabilize formerly protected profit streams. (For examples of these capabilities, see Exhibit 2.)
Balancing the tension
Our work has highlighted three core organizational areas where balancing this tension between stability and flexibility is critical: organizational structure, which defines how resources are distributed; governance, which dictates how decisions are made; and processes, which determine how things get done, including the management of performance.
Traditional hierarchies—boxes and lines on the org chart—typically specify where work gets done and performance is measured, and who’s responsible for awarding bonuses. All this generally involves a boss (or two in matrix organizations), who oversees work and manages direct reports (see sidebar, “Moving away from the mechanistic”).