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18 MARCH 2011
Shaking off the dead hand authority
by Jules Goddard

Imagine: You are an employee of a multidivisional company. You work as a manager in one of these divisions. Suddenly, out of the blue, the Board announces its decision to liquidate the company.

You and every other employee, including the executive members of the Board, are made redundant; but, as compensation, you are all given the exclusive right to bid against each other in a sealed auction for any of the company’s assets in a month’s time.

What would you do? How do you think your fellow employees would respond to this invitation? In particular, how many of you would go to the lengths of assembling a bid and how would you spend the next month doing so?

I have described this experiment and put these questions to many different groups of executives attending many management development programmes at London Business School over the last five years. The answers, from companies as diverse as Rio Tinto, Roche, Danone, Deutsche Bank, Microsoft and Rolls-Royce are always remarkably alike.

First of all, people say that they would form themselves into bidding teams. Individuals would seek out other individuals whom they know and respect, whose companionship they value and whose talents they believe complement their own.

Once the teams were formed, they would identify an asset cluster in the business that, from experience, they were confident they could manage profitably. Typically, this would comprise a mix of intellectual property (such as patents, brand names, trademarks and research reports) and physical assets (such as buildings, plant and equipment). The precise mix would depend upon how each team interpreted its own distinctive competence and how they saw this combination of assets mapping onto future market opportunities. They would then price their chosen assets in the light of the strategy that they thought would work best; they would raise whatever capital they needed to make the acquisition; and, finally, they would tender their bid for the assets.

Predictable numbers and process

Roughly 5–10 per cent of the employees of the company would hook up with one another in various team combinations. Many individuals would discover that they were not attractive to anybody else and were not being invited to join teams. Others would find that their skills (and personality) were in huge demand. The reputation and perceived quality of individuals would bear no relationship to seniority, position or rank. The size of the teams that would emerge from such a process would average between five to seven people who, in aggregate, would bid for a very selective subset of the assets of the business. Together, these assets would be bought for 40–50 per cent of the market value of the parent company.

About one-third of the bidding teams would succeed in acquiring the assets they wanted; and, of these, half would be out of business within two years. A further quarter would have been absorbed into other companies, some of them having merged with their former colleagues in other teams. Predictions of future performance suggest that, within five years, the aggregate market capitalisation of this portfolio of surviving businesses would be at least double that of the legacy company at the time of its liquidation. (For a company of 50,000 employees and valued at £5 billion, for example, these assumptions suggest that such an auction would split the company into 50 surviving businesses together worth £10 billion within five years.)

This is no more than an imaginary experiment but, like a dream, it can offer a new perspective on some hidden truths.

Lessons to be learned

The Pareto Law (the 80:20 rule) is alive and well.
It takes less than 10 per cent of a typical workforce, freed from hierarchical controls and bureaucratic processes, to double, within five years, the value of an enterprise, using less than half of its balance sheet.

Entrepreneurial skill or ambition seems to reside in very few people – roughly eight per cent of the workforce.

The bulk of a firm’s assets are believed by most employees to be sterile and incapable of yielding positive returns.

Most large companies are unmanageable.
Considerable wealth is locked up in super-scale firms.

Large companies are typically too complex to be managed effectively.

The cause is less likely to be the incompetence of managers than the deficiencies of managerialism.

The principles underpinning managerialism (that is, the traditional model of management) are fundamentally flawed.

The modern workplace breeds disengagement.
Invited to contribute to the success of the enterprise, most employees, including the majority of managers, find it difficult to come up with ideas for radical performance improvement; they are not accustomed to wondering, “What would I do if I were the CEO or if I owned the business?”

This suggests that, for most people, work consists mainly of complying with instructions, processes and rituals; their job would seem to amount to little more than working rather long hours completing whatever task they are asked to perform with diligence but without any thought as to its value or contribution to the performance of the enterprise.

Most employees go to work to draw a salary or a wage rather than build a business or create economic value.

Only rarely does work call forth the requirement to be imaginative, to take a personal risk, to test an idea or to explore the unknown.

Hierarchy and bureaucracy set a low ceiling on performance.
The prevailing management model operates at about 50 per cent efficiency. In other words, it leaves on the table about half the potential value of the enterprise.

The knowledge of how to double the value of an enterprise certainly exists in the organisation – but it is dispersed among many minds and can be aggregated and applied only under certain circumstances.

These circumstances are created when an internal market replaces the traditional hierarchy.
 
Only a market would seem to possess the capability of aggregating and applying the collective intelligence of a workforce.

Executive boards that do not have access to this dispersed knowledge cannot be expected to make well-judged strategic decisions.

Only by drawing upon ‘the wisdom of the crowd’ can the value of the enterprise that is lost by its overdependence on hierarchy be unlocked.

Small changes of organisational context can liberate big improvements in corporate performance.
Simply by offering greater freedom of choice and by placing greater trust in the judgements of large numbers of employees, a broad plethora of problems, whose solution is aggravated rather than enabled by hierarchy, start to get skilfully addressed, such as:

  • Finding leaders
  • Building teams
  • Engaging employees
  • Forecasting outcomes
  • Pricing options
  • Detecting waste
  • Picking winners
  • Abandoning losers
  • Extending the lessons

Why are these problems better solved by markets than hierarchies? What explains the difference of performance? There are at least four principles that can be invoked:

  1. The teams are not appointed by top management – they are self-forming and self-directing.
  2. The assets that these teams are responsible for managing are not allocated to them – they are chosen by them.
  3. The strategies designed to translate these assets into economic value are not handed down to them for implementation – they are invented by them.
  4. The enthusiasm that people bring to this process of invention is not the result of being managed well by others – but rather the result of self-management.

The fact is that the standard model of management is becoming increasingly dysfunctional, particularly in industries in which innovation is the main driver of value. Based on centralisation of power, specialisation of task and standardisation of process, it may well be appropriate for certain organisational tasks – typically those for which expertise based on scientific knowledge is a key qualification.

However, the standard model of management is poorly suited to resolving other problems, either those in which science or technical expertise has nothing to say or those in which experience has dubious relevance. These problems include setting investment priorities, allocating capital, drawing the boundaries of the enterprise (the make/buy decision), identifying product-market opportunities, bringing out the best in people and designing an organisational context that puts the intelligence of the collective onto the problems and opportunities that matter.

The performance bottleneck in most businesses – the elephant in the room, as it were – is this traditional model of management, with its obsessive and counterproductive reliance upon notions of control, contract, compliance and constraint. In effect, managerialism (or ‘bossism’, as it has also been called) is the legacy of an organisational technology invented at the end of the 19th century to command and control very large numbers of unskilled men in the performance of complex tasks that demanded high levels of coordination. Over a century later, in a world in which every other technology has changed beyond recognition, the social technology of managerialism seems stuck in the age of factory gates, time clocks and smoking chimneys.

In its place, information technology, particularly as it becomes increasingly personalised, is starting to offer much more clever solutions to the timeless problems of direction and coordination but without the dead hand of authority, the false need for alignment, the fatal conceit of planning or the dispiriting effect of ticking boxes.

Jules Goddard, formerly Gresham Professor of Commerce at City University, is currently an Associate of the Management Lab at London Business School.

Source:

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