WHAT I'VE LEARNED ABOUT ORGANISATION HEALTH FROM HAVING A COUPLE OF ‘REAL JOBS’ (and why I’m returning to consulting)

In 2011 my Mckinsey colleague, Scott Keller, and I published Beyond Performance. It was a meticulously researched book drawing on seven years of data crunching from 2,000 clients. Its central thesis was ‘health today drives performance tomorrow’. Lehman Brothers had failed in 2011 and the business world had woken up to the fact that the soft stuff matters. Scott and I tried to categorise the soft stuff and create a lexicon for managers to make the soft stuff tangible and actionable. Since then much has been published on organisation health (including Beyond Performance 2.0 in 2022) and the concept has gained widespread acceptance in both the practical and academic fields.

My personal journey took me out of consulting and into private equity. I had worked extensively with Bain Capital as a consultant, and they had been generous enough to provide a case study for Accelerating Performance co authored with Sharon Toye. That experience made me determined to get some real world experience of applying the concept of organisation health to businesses I was personally invested in. The first leg of my journey was into Wealth Management and Private Banking. Along with two colleagues I has had the pleasure of serving as clients when I had my consulting hat on, we raised some PE capital and bought a large share of a pan European private bank. The second leg took me into insurance and , in particular, applying artificial intelligence to predicting risk behaviour . In this business I was co founder alongside two colleagues and we were backed by both PE and a credit house.

These experiences were in many ways very different from each other. But they both caused me to reflect deeply on the drivers of organisation health. As a consultant I would help clients diagnose their current level of health and then craft a carefully structured plan to improve health and its impact on performance. And it (usually) worked. With sustained focus organisations can indeed improve their health.

But I now think I was half wrong. Or at least I was driving with only half the cylinders firing. I could work with clients to pull the usual levers to streamline organisation design, broaden spans of control, increase incentives, sharpen performance management and build more effective teams. But in retrospect I now feel I missed some underlying realities that drive organisation health at least as strongly as these fairly obvious areas.

So what are they?

1. Shareholder alignment.

Shareholders own the company and delegate the running of it to managers. If shareholders and management aren’t aligned the organisation will struggle to be healthy. In one organisation I know well, management had a five year vision with multiple rounds of investment as the product portfolio grew. But the major shareholder, although they signed up to the vision, wanted to see a return on their money in two years and did not have deep enough pockets to fund the whole development cycle.

A misalignment  between management and shareholders will unwittingly produce a strategy that flip flops between priorities, cancelled initiatives, random cost cutting efforts and a general sense of angst at the top of the shop.

And don’t just think of PE here. The public capital markets have the same issue. Activist investors raison d’être is to nudge ( sometimes pretty violent nudges) management into prioritising shareholder priorities.

2. One source of truth.

I’m finding it difficult to write this section without it seemingly blindingly obvious and trite. And yet my experience is that it’s a huge problem in most organisations. People argue, fight, disengage, work at cross purposes, and moan not because they are bad tempered idiots but because they are working with different data. A healthy company has one set of financial, operational, customer and people data that is the basis of decision making. So easy to say, so difficult to do. Often different parts of the same organisation only have a partial view of the elephant. They see sales are down, but they don’t see that it’s because of recruiting and retention challenges get. Or they don’t appreciate that lower sales are actually a good thing because it’s an unprofitable segment that’s been dropped. Or the CEO is in a funk because customer complaints have doubles but doesn’t realise that is a direct consequence of reducing the technology budget and halting the customer self service capability.

None of this is deliberate. It’s usually the result of systems that don’t talk to each other but are too expensive to replace. Advances in data science show some promise in resolving this quagmire but we have a long way to go.

3. Overhead costs.

I can’t remember a senior manager ever telling me they wanted to increase overhead costs. And yet they keep growing . I live in the UK so allow me to be parochial. In 1990 the average overhead costs for the FTSE 100 was 16% of total costs. Today it’s 35%. There are lots of plausible reasons for this increase. Regulation in many industries is much tighter. Amongst others we have had the melt down of Lehman’s, the opioid crisis in pharma  and the emissions scandal in car manufacturing to blame for this. And who can argue that regulation isn’t required given the regularity of breaches? But the consequence is that overhead costs grow like Topsy ( and this is a major driver of the low levels of productivity growth many major economies have been experiencing).

I can’t argue against effective responses to regulatory requirements but I can observe that organisations that have a high proportion of staff not directly engaged in satisfying customers needs tend to be unhealthy. Peter Drucker was right, the purpose of an organisation is to serve ( he actually said invent) a customer.

4. Simplicity trumps strategy.

No company will win with a dumb strategy. But consider the strategies of the worlds top ten banks, there’s barely a hairs breadth between them. Ditto for car manufacturers, energy companies, insurers and retailers. The returns on strategy have fallen precipitously as technology has reduced barriers to entry and increased access to knowledge. And yet the shareholder returns of the top quartile baks are 4X those of the bottom quartile. It’s the same in every industry. The key to competitive success is no longer strategy, it is the ability to mobilise, execute and transform with agility.

Keep things simple. Complexity in organisations is like inflammation in the human body, it makes the joints fragile. One of the things PE does well is to be radical in terms of simplifying the product set, markets served, the operating model, organisation design . If I had the top 20 leaders of an organisation in a room for a week I would spend one day on strategy and six days on a simple execution approach.

My esteemed predecessors in Mckinsey Peters and Waterman extolled the virtues of sticking to the knitting in In Search of Excellence. They were right. Do the basic things well before venturing into the outer reaches of strategy. Whats true on a spreadsheet rarely is in reality.

5. Interpersonal flexibility in the most senior leader(s).

I recently read some research which stated that if a senior leader does something great , for example seeking out and thanking an employee who went above and beyond, the story is repeated three times by everyone who hears it until it eventually peters out . And yet if the CEO loses their cool and rants at a team member it's repeated nine times and the period in which its still active currency is much longer. The velocity of circulation of bad news is 3X that of good news!

Organisation health is about how the company behaves, and that is all about how individuals behave. If the senior leader cannot be a consistent role model efforts to create health are severely hampered. Many CEOs are extremely driven individuals . That’s good in many ways. But that can turn into slave driving and gaining compliance rather than commitment very easily. What is needed for a healthy organisation is for the CEO to have the interpersonal flexibility to adjust their behaviours to best serve the person or group they are with in that moment. A tall order, but servant leadership is just as critical today as it ever was.

I’m sure there are other hidden drivers of organisation health that I’ve not yet discovered. And that’s why I’m returning to my first love of consulting. I’m not a brain surgeon or an inventor of climate reversal technology. My best contribution to this world is to help human systems (what we normally call organisations) become healthy.

Here’s my new website. I will be working with some fabulous colleagues. If you have a perspective on organisation health I’d love to hear from you.