The external market is full of vitality, but the internal operating models of many companies have fallen into rigidity. The contrast between the two is growing day by day, and has become one of the serious problems faced by enterprises today. From the perspective of the external environment, the various needs of consumers and stakeholders are being rapidly reshaped by various economic, social and environmental trends, which requires companies to be more flexible and adaptable in their operations. But internally, the operating model of most companies is still based on management methods from decades ago, relying on hierarchical management and strict control.
Digitally native companies like Google and Netflix break out of this common management reality. Without traditional structures, they are able to organize themselves in a more agile way, perfectly suited to today’s dynamic environment.
The temptation for traditional companies is to copy the operating models of these digital winners. For example, when ING Bank launched its agile transformation, executives visited Spotify and became obsessed with its “tribal” organizational model. But if we really want to implement the Shengtian model in a large company like ING, it turns out that we will encounter many challenges and many unexpected complex problems – for example, we need to deal with various corporate rules level by level. and issues of procedures, industry regulations and deep cultural norms.
In our consulting experience, we have seen many traditional companies try to move from traditional to agile, with both success and failure in the end. A fact that cannot be ignored is that companies with strong traditional models cannot simply follow the self-organizing methods of Google, Netflix, or Sony, because these latter companies have no historical baggage. Established companies do tend to be bound by tradition, that’s the reality. The history of established companies should not be ignored: they must find their own way when it comes to modernizing their operating models. Since copying the practices of digitally native companies is not advisable, how can traditional companies reinvent themselves to keep up with today’s dynamic environment?
Starting with Donald Sull and Kathleen M. Eisenhardt’s seminal research* on simple rules in a complex world, and using the work of Gary Hamel and Michele Combining Michele Zanini’s de-bureaucratic thinking** with our own research on judgment and trust, we designed a circular framework that can help large, mature companies modernize their legacy models. This framework – which we call the Reinvention Circle – consists of three core elements: policy simplification, decentralization and mutual trust.
The logic behind it is: the simplification of policies can give employees more freedom and power; within this new boundary and under new guiding principles, employees can make high-quality decisions at their level. To do this, managers must create conditions to support partners in their work, including acting as coaches, providing the right data and tools, and building trust. Once mutual trust grows, it becomes easier to further simplify the rules.
In industries ranging from financial services to energy to industrial products, there are many examples of traditional companies trying to build new operating models based on the basic principles of re-engineering. Consider the example of Italy’s national electricity company Enel. Enel was founded 60 years ago. It is currently making profound changes to its traditional model, while also driving the energy transition towards electrification to achieve a better, more sustainable future for all. Guido Stratta, the company’s head of human resources and organizations, set about reinventing the company’s management style and culture toward what he calls “kind leadership.” This reinvention changes the bureaucratic command-and-control model toward an empowering, motivating, and purpose-driven model based on mutual trust, creating an environment where people’s passions and talents can flourish. As part of this reinvention, Enel revamped several components of its operating model, in particular the company’s traditional processes, policies and procedures in different areas: from investment approval and business development, to recruitment and onboarding processes, to travel Policy and Procurement.
Based on the principle of re-engineering, Enel’s first step is to establish simplified rules: demarcate boundary conditions, thresholds and guiding principles for decision-making for thousands of employees, giving them greater freedom to make decisions based on independent judgment. . For example, the group’s travel policy has been greatly simplified, setting only a cap on the total cost of travel rather than setting limits on individual items. Seven situations requiring approval have also been cancelled.
Today, employees can decide for themselves which solution is best for their job: Is a flight really necessary, or are health and environmental concerns warranting a remote meeting? The role of managers has also shifted from approval and authorization to background setting. Similar logic applies to the hiring process, allowing people to skip steps in order to be more flexible in response to pressing needs. Without this, needs cannot be met.
Let’s look at another industry: An industrial products company applied this framework to break the hierarchical management method of the R&D process (called the “stage-gate” model), with the purpose of speeding up the development cycle of new products. Previously, the company’s innovation development process involved more than 100 steps, detailed in a meticulous manual. In an effort to radically change this approach, the company began allowing flexibility and autonomous decision-making, and established guidelines that allowed employees to decide for themselves which steps could be omitted in certain situations.
Today, these steps are viewed as little more than a guideline from which employees can make decisions about which tasks are unnecessary and which can be eliminated. Executives have taken on more of an advisory role, and the number of official steering committees has been cut, leaving more room for informality.
Decision-making and data literacy
These examples illustrate that in order to achieve timely decision-making, policy simplification must be a necessary prerequisite. Judgment and trust are also key. If employees are no longer bound by a restrictive set of rules, they will need to exercise their own judgment in their respective roles. To make decisions at the grassroots level, employees must have access to information and data and know how to analyze it.
It’s easier than ever for employees to log into systems and access data, but making the right decisions for the business goes a long way if employees only have access to the data but don’t know how to use the system and apply the data to generate insights. Not nearly enough. Therefore, data literacy must become a common capability within every organization. In other words, all employees must have the ability to independently analyze relevant data.
British multinational pharmaceutical company GlaxoSmithKline (GSK) is one company committed to improving data literacy. The company recently established a Data Academy to improve the data literacy of its 95,000 employees. The Academy’s training courses are structured around three distinct data literacy roles: “experts” (data and analytics professionals), “users” (the majority of people who use data and tools to help complete daily tasks), and internal “consumers” (Like managers, who are traditionally responsible for business metrics).
Preliminary evidence suggests these practices are paying off: Since the launch of the Data Academy platform in June 2021, 20,000 of GlaxoSmithKline’s 100,000 employees have engaged in interactive learning from its content.
Delegating decision-making also means allowing for exceptions and knowing why rules need not be adhered to in a given situation, or should be adapted to suit the circumstances. (Of course, although the rules allow exceptions, it is still necessary to mark them in the system in a well-documented, open and transparent manner.) Handelsbanken and Affinity Bank have both adopted the policy of implementing it in their branches. A pioneering approach to autonomous decision-making.
The new role of leader
Decentralizing decision-making requires leaders to take on a new role. They need to create conditions (various tools, data and systems, skills, etc.) to help their partners complete tasks. They must act as advisors, providing coaching and removing obstacles, rather than monitoring the execution of tasks.
Achieving this change in leadership style is not easy. Building and maintaining trust can be difficult for leaders because they often have to let go of many of the beliefs and practices associated with traditional management. Consider a leader who frequently overturns the decisions of his subordinates without providing a rational explanation. This behavior is incompatible with a trust-based process because it undermines employees’ ability to make autonomous decisions within clear guiding principles. This can demotivate employees, discourage them, and weaken their willingness to contribute. To avoid this trap, leaders need to come up with a specific and actionable list of actions they commit to start doing or not doing. For example, at Enel, we designed a “Trustful Behavior Index” that measures each manager’s level of trust across several broad categories, such as personal vulnerability, reliability and empathy. We first tested this index with HR leaders (because they can lead the way in behavioral change) and identified gaps and opportunities to improve trust levels.
Three stages of change
The operating model of a large, mature company encompasses many processes, procedures, and management styles. Clearly, change will not happen overnight. According to Enel’s Guido Strata, “This transformation requires that you win the hearts and minds of both employees and leaders during the transformation process”. Here, there is no “one-size-fits-all” solution designed from the top down. This is an ongoing learning exercise in which each company must find and tailor its own model. So it’s best to start with something small. We propose moving forward in three phases.
Select a few processes to start with during the testing phase; involve real users; identify key decision points in existing processes; brainstorm and creatively apply a new set of decision-making and control models; and draft “version 1.0” of the new process. At the same time, ensure that leaders’ actions are designed to build trust and create the ideal climate and support tools for employees.
The learning phase is tested within the company on a small scale (a business unit or a subsidiary in a country); the results are measured with clear KPIs (including behavioral indicators); the learning results are summarized into a toolkit with specific examples from the company. Used as an internal reference case to be shared elsewhere in the company.
The promotion phase promotes this practice in other processes and procedures, conducts method training, shares experiences, and builds a community of practice.
The traditional model is in urgent need of reinvention. Three elements are key: simplifying policy, decentralizing authority, and trusting each other. All three elements are essential for an efficient solution: Simplified policies unleash autonomy, and for this freedom and autonomy to be in the best interests of the company, decision-making needs to be delegated, while trust ensures that leaders Support for their team.
Pioneers from traditional industries prove that established companies don’t have to copy what Netflix or Sony did. Instead, they should find their own way to evolve their operating models from traditional to modern.