The five separate fingers are five independent units. Close them and the fist multiplies strength. This is organization.
—James Cash Penney, founder of JC Penney stores
In the late 1990s, leaders at Honeywell’s Aerospace division began to think about how advances in digitization, communications, and connectivity might create opportunities in its aviation businesses. Those businesses made products like engines, brakes, navigation gear, and avionics. They also provided services like airplane maintenance and flight information software.
“We had a lot of ideas about what we could do with connectivity and what it could mean for our businesses back then,” recalls Carl Esposito, formerly president of Honeywell’s Electronic Solutions business unit (responsible for cockpit systems, navigation, space, and safety systems businesses). But, he adds, “We needed the technology to catch up [to the company’s vision].” Cell phones were not yet connected to the Web; geo-positioning and communications satellites were still largely optimized for military rather than commercial usage; the term “Internet of Things” had been introduced, but initially just to promote RFID technology; and cloud computing was in its infancy.
Ten years later, however, technologies were catching up fast. Smartphones had gone online and become part of everyday life. Military restrictions on satellite usage had been relaxed, and more commercial satellites were orbiting the earth. The Internet of Things had begun to take on its present role as the information backbone of industry and commerce. Cloud computing had come of age. By 2010, Honeywell Aerospace was mapping out the ways the division’s products and services could be brought together as a “connected aircraft” business that would add significantly more customer value than the sum of its parts, for example by offering real-time solutions for aviation customers, such as improved power and fuel usage, predictive maintenance, more precise flight planning, and real-time, crowdsourced weather information.
To fully benefit from the opportunity, Honeywell had to add capabilities in connectivity and communications to the aerospace division’s existing strengths in manufacturing and services. It did this via acquisition and partnerships. In 2011, Honeywell acquired EMS Technologies, which specialized in airborne communications devices and systems. The next year, Honeywell entered an exclusive partnership with Inmarsat, the global satellite services provider, to provide in-flight connectivity services to aviation customers around the world.
Adding those communications and connectivity capabilities wasn’t enough. They had to be integrated fully into Honeywell’s everyday way of working. Once corporate leadership green-lighted the new connected aircraft business, Honeywell realized that a major reorganization of its aviation product and services business would be needed to bring the right people, skills, and capabilities together. “In aviation,” says Esposito, “we’ve built planes forever in a very methodical, structured way, where we have functions that are really separate and segregated. We built them piece by piece, as opposed to thinking holistically. It was difficult to cross boundaries between engines and avionics and electronics—but that’s exactly what was needed now because connectivity was really transformational across all those products.”
In early 2014, Mike Edmonds, then divisional SVP in charge of services and connectivity—a small business at the time—was to present a business review at an executive committee meeting. He was proud because he had managed to expand the margins of the business significantly. While celebrating this success, the executive committee asked him what it would take to grow the top line of the business commensurate with what he had done on the bottom line. Edmonds said he would come back with a plan in thirty days. “Come back in three hours,” the committee told him. “We think you know what to do.”
Edmonds, indeed, did have the outlines of a plan—but he had not vetted it with anyone, a dangerous move in the Honeywell culture. In what he recalls as a light bulb moment, when the meeting reconvened, he asked the executive committee for radical organizational changes: bringing IT, data analytics, and engineering people from their home functions into one team and granting authority to hire new product managers and team members with data analytics skills. Tim Mahoney, then CEO of Honeywell Aerospace, said: “Okay. I want the new positions to be posted by the end of the day. And I want these IT, data analysis, and engineering people to report to Mike [Edmonds] and be moved over by the end of the week.”
As the transformation got underway, new teams were tasked with rethinking how legacy offerings that had existed as stand-alone products could be reimagined to operate in a broader, networked environment. Leaders needed to identify specific types of persons to make it all work. “What we needed,” Esposito recalls, “was people that could step out of their technical expertise in their functional area and think about the larger problems we were trying to solve.” He refers to these people as “translators,” who were able to facilitate discussion between, for example, different technical specialists such as wheels and brakes, avionics, and connectivity and were also able to communicate with marketing and product management specialists. “Once people began to understand the different way these teams talked, the floodgates of ideas opened, and people started to really see the vision and where this could go.”
By 2015–2016, Honeywell was starting to roll out some of its most promising ideas, including GoDirect Connected Maintenance. The solution analyzes aircraft data and delivers diagnostics as well as predictive, prescriptive alerts; it allows for up to 35 percent savings on maintenance. GoDirect also provides connected weather radar that shares data between planes, much as Waze crowdsources traffic information for motorists. In addition, GoDirect offers high-speed WiFi access for flight crews and passengers.
In 2019, the company introduced Honeywell Forge, a next-level connectivity solution that uses advanced data analytics to deliver a comprehensive portfolio of in-flight connectivity, flight planning and optimization, and flight database services.
New ways of thinking were needed not just in product development but across the entire organization. “We spent a huge amount of time developing training programs and doing internal communication to help our employees be able to tell the simple story,” says Kristin Slyker, former vice president of Connected Aircraft. “We’ve been helping them communicate analogies for connected aircrafts; for example, talking about the fact that a connected aircraft is a little bit like a cellular phone. We sell hardware—for example, an antenna—that is like the phone itself. We partner with Inmarsat to bring airtime services—that is, like Verizon or Orange. And, finally, we develop apps or software applications, like flight efficiency applications, that help customers save fuel.”
A lot of change was needed in the sales organization, traditionally used to selling expensive components like engines rather than selling services or solutions. “It was more appealing for a salesperson to sell a quarter-million-dollar avionics upgrade than to sell a ten-year maintenance plan for $25,000 per year,” says Edmonds, “even though the total dollars might be the same.”
But Honeywell stayed the course, constantly reaffirming the importance of the transformation. In addition to structural changes, leadership also changed salespeople’s incentive structures, requiring them to sell a minimum amount of services to make their numbers. The company also provided in-depth training, so salespeople felt more comfortable “talking connected.” Says Edmonds,
We realized we had to grow our focus well beyond our own product set and address customer problems. My best customer meetings are when I go in with no slides at all and I sit down and introduce myself and then say, “I’m really interested in your problems. Could you tell me what your biggest delay and cancellation drivers are?” and get them talking about what’s on their mind. If they give me some of their data to look into a specific maintenance problem, I can look for other maintenance issues or even flight services problems for the pilot, as well, and then go back in with a solution. That’s a very different way of selling from what we used to do.
Honeywell’s connected journey isn’t done yet, but it’s making great progress transforming from an industrial company to the software enabled industrial of the future. Today, Honeywell Connected Aircraft is an $800 million business and is considered by many analysts to be the market leader in the connected aircraft space. The Honeywell Forge flight efficiency platform marks another important step in setting the way: the system was adopted by 128 airlines and more than ten thousand aircraft globally in its first year on the market.
Honeywell’s Connected Aircraft story illustrates many of the leadership imperatives we have mentioned before. The company looked ahead at what its customers’ real challenges were, redefined its place around a much bolder value proposition, integrated the right technology, and then moved customers in that direction. It leveraged advances in technology not to copy what others were doing but to build its own differentiated value proposition. It pursued acquisitions to build differentiating capabilities. It worked more closely with its ecosystem. But then Honeywell also changed the fundamental way it was organized to work. It invested in enabling mechanisms like training and development and incentive structures to help people break out of the old model and work in the new way. And, all along this journey, the leadership team stepped up and acted decisively.
Many companies today face the same kinds of challenges that Honeywell faced. The way you will create value is changing. You will need to build, enhance, and integrate your key capabilities into a powerful value-creation engine to help you differentiate in your new place in the world. Building that engine and constantly pushing the limits of what’s possible is a Herculean task, and you will need to focus all your organizational energy on delivering the outcomes those capabilities require.
With the model of value creation changing and your success depending on scaling up these complex capabilities, how you work must change, and your organization must be redesigned to support that new way of working. Like Honeywell, you will need to bring broad and diverse roles, skills, and talents together to deliver value that your competitors can’t match. You will need people to collaborate fluidly, focused on the outcomes of their work. It’s also highly likely that you will need to collaborate with partners and people outside the boundaries of your traditional organization. And because you will need to continuously innovate, strengthen, and adapt your capabilities to respond quickly to market needs, you will need an organization that can, in many ways, be self-directed.
Most organizations are not set up for this kind of flexible, collaborative, and outcome-oriented work. They continue to operate within more rigid organizational constructs that were designed for the work of previous centuries.
Winning in the beyond digital world requires a new model of organization and teaming. Jeroen Tas, Philips’s former chief innovation and strategy officer, makes it clear: “You need diverse teams to solve real challenges. You may want to develop the next iteration of your proposition. That can’t be done by R&D engineers only. You may have a big account that you want to win. You don’t do it just with salespeople. You may have a supply chain problem. You’re not going to solve it with just logistic experts. We’ve had a hundred years of functional decomposition. We now need to bring it back to craftsmanship; we need to tie different things together. And we have to recognize that we need different types of teams for different purposes.”
This new model isn’t about plucking people out of their functional roles and asking them to work together 10 or 20 percent of their time, or for six weeks or six months (which is how most companies use cross-functional teams; see “Transcending the Traditional Functional Model”). It’s about building more durable, outcome-oriented teams tasked with generating the outcome that each of your differentiating capabilities requires for you to be able to deliver on your value proposition. And since your company’s differentiating capabilities aren’t mono-functional, these teams must bring together everything they need from across the organization and your ecosystem.
Transcending the Traditional Functional Model
Most companies’ organizational models can trace their roots back to the nineteenth century. Some of the first business functionaries were railroad telegraph operators who managed schedules. Then came sales forces, finance departments, and R&D labs—including the original labs of Thomas Edison and Alexander Graham Bell. As companies grew larger and more diverse, they started adding business unit and regional organizational structures to better serve individual markets, ultimately creating matrixed organizations where most people had two reporting lines—a functional one and a business unit/region-specific one. In most cases, HR people would continue to work largely on HR-related work only, and finance people would work largely on finance only, leading to what’s often perceived as functional silos.
Functions have always played a key role in the development of functional expertise, the upskilling of employees, and the provision of functional career paths. This role, however, has come under fire in the beyond digital age because of the sheer explosion of skills and specificity of capabilities that are required for companies to compete, let alone win. Just think about what it means to be good at marketing these days: analytics, user experience design, buyer behavior understanding, digital asset management, social media engagement, public relations, branding, advertising, and many more skills are needed. There isn’t a generic marketeer anymore, nor is there a generic marketing career path or a generic marketing upskilling effort. The skills needed have become much more intricate and specialized.
This has led to companies assessing which skills they should own and which skills they’re better off accessing from their ecosystem. While companies have gotten used to relying on outside talent in specific areas like public relations or creative development where they lack the opportunities to attract, develop, and retain great talent, they now need to adopt that way of thinking across a much wider range of skills—focusing on the areas in which they have sufficient scale and an ability to attract top talent, and tapping into a greatly expanded ecosystem to provide unique skills everywhere else.
Despite these developments, the fundamental challenge is that the traditional model, where leaders focus on “functional excellence” and build large functional organizations almost by default results in their losing sight of the end outcome that needs to be achieved. Motivations and incentives can get skewed: while Operations may strive for standard runs, R&D wants exquisite customization; while Sales wants to satisfy customers, Service aims at managing costs. Another challenge is that functions tend to measure themselves against industry functional benchmarks rather than doing unconventional things that help further the company’s very specific strategy. It is extremely difficult for functions on their own to build the future when the company’s most impactful work is inherently cross-functional.
The path to building and scaling differentiating capabilities in today’s value-creation model, however, requires more cross-functional expertise and collaboration. It’s not enough to rely on the finance person doing a great job on finance work and then handing off to the next function. Today, the finance person also has to, for example, learn data analytics skills, know how to work with technology, and work symbiotically with the sales, marketing, and operations functions to help accurately forecast and match supply with demand and price products and services at exactly the right levels. The finance person has to be just as aligned and motivated to deliver the operational efficiency, revenue, and profit goals as the operations production supervisor, sales manager, or the marketing product manager. They all have to become much more outcome-oriented versus functional output–oriented. This is especially true as the differentiating capabilities needed for success become more complex and cross-functional, requiring the rapid stitching together and continuous improvement of insights, skills, processes, data, and technology from across the company.
The human technology that has been created to address these challenges—“cross-functional teams”—that bring together different functions and units to achieve a specific objective or project, is becoming ubiquitous in many organizations. Consider, for example, cross-functional engineering teams with members from customer service, manufacturing, R&D, and product marketing groups that come together to solve a quality problem. These teams can work well for targeted efforts like projects, initiatives, change programs, and communications initiatives. But they have proven unsuccessful in generating sustained value creation. That’s because in many cases they lack the staying power and influence to really make a difference, and their members have many functional responsibilities that take priority over what the team is supposed to achieve. If functions continue to own talent and influence the direction of careers, they will always win in the race to define agendas and focus—no matter how well intentioned the cross-functional team. Often these teams don’t get the best talent; they lack clear targets, metrics, and incentives tied to the desired outcome; and they don’t have the clout at senior decision-making levels that the importance of the task would necessitate. These teams are occasionally a useful tool, but they are not the blueprint for building a house.
Other companies have attempted to solve this challenge by overlaying end-to-end process models and roles on top of the traditional matrix organization. In other words, they maintain the traditional functional and business unit matrix, but tell people how to hand off work from one step to another to make collaboration more efficient. While these end-to-end process models may be necessary when you’re implementing new enterprise resource planning systems that cut across functions, they typically aren’t the solution to your challenges for how to create value. Indeed, they usually end up as a complicated exercise of mapping “standard” process flows and adding another decision-making checkpoint (in the form of global process owners) to the organization to manage and validate that people follow the process. But what do you do when you have to react rapidly in today’s world and go outside the blueprinted process to do what is necessary to win in the market? End-to-end process models are invariably rigid and of limited help when the traditional functional matrix model remains the superstructure of the organization.
No matter how great a process is, it’s hard to replicate the agility and ingenuity of people working together as one team with a common aim.
For these outcome-oriented teams to succeed, they will need to:
We’ve seen a number of companies change their organizational structures and create select outcome-oriented teams that are long-lived and cross-boundary. These have become common in the innovation capability in particular, where companies have broken down traditional silos between R&D and other functions such as customer insight, marketing, sales, service, operations, and finance. These teams focus on innovation as a truly integrated capability, working across the whole organization. Their members are not “on loan” to the innovation teams, they are part of a fully operational outcome-oriented team, and work together as a clear unit. Many include ecosystem partners and customers outside the traditional organizational boundaries in the team. Similarly, hospitals have created patient experience teams that focus on improving patient outcomes and satisfaction and that coordinate departments such as cardiology, intensive care, nursing, and physical therapy.
Other examples include: total quality teams (integrating people from across R&D, manufacturing, supply chain, logistics, marketing, sales, finance, and customer service), customer experience teams (combining people from across the value chain to own and shape the customer journey), and revenue growth management and in-market execution teams in consumer product goods companies (integrating finance, marketing, sales, data, technology, and supply chain).
In the new, capabilities-based organization, outcome-oriented teams sit alongside functions and focus on delivering the company’s differentiated capabilities. These teams coexist with the corporate center, business units, and functions/shared services (see figure 5-1), but increasingly become more prominent elements of the organization. In many organizations, we see that the majority of functional headcount gets embedded within outcome-oriented teams and rotates across different teams and business units to develop broader skills and collaborative ways of working. In fact, the bulk of organizational budgets and headcount spending shifts from traditional functional leaders toward outcome-oriented teams, enabling those teams to drive the company’s priorities around differentiating capabilities in a coherent way. In short, the implementation of outcome-oriented teams aligns the organization’s structure with the most important work that needs to be done to deliver the outcomes that matter to your value proposition and to your customers.
Thus, in the capabilities-based organization, purely functional teams become more focused on specialized mono-functional work (for example, investor relations or labor relations) and driving functional expertise (for example, by shaping policies and procedures, establishing the appropriate governance over functional expertise, sharing and growing functional best practices across the organization, and developing the functional talent and skills needed to feed the rest of the organization). While still critical to the company’s success, in this model, functions directly manage a smaller universe, but indirectly influence and support the value creation model across the organization. Their role remains important, but with more indirect influence and guidance versus direct ownership of the majority of activities.
Some readers may recognize a form of this model in the expanding scope and role of their shared services organizations over the last two decades. The old shared services model of transaction centers that consolidate transactional functional activities (for example, accounts payable and accounts receivable) has today evolved in many organizations toward more integrated global providers of cross-functionally integrated end-to-end business outcome services (for example, working capital optimization) enabled by digital and data insights capabilities. In many organizations, these outcome-oriented business services groups have become the largest owners of headcount—including both company employees and external partners. We see this phenomenon as one leading indicator of the capabilities-based organization that will become more prominent as more companies go beyond digital.
From the traditional organization to the capabilities-based organization
Business units, in this new model, become even more customer- and market-centric (and less product-centric) and play an increasingly important integration role to ensure capabilities are appropriately shaped toward customer needs. This integration role is very distinct from the old “general management” role, being focused more on how to interface with the customer versus organizing all of the activities needed to deliver. The business unit role, indeed, becomes much more about assembling the output of outcome-oriented teams in ways that meet customer-specific requirements.
Creating the right set of outcome-oriented teams starts with clearly defining your differentiating capabilities and the outcomes they need to generate—not what they are able to generate today, but what they need to generate for your company to deliver your re-imagined place in the world. This capability blueprint defines what expertise, knowledge, technology, data, processes, and behaviors are required in what way to deliver the desired outcome—just like the architectural blueprint defines how every aspect of a structure must come together. The capability blueprint will help you identify people with the right skills you need to put together and empower to work across the old boundaries to deliver the outcomes you need. Where to start? The more important the capability for your company’s value creation and the more diverse the skills that are needed, the more urgent the need to act.
In many companies, the transition from the functional to the outcome-oriented organization model does not happen overnight, with a big bang. But given the urgency for companies to build the capabilities required to deliver their reimagined place, they will need to think about how to accelerate the transition. Carefully assess how to phase changes so you bring the most important capabilities online, and the right resources together.
In some organizations, companies start adopting new ways of working such as agile methodologies—bringing together people from across functions with nonhierarchical roles to work in structured sprints to support problem solving of complex topics. And in other organizations, shared service centers or even entirely new teams are asked to take on new capability development. While these may be helpful steps, they are often not sufficient in themselves to achieve the kind of transformation required in the organization’s way of working. In fact, if not part of a larger change, sometimes these new teams will struggle to have impact, being seen as “pirate ships” without the ability to integrate in the overall organization.
Microsoft began a transformation after the appointment of Satya Nadella as CEO in 2014, in a “renewal of Microsoft.” The case for change was obvious: quarterly shipments of PCs had slumped to 70 million, while smartphone shipments were rocketing past 350 million. This was bad news for Microsoft, since 75 percent of its revenue came from Windows software preinstalled on PCs. To make things worse, the company had made little headway in mobile or other rising technologies like cloud computing, social media, software-as-a-service solutions, and big data. It was hard to see how Microsoft would succeed in the rapidly evolving technology market.
Jean-Philippe Courtois, executive vice president and president of Microsoft Global Sales, Marketing and Operations, remembers, “It was very clear to us that what got us there twenty-five years ago would not get us here in the future. The mission we had as a company, that one day there would be ‘a computer on every desk, in every home,’ had been fantastic; it had really carried us forward. But it was insufficient. So we developed a new worldview: ‘With the magnitude of change going on around us, every company in the world is going to become a digital company, and every person in the world needs to become digitally native. And the world is becoming a cloud-first, obviously mobile-first, world.’ ”
How could they help their customers digitally transform if they had fallen so behind? On his first day as CEO, Nadella announced a new strategy of “mobile first, cloud first,” which later evolved to “AI/cloud first.” Microsoft’s old mission statement—“a computer on every desk, in every home”—was retired and replaced with “To empower every person and every organization on the planet to achieve more.” The former was about selling products to customers; the latter is about providing outcomes—in other words, solutions—for customers.
“The transformation we had to undertake was huge,” says Courtois:
We started this journey with the legacy people, skills, organizations, processes, tools, and capabilities of a company that was used to license software agreements to customers, the smallest and largest in the world, with little ongoing customer interaction afterwards. And now we understood that our new worldview required us to shift away from being a software-oriented company to being a cloud-oriented one. That meant, for example, that we had to completely change the pace of innovation, away from what used to be three- to four-year software release cycles to teams that are creating new services and solutions every few weeks.
And it also meant that Microsoft would have to focus much more on driving consumption of cloud services by its customers.
One of the key organizational changes underpinning Microsoft’s refresh was the transformation of the company’s global commercial business. The change was a massive undertaking. Over several months, seventy executives and some four hundred senior managers developed a strategy, unveiled in February 2017, that profoundly changed the way Microsoft’s commercial division goes to market. The transformation was organized around five pillars to bring the right resources to the right customer at the right time, enabling Microsoft to support its customers with their digital transformation and drive consumption:
Some of the key organizational changes were designed to move the company away from its traditional functions—presales, sales, and post-sales—to more specialized roles better aligned with customers’ needs. These included realigning specialized account-team units to better support the company’s enterprise accounts (the top accounts) with industry experts. The changes also involved refocusing specialist team units—comprising solution specialists and technical solution professionals—to focus on acquiring new customers and delivering technical support to existing customers. In addition, the changes meant creating a customer success unit to demonstrate the value of the cloud to enterprise customers, induce the adoption of more services, and increase consumption. With all these diverse skills coming together, Microsoft’s new outcome-oriented teams were well positioned to deliver on the company’s new place in the world. “We also have an overlay of what we call the ‘global black belt team’ who work on top, at the global or regional level, to help on even more advanced capabilities,” says Courtois.
There were two key reasons why Microsoft organized this way. As Courtois explains, “The first reason is because we need that multifaceted set of skills and ways of working in order to accompany our customers along the cycle of their transformation. Every company is becoming a software company. That’s much more than just moving a bunch of virtual machines to the cloud—it’s about building new businesses and new models. We need all those capabilities to become much more intimate with our customers’ businesses and their business strategies.”
The second reason is cultural. Microsoft had been a product-centric company, and if it wanted to become a “customer-obsessed company” (as it calls itself) it had to organize differently. Courtois argues,
We’ve got to support our customers’ transformation, from beginning to end: First, we need to envision the digital capabilities our customers need. Then we’ve got to work with our customers on what is the right technology architecture to build that capability, based on their legacy architecture and who they are as a company. And then we need to translate that into many projects at a much faster pace in order to create digital products, digital operations, digital customer journeys, etc. In order to drive this culture change, we had to create a very different kind of organization capability on the ground.
When the new organization went live on July 1, 2017, the jobs of forty thousand people in Global Sales, Marketing and Operations, as well as the Worldwide Commercial Business, changed overnight—from the most common role or account executive on up.
“We changed the roles of 90 percent of our leaders and about 80 percent of non-leaders. It was a fairly major change,” recalls Nicola Hodson, vice president of Field Transformation in Global Sales, Marketing and Operations:
We had about six months before launching on July 1, 2017, in order to plan, test, and start to bring layers of leadership onboard with the changes. We put a lot of effort and planning into building a coalition of support. We started with a small core team, doing the planning work and the design. We expanded that to take on more field people to test it properly. Then, we took genuine time and space to bring on area leaders and their leadership teams. By the end of May, we had spoken to all of our leaders. We had explained the changes to them. We had appointed them into the new roles, and they were all secure and ready to go when we communicated to the entire organization on July 1.
After the company hit “go” on July 1, not everything went perfectly, of course—some things needed to be detailed further or changed. That’s when it was so important to listen to the tens of thousands of people on the front line who were starting to live the new model. Hodson recounts, “We had a live Q&A system up and running. We had a daily huddle with the core team to go through the issues that were being raised. We had a team of people from different parts of the business to which we handed them off. We did a lot of deep listening tours in all of the areas to find out what was landing well versus not and making sure that we were very action-oriented where things weren’t going according to plan.”
As illustrated by the Microsoft and Honeywell examples, making this capabilities-based organization work can’t be achieved by simply changing the lines and boxes on your organization chart—you will likely need to modify and even reengineer the DNA of your organization to make it much more collaborative and to focus it more on outcomes. Beyond the work of architecting and blueprinting the critical outcome-oriented teams, there are four enablers we’ve seen leaders emphasize the most because they can make or break your effort to re-architect the organization: the way you allocate investments and budgets; how you define, measure and reward performance; how you set up career paths; and how you evolve your culture by encouraging new behaviors.
To make the capabilities-based organization work, you will need to rethink how you allocate budgets and investments and how you manage the P&L. That is one of the most powerful levers leaders have to focus the company’s activities on what matters most. Given how critical the differentiating capabilities are for your organization’s success, the bulk of your spending will need to go into building and scaling up those capabilities. And since outcome-oriented teams are the main driver behind your company’s differentiating capabilities, the bulk of your investment needs to be directed toward those teams. In fact, we would argue that if you haven’t substantially reallocated investments and if your budgets have changed only minimally, you are likely investing in your past more than you are in your future.
This will have potentially significant consequences for how the P&L is managed and for your planning processes. Instead of functional leaders dictating exactly how many people they need and what tools they need to invest in, your outcome-oriented teams must make choices on the investments they need and what they need the functions to deliver for them. At the same time, functional excellence requirements will have to be considered based on the minimum quality standards, budgets, and plans of the outcome-oriented teams. Similarly, your outcome-oriented teams will need to define requirements and targets for business units to take into account during their planning activities (and vice versa). This shift in planning and budget management from the traditional matrix organization will require a rethink of the planning processes and mechanisms that enable governance and collaboration. Who leads the planning cycle, how budgets get finalized, who participates in business reviews during the year, and how decisions get made across the organization will all need to be reset to support the working of your new model. To free up the resources required for the organization’s differentiating capabilities, you will need to be ruthless in areas that should be “lights on” (which are necessary but which you should spend as little as possible on) and table stakes (where you need to be as good as competitors but not better). The change will likely require iteration and fine-tuning to bring along the required balance of power within the organization toward teams that truly collaborate to achieve value-creating outcomes.
To shift the focus of the organization toward building and scaling your differentiating capabilities, you will need to change the organization’s metrics to the outcomes you want to achieve. What metrics are appropriate depends on your specific situation. It could be time-to-market for new innovations, carbon footprint and sustainability impact, customer satisfaction, the impact you’re having on the success of the ecosystem as a whole, or (as in Microsoft’s case) customers’ consumption of services (a measure of whether customers are experiencing outcomes). One of the major changes Microsoft made was how it compensates its people. It’s no more about the value of the contract, but the customer’s consumption over time. The company measures consumption for all its customers, which enables leaders to engage individual salespeople in a discussion about the obstacles they face to get their customer to move forward. What Microsoft did—and what any company must do that aims to bring the capabilities-based organization to life—was to measure performance and compensate people based on specific outcomes, not on output.
Some organizations, like law firms and consulting firms, are even linking employee bonus incentives to the results their customers achieve. Instead of measuring and paying people solely based on how much revenue they generate, the firms include whether their clients achieved the results sought. These incentives require careful calibration, as client results may not accrue within the typical annual performance appraisal cycle. However, such incentives create a powerful mechanism to focus the organization on collaborating to achieve truly value-creating outcomes.
You will also need to rethink the balance of individual incentives versus team incentives. Most incentives today relate to selling products or services, and therefore get to a single point of accountability quickly: Did the person hit their sales quota? Did the leader deliver on their commitment? While those incentives are important, you will also need to make sure that you make progress in building and deploying your company’s fundamental advantage—its capabilities system. This requires meaningful teaming between outcome-oriented teams, functions, and business units that must embrace, incorporate, improve, and integrate this advantage. Those team-based objectives and incentives need to be established—and appropriately balanced with expectations for individual performance and behaviors—for your transformation to be successful.
You will also need to change how you do performance reviews, who participates in these reviews, and the type of conversation in that review. As part of Microsoft’s journey to adopt a capabilities-based organization model, Courtois killed their traditional midyear review, which he found not to be in line with the company’s new way of working. Not only did it cause leaders to spend too much time away from the market and away from customers, it had also resulted in lecturing and finger-pointing if an area’s performance was lagging. Courtois replaced that with a quarterly business connect in which the team has a shared dialogue around business trends, obstacles and issues, major insights, and what they as a team need to do to succeed. The focus of the discussion became more about the collective actions to take to achieve results and the help needed. Since your company’s ability to create lasting value depends on delivering integrated outcomes, you too will need to shift your performance dialogues to focus on collaborative outcomes.
The traditional hierarchical development models of the past, where people spend their entire career in a function and move up through a series of vertical promotions, aren’t what is needed today. To deliver the critical cross-functional capabilities that enable your place in the world, you will need employees who have both deep experiences within their area of specialization and diverse experiences across areas. This depth and breadth of experiences is also increasingly what employees are looking for to keep their skills relevant and preserve multiple career options in the midst of a rapidly changing business landscape. We already see this model in many organizations in specific areas, and, in fact, today’s senior leadership teams have more diverse experiences than decades ago, reflecting not only the increased prevalence of this career track, but its ability to create great leaders.
This type of interdisciplinary model may not be right for your entire organization, but companies must articulate a set of new career paths and development options to help people build the skills they need. In these new paths, people progress in a series of lateral moves through a number of different functions and teams. They don’t have to be managers and leaders to grow; playing the role of a contributor on a team also lets people grow. People can also play the role of a “translator”—someone who facilitates the collaboration between outcome-oriented teams, functions, and business units using their influence rather than positional authority. In this new type of career model, people are not judged and rewarded based on managing an increasing number of internal resources but based on their contribution to the team and the outcomes they are accountable for. In rare instances, people even spend a portion of their careers working with ecosystem partners and developing experiences outside the company. Some companies have institutionalized this development process by creating secondment programs to send key talent to work for partner organizations for a time before returning to their “home” organization—and we expect more companies to send employees to partners as we integrate capabilities and need to ensure trust and seamlessness in service of an ecosystem’s role in society. In sum, in the capabilities-based organization, career paths also need to be designed from an outcome-oriented mindset—focused on whatever is necessary to get the best outcomes, rather than based on a traditional view of organization hierarchy.
Michael Corbat, the former CEO of Citigroup, relates to this. In the old days, he says, “people were used to running their professional lives in relatively narrow verticals, being responsible for optimizing a vertical, and ascending in their vertical.” But creating the best-in-life experiences that Citigroup aims to offer their customers (see chapter 2) requires the company to stitch together many different capabilities. People now progress through many lateral moves that allow them to gain much broader experiences and collaboration skills. “There are no more straight lines to a job. We give people a more curated journey of their career,” Corbat adds.
Given the variety and complexity of career paths as we move into a world beyond digital, people will need more one-on-one career coaching and mentoring. There’s no longer a single highway that leads upward; there are many different roads with many lateral moves. Some of the steps you should consider:
Asking people to work in this new capabilities-based model is a huge shift. They will have to let go of traditional functional loyalties and priorities to reorient their thinking around a new outcome—which in many cases will be continuously innovated and shifted over time. They will have to learn new skills that may be alien to them, or for which they may have relied on someone else in the past. This time, they will not be able to rely on someone in IT to run data analysis for them—they will instead have to learn how to do it on the fly and apply their expertise to it. Traditional power and decision-making structures will change around them, and they will have to learn how to achieve an outcome by working with and through others instead of being able to rely on their individual efforts. The mindset and behavior changes needed will very likely be significant and possibly even unnatural and unsettling.
Formal measures like changing budgets, metrics, and incentives will help, but you won’t succeed in “un-training” and retraining people to work in the new way without explicitly helping them shape and practice new behaviors. In other words, you will need a grease to help the organization work in the ways needed and to shape the culture that reinforces your value creation system.
When articulating the behaviors you want people to adopt, ensure that they are specific, visible, actionable, emotionally resonant, and, ideally, motivating. Depending on your specific situation, the key could be behaviors like fostering explicit conversations about trade-offs between quality, speed, and budget; giving expert input freely and willingly (but if someone decides to go another way, supporting them); making decisions and articulating the facts behind decisions clearly; and aligning resources explicitly to prioritized opportunities to maximize impact.
For Microsoft’s commercial transformation program to be successful, leaders knew they had to define what that new selling approach should be, and measure, wherever possible, whether the organization was moving in the right direction. They were quite granular in their definition of the new behaviors they wanted people to exhibit, as Jean-Philippe Courtois explains:
First, we need our people to engage much more with business decision makers as opposed to IT people—and that is easy to measure. Second, we defined how they should trigger the right conversation once they go to those customer meetings—how they learn from the customers, and how they get relevant by having an intelligent conversation. Third, after they’ve established the relevance in that first meeting, how do they then point to an engagement model where they’re going to bring relevant industry specialists and digital advisors to do some business envisioning together with the customer and develop an agenda of transformation that Microsoft can support? And fourth, how do they then bring our tech person and the customer’s tech person together so they translate that into the digital capabilities that we need to build?
This new behavior model was facilitated by a significant investment in training and development and engagement of the organization on how to implement the behaviors in practice.
Eli Lilly illustrates the critical role that leadership plays in enabling those key behaviors and eliminating disincentives and roadblocks (we will tell Eli Lilly’s transformation story in more detail in chapter 6). For Lilly’s transformation to be successful, one of the most important imperatives was to speed up the company’s innovation process. This required formal changes in the organization and in leadership roles, such as giving the heads of its five new business units more involvement and more decision rights in the later stages of R&D. But it also required people to change how they behaved. “Resistance to change is particularly strong at Lilly because Lilly is the largest and most attractive employer in the region, and there are few alternatives,” says Dan Skovronsky, who co-led the R&D overhaul. “People are afraid of taking risks because losing your job may mean packing up your family and moving. So why try and chase things? It’s better just to keep your head down and keep working here, because it’s such a nice place to work.”
Resistance to change, however, was the failure mode, given that the company needed to develop and bring new drugs to market much faster than had been the practice in the past. Traditionally, the environment it had created was one where the most important thing was for you to hit the deadlines you said you were going to hit, which led people to create generously buffered deadlines, which in turn led Lilly to be among the slowest in the industry. Says Skovronsky,
We needed to set ambitious goals and not penalize people when they failed to hit them. We had to give employees the confidence that they’re not going to lose their job, that they were not going to get demoted because they took a risk and it didn’t work out. We needed to show them that, in fact, that was the route to promotion. We told them, “Forget about the buffer. Give me the really aggressive best-in-industry timeline. Tell me what you need to achieve that, and don’t be afraid if you miss it by a couple of weeks or a couple of months. The fact that you tried to do something really bold means you’re still going to be way better than you would have been before.” We had examples of teams that missed their deadlines, but they had incredibly aggressive, unbuffered, best-in-class type of deadlines. They were two months late, but two years faster than they would have been in the old system. We rewarded them, made heroes out of them, and did storytelling around them. And that, I would say—more than anything else—was what was required to make the change happen.
While these may be nice stories, shaping the right behaviors that lead to the outcomes you want takes real work. It is a strategic exercise and effort not to be left to chance, or to the HR department to solve. Years of research and work in this area tells us that shaping behaviors requires defining the few critical behaviors you want to see manifested in your organization and assiduously cultivating them.1
There is no one-size-fits-all answer to the perfect key behaviors. However, the work of the Katzenbach Center at PwC’s Strategy&, a global knowledge center on culture and leadership, has taught us that critical behaviors can be shaped with a few simple steps:
Establishing a capabilities-based organization is a great goal but naturally involves intrusive change in all the areas we’ve highlighted—structure, budgeting and planning, performance management, career paths, and how people behave—all of which are related. In many cases, you will need to rethink and even undo basic ways your company has worked. It is for this reason that we see many companies making this journey in steps, introducing select outcome-oriented teams before migrating the entire organization structure. This gives time to mature people processes, governance processes, and other important enablers to enable the capabilities-based organization to work.
The rationale for change to the organization, however, is inescapable. When the fundamental model for how you create value changes, the organization must change. The transformation needs to bring capabilities and outcomes to the surface and make them the primary focus of the organization. This won’t be easy. Defenses in the old organization will be activated. But the change is critical. Your top team will therefore have to embrace it wholeheartedly. And the top team itself will have to change, as we will see in the next chapter.