The first change is the continuing shift from semiskilled work to what economists call knowledge work. When modern management was being invented almost a century ago, most employees were semiskilled workers, such as laborers and production line workers. Doing their work required little training and practically no brainpower. They were expected to do what they were told. How they felt about it was irrelevant.

Traditional management was developed principally to get these semiskilled employees to perform repetitive activities competently, diligently, and efficiently. As their work has been steadily replaced by machines and computers, meeting that challenge has become steadily less relevant in today's workplace.

Work today increasingly requires the application of brainpower and knowledge. Workers include lawyers, doctors, accountants, marketers, administrators, software developers, and researchers with Ph.D.s. These workers—knowledge workers—are expected to identify issues, think through problems, and come up with new solutions. The shift from semiskilled work to knowledge work has changed the relationship between those in charge and those doing the work.

As management sage Peter Drucker noted, "Workers throughout history could be 'supervised.' They could be told what to do, how to do it, how fast to do it and so on. Knowledge workers cannot, in effect, be supervised."^[20]

Second, the engagement of the workforce has become a serious productivity issue. As social critic Alain de Botton points out, "Once it became evident that someone who was expected to remove brain tumors, draw up binding legal documents or sell condominiums with convincing energy could not be profitably sullen or resentful, morose or angry, the mental welfare of employees commenced to be an object of supreme concern."^[21] Yet although the mental welfare of employees is recognized as a supreme concern, that concern hasn't led to supreme success: only one in five of the global workforce is fully engaged.^[22]

For much of the previous century, people were happy enough to have a job—any job—that provided a good salary. That's no longer enough. As work has shifted from semiskilled labor to knowledge work, workers want not just jobs, but meaningful jobs—jobs where they can contribute and make a difference. They want these jobs today, not five or ten years from now, and they will give preference to employers who can provide them.

From the firm's point of view, unused talent is a serious productivity problem. And it's not merely suboptimizing for the firm. Since the workers themselves are aware that they are not being allowed to give their best and are spending their time unproductively, both managers and workers become disgruntled. Internal processes grind away, and the customers become more and more an afterthought. The fact that current management practices prevent a full human flourishing is in itself an economic, management, social, and moral problem of the first order.

Third, customers are no longer willing to be treated as an afterthought. The twentieth-century firm wasn't sharply focused on pleasing customers. That was because, by and large, it wasn't necessary. Demand was soaring, and firms could sell whatever product or services they generated. Oligopolies had control of the marketplace.

For much of the previous century, oligopolies could interrupt whomever they wanted with any message they cared to transmit. And the buyers were forced to watch it because there were only three television channels. The system was spamming people over and over again with impersonal, irritating, irrelevant TV commercials that people didn't want to see about stuff they weren't interested in.

This worked as long as there were only a few channels of communication and a few sellers and a few products, and buyers had limited information and little choice. But the situation changed. A few channels of communication turned into multiple channels of communication. A few sellers turned into many sellers. A few productsturned into the clutter of multiple products. Once buyers had instant access to reliable information and became fed up with being spammed, the old model fell apart. The result was a fundamental shift in the balance of power from sellers to buyers. Now, unless clients are delighted, they can—and will—go elsewhere. So businesses have to change their focus from producing goods and services to an explicit goal of delighting clients.

Some organizations might feel that the word delight is implausible as a serious business proposition. Yet any firm that aspires to create enduring customer loyalty must find a way to turn passively satisfied customers into active advocates and promoters of its goods and services. That usually means doing something noteworthy—something sufficiently different that customers take notice and talk about it to others.

It's no longer enough merely to remove defects. Customers expect zero defects. If the customer's experience fits a predictable pattern, it will be boring to the customer, who will therefore ignore it. The bar has been raised. To turn customers into advocates and promoters of the firm's goods and services, organizations must not only minimize errors: they must innovate. They must break out of the pattern that their customers have come to expect. They must find new and economical ways to provide goods or services that are differentiated, noteworthy, surprising, or remarkable.^[23]

Delighting clients is the primary goal—a means to competitive advantage and profitability. It takes precedence over profits, turnover, and market share. That's because unless the firm is delighting clients and turning its customers into enthusiastic advocates and promoters of its products and services, those financial indicators are emblems of temporary success that won't endure.^[24] Following several decades in which many firms aimed at maximizing shareholder value, we are now entering the era of customer capitalism, in which the purpose of the firm is to serve clients.^[25] (See Chapter Four.)

Delighting clients becomes the primary goal of work. One of management's key functions is to give everyone a clear line of sight as to how their work is—or isn't—leading to client delight.

The unhappiness of workers and the dissatisfaction of customers are big problems in themselves. Yet the root cause of today's troubles—the fourth big change in the world of work—is something more serious and less obvious. The root cause is that the gains in productivity that came from conceiving of work as a system of things that can be manipulated to produce goods and services have largely run their course.

The productivity gains accomplished in the twentieth century using that mental model of management were amazing—indeed unprecedented in the history of the human race. However, the expectation that those gains would continue uninterrupted into the new century has not materialized. The reasons are corollaries of the other shifts.

Once a firm sets out to maximize the full talents, ingenuity, and inspiration of its workforce, it discovers that it is interacting with people, not inanimate things that can be manipulated. Any hint of manipulation is dispiriting and counterproductive. Managers have to be able to inspire genuine enthusiasm for worthwhile goals. Even more important, once a firm goes beyond the relatively simple task of producing goods and services and sets its sights on the complex goal of delighting clients, it finds that it is dealing with a radically more difficult challenge.

Producing a certain quantity of goods or services is a task that can be accomplished in its entirety. Management can set up a hermetically sealed system and be confident of 100 percent "success" every time. Success is finite, linear, and under management's control.

Delighting clients is different: it can only be approached by increasingly close approximations; it is never fully attained or assured. Client delight is mercurial. What was good enough yesterday might not be good enough tomorrow. Continuously delighting the client requires continuous innovation.

Moreover, in the twentieth century where the workplace consisted of a system of things to be manipulated, a firm could get away with sending messages to customers and telling workers what to do. Now the firm suddenly finds that these communication behaviors no longer work. They not only rub people the wrong way; they often have the opposite effect of what was intended.

Today managers have to recognize that they cannot delight clients or draw on the full talents of the workforce merely by sending messages and telling people what to do. Instead, they need to be having interactive conversations, using authentic narratives and open-ended questions, and engaging in deep listening. They need to be communicating with people as responsible, thinking, feeling adults, so that communications leave them energized and clients positively excited rather than dispirited and used. Managers have to stop doing things to people and start doing things with people. What business once saw as a utopian moral ideal has now become an inexorable economic necessity.

The reality is that most established firms—no matter which business they are in, no matter how sophisticated their products or services, or what the country of origin—are still operating on the assumption that the workplace can and should be built around the central idea of a system of things to produce goods and services.

Today's manufacturers, financial institutions, pharmaceuticals, and oil companies have been built on the notion that the workplace is a system of things that is more important than the particular individuals within the system. "The system" is what enabled the formation of large organizations that exceeded the management span of control of a single manager. It is what enabled the huge gains in productivity of the twentieth century. From the outset, the United States led the world in the application of "systems of things."

According to Peter Drucker, the first—and best—traditional manager was the man who designed and built the first Egyptian pyramid four thousand years ago: it still stands.^[26]

Other theorists date the emergence of traditional management to the period when large organizations began to appear in the early nineteenth century—particularly the railroads. As the population grew in the United States, the railroads were laying rails across the vast territory and sending trains down a one-way track in both directions. Inevitably there was a collision. The first major accident happened on October 5, 1841, when a couple of trains on the Western Railroad had a head-on collision. A conductor and a passenger were killed, and seventeen others were injured.^[27]

Following a public outcry, the directors of the Western Railroad appointed a committee headed by an army man, Major George W. Whistler, to determine what sort of organization should be in place to prevent this kind of thing from happening. The committee could have looked at two very different approaches for running large organizations.

One approach was the army, which at the time was predominantly a steep hierarchy with detailed control from the center. Its focus was on order and certainty. The practices were centralization, coercion, formality, tight rein, imposed discipline, obedience, and compliance. The practices were founded on distrust: unless people were tightly controlled, they might do the wrong thing. The goal was to reach optimal decisions, even if they were not the most rapid. The linchpin of the approach was the brilliant general at the top who would study the situation, make the right decisions, give orders, and win the battle. This had proved to be a successful model of military organization down the centuries. The more disciplined the army, the more successful it was. The communications were top down, explicit, and linear. It was a hierarchy in which the management style was directive and transactional. The assumption was that the world was knowable and predictable. People at the top were best placed to know what was going on and to run the organization.^[28]

By contrast, a variety of other large organizations had relatively flat organizational structures. The Roman Catholic church, the Hanse, the East India Company, the British Empire, and the Hudson Bay Company had all prospered by establishing at the center the values and principles to be followed, but allowing the application of the values and principles to particular situations to be handled at lower levels; self-discipline and individual initiative were highly valued. The approach placed a great deal of trust in the person on the spot to adjust actions to the local context. Overall, despite strong centralist tendencies, the leadership style implied a remarkable level of delegation: an ability to lead at the lowest levels was valued.

These were the two very different historical approaches to large-scale organization. As the committee was headed by a military man, it is hardly surprising which model Major Whistler chose: central offices to be run by "managers."^[29] It established a chain of command with clear lines of authority and clear descriptions of responsibilities at every level. The strengths of the approach were obvious. Out of chaos and confusion, it created order, workability, and predictability.

The system was founded on defining responsibilities in writing and detecting derelictions of duty so that the offending individuals could be punished. At the time, the risk that such a system might limit individual initiative, flexibility, and innovation seemed less important than the goal of establishing order.

Workers were instructed to act in accordance with rules that enabled the system to be predictable and safe. Instructing people to conform to established procedures remains the essence of traditional management even today.

In modern management parlance, workers are turned into "human resources": things, not people. Harold Geneen, the CEO of ITT, expressed the idea pithily in 1965: "The goal of management is to make individuals as predictable and controllable as the capital assets for which they are responsible."^[30]

In this way, the system enabled companies to become big. But could the system enable companies to become better?

The man who answered the question about how the system could help companies be better was Frederick Winslow Taylor, author of The Principles of Scientific Management and, by some accounts, the father of twentieth-century management.

In 1899, Taylor became fascinated by a simple question: How many tons of pig iron bars can a worker load onto a railcar in the course of a working day? Management theorist Paul Stewart depicts the situation:

After Taylor was let go from Bethlehem Steel in 1901, he went around the United States regaling audiences with stories about the Pennsylvania Dutchman he called "Schmidt" and the improvements in productivity that were achieved through "scientific management." In due course, his thinking was adopted by an emerging breed of management experts. In 1909, Taylor's principles of scientific management were introduced into the curriculum of the newly opened Harvard Business School.

In 1911, in The Principles of Scientific Management, Taylor issued his ominous, prescient declaration: "In the past, Man has been first. In future, the system must be first."^[32] Although at times Taylor occasionally professed an interest in improving the lot of workers, he was well aware that "the system" was ultimately about making more money for the company. As he wrote in Shop Management, "The full possibilities of this system will not have been realized until almost all of the machines in the shop are run by men who are of smaller capabilities and attainments, and who are therefore cheaper than those required under the old system."^[33] And so the practice of dumbing down the workplace and outsourcing jobs was born.

Next came Henry Ford's assembly line. Here, the activity of self-directed labor conducted by the worker was sliced into tiny parts and then reconstituted as a process controlled by management and delivered to the worker. Initially there was revulsion from the workers, and Ford had to hire many men to add one to his production line.^[34] Eventually the workers either got used to it or were required to adopt it, as Ford was able to eliminate the other companies that did not adopt his assembly line methods. Ford prospered even if the jobs were monotonous.

Ford's system was more productive for the company but not agile enough for the customer. It was constantly producing too many, or not enough, cars. So the next step was to apply Taylor's methods to management itself.

This time it was General Motors that showed the way. Alfred Sloan created decentralized divisions that managers could oversee from corporate headquarters simply by monitoring production and financial numbers. He created one division for each car model: Chevrolet, Pontiac, Buick, Oldsmobile, and Cadillac. Corporate executives were experts not in making cars but in finance. Engineering and manufacturing specialists were assigned to oversee those functional areas. Operations were not seen as a top management responsibility.

Executives managed by the numbers: output, inventory, sales, margins, market share, profit, and loss. They reviewed whether each division was performing in accordance with the plan; if it was not, adjustments were made. In this way, managerial work was sliced into smaller pieces just as manual work had been.

With the introduction of radio, mass marketing gave companies the chance to reach a wide variety of potential customers. The goal was to induce a broad audience with different needs to buy the same product. By mass-marketing and mass-producing the same product in roughly the same way to all consumers, companies could reach the largest potential market at the lowest cost. The result was average products that sold well.

The lack of management involvement in the work created a risk that its decisions would not correspond with the realities of the workplace or the marketplace.

In the 1950s and 1960s, the risk wasn't significant given the heavy and growing demand for goods and services and the difficulty of new entry into the market. Customers, deprived of material goods for two previous decades of depression and then war, didn't insist on high quality or service. They were happy just to get any television or refrigerator.^[35]

The regime of Robert McNamara at Ford, the Defense Department, and the World Bank epitomized the management of the era. Through elaborate planning exercises, McNamara, with his teams of the best and brightest, decided which sectors to be in, how much capital to allocate to each, and what returns they would expect the operating managers to deliver to the company.

Staffs of corporate programmers and budgeters assembled data about divisional performance and intervened to adjust plans and activities. The arrangement was scalable: when a company needed to grow, it added more workers at the bottom and then more managers in the layers above. Now both managers and workers could be manipulated like things.

These arrangements were appropriate to a world where paying customers could be taken for granted, the entry of aggressive new competitors was rare, and the supply of compliant managers and workers was not something to worry about.

In 1993, traditional management jumped on the bandwagon known as business process reengineering. The initial idea was sensible: to reengineer processes, essentially a new fix to the system—particularly processes that took advantage of technology to minimize handoffs and enable smaller teams to work on tasks from start to finish.^[37] Such process improvements could lead to modest gains in productivity, although the change was hardly the kind of reform needed to deal with the profound structural problems of the traditional workplace. Nevertheless, Michael Hammer and James Champy were able to hype this modest proposal into something they called "radically new," "a fresh start," "something entirely different."^[38]

The claim was attractive to traditional managers for several reasons. For one thing, it was a technology fix: managers didn't need to change their behavior. They could sit back while technology solved the problem. For another, the reengineering could be done by experts—even by reengineering "czars."^[39] The fact that managers could hire others to do the hard work of reshaping the organization fit the prevailing Taylorist culture.

It offered CEOs an attractive image of immaculate top-down power, since the "almost perfect model" for the reengineered organization was the National Football League (NFL) team: the head coach called in every play, and the players flawlessly executed his will.^[40] It also happily provided management consultants with "the next new thing" and opportunities to market newly minted prowess in process reengineering.

The downsides of the approach were mirror images of the advantages. Because the management problems organizations faced were not inherently problems of technology, the introduction of technology did little to address root causes. Being designed by "experts" who didn't always understand the requirements of the work, the solution often didn't fit the specific workplace. Because the process changes were introduced without basic change in the behaviors of the managers or the workers, the problems caused by those behaviors continued.

Business process reengineering was something done to the workforce. For most workers, it made jobs worse. Because business process reengineering didn't affect the goals of business, which continued to focus on improved efficiency through downsizing and outsourcing, often using fewer, less educated, and cheaper people, the social problems of the workplace were aggravated. Nor was thought given to the strategic implications of the wholesale shipping of expertise overseas to countries where workers could be more easily manipulated.^[41]

The metaphor of the firm as an NFL football team, with the head coach calling in every play, revealed how little Hammer had grasped the need for greater agility and innovation in a rapidly changing environment. It was assumed that the world was knowable and predictable. The guy at the top could figure out what was going on and make all the key decisions.^[42]

In fact, a principal attraction of business process engineering was precisely that under the guise of being something entirely different, it was more of the same. It was another superficial fix to a system that was suffering from rot from within. It was a bandage on a cancer.

By 2009, the problems facing management were formidable. A study by the Deloitte Center for the Edge catalogued the long-term performance trends. The return on assets of U.S. companies continued its steep decline. With economies of scale evaporating, resort to downsizing and outsourcing weakened firms' future ability to compete. Meanwhile, as barriers to entry eroded and competition intensified, modest gains in labor productivity were mainly captured by customers and creative talent. "Winning" companies barely held on to their success, and market "losers" destroyed value more rapidly than ever before. Customers were increasingly disloyal to brands. Executive turnover accelerated.^[43] In the past twenty-five years, start-ups created 40 million jobs in the United States, while established firms created almost none.^[44]

In effect, organizations today face a crisis. It's not a crisis involving a single catastrophic event, like the financial meltdown of 2008, although that too is a symptom of the trouble that is afoot. The crisis is more insidious and more serious.

A crisis of this scale and age is not something that can be resolved with a single management fix, such as instilling a sense of urgency^[45] or putting more emphasis on intrinsic motivation.^[46] Individual fixes are impotent to deal with a crisis of this size and complexity. They don't stick.

What the champions of business process reengineering failed to see was that the fundamental problem of the workplace wasn't this or that particular system or process. The deeper problem lay precisely in thinking about work primarily as an internally driven set of processes, using people who could be manipulated, rather than viewing the workplace as an interaction of thinking, feeling, laughing, caring human beings whose talents, energies, and ingenuities are fully engaged in finding ways to delight clients.

When process engineers started talking about work as an improved system of processes, they were already well on the way to aggravating the problems they were trying to solve. They had lost sight of what work should be about—what it takes to make a truly productive and vibrant organization.

And where was the client? As long as the purpose of business process reengineering was conceived as the more efficient production of goods and services, it was likely that the client would also end up getting the short end of the stick and have to spend vast amounts of time waiting on the phone to have a confused conversation with some call center on the other side of the planet.

The champions of business process reengineering failed to see that the activity was Taylorism under a different label.

The new way of managing means busting the iron triangle of constraints in which firms have for too long been imprisoned. All too often, gains in organizational productivity have made things worse for workers and lowered quality of service to customers. Improvements in the workplace for workers have increased costs and undermined productivity. Upgrading service to customers has also been at odds with improving productivity. Enhancing one dimension has led to setbacks on one or both of the other two.

Figure 2.1. The Iron Triangle

Reform of the workplace means rethinking work from first principles and seeing how the productivity of the organization, the life of workers, and the experience of customers can be simultaneously upgraded. It means breaking the iron triangle (Figure 2.1).

Equipping organizations to break the iron triangle requires a fundamental shift in management thinking and practice. In effect, the underlying sources of productivity are being rethought while simultaneously making things better for the workforce and becoming more responsive to customers.

The inquiry is not about what sort of personality is needed to tolerate a blizzard of half-truths that managers must transmit and employees have to swallow in some new "system." It's not about offering workers health spas, gourmet cafeterias, or karaoke competitions at lunchtime while leaving jobs unchanged.

It's about fundamentally restructuring work and generating a true partnership. It's about draining the swamp of nontransparency in which most managers and employees currently swim and exposing the rocks for what they are, so that firms can get rid of them and become more productive. It's about what it takes to continuously deliver client delight.

It speaks to the goals, behaviors, economics, and ethical principles that must govern the workplace for this century.