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ReInventing Management by Empowering Employees
BY KENNETH CLINE
To survive in the 21st century, banks will need to reinvent their management principles to push authority and accountability further down in the organization, says business strategist Gary Hamel.
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SYNOPSIS | In an interview, consultant and business strategist Gary Hamel says banks and other companies will need to reinvent their management processes. The top-down, hierarchical management systems of the last century were conducive to manufacturing standardized products; they won?t suffice in today?s information-based economy. Part of the solution, Hamel says, is pushing authority and accountability further down in the organization so companies can respond more nimbly to competitive conditions and develop a consistent process of innovation.
Gary Hamel ? consultant, academic and best-selling business author ? is no stranger to big ideas. In the mid-1990s, along with C.K. Prahalad, he coined the phrase ?core competency,? which is now enshrined in the vocabulary of corporate executives. His 2000 book, Leading the Revolution, called for developing a new model for business innovation.
Hamel?s latest concept is ?reinventing management DNA,? which advocates a revolution in management principles. ?In a large corporation,? Hamel writes in a February 2006 Harvard Business Review article, ?the only way to change how managers work is to reinvent the processes that govern that work.?
According to Hamel’s explanations in the following interview, hierarchical, top-down management is a relic of the 20th century, when it was effective in the manufacturing of standardized products. Hamel believes that companies need to re-think this paradigm in the new century. The development of management structures that allow for more autonomy on the frontlines can enable companies to respond more nimbly to shifting markets and customer preferences, he says.
What’s the relevance to banking? As he will explain in-depth at BAI’s upcoming Retail Delivery Conference & Expo, Hamel believes that banking is as vulnerable to radical new business models as any other industry. He cites United Kingdom examples of companies such as Zopa.com and uSwitch.com that are already challenging the traditional model of financial services. Bankers should not be lulled, he warns, into believing that their regulated status will protect them from new competitors. “They’re going to have to figure out ways of being more innovative on a consistent basis,” he says.
And that means reinventing their management DNA.
Q: What’s your assessment of the current state of management innovation in banking?
Hamel: All of us have the same kind of managerial DNA inside of us. What we believe about how to motivate, how to lead, how to organize and how to allocate resources is the product of the last 100 years of management education and management research. You have to go back in history a while and understand the problem management was invented to solve.
At the beginning of the 20th century, the problem was how to do things over and over again with great efficiency and perfect replicability. Of course, that is important in banking, which is a transaction-driven business. You want every transaction to be flawless and handled in the same consistent way. We know how to run organizations with discipline and with efficiency, where people conform to standard rules.
But, as we look forward, wealth creation is going to come from companies that are really capable, I would say, of doing three things. One, they can re-invent their core strategy, their core business model, on an accelerated pace. Two, they make innovation everybody’s job every day and don’t squander a bit of human imagination across the organization. Finally, they understand how to get the best out of their people.
Again, if you look at management traditionally, we were very good at getting discipline out of our folks, even a fair proportion of their intellect, but we weren’t very good at getting their initiative, their creativity and their passion. In fact, in many cases, those were seen as not very helpful in an organization. Yet, as you look forward, creating wealth is going to depend on employees who, every day, are willing to bring those gifts to work. You can command obedience, diligence and intellect, but as a manager, you can’t command creativity, initiative and passion. Those are things that people either choose to give to their work or they don’t.
So, getting that out of people and dramatically increasing the returns on human capital is going to require us to invert our leadership model. Leadership will less and less be about serving the organization’s goals and more and more about creating an organization that allows people to meet their own goals.
A lot of financial services companies have spent the last decade re-engineering their business processes. Over the next few years, we are going to have to put as much energy into re-inventing our management processes — how we plan, how we organize, how we allocate resources. Because it’s the management processes, not the business processes, that really get in the way of creating value.
Q: In every organization, people’s jobs and income are tied to their position in the organizational chart. So how can you get an organization to give up all those interests vested in the way the company is managed?
Hamel: We have created in our organizations a managerial class that has certain privileges and prerogatives and they are probably eager to protect those. But I think the reason it will change is, it’s going to have to.
In the medium term, there’s probably no alternative. If you look back over economic history, there are a couple of things that are obvious. In the medium and the long term, there is no other way to create growth and to create wealth other than with innovation. In the short run, you can acquire your competitor, do some financial re-engineering, do another round of cost take-outs, etc. All of those things may pop the share price in the short term. But none of them will help you grow shareholder value in the long term.
It’s interesting that, in banking, some of the most successful and innovative banks are some of the smallest, like Portland-based Umpqua Holdings Corp. and New Jersey’s Commerce Bancorp. We’ve looked across the industry and could find no correlation between size and profitability. So, organizations are just going to have to wake up to that. They’re going to have to figure out ways of being more innovative on a consistent basis.
Companies are going to be reluctant, and there will certainly be some resistance, but there’s really no alternative. One of the advantages that the banking industry has had — although many people in the industry moan about it — is regulation, which makes it difficult for newcomers to get started. Having said that, if you look at what has happened in the airline and telecommunications businesses, both highly regulated, it’s very dangerous for incumbents to believe that regulatory barriers are going to give them immunity from a new and unconventional business model.
In fact, some of the most interesting, radical business models out there right now in the world are in banking. Zopa.com, in the U.K, is basically a way for lenders and borrowers to find each other with no banker at all in the middle. (For more on Zopa, see “Who Needs a Bank? e-Bay-Like Service Asks” in the November 23, 2005 issue of BAI’s Banking Strategies Retail Delivery Insights). London-based uSwitch.com gives people perfect information about their existing credit card interest rates and charges and allows them to compare that to hundreds of other credit cards and automatically makes that switch.
Every company has the choice of being ahead of the curve or behind the curve. The U.S. automobile industry, for example, took 20 years to understand what Toyota was doing. It wasn’t because Toyota had some difficult technology to figure out. It was that Toyota had a different management principle. They believed that they could give first-line employees the tools and information needed to solve quality and efficiency problems on the front- line. They figured out a way of exploiting the intellect of their employees in a way that Detroit, to this day, has not been able to match.
Q: Is pushing autonomy and self-direction downward at the core of what is required, as your Toyota example suggests?
Hamel: I don’t think it’s the only thing that’s required, but it’s a big part of it. Companies need to become as conscious and as innovative around how they manage as they are around how they produce their services or how they serve their customers, or anything else.
We recently did a survey of management magazines, both popular magazines like Fortune and academic journals. We discovered almost 60,000 articles focused on technology innovation, about 5,000 focused on product innovation, a few hundred on strategy or business model innovation and barely a handful focused on management and organizational innovation.
And that’s weird, because managerial and organizational innovation actually contribute more to long-term competitive advantage. Technology doesn’t provide long-term advantage; it never has, it never will. When companies buy their IT from the same handful of vendors, they match each other move for move.
Q: What if bankers respond, well, OK, but banking is a different industry because you have the fiduciary relationship with customers and you’re handling their money, therefore you need controls and hierarchy. Is control essential in banking?
Hamel: Clearly, the controls have to be there. The problem is, we see employee discretion and discipline and control as mutually exclusive. We think: I can have more freedom or discretion, but it’s always going to come at the expense of control. Likewise, if I have more controls and more discipline, I dampen down freedom.
If you want to build an organization that’s adaptable, that’s innovative, people have to have discretion. The way you build a responsive organization is to have people every day at the frontlines who can make unencumbered decisions, without a lot of permission. They can make the choices that need to be made right then, to help the bank respond to changes in customer demand, or whatever.
One of the secrets of management innovation is separating out the “what” and the “how.” We can all agree on the what, i.e., that you want people who follow the rules, who are very accountable, responsible and who don’t take shortcuts. Everybody would agree on that.
If you look at the how, we’ve produced that with standard operating procedures, with narrowly defined boundaries of employee discretion, with a lot of supervision, a lot of bureaucracy, and people checking on decisions that are made. That’s how we produce discipline.
Whole Foods and Google are some of the most disciplined companies I know. But their discipline comes from transparency. There are not a lot of controls in these organizations. Yet everybody knows what everybody else is doing and they can see, almost day by day, how profitable their unit is, whether costs are in control and so on. When you have that kind of transparency, you don’t need a lot of control. It’s apparent to people whether you’re managing the business in a responsible way or not. So, transparency means a lot of peer responsibility.
At Whole Foods, for example, the stores are organized into small teams: produce, meats, cheeses, etc. And those teams have a degree of authority and discretion that I think is almost unprecedented in retailing. They set the prices, they set staffing hours and they choose the products to go on the shelves. There’s a lot of freedom but also a lot of accountability. Every week, they are measured on the profitability of that department. Everybody in that store, and in every store across the Whole Foods network, can see their profitability figures every week. And if they meet certain targets, they get a bonus in next week’s paycheck. All rewards are team-based, so in that organization, you’re not going to have many slackers.
We’re always going to need some residual set of controls, but the challenge is how you create an environment in which transparency, the pressure from peers to perform and to meet targets, is driving that accountability, rather than a lot of expensive overhead of bureaucratic controls.
Can you do that in banking? That remains to be seen. But banking is not unique; every company has enormous financial responsibilities to shareholders, customers and vendors. Banking can learn from other industries.
Q: How can bankers start to implement these ideas?
Hamel: I like to talk about revolutionary goals, but evolutionary steps. You don’t turn large organizations inside out; you have to do things in a step-by-step process.
Generally, I think the trick is to learn how to be as experimental with new ways of managing as we are with, for example, new services or products. Companies have learned how to test market the new service or new product, try it out in a region, model it, so that’s a very familiar thing to do.
Unfortunately, when it comes to management, we often have the sense that you have to put some really smart people in a room, give them a few months, then try to reinvent the whole thing. Almost by definition, that makes you very incremental, because nobody is ever going to get permission to do something very radical, system-wide, across an organization.
Google gives every one of their development people, about half the company, 20% of their time to work on anything they want to work on. There’s a little software company in Australia that thought that was an interesting idea, but they couldn’t take the risk of doing that across their organization. So, instead, they call their development people together about one day a month to discuss their best ideas and decide among themselves which are worth pursuing. Often, some of the projects that come out of this end up going into the formal development process, displacing other products.
So, the secret is to be bold in terms of the aspirations you have, but then to find ways of experimenting that don’t put the organization at risk. Then if the experiment works, it’s a question of how do we extend it, what will we want to learn next? So, I think that’s a big part of making these ideas succeed.
Q: Big ideas with small steps ...
Hamel: Yes. If you want to innovate, you have to start with new principles. In science, for example, you don’t get any real advances until somebody shifts the paradigm. One of the things we’ve been doing over the last several years is trying to understand the design rules or principles we need to build 21st century organizations.
Part of that work has involved looking at things that are highly resilient. So, we’ve looked at life in the biological system, at markets, at cities and at constitutional democracies that have proven their ability to adapt and change over time. When you do that, you come away with a very different set of principles involving the importance of variety, experimentation and decentralizing power and authority.
So, in management innovation, you have to start with some principles that really pull you in new directions, that inspire you to try new things. If you start with the same old principles, you start with where we are today in automotive engineering. We’ve had this 100-year-old paradigm called the combustion engine and there’s only so much you can do with that going forward.
Then you need to be able to translate those new principles into very simple first and second steps.
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