In today’s fast-changing world where there is often pressure to get results faster, it is tempting for leaders to focus their thinking on the short-term and define goals and projects that will deliver results quickly. Indeed, the move in recent years towards ‘agile’ business thinking and ‘agile’ working can encourage leaders and managers to think in such terms. However, the best route to sustained organisational performance is actually for leaders to manage their organisation for both the long-term and the short-term at the same time. Leaders need to be artful spinners of plates of different time-frames!
On the business development front, for example, good strategic leaders know this twin-focus requires them to be planning new product development for several years ahead whilst at the same time today selling existing products or launching recently developed products. What is less appreciated by many leaders, though, is that they need to be thinking about and managing their company’s longer-term ‘organisational health’ whilst they are also managing short-term operational performance. The problem is, whilst managing organisational health sounds like a great idea to many leaders, it doesn’t feel like a necessity for achieving their short-term goals – which is typically what they are judged on and rewarded against. Leaders may worry that it is going to distract them from dealing with the ‘here and now’. This is misguided.
What, then, is meant by ‘organisational health’? It’s a term that goes beyond the physical and mental state of people in a workplace. It’s also more than just culture, employee satisfaction, or employee engagement. It refers to an organisation’s overall ability to align around a defined vision and strategic direction, execute against that vision, and renew itself in response to fresh opportunities. In other words, how well it runs and adapts, no matter who is in charge and what strategy has been chosen.
The concept of organisational health has been particularly promoted by leading consultancy firm, McKinsey, who have monitored the health of hundreds of different companies across dozens of countries over the last ten years using a measure they developed called the ‘Organisational Health Index’ (OHI). This is a composite ‘score’ based on asking employees and managers about their perceptions of how well they think their organisation performs against nine specific dimensions of organisational health (see below) and what supportive management practices they see or don’t see being used there.
The notion of organisational health was well set out in the book Beyond Performance in 2011 by McKinsey consultants Scott Keller and Colin Price. In contrast to the very slender research evidence of earlier ‘classic’ books that tried to identify the keys to sustained company performance (e.g. In Search of excellence, 1982, based on a study of only 43 companies and Built to Last, 1994 which looked at – remarkably – just 18 companies!), the research base used by Keller and Price has been wide and deep – including responses to OHI surveys from more than 600,000 employees at more than 500 organisations, 6,800 senior executives who subscribe to McKinsey Quarterly, data from 100+ projects of McKinsey’s own clients, and reviews of more than 900 publications.
From their many years of research, McKinsey have consistently seen a strong correlation between organisational health and the financial performance of the companies they monitored. Key findings have been:
–Almost all companies perform better if they improve their health. Around 80% of companies that took concrete actions on health saw an improvement in performance (in terms of earnings and total returns to shareholders). The majority of these companies moved up an entire quartile against all other companies in McKinsey’s database.
-The top quartile of publicly traded companies in McKinsey’s OHI delivers three times the returns to shareholders as those in the bottom quartile.
–Those companies that rise to the top quartile achieve the biggest financial rewards. Companies whose health improvement efforts took them from the second quartile of the OHI to the top quartile recorded the biggest financial performance boost: a clear indication that working on health is an important factor in going from “good” to “great”.
In more recent, complementary research, McKinsey looked at the relationship between organisational health and performance over the long-term at 51 companies where they had a rich set of data on both fronts. Factors they used to assess long-term performance included earnings history, consistency of investment patterns, and the extent to which companies focused on long-term ‘value creation’ rather than short-term targets. The research found a strong, two-way correlation between health and long-term performance – with the healthiest companies being the ones that focus on long-term value creation and, in the other direction, those companies focusing on long-term value creation outperforming their peers on all nine of the key dimensions to organisational health.
Another noteable finding from all of McKinsey’s research over the years is that organisations can see tangible performance improvement in as little as 6 to 12 months. This holds true for companies across different sectors and regions, as well as in contexts ranging from wide-ranging turnarounds to more specific improvement initiatives.
So, given this evidenced case for organisational health, what exactly makes up ‘organisational health’ ? In a nutshell, good health has three key attributes: good internal alignment, good quality of execution, and good capacity for renewal. Supporting and enabling these attributes are ‘nine elements of organisational health’:
i) Direction – a clear sense of where the organisation is heading and how it will get there that is meaningful to all employees;
ii) Leadership – the extent to which leaders inspire actions by others;
iii) Culture & climate – the shared beliefs and quality of interactions within and across the different parts of an organisation;
iv) Accountability – the extent to which individuals understand what is expected of them, have sufficient authority to carry it out, and take responsibility for delivering results;
v) Co-ordination & control – how well an organisation is able to evaluate performance and risk, and to address issues and opportunities when they arise
vi) Capabilities – how much an organisation has the skills and talent required to execute strategy and create competitive advantage;
vii) Motivation – how enthusiastic employees are to put in extra effort to deliver results
viii) External orientation – the quality of engagement with customers, suppliers, partners, and other external stakeholders;
ix) Innovation & learning – the quality and flow of new ideas and the organisation’s ability to adapt and shape itself as needed;
Each of these nine elements has been broken down by McKinsey into a small number of specific, helpful management practices. Some examples: one of the practices related to ‘direction’ is “articulating a clear direction and strategy for winning, and translating it into specific goals and targets.” For ‘leadership’, one practice is “involving and empowering employees through communication, consultation and delegation”. For ‘co-ordination and control’, a practice is “focussing on operational KPIs, metrics, and targets to monitor and manage business performance”. And, for ‘capabilities’, one practice is “embedding capabilities and know-how through codified methods and procedures e.g. training manuals and SOPs.”
Altogether, thirty-seven specific practices were identified and defined by Scott and Price in their OHI. Too many to list here, but all are sound and reasonable, save that some are very similar in being basically about good people management or good performance processes and so several could perhaps have been merged to simplify the model overall.
The key to gaining from applying the model is for leaders to put the notion of organisational health at the heart of how they direct and run their organisation, managing it as rigorously as their financial and operational performance. It means maintaining that twin-track mind-set of concern for both long-term health and short-term results, at the same time. It means leaders thinking about and developing their organisation’s health proactively and strategically, not being passive bystanders watching the organisation shape itself. However, don’t just think about health in overall terms: you need to look at each of the individual constituent elements that make up organisational health (as described above) and seek specific opportunities for improving practices, processes or behaviours. Then check that your policies in each area will support each other and work holistically together.
Three ‘must-dos’: Firstly, be sure to set some targets for key areas of your organisational health and integrate health into your company’s overall performance scorecard and regular performance reviews, with data to show how you’re doing against targets (Consider that organisational health is a useful ‘leading indicator’ i.e. advance signal of performance, whereas financial results are a ‘lagging’ indicator). Secondly, be sure to weave health into the design and planning of all critical business initiatives and projects. And thirdly, guide and motivate individuals to value and support organisational health by including guideline behaviours and practices in people’s individual job descriptions and using appropriate financial and other incentives.
Overall, the concept of organisational health is a very valuable and research-justified aid to securing effective organisational leadership and performance results. Its central message is “pay attention as much to your organisational health as your P & L”. To be honest, though, it’s still not a phrase or model that I come across routinely in my various consulting or executive work – which I find curious. I suspect that the slight complexity in the McKinsey model has not helped: 37 exemplar practices and 9 not-so-easy to remember elements – in contrast to some other organisational models like the very familiar ‘7-S’ model that came out with the In Search of Excellence book I mentioned earlier.
Nevertheless, I think we should all be impressed by the existing (and continuing to grow) evidence behind the ‘organisational health’ model and be sure to try and incorporate it into our overall approach to organisational planning and performance management. Not least, the model is a pointed reminder not just to consider and measure employee-centred issues in organisational development in terms of employee satisfaction or employee engagement: those nine elements of organisational health point to a lot more!
Written by Mike P. Owen, CEO at Owen Morris Strategic.
If we can be of help with your organisational planning or performance, do get in touch.
Email: firstname.lastname@example.org Office tel: 01886 881092
Copyright of Owen Morris Partnership 2018