• Strategy
  • McKinsey & Co.

Managing Your Organization by the Evidence

An organization is much more likely to improve its current performance and underlying health by using a combination of practices rather than any one of them alone, new McKinsey research finds.

What is this proven combination of practices? To arrive at it, you must extrapolate backward from the outcomes you seek. Academic literature, our own experience, and intuition all point to accountability, clear direction setting, and a strong culture as the main foundations of a high-performing company. These outcomes underpin high levels of organizational performance.

The McKinsey research unambiguously identifies the best practices for achieving these outcomes. Senior executives must provide for clear roles within a structure matched to the needs of the business (accountability), articulate a compelling vision of the future (direction), and develop an environment that encourages openness, trust, and challenge (culture). Each of these practices, the data tell us, works best in relation to a specific outcome, but applied in combination they produce much more dramatic results, for they have a mutually reinforcing dynamic. Increasing the amount of effort behind any one practice increases the likelihood of achieving not only its target outcome but also the other target outcomes, thus making organizations more effective overall.

For most people, the way these three practices—clear roles, an inspiring vision, and an open and trusting culture—interact to create complementarities is intuitively clear. Employees perform well when they are working toward a future that attracts them, know when they can operate freely, and are encouraged to improve constantly. (For a full discussion of the importance of complementarities in organizational design, see John Roberts, The Modern Firm: Organizational Design for Performance and Growth, Oxford: Oxford University Press, 2004.) Our research supports such intuitions not only because the survey respondents linked the base case to overall organizational effectiveness but also because companies that apply the base case outperform the others in revenues and margins. In our view, the correlation between the base case and superior performance is not an accident, and causality probably operates only in one direction: a better organizational design begets higher performance. Moreover, the link to financial performance is empirically evident as well, at least anecdotally. An analysis of the organizational effectiveness of different production facilities owned by the same global energy group, for instance, showed that improved organizational performance correlates to improved financial performance (exhibit). For a facility of typical size and with typical margins, better organizational performance correlated to a financial improvement worth $25 million to $30 million.

Accountability

Many executives, we find, struggle to design structures, create reporting relationships, and develop evaluation systems that make people accountable—in other words, that require them to take responsibility for the results of the business. Our database suggests that companies seeking to improve in this area are much more likely to succeed if they concentrate on giving individuals clear roles rather than resorting to other options, such as consequence management. Our own experience of working with companies confirms this point. The regional directors of a multinational building-materials group, for example, took greater individual responsibility for their regions’ performance when the company adopted role descriptions defining their autonomy in customer and operational decisions but standardizing all back-office and control processes. New KPIs, reporting mechanisms, and rewards were only introduced a year later.

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