The PeopleWise Organization: MANAGING THE HUMAN SIDE OF CHANGE Kepner-Tregoe by Quinn Spitzer, Jr. Forethought There is little doubt that businesses will undergo tremendous change over the next 15 years. Unrelenting social, political, economic and technological change will alter both how organizations look strategically and how they will be run. In this turbulent environment, executives have a clear choice: manage the process of change and succeed, or grasp at the latest management trend and sidestep from one initiative to the next with no forward movement. When I was at Xerox-and before our Leadership Through Quality effort-we were on a change binge. We tried many approaches to improve performance, but they were largely ineffective. Flavor-of-the-month change just didn't work. The PeopleWise Organization breaks this pattern of initiative overload and is an important contribution to the art of management. The focus is on the human side of the enterprise and how to energize an organization by tapping its collective wisdom-that combination of brainpower, judgment and instinct that is the enduring source of competitive advantage. Organizations must become more nimble and versatile. The window of opportunity is getting progressively smaller. Those who wait are left wanting, as more fleetfooted competitors seize the moment- and the customers. The key is to develop the organization's human resources and to design systems, structures and processes that are enablers, not blockers, of the highest levels of achievement. The six steps outlined in this research report can be useful to any organization undergoing change. While they differ somewhat in vocabulary from our approach at Xerox, they follow the very same path. Consider them carefully- and put them into practice David T. Kearns Stamford, Connecticut Mr. Kearns is former Chairman and Chief Executive Officer, Xerox Corporation, and former Deputy Secretary, U.S. Department of Education The PeopleWise Organization: MANAGING THE HUMAN SIDE OF CHANGE by Quinn Spitzer, Jr. Few senior executives would argue with the proposition that change--anticipating it, inducing it and making it happen--is one of the great challenges confronting the modern business organization. Change, of course, is nothing new. When the ancient Greek philosopher Heraclitus observed that you can't step into the same river twice, he was stating what thinkers more than two thousand years later would reiterate: change is a constant of the human condition. What separates our age from the past is not that change is a fact of life, but that it has become a defining feature of it. Rapid, revolutionary and far-reaching change is upon us. Nothing is immune, not even that avatar of stability, today's mega-corporation. Who would have thought that bulwarks like Kodak, General Motors, IBM, ICI, Mercedes-Benz, Sony and Toyota would be humbled by the winds of change? There has been much written about the causes of the change buffeting business organizations. Many observers point to globalization, the growth of information technology, new forms and intensity of competition, and pressure for rapid innovation as the four horsemen of the revolution around us. Whatever the causes, the net effect has been to set off an activity frenzy in most major organizations. To insure safe passage through the turbulence, senior management teams are busily downsizing, restructuring, reengineering, TQMing and teaming their organizations. THE NEW INITIATIVE OVERLOAD In research conducted late last year with 400 executives worldwide, Kepner-Tregoe found that 42 percent of those studied had undertaken 11 or more major programs, initiatives or projects to improve organizational performance in the preceding five years. Nearly 59 percent reported undertaking three or more major initiatives in the last 18 months--more than one every six months. These initiatives were not exactly undertaken on a popcorn budget. Nearly one out of three executives spent in excess of $5 million on major improvement efforts in the last five years. They are putting their money where their fears are. But is the money wisely spent? And is the parade of programs marching through our organizations preparing them for the future? Executives in the study felt that some of the results, at least in the short term, were positive. Three out of five said their initiatives resulted in improved profitability, not an unexpected short-term outcome from restructuring and cost-cutting efforts. But whether profitability will continue to improve over the longer term is questionable. In a study of 495 executives conducted by Kepner-Tregoe two years ago, the best indicator of whether or not a company would downsize was its previous behavior. Thirty-eight percent of the executives who reported downsizing said they anticipated doing it again over the next 12 months. That number rose to 43 percent for executives reporting two or more cost-cutting initiatives. Costs will creep back and profits will decline when companies cut costs but don't learn to manage them. However satisfied senior executives may be with their overall change efforts, the view from the firing line is considerably different. In a parallel study of 150 non-managerial workers just completed by Kepner-Tregoe, 43 percent said that downsizing/cost reduction efforts had not met the objectives set, or met the objectives only somewhat. And nearly half said the same about restructuring. Only two in five reported that the effect on their organizations was improved profitability. In fact, of the 11 types of initiatives workers were asked about, including productivity improvement, quality efforts, culture change, empowerment/involvement, reengineering and the like, an average of only 20 percent said those initiatives exceeded expectations. Research conducted by others calls into question the effectiveness of change initiatives on many aspects of the organization, from quality to systems. A study of 584 companies in the United States, Canada, Germany and Japan, conducted by Ernst & Young and the American Quality Foundation, showed that the majority of quality initiatives failed to achieve significant improvement. In reviewing a broad range of initiatives such as benchmarking, Total Quality Control, reengineering, worker empowerment, and skill-based pay, The Wall Street Journal concluded that "...while these approaches may promise more motivated workforces and greater productivity, the results often fall far short. When this happens, companies find they must sharply modify, abandon or find antidotes to programs that bring sweeping changes to organizational and human-resource management." [1] Reengineering gurus Michael Hammer and James Champy estimate that "as many as 50 percent to 70 percent of the organizations that undertake a reengineering effort do not achieve the dramatic results they intended." [2] This last conclusion is confirmed by Kepner-Tregoe's 1993 research on change initiatives which found that, despite widespread reengineering efforts, two out of three executives reported that their organization's internal systems were "worse" or "the same." The impact of change initiatives on the human side of an enterprise is equally grim. Nearly two out of three executives surveyed felt employee morale was "worse" or "the same" as a result of the initiatives that were undertaken. More than 60 percent rated their employees' reaction to organization change initiatives as neutral, skeptical-or downright resistant. Perhaps most alarming of all for the future, 57 percent rated their workforce's skills as "worse" or "the same." And without the necessary skills, it is not surprising that employees fear-and even resist-change. The human side of change demands top management's urgent attention. Companies today face unrelenting pressure to innovate rapidly and execute flawlessly. They will no longer be able to muddle through, much less flourish, without a workforce that is ready, willing and able to compete WHY DO INITIATIVES FAIL? One company we know is a major player in the chemical industry. Its earnings in the U.S. have been sluggish, with no upturn in sight. Recently, top management called for cuts of $100 million in operating expenses over the next five years. The president organized a task force of key managers, directed its members to meet off-site with a battery of outside consultants, and asked for a restructuring plan to be on his desk within 90 days. Already the organization's rumor mill is churning, and a pervasive angst is settling in. Don't bet that this initiative will lead to long-term success There is nothing unusual about this company's approach to change. It is a replay of what happens countless times in countless other companies. A problem exists. Bring in the fast trackers to develop a plan. Get the CEO to buy off. Restructure. It's a compelling, action-oriented approach to change. Unfortunately, it is seriously flawed To understand why, consider the command-and-control model inherited from the late 19th century, a model that remains part of the baggage carried by many of our best executives. This classical model organizes work around a centralized bureaucracy. According to the model described by the early 20th century sociologist Max Weber, and then enshrined in the "scientific management" approach of Frederick Taylor, organizations are hierarchical structures that are functionally specialized. They are power pyramids in which decision-making responsibility, along with the need to think, diminishes as you "descend" through the organization. According to Taylor's approach: "The worker's equal division of work was to do what he was told to do by management, and his share of the responsibility was that responsibility to do what he was told. The whole attitude of Taylor in this respect was described by a mechanic who worked with him... Taylor would tell him that he was 'not supposed to think, there are other people paid for thinking around here.'" [3] Three-quarters of a century later, as Ray Marshall and Marc Tucker point out in Thinking for a Living, companies would "pay the price for so seriously underrating the contribution that 70 percent of our workforce could make to the products and services their firms produced...." [4] Executives today certainly have tried to unhitch their organizations from their classical moorings, as the current rash of initiatives suggests. But how successful have they been? Not terribly. John Horne, President and Chief Operating Officer of Navistar International Transportation Corporation, echoes comments we hear from executives around the world: "It is intriguing how so many companies jump from one clich‚ to another. Remember MBO? Zero-based budgeting? Quality circles? Now we're reengineering. Many of our companies are failing because they've forgotten about business fundamentals." Many who are undertaking current initiatives suffer from the same assumptions that governed the classical model-and are destined to fail. They assume that organizations are an array of systems, processes and structures to be "reengineered." Organizational "architecture," rather than people, is considered the key to performance. With the right structures, systems and work processes, you can change human behavior. They assume that, although people are important, they are also interchangeable, replaceable entities who will readily conform to new structures and systems. And they assume that the organization's employees rank well behind stockholders and customers in the scheme of things. Current initiatives tend to be flawed, not only in design and focus, but in their implementation. This is especially true of massive change projects that are imposed top-down on unsuspecting victims. As in the chemical company we mentioned, change becomes a quasi-clandestine activity, conducted like 19th century diplomacy--"secret covenants, secretly arrived at." Organizations communicate change poorly, don't involve employees, and envision solutions in isolation without understanding the delicate balance among the constituent parts of an organization, the interrelationships that make it "go." Dr. Ikujiro Nonaka, professor of management at Tokyo's Hitotsubashi University and a world-renowned business thinker, sums it up: "So many of today's management actions such as reengineering and restructuring are based on a deductive kind of thinking. They aim to improve what is. At best, they help a company catch up, but not get on top. They do not lead an organization to develop new hypotheses and create new knowledge. Simply cutting costs and improving business processes no longer is enough." The classic mechanistic model clearly misses the mark. It fails to engage to the fullest extent an organization's most important asset--its people and their collective experience, learning and intelligence--and thus ignores its most urgent priority. As USF&G'S Chairman and CEO Norm Blake sees it, "the fundamental challenge to an organization is to harness its collective learning power." TOWARD THE NEW BUSINESS ORGANIZATION Natural resources, capital and physical labor once defined the wealth of nations and the success of business organizations. These will always be important, but knowledge, information and ideas are the capital of the future. The key to success, as Marshall and Tucker observe, is determined "not by the accident of possession, but by the capacity to generate new knowledge and the ability of the workplace to apply that knowledge skillfully in the production process. Thus, human resources--ideas, skills and knowledge--replaced natural resources as a major source of production and wealth." [5] But it is more than knowledge that will drive the organization of the future. It is an organization's ability to tap its collective wisdom--the accumulated judgment, perceptions, experience, intuition and intelligence of all employees--as it pursues product and market opportunities and better ways of serving its customers. If the application and utilization of an organization's collective wisdom is crucial to competitive success now and in the future, what can be done to exploit it? Among our clients around the world, we have encountered a growing number of executives, managers and workers moving ahead to forge a radically new type of organization in the face of all the change around them. Some companies are undertaking extensive, across-the-board change to bring about this new kind of organization. Other efforts are more measured. Whatever the magnitude, they are putting aside the mechanistic model in favor of a far different approach. This approach focuses change efforts squarely on people--on liberating their creative and intellectual energy. Employees--all of them--have thinking jobs. Their knowledge, experience and ability to innovate are the true source of competitive advantage. Concurrent Computer Corporation's CEO and President John Stihl puts it this way: "Our facilities, even our technology, are perishable. Computer technology changes so fast. It's people and creativity that set you apart over the long haul." From his office thousands of miles away in Selangor, Malaysia, Francis Foo, Chief Executive Officer of plywood manufacturer CHG Industries, looks at his organization in much the same way. His company's biggest problem is that the quality of raw material--plywood--is deteriorating with increased demand, but customer expectations about quality keep rising. How does CHG tackle the problem? By tapping the experience and thinking power of its people. Explains Foo, "You can build a new plant and install all the best machinery, but if you don't improve the skills of employees, allow them to share their knowledge and develop a new way of looking at almost everything, then you won't succeed." These executives are describing a new model that tacitly assumes that what is good for employees is good for customers and stockholders. Whenever a change is contemplated, executives using this new model ask two key questions: How does this change benefit the organization? And how does it benefit the people? What's more, they ask these questions in reverse order. These executives know that there must be a mutuality of interest between where the organization is headed, where it currently is--and why people should go along for the ride to close the gap. This new model views change, whether a broad, transformational effort or more narrow one, as an integrated process. It treats organizations as an ecosystem in which people exist in dynamic equilibrium with structures, systems and processes. But ultimately people will drive value through to customers and stockholders, and they are the starting point for how a business is organized and run. Delighting customers and pleasing stockholders are the hallmarks of organizations in which people can--and want to--contribute their very best. Unlike its mechanistic predecessor, this new model defines organizations as communities of people, rather than an array of structures and processes. True, structures and processes must be top-notch, but they don't drive change. People do. "So much change in organizations," observes Banthoon Lamsam, President of the Thai Farmers' Bank, "is little more than rearranging the chairs and tables. What's most important is to get people to change." Adds Amy Marks, USF&G's Senior Vice President of Human Resources, "The same people tend to behave in the same way even when placed within different organization structures. Organization structure and processes are enablers or inhibitors, but they don't define how an organization or an individual behave." We call this newly evolving model the PeopleWise Organization. THE CHRYSLER - NEW CASTLE STORY If you want an example of the PeopleWise Organization in practice, visit the Chrysler Corporation's machine-and-forge facility in New Castle, Indiana. From the outside, the New Castle plant looks like your typical Rust Belt dinosaur. It was built in 1902 and shows its age. In its heyday in the '70s the plant employed 3,500 workers, but by the early '80s the population had shrunk to 500 workers. It's the typical tale of industrial woe: union management rifts, wildcat strikes, workers churning out grievances at the rate of 85 a month; souring operating costs that made the plant a money loser; and, a new product line that made many of the plant's products obsolete. But things have changed. Workers now walk with bounce, look at the machines with a caring eye and attack their tasks with the determination of recruits at boot camp. Murals painted by the workers bring life to the plant's cement walls. "The pride has come back," says union facilitator Jim Lewis. By almost any measure--for example, defective material on parts shipped dropped nearly 70 percent--Chrysler-New Castle has achieved an impressive turnaround. Within three years of the transformation effort, the plant converted its $5 million a year deficit to a $1.5 million annual profit. What precipitated this unusual success story? Not some faddish TQM program or a corporate reengineering effort, and certainly not an injection of capital or fancy new equipment. Back in the '80s, money at Chrysler was scarce. No, it wasn't physical assets but intellectual assets that made the difference. Chrysler-New Castle harnessed the brainpower of its workers. The change at the plant began with a vision which had as its centerpiece the managers and workers. The vision for change was provided by what Chrysler calls the Modern Operating Agreement (MOA), a radically new way of managing plants that was designed to jump-start organizational transformation in six Chrysler plants, including New Castle, beginning in 1986. "The MOA is a concept which promotes management and hourly people working together for a common cause--to ensure the survival of this plant by reducing costs and making this plant competitive in our industry," explains Dennis Mason, New Castle's Plant Manager. Management and labor initially identified a common set of values and a code of behavior that said what was good for management was good for labor--and vice versa. Interests were viewed as complementary rather than mutually exclusive. Once this common set of values and behaviors was articulated, management and workers moved to change the performance system to reinforce those values. A Capability Pay Progression Plan was implemented in which employees earned more by voluntarily learning to do more jobs. Neckties were verboten and time clocks were trashed. The MOA then outlined a new set of union-management relationships. There were fewer job classifications--50 production classifications were reduced to four. In the skilled trades, the number dropped from 22 to 8. There were also fewer levels of management. "In the past," says Mike Atkins, a union facilitator at the plant, "we were not allowed to use our brains to do anything except dial a number, call a supervisor, and say, 'Will you take this part or won't you?' Now management is no longer asking us to park our brains at the door." Six union and management employees, for example, use brainpower in their positions as facilitators, where they act as links between workers and union and management leaders. Harnessing the brainpower of an organization requires treating workers very differently from the old sweat-and-brawn approach. For example, says Chrysler facilitator Bill Waite, "the drillpress operator's biggest change is the fact that he is responsible for doing this job. That sounds funny, but in the past you were told how to do the job and when and where to go to do it." The drill-press operator now has ownership. He is part of a team--one of 72 teams on the plant floor. He has helped to define the responsibilities of his team. He makes recommendations, attends weekly team meetings, and pores over quality reports to check his team's performance. The union-management committee that spearheaded the change effort asked itself this important question: What kind of structure would allow workers to use their creative, productive energies to the fullest? They didn't ask what would reduce cost or shrink cycle time, but what structure would best tap into the thinking power of the workforce. The answer: Lower the decision level. Layers of supervision had to be shucked. There are 26 fewer supervisors in the plant today than in the past, and the supervisors' roles have changed. They are now called "advisors" and serve principally as consultants to teams. They also handle discipline issues that are not resolved by informal team pressure. A growing number of teams operate without advisors. Teams have significant elbow room for problem solving and decision making. "If we want, we can rotate jobs every half hour," says team coordinator Bill Brumfiel. "This is the team's decision. Before the MOA, you had a job and that's where you stayed.... If we see a better way of doing something, we pass it along to management for review. Every suggestion gets answered." The New Castle plant equips workers with the skills needed, provides opportunities to use those skills, gives workers a safety net so they can take risks (and even fail), and creates an environment where workers learn from one another. For a plant with fewer than 1,000 workers which has only recently come out of financial limbo, the sheer amount of training is impressive. Since 1986, more than 186,000 hours have been spent in training employees. There was a clear, integrated change process. Chrysler management and union officials both in Detroit and at the plant knew that what they were after was transformational, not incremental. Given the complexity of the change and the history of union and management warfare, the change process had to be clear, integrated and sequenced. It had to involve every employee every step of the way and address everything from culture, structure and systems to work rules and training. Such an organizational renewal is expensive and longterm. But managers and workers alike think the cost and effort are worthwhile. "I don't believe there is any way we could have survived, competing against the markets we are competing against, if we had continued to operate the way we once did." says Harold Scott, a grinder operator. Plant Manager Dennis Mason knows the value of what he has inherited. "The New Castle group," he says, "understands better than any other what's required to compete effectively." Chrysler Corporation agrees. It is prepared to add another $58 million to the $38 million recently invested in New Castle. Not bad for a plant that was once a car length away from closing. Chrysler moved to reinvest in the plant, not because it achieved change, but because it learned how to sustain it. Chrysler-New Castle demonstrated that it could build change into the very fabric of its business by first considering the human side of change. TOWARD THE PEOPLEWISE ORGANIZATION In our work with the Chrysler-New Castle plant and with many other organizations at corporate, divisional and plant levels, we have learned that the successful transition to the PeopleWise model involves taking six key actions. 1. ARTICULATE AND COMMIT TO A COMMON SET OF VALUES Change can be a gut-wrenching experience, even when you involve the workforce. Common values provide an important compass point of stability. Values also provide a basis for trust which is crucially important for organizations undergoing change. Charts and numbers appeal to reason, but embracing change takes a leap of faith which can come about only from trust built on common values. "Before you initiate change," cautions James McCaslin, General Manager for Harley-Davidson's York, Pennsylvania plant, "you must build trust between employees and management--and that doesn't happen overnight." How does McCaslin proceed? "My way is not to reengineer every damn thing, but to focus on a key value such as the well-being of our employees, and especially plant safety." McCaslin picks plant safety because employees and management share a natural common interest. He uses safety as a springboard for building trust--and consequently, a foundation for plant-wide change. In the Chrysler-New Castle plant, the company advanced a new set of values as a basis for transforming the work environment. The message was clear, simple and very specific: We need your judgement, experience and brains. It got everyone's attention and helped to allay anxiety. The fact that these values were also discussed, documented and included in the contract demonstrated that this was not some idle "visioning" exercise, but the real thing. Change, especially when it is significant, cuts right to the "inner self." It is the ultimate epiphany in business life. That is why a discussion of values or basic beliefs is so important. According to David Miller, Florida Power Corporation's Senior Vice President, "The change process begins by reinforcing the right set of values. Values tie together processes and systems and create the bond of trust that puts change in the hands of all employees." Peter Neff, President and Chief Executive Officer of Rhone-Poulenc Inc., can vouch for the connecting force of common values. During a five-year growth spurt, his organization acquired 18 companies, boosting overall sales from $350 million to $2.5 billion. These companies ranged from Union Carbide's Ag Chemicals to a small company making cheese cultures in Sioux Falls, North Dakota. Rather than attempt to impose change by fiat or have it ride the wings of a restructuring effort, Neff opted for a different approach. "The first thing we decided that we needed," Neff explains, "was to develop a set of core values for the company, such as integrity, safety, partnership and quality. These values drive behavior." Neff reinforced Rhone-Poulenc's core values in speech after speech, but nothing said it like action. He points to safety as an example. "We had real safety issues in some of the companies we acquired, and we spent a good deal of money in tough times and with a heavy debt load to make these operations safe. Our profits were affected for a significant period of time before we brought them up to our standard for safe practices." Executives such as Neff treat values and beliefs not as typical corporate pieties, but as fundamental guides for change. As they move to create PeopleWise Organizations, these executives depend on values to reinforce new ways of behaving. At Concurrent Computer Corporation, one of these basic beliefs is to "Encourage one another's ideas and suggestions." If you think this belief is a cream puff, listen to the story Concurrent's CEO John Stihl tells about someone who violated it. "Just recently," says Stihl, "I let go one of the brightest, hardest working, most dedicated people I've ever known in my life. It was very tough, but he was the worst micro-manager I've ever seen. People complained that he 'straight-jacketed' them. I worked with him a long time and finally I said, 'This isn't going to work.'" For values to serve as a useful guide to organizational change, they must be clear and specific. This makes their articulation all the more difficult. Timothy Smucker, Chairman of The J.M. Smucker Company, remembers how tough it was to put the company's basic beliefs in writing. "They [basic beliefs] are very deeply felt, and we wanted to be sure to dot every 'i' and cross every 't'. The essence of what we believe was not too difficult to identify, but describing our beliefs in a document was a real challenge." The J.M. Smucker Company statement took a long time to hammer out. But it was time well spent because these basic beliefs form the bases of decision making. For example, here is what the company's top team said about quality: Quality applies to our products, our manufacturing methods, our marketing efforts, our people, and our relationships with each other. We will only produce and sell products that enhance the quality of life and well-being. These will be the highest quality products offered in our respective markets because Smucker's growth and business success have been built on quality. We will continuously look for ways to achieve daily improvements that will, over time, result in consistently superior products and performance At Smucker's, quality comes first. Sales growth and earnings will follow. PeopleWise Organizations discuss, debate, state and embrace a set of underlying values, which is what you would expect from companies that put their people first. Values are the social cement of the new PeopleWise Organization. They firmly establish the relationship between an organization's culture, its people and the necessary systems, structures and processes. 2. PROVIDE DIRECTION AND A STRATEGIC CONTEXT Once an organization has a common set of values or beliefs, the question becomes: Where is it going with them? This question begs for an organizing idea around which to build its future. That idea is the organization's strategy. Strategy is a framework that guides those choices that determine the nature and direction of an organization. These choices involve making decisions about five fundamental business questions: -- What is the thrust or focus for future business development? -- What is the scope of products and markets that will -and will not-be considered? -- What is the future emphasis or priority and mix for products and markets that fall within that scope? -- What key capabilities are required to make strategic vision happen? -- What are the growth and return expectations? Once an organization answers these questions clearly and specifically, it has an unambiguous sense of where it is going. It knows which product and market choices it will be pursuing and, just as important, which it will avoid. Strategy, as one executive we know put it, is a "North Star concept" which guides an organization through change. While change is never easy, people are more inclined to change behavior when their leaders have a clear sense of direction, engage a broad number of people in developing that direction, and are able to demonstrate to everyone that at the end of the day. all the effort and anxiety will be worth it. Direction aside, the central idea that strategy provides enables employees to organize their experience. Whitney MacMillan, Chairman of Cargill, Inc., likes to tell a story about the time he was young and stopped to watch a game being played by a number of teenagers. "I impatiently asked my parents, 'What are they doing?' I was too young to figure out what was taking place before me. 'They are playing ice hockey,' I was told. Once the ground rules of the game were explained, the seemingly random movements of the players fell into place. The movements made sense. My parents had given me something useful: An idea that organized the experience." A clear strategy sets the context for every employee, just like MacMillan's idea about hockey. It gives everyone an understanding of why the organization exists, where it is going and what role he or she plays in getting it there. In the classic mechanistic model, you didn't spend much time casting about for an idea to organize your experience. Context was narrowly defined as "your job." There was little need to look beyond your desk or machine. It is different in the PeopleWise Organization. Because the creation and application of knowledge and the deployment of judgment and experience are key, structures are flexible. There is no single locus of decision-making responsibility, and cross-functional teams break down bureaucratic barriers. Given this dynamic, it's difficult for employees to know where their jobs "fit in." Without an idea that helps organize their experience, each employee's ability to contribute to the collective intelligence is likely to be diminished. The best starting point is the overall business strategy. Dale Johnson, CEO and Chairman of the SPX Corporation, uses his company's strategy not only to define future direction but to provide employees with a central idea for understanding the organization and their potential to contribute. Says Johnson, "As CEO, it's up to me to insure that our culture, structure, systems and processes reflect the intent of the strategy; that planning and budgeting are aligned with the strategy; and, that decisions ranging from restructuring to compensation are in agreement with our long-term direction. " Johnson emphasizes the importance of having each associate understand the company strategy and how it applies to his or her job. He cites a case in point: "In one of our divisions, employees at every level understand the strategy, its competitive advantage and the core competency requirements. They know the impact of their day-to-day decisions on the strategy. Information about performance flows through the managers' organization. Employees know their unique contribution to business success. This operation is achieving excellent success and provides a model for others to follow." There is much talk these days about having middle managers "model" whatever new behavior is required. Forget waiting for others. Modeling should begin with the top team, and there is no better place to start than with setting the organization's strategy. At the Bath Iron Works Corporation, President and Chief Executive Officer Duane "Buzz" Fitzgerald faced the kind of situation that would make any senior executive lose sleep. Imagine having your customer, in this case the U.S. Navy, turn its budget for shipbuilding into a peace dividend. What's more, Bath Iron Works was caught unprepared for the challenges ahead. "We were a very hierarchical organization," explains Fitzgerald. "All wisdom was presumed to reside at the top. People at the bottom didn't get paid to think." It's not the kind of environment where creative thinking about new business direction flourishes. Fitzgerald decided to initiate the change process with a gutsy move. Rather than gather his top lieutenants and head for the mountaintop for an exercise in setting vision, he assembled a team of 30 employees. It included senior and middle managers, along with union officials. Once the group settled in, it developed a vision for the company based on an ambitious diversification effort. Since a cross-section of the organization's employees had a hand in its development, the vision rapidly became "ours!" The signals that senior managers send can speak volumes about change. In the case of Bath Iron Works, the process used to arrive at the vision was just as important as its content. Buzz Fitzgerald showed his troops that their brains were key to the company's future. Knowledge is not built in a vacuum. It is acquired cumulatively. Within any organization, the greater the knowledge of the strategic context, the greater the opportunity to add to it. Where is my company headed? How does my job contribute to it? What is the relationship between my job and the company's success? John D. Rockefeller was reported to have said that if you had to ask about the price of something, chances were you couldn't afford it. If these strategic questions are plaguing an organization, then chances are you can't afford to buy its stock- -unless, of course, you're willing to take a loss. 3. ESTABLISH A SOCIAL CONTRACT Common values establish the organization's governing ethos; strategy determines its direction. But what does an organization owe its people--and what do they, in turn, owe to the organization? The PeopleWise Organization sees itself as a community of people, and in every community there are shared responsibilities, risks and rewards. The PeopleWise Organization operates on a kind of quid pro quo. Roger Ackerman, President of Corning, explains that: "Healthy organizations enable employees to meet personal goals, and in doing so they achieve organizational goals." The Social Contract establishes mutual roles, rights and responsibilities. At Chrysler-New Castle, the Modern Operating Agreement, or MOA, clearly delineated the duties and responsibilities of teams of workers at the plant from those belonging to management. For example, the MOA spelled out 20 duties for the plant's teams, such as "assist in development of assignments," "provide inputs into work standards," "monitor and report attendance" and "administer the Capability Progression Plan." New Castle also developed 15 "team coordinator" or team leader duties. But the MOA was deliberately ambiguous. Explains union facilitator Mike Atkins, "The MOA was intended to be general to allow input from the people. If management and the union were going to dictate everything, what was the purpose of sharing decision-making responsibility?" In return for the elbow room given to the workers, management expected a new set of behaviors ranging from the aggressive acquisition and flexible use of skills to self-directed work teams, along with dramatic improvements in quality, productivity, delivery and cost. When Norm Blake arrived at the doorstep of USF&G in 1990, he faced a daunting challenge. Blake says he found "a dysfunctional culture, poor work ethic. resistance to change, and little communication. In terms of the functional organization, there was no integration of objectives, no accountability, no bottom-line focus.... There was a limited skill base, no training, no human resources development, no concerted effort to find and recruit employees who were eager to learn." Blake knew that achieving the monumental turnaround USF&G required would not be a cake walk. Everyone had to be crystal clear about mutual responsibilities and these were articulated in a "Social Contract." Explains Blake, "Our Social Contract arises out of a fundamental trust between employer and employee an agreement that implicitly states that if you get some thing out of the corporation, you owe something back And if the organization gets something out of the individual, it owes that individual a reinvestment in terms of development, job experience, education and a supportive environment." The Social Contract may be a written document, like Chrysler's Modern Operating Agreement, though it need not be. Says Amy Marks, USF&G's Senior Vice President for Human Resources, "The Social Contract is something that we talk about quite a lot and make sure everyone understands, but it's not a formal document. When you reduce something like that to the printed page, it becomes a formula and loses its nuance . " The Social Contract must continually be in front of the organization as it fosters new relationships with its people. Talk is fine, but actions speak loudest. For example, at USF&G the introduction of the Social Contract was quickly followed by a five-step plan to create a learning environment, one which demonstrated USF&G was prepared to live up to its obligations. That plan included: -- Heavy investment in formal learning throughout the company; -- Broader learning opportunities for employees that encouraged them to "zig-zag" rather than follow the traditional narrow pathway up a bureaucracy; -- Role modeling and mentoring as a valuable avenue for learning; -- Knowledge sharing through extensive use of cross-functional teams with real power; and, -- A reward for performance that reinforces all learning. The notion of a Social Contract goes back to political thinkers such as John Locke and Jean-Jacques Rousseau who used it to describe the relationship between citizens and the state. Today, it is used by companies to establish a new baseline for relationships between employees and their organizations in an attempt to turn collective knowledge and experience into competitive advantage 4. DESIGN THE RIGHT PERFORMANCE ENVIRONMENT George Edgar is the Group General Manager of the Steel's Long Products Division, a $525 million-a-year business that is part of BHP, Australia's largest private corporation. Edgar took over as general manager three years ago when the division was in deep trouble. Price competition was fierce, manufacturing costs had skyrocketed and the workforce was bloated. Survival was on the line. What should he do? It was tough-love time at the division, and Edgar moved decisively to cut operating costs. But he wasn't interested in the typical slash-and-burn exercise. Instead, he converted the cost-reduction program into an opportunity to redefine the workplace. He wanted those who remained to contribute their brains and not just brawn to the organization. One downsizing in a lifetime was enough! Edgar made one assumption about the workforce--that "none of them were fools. Many of the workers had strong organizational abilities. They could think and solve problems. But no one ever took the time to bring them on board." To bring the workers around, Edgar spent countless hours explaining the "why" of the division's situation. In group meetings and one-on-one sessions, he clearly and comprehensively defined the crisis and the need for action. "We let it hang out, warts and all." But beyond this, Edgar outlined an exciting new vision. "I told everyone I no longer wanted to have a group of employees that simply park their brains at the gate, come in, act like robots and then pick up their brains on the way home." Edgar wanted nothing less than to change the mindset and the response patterns of everyone at the plant. He wanted employees to take the initiative, both individually and in teams, to solve problems, make decisions and share ideas. Feedback would be crucial, especially since little had ever been provided to workers. Comments Edgar, "There was just no information that told employees whether their day was good, bad or indifferent." Nothing beats giving and receiving feedback the old-fashioned way, by "burning up the shoe leather," as Edgar puts it. He began walking the aisles, talking to workers, asking questions, making suggestions. The plant also developed formal measures to track performance and provide feedback directly to workers Another kind of feedback has evolved from the team structure in the plant. "When a team looks like it's about to go nowhere," says Edgar, "it seems to sort out the obstructionists, puts the pressure on and gets them back on board." Increasing collective brainpower is a noble goal, but it must be fueled by information. "If you don't have facts and data, you can't manage," Edgar observes, and then adds: "Likewise people on the shop floor can't contribute without facts and data. Once you give people information, they can start to manipulate it. They'll play with it. They'll say something like, 'Gee whiz, we can do this a bit better than those figures are showing.'" The division's cost reporting system was overhauled so cross-functional teams would have quick access to financial and production figures. You can, of course, do a data dump on employees without giving them the skills to analyze and interpret information. It's a quick way to encourage indifference and even hostility. There is no such danger at the BHP Steel's Long Products Division. The plant now provides extensive employee development in analytical problem-solving and decision-making techniques, statistical process control, true cost performance, and the like. Forty facilitators circulate through the plant as in-house consultants, looking for opportunities to help workers apply the new skills to their jobs. In addition, two senior executives who report directly to Edgar are devoted full-time to running interference, jump-starting stalled changes and making sure that ideas flow freely. Priorities are set carefully to direct the creative energy of the workforce. This year, for example, 86 business objectives were identified across the plant. Each department tackled four or five major objectives with cross-functional teams of managers and workers. It is a learning-by-doing environment, with tight performance specifications. Any change effort must include a set of positive and negative consequences to help employees identify the desired behavior and be rewarded for achieving it. Edgar admits that "we've still got a long way to go here." While the plant develops a more formal reward and recognition system, Edgar uses everything from the old-fashioned pat on the back, to getting media attention for a unique accomplishment, to having teams present their results directly to top management The BHP Steel's Long Products Division is now seeing the payoff of developing a PeopleWise Organization. For example, plant productivity has increased from 250 to 575 tons per person. "Fully absorbed "cost-per-ton" should decline a full 30 percent by next May. Yield across the plant is up 11 percent. Edgar approached change like every good manager fostering a PeopleWise Organization. He remembered that an organization is a community of people. People in an organization work within a performance environment. The systems, structures and processes that are embedded in that environment help people respond effectively to change. People-change requires managing five key dimensions of that performance environment and keeping each one in balance during the change process. George Edgar and his colleagues are posing fundamental questions throughout the organization regarding the five dimensions of the performance environment. -- Why must my organization and I change? -- Who is responsible for getting the job done and what new skills are needed? -- What changes-in individual and team behavior and in systems, structures and processes-must be made to prepare our organization for the future? -- What if I/my team behave a certain way? What are the consequences for me and the organization? -- What information will tell us we are meeting our objectives? Change on the human side involves understanding and managing these five dimensions of the performance environment. In other words, employees must: understand why the situation requires change; be clear about the performance specifications of change; see positive consequences for making the change; have the skills and support to do the job; and, have the information to succeed. 5. BUILD INFRASTRUCTURE An organization's structure is a kind of skeleton that holds together its disparate parts. Its systems are the nerves of an organization through which information is transmitted. Structure, processes and systems--the infrastructure--are crucial to an organization's success. They must be aligned with the strategy, and be operationally noise-free and people-friendly. They exist to channel the brainpower of an organization. In addition, changes in infrastructure are crucial because they often are the most visible indicators of change. They tell employees that top management is serious. Says Tim Cooney, Navistar's point man on organizational change, "People need to see real evidence that something is happening. When you undertake significant systems change, people begin to feel that the initiative is not just another case of revamping the jobs of the top management group." In many companies, millions of dollars have been spent to create Year 2000 systems and structures- which are then inserted into a 1960s performance environment. Result: frustration, not enough forward movement, and failure in 50 to 70 percent of the cases. But prevailing wisdom suggests that you first reengineer or reinvent an organization's structure, systems and procedures and then help people adapt to these by implementing an array of change initiatives. The PeopleWise Organization stands this thinking on its head. It maintains that people adapt structure, systems and processes to match the needs of their jobs and their organizations. People are the first principle of change. Because people adapt structure, systems and processes to their needs, and because those needs continually change in response to a rapidly changing work environment, the infrastructure in PeopleWise Organizations is always evolving. At Chrysler-New Castle, work team assignments may rotate as frequently as every half-hour. This is quite a departure from the old days when, given the existing job classification system, a worker might stand at the same work station or machine for a lifetime. USF&G's Amy Marks is right when she labels structure and processes as "enablers or inhibitors." Prior to Chrysler-New Castle's transformation, structure was a real inhibitor. As the organization asked how it could open up the thinking power of employees, it trained its sights first on the performance system. Only then were changes made in the infrastructure; they included everything from delayering, to process and systems improvements, to the team approach. And because workers were prepared, they readily embraced these changes. PeopleWise Organizations recognize the potential of reengineering. For these organizations, however, people are the measure of what structure, systems and processes should be. 6. CREATE A LEARNING ENVIRONMENT As the intellectual component of every job from assembly worker to CEO increases dramatically--along with the need for speed, flexibility and innovation--knowledge and development of employee skills become critical. PeopleWise Organizations develop skills that have broad and long-term applicability. While these companies provide the tools, equipment and systems for employees to excel, their emphasis is on developing the critical thinking skills of managers and workers. Kepner-Tregoe has thousands of examples which demonstrate that such skills can be taught and learned. People can sharpen and use their critical thinking skills to gather, sort and analyze information. They can become more proficient problem solvers, decision makers and planners. And when they do, performance goes up dramatically. At Blue Circle Cement, which produces half of the U.K.'s cement, investments in skill building at the time of a major cost-reduction program reduced annual expenditures on plant maintenance and contract labor by 15 percent. As part of their reducing plan, Blue Circle did all the usual things: eliminated management layers, flattened the organization, and decentralized the decision-making structure. But they went beyond the usual by providing the critical skills to ensure success. According to Bernard Crane, General Manager of Blue Circle Cement's Hope Works, "We identified the analytical tools our people could use to achieve those goals at their level--tools which became a common language for all our workers." PeopleWise Organizations know that you don't just "teach" employees new skills. You create a learning environment where these skills can be acquired, used and continuously improved. In such an environment, as USF&G's Norm Blake describes it, "learning and education are not relegated to the classroom or training seminars, but become a part of the shared culture, the shared values of the organization in its drive to succeed." When Blake headed up Heller Financial Services, a member of the Fuji Bank family, he noticed something interesting about the copious notes his Japanese colleagues took at meetings. "These notes were not just transcriptions...rather they were interpretations of the ideas, somewhat like marginal jottings, that reflected the assimilations of the ideas presented. After the meeting colleagues would gather to organize a collective assessment of what was learned.... Their collective notes became part of the library, the knowledge assets of the organization." Dr. Nonaka makes an important distinction between "explicit knowledge," which is formal and systematic and can be readily shared, and "tacit knowledge," which is highly personal "know-how." Tacit knowledge may be difficult to articulate but it is important to try. Such knowledge is the primary source of innovation. One important way PeopleWise Organizations tap into tacit knowledge is through extensive use of teams. Group discussion and hands-on problem resolution help convert tacit knowledge to explicit, transferable collective knowledge. At USF&G, for example, Norm Blake's turnaround efforts were built largely on the insights and intelligence of task forces of middle managers. These task forces studied the "actual" and developed recommendations that led to the company's transformation. At Navistar, President and COO John Horne reorganized his company around cross-functional business teams that reach from the plant floor to the corporate area. Says Horne, "the best way to break through the mold is to get people to work on problems from different perspectives--the people who design your products, build, sell and service them--and let's not forget those who buy them, the customers." In addition to using cross-functional teams like those at Bath Iron Works Corporation and Chrysler-New Castle, other managers have moved to create a learning environment by kicking up the dust. At the Dixiewire Company, Richard Lee Meyer, Vice President and General Manager, decided that the best way to energize his workforce was to begin with the plant's supervisors. Meyer played a game of musical chairs, only this was for real. "I took some of the supervisors and moved them to production scheduling. I took production schedulers and moved them to the shop floor. I took engineers and put them in shipping." Meyer wanted to break the plant's silo thinking, increase the circulation of new ideas, and find out whether his supervisors were willing to learn from more knowledgeable subordinates. He also wanted to deliver an important message to the troops: Forget the old power positions; learning and contributing ideas is where the action is. Individual knowledge, skill and experience are like money in a piggy bank. Unless human capital is shared throughout an organization, it cannot be fully exploited. A FINAL WORD During the high-flying '80s, Tom Peters and Robert Waterman touted their list of "excellent" companies. These were considered to be the best-of-the-best at a time when the economy was in high gear and many companies were raking in profits. The worldwide recession of the past several years has created a very different dynamic in the marketplace. It's a lot tougher to succeed in the '90s. For one of the few times in this century, entire industries--automotive, airlines and information technology, to name just three--and not just individual companies are undergoing massive dislocation. Yet within these industries, there are a few dramatic exceptions. A select number of companies have survived, even flourished, amid the chaos. These are not merely excellent companies in prosperous times. They are superstars when their industries around the world are collapsing. Why have these companies succeeded? Take another look at Chrysler-New Castle for an answer. As automotive companies from General Motors to Toyota to Volkswagen have experienced some of the worst losses in their history, Chrysler--a company that once was on the brink--is now achieving record profits. Why? Because it has harnessed the brainpower of the workforce. The airline industry, like the automotive industry, has been shattered. During the past several years, it has lost more money than in its entire history. Last year, the airline industry in the United States posted a $1 billion loss, and internationally, carriers from Lufthansa to Japan Airlines are reeling. Yet, British Airways is a standout. Like Chrysler, British Airways has discovered how to tap the energy and creativity of its intellectual assets to achieve dramatic results. For example, in British Airways' engineering unit, top management wanted to trim 10 million [pounds] from operating expenses. Rather than wield the ax in typical fashion, British Airways decided to train its workers, give them the authority to make decisions, and then turn them loose to solve the cost issue. Result: nearly 25 million [pounds] slashed without forfeiting a single job. The computer industry is also deeply troubled, as tales of woe from Digital Equipment, IBM and Fujitsu will attest. Hewlett-Packard has not only weathered the storm but is flourishing. Like Chrysler and British Airways, Hewlett-Packard's success is due in large part to its focus on involving employees at every level in solving problems and making decisions and in encouraging everyone to contribute to product and service innovation. Hewlett-Packard's continual emphasis on shared values and beliefs creates an environment where people are the prime movers of technological advancements. "The magic is in the people," says SPX's Dale Johnson. And so are the results. Executives, managers and workers who are converting their companies to PeopleWise Organizations know that traditional ways of doing business are no longer valid. Not only the recent economic downturn, but also the primacy of ideas and innovation have changed forever the way businesses are directed, organized and run. Performance dramatically improves when collective wisdom becomes the prime mover of the business. Executives, managers and workers who are meeting the challenge of converting their work environments from the classic mechanistic model to the people-driven organization know that change is tough business. Change requires the will to succeed and a systematic process to bring it about. But the rewards are there, both in bottom-line improvement and in the collective pride that comes from tapping into the very best employees can give. Because change is all around us, the PeopleWise Organization never "arrives." Today's business environment is too dynamic for static institutions. In steering the PeopleWise Organization through the turbulence, top management must focus squarely on the human side of change. ____________________________________________________ Footnotes: [1] Fred R. Bleakley, "The Best Laid Plans," Wall Street Journal, 6 July 1993, p. 1. [2] Michael Hammer and James Champy, Reengineering the Corporation (New York: Harper Business, 1993), p. 201. [3] Quoted in Ray Marshall and Marc Tucker, Thinking for a Living (New York: Basic Books, 1993), p. 5. [4] Ibid, p. 12. [5] Ibid, p. 35. _______________________________________________________ ABOUT KEPNER-TREGOE Kepner-Tregoe has earned a worldwide reputation for helping transform organizations. By effecting change from within the organization, Kepner-Tregoe builds commitment to new organizational directives, and provides the tools, technologies and processes for people to succeed. As a result, a Kepner-Tregoe intervention avoids undercutting the efficiency, morale and productivity of the workforce. Change is only successful when it focuses on the organization's people--the skills, the workplace and performance environment--linking the human resource to the organization's strategy, its structure and the processes by which goals are accomplished. Kepner-Tregoe works across boundaries, at every level, providing common processes and methodologies for: setting and implementing strategy; redesigning human performance environments; developing thinking skills; and realigning the infrastructure to achieve strategic and operational goals. This strength in implementation sets Kepner-Tregoe apart. By focusing on the human side, Kepner-Tregoe helps clients achieve a competitive advantage based on the collective knowledge, skills and capabilities of their people, the only real and sustainable competitive advantage. ___________________________________________________ ACKNOWLEDGEMENTS We wish to thank all our clients and especially those executives cited in this report for their continuing support of our efforts and their insights into the human side of organizational change: Roger G. Ackerman, Corning, Inc. Norman P. Blake, Jr. and Amy P. Marks, USF&G Corporation Timothy J. Cooney and John R. Horne, Navistar International Transportation Corporation George Anthony Edgar, BHP Steel Long Products Division Duane D. Fitzgerald, Bath Iron Works Corporation Francis Foo, CHG Industries Berhad Dale A. Johnson, SPX Corporation Banthoon Lamsam, Thai Farmers Bank Public Co., Ltd. Whitney MacMillan, Cargill, Inc. Dennis Mason, Chrysler-New Castle, and all his colleagues at the plant James A. McCaslin, Harley-Davidson, Inc. Richard Lee Meyer, Dixiewire Company David L. Miller, Florida Power Corporation Peter J. Neff, Rhone-Poulenc Inc. Timothy P. Smucker, The J.M. Smucker Company John Stihl, Concurrent Computer Corporation We also are grateful to Dr. Ikujiro Nonaka of Hitotsubashi University for his incisive thinking on the new knowledge-based organization. T. Quinn Spitzer, Jr. President and Chief Executive Officer Kepner-Tregoe, Inc.