How many people should lose sleep over their company's results?
Yagev Ben Itzhak, Certified Senior Adizes Associate, and
Brandi Bennitt, Assistant Adizes Associate
The basic question we will try to answer is: how does the Adizes Methodology prevent catastrophic behavior like the one displayed by the management of Enron, WorldCom and similar organizations. How do you create accountability throughout your organization? Do you look for people who accept personal responsibility? Do you build accountable behavior by focusing on the reward system? Do you train people to change the corporate culture? Well, the answer is all of the above.
And still that will not suffice. In order to create accountability you must first create transparency. Once the elements of transparency are in place, feedback loops become clear. Then is the time to connect results to the reward system. The following article explains how to achieve exceptionally high levels of performance with accountability by using the tested Adizes Methodology.
One of the most common complaints of stockholders and founders of companies is that other people don’t care as much as they do, that their employees are not as inspired by the vision of the enterprise as they themselves are. The tie-in between accountability, which can be defined as responsibility for the results of your actions, and the motivation to perform actions that are in the best interest of the organization, is the feedback loop. Problems occur when those who are responsible for inputs into that loop are divorced from the outputs. Many times, the big difference between an owner and an employee is the level of involvement of the owner in the direct feedback loop of performance: if the organization runs efficiently and effectively, the owner will be rewarded with increased profits and increased opportunity. Conversely, if the organization does not run efficiently and effectively, the owner will be faced with loss of income and decreased opportunity.
All too often, employees make contributions to an organization through their inputs – their labor, their decisions and actions – but do not receive information about the results of their efforts. Usually because no structure has been put in place to include them in the organization’s overall feedback loop. Organizational inefficiencies that can result in huge losses to the company are usually outside those individual employees’ area of interest or concern. Their feedback loops include only themselves and their own performance in their individual job functions. They will be rewarded if they accomplish their job objectives and punished if they do not. So for them the actions required to achieve their individual objectives, make sense.
Now, imagine expanding the feedback loop of each of these employees so that it includes not only the employee’s individual performance, but the performance of the department as a whole, including its efficiency. Imagine if these employees were aware that their job rewards were riding on their ability to be as efficient and conservative as possible. Do we recommend rewarding employees based on the performance of their area? Yes, but only if you create the necessary infrastructure for that step to succeed. You need structure the company so that every employee has as expanded a feedback loop as possible, so that each and every individual employee is fully aware of and directly affected by the impact of his/her decision-making, productivity, and efficiency, on the corporation as a whole. This is a critical element in creating accountability. At the same time you have to create a culture for these employees to affect the results of their area. This kind of culture necessarily calls for “participative management”.
So how do you structure a company so that each employee feels the full impact of his/her work on the company as a whole? In some companies the employees actually DO own the company, but unless they know how their work impacts their organizations, ownership per se will not cause accountable behavior. What do you do when you want to retain control of the company but want to inspire your team members to behave as though they owned the company themselves, as though they were spending their own money – and investing their own resources? Adizes suggests a three-step process: create organizational clarity, structure the organization that reflects its strategy, and then create organizational transparency. The object of this process is to create a system where the both the budget and the goals of the department and division are known to every single employee. Once this is accomplished, the allocation of all resources can be tightly focused on accomplishing those specific, stated objectives. How can this be accomplished?
Organizational clarity – the first step
Many managers, especially middle management tend to lose their way because they were never clear on their company’s goals and values in the first place. Let us emphasize here that organizational clarity will not be achieved simply by drafting a mission/vision/values statement and hanging it on the wall. Enron had one of the best mission statements ever drafted. A mission statement that is not integrated into the organizational DNA is not worth the paper it is written on. In order to spark a process that will result in a mission, values and goals that are felt throughout the organization, it is necessary to go through a discovery process that creates clarity for the senior management and other key officers, and which also creates an impetus to drive that clarity down throughout all levels of the organization.
Creating organizational clarity involves a process of creating clarity of goals and functions not only on an organizational level, but throughout every single level of the organization down to the lowest indivisible unit. An indispensable element in creating clarity is defining the internal balance of power in the organization. In healthy organizations, units with profit orientation and closeness to the market are the ones that call the shots. In unhealthy, aging organizations the units with political power are finance, accounting and legal. Part of creating structural clarity is defining the political power in the profit oriented divisions or areas. Once this clarity of function and goals has been achieved, budgets should be drawn up to support the achievement of these functions. Lastly, the organization needs to create a clear relationship between profit centers and support functions; so that support functions support profit centers, and profit centers do what they are supposed to do, that is, generate a profit.
A structure that reflects strategy – the second step
Although this sounds very trivial, very few organizations are willing to take the steps to change their structure to fit their own mission, vision, and values. This is a revolutionary
Organizations should be structured around profit centers that reflect the organizational strategy. These units might be based on geography – i.e. Asia, Europe, USA, or around specific product lines, for instance, printers vs. PCs, or even markets, such as business PCs vs. home PCs, small business vs. large business, or sectors such as private sector vs. public sector.
Clarity at the unit level is achieved through creating clear metrics. How are these identified and measured? Metrics must be identified to measure the results of the new objectives as well as indicators of success of these new objectives.
For instance, if your objective is higher levels of customer satisfaction, you might measure things like delivery time, return rate, and aging accounts. So it is necessary to look at two levels – the higher level (overall results) and the indicators of achievement at that unit level.
Transparency – the third step
Once these conditions of clarity and structure have been achieved, the next step is to create transparency. Transparency means that everyone within the organization knows and understands the budgets of not only their own department, but also every other department on which they rely. When an organization is small this is the natural state of affairs. Usually, when there are only a few people, in the daily process of doing business everyone is kept informed of what is going on with the entire organization. It is almost unavoidable. But as an organization grows and functions become specialized into different departments, the typical structure does not create a clear transparency of information. Departments become enclaves, and pretty soon you hear people saying things like “I don’t know what those people in marketing are doing with their budget” as though they aren’t even on the same team. In fact, most people within a department don’t even know their own departmental budget. This creates an accountability break down. If they don’t know the budget, how can they be accountable for the results those budgets are supposed to achieve? In the absence of budget awareness, priority is usually given to accomplishing immediate objectives. The problem is that budget concerns, if they were considered, might change the priority of those immediate objectives. Yet without budget knowledge, this important element is never considered and cannot be resolved.
In order to create transparency, the intent of every department within the organization must be clearly defined: is it a profit center, or is it a support center? Functions like marketing, sales, and customer support and even logistics and finance can become profit centers if they directly contribute to revenue generation. Support functions usually include accounting, human resources and legal services as well as general administration services. Transparency is achieved by defining the relationships between the profit centers and support units through a process of budget oversight. The principle that is in operation here is that support units exist only to serve the profit centers. Therefore, the budgets of the support units are subject to approval by the profit centers that they serve, and the profit centers are responsible for paying the support units out of their own budgets according to their use of the specific service.
Three things should be very clear for each and every unit within the organization – within the structure that has now been created:
It is important to emphasize that clarity and transparency are necessary preconditions to accountability, but they are not enough by themselves. Without a culture of open dialogue, where people are encouraged to question objectives and results and are not penalized for doing so, accountability will still be stymied. If the organization is able to successfully create an environment where its employees feel comfortable challenging the status quo, then it will transfer accountability down to the lowest levels where this acceptance and openness is practiced.
Accountability can be transferred downward to the lowest level where it makes sense to calculate inflows and outflows. In professional firms such as accountants and lawyers, it makes sense to look at every professional as a profit center. In retail, every store might be a profit center, but probably not every salesperson. Even if an individual cannot be considered his/her own profit center, accountability can be created through tracking performance through inflows and outflows of the unit as a whole. The final step in the process of creating a culture of accountability is to determine a reward system that will support and reinforce accountability throughout all levels of the organization. Once accountability has been transferred downward throughout the organization, the rewards must follow suit.