Jeremy Cox, Vanguard Consulting

Managers think their job is to manage change. Real leaders know that the real task involves changing the way we manage our organisations. Two systems, one organisation

There are two systems to act on to bring about change in organisations. The first, ‘the system of work’, is the way everyday work is carried out: how customers access services and the way work processes operate to fulfil customer demands. For example, this could be mortgage processing in a bank, supporting vulnerable adults in a social care service or responding to emergency incidents in the case of fire or ambulance services.

There is usually significant scope for improvement here, and when staff and managers work together to redesign the system of work using the Vanguard Method, organisations achieve improvements way beyond anything that would be expected from a conventionally managed organisation: lending and claims decisions made in minutes, housing repairs and benefits applications done in a day, vulnerable lives turned around, demand turned off in healthcare, – all at lower cost and with higher staff morale.

But there is another system, deeper and often invisible, which is ‘the system of management’. It is made up of the assumptions and thinking behind everyday management decision-making, and manifests itself in the organisational infrastructure that brings these assumptions to life. Its components are ‘hardwired’ processes for how staff are rewarded, how performance is monitored or how services are commissioned, and there are governing assumptions behind these processes too: what do we believe about what motivates people? How should measures be used? How do we set and monitor performance against budgetary goals?

Making the distinction between process change (which managers always say they want) and management system change (which they usually haven’t thought about) allows for a profound insight –throwing new and sharp light on where and how to take action, and creates a giant step towards becoming a more effective leader. The opportunity is this: managers think their job is to manage process change, real leaders know that their job is to change management.

Think about the annual business-planning process in your organisation and draw it out on paper. The process is based on traditional command-and-control assumptions that separate decision-making from work and assume organisations are best designed as top-down, functional hierarchies. In a typical organisation, the picture will show an annual cycle with a ‘golden thread’ linking corporate strategy to business-unit plans and targets, and then down to individual performance objectives. There will be scheduled reports and meetings to feed ‘management information’ back up the food chain. There will be rating and reward systems for staff, with associated form-filling, appraisal meetings, and HR staff to co-ordinate them.

If you stand back from the picture, what you will see is the outline of the system of management, and how that governs the system of work. The diagram below is a simple yet powerful model of how the two systems work together.

Figure 1. A simple conceptual model of the two systems

Just as there is significant opportunity to drive improvement through redesign of the system of work, the system of management is ripe for recasting too. In a large financial services organisation, we saw business change and IT projects where we found that 80 per cent of the change budget was spent on management overhead and only 20 per cent on designing, testing and implementing changes to core flows. The change that this system delivered was, in the client’s words, typically ‘late, expensive and wrong’. We often refer to the ‘management factory’, a place where meetings happen, reports are discussed and budgets are tracked against plans. These are elements that in themselves create no value for customers and rarely contribute positively to the core work.

The problem is not the managers, it is the system of management

A key opportunity to improve is sadly hidden to most managers because like the water a fish swims in, the system of management is invisible to them. Managers typically change the system of work in an attempt to improve performance, for example by encouraging channel shifting or automation of processes. But changing the system of work will not yield sustainable performance improvements if the management system that governs it remains flawed.

Many organisations remain wedded to the idea of targets. Unfortunately, we know that the use of targets in a hierarchical system only engages peoples’ ingenuity in managing the numbers rather than improving their methods. People’s attention turns to being seen to meet the targets – fulfilling the bureaucratic requirements of reporting that which they have become ‘accountable’ for – at the expense of achieving the organisation’s purpose. In simple terms, all this effort constitutes and causes waste – inefficiency, poor service and, worst of all, low morale.

The notion of a target is plausible. In principle, there is nothing wrong with individuals having targets that they may set themselves – lose weight, run further, get another job, earn more money. But targets in a hierarchical system are imposed with authority by people who are generally detached from the work being carried out. Targets are therefore arbitrary. They may suit a plan, but they do not start from a knowledge of capability – what the system predictably achieves and why.

When targets produce unintended consequences, as they always do, managers react to the symptoms by doing more (adding targets) or less (subtracting targets, de-coupling incentives from targets) of the wrong thing. But doing the ‘wrong thing righter’ is not the same as doing the right thing. Unfortunately, leaders who grasp the damage wrought on their organisation’s performance by targets are forced to confront a dilemma because doing something different at the level of work requires de-constructing the system of management that creates and underpins the target regime. Arriving at this insight is by no means guaranteed – it is impossible for most managers (and government ministers) to imagine an alternative because of the degree to which targets have become embedded in our collective mindset.

The financial services sector has had its own well-documented problems with targets and incentives leading to dysfunctional – and indeed illegal – behaviour. Systemic mis-selling ranging from private pensions and endowments to PPI has led to multi-billion pound compensation pay-outs and huge reputational damage. The solutions from companies and regulators alike have been consistently to bear down more stringently on the system in which people work through regulation, control of bonus payments and by encouraging team-based rather than individual rewards. A fundamental re-think would require both the acceptance of the counterintuitive truth that it is inherent in targets to cause sub-optimisation and the active dismantling of the organisational infrastructure that creates, sustains and enforces the target regime. I recently met a manager whose organisation used targets and incentives to drive sales of PPI compensation claims to people who had been mis-sold PPI by banks using targets and incentives to manage their sales operations. If you worked in that system every day, do you think you would get the irony of your situation?

Three key issues with the system of management

A flawed system of management causes many problems.

First, it damages everyday performance of the core work. Consider the following examples:

  • Top-down performance management causes systemic sub-optimisation and demotivation, as ‘what do I do to get the sale (and meet my target)’ invariably wins over ‘what is the right thing for me to do for the customer?’
  • Supplier relationships based on contractual specifications or Service Level Agreements (SLAs) drive processes that are aligned to contract requirements rather than customer needs,. This has the effect of worsening service and increasing costs (for example ‘variations’ in IT or facilities contracts used to generate revenue).
  • The productivity focus of operations often has the paradoxical effect of reducing efficiency. In a telecoms company’s repairs operation, managers paid attention to productivity data in the belief that higher fault closure numbers would equate to a higher level of performance for their customers. When examined over time, it was clearly demonstrated that this behaviour was in fact driving up demand: it was discovered that faults were being reported to be closed on the system without actually being fully completed. Customers were thus re-entering the system and becoming increasingly irate that their problems remained unresolved.

Each of these issues has underlying structural ‘system of management’ roots. Improvement requires that the underlying management structures are re-designed in parallel with process (system of work) redesign – the two must be treated as indivisible if permanent improvement is to be achieved.

Second, the way managers change or ‘improve’ the ‘system of work’ damages performance tomorrow:

  • An experiment with redesigning insurance sales demonstrated that sales could be increased with a 1:14 return on investment. Investment was impossible, however, since annual planning, budgeting and bonus systems demanded operating expense reductions, not investment, and could not be challenged.
  • Frontline work in financial services and other organisations is frequently offshored/outsourced to reduce operational cost. Redesign of work from the perspective of customer value predictably results in improved service at lower cost, with work being repatriated. The top-down drive to offshore persists, however, since an unreformed system of management continues to mandate counterproductive cost-driven change initiatives.

The counterintuitive takeaway from these examples is not that we need to do change better, but that we need to change the way that we approach change. Instead of separating decision-making from work, managers must learn to both study ‘how the work really works’ and then lead improvement activity in situ, with emergent change based on knowledge.

The third problem lies in the cost of a misfiring management factory. Organisations routinely waste vast amounts of money on management capacity devoted to doing the wrong thing. One client discovered that much HR resource was being consumed by programmes that contributed no value to the service delivered to customers. Through redesign focused on only doing value work, it reduced the strain on HR capacity by 50 per cent. Outcomes of this order are not unusual, but are only achievable by changing the system of management.

The intervention challenge

To act on the system of management, leaders need to study the impact of the system of management on both customers and the system of work that delivers service to customers.

Our examples illustrate that the ‘system of management’ is hardwired through organisational processes for planning, objective-setting, performance monitoring, managing change and the like. Those physical processes and system conditions are themselves a product of ingrained management thinking, and to change this is to engage people in discovering counterintuitive truths. The intervention challenge is thus not two- but threefold: to help leaders learn how to redesign the ‘system of management’ in parallel with redesign in the ‘system of work’, and to gain the counterintuitive insights that reframe their underlying assumptions about the design and management of work.

The hardest of the three is the last – opening leaders up to the ‘eureka moments’ that in turn trigger a rethink and redesign of the two systems that govern the way that all of the organisation’s work operates. It’s all very well to tell colleagues that all they need to start the process is to be willing to change the way they think. In itself, this is a perfectly correct analysis of the situation, but it is not very useful as an approach to intervening to get people to change. The first golden rule of intervention is that if the an issue is likely yield counterintuitive conclusions, the starting point is without exception what the Japanese call ‘Genchi Genbutsu ‘: going to see for yourself, figuring out what is going on in the system of work and therefore what is causing it in the organisation’s system of management. The second golden rule is to resist the temptation to explain your revelation to others and insist that they too must go and see things for themselves. Only when they have discovered for themselves the connection between change in the system of work and change in the system of management can the tantalising potential for transformational organisational improvement begin to be realised

Read similar articles in Edition One of The Vanguard Periodical: The Vanguard Method in Financial Services. Ask for your FREE hard copy or PDF.