People at the Core

According to management thinker Gary Hamel, businesses that want to create thriving, resilient organizations will need to shift the way they think about employees. And business schools will have to help them.

“HOW DO YOU build organizations that are as human as the people who work there? For me, that’s a very important quest.” It was 2008 when Gary Hamel made that comment in an interview with BizEd—and 12 years later, it’s a journey he’s still on. Hamel, a longtime faculty member at the London Business School, has devoted much of his career to considering how to make organizations the best places they can possibly be—both for the organizations themselves and for the people who work there.

Gary Hamel

Author Gary Hamel

In his newest book, Humanocracy, Hamel and co-author Michele Zanini explore how large soulless bureaucracies can be turned into thriving, resilient organizations that nurture talent and spark innovation. The authors share stories about leaders of vanguard companies that have restructured enterprises around employees, giving them the freedom and the tools to solve problems and make critical decisions.

Business schools can be vital partners in helping organizations remake themselves into humanocracies, Hamel noted in a recent conversation with BizEd. But they have to be prepared to revamp their curricula, refocus their research priorities, and remake their business models. They, like the companies they serve, will have to put people at the center of their operations.

What first brought you to the idea that businesses should turn from being bureaucracies to being humanocracies?

When I was a PhD student at the University of Michigan in the late ’70s, American companies were being challenged by foreign competition in a powerful way. It was clear that companies like Toyota and Honda didn’t have more resources, better factories, or better equipment; they were utilizing their human talent in ways their U.S. competitors were not. They believed all employees could be inspired problem solvers if they were provided opportunities to learn, grow, and add value.

Later, when I was an academic, I began spending a lot of time inside large organizations, and I realized that they were all afflicted with the same disabilities. They were inertial. They struggled with the pace of change. And they were dispiriting for the employees who worked there.

I realized these core incompetencies were ubiquitous because all organizations were built on the same operating system—bureaucracy. It’s a model where strategy is set at the top, power trickles down, employees are slotted into roles, and people compete for promotion.

How did bureaucracy become the dominant way businesses were organized?

To a large extent, it goes back to Frederick Taylor, one of the first management consultants. He used a mashup of military command structures and the principles of industrial engineering to address a very particular problem in management—how to turn human beings into machines. In 1911, he published The Principles of Scientific Management, in which he says, “In the past the man has been first; in the future the system must be first.” It’s an oddly relevant quote today.

It’s important to remember that bureaucracy was a product of its time, when chain of command was the best management strategy. In the mid-to-late 19th century, the average worker was poorly educated, information was hard to acquire and move, scale was the most important advantage, and change was relatively gradual. Today, none of these things are true, but we’re still stuck with an organizational model that was built to maximize compliance. It’s a bit like imagining what the world would be like if its computer systems never moved beyond MS-DOS.

Our organizations are not good at embracing change or inspiring people, because they were never built to be good at those things. Now we need organizational models that focus less on maximizing compliance and more on maximizing contributions.

But we rarely have them. A 2018 Gallup poll shows that 13 percent of American workers are “actively disengaged,” while 53 percent are “not engaged.” The vast majority of people are happy with the work they do, but they’re disengaged because of how they’re managed. People don’t bring their initiative and passion to work. Those things are gifts, and if they’re not valued at work, people leave them at home.

How can organizations move from being bureaucracies to being humanocracies?

It takes four M’s: One, a shift in mindset, particularly in how we view human beings at work. Two, the motivation to be honest about the cost of bureaucratic drag. Third, new models that allow companies to imagine alternatives. And fourth, migration—figuring out how to get from here to there.

Let’s take these one at a time. First, how do we shift the mindset?

We have to challenge our own assumptions about the relationship between individuals and organizations. In the bureaucratic model, the institution comes first. Individuals are literally human resources used to produce products, services, and income. When people are treated as instruments, they are unlikely to give their best.

IF COMPANIES COULD REDUCE THE BUREAUCRATIC CLASS BY HALF, WE COULD ADD JUST UNDER $3.5 TRILLION TO THE U.S. ECONOMIC OUTPUT.

A humanocracy flips that around and says the individual comes first. Individuals join institutions because they understand there are things they can do together that they can’t do alone. The institution is the vehicle in which individuals make an impact on the world. And in this rendering, the institution—not the human being—is the instrument.

Second, where do we look for new models?

I discuss several vanguard companies in my book. One is appliance manufacturer Haier, a company of 80,000 employees organized into 4,000 microenterprises. Each group sets its own strategy to hire and fire employees, organize work, and distribute the rewards of success.

Another is Nucor. It is by far the most profitable and innovative steel company in the world despite having one-third of the managers per capita as its major competitors and having no head office functions other than finance. The Nucor leaders say, “We build people, not steel.”

A third one is Buurtzorg, the leading provider of home health care in the Netherlands. It employs 16,000 caregivers but only two line managers. The caregivers are divided into small teams, each one responsible for taking care of its own hiring, training, marketing, and office functions. It’s tied together with a social platform where nurses can pose questions and get hundreds of responses. The work of management is moved to the periphery of the organization.

Once you see these examples, you realize that unless companies shift their perspectives and build themselves around people, they’re lost. They will never be truly capable organizations.

How do companies take the third step—developing the motivation to change?

By understanding the cost of the old model. My colleagues and I started calculating how much an excess of bureaucracy was costing the U.S. economy. We said that if companies could reduce the size of the bureaucratic class by half and redeploy all that energy into value-creating roles, we could add just under US$3.5 trillion to the U.S. economic output.

But no one does this kind of accounting at the organizational level. Most of the costs are invisible. Apathy doesn’t show up on a P&L. Conformity and the pressure toward compliance don’t show up on a P&L. In a survey we did for Harvard Business Review, Michele Zanini and I found that 76 percent of respondents from large companies believe the primary way people can get ahead in their organizations is through bureaucratic behavior. All their emotional energy goes into winning zero-sum battles for promotion instead of creating more value for customers. Those costs are not visible. We created the Bureaucratic Mass Index as a way for organizations to get baseline estimates on those costs.

And the fourth step—migrating to a new model?

Bureaucracy is the most ubiquitous social technology in the world. Change won’t happen through some giant top-down reengineering effort, but through a lot of localized experimentation. People at every level must feel they have the freedom to experiment with planning, organizing, compensating, and hiring in ways that make the organization more resilient, more innovative, and more humane. The companies that have been on this journey did not start with some grand plan. They simply committed themselves to principles like ownership, meritocracy, community, and experimentation.

How can business schools encourage bureaucracies to become more human-centric?

Three ways: by adjusting the curricula, redirecting the research, and changing their own business model.

In terms of adjusting the curricula, schools must ask how they can train leaders for tomorrow’s organizations rather than yesterday’s organizations. I think there are assumptions baked into our curricula about the way organizations work—for instance, there are multiple layers of management, and employees aren’t capable of managing themselves. We have to challenge these assumptions.

Business schools are still predicated on the idea that the important relationships in organizations are vertical rather than horizontal, and that strategy is set at the top, but the world is leaving that hierarchical model behind. We need to think hard about what we teach in a world where fewer and fewer people have management roles and where organizations are increasingly pancake-flat.

Business schools need to be looking deeply at the vanguard organizations. We need to understand what organizations need to look like, what kind of people will be able to help their organizations succeed, and how we can weed out our old bureaucratic assumptions.

BUSINESS SCHOOLS ARE LUXURY HANDBAG MAKERS WITH HIGH-PRICED RETAIL SPACE IN A WORLD WHERE MOST PEOPLE WANT BACKPACKS.

Much of what business schools are teaching students is very important—students need to gain analytical skills, learn to read a P&L statement, and understand the implications of big data and AI. But I wish we also were teaching students how to become positive forces for change and how to hack the systems around them. I would like to see every person graduate from business school with an appetite to be a management renegade.

You said that business schools also need to change their approach to research. How so?

We need to ask if we’re doing important research. The market test of that is, Are companies beating at our doors wanting to partner with us and give us money?

Over the last few years, U.S. companies have spent about $2.5 billion a year funding university research. The vast majority of that funding is going into computer sciences, life sciences, and engineering. In 2018, the amount that business gave to management research was $50 million. What does that tell you about how businesses see the value of business school research? It says, “We don’t really think you’re our full partners in helping us invent the future of management in organizations.”

Researchers in medicine, engineering, and the life sciences are working on extraordinarily important problems. How do we build machines that can think? How do we find vectors for delivering gene therapy? By contrast, business school researchers tend to be packagers of best practices.

So much business school research is focused on characterizing the way things work now, and not enough is aimed at changing the way things work. Business school faculty need to become indispensable partners helping companies become more resilient, innovative, and flexible.

Finally, you believe business schools need to reinvent their own business model.

Right now, many business schools have enormously high fixed costs, and that model is unsustainable in the digital world. We’re luxury handbag makers with high-priced retail space in a world where most people want backpacks.

In virtually every other industry in the past couple of decades, new players have come in and said, “Let me reimagine this industry from the customer backwards.” It’s hard to find a single incumbent that’s been in front of the change curve. I absolutely believe digital delivery will have the same impact in education.

The new digital learning products are going to substantially lower the price points for education, but total industry revenue may go up because we can vastly expand the audience. New platform models will allow providers to offer e-learning solutions that no individual institution can afford today. Improved data analytics will drive choices on how teachers get paid and what kinds of courses get developed. People who have no vested interest in the old model will think about education in a much more radical way.

It’s critical for business school deans to ask if their faculty and staff have a genuine sense of urgency about the changes to come. Are faculty and staff up to date on the recent trends in e-learning? Do they have a sense of optimism about it—do they believe the opportunity is bigger than the potential threat? Have deans created an open strategy process that brings people together and collectively focuses their imaginations on how to succeed in the new world?

If business schools are able to embrace this new digital model of delivering education, how will that help turn bureaucratic companies into humanocracies?

Business schools have an extraordinary opportunity to make an impact in two dimensions. First, we can raise our aspirations about the number of people around the world that we reach and help. Schools accredited by AACSB train fewer than 100,000 MBA students a year. Against the challenge of upgrading the world’s management and leadership skills, and given the unprecedented challenges we face as a species, the difference we are making is so small as to not really be measurable.

The question I would like to ask is, how do we train a million people a year, or 10 million people a year, to be better leaders? The vanguard companies like Haier and Nucor teach every single employee how to think like a businessperson. At Southwest Airlines, every flight attendant and baggage handler goes through an orientation program to learn about the economics of the airline industry. Every single person at Southwest can talk about load factors and turnaround times, and they know if they can improve those numbers, they can influence their compensation.

HOW DO WE TRAIN A MILLION PEOPLE A YEAR, OR 10 MILLION PEOPLE A YEAR, TO BE BETTER LEADERS?

I think everybody in our economy needs to think like a businessperson. Every employee should know how to read a balance sheet and how to run a smart experiment with customers. That gives business schools an extraordinary opportunity to ask, How do we upgrade the business skills of every single person who’s working today?

What’s the second way business schools can have an impact?

They can work on the most pressing challenges that organizations face—including the current pandemic, climate change, environmental degradation, racial disharmony, geopolitical tensions, job displacement, and the effects of automation. To tackle these challenges, we are going to need every bit of initiative and ingenuity we have as a species. And if there’s any group of people who should understand something about how we unleash those capabilities in productive ways, it should be the people who are teaching and doing research at the world’s leading business schools.

To do that, we’ll have to ask: Who is our audience? How do we deliver value? What are we actually teaching? What does a great organization look like?

We’re at a profound inflection point in the way we think about delivering business education. The tectonic plates are slowly shifting, and we have a bit of an earthquake. This is a great time to step back and ask deep questions.

 

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