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Introduction

Why Managers Need the Six Simple Rules

How do companies create value and achieve competitive advantage in an age of great complexity? This is a question we constantly ask ourselves as we go about our work of helping chief executives and their leadership teams build successful businesses.

When we reflect on our work with the companies we have helped over the years—five hundred or more in all kinds of industries in more than forty countries—what we remember most vividly is rarely the specific problem that caused a business leader to call us in. Rather what comes to mind is the people—an airline maintenance worker, a head of R&D, a hotel receptionist, a sales director, a train driver, a CEO—all of whom were facing more or less the same situation. They confronted a challenge that seemed impossible: increased complexity in their business. We’ll discuss complexity in greater detail further along, but briefly, we mean that companies face an increasing number of performance requirements; the number can be in the range of twenty-five to forty different requirements, far more than twenty or even ten years ago. Often the requirements are contradictory in nature, such as the need to produce goods of high quality that can sell at low prices, or for services to be globally consistent yet also responsive to local demands (see the sidebar “The Complexity Challenge and Opportunity”).

To meet the challenges of complexity, the people we remember so well had tried applying the “best” management thinking and following the “best practices” of the day—including, as we’ll see, both structural fixes and people-oriented approaches—and those practices had failed to bring them success in their efforts in creating value. They were working hard and, when they failed to achieve the results they wanted, they worked harder. But they didn’t have much hope the outcome would be any different. They felt overwhelmed, trapped, and often misunderstood and unsupported by their teams, bosses, and boards.

What’s striking is how poorly served these people were by the conventional wisdom in management—the management theories, models, and practices developed over the past one hundred years. Instead of helping these people manage the growing complexity of business, all the supposed solutions only seemed to make things worse. There had to be a better way, and through on-the-ground work with these people and their organizations, we have battle tested the approach that we describe in this book. We call this approach smart simplicity and it hinges on the six simple rules.¹

Yves comes at the issue as director of the Institute for Organization at The Boston Consulting Group (BCG), where he brings economics and social sciences to bear on the strategic and organizational challenges of companies and their executive teams—especially as they relate to complexity. Yves formulated the smart simplicity approach to managing complexity, based on his background in research and theoretical inquiry, as well as his extensive work with clients in the United States, Europe, and Asia-Pacific. As head of the firm’s People and Organization Practice in North America, Peter has partnered with Yves to implement the six rules of the smart simplicity approach, drawing on his long experience working with some of the world’s most prominent companies.

Through our client work and continued research, we have continuously refined the rules so that they offer a theoretical framework and a set of practicable management tools. We are actively working together, and with our BCG colleagues, to successfully apply the simple rules—helping companies around the world grow, create enduring value, and achieve competitive advantage.

How Complexity Leads to Complicatedness

To understand the power of the simple rules and why they are so essential in business, let’s start by defining the problem. Today, companies have to deal with greater business complexity than ever before. This complexity arises from the requirements companies must meet to create value for their stakeholders. These requirements have become more numerous, are changing faster, and, what’s more, are often in conflict with one another. We have actually measured this evolution and created what we call the BCG Complexity Index. It shows that business complexity has multiplied sixfold since 1955.²

THE COMPLEXITY CHALLENGE AND OPPORTUNITY

Performing on Everything for Everyone

The BCG Institute for Organization created the Complexity Index by tracking the evolution of the number of performance requirements at a representative sample of companies in the United States and Europe over a period of fifty-five years—from 1955 (the year the Fortune 500 list was created) through 2010. In 1955, companies typically committed to between four and seven performance imperatives; today they commit to between twenty-five and forty.

Between 15 percent and 50 percent of those performance requirements are contradictory. Around 1955, hardly any were. Companies currently may have to offer high-quality products and sell them at rock-bottom prices; goods have to be innovative and also produced efficiently; supply chains must be fast and reliable; service must be globally consistent and, at the same time, highly responsive locally. When a company is able to reconcile valuable yet contradictory requirements, it breaks a compromise and, in so doing, unleashes new value for customers. This new value creates advantage and fuels profitable growth.

We see two important causes for the growth of complexity. First, shifting trade barriers and advances in technology have provided customers with an abundance of choices. With so many options available, customers are harder to please than ever and less willing to accept compromises.

A second factor is an increase in the number of relevant stakeholders. Companies must answer to customers, shareholders, and employees as well as to any number of political, regulatory, and compliance authorities. Each of these groups has specific demands, and it has become penalizing for companies to satisfy one at the expense of any other.

Some observers think increasing business complexity is the problem. We disagree. We believe that while complexity brings immense challenges, it also offers a tremendous opportunity for companies. Increasingly, the winners in today’s business environment are those companies that know how to leverage complexity and exploit it to create competitive advantage.

The real curse is not complexity so much as “complicatedness,” by which we mean the proliferation of cumbersome organizational mechanisms—structures, procedures, rules, and roles—that companies put in place in an effort to deal with the mounting complexity of modern business (see the sidebar “The Complicatedness Trap”). It is this internal complicatedness, with its attendant bureaucracy, that destroys a company’s ability to leverage complexity for competitive advantage. Even worse, this organizational complicatedness destroys a company’s ability to get anything done. However, although complicatedness is a curse, it is not the fundamental root cause of the problem; it is, as we shall see, only a by-product of outdated, ineffectual, and irrelevant management thinking and practices.

THE COMPLICATEDNESS TRAP

Fewer Value-Adding Activities, More Useless Work on Work

The BCG Institute for Organization created an index of the number of procedures, vertical layers, interface structures, coordination bodies, scorecards, and decision approvals over the past fifteen years. Across our sample of companies, this index has increased annually by 6.7 percent, which, over the fifty-five years we studied, yields a thirty-five-fold increase.

Managers in the top quintile of the most complicated organizations spend more than 40 percent of their time writing reports and between 30 percent and 60 percent of their total work hours in coordination meetings—work on work. That doesn’t leave much time for them to work with their teams, which, as a result, are often misdirected and therefore expend a lot of effort in vain. Our analysis shows that in the top quintile of complicated organizations, teams spend between 40 percent and 80 percent of their time wasting their time. It is not that teams are idle. On the contrary, they often work harder and harder but on non-value-adding activities. It means they have to do, undo, and redo, and when their efforts seem to make less and less of a difference, people lose their sense of meaning. It’s hardly surprising that, based on our analysis, employees of these organizations are three times as likely to be disengaged as employees of the other companies we studied. (See figure I-1.)

FIGURE I-1

The response to complexity

Source: BCG analysis.

But first it’s necessary to understand just how pervasive and troubling the phenomenon of organizational complicatedness really is. We have done research into the rise of complicatedness, and the findings are striking. Over the past fifteen years, the number of procedures, vertical layers, interface structures, coordination bodies, scorecards, and decision approvals has increased dramatically—between 50 percent and 350 percent, depending on the company.³

This rapid rise in complicatedness is shocking. What also surprised us is that our analysis shows absolutely no correlation between the size of companies and their degree of complicatedness. A big company is just as likely to be relatively uncomplicated (compared to the average index) as a small company is to be very complicated. Nor is there any correlation between complicatedness and the degree of diversification. The diversity of the business portfolio does not automatically increase complicatedness. What matters, then, is not the size of the company or the number of businesses in which it competes; what matters is how the resulting business complexity is managed.⁴

Complicatedness spells trouble for a company’s performance and productivity, trapping people in non-value-adding activities and causing waste and overconsumption of resources of all kinds: equipment, systems, inventories, committees, and teams. Complicatedness also has a pronounced negative effect on a company’s ability to formulate a winning business strategy, causing it to miss new opportunities and fail to meet new challenges. As we have witnessed firsthand, complicatedness has deleterious effects on the human beings who are trapped in such organizations, inevitably leading to frustration, dissatisfaction, and disengagement.⁵

Indeed, we think that organizational complicatedness is the primary reason that disengagement and dissatisfaction at work have become so damaging. Surveys by The Conference Board show that the percentage of Americans who are satisfied at work declined from 61 percent in 1987 to 47 percent in 2011.⁶ Studies abound on stress, burnout, work-related suicide, even death from exhaustion (the Japanese have a word for it: karoshi).⁷

Some argue that declining engagement is a cause of the stagnant productivity that afflicts companies, industries, and socie-ties in many parts of the world.⁸ Is it poor engagement that saps productivity?⁹ Or is it the pressure to improve productivity and the discouragement people feel when efforts fail that undermine engagement at work?¹⁰ This chicken-and-egg discussion is irrelevant; whenever we have intervened on such issues, we have always found that employee disengagement and stagnant productivity are triggered by a common factor: organizational complicatedness.

The Root Causes of Complicatedness

But, as we have hinted, complicatedness is itself only a by-product, a symptom, of the real problem. To understand the root causes of complicatedness, we must go deeper to explore a set of deeply engrained assumptions that guide how companies have responded to complexity. In struggling with the problem, most organizations have relied on two approaches with a long history in management theory and practice. We refer to them as the “hard” approach and the “soft” approach, and they are the product of two major revolutions in management theory and practice during the twentieth century and, unfortunately, remain to this day the two basic pillars of modern management. Almost all management thinking and best practice today is based on one of these two approaches, and usually a combination of the two—be it for restructuring, reorganizing, cultural transformation, reengineering, or improving engagement or motivation.

The “Hard” Approach to Management

The hard approach is the product of more than a century of managerial thinking that began with Frederick W. Taylor’s work on scientific management. It was further developed in the discipline of industrial engineering and continues to this day in practices such as reengineering, restructuring, and business process design.¹¹

The hard approach rests on two fundamental assumptions. The first is the belief that structures, processes, and systems have a direct and predictable effect on performance, and as long as managers pick the right ones, they will get the performance they want. So, for example, if you want your employees to customize your offering to local market demands, you choose a decentralized organizational structure; if you want to leverage economies of scale, you choose a centralized structure, and so on. The second assumption is that the human factor is the weakest and least reliable link of the organization and that it is essential to control people’s behavior through the proliferation of rules to specify their actions and through financial incentives linked to carefully designed metrics and key performance indicators (KPIs) to motivate them to perform in the way the organization wants them to.

Perhaps the hard approach made sense in the past, but it is dangerously counterproductive in today’s complex business environment. When the company needs to meet new performance requirements, the hard response is to add new structures, processes, and systems to help satisfy those requirements, hence, the introduction of the innovation czar, the risk management team, the compliance unit, the customer-centricity leader, Mr. Quality-in-Chief, and the cohort of coordinators and interfaces that have become so common in companies. (See the sidebar “Beyond the Org Chart.”)

KEEP IN MIND

Beyond the Org Chart

Whether to organize a company by function, geography, product, customer segment, technology, or some other dimension is an issue that companies face continually. Often, an organization will cycle through various options over time.

But in an environment of complexity, whether a particular task is contained in this or that box in the org chart has become less important. Performance increasingly depends on the cooperation between the boxes. If you organize by function, you will have to make people cooperate to satisfy varying local customer needs. If, on the other hand, you organize by geography, you will need to make people cooperate to develop functional expertise, and so too whether you organize by product, technology, or customer segment. No matter how you arrange the boxes, there will always be performance requirements that fall between them requiring cooperation.

Even the question “Where does the P&L sit—in the regions, or the business units?” that is often at the center of discussions about organization design has little relevance any more. The proof is that companies that make the profit-and-loss statement (P&L) the cornerstone of accountability end up with multiple P&Ls—a P&L per region, per business unit, per key customer account, per product, and even sometimes per product component—in short, more complicatedness. We are not saying that organization design is unimportant. Organization design is critical. But, as we will see, it must be performed in a way very different from the current practices.

The “Soft” Approach to Management

But the hard fixes have some squeaky wheels that need greasing, and to do that companies turn to what we call the soft approach—practices such as team building, people initiatives, affiliation events, off-site retreats, and the like (all added on top of the work itself)—so that people will feel better at work and work better together. The soft approach has its main origins in the work of Elton Mayo in the 1920s, which led to the development of the human relations school of management. According to this perspective, an organization is a set of interpersonal relationships and the sentiments that govern them.¹² Good performance is the by-product of good interpersonal relationships. What people do is predetermined by personal traits, so-called psychological needs and mind-sets. In other words, to change behavior at work, change the mind-set (or change the people).

At first glance, the soft approach may seem like the antithesis to the hard approach, but it isn’t. Both seek to control the individual. The only difference lies in the fact that the soft approach assumes that what really matters is emotional rather than financial stimuli. Emotional stimuli include affiliation activities, celebrations of all kinds, and the display of appropriate “leadership styles.” The dynamic that these two responses to complexity produce goes something like this: the hard approach raises new obstacles for people and contributes to dissatisfaction and disengagement. Because people feel bad and ineffective, managers use the soft approach, ostensibly to help them feel and work better. Managers then assume they have addressed the problem, even though they have only addressed the symptoms. Paradoxically, this puts the onus for any continuing disengagement on the victims themselves. If problems persist (and, of course, they always do), it must be because there is something wrong with the psychology of the people involved—they have a bad attitude or the wrong mind-set. They just don’t get it. As we shall see in some of our company examples, at its worst the soft approach can become a disguise for simple prejudice and stereotyping—for example, about the attitudes of women or young people in the workforce—leading to an enormous waste of talent and compounding ineffectiveness with injustice.

Hard and Soft Approaches Are the Root Problem

In our experience, complexity can only be addressed by people using their judgment in the moment. People’s autonomy is therefore essential to deal with complexity. No amount of structure, planning, or formal rules and procedures will ever be enough to anticipate the kinds of problems people on the front line of the business will face, solutions they will need to innovate, or new opportunities they will recognize. In this respect, the human factor isn’t the weak link—something to be minimized and worked around. Rather, it is the key resource for coping with complexity. Companies need to invest in—and trust—the intelligence and ingenuity of their people by expanding their autonomy and room for maneuver. Only then will employees be able to make judgments, balance complex trade-offs, find creative solutions to new problems, and do the right thing, making the best use of the available information and interpreting the rules to fulfill the spirit and not just the letter of the law. Simply piling up structure upon structure and multiplying procedures and formal rules (including some that contradict each other) with the hard approach only adds new obstacles to dealing with complexity.

It is also in the nature of complexity that no one individual has the entire answer. So it is equally necessary that people use their autonomy to cooperate with each other. Companies need to encourage—and, indeed, impel—people to perform their specialized tasks in a way that also enhances the effectiveness of others. But the more people cooperate, the harder it becomes to determine who contributed what to the ultimate solution. The proliferation of metrics and incentives of the hard approach not only adds to complicatedness but actually obstructs the kind of cooperation necessary to deal with business complexity.

These two characteristics—autonomy and cooperation—are precisely what the hard approach seeks to eliminate. Its goal is to immunize the organization against the perceived risks inherent in people’s autonomy and to minimize the need for cooperation. The belief is that if the structures, processes, and systems are adequate, and that if everyone has received the necessary training and the right incentives, then everyone can remain within their silos, do what they have to do, and there will be no need for cooperation. As for the soft approach, it negates people’s autonomy in using their intelligence because it views the individual’s decisions and actions as Pavlovian responses to psychological needs and emotional stimuli (just as the hard approach views these decisions and actions as Pavlovian responses to financial stimuli). Moreover, as we will see in the next chapters, the emphasis on good interpersonal feelings typical of the soft approach creates obstacles to cooperation. Cooperation has nothing to do with a touchy-feely conviviality. The two pillars of current management practices are unable to handle the new challenges that corporations face. As the hard and soft approaches are being stretched beyond their limitations, companies have to resort to stitches and patches in their structure and management processes that not only fail to address complexity but also make failure increasingly costly for all stakeholders.

The Doom Loop of Management

The encounter between business complexity and the hard and soft approaches triggers a chain reaction of complicatedness and a doom loop for organizations. In front of the new complexity, the hard and soft attempts to control individuals can only create complicatedness. Complicatedness leads to stagnant productivity and disengagement, which then feed off each other. In response, companies redouble their efforts with more hard fixes and soft initiatives, which only serve to make the problem worse. (See figure I-2.)

But as we shall see, there is another way.

FIGURE I-2

The doom loop of management

Smart Simplicity

The simple rules are a way for managers to break out of this doom loop and start moving beyond the hard and soft approaches in order to deal effectively with business complexity (see the sidebar “The Six Simple Rules Overview”). The primary goal is to create more value by better managing business complexity. However, as managers peel away the stitches and patches that have accumulated through the use of approaches that are obsolete in today’s world, the by-product is also the elimination of complicatedness and its attendant costs. In this respect, the six rules constitute a third revolution in management—”smart simplicity.” By helping manage complexity and remove complicatedness, the simple rules allow organizations simultaneously to improve performance and engagement. What’s more, the doom loop is transformed into a virtuous circle: better performance leads to more opportunities for people; more opportunities generate more engagement; more engagement nurtures higher aspirations and contributes to even better performance.

The rules are based on the premise that the key to managing complexity is the combination of autonomy and cooperation. These are two words that people rarely think of as going together, but it is precisely the combination of the two that is required to handle complexity without complicatedness. Individual autonomy harnesses people’s flexibility and agility; meanwhile, cooperation brings synergy so that everyone’s efforts are multiplied in the most effective way for the group.

The purpose of the simple rules is to create situations in which each person’s autonomy—in using judgment and energy—is made more effective by the rest of the group, and in which people put their autonomy in the service of the group. The rules are designed to create an organizational context in which cooperation becomes the best choice for each individual. In other words, these rules help organize and manage in a way that makes cooperation an individually useful behavior—a “rational strategy”—for people. The simple rules do not aim at controlling employees by imposing formal guidelines and processes; rather, they create an environment in which employees work together to develop creative solutions to complex challenges.¹³ The cooperation achieved thanks to the simple rules is such that, at any time, people are mutually advantaged and impelled by others to come up with the right solutions to deal with performance requirements, even if what is right cannot be specified in advance.¹⁴ Simplifying in a naive way—by ignoring or discarding business complexity—is a dead end. You have to be smart and play on people’s smartness. You have to recognize business complexity and simplify in a way that leverages people’s intelligence and judgment. The combination of autonomy and cooperation allows you to do this.

THE SIX SIMPLE RULES OVERVIEW

1 Understand what your people do. This rule is about getting a true understanding of performance—what people actually do and why they do it—and avoiding the smokescreen of the hard and soft approaches. With this understanding, you can then use the other simple rules to intervene.

2 Reinforce integrators. This rule involves giving to units and individuals the power and interest to foster cooperation; integrators, when reinforced, allow each one to benefit from the cooperation of others.

3 Increase the total quantity of power. This rule shows how to create new power—not just shift existing power—so that the organization is able to effectively mobilize people to satisfy the multiple performance requirements of complexity.

4 Increase reciprocity. This rule and rules five and six shift from creating the conditions for effective autonomy to ensuring that people put their autonomy in the service of the group to deal with complexity; rule four achieves this through rich objectives, the elimination of internal monopolies, and the removal of some resources.

5 Extend the shadow of the future. This rule harnesses the natural power of time—rather than the use of supervision, metrics, and incentives—to create direct feedback loops that impel people to do their own work today in a way that also contributes to the satisfaction of performance requirements that matter in the future.

6 Reward those who cooperate. This rule radically changes the managerial dialogue—covering the entire spectrum from target setting to evaluation—in a way that makes transparency, innovation, and ambitious aspirations become the best choice for individuals and teams.

Why not fewer than six rules? We know that the six rules cannot be boiled down to fewer rules because no rule can be deducted from the five others. None of the six rules is superfluous. Vice versa, we have never encountered a situation in which the solution would not be a combination of some of the six rules. It is not necessary to add another rule. Together the six rules constitute a minimum sufficient set to confront complexity.

The first three rules are designed to give people an advantage in the way they mobilize their intelligence and energy at work by providing them with relevant knowledge, room for maneuver, power, and the resource of cooperation. The first simple rule is about understanding what people do and why they do it. The second rule is about the utilization of power to foster cooperation. The third rule is about the production of power. These first three rules create the conditions for individual autonomy so that its effectiveness can be multiplied through cooperation from others.

Simple rules four, five, and six are designed to impel people to confront complexity and to use their autonomy to cooperate with others, by embedding feedback loops that expose them as directly as possible to the consequences of their actions, without the need for extra supervision and structure or for the bureaucracy of compliance metrics and incentives. The fourth and fifth rules create direct feedback loops that are intrinsically embedded into work processes and activities. The direct feedback loops created by the fourth rule are based on interdependencies—space, so to speak. The feedback loops of the fifth rule are based on time, directly gratifying or penalizing people depending on how well they do today for tomorrow. When work processes do not allow for direct feedback loops, management intervention is needed as a last resort to close them, through evaluation. This is the role of the sixth rule.

In summary, the first three rules use the group effect to give people’s autonomy an advantage in best using their energy and judgment, while the last three rules impel people to put their autonomy in the best service of the group. Whenever people apply their full energy and intelligence to the greater range of possible solutions that arises from cooperation, they are bound to reach superior solutions to those predefined or hard-wired in procedures and structures and to the loose compromises of collaboration within informal, consensus-seeking groups.

By calling the rules “simple,” we don’t mean to imply that they are necessarily easy to put into practice. Using them requires managers to think differently and work differently. Nor do we mean that managers should pursue simplification as a goal in itself.¹⁵ What we do mean, however, is that these rules allow executives to create competitive advantage by exploiting complexity without getting complicated.

The Scientific Basis of the Six Simple Rules

The six rules are based on fundamental developments in the social sciences that can be traced back to the work of Herbert Simon and Thomas Schelling. Simon received the Nobel Prize in 1978 for his study of decision making, and Schelling in 2005 for his game-theoretic work on conflicts and cooperation. Simon’s research brought a radically new perspective on cognitive processes, how the individual decides and acts, while Schelling’s helped us better understand interactions between individuals and the effect of these interactions on overall results, which can be very different from their individual intent. Other important intellectual contributors are Michel Crozier and Robert Axelrod. Crozier started his career by studying labor movements in the United States after World War II and then created a new approach called the strategic analysis of organizations. Axelrod is a political scientist who has helped us better understand cooperation as an evolutionary process and also coined concepts we have used to name some of the simple rules.¹⁶

These developments have led to a variety of new perspectives on organizations and to useful insights about human behavior that are extremely relevant to how organizations manage complexity. For example:

 Human behavior is strategic. People adapt to their environment strategically (in the sense that game theory uses the term) in order to fulfill certain objectives or goals. They may be more or less conscious of those goals, but the goals can be identified by studying carefully how they act. In this respect, human behavior can always be analyzed as a rational strategy in an individual’s context; there are always “good reasons” (in the sense of reasons with explanatory power) for how people behave.17

 Formal rules and procedures don’t have a predetermined effect on people’s behavior. Rather, people actively interpret rules and use them as a resource to fulfill their goals. What matters are not the rules, but the ways people use them.

 Cooperation isn’t just some taken-for-granted value or goal (the desire that people “work together as a team”). It is a complex social process, hard to create and easy to destroy. Organizations have to create the right context for cooperation.

 Power isn’t a necessary evil or source of coercion. It is a critical resource for the individual in organizations and for mobilizing collective action.

These concepts are the basis on which the six rules operate and why these rules work, especially given the complexity that is making all traditional hard and soft management approaches obsolete. Our focus with the six simple rules has been on making these concepts actionable—that is, to help managers to use them in their day-to-day work running business organizations. You can think of the six simple rules as guidelines for practice. Because all performance issues arise from people’s actions, decisions, and interactions—what we call behaviors in this book—the six rules provide the basis for tackling the whole lineup of organizational challenges, including productivity, innovation, growth, and cultural transformation.

Getting Started

Each of the six chapters of this book is organized around one of the simple rules. The purpose of the simple rules is to let managers really manage, to use the tools that managers have always used—strategy setting and organizational design—but for a different end and a far more effective outcome. The rules help managers foster both autonomy and cooperation to effectively handle business complexity and prevent much organizational complicatedness. Unlike other recent books that propose new roles for managers, we focus less on psychological issues of individual motivation and one-to-one interactions and more on managing large-scale situations and the collective properties (for instance, productivity and innovation) that emerge from multiple interactions among groups, units, and teams.¹⁸ There is a lot of loose talk these days about self-organizing systems and the end of management. Let’s be clear: we believe in the essential role of management. But we contend that traditional methods, developed for a different, less complex era, are obsolete or fast becoming so. Let’s begin, then, with the first fundamental rule of management, simple rule one—understand what your people do.