Unleashing the Power of the Informal Organization

To return to long-term performance and good health, companies will need to embrace both formal and informal structures that are present in every organization. Anxieties must be counter-balanced with more positive emotions, and it is up to HR leaders to support and guide managers to engage employees in the turnaround.

Sunday, August 1, 2010
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As our economy struggles to rebound from the worst economic crisis in recent history, the global workforce has understandably been shaken. Fortunately, we can learn from those who weathered the turmoil of late 2002 and found ways to engage employees in the economic turnaround. And, HR executives have a critical role to play in these efforts.

For example, by 2002, Texas-based Reliant Energy was sent into a tailspin by chaos in the capital markets, deregulation of the Texas electricity markets and the collapse of corporate neighbor Enron.

According to Karen Taylor, senior vice president of human resources, employees "felt like they were on a sinking ship." When turn-around leader Joel Staff took the reins as CEO, he assembled his senior team at an offsite and established a set of values to guide them.

Rather than rely on formal communications to share those values, Staff's team created a series of recurring Tuesday Talks, informal brown-bag lunches where people would gain a first-hand perspective on the current situation and get straightforward and honest answers to hard-hitting questions about the company's future.

Staff told people repeatedly "I can't guarantee your job or anyone else's for that matter, but I can assure you that the best way for us to keep as many jobs as possible is by pushing ourselves to work hard together." 

Tuesday Talks became extremely popular in maintaining transparency and addressing employee's concerns. Moreover, the small gatherings helped build the informal networks that spread senior management's message and fostered collaboration across the company.

Taylor, the chief architect of Tuesday Talks, was central to building employees commitment to the company through some of its darkest days.

The Time Is Now

Reliant's experience is relevant for many companies. A recent global survey of CFOs conducted by Duke University and CFO magazine found that "employee morale" is one of the group's top three internal concerns. Amid the "great recession," many senior leaders turned to traditional means of coping with business challenges: cost cutting, restructuring and reducing the workforce.

With many employees losing their jobs, remaining workers often feel fortunate but also burdened by larger workloads, increased stress and reduced resources. Further, organizational psychologists have identified a "layoff survivor syndrome" related to employees' emotional, psychological, and physical reactions to remaining on the job after a reduction in force, according to the Conference Board.

At best in these situations, employees can become risk averse and focus on self-preservation. At worst, their cynicism, shock, learned helplessness, Machiavellian politics and apathy can be toxic.

To return to long-term performance and good health, these anxieties need to be counter-balanced with more positive emotions. Positive emotions are critical if employees are to help energize recovery plans. Managers with the support and guidance of HR professionals, will need to embrace both formal and informal structures that are present in every organization.

Clearly, the time to act is now, not during the next business review, employee survey or formal reorganization.

Formal mechanisms such as compensation and promotions are commonly used to attempt to retain and motivate employees. Such measures are valuable but insufficient for re-energizing beleaguered employees after a crisis period.

Specifically, the impact of these interventions can be short-lived and often target few individuals. For example, financial incentives are great for attracting top talent, but not necessarily for retaining and motivating current employees, who are frequently more interested in their work and their colleagues.

Therefore, formal measures must be balanced with informal mechanisms to truly drive employee commitment and motivation.

The Informal Explained

The formal and informal sides of an organization are analogous to the left and right sides of the human brain. The formal, rational left side is focused on the typical business disciplines -- e.g., creating detailed strategies or building sophisticated financial models or workflow processes codified in charts, presentations, spreadsheets, and handbooks.

Financial-compensation programs and rewards are examples of the formal mechanisms that organizations use to align behaviors with strategies and plans, and to ensure compliance with policies and procedures.

In contrast, emotional commitment trumps rational compliance in the informal "right brain" side of a company. The informal side is interactive, operating across the organization, as well as up and down.

It comprises elements such as working norms, shared values, social networks, peer interactions and communities of common interest. The informal is the collection of practices, ideas, feelings and interactions that help fill in the gaps left by the formal organization -- where plans and policies are in conflict or don't tell employees what behaviors are expected.

The informal elements of an organization are rarely written down, but they exist nonetheless and are highly influential.

As Jon Katzenbach and Zia Khan point out in their new book, Leading Outside the Lines: How to Mobilize the (in)Formal Organization, Energize Your Team, and Get Better Results, "The informal elements of your culture are at work right now -- today -- and they are working either for you or against you."

The Path Forward

While the informal organization may seem hard to manage, there are concrete actions that managers can take to influence it and thereby invigorate their employees and build for the future. Not all senior leaders or line managers will be able to immediately translate higher-level concepts of formal and informal organizations into concrete actions that raise commitment and improve business performance.

As a result, HR executives often need to act as coach, facilitator and consultant to help senior leaders manage both sides of the organization. Companies that want to mobilize the emotional side of behavior should seriously consider a multi-pronged and multi-level attack. 

Instill pride in the organization: This can come from the top -- ideally from the CEO or business-unit senior executive -- and thrive with the full support of other senior leaders.

The purpose is to create a unifying rallying cry or "pride anthem" about the organization's accomplishments together and reinforce how it is now better positioned for long-term success.

For example, Aetna was in the midst of a turnaround effort involving both formal and informal actions. To impart how these efforts were affecting employees, CEO Jack Rowe used the anthem "Restoring the Aetna Pride," which connected with employees and tapped into their latent pride.

The work at Aetna was multifaceted, but without a unifying message it may not have gained traction.

Most importantly, it provided a potential source of pride in the work that managers throughout the company used to motivate critical behavior change. Ultimately, Aetna executed a significant business turnaround; in five years, the company went from losing $1 million to making $5 million each day. 

While the main message needs to come from the most senior leader, HR executives are uniquely well positioned to provide insight into that message by communicating the "pulse of the organization" gleaned from the quantitative and qualitative information they have at hand. 

Providing this guidance, and their professional judgment will bolster the message and better facilitate senior leaders' efforts to drive pride throughout the organization. Further, HR must be visible partners with senior-line leadership, working side by side.

Clearly articulate compelling values: Turnarounds are perfect opportunities to be aspirational and define the values that will propel the organization and inspire the workforce. Articulating values may entail blending the company's historic core values (e.g., from the founders) with new values essential to future success.

However, it is imperative that the values be real and demonstrable because they will become the mantra for how work gets done throughout the entire organization.

For example, at StockPot (a Campbell Soup subsidiary), Ed Carolan led a transformation effort rooted in informal organizations. Employees and managers were jointly involved in defining the new values that really mattered on the front lines. These values were then expressed through concrete operational tactics and behaviors, reinforced and assessed with metrics.

In just two years, Carolan's efforts led to dramatic improvements:

* Profitability rose by 50 percent.

* Plant efficiency improved by 23 percent.

* Employee engagement increased by 14 percent.

Tap into informal organizational networks: In most organizations the list of key individuals is widely known and yet not always obvious from looking at organization charts. These are employees who have widespread impact, credibility and influence -- independent of their position in the hierarchy.

They are often long tenured and widely connected, serving as true hubs of information, trust and energy; people seek them out for answers as well as advice and support.

If these individuals are identified (e.g., through organizational network analysis or qualitative means) and their support for corporate efforts is secured, they can spread positive sentiment about initiatives and enhance the rate of acceptance.

Conversely, these individuals can poison and derail a change initiative if they are not included from the start as visible champions, starting with the design phase.

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In successful turnarounds, companies leverage organizational networks to solve major business problems. HR executives can be the catalyst to bring analytical and methodological rigor to produce quantitative and qualitative data on the informal organization (e.g., social-network analysis).

For example, one high-tech company -- a high-growth market share leader in a very profitable testing segment -- tapped into organizational networks to help restore order following a major financial crisis and restructuring.

Specifically, the finance function was in turmoil as it tried to balance 50-percent revenue-growth rates with a financial restatement, leading to senior team infighting and burnout.

The company used a combination of interviews and organizational-network analysis to create a snapshot of the informal organization and trust networks, and then pursued targeted interventions based on the findings.

Through these efforts, it was ultimately able to accomplish the following:

* Retain 85 percent of at-risk talent;

* Rebalance workloads to ensure completion of the restatement, while installing new revenue systems on time and on budget.

Instill pride in the work itself: There is probably nothing more important in determining the commitment and behavior of employees than how they feel about "the work itself." To increase ownership and enable meaningful change, employees need to know how their day-to-day lives will be affected by what they do on the job -- and how their work fits within the company's plans.

Research indicates that motivation is directly related to how employees feel about the work itself. Pride in the company generates loyalty, whereas pride in the work motivates behavior.

Therefore, managers need to instill pride not only in the organization as a whole but in the day-to-day work itself. One tactic that has been broadly successful involves identifying what we call "pride builders."

Pride building is a learnable managerial capability that enables leaders to achieve significant incremental performance gains by building a strong emotional connection between individuals and their day-to-day work.

Pride builders, therefore, are key champions in helping to connect values and behaviors. They serve as the critical link between senior executives and the front lines, and encourage behaviors that will improve motivation and performance.

HR executives can bring disciplined execution to oversee the process and ensure that the right people are included in the pride-building effort and that tangible learning is gleaned from the initial pride-building group to be shared with the broader organization.

For example, a manufacturing division within a "supermajor" energy company enlisted a pride-builder methodology to drive operational transformation. Its process entailed (1) enlisting key stakeholders in planning, (2) identifying leaders throughout the organization known for being particularly good at motivating employees and validating their pride-building behaviors, (3) convening an advisory council made up of pride builders and other key employees to share these behaviors and (4) using the advisory council to spread practices and lessons learned more broadly in the organization.

This identification of pride builders and pride-building behaviors was systematic and included employee involvement from all levels, thereby increasing ownership. As a result, this division achieved the following:

* A 27-percent decrease in unplanned downtime (equivalent to a $75 million annual increase in operating margin).

* A 49-percent decrease in recordable incidents.

* An 18-percent improvement in safety performance.

As we begin the arduous journey toward recovery, organizations must be prepared to re-energize their workforce. HR executives can not only help to "stop the bleeding," but can deliver transformative value to the business with active coaching, facilitation, analytical rigor and disciplined execution.

Specifically, formal organizational mechanisms are insufficient for repairing damage and motivating employees to drive long-term health and performance. We suggest using a four-pronged attack based on instilling pride in the organization, developing values behind which everyone can rally, capitalizing on informal organizational networks (especially central "hubs") to accelerate the rate of change and make the changes "viral," and instilling pride in the work itself.

By harnessing the untapped potential in the informal organization, in conjunction with traditional formal structures, companies can revitalize their workforces and put themselves in position to emerge stronger than ever.

August Vlak is a senior advisor at Booz & Co., where he is a member of the Katzenbach Center and the Life Sciences Group. He works with leading companies on organizational performance and innovation challenges. He is the co-author of "Identifying and Grooming Breakthrough Innovators" (HBR 2008). Scott Thomas is a senior associate with Booz & Co., and senior member of the Katzenbach Center.  He works with leading organizations on organizational strategy and performance challenges.  He works in a number of sectors and has most recently focused his work in the Digital space. Efram Lebovits is an associate with Booz & Co., and a member of the Katzenbach Center. He works with leading companies on organizational strategy topics and develops new approaches in the areas of leadership and culture. 

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