Getting a read on the state of organizations

| Podcast

Organizations have faced a number of economic-, geopolitical-, and pandemic-related disruptions the past few years. How are they faring? That is the focus of McKinsey’s recently released State of Organizations report, which offers an overview of the ten shifts that have most affected organizations’ ability to attract and retain talent, work efficiently, and achieve growth and other performance goals.

On this episode of The McKinsey Podcast, McKinsey senior partners Dana Maor and Patrick Simon speak with McKinsey editorial director Roberta Fusaro about three of the most asked-about shifts: increasing speed and strengthening resilience, the hybrid workplace, and building capabilities in a rapidly changing workplace.

After, it can be scary to share a dissenting opinion. But McKinsey senior partner Katy George shares a time she took that risk and reaped the rewards—from our My Rookie Moment series.

The McKinsey Podcast is cohosted by Roberta Fusaro and Lucia Rahilly.

This transcript has been edited for clarity and length.

Big change has arrived

Roberta Fusaro: It’s no secret that the past few years have been incredibly tumultuous for everyone, but particularly so for business leaders. McKinsey’s recently released The State of Organizations 2023 report cuts through that tumult to talk about trends that are affecting companies today. I’m curious, Patrick; can you tell us a little bit about why we conducted this research?

Patrick Simon: Over the past years, we’ve seen a truly foundational tectonic shift of questions CEOs ask us with respect to their organizational model.

There are many reasons for that. Obviously, we’ve all gone through the COVID phase. There’s a new dynamic in Europe, inflation has been up, and there’s been a disruption to supply chains, among many other things.

But there’s also a new set of capabilities on the horizon that organizations need to be able to provide to be successful around sustainability, advanced analytics, AI, and many other aspects. So what are the biggest shifts that the C-suite needs to be aware of in order to successfully transform organizations?

A number of clients asked us to provide that view. So we did some research starting last year, asking 2,500 business leaders what they see as the biggest organizational shifts everyone should be aware of.

We came up with ten shifts that explain most of that equation. By the way, only about half the organizations that we talked about feel prepared for the coming years when it comes to organizational transformation. And the other half is still looking for an answer on how to best go about it. We believe the ten shifts will act as a compass and hopefully provide enough direction for that journey to come.

Roberta Fusaro: Dana, talk to us a little bit about some of the organizations that stood out.

Dana Maor: As you can imagine, we were looking to identify those that “got it right” and had found the recipe to successfully navigate these potentially overwhelming shifts. We looked not only at their financial performance but also at how they perform from a cultural perspective, what the brand perception looks like, and what the buzz is around them from a talent perspective.

We really enjoyed identifying what we call “beacon organizations” across geographies and industries. What’s even more fascinating is that those who cracked the code spanned from Mars, with 140,000 employees, to PsiQuantum, a quantum-computing-related company with 200 employees.

When you do this right, you can do this regardless of the size of the company, geographies, whether it is in traditional industries or new industries. So Mars, PsiQuantum, LEGO, and Decathlon were some of the companies that got the answer right.

Move fast, build resilience

Roberta Fusaro: I’d like to dive into the shifts around increasing speed and strengthening resilience. Dana, could you talk a little bit more about how companies can become more prepared to react to future shocks and disruptions? What are the capabilities and mindsets that they need?

Dana Maor: If there’s one thing that the last few years have taught us, it’s that those companies that are resilient need to be able to respond to shocks very, very quickly.

Those that have cracked the code are actually very successful in making sure that they have a way to navigate an operating model at large, which includes structure, processes, and people.

As a result of that, they don’t only bounce out of the crisis, but they actually bounce forward. They land on their feet relatively unscathed. They race ahead with new energy. They manage to come out as winners when it comes to attracting the best talent.

The word that describes that is agility, and it’s an important component. Unfortunately, only 14 percent of leaders surveyed reported their organization has truly adopted those agile operating models across the board.

Organizations with little or no experience with agility or adaptability can end up in a double bind. They’re unmotivated to prepare for a crisis during periods of calm, and they’re unable to change course and respond quickly when disruptions occur.

The question that organizations need to ask themselves is what accounts for their lack of preparedness. When we asked those 2,500 leaders, we came away with some of these answers.

The number one issue, of course, is funds to develop surplus capacity and contingency solutions. One-third of respondents cited unclear priorities for targeting resilience. And another third said that initiatives are being launched in organizational silos, limiting their effectiveness.

The last third cited limited willingness and lack of excitement as impediments. To solve this, they need to think systematically about ways to build their resilience. They will need to take care of those elements we’ve mentioned—review them on an ongoing basis rather than doing it only on a one-off basis and think about how they organize for speed, empower their people, and develop a culture of continuous learning.

The capability opportunity

Roberta Fusaro: The growing deployment of new technologies in the workplace and the skills needed to drive growth and value are changing, and companies are looking to fill capability gaps. Patrick, can you talk a little bit about how leaders can bridge this chasm and achieve competitive advantage?

Patrick Simon: Almost every strategy that is being launched these days has elements of digital, of direct to consumer, of advanced analytics, and lately, artificial intelligence.

Building these capabilities as institutional differentiators will matter more and more. There are a few ways to go about this.

First, it is about training your internal staff and fostering a culture of learning, experimentation, and evolution. We see that organizations that do that well make this a CHRO or CEO priority to make sure people get the time to explore, learn, test, and build their own capabilities. This is often accompanied by training programs and making sure experts are at their fingertips to help with that process.

The second element is scouting for talent outside of the organization and creating a value proposition that matters to that talent, especially when it comes to younger capabilities around digital sustainability, AI, and so on.

Talent is really drawn toward purpose-driven companies. We see that companies that are high on purpose—that can formulate a task that really makes sense and appeals to the greater societal good—really outperform. And last, in order to build capabilities and fill gaps, it’s all about role modeling.

So it needs to become a key narrative of the C-suite to talk about talent, place talent in the center, and make sure that talent is appreciated with respect to career development and opportunities in the organization.

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Roberta Fusaro: Dana, organizations can only be as resilient as their leaders to some degree. In today’s turbulent environment, a lot of leaders may be tempted to stick with what’s worked in the past regardless of whether those approaches are still fit for purpose rather than rethinking how they’re leading or changing the way they lead. Can you talk a little bit, Dana, about what we found in the report around this leadership topic and how leaders can be more successful in the future?

Dana Maor: Absolutely, this is a critical point. We have found out, not surprisingly, that one of the biggest determinants of employees’ happiness, engagement—excitement to stay in an organization—depends on their direct manager, who’s a leader.

When we look at our beacon organizations, we see that anyone who takes initiative in their organization is considered a leader. Whether it is a colleague choosing to lead an initiative they are passionate about, or an associate, or a teammate.

So there’s no question that leaders and how they show up in their organizations make a tremendous difference. And unfortunately, the big statistic from our current survey regarding organizational leadership is that only 25 percent of respondents say they consider their leadership culture to be one that inspires employees to be the best that they can be, which is worrying.

We also know from talking with leaders that many are actually exhausted themselves. So how do you find that leadership energy and capacity to be resilient? It’s not a new model, but when we think of leaders, we need to think about essentially three layers.

What is a leader’s ability to lead themself? Are they aware of their own limitations, of what gives them energy, of how they thrive? How they lead others—peers in the C-suite and others on their team? And as a result of that, how do they exhibit the leadership skills and mindsets required to lead at scale?

The three biggest obstacles that prevent organizations from switching up their leadership styles are the lack of incentives, short-term thinking, and the lack of training. Many organizations are taking measures to break through that.

Almost 40 percent of respondents say their organizations have made development a core part of leaders’ daily work. They actually take measure of how much time is spent on developing others. And almost 30 percent say they’re making leadership training more accessible to more employees.

So what’s the right formula? We have to think about how we help leaders lead themselves and lead their teams, as this is a critical factor in determining their engagement success and happiness. And we have to think about how to help with leading at scale, with redesigning how value is created, moving beyond being a manager who ensures that profits are predictably delivered to shareholders who actually have a vision and can engage people to deliver that impact.

Getting AI-ready

Roberta Fusaro: Patrick, how are companies thinking about applied AI, one of our other trends in the report?

Patrick Simon: We’re seeing questions come up and solutions evolve across the entire value chain of an organization. There are now solutions being put in place, starting with procurement and selecting the right procurement provider, all the way to simulating innovation and having AI make suggestions on what innovation to actually take to market and analyzing sales data and creating a different connection with the customer.

So business itself is transforming, and you need to get the organization AI-ready. There are different aspects to this. One, again, is around talent. You need to make sure you have talent in your organization that can help translate AI innovations into conclusions that matter to your business.

The second thing really is a structural and process point of view that utilizes AI.

Just imagine for a second that you could deploy ChatGPT to a lot of the basic organizational questions every organization is dealing with, such as who is working on what, who is talking to whom on topic X, and who’s owning decision Y. AI could help create organizational clarity.

Or imagine you deploy it to improve the effectiveness of meetings. Right now, we see that over 60 percent of managers spend time in meetings that they don’t find useful. Just imagine if you could get an automated, very-high-quality summary from each of these meetings. You could save a lot of time. Questions around organizational efficiency and effectiveness are key. And then last, it is still unclear what processes and tasks will be replaced by AI versus which tasks will be enhanced.

So having this culture of experimentation really matters. It’s these three aspects that we see companies that are ahead of the curve do well. They’re not afraid, but they’re also not jumping to conclusions. They’re taking a careful look and balancing the risks and the rewards of AI.

True hybrid is the only path forward

Roberta Fusaro: One key trend that I think a lot of leaders are dealing with right now is the balance of in-person and remote work in the workplace. Patrick, what does having a true hybrid setup mean for organizations that want to attract and retain talent?

Patrick Simon: By true hybrid, we mean combining the benefits of in-person, on-site work with remote work.

We see that about 80 percent of people who have had exposure to remote work before don’t want to give that up anymore. They’re looking for a hybrid model with a mix of on-site and remote work models. Obviously, we should not forget there is a good chunk of the employment force that needs to be on site—all the folks in in-person service and in production and so on. But for those who have an option of remote, it’s a significant attractor to talent.

In order to get that right, typically, you need good infrastructure. You need to have systems in place that actually allow people to seamlessly work on site and off site. Second, you need to be able to switch from measuring work inputs—or presence on site, often measured by hours of work—to measuring impact and outputs. Which, by the way, forces a really good conversation because you’re ultimately asking together, with the employee, “What is the output of the work that we want to see?”

And then lastly, it does require openness by the C-suite. We do see there’s a lot of skepticism. A lot of CEOs are calling their workforce back on site 100 percent. We recommend going with a true hybrid model just because there is a whole generation that now has been educated and truly appreciates hybrid work models.

Roberta Fusaro: Dana, anything to add there?

Dana Maor: I agree, Patrick. And the one thing that I would add is that when you think of hybrid as a CEO, you need to place just as much thought into what it is that you do when you are in person, on site, and what is it that makes it worthwhile for colleagues to come and be together on site.

Roberta Fusaro: Patrick, is there an example of a company that’s starting to get this right around hybrid work?

Patrick Simon: Yes, absolutely. There’s a beacon we feature in the report, GitLab, which is one of the biggest development security operations platforms in the world. They’re actually fully remote. They do get together for cultural events and team building. But other than that, their work is remote. And it has really changed the talent equation for them because they’re looking in every part of the world for talent.

They have a system, culture, interfaces, and processes that allow them to integrate that talent into their ecosystem. It’s an extreme example because it’s 100 percent remote. But again, the idea of culture enforced by leaders’ infrastructure really matters. They’re doing really well with this model.

Next best steps

Roberta Fusaro: Dana, if you were trying to address any one of these organizational shifts that we’ve discussed on their own, it would be a complex undertaking in its own right.

Thinking about all ten together seems to amount to a supreme challenge. How can leaders take The State of Organizations 2023 report and decide what they can do tomorrow to start to calibrate the ambition, capture new growth opportunities, and thrive in this unsettled world?

Dana Maor: It’s probably a four-part, integrated approach. First and foremost, we like to talk about designing your organization to the value that you’re aspiring to achieve. You should look at the organization and understand, as a CEO, as a business leader, where the value is trapped in your organization and what elements would allow you to unleash this value.

When you understand that, it could guide you through cultivating talent. “Where are the capability gaps? What is the kind of talent that I need to recruit? What is the kind of talent that I need to grow?”

There is no question that you need to invest in leadership. Because, as we’ve said, it is the leaders across the organizations who are our multiplier effect—who give us the energy and power through those very demanding times. Being thoughtful about the middle, and the front line.

And last, I would say any journey that you embark on, particularly now that change is a feature and not a bug, is change behavior at scale. What is it that you need to do to put together a change plan that allows you to sustainably travel this journey?

So I would say, in synthesis, four things: set the direction and calibrate the ambition, cultivate talent, invest in leadership, and think about change leadership at scale.

Roberta Fusaro: Dana, Patrick, thank you so much for taking the time today.

Dana Maor: My pleasure. Thank you, Roberta.

Patrick Simon: Thank you for having us.

Lucia Rahilly: Next up, McKinsey senior partner Katy George was rewarded for her honesty—from our My Rookie Moment series.

Katy George: I was the project manager on a yearlong effort to redesign the way our client’s supply chain worked. The toughest part of the problem turned out not to be what the technical solution, new analytics, or new process was but rather how the organization was going to work. We left that to the end.

We said, “We’ll first design the functionality that’s required. Then we’ll talk about organization.” We actually debated as a team, and we couldn’t really agree on the right way to proceed in terms of what our recommendations would be on the organizational model.

In fact, one of the partners met with the CEO and came back from that meeting all excited that they’d aligned on something they thought would work. Well, I was the one closest to the problem, and I was the one who’d actually spent a full year working every single day with the people who’d have to execute this new model.

When I heard about what they discussed, I realized that there were several fatal flaws. I was really nervous about telling my partner that because he had already aligned this with the CEO, but I did actually muster the courage to explain what I thought the problems were and what I thought a better model would be.

I was really amazed. Not only did he appreciate my input, he actually helped me structure a progress review to give to the CEO and his entire leadership team the next day. He was very clever because we structured all of the issues and the key questions to determine what the right organization design was as part of the presentation so that as the CEO listened to this presentation, he could understand why we were now steering to a different outcome than he had heard from the partner earlier.

Normally, it probably would’ve been a presentation that one of the partners would’ve made. But because it had been my idea, and I was passionate about the new structure, I was the one who gave the presentation and led the discussion. It was really fun. I felt totally in control, though very nervous about presenting to the CEO and his leadership team.

It went really well. They implemented my idea, and I think it is their organizational structure to this very day.

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