In this time of rapid disruption for US healthcare, senior payor executives agree on the critical importance of a cogent strategy. Our research confirms this belief: across industries, we have found that about 50 percent of the performance differential among companies results from differing strategic postures. The other 50 percent depends on what we call organizational health: how well a company aligns its people, executes its strategy with excellence, and renews itself over time to sustain its desired financial and operational results. Good organizational health reflects the company’s culture, behaviors, and management practices, all of which must be supported by the right organizational design (e.g., its governance, decision making, and structure).
Given industry headwinds, many payor executives are considering organizational redesigns to better align their businesses with their new strategic imperatives. While restructuring may indeed be necessary for many payors, our advice is: “proceed with caution.” On its own, restructuring achieves all of its objectives less than 10 percent of the time.
In some cases, results are suboptimal because the new design is inherently flawed; in other cases, implementation is poor. In both cases, a common underlying problem is that the redesign focuses on the lines and boxes in an org chart and largely ignores, or merely pays lip service to, organizational health. However, we have found that when a rigorous organizational redesign is linked with efforts to improve organizational health, companies become more nimble and innovative, dramatically increase their ability to execute strategies successfully, and create significantly more value over time.
This article describes how organizational redesign and organizational health efforts can be intertwined. First, we focus on how a company can redesign its organization while embedding organizational health as a core component. We then describe how the company can select the set of management practices that will foster the culture and behaviors needed to strengthen organizational health and allow the new design to work effectively. The result should be a company that is optimally fit for delivering against its strategy. Our approach and insights are based on deep research McKinsey has conducted, including its Organizational Health Index (OHI) survey, which currently contains more than one million responses from managers at more than 1,000 organizations around the world.
What organizational health can achieve
Results from the OHI survey demonstrate the strong correlation between organizational health and a broad range of performance measures. For example, companies in the top quartile of health are 2.2 times more likely than unhealthy companies to earn an above-industry average EBITDA margin. They also achieve a three times greater total return to shareholders (Exhibit 1 in attached PDF).
The correlation is present in all industries and sectors—the healthier the company, the higher and more sustained its financial and operational performance.
Differences in organizational health affect performance not only between companies but also within different divisions of the same company. We have conducted controlled experiments in which we actively infused organizational health elements into performance improvement efforts at some but not all divisions of a single company. The performance and health initiatives delivered almost twice the impact that the performance only initiatives achieved.
Building a nimble organization
Given the current industry environment, it is not surprising that many payors are considering significant restructuring in the belief that their organizational designs are out of date. Most payors know, for example, that they must increase their focus on the individual business unit and strengthen collaboration across key functions (network, IT, sales, etc.) to ensure that they can match their support strategy to evolving business needs. Their current organizational designs make it difficult for them to make the necessary changes. For example, their structures, processes, and incentives are impeding their ability to become more nimble, cost efficient, and consumer-focused.
If you are concerned that your organizational design is out of date, ask yourself whether any of the symptoms listed in Exhibit 2 (in attached PDF) are present in your company. If the answer is yes, your company probably lacks the agility needed to respond optimally to industry disruption.
If you do decide that a restructuring is necessary, perhaps the first decision you should consider is whether the new organizational design should be based on geography, segment, or product/service line rather than on function. In many companies with functional, matrixed organizational designs, P&L authority is not entirely clear or is sufficiently dispersed so that only the CEO has full authority. Consequently, cross-cutting decisions must float all the way to the top unless there is full consensus at lower levels. The result is often very conservative decision making. In a slow-moving market, this approach is manageable and perhaps even beneficial. But in an industry with complex and fast-moving market dynamics—a good description of US health care today—it can impair performance.
In rapidly shifting industries, companies usually benefit from having organizational units with clear profit-and-loss accountability and from giving decision-making authority to lower levels. However, there is no single answer as to whether the organizational units should be based on geography, segment, or product/service line rather than function. The choice depends on your strategic priorities. Similarly, decisions about which new organizational design elements to add must be based on your strategic im peratives. For example, if your company is making an affordability play, you may need to centralize more functions and established more shared services groups as a way to reduce costs. The following six guiding principles can help you ensure that a restructuring supports your strategic imperatives and strengthens your organization’s health:
Don’t focus only on the org chart. Focus as well on what decisions need to be made and how those decisions will get made, as well as on what managers will be accountable for and how things will work in the new organization. Think carefully about your strategic imperatives, which are likely to be significantly different from your prereform imperatives. The new organizational design should be laser-focused on enabling your company to deliver against those imperatives.
Rigorously develop and assess multiple options so that you can identify the optimal organizational design model. Many companies fixate narrowly on current pain points (the frustrating elements in the existing organization design that slow things down), and so they develop a new design that solves those issues but inadvertently creates new pain points. It is far wiser to focus first on the new organization’s future strategic requirements—exactly what it will need to do and deliver. You can use this information as the “true-north” compass for optimizing the new design.
Drive both top-down and bottom-up design. If you ask a few executives to “master plan” the new organizational design, they will almost certainly get some of the details wrong. Furthermore, the people who have to implement the design will lack understanding and ownership of it, which dramatically increases the risk of implementation failure. However, a purely bottom-up approach leads to inconsistency, redundancy, and often higher costs. The trick is to find the right balance by using a combined top-down and bottom-up approach.
Manage the change. Restructuring can be a major “unfreezing” event for a company. Executed wisely, it is an ideal time to simultaneously and substantially improve organizational health. The new design should therefore alter how people work, where they spend their time, how decisions get made, and how performance is delivered. Merely shifting lines and boxes will have no real impact unless you can also shift people’s behaviors and underlying mindsets, and that generally requires that you help them build capabilities and offer them incentives that reinforce the desired changes. During the restructuring, make sure you communicate—frequently and consistently—using a clear, compelling narrative or “change story” to help align and excite people at all levels of the organization. In addition, be sure to position both formal leaders and informal change agents at every level to turbocharge the effort.
Define metrics to assess short- and long-term performance and health. Make sure that the company overall, each organizational unit within it, and all key managers at every level have a clear set of objectives. Then, define the performance and health metrics that will assess results achieved. Use those metrics to ensure alignment and accountability. Intervene quickly and make appropriate course corrections if any unit (or any person) is not delivering.
Move fast. Even the best change efforts can unsettle people, and nothing is gained by stretching the process out. Best-practice tools and techniques are available that can accelerate the collaborative design process, transition planning, and implementation. (For a closer look at one such tool, see the sidebar below.)
By following these principles, a company can ensure that its organizational design is a good fit for its strategic imperatives. For example, many of today’s most successful global consumer products companies are structured so that their marketing resources are decentralized (which enables their marketing talent to stay close to consumers), but they also have centralized “centers of excellence” in areas where economies of scale and skill are important. This structure enables the companies to develop and market a portfolio of solid, innovative brands that keep them ahead of the competition.
Building a healthy organization
Perhaps the hardest part of a redesign is making sure that the new structure fosters— rather than impedes—organizational health. The challenge arises, in part, because few executives know how to measure or manage their company’s health.
To help them do so, McKinsey developed the OHI. This tool assesses 37 management practices in nine core areas (Exhibit 3). In our experience, no company is able to excel at all 37 practices—attempting to do so results in mediocrity across the board. Instead, high-performing companies focus on a handful of critical practices that work together as a winning “recipe” to create a coherent, effective management system that fully supports the organizations’ strategic imperatives. They aim to be “good enough” at all 37 practices but to excel at just that handful (often, only about 10).
We have found that the winning recipes fall into four distinct archetypes, each of which reflects different core beliefs about value creation and organizational success (Exhibit 4). In our experience, companies that align closely with any of these four archetypes are five times more likely to be healthy and to deliver sustained strong performance than other companies are.
Understanding the archetypes
Leadership-driven organizations focus on motivating, developing, and empowering great leaders. They emphasize practices that attract and inspire up-and-coming talent, while also providing a range of “learn-by-doing” career opportunities. These companies pair high levels of empowerment with equally strong accountability.
For payors, this approach often translates to having largely autonomous business units or regions with independent P&L accountability. Strong leadership is prioritized at both the regional and corporate levels. Senior executives spend up to half their time guiding, motivating, mentoring, and deploying top leadership talent.
Market-focus organizations concentrate on developing a distinctive mix of products and services, as well as strong brand recognition and customer loyalty. To do this, they develop deep insights into their customers and competitors, and leave themselves open to new product ideas (including those from external sources). These companies excel at marketing, distribution, and pricing.
For payors, this approach requires the ability to segment customers and understand the needs and wants of each segment (even when customers cannot fully articulate them). Payors would also have to have an accurate appraisal of how competitive offerings stack up, a willingness to develop innovative product offerings, and excellence in pricing (based on the ability to link granular financial management with deep knowledge of both state and federal pricing guidelines and what customers are willing to pay).
Execution-edge organizations have a clear, well-honed product and market strategy, and they excel at delivering against it. These companies concentrate on quality, efficiency, and productivity. They harness the full potential of their workers, especially those at the frontline closest to value delivery, to make regular, incremental improvements in what they do and how they do it.
For payors, this approach often translates to a focus on efficiency achieved through strong claims processing and IT capabilities. To ensure continuous improvement, the payors review performance metrics at every management meeting, create formal structures to raise ideas from lower levels of the organization, and ensure a culture of achievement and healthy internal competitiveness.
Knowledge-core organizations have the talent and knowledge necessary to deliver distinctive expertise and advice (often, on specific projects). These companies succeed by acquiring the best talent; they then use rewards and recognition to motivate people and assign each person to the roles and projects they are uniquely suited for.
Few payors are likely to follow this approach at the enterprise level, but some payor functions could adopt a knowledge-core subculture. This approach could, for example, help actuarial functions better manage risk and achieve pricing excellence. A knowledge- core approach would also be appropriate for the physician groups acquired by payors pursuing vertical integration. (For more information about what is required to use two archetypes within the same company, see the sidebar on p. 132.)
Selecting a recipe for success
In all industries, companies can succeed using any of these archetypes. Our experience shows, however, that often some archetypes are more common in a particular industry than others. For example, most payors have, historically, striven to achieve distinctiveness through either an execution-edge or leadership- driven approach. Execution-edge payors have sought competitive differentiation through service quality and efficiency (e.g., low administrative expenses, proficient claims processes, swift call-resolution times). At leadership-driven payors, relatively autonomous business units have been expected to deliver against independent objectives.
We believe that as the healthcare landscape evolves, many payors may benefit from adopting a market-focus approach. The ongoing shift from a B2B to a B2C market, and the increasing diversification of the customer base, is requiring payors to have a deeper understanding of customer needs across segments, as well as a strong grasp of external trends and government regulations. To meet the needs of their most critical customer segments, payors will have to use consumer insights to develop innovative products and services, design provider networks, and refine their communication techniques. At the same time, they will have to understand, and be able to counteract, their competitors’ rapidly evolving strategies. Many of these skills and processes may be new for payors. Others may currently exist in pockets of the organization but will soon be needed at scale. Making the shift from an execution-edge or leadership-driven archetype to a market-focused archetype is not easy but can be done if a company identifies the management practices it most needs to change. (For more information about how this type of shift can be undertaken, see the sidebar on p. 134.)
Of course, not all payors may want to make the change to a market-focus archetype. To select your preferred archetype, we recommend that you consider three criteria:
Alignment with future competitive strategy. Understand how the archetype you are contemplating will support your business objectives and competitive strategy going forward (e.g., exchange focus, distinctive care-management capabilities).
Leadership preferences and capabilities. Reflect on the different experiences, strengths, and biases held by the members of your senior team. They should all play a role in the choice of archetype.
Current strengths. If your company currently has strong organizational practices, it may be easier to build on them rather than target new practices when establishing an archetype. Do not assume, however, that you have an accurate understanding of your company’s strengths. In our experience, a senior team’s assessment of their organization’s health often differs significantly from what is happening on the frontlines (the senior teams tend to be more optimistic). To gain a more realistic understanding of your company’s strengths and improvement opportunities, use an objective tool such as the OHI.
When properly intertwined, efforts to improve organizational design and organizational health can leave a company better able to respond rapidly to an evolving environment. Its organizational units will be able to work together more closely and collaborate more effectively, and its senior executives will have the appropriate balance of focus and bandwidth to build and execute new strategies. Although organizational design and organizational health efforts are not easy to implement well, they are critical for payors that want to deliver against the strategic imperatives and execution challenges that the rapidly changing US healthcare marketplace demands.
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