The 21st Century Organisation

The 21st-century organization

Big corporations must make sweeping organizational changes to get the best from their professionals.

Lowell L. Bryan and Claudia Joyce

2005 Number 3

About half a century ago, Peter Drucker coined the term "knowledge worker" to describe a new class of employee whose basic means of production was no longer capital, land, or labor but, rather, the productive use of knowledge. Today, these knowledge workers, who might better be called professionals, represent a large and growing percentage of the employees of the world's biggest corporations. In industries such as financial services, health care, high tech, pharmaceuticals, and media and entertainment, professionals now account for 25 percent or more of the workforce and, in some cases, undertake most typical key line activities. These talented people are the innovators of new business ideas. They make it possible for companies to deal with today's rapidly changing and uncertain business environment, and they produce and manage the intangible assets that are the primary way companies in a wide array of industries create value.

Productive professionals make big enterprises competitive, yet these employees now increasingly find their work obstructed. Creating and exchanging knowledge and intangibles through interaction with their professional peers is the very heart of what they do. Yet most of them squander endless hours searching for the knowledge they need--even if it resides in their own companies--and coordinating their work with others.

The inefficiency of these professionals has increased along with their prominence. Consider the act of collaboration. Each upsurge in the number of professionals who work in a company leads to an almost exponential--not linear--increase in the number of potential collaborators and unproductive interactions. Many leading companies now employ 10,000 or more professionals, who have some 50 million potential bilateral relationships. The same holds true for knowledge: searching for it means trying to find the person in whose head it resides, because most companies lack working "knowledge markets." One measure of the difficulty of this quest is the volume of global corporate e-mail, up from about 1.8 billion a day in 1998 to more than 17 billion a day in 2004. As finding people and knowledge becomes more difficult, social cohesion and trust among professional colleagues declines, further reducing productivity.

A flawed organizational design

Today's big companies do very little to enhance the productivity of their professionals. In fact, their vertically oriented organizational structures, retrofitted with ad hoc and matrix overlays, nearly always make professional work more complex and inefficient. These vertical structures--relics of the industrial age--are singularly ill suited to the professional work process. Professionals cooperate horizontally with one another throughout a company, yet vertical structures force such men and women to search across poorly connected organizational silos to find knowledge and collaborators and to gain their cooperation once they have been found.

Worse yet, matrix structures, designed to accommodate the "secondary" management axes that cut across vertical silos, frequently burden professionals with two bosses--one responsible for the sales force, say, and another for a product line. Professionals seeking to collaborate thus need to go up the organization before they can go across it. Effective collaboration often takes place only when the would-be collaborators enlist hierarchical line managers to resolve conflicts between competing organizational silos. Much time is lost reconciling divergent agendas and finding common solutions.

Other ad hoc organizational devices, such as internal joint ventures, co-heads of units, and proliferating task forces and study groups, serve only to complicate the organization further and to increase the amount of time required to coordinate work internally. The result is endless meetings, phone calls, and e-mail exchanges as talented professionals--line managers or members of shared utilities--waste valuable time grappling with the complexity of a deeply flawed organizational structure.

A new organizational model

To raise the productivity of professionals, big corporations must change their organizational structures dramatically, retaining the best of the traditional hierarchy while acknowledging the heightened value of the people who hatch ideas, innovate, and collaborate with peers to generate revenues and create value through intangible assets such as brands and networks. Companies can achieve these goals by modifying their vertical structures to let different groups of professionals focus on clearly defined tasks--line managers on earnings, for instance, and off-line teams on longer-term growth initiatives--with clear accountability. Then these companies should create new, overlaid networks and marketplaces that make it easier for professionals to interact collaboratively and to find the knowledge they need.

Companies can not only build this new kind of organization but also reduce the complexity of their interactions and improve the quality of internal collaboration by implementing four interrelated organizational-design principles:

1. Streamlining and simplifying vertical and line-management structures by discarding failed matrix and ad hoc approaches and narrowing the scope of the line manager's role to the creation of current earnings

2. Deploying off-line teams to discover new wealth-creating opportunities while using a dynamic management process to resolve short- and long-term trade-offs

3. Developing knowledge marketplaces, talent marketplaces, and formal networks to stimulate the creation and exchange of intangibles

4. Relying on measurements of performance rather than supervision to get the most from self-directed professionals

The ideas underlying each of these policies may not be entirely new, but we don't know of any company that applies all of them holistically--and this failure limits the ability to perform up to potential. A company that tries to simplify its vertical organizational structure without helping large numbers of self-directed professionals to collaborate more easily might increase its efficiency, for example. But that would be more than offset by a decrease in its effectiveness.

Simplify the line structure

The first design principle is to clarify the reporting relationships, accountability, and