An excerpt from the first chapter, "Decisions and Results."
Trevor Gregory was frustrated. A senior executive of ABB UK, the British division of the big Zurich-based power technology and automation company, Gregory was racing to put together several critical bids for clients, including the Channel Islands electricity grid, London Underground, and National Grid. The opportunities played to all of ABB’s strengths as a global engineering colossus—they required technologies, project delivery, and services from several parts of the company. Few competitors could match these soup-to-nuts offerings. The contracts would mean hundreds of millions of dollars in revenues for ABB over many years.
But instead of cruising through, Gregory was bumping up against one organizational obstacle after another. The company seemed to reinvent the process for submitting major bids every time a bid came up, even though multimillion-dollar proposals like these were regular events. Worse, each of ABB’s units had its own profit targets and set its own transfer prices, including a margin acceptable to that unit. By the time a bid got through the chain of ABB units, the end price was often too high to be competitive. Gregory and other managers then faced an exasperating choice. They could go in high and lose the business. They could walk away without bidding. Or they could invest blood, sweat, and tears in trying to pull the bid together, piece by laborious piece.
These opportunities are really important, Gregory thought to himself. We’ve got to make them happen. But he dreaded the arduous internal negotiations required to assemble the bids. Why on earth, he wondered, didn’t his company work better? Why wasn’t it set up to make good decisions on a routine basis for the benefit of the whole business?
This book is about how to fix decision failures like the ones that plagued ABB. It’s about how to create an organization that hums—one that can make and execute good decisions, faster than the competition, and without too much (or too little) time and trouble.
ABB’s situation was particularly severe, as we’ll see in a moment: its decision failures led it to the brink of bankruptcy. But most failures are chronic rather than acute, and they show up in many companies, not just those that are courting insolvency. The signs are familiar. Decisions take longer than they should. They are made by the wrong people or in the wrong part of the organization or with the wrong information, and so turn out badly. They aren’t made well, because no one is sure who’s responsible for making them, or because the organization has created structures or incentives that virtually guarantee a poor outcome. Sometimes, of course, decisions are made, maybe even in a timely fashion. But then they are badly executed. Or else the debate starts all over again and they are never executed at all.
No company can live up to its full potential unless it can decide and deliver. Good companies can’t become great. Troubled companies can’t escape mediocrity. And it isn’t just financial results that suffer. Organizations that can’t decide and deliver are dispiriting to their employees. From the C-suite to the front line, people feel as if they’re stuck in molasses or trapped inside a Dilbert comic strip. Aggravations and absurdities abound. The European division of an American automaker, for example, repeatedly lagged behind competitors in bringing out new features on its cars. The reason? Marketing thought it was in charge of deciding on new features. Product development thought it was in charge. The two functions had different incentives—marketing’s were primarily on sales, product development’s on costs—and so could never agree. Every proposal had to be thrashed out in long, contentious meetings. It isn’t hard to imagine how the people in these functions—indeed, pretty much everybody in the organization—felt about coming to work in the morning.
But things don’t have to be that way.
For more than twenty-five years, the three of us have consulted to organizations of all sorts. Our clients have included large multinational corporations, entrepreneurial ventures, research universities, and nonprofit institutions, and we have worked with leaders at every level. Despite their differences, we noticed, all these organizations share one consistent trait: when they focus explicitly on decisions, the organizations learn how to improve their performance. As their decision making and execution get better, so do their results. They can pull themselves out of the kind of downward spiral that ABB was caught in. They can create great working environments, which in turn attract the kind of people who get things done. They build the organizational capabilities to decide and deliver time and time again, in every part of the business. That, we saw, is the key to sustainable performance.
Over time, we worked with enough organizations that we began to see how to systematize this approach to decisions and performance, how to map it out and capture it in a sequence of steps. We conducted a series of research studies to validate and extend these insights. We published many of the ideas in Harvard Business Review and elsewhere and then refined them in light of feedback we received from executives. (See, for example, “Who Has the D? How Clear Decision Roles Enhance Organizational Performance” and “Stop Making Plans, Start Making Decisions,” both in the Review’s January 2006 issue.) Eventually we began to discuss writing a book about it, so that not only our clients but also other organizations could kick-start the process—so that they could understand what’s involved and see how others have done it.
The volume you’re holding is the result. It’s for every leader—no matter his or her level in the organization, no matter the size of the group he or she runs—who wants to improve how people make and execute decisions and thereby improve results. We’ll show you how to assess your decision difficulties and then how to attack them. We’ll outline the steps required to build an organization that can truly decide and deliver, and we’ll suggest some tools that will help you along the way. We’ll tell stories of companies that have dramatically improved their decision making and execution, and we’ll talk about others that are well along on the journey.
Let’s begin by examining what really went on at ABB, and how the company pulled itself back from the edge.
ABB’s road to success
For much of the 1990s, ABB looked like the very model of a modern corporation. Its CEO, Percy Barnevik, was hailed as a visionary. Barnevik, said management writer Tom Peters, had created “the most novel industrial-firm structure since Alfred Sloan built ‘modern’ GM in the 1920s.” ABB had some five thousand profit centers, each with its own leadership team. An intricate matrix-management system linked the profit centers to one of sixty-five business areas and to country organizations around the globe.
ABB’s economic performance at first seemed to justify the accolades. Beginning in 1997, however, the company began a long downhill slide. Over the next five years, its profitability plunged, its debt skyrocketed, and the value of its shares collapsed. By late 2002, the company was literally forty minutes away from filing for bankruptcy. People throughout ABB were stunned. What on earth had happened to the company that was supposed to be the shining star of the new global economy?
In truth, ABB had a litany of problems. In 1990, it had acquired Combustion Engineering, an American company that turned out to have large potential liabilities from asbestos litigation. Later in the decade, ABB’s leaders were caught up in the dot-com craze; they began channeling investment away from the company’s core and into speculative ventures. ABB even became embroiled in a bitter public controversy over the pension packages of a former chairman and CEO.
Like other global companies, ABB might soon have wrestled these issues to the ground. But there was another and ultimately more devastating challenge lurking below the organizational surface. As Trevor Gregory knew, the company simply wasn’t set up to make good decisions on a routine basis. It couldn’t act quickly. It couldn’t execute well. If you had peered deeply into its inner workings at the time, you would have seen a kind of systemic decision failure, with roadblocks and potholes dotting the organizational pathways. People were snared in traps that they couldn’t escape.
The lack of good information on pricing and margins, for instance, made it impossible for managers even to know which potential contracts would offer an attractive return for ABB, let alone put together a bid. How could they possibly make good decisions about which opportunities to pursue? Overall, the company was structured into a complex labyrinth, with thousands of units operating on their own. Many of these local entities controlled factories and thus did all they could to sell the products those factories made, even if that meant discouraging customers from patronizing other ABB units. Some country managers pursued acquisitions that helped their own businesses but didn’t help ABB as a whole. The thousands of profit centers at ABB may have enhanced people’s feelings of ownership and accountability for individual units’ performance. But the coordination and motivation required to optimize the company’s overall performance was missing.
These decision failures grew more severe over time. The company made more and more acquisitions, often failing to integrate them into its matrix system. Some managers began to gripe that they had three, four, even five bosses and had to get approval for major decisions from each one. With so many decisions requiring intensive negotiations, internal politics grew bitter. No one seemed able to turn things around.
And then, at last, things began to change.
In September 2002, Jürgen Dormann took over the leadership of ABB. A former CEO of Hoechst and chairman of Aventis, he moved quickly. He sold noncore assets to raise cash. He negotiated a new credit facility. He created a trust fund to settle the asbestos claims.
Most important, he began to rebuild ABB’s organization so that it could again make and execute good, speedy business decisions.
Dormann and his team restructured the company, consolidating its remaining businesses into two divisions and just twenty-eight business areas, down from sixty-five. They centralized profit-and-loss accountability. They eliminated an entire management layer, streamlining decision processes. They simplified transfer pricing and required full margin transparency. Under Dormann, ABB’s market and country organizations began to operate according to what the company called demand profitability: they would henceforth focus not on what they could sell from their factories, but on what they could sell to customers in their areas, regardless of where in ABB the product might be made. Thanks to all these measures, managers could make decisions that benefited ABB as a whole, rather than just one part of it.
But Dormann knew that those changes by themselves wouldn’t be enough. ABB also needed a strong, focused organization that helped and encouraged people to make good decisions and execute them well. It needed an environment that liberated managers and employees from the silos they had worked in, that freed them to make decisions benefiting the company as a whole. Everywhere in the organization, ABB would need individuals who were able and willing to make those decisions.
So right from the beginning, Dormann built a tight, cohesive leadership team aligned around a set of clear, well-understood goals. He pushed the organization to adopt three simple values—responsibility, respect, and determination—and sponsored discussions of what those values meant in practice. His team spelled out which decisions would be made by headquarters (relatively few) and which by the divisions and business units; executives then promoted people who were committed to the new approach and who could actually make the necessary decisions. HR director Gary Steel led an initiative for a new, frugal culture, ultimately saving the company about $1.2 billion as people began factoring cost considerations into more of their decisions. Steel also revamped ABB’s incentive system, putting most managers on a bonus scheme tied to a group scorecard. That, too, prompted decisions aligned with the company’s interests.
By 2007, ABB was fully back on track. It was profitable. It had cash in the bank. Its share price and market value had grown more than fivefold in the previous four years. It was hit by the economic downturn, of course, but by late 2009 was climbing back. Not surprisingly, leaders who lived through the turnaround tell the story from different angles. Steel emphasizes the culture shift; another executive talks about customer focus and leadership; a third emphasizes restructuring and operational excellence. But the theme that ran through all those changes, the thread that linked them one to another, was that all contributed to eliminating the decision barriers that had hamstrung the company. As the turnaround progressed, ABB developed a new capability—the ability to make and execute the decisions that produce great performance, day in and day out. In short, the ability to decide and deliver.
Gregory, now the U.K. and Ireland CEO for ABB, summed it up for us. “The changes we went through back then gave this business an opportunity to fly,” he says. “And it has flown.”
ABB’s experience illustrates a simple and uncontroversial premise that is the starting point for this book. Decisions matter. They are to an organization what cells are to an organism: the basic building blocks. An organization’s performance relative to its competitors is no more or less than the sum of the decisions it makes and executes. Better, faster decisions and better, faster execution naturally produce better results than do poor, slow, or badly executed decisions.
That’s probably obvious to any executive, and there’s evidence for it all over the business world. Asahi decides to introduce new “dry beer,” while market leader Kirin and other competitors remain focused on traditional products. Asahi gains significant market share and is able to compete for the number-one spot in the Japanese brewing industry. Netflix offers customers the convenience of movies by mail for one flat monthly fee. Blockbuster is slow to respond—and when it later decides to compete head-on with Netflix, Blockbuster has to play catch-up. The U.K. retailers Tesco and Sainsbury, fierce competitors, both decide to launch a line of private-label products in the 1990s. But Sainsbury’s positioning is confusing and its packaging unappealing; Tesco executes better, in these and in many other areas. Tesco pulls ahead, and its shareholders are handsomely rewarded.
The connection between decisions and results is intuitive; it’s also supported by data on decision effectiveness that we gathered from more than 750 companies around the world. We’ll discuss the implications (and limitations) of that data in chapter 2. For now, we note just two points. First, in every industry and country we studied, there is a high correlation between an organization’s decision abilities and its financial results. Good decisions, made and executed quickly and effectively, go along with good performance everywhere. Second, there’s an equally strong correlation between decision effectiveness and employees’ attitudes. We asked people how likely they would be to recommend their company as an employer to a friend or relative, which is one of the best ways to learn how people really feel about their organization. The scores are far higher for companies that are best at making and executing decisions.