LEADERSHIP TEAMS AROUND THE WORLD have been operating in a highly volatile and uncertain environment — first having to cope with the COVID-19 pandemic and then with the ensuing economic slowdown, soaring inflation and geopolitical disruption. In such an unsettled period, it is no surprise that efforts to strengthen short-term resilience have dominated the agenda at many companies.
Less obviously — but no less importantly — business leaders are having to address a range of organizational shifts that have significant implications for organizational structures, processes and people. Depending on how organizations address them, these shifts are both challenging and harbingers of opportunity.
With this in mind, we have launched McKinsey’s “The State of Organizations Report,” an ongoing research initiative that both pinpoints the most important people, procedural and structural shifts that organizations are grappling with and seeks to provide some guidance about how to approach them.
In our inaugural report, we go into depth on 10 of the most important shifts. In this article, we will summarize them. For those interested, the complete report is available online.
SHIFT 1: Increasing Speed While Strengthening Resilience
Business shocks requiring quick responses have become the new norm for organizations. Companies need to focus on being prepared and ready to act at all times — and quickly. Yet our research suggests that while some organizations do emphasize preparation, many focus only on one singular aspect of it (anticipating and then addressing an acute challenge, for instance). They forgo the holistic approach of routinely reviewing and transforming structures, processes and people so that they don’t just bounce out of crises but bounce forward — landing on their feet relatively unscathed and charging ahead with new energy.
Most people understand the importance of organizational resilience: More than 60 per cent of respondents in our survey reported that it will only become more important in the future. Yet many said they don’t feel that they are well prepared for the external shocks that may emerge over the next few years — or the further disruption those shocks might bring.
In our experience, companies with capabilities in both adaptability and resilience are better able than others to absorb shocks and turn them into opportunities for capturing sustainable growth. Leaders and teams in adaptable organizations are better prepared than others to assess the situation at hand, reorient themselves, double down on what is working and walk away from what is not — and do it all quickly. With each bounce forward, they become increasingly resilient. Achieving this requires organizing for speed of response, giving power to your people and developing a culture of continuous learning.
What employees want from their work varies significantly depending
on age group, life stage, work experience and other factors.
SHIFT 2: Balancing In-Person and Remote Work
Before the onset of COVID-19, most organizations expected employees to spend more than 80 per cent of their time in an office. Now only about 10 per cent do, while the remaining 90 per cent have embraced a range of hybrid work models that allow employees to work virtually from off-site locations (including home) for some or much of the time. Employees generally like this development: More than four of five who have worked in a hybrid model over the past two years want to retain it, largely because of the flexibility and balance it affords them.
Only 14 per cent of respondents to our survey believe that remote work will become less common in the future; more than half believe it will become even more common. Leaders, managers and employees are still grappling with the effects of this broad behavioural upheaval.
To succeed, each organization must determine how best to combine remote and in-person work in ways that suit the specific needs of its workforce. This is the world of ‘true hybrid.’ True-hybrid organizations create policies, workflows and documentation that help employees understand which activities are best done in person and whether those activities are best carried out in real time or asynchronously (that is, with all team members being online when it is most convenient for them rather than simultaneously.)
True-hybrid organizations also consistently address the shortcomings that occur with conducting activities in the less optimal format. By looking beyond the static definition of hybrid work models and remaining open to the entire universe of options for how, when and where employees work, true-hybrid organizations can distinguish themselves as destination workplaces.
SHIFT 3: Making Way for Applied AI
The application of AI for building better organizations holds promise, particularly when companies manage AI with practical, ethical and risk-related concerns in mind. Our research shows a strong impact of AI on efficiency. Companies that have seen the biggest bottom-line returns from applied AI — those that attribute at least 20 per cent of EBIT to their use of AI — are more likely to have set themselves up for success by aligning AI and business strategies.
AI can amplify talent, helping leaders improve the speed and efficiency of everything from candidate hiring to making their resource deployment more effective, increasing the personalization of capability development and improving employee experience and engagement. In line with that, our research shows that organizations with strong use of people analytics see an 80 per cent increase in recruiting efficiency, a 25 per cent rise in business productivity and a 50 per cent decrease in attrition rates.
Applied AI — machine learning, in particular — can help organizations perform with speed and precision, thereby improving resilience. With it, individual and team decision-making can be pushed to the edges of the organization, removing obstacles to action and enabling faster responses to market needs while accounting for factors such as human bias. All tolled, this translates into quantifiable impact.
SHIFT 4: Embracing New Rules of Attraction,
Retention and Attrition Is there anybody out there? It’s a question senior leaders around the world are asking as they try to fill open positions while keeping existing employees on board and engaged. In the wake of the pandemic and the accompanying ‘Great Attrition,’ human capital is scarcer than it’s ever been.
McKinsey research conducted between 2021 and 2022 revealed something shocking: 33 per cent of employees across nine countries in Europe, 40 per cent of employees in the U.S., 45 per cent of employees in the Middle East and 60 per cent of employees in India were planning to leave their jobs. But we found that most surveyed employers in those countries erroneously believed that less than 20 per cent of their workforce was planning to leave. And relatively few employers have acknowledged or found ways to re-engage ‘quiet quitters’ — the spectrum of employees who are doing less than they had done previously, ranging from those who fulfill their defined job descriptions but don’t do anything more to those actively destroying value by doing nothing.
Many employees are redrawing the boundaries between their work and personal lives. Some have left jobs to take on very different roles while others are leaving the workforce entirely. We found that what employees want from work — for instance, flexible hours, opportunities to advance, tasks that have purpose and meaning and adequate compensation — varies significantly, depending on age group, life stage, work experience and other factors. In this changed environment, the question for senior leaders to ask is, ‘What do we need to do differently to attract and retain top talent?’
SHIFT 5: Closing the Capability Chasm
With the growing deployment of new technologies in the workplace, from automation to AI, the skills that are needed to drive growth and value over the next decade are changing, and companies everywhere are looking to fill capability gaps. In our experience, companies across sectors often announce technological or digital elements in their strategies without having the right capabilities already in place. To plug those gaps and achieve a competitive advantage, they need to build institutional capabilities.
Put simply, institutional capabilities are the key elements that make up a company’s superpower — that is, an integrated set of people, processes and technology that creates value by enabling an organization to do something consistently better than its competitors do. Institutional capabilities stem from a company’s strategy and need to involve work that is integral to the company and its industry.
When well executed, such capabilities become a lasting edge, leading to consistent outperformance and growth over time. But organizations today find themselves lagging behind in their core activities, often as a result of insufficient resources or consistent commitment to institutional capability building. Filling these gaps is a big agenda, but one that is increasingly significant. In our survey, 90 per cent of respondents asked about capability building deemed it to be something that their organizations need to act on ‘now’ or ‘soon’; while only five per cent felt that their capabilities were already set.
40 per cent of respondants cited a lack of digital analytics capabilities and
26 per cent cited a lack of capability in generating customer insights.
SHIFT 6: Walking the Talent Tightrope
Business leaders have long had to walk a talent tightrope — carefully balancing budgets while retaining their key people. That walk is more complicated than ever in a tight labour market affected by industry churn and post-pandemic corrections. As organizations look to protect the business in the near term at the same time as setting it up for success in the long term, one important focus is on ways to match top talent to the highestvalue roles.
This idea isn’t new, but it is timely when the value contribution of certain roles is increasingly shifting to tech specialists. In our survey, 40 per cent of respondants cited a lack of digital analytics capabilities, 32 per cent cited lacking software development capabilities and 26 per cent cited lacking capabilities in generating customer insights.
Mastering the talent tightrope pays off: Our research shows that companies that reallocate high performers to the most critical roles on a quarterly basis are 2.2 times more likely to outperform direct competitors than are those that revisit roles less frequently. These high performers can influence the overall productivity of projects and business units, which, in turn, affects financial outcomes. Yet many organizations are uncertain about exactly which roles are the most critical, where the high performers are in their organizations and how to bring these two sides of the equation together.
Indeed, 46 per cent of survey respondents asked about the roles that are most critical to creating value in their organizations said they had ‘no,’ ‘little’ or only ‘some’ clarity on the topic. Aggravating the matter is that about 20 per cent of the critical roles that organizations need either don’t exist yet or have greatly evolved in scope. And even when organizations do put people in the right roles, 40 per cent of those employees will require skill development or other interventions to be successful.
SHIFT 7: Leadership That is Self-aware and Inspiring
Leaders may be tempted to stick with the approaches that have worked for them in the past — regardless of whether they are still fit for those purposes — rather than rethinking the way they lead. But the costs of remaining in the ‘familiar zone’ can be high. Those who do so run the risk of alienating key stakeholders who now expect organizations to be accountable for both profit and sustainability objectives, as well as employees who may feel demotivated, overwhelmed or otherwise unable to bring their best self to the workplace.
The essential task for leaders comes in three layers: They need to be able to lead themselves; they need to be able to lead a team; and they need to exhibit the skills and mindsets required to lead at scale, coordinating and inspiring networks of teams and ensuring that their organization functions as a cohesive whole. That’s a big ask of any single human. For every leader, it requires building a keen awareness both of themselves and of the operating environment around them.
SHIFT 8: Making Meaningful Progress on Diversity, Equity and Inclusion (DEI)
Over the past several years, more and more organizations have prioritized DEI, including it in their product, process and investment decisions as well as how they hire, retain and develop talent. And despite recent economic challenges and resource constraints, most remain committed to these efforts. Almost half of survey respondents told us their organizations have focused on strengthening their leadership DEI efforts and holding leaders accountable for delivering on DEI goals. Forty-three per cent said their organizations have focused on creating more transparency in promotions and pay processes and 43 per cent said their organizations have taken measures to tackle bias and discrimination in the workplace.
In many cases, however, these initiatives are not translating into meaningful progress. Our results reveal a gap between what organizations say they want to do with DEI and what they are actually doing. While there has been some progress on diversity initiatives, equity and inclusion efforts continue to lag behind. Even relatively diverse companies face significant challenges in creating inclusive and equitable work environments. More than 20 per cent of respondents could not confirm that there is a sense of community and inclusion in their organizations.
SHIFT 9: Investing in a Portfolio of Mental Health Interventions
In the McKinsey Health Institute’s Global Survey on Mental Health and Well-being, almost 60 per cent of respondents said they had experienced at least one mental-health challenge at some point in their lives — a figure consistent with other research. This trend holds true regardless of country, industry, age group, role or gender. The message is clear: Most employees are directly or indirectly affected by mental-health-related challenges, so they cannot be treated in isolation from the workforce. Four of five HR leaders report that mental health and wellbeing are now top priorities for their organizations. And despite concerns by some about a potential rise in ‘well-being washing,’ estimates show that nine of 10 organizations are offering some form of structured wellness programs to employees, incorporating benefits such as yoga classes, mindfulness and time management workshops, paid subscriptions to meditation apps, and extra days off work for mental healthcare. Despite these efforts, many workers continue to feel overwhelmed. Our research and experience in the field suggest that this may be because their organizations — with the best of intentions — have focused on launching interventions that remediate symptoms of mental distress rather than on addressing the root causes of poor mental health and well-being. Since this problem is system-wide, we encourage employers to invest in systemic interventions that are developed and managed with the same rigour and strategic thinking applied to other corporate initiatives.
Four of five HR leaders report that mental health and well-being are now top priorities for their organizations.
SHIFT 10: Efficiency Reloaded
The mismatch between existing operating models and market realities is more visible than ever. With profitability levels often being challenged over the past three years, the room for tolerance and the margin for error have become slimmer. Companies are therefore refocusing their attention on efficiency measures. More than one-third of leaders who participated in our survey listed efficiency as one of their top three priorities for the coming years.
Much work lies ahead. In many cases, more than half of all direct reports to a CEO don’t have profit-and-loss responsibility, and there can be as many as 12 layers between the CEO and the front line. Many organizations have become bloated, with endless meetings and incessant e-mails among the unnecessary interactions. Getting efficiency right is about fixing the foundations of how work gets done while taking a leap ahead by placing decision rights in employees’ hands.
The Path Forward
Any one of the shifts we have highlighted is a complex undertaking in its own right. All 10 together amount to a supreme challenge for leaders and their teams, especially in our uncertain times. Following are four steps to get started.
- SET THE DIRECTION AND CALIBRATE THE AMBITION. The critical first step is to develop a clear perspective on exactly what changes are required for your organization to compete more effectively. This calibration will set the course for what follows. As part of this process, CEOs must identify the value that may be trapped in their organizations because of certain elements of the operating model. Functional groups that isolate themselves from others, computing systems that are incompatible, overly complicated procurement and other administrative processes — all of these can prevent organizations from capturing productivity gains and financial outcomes that could create more value.
- CULTIVATE TALENT. Without the right talent, any new organizational model likely won’t work. Long before the pandemic, digitization and globalization were already changing how organizations operated and the skill sets that they needed to compete. As indicated herein, finding, developing and retaining talent now and for the future have become key challenges — but not insurmountable ones.
- INVEST IN LEADERSHIP. If talent is the lifeblood of organizations, leaders are the heartbeat, keeping ideas, people and workstreams moving and enabling breakthrough performance. Leaders are a heterogeneous bunch, working at different levels and affecting different areas of the organization. But their collective influence matters. Our research shows that an organization is 2.4 times more likely to achieve performance targets if it has a focus on developing leaders and that transformations are more than five times more likely to succeed if leaders model desired behavioural changes.
- CHANGE BEHAVIOUR AT SCALE. At-scale change can be difficult to accomplish and even harder to sustain, especially now. Leaders’ messages don’t always break through to employees who may be working outside of an office, thinking differently about the nature of workplace relationships and already feeling overwhelmed by the idea of yet another business transformation. Change becomes more manageable when CEOs adopt a human-focused approach and break it down to its essentials. If organizations need different behaviours, they need to encourage different mindsets — what employees feel, think and value. And to foster these new mindsets, leaders need to change the system — the set of the experiences that influence employee mindsets. To achieve this, they must engage employees’ hearts as well as their hands and heads.
Of the approximately eight billion humans on this planet, about 3.3 billion worked in an organization last year. At a time when the very definition of ‘being at work’ is in a state of flux, these billions of global citizens are being shaped every single day — both directly and indirectly — by what goes on at work. Getting organizations right is thus not just about the success of individual companies and institutions; it’s about the broader wellbeing of society.
Patrick Simon is a Senior Partner in McKinsey & Company’s Berlin office. Dana Maor is a Senior Partner in McKinsey’s Tel Aviv office. Patrick Guggenberger is a Partner in the firm’s Vienna office. Excerpted from “The State of Organizations 2023: 10 Shifts Transforming Organizations,” copyright (c) 2023 McKinsey & Company. Reprinted with permission. Full report is available for download at mck.co/StateOfOrgs.
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