By all accounts at the time, Robert Nardelli was an excellent choice for CEO of The Home Depot (THD) in 2000. The Board felt that the company had outgrown the entrepreneurial spirit and “Agent Orange” culture that made them so successful early on. Most business analysts and journalists clearly believed the kind of formal discipline and process rigor Nardelli had mastered at General Electric was just what THD needed to deal with its growing size and scope.
Unfortunately, the informal elements of Agent Orange were not on the same side. Several informal leaders throughout the organization felt overlooked or ignored; many left and others simply resisted. Within six short years, a new CEO from within was at the helm, and Nardelli had moved on to Chrysler. In the six years prior to Nardelli’s tenure at THD (when the informal was thriving), the company’s sales grew at a compounded annual rate of roughly 24 percent; during his six year tenure (when the informal was neglected) the annual growth rate was cut in half. Some may argue that this change in growth had more to do with the market maturing; however, THD’s largest competitor, Lowe’s, managed to grow at a rate that was 33% higher during this same period.
Contrast that story with the remarkable Aetna turnaround between 2001 and 2006. The company went from losing $1 million per day to earning over $5 million - and is still regarded by many as perhaps the most successful turnaround in North America in the last 10 years. However, a look at the Aetna history reveals that three different CEOs over the previous 10 year period had attempted similar transitional change efforts without much success. These efforts were textbook formal “programmatic change management”. The basic difference this time was in the way that CEO Jack Rowe and COO Ron Williams used the informal and emotional elements of the organization to support, energize and complement the formal, programmatic efforts.
For example, one of the first things Rowe did was to cultivate an informal network of about 100 leaders from various levels and parts of the organization. He interacted with them regularly in various ways, encouraged their frank observations, and built feelings of ownership for his “New Aetna” strategic intent. He and Williams also convened dozens of multi-level “safe space” discussions about Aetna’s traditional values and how to bring them back to life. These discussions not only shaped the values in more realistic ways, but extended them to energize leadership behavior changes needed at all levels. These efforts were largely fueled by informal interactions, but those interactions were guided by a few formal mechanisms as well (such as leadership templates, performance evaluations and revised training and development programs).
In contrast to The Home Depot, where the change efforts suffered because the informal was not fully on board with Nardelli’s changes, the Aetna effort was accelerated because the informal and the formal were “jumping together.”
Illustrations of the importance of formal and informal balance are found in many of the recent situations. At Washington Mutual, for example, the leadership attention to their formal values was well-known, if not legendary. New acquisitions were always impressed with the heavy emphasis placed on learning and living the WaMu values. Unfortunately, as one of their newer senior hires observed, the formal attention given to their control processes was much less than he had expected - and eventually proved inadequate to identify the behavioral slippages that eventually led to their bankruptcy. This is not to suggest that giving priority formal and informal attention to “living the values” is inappropriate; only that it can seldom replace formal attention to valid control processes.
How Does the Informal Differ?
The essential differences between the formal and the informal dimensions of an organization are not always well understood. Simply put the formal is more rational, analytic, and programmatic. It consists of elements that are easily identified and explained in official documents (i.e., strategy, structure, process, program and metrics). It works top-down through the hierarchy. The informal is more emotional, intuitive and interactive. It consists of elements that are not easily identified or explained in official documents (e.g.relationships, ad hoc forums, personal networks, working norms, and communities of common interest). It works across the organization through peers and key influencers. While most of us recognize these two basic dimensions of organizational behavior, few of us have mastered the art of getting them to complement one another. However, most “peak performing organizations” are masters of both.
Characteristics of the Formal and the Informal
The “How” versus the “What”
What peak performers do is clear: they mobilize different elements of their informal organization to complement and accelerate the formal. They have learned (often, the hard way) that “one without the other” seldom works for long. How they do it varies.
At Aetna, Rowe and Williams capitalized on two informal elements: (1) networks of well-respected people from different parts of the organization and (2) open forum and non-hierarchical “safe-space” discussions on how to instill value-driven behaviors. Both of these elements built emotional commitment and support across the enterprise. However, it is important to note that they also matched those informal initiatives, with rigorous process redesign, efficient structures and planning discipline. As a result they were able to integrate emotional and rational commitment to change critical behaviors at multiple levels in key populations. Thus front-line behavior change was augmented by mid-level and top-level behavior change.
To illustrate further here are two major change efforts at two very different global companies. The first is Bell Canada where the CEO mobilized a group of nearly 2,000 front-line leaders to generate customer-centric behavior change across over 30,000 front-line employees in less than 18 months. They developed a “community of practice” among front-line supervisors that combined the power of highly credible peer-to-peer stories with proven results from rigorous pilot tests (e.g. significant increases in customer satisfaction, revenue per service representative, and employee satisfaction).
The second illustration is from the refinery operations of one of the largest and most successful global energy companies. In this case they utilized a combination of front-line leaders at their refineries who were well known for their motivational capabilities (we call them “Pride-Builders”) to identify the key behaviors required to improve results on core safety and performance metrics. Ad hoc advisory councils were subsequently formed around these pride-builders. These councils included other front-line and mid-level leaders, thereby creating informal mechanisms for the pride-builder wisdom to spread across the entire refinery. This effort was managed through a series of pilot tests that yielded incredible results: e.g., safety performance was increased by close to 20 percent, unexpected downtime was decreased by almost 30 percent and operating margins at the pilot facilities rose dramatically. These pilots were designed to be scalable and customizable allowing the approach to spread across the company’s global sites. All of this was accomplished on the heels of a rigorous cost-reduction effort, and the financial gains were in addition to the cost reduction results.
Role Models and the Informal
It is important to note that in each of these examples, a key element was the active involvement of role-model managers near the front line to inform and supplement top-down efforts.
Jim Kouzes and Barry Posner write in their soon to be released book “The Truth about Leadership: The No-fads, Heart-of-the-Matter Facts You Need to Know” that the leaders nearest to you are likely to be your most important role models. Their research shows that all people (no matter of age) tend to select family members as their closest role models. However, of those over the age of 30, the second most likely role model (23 percent) is a business leader. When Kouzes and Posner dug deeper they found the “business leader” did not mean the Chairman, the CEO or an SVP. Instead, business leader referred to one’s immediate supervisor.
The drill instructors (DI) in the U.S. Marine Corps are among the better examples of this kind of leader. Initially feared and obeyed by recruits, DIs soon morph into powerful role models. Recruits “graduate” from Parris Island at the end of a 54 hour ordeal called The Crucible. At the start of each stage of that final exercise, a small plaque commemorates Medal of Honor winners in similar battle conditions. Virtually everyone at the graduation ceremony - recruits, families and DI’s - is in tears reflecting the emotional commitment involved. Recruits remember their DI’s for years thereafter, and try to emulate their courage, caring and commitment. (Marine Corps values). But the DI’s “secret sauce” is not in the formal leadership role they occupy in boot camp. Rather it is in the informal attention they give to each individual recruit to make them “feel good” about the boot camp trials they face each day. This informal attention differs depending on what each person’s needs are at any particular time. DIs stay up late at night, preparing for each day’s exercises, and arise well before reveille each morning. They also change uniforms several times a day. In every way - formal and informal - they look and model the emotional commitment that recruits are expected to emulate.
Leaders and leadership flows all the way through organizations. Thus, tapping into the expertise of top performing front-line leaders can help spread behavior changes throughout an organization. Using the “role model” connection that these leaders are likely to have is a critical tool of the informal. Formal mechanisms alone seldom access this type of influential power.
“Jon Katzenbach and Zia Khan are the authors of the new book Leading Outside the Lines: How to Mobilize the (in)Formal Organization, Energize Your Team, and Get Better Results (Jossey-Bass 2010). www.leadingoutsidethelines.com“
Jon Katzenbach is a senior partner at Booz & Company and leads The Katzenbach Center, where promising new approaches in leadership, culture and organization performance are developed for client application. His books include Wisdom of Teams, Peak Performance and Why Pride Matters More Than Money. He received his MBA from Harvard, where he was a Baker Scholar. Jon is a founding partner of Katzenbach Partners.
Zia Khan is vice president for strategy and evaluation at the Rockefeller Foundation, which supports innovations that help people share globalization’s benefits more equitably and strengthens their resilience to social, economic, health and environmental challenges. Zia also advises leaders on the integration of strategy and organization as a senior fellow of the Katzenbach Center, which he co-founded with Jon Katzenbach, and as an individual consultant. Zia hold a B.S. from Cornell University and an M.S. and Ph.D. from Stanford University.