Decision Rights Guardrails to Empower Teams and Drive Company Performance

Most business leaders are now accustomed to the continuous need for organizational change. They are on a transformation journey to make their companies future ready—an ambidextrous state in which companies use digital capabilities to simultaneously delight customers through rapid innovation and reduce costs through greater operational efficiency. In 2018, MIT CISR identified four types of disruptive change (which we characterize as “explosions”) that companies must confront.[foot]P. Weill, N. van der Meulen, and S. L. Woerner, “Becoming Future Ready Requires Organizational Explosions,” MIT Sloan CISR Research Briefing, Vol. XVIII, No. 8, August 2018, https://cisr.mit.edu/publication/2018_0801_PathwaysExplosions_WeillVanderMeulenWoerner.[/foot]

The most challenging change to realize involves a company’s decision rights, which determine who has the authority and accountability for key decisions in the organization. In a recent MIT CISR survey, respondents rated nearly two-thirds of the 986 companies they represented as “not effective at all” to only “moderately effective” at changing decision rights.[foot]MIT CISR 2019 Top Management Teams and Transformation Survey (N=1311). The decision rights effectiveness measure is calculated as the mean of six items that cover decision rights changes for creating new customer offerings, improving the customer experience, defining the business model(s) of the enterprise, digital design and technology, operational excellence, and partnering across the ecosystem.[/foot] Such companies primarily rely on the CEO and the top management team to drive transformation results, with the rest of the company tied up in silos and hierarchical structures. Managers must make decisions such as what customer offerings to discontinue and launch, when to change processes, and how to improve the customer experience, despite being the furthest removed from the sources of data that inform these decisions: the customers, vendors, partners, regulators, and other parties that comprise the company’s ecosystem of stakeholders. This makes managers a decision-making liability— stifling efficiency and agility.

Future-ready companies, in contrast, make better and faster decisions by relinquishing their top-down (“command and control”) approach to decision making. These companies empower cross-functional teams. Managers don’t just hold teams accountable; they give them the authority to decide for themselves WHAT they will accomplish and HOW to get things done.[foot]We found that authority for setting the team mission and objectives (i.e., what to accomplish) typically falls to those who fulfill the role of strategist or business/product/solution/capability owner on the team, while authority for delivery and for operational rhythm (i.e., how to get things done) is the domain of technologists, delivery owners, and/or team leads. [/foot] With a deliberate commitment to empowerment, these companies can fully leverage employees’ unique skills and proximity to stakeholders. Teams can rapidly explore new (digital) opportunities. Compared to companies that fail to change their decision rights, are stuck in a “command and control” mindset, and don’t rely on employees to drive digital transformation results, we found that the empowered companies achieved[foot]For this analysis, we compared companies that were rated as “very effective” or “extremely effective” —which we classified as “empowered”—to those that were rated “not effective at all,” “slightly effective,” or “moderately effective” —which we classified as “not empowered”—on all of the following measures: changing decision rights, moving from a “command-and-control” to a “coach-and-communicate” approach, and having employees drive digital transformation results. Nearly 17 percent of the companies in our survey classified as “empowered.” Reported performance results are based on self-reported performance data (N=820), which we found to be moderately correlated with actuals based on most recently available Compustat data, as per Q3 2019 (r(232)≈.34, p<.01). [/foot]:

• 25.6 percentage points higher industry-adjusted net profit margins
• 10.4 percentage points higher industry-adjusted revenue growth rates
• 24 percentage points higher revenues from products and services introduced in the past three years

Empowerment Beyond Digital

Transferring decision-making authority to teams can be a daunting prospect for managers. While many managers recognize that greater empowerment could make their companies more agile and innovative, they also fear it may introduce additional risk, or that efficiency and organizational alignment will suffer. It’s no wonder empowered cross-functional teams are most often found in separate (legal) entities or digital innovation hubs, where they can safely break old rules and design new customer-centric offerings. Meanwhile, the rest of the company is expected to support new digital endeavors with a relentless focus on reliability, stability, and discipline (i.e., operational efficiency).[foot]The discrepancy between these rule sets is outlined in J. W. Ross, C. M. Beath, and M. Mocker, “Digital Success Requires Breaking Old Rules,” MIT Sloan CISR Research Briefing, Vol. XIX, No. 10, October 2019, https://cisr.mit.edu/publication/2019_1001_BreakingRules_RossBeathMocker.[/foot]

But becoming future ready requires a company to become digital through and through, with all teams working in both agile and efficient ways. To make this happen, the future-ready companies we studied employed four specific guardrails that focus a company’s purpose, data, policies, and approach to resource allocation in order to simultaneously empower and align teams with company-wide interests.[foot]This briefing reflects findings from both the MIT CISR 2019 Top Management Teams and Transformation Survey (N=1311) and interviews with 41 executives at 22 companies conducted in 2019 and 2020. Peter Weill and Stephanie Woerner helped to create the guardrails framework and collect and interpret the quantitative results. Jeanne Ross and Cynthia Beath helped to collect and interpret the qualitative results.[/foot] Like their counterparts on the road, such guardrails enable teams to make decisions faster, while also constraining decision options to reduce risk and keep the teams headed in the right direction.

1. Purpose in Action

A company’s purpose defines its reason to exist and forms a primary driving force for decision-making throughout the company. While empowered teams are authorized to define and pursue their own missions and goals (i.e., the WHAT), they should also have a unifying purpose (i.e., the WHY) to guide them as they figure out how to collectively achieve the company’s vision:

A great purpose inspires teams and provides meaning, but also constrains team efforts by focusing on a common goal. If the purpose is too generic—e.g., “achieving exceptional shareholder returns”—it won’t inspire. Too broad—e.g., “meet the needs of a changing marketplace”—and it won’t focus the company. The purpose of health technology company Philips, for example, is “to make the world healthier and more sustainable through innovation.” To make such a purpose actionable, management has to translate its intent into an overarching strategy that is directive enough for teams to act on and explore further, while also providing a basis for the creation of new teams. In Philips’ case, teams are asked to focus on the company’s “quadruple aim” to enhance the patient experience, improve health outcomes, lower the cost of care, and improve the work life of care providers. By focusing teams on these outcomes, Philips expects to improve the lives of three billion people per year by 2030.[foot]See additional details in “Our Strategic Focus,” Philips website, https://www.philips.com/a-w/about/company/our-strategy/our-strategic-focus.html.[/foot]

Frequent communication between teams and management helps to socialize and align the strategy throughout the company. As teams execute on their missions, they rapidly gain unique insights into the viability of solutions and stakeholder needs. Successful teams we studied were comfortable redefining their missions as needed, expecting the changes to be reflected in adjustments to the overall corporate strategy. The purpose of a company does not stand still; it is a purpose in action.

2. Democracy of Data

Companies that have democratized their data can provide empowered teams with access to—and an understanding of—all the data they need to make evidence-based decisions. Difficulty in predicting which teams will need access to which data, however, means that companies must move from a restricted (i.e., siloed and curated) data approach toward one that provides regulated access to more and better data in a timely manner. Doing so is both enabling and constraining; it helps teams to devise and test relevant solutions more quickly, while simultaneously keeping teams from jeopardizing data integrity, endangering company compliance with legal and governmental regulations, and working on similar problems in isolation.

Technological solutions, such as data virtualization, data federation, and self-service business intelligence, enable data democratization by helping teams deal with complex and huge volumes of data. We found that future-ready companies offer these solutions through enterprise-level data offices (as opposed to siloed IT unit ownership) and/or include them in enterprise data platforms:

Yet even the most powerful and easy-to-use data solutions are not enough to ensure that teams will extract value from data. Quality decision making also requires that the master data is accurate and of high quality, and that team members have (or have access to) the skills to properly analyze the data. Enterprise data offices therefore also have to support team decision making through metadata management, data quality management, norms of acceptable data use, data science training, and the provisioning of data scientists.[foot]For a detailed description of five key enterprise data capabilities that companies should develop, read B. H. Wixom and L. Owens, “Digital Data Monetization Capabilities,” MIT Sloan CISR Research Briefing, Vol. XIX, No. 4, April 2019, https://cisr.mit.edu/publication/2019_0401_DataMonetizationCapabilities_WixomOwens.[/foot]

3. Minimum Viable Policy

If empowered teams are to make most of their own decisions, then companies should reasonably aim to minimize their policies (i.e., the number of decisions that they have already made for teams). The minimum viable policy guardrail aims to safeguard business continuity with the least amount of policy required.

Figuring out which policies, procedures, and standards to put in place at the enterprise level, which to suggest for potential adoption because they appear to be best practices, and which to remove safely can be a complex exercise—particularly for technology decisions. A “comply or explain” approach recognizes that there are no universal solutions to prescribe. Instead, firms provide strong recommendations, or surface existing solutions (e.g., through enterprise repositories like GitHub), for teams to follow and adopt. If teams choose not to comply, they should be ready to explain why not to a dedicated committee:

Provided that companies can detect deviations from their recommended norm, a comply or explain approach can help to embed policies and standards into teams’ daily operations. It requires teams to consider their interdependence, and factor in options for reuse rather than pursuing the quickest (or their preferred) solution.

4. Resources to Run

A major constraining factor in a team’s decision-making process involves physical, human, and financial resources. Teams without the required resources are not empowered; they are abandoned. Traditional resource allocation processes fail in an empowered context because of their inefficiency and inability to accommodate rapid changes. As these processes are project based and fixed for a specific duration (typically a year), it becomes very difficult to change team missions halfway through without causing a cascade of adjustments for other teams. The result is unwanted tensions and increased competition for resources between teams. One way to avoid this cascade is to use venture capital-type funding approaches, or to provide explicit mechanisms for teams to unlock contingent budgets:

Such funding approaches will fail, however, if the approval or unlocking process is too lengthy (i.e., introducing many start-stop moments) and/or conducted by committees that are far removed from customers and other key stakeholders. That is why these approaches are increasingly combined with more empowered resource allocation processes in which management funds groups of teams that focus on the same customers, solutions, or capabilities (for instance, defined by lines of business, tribes, or value streams). Representatives from within each group then periodically decide how to (re)allocate their joint funding—drawing on functional communities (i.e., chapters) or on capability groups on a pay-per-use basis to fully resource their teams—informed by each team’s potential to create value.

Stop the Balancing Act

Continuously delighting customers through rapid innovation while simultaneously improving operational efficiency doesn’t have to be a precarious balancing act. Ultimately, siloed management of these goals only serves to limit company performance. Instead, we found that true ambidexterity requires a focus on decision rights, guided by four reinforcing guardrails. Implementing these guardrails will simultaneously empower and align cross-functional teams with company-wide interests.