Architecting the resilient enterprise, Part I

My last series of articles (Part I, Part II) demonstrated how difficult it is for CEOs, and even more so for boards, to know everything that happens in the trenches and to forestall negative surprises. The only repeatable way to counter the fog inherent in the management of complex enterprises is to bake in the agility to avoid many of the worst surprises and the resilience to recover from the unavoidable.  In this series I will explore how to build this agility and foster resilience.

With apologies to Gautama, the road to enterprise resilience lies in the noble five-fold path: the right leadership, the right incentives, the right architecture, the right culture, and the right management approach.

Right leadership

There is a Russian proverb that says, roughly "A spoiling fish starts rotting at the head." It is not that a great CEO will always ensure ultimate success, but a rotten CEO will oftentimes bring on disaster. As it happens, however, rotten CEOs are rarely replaced in time. Public company boards are notorious for too often backing management regardless of performance, and even many private owners are all too often reluctant to take this step until the business is in extremis.

While this is good news for incumbent CEOs, it is not necessarily so positive for shareholders, customers or employees. One reason that boards are so reliant on CEOs in place is that they have poor visibility into the enterprise, as I have discussed in a previous article. Yet understand they must, if they are to fulfill their duty of providing governance and oversight. For starters, they should trust top management say-so less and seek to understand what they are not being told, whether deliberately or because of CEOs' blinders. Directors would do well to spend time with middle managers, to mingle with employees, to look beyond slides and presentation numbers, to set measurable objectives and hold management to them.

In the occasion that a CEO is in fact replaced, boards would do well to select wisely and set up the new exec team for success from the beginning. In briefing their search agents, they would do well to mark that flashy stars are rarely top performers, that if a CEO looks too good to be true then she probably is, and that great CEOs don't necessarily come from the same space as the company's own sandbox.

What I said about boards and top managers applies as well to CEOs and their cabinets. A rotten head of marketing or engineering may well doom an otherwise well-managed company, while great ones often pull out some impressive rabbits when the circumstances warrant.

Right incentives

Once right management has been achieved, it is time to pay attention to the incentives it receives. There is a great deal of literature that objects to the use of incentives to maximize performance, and much of it is in fact on point; however, I will posit, if controversially, that all work is performed mainly because of the incentives - even if the incentive is the ability to feed one's family, to make a difference or to satisfy ambition. I will argue that while poorly designed incentives can do much harm, the right incentives are crucial to achieving positive results.

Boards in particular often struggle in designing the right incentive structures for their CEOs because of their limited visibility into the company's inner workings. If their and the management's incentives are not aligned then the CEO will have every reason to obfuscate emerging problems for as long as possible, in hopes that they will in time go away or become irrelevant. Only when the management feels like they are on the same side of the table as the board will they treat the board as their strategic resource and seek to work together to air and resolve emerging problems.

It is a truism in economics that the outcome one incentivizes is one received, and indeed incentives demonstrably matter at all levels in organizations. As important is it is to set the right ones, achieving this nirvana is by no means a simple matter. People are remarkably adept at finding unexpected ways to achieve metrics being measured, no matter legal or ethical considerations, often enough causing in the end considerable harm. CEOs would be well-served to give a great deal of thought to unintended consequences of their incentive plans, to adjust plans regularly, and to keep a sharp lookout for sharp practices - superior performers should be scrutinized closely even as they are being held up for emulation. This scrutiny need not come from the place of overt mistrust - after all, if they are to be emulated then their methods demand thorough understanding.

Just as important is setting the types of incentives that have the power to motivate the target employee population. For an extreme example, incentivizing salespeople purely with recognition and engineers solely with cash can both be counterproductive. Most companies use annual reviews and base pay adjustments as cornerstones of their incentive structures for middle managers and the rank and file, even though their effectiveness in producing desired results is as dismal as the effort to produce reviews often enough brings real work to stand-still. My recommendation for CEOs is to separate pay from incentives and to think of incentives in terms other than necessarily financial. I will explore this concept in greater depth in the a future article.

Finally, it is important to tie incentives to metrics that are in the power of the employees to directly influence. There is nothing so demoralizing as knowing that you will miss your bonus because you have had no opportunity to impact the metric that was incentivized. This is not to say that profit-sharing schemes are to be discouraged, to the contrary, they can be a valuable took to build cultural cohesion - but they should not be confused nor conflated with incentives.

In the next article series we will address the art of leadership in creating the right culture and enterprise architecture. 

Cross-posted to LinkedIn Pulse