The principle of Occam’s Razor states that the simplest explanation to a problem is probably the correct one. Essentially, the human brain has a bias toward seeking out the simplest answer to problems. This concept also applies whenever difficulties arise in organizational innovation or transformation processes. Top managers point to middle managers, middle managers point to employees, and employees point back up the chain of command. All assert that “It’s the others who don’t want change.”
But innovation processes are complex. You don’t succeed by making only one simple alteration or adjustment. And, you must mobilize many people at once. So if the strategy calls for transformation, and you as a leader call for innovation, you need to ensure that the organization can handle the job and avoid the Occam’s Razor pitfalls of oversimplifying the issues.
Yes, human resistance to change is real, partly due to individual differences in risk aversion, psychological biases and capability deficits. But, far more important than human resistance to change is the design of the organizational system that’s creating barriers for people to increase their innovation power. As a leader, you can actually promote the conduct required on behalf of the organization, but only if the system is adapted to the reality you want to create. The Key Performance Indicators (KPIs) and reward systems that your organization uses play a tremendous role in this, but far too often they’re not aligned with corporate strategy.
KPIs are a mess
In a recent survey, more than 3000 leaders from around the world were asked about their KPI strategies. Results showed that there seems to be no best practice when it comes to KPIs and that KPIs rarely guide the organization. Only 26 percent agreed that their functional KPIs were consistent to a great degree with the organization’s strategic goals.
This is, of course, paradoxical, as the entire purpose of KPIs is to be a management tool. In other words: KPIs are a mess and there’s much room for improvement. What the study also indicated, however, were differences in the return on KPI efforts for organizations that used KPIs alone to monitor employee performance and for organizations that used KPIs to help employees strengthen their performance and increase motivation.
Playing the transformative long game
Simply using KPIs to monitor performance, such as an employee’s past sales numbers, and reward them based off these results, in many ways is a deceptive shortcut toward long-term results. It’s easy to measure, but is it also supporting the employee in improving performance? Many studies show that’s probably not the case as it 1) monitors the past, and 2) people in many of today’s jobs are primarily encouraged through intrinsic motivators like meaning, learning and development, over extrinsic motivators like money, bonuses and prestige. Our KPIs should mirror this. We’re beginning to see forward-thinking companies adapt these principles.
The big Danish water pump manufacturer, Grundfos, has established a new so-called digital factory that develops digital solutions across the organization. It has developed KPIs for the factory’s specially selected employees on how willing they are to help others and on the extent to which they’re motivated to participate in the company’s new digitization journey. The purpose is to ensure that all employees in the new unit, which plays a decisive role in bringing the whole organization forward, become aware of and work in the best way to make the right products and build the right culture in the organization.
Microsoft, known to be an extremely competitive sales-focused organization, has done something similar. Since CEO Satya Nadella took the reins in 2015, the organization has been engaged in a transformation process to make the culture less competitive and more focused on long-term customer value and collaboration. Although employees are still assessed on revenue, they’re now also assessed on their ability to create solutions with customers, as well as whether they share and build on the knowledge of others.
Alphabet’s (Google’s parent company) experimental Laboratory X even offers rewards for teams that kill ideas and shut down projects that present unsolvable problems during experiments. It may sound strange to reward people for not carrying out projects, but the method in the madness references what psychologists call the sunk cost fallacy — or, in other words, the point at which you’ve invested so much time, money or emotion in a project, you can no longer make yourself stop. This not only saves employees and organizations time, but it reduces development costs and increases motivation, thereby supporting the long-term strategy over shorter-term results.
The system will always win
People don’t control the organizational systems; the systems control people. While societal systems can change due to pressure from the population, change for companies is different. We just don’t see revolutions orchestrated by employees. Yes, there may be protests, which we’ve begun seeing for moral reasons, but companies aren’t democracies, and employees only have limited power.
As a leader, you need to be very aware of the system’s power over the organization’s results. Just because employees aren’t challenging the system doesn’t mean that it’s running as it should. Employees are more likely to resign themselves to the limitations of the system, even though they don’t feel they’re appropriate, or they’ll look for a position elsewhere. To put it simply: When you put individuals up against the system, the system will always win.
Adapting your KPIs and rewards systems to play the transformative long game is likely your biggest innovation problem, yet it’s crucial for turning your organization into an innovation champion for the future.
Kris Oestergaard is a sought after speaker, facilitator, researcher and expert on innovation in legacy organizations, corporate cultures and exponential organizations. He is co-founder and Chief Learning and Innovation Officer at SingularityU Nordic, a collaborative venture with Singularity University in Silicon Valley. His new book is Transforming Legacy Organizations: Turn Your Established Business into an Innovation Champion to Win the Future (Wiley, June 10, 2019). Learn more at sunordic.org.