Ten shifts that are transforming organizations— and what to do about them

CEOs together with their 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’s 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 structures, processes, and people. These shifts are both challenging and harbingers of opportunity, depending on how organizations address them.

 

Some shifts, most notably how to strike the right balance between in-person and remote work, took place at the height of the pandemic and have lingered. Others, such as an ongoing mismatch in the labor market and a decline in employees’ mental health,1 have been accelerated by the COVID-19 crisis. Still others, such as effective leadership development and capability building, are perennial organizational issues that have proved more vexing— and more important to get right—in the current environment. All of these shifts have long-term consequences, and all require clearheaded thinking and decisive action that can’t be postponed.

 

Finding the appropriate organizational responses to these changes is far from simple. As part of research into this topic, we conducted a survey of more than 2,500 business leaders around the world. Only half say their organizations are well prepared to anticipate and react to external shocks, and two-thirds see their organizations as overly complex and inefficient.

 

How can leaders and their teams reorient their organizations? Where to look? Where to start? Management philosophies and approaches that succeeded in the past may no longer be fit for purpose in a world in which companies and industries are boundaryless, every organization is digital, hybrid work environments are taking hold, and the employee–employer contract is up for renewal (and potential overhaul).

 

With this in mind, we have launched McKinsey’s The State of Organizations 2023 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 ideas and suggestions about how to approach them.

 

In this inaugural report, we go in depth on ten of the most important shifts. As a part of the exercise, we share inspiring stories and best practices from beacons—organizations that have been able to adapt to recent economic and operational disruptions and forge a new path for the modern organization.

 

We conclude by suggesting an integrated approach to achieving organizational change at scale. It comprises developing a clear perspective about the extent of the organizational changes that are truly needed, cultivating talent, investing in leadership, and responding—at scale—to changing circumstances, new challenges, and new opportunities.

 

The potential rewards of a job well done are significant: leaders who can unlock the most value from their organizations today can become the performance champions of tomorrow. Conversely, those that fail to improve their organizations may fall behind peers who have succeeded in doing so, putting in jeopardy their competitive position and growth prospects. McKinsey research has shown a direct link between an organization’s health and its financial performance.

 

In any discussion of organizations, it’s important to recognize their fundamental importance to our lives. Of the approximately 8.0 billion humans on this planet, about 3.3 billion of them worked in organizations in 2022.4 They are being shaped, both directly and indirectly, every day by what goes on at work—at a time when the very definition of “being at work” is in a state of flux. Getting organizations right is thus not just about individual companies and institutions; it’s about the broader well-being of society.

 

 

The ten most significant shifts facing organizations today

 

1. Increasing speed, strengthening resilience Volatility is a feature, not a bug, in today’s organizations, yet half the respondents in the State of Organizations Survey say their organization is unprepared to react to future shocks. Those able to bounce forward—and quickly—out of serial crises may gain significant advantages over others. To be able to do so requires organizing for speed of response, giving power to your people, and developing a culture of continuous learning In the 2020–21 economic recovery, resilient companies generated TSR 50% higher than their less resilient peers’
2. ‘True hybrid’: The new balance of in-person and remote work Since the pandemic, about 90 percent of organizations have embraced a range of hybrid work models that allow employees to work remotely from off-site locations (including home) for some or much of the time. What’s important is that organizations provide structure and support around the activities best done in person or remotely. By remaining open to the entire universe of options for how, when, and where employees work, including with a reset of performance expectations, “true hybrid” organizations can distinguish themselves as destination workplaces. >4 of 5 employees who have worked in
hybrid models over the past 2 years want to retain them
3. Making way for applied AI AI doesn’t just have the potential to supercharge a company’s operations; it can also be used to build better organizations. Companies are already using AI to create sustainable, long-term talent pipelines; drastically improve ways of working; and make faster, data- driven structural changes to their organizations. As organizations embrace the opportunities offered by AI, they need to focus on embedding its use in corporate culture, hiring and developing AI-savvy leaders, and being thoughtful about AI-related risks and ethical concerns. Organizations used an average of 3.8 AI
capabilities (eg, natural- language generation, computer vision) in 2022, double the 1.9 used in 2018
4. New rules of attraction, retention, and attrition eople are revising their attitudes both toward work and at work. Employees who quit (or who are “quiet quitting”) say it isn’t just money, work–life balance, professional development, or purpose that will bring them back to work in 2023: it’s a combination of all those things. In Europe, for example, 35 percent of people leaving jobs cite unsustainable performance expectations. Organizations can respond by tailoring employee value propositions to individualized preferences in ways that can help close the gap between what today’s workers want and what companies need. 39% of respondents in a recent survey conducted in 7 countries say they are planning to leave their jobs in the next 3–6 months
5. Closing the capability chasm Companies across sectors often announce technological or digital elements in their strategies without necessarily having the right capabilities in place to integrate them. To achieve a competitive advantage, organizations need to build institutional capabilities—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. That means plugging gaps in their core activities, which are often the result of insufficient resources or inconsistent commitment. Only 5% of respondents say their organizations already have the capa- bilities that they need
6. Walking the talent tightrope Business leaders have long walked a talent tightrope—carefully balancing budgets while retaining key people. In today’s uncertain economic climate, organizations need to focus more on finding ways to match top talent to the highest-value roles. The idea isn’t new, but it’s the right one in this era of hybrid work models, increased employee mobility, and skill shortages. McKinsey research shows that, in many organizations, between 20 and 30 percent of critical roles aren’t filled by the most appropriate people. The highest performers in a role are 800% more productive than average performers in the same role
7. Leadership that is self-aware and inspiring Leaders these days are necessarily focused on short-term responses to crises, but they also need to think longer term and cultivate fit-for-purpose behaviors. They need to be able to lead themselves, they need to be able to lead a team of peers in the C-suite, and they need to have the leadership skills and mindset required to lead at scale, coordinating and inspiring networks of teams. That requires leaders to build a keen awareness both of themselves and of the operating environment around them. Only 25% of respondents say their organizations’ leaders are engaged, are passionate, and inspire employees to the best-possible extent
8. Making meaningful progress on diversity, equity, and inclusion Many organizations are focusing on diversity, equity, and inclusion (DEI), but in many cases, the initiatives aren’t translating into meaningful progress. What’s often missing is a clear link between DEI strategy and the business strategy. One path forward is for leaders to be more systematic early on, considering the objectives and desired level of impact from their programs. To realize DEI aspirations, leaders will need to identify opportunities for making progress within their organizations, as well as for improving their external communities and society. >70% of respondents say their organizations express transformative DEI aspirations; only 47% say they have the infrastructure to realize their DEI aspirations
9. Mental health: Investing in a portfolio of interventions Nine of ten organizations around the world offer some form of well-being program. But global health and well-being scores remain poor, despite well-intended interventions. Research highlights the link between reports of poor mental health and well-being and organizational issues, including attrition, absenteeism, lower engagement, and decreased productivity. In 2023, organizations need to refocus their efforts on addressing the root causes of mental-health and well-being challenges in a systematic way; one-off and incremental fixes won’t be enough. Employees facing mental-health and well-being challenges are 4× more likely than others to want to leave their organizations
10. Efficiency reloaded In today’s uncertain business climate, companies are refocusing attention on efficiency measures—more than one-third of respondents in our survey list efficiency as a top three organizational priority. Boosting efficiency is about more than managing immediate crises or getting the same work done with fewer resources. Deploying resources more effectively to where they matter the most promises substantial benefits, including improved organizational health, higher shareholder returns, and better and faster decisions. Being efficient often means placing more trust in your organization and empowering employees. ~40% of respondents point to complex organizational structure as a cause of inefficiency, and a similar proportion cites unclear roles and responsibilities

 

 

Source: Mckinsey & Company

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