Don Sull's blog

Organizational hydraulics translate corporate priorities into coordinated action throughout the organization.  Hydraulics include processes to select overarching priorities, translate them into individual performance objectives and cascade them down the chain of command, monitor progress, and reward performance. When a firm’s hydraulics are broken, top executives must exert heroic effort to get things done, while well-functioning processes allow an organization to execute effectively on priorities, even when these priorities shift in response to changing market conditions.

In recent decades, few markets have been more turbulent than Brazil, and few firms demonstrated greater agility than Garantia Bank and its affiliated companies, including the brewer AmBev, retailer Lojas Americanas, and logistics company America Latina Logistica, and will use these companies to illustrate effective organizational hydraulics.Effective hydraulics start at the top, when the senior executives set the overarching priorities for the following year. Across a wide range of settings, cognitive psychologists find that people can store no more than three to five similar items in their primary memory and remember these flawlessly without prompting, while additional items garble recollection.

Garantia company executives cap the number of corporate priorities a three to five in any year, and communicate them clearly throughout the organization to focus attention, resources, and effort on a handful of “must win” battles. In many companies, in contrast, agility stalls in the boardroom when top executives deluge the organization with multiple, and often conflicting, objectives. Middle managers in a large European engineering company, for example, tallied more than fifty strategic priorities promulgated by headquarters in the preceding two years.

Effective hydraulics translate corporate priorities into individual objectives. In the Garantia companies, subordinates negotiate with their boss to set three to five individual objectives, favoring quantitative targets when possible, and those that could be measured on an ongoing basis. At America Latina Logistica (ALL),  Brazilian logistics company controlled by Garantia, employees at each level met with their boss to agree on targets for the following year that linked to overarching corporate objectives. These objectives were capped at five for any individual in a year. Quantitative targets trumped qualitative, as did objectives that could be tracked on an ongoing basis rather than at year-end.

ALL tracked performance against objectives at the corporate, unit, and individual level, and the company posted the results publicly. Executives worked at standard-sized desks in an open office, and behind each manager’s desk hung a chart that listed their five objectives, color-coded to denote progress. A green dot indicated on track, a yellow dot meant at risk, and a red dot flagged initiatives off track. To flag and reconcile potential conflicts among objectives, the CEO of ALL spent one weekend each year reviewing the individual objectives for the top few hundred executives throughout the company.

Garantia’s employees have strong incentives to achieve their objectives. Top performers earn a bonus equivalent to 150% of their annual salary, while the worst performing employees earned no bonus at all. The brewer AmBev structured compensation to counterbalance the short-term and individual focus their bonus system might create. No one in the company received a bonus unless the company as a whole hit its targets. The brewer also elected approximately two hundred partners, who were required to borrow to buy a large amount of company stock, and use approximately 75% of their future bonuses to service their debt. Individual bonuses focused employees on their own short-term objectives, while ownership balanced their attention to the company’s long-term, collective success.

My next post will discuss the “soft” aspects of operational agility including people and culture.