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The Smart Solution

to the Productivity
Paradox
By Elsy Boglioli, Vanessa Lyon, and Yves Morieux

R obert Solow, Nobel laureate in


economics, famously quipped in 1987
that “you can see the computer age
ing power. And while history might suggest
that today’s digital, cloud, and connected
technologies will have little effect on pro-
everywhere but in the productivity statis- ductivity, we believe their benefits could
tics.” Other than a brief bump between be substantial. Compared with the industri-
1995 and 2000, the growth in productivity al systems of the past (massive HR, ERP,
in advanced economies has not kept pace and CRM databases), today’s technology is
with the growth in IT spending. more flexible, forgiving, and conducive to
collaboration and data analytics. For exam-
Technology was supposed to free people ple, agile software development, which is
for more productive uses of their time. But based on iteration and continual improve-
so far it has not worked out that way. Com- ment, allows developers to write code that
panies invested heavily in technology but conforms to how people actually do their
not in true integration. They integrated the jobs.
tools with one another but not with the
way people work. As a result, they often If companies successfully marry these new
made matters worse. The technology that digital approaches with what we call
was meant to liberate employees has insid- “smart simplicity,” they can unleash the la-
iously trapped them. It is no wonder that, tent power of their technology and their
in 2014 in the US, 51% of employees re- people. Smart simplicity is built on the
ported being disengaged, while 18% said premise that companies are most produc-
they were “actively disengaged,” a recipe tive when they harness the intelligence of
for subtle forms of corporate sabotage. their employees. (See “Smart Rules: Six
Ways to Get People to Solve Problems
Now we are at the dawn of a new technolo- Without You,” BCG article, October 2011.)
gy age, characterized by the explosive Many of today’s most successful digital na-
growth of data, connectivity, and process- tives, such as Netflix and Spotify, deploy as-

For more on this topic, go to bcgperspectives.com


pects of smart simplicity in order to run ag- Together, digital technologies and smart
ile and productive businesses. simplicity can help solve the productivity
paradox.

Fixing Taylor’s Legacy


The structure of the modern corporation The Digital Solution
owes a debt to Frederick Taylor, a US If Taylor is responsible for the structure of
mechanical engineer who applied the prin- modern corporations, economist Ronald
ciples of his profession to factories. Taylor’s Coase illuminated their economic ratio-
approach assumed that workers had little nale. As he explained in his 1937 article,
ability to think for themselves and work “The Nature of the Firm,” entrepreneurs
unsupervised. Today, 100 years after Taylor can choose to contract for goods and ser-
laid out his system of scientific manage- vices in the market. But by forming corpo-
ment, the introduction of technology into rations, they avoid the transaction costs—
organizations built on his principles tends the effort spent in research, negotiation,
to constrain rather than expand employ- coordination, and enforcement—associated
ees’ ability to exercise their creativity. with such market exchanges.

Smart simplicity seeks to unlock productiv- As organizations grow, however, they create
ity by creating an environment in which their own internal transaction costs—what
employees are able to both exercise their we call “complicatedness.” Complicated-
autonomy and work together. Autonomy ness refers to the structures, procedures,
harnesses people’s flexibility and agility, processes, and other well-meaning mecha-
while cooperation multiplies the effects of nisms intended to address the mounting
their efforts through synergy. When people complexity of modern businesses. (See Ex-
cooperate, they require fewer resources. hibit 2.) Over the past 15 years, the num-
(See Exhibit 1.) ber of procedures, vertical layers, interface
structures, coordination bodies, scorecards,
What’s more, smart simplicity and digital and decision approvals has increased be-
work well together. Digital technologies fa- tween 50% and 350%, depending on the
cilitate the autonomy and cooperation at company.
the heart of smart simplicity, and smart
simplicity addresses the sociological com- Digitial technologies can help reduce both
ponent—how work gets get done—that so external and internal transaction costs.
often is missing in technology integration. Their flexibility—coupled with the power

Exhibit 1 | As Cooperation Increases, the Need for Resources Decreases

RESOURCES

COOPERATION
Source: BCG analysis.

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Exhibit 2 | The Vicious Circle of Complicatedness

BIGGER COMPANIES
MORE COMPLEX
CHALLENGES

MORE LAYERS,
STRUCTURES, AND
TOOLS
Vicious circle Accelerated
pace of change
COMPLICATEDNESS

DISENGAGEMENT PRODUCTIVITY LOSS

Source: BCG analysis.

of smart simplicity—allows for faster infor- data, communicate instantaneously, and


mation research, easier coordination, quickly build and modify digital
streamlined processes, and greater coordi- applications favors collaboration and
nation both within and across organiza- lower transactional costs.
tions (as we will show later).
According to a recent study, companies that
Digital technologies allow companies to im- lead a digital transformation of their busi-
prove productivity in two ways: by making ness are 26% more profitable than their in-
hard improvements that dramatically in- dustry average.1 These companies do not
crease the efficiency of “smart” machines just apply digital pixie dust to existing pro-
and processes, and by making soft improve- cesses but thoughtfully integrate technology
ments that increase the efficiency of peo- into those processes and the flow of work.
ple working together.
The essence of true digital transformation,
•• The Hard Side. Increasingly, machines in our view, is leveraging digital tools to
are communicating and coordinating push smart simplicity into organizations
with one another. Sensors, for example, and unlock latent productivity.
can detect when a piece of equipment
is close to failure and automatically
order a replacement. A recent BCG Smart Simplicity
analysis concluded that digital and Smart simplicity is built around six “smart
related technologies could make rules” that derive from game theory, sociol-
improvements in productivity worth ogy, observation, and proven application.2
€90 billion to €150 billion over the next They allow employees to make critical
five to ten years in Germany alone. (See judgments, balance complex trade-offs, and
Industry 4.0: The Future of Productivity come up with creative solutions to new
and Growth in Manufacturing Industries, problems. Simply stated, the rules are as
BCG Focus, April 2015.) follows:

•• The Soft Side. The soft benefits are 1. Understand what your people really
where smart simplicity can provide the do. To respond intelligently to complex-
most help, and these may ultimately be ity, people must really understand each
the more powerful levers to unlock other’s work: the goals and challenges
productivity, especially as services and they have to meet, the resources they
“people businesses” come to dominate can draw on, and their constraints. This
the global economy. The ability to share kind of information can’t be found in

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formal job descriptions; you can learn it better to take resources away. A family
only by observing and interacting. with five television sets, for example,
doesn’t have to negotiate over which
2. Reinforce integrators. Conflicts program to watch because everyone can
between front and back offices and watch the show that he or she prefers.
between the corporate center and
country operations are common. Often, 5. Extend the shadow of the future. The
the response is to create some sort of longer it takes for the consequences of a
coordinating unit—a middle office or decision to take effect, the more difficult
regional layer. But that just turns one it is to hold a decision maker account-
problem into two. A better response is able. For example, by the time a
to empower line individuals or groups multiyear project is completed, many of
that work effectively across organiza- those involved at the launch will have
tional boundaries. In almost any unit moved to another job or location. To
you will find one or two managers— paraphrase game theorist Robert
often from a particular function—who Axelrod, the “shadow of the future”
already interact with multiple stake- does not reach them.
holders. These people can act as
integrators, helping teams obtain from One way companies can extend the
others the cooperation needed to shadow of the future is by increasing
deliver more value. the frequency of output performance
reviews. A telecom systems manufactur-
3. Increase the total quantity of power. er found that cooperation between its
Usually the people with the least power hardware and software engineering
in an organization shoulder most of the units increased when it performed
burden of cooperation and get the least compatibility testing every two weeks
credit. When they realize this, they instead of every six months.
often withdraw and hide in their silos.
Companies need to give these people 6. Reward those who cooperate. In some
more power so they will be willing to activities, such as R&D, there is such a
take more initiative, but without taking long interval between cause and effect
power away from others—which can that it’s impossible to set up direct
happen in reorganizations, for example, feedback loops. In such cases, managers
when one part of the company gains can close the feedback loop by explicit-
power at the expense of another. ly introducing a penalty for people or
units that fail to cooperate and increas-
New sources of power can be created ing the payoff for all when they do.
around expertise building and knowl-
edge transmission. For example, in a
matrix organization of project manag- Digital Simplicity
ers and line managers, project manag- There is nothing digital, per se, about
ers can assess and reward project- these smart rules, but digital technologies
related performance, while line manag- can activate many of them. (See Exhibit 3.)
ers can decide who gets to be trained in Digital is particularly effective at under-
advanced management skills. standing what people do (rule 1), as it facil-
itates transparency, data sharing, and fast
4. Increase reciprocity. A good way to communication. Executives can identify in-
spur productive cooperation is to tegrators, who effectively move across in-
expand the responsibilities of integra- ternal hierarchies, by analyzing informa-
tors. Making their goals richer and more tion traffic (rule 2). And integrators can be
complex will drive them to resolve given new power (rule 3) in the form of ac-
trade-offs. And they won’t necessarily cess to employee data or responsibility for
need more resources to go with their managing an internal online forum. Like-
new responsibilities. It’s actually often wise, in matrix organizations, data and dig-

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Exhibit 3 | How Digital Tools Can Support Smart Simplicity

POTENTIAL OF
DIGITAL TO SUPPORT
SMART RULE THE RULE EXAMPLE RISKS

Understand what Master data management and Information overload, loss of focus
your people really do other tools that provide a
single point of reference
(social networks, forums,
chats, wikis, blogs)

Reinforce integrators Network analysis can identify Integration of complex internal


employees who cross internal networks and communities
hierarchies, and digital tools
can empower them

Increase the total Access to data, digital tools, Resistance from traditional managers;
quantity of power and communities can serve potential that digital power will be overused
as new sources of power

Increase reciprocity Integrators can be given new Free riders who do not contribute to
responsibilities, such as access the community
to data; several teams can be
given joint performance
measures when responsibility is
shared

Extend the shadow Digital tools such as prototyping Information overload


of the future can bring the future closer and
create feedback loops between,
for example, sales and R&D

Reward those who Ratings, rankings, and objective Pressure on individuals


cooperate measures can evaluate communi- unaccustomed to being ranked.
ty contributions

Source: BCG analysis.

ital tools can empower executives who central to smart simplicity. (See the sidebar,
might otherwise think they have lost au- “Smashing the Waterfall.”)
thority in a reorganization.
These principles can be applied well be-
Just as data can help identify integrators, it yond the confines of software develop-
can help spot people who are not cooperat- ment. Agile methodologies, for example,
ing and be used to evaluate performance work in such areas as outsourcing negotia-
when several teams share responsibility for tion, mortgage origination at banks, and
an outcome (rule 4). Digital tools can cre- nonsoftware product development.
ate feedback loops so that employees be-
come more responsible for their actions
(rule 5). Finally, these tools can help re- Context Matters
ward those who cooperate by measuring Digital is not a panacea. By themselves,
online collaboration or evaluating partici- digital tools will not promote cooperation
pation in decision making across hierar- and autonomy. Like traditional IT tools,
chies (rule 6). digital can reinforce existing patterns of
corporate inefficiency. Its ease of use and
One place where you can see the six smart flexibility, for example, can lead to a prolif-
rules in action is in teams that deploy agile eration of incompatible tools and compet-
methods of software development. Agile ing user interfaces. The exponential growth
teams have moved away from the hierar- in digital data can also make it challenging
chical “waterfall” model toward a cross- to separate signals from noise.
functional and cooperative setup support-
ed by digital tools. In short, they embrace What, then, is the best way to marry digital
the cooperation and autonomy that are tools and smart simplicity? To start, there’s

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Smashing the Waterfall
Cloud and agile teams are embracing deploying code. With a single click, devel-
concepts at the core of smart simplicity opers’ code can be checked in, tested,
by doing away with waterfall develop- and deployed. This frees up coders to
ment. In a waterfall, separate groups exercise their creativity and write code
conceive, design, build, test, put into rather than wait for other teams to
operation, and maintain software. It’s a complete their work. (Such downtime
model that comes straight out of Taylor’s can frequently consume 20% to 30% of a
principles. Participants can spend more developer’s workweek.) The automated
time sitting in meetings and managing tools help create direct feedback loops,
handoffs across organizational boundar- in the vernacular of smart simplicity, but
ies than writing and testing code. also provide a level of comfort to
Disputes among these groups are often executives, who may worry that they
discovered late in the game and have to have relinquished operational control to
be resolved by senior executives. developers. Coders also write modular
software that can be easily joined with
In cloud organizations, executives tend other modules and swiftly updated.
to head cross-functional product teams Similar to automation, modularity helps
rather than functional silos. All the speed the development process by
functions needed to deliver a product or reducing downtime.
service report to a single leader, who has
the authority to marshal resources and Data, in particular, becomes a source of
make decisions without time-consuming power at these companies. The
negotiations with other parts of the cross-functional teams invest heavily in
organization. Many of these teams systems that generate real-time usage
combine the development, testing, and metrics, and they constantly monitor this
operations functions into a single data. Operational dashboards are
software engineering role. These coders generally updated every minute, while
are responsible not just for writing but business dashboards are updated daily.
also for testing and deploying features, Anyone at the company can see the test
reducing the handoffs that slow develop- results and other operational and usage
ment at traditional companies. metrics. This broad dissemination of
data serves as a new source of power for
Cloud teams support this radically employees. It also opens the door for
different organizational model with innovative thinking and cross-pollination
digital tools. First, they have highly of ideas.
automated processes for testing and

nothing simple about the application of be bottleneck processes or components of


smart simplicity to your organization. Un- the organizational matrix that are redun-
like digital start-ups, most organizations dant or obsolete. Next we ask companies to
have decades of practices and legacies identify the obstacles that stand in the way
baked into their collective unconscious. of cooperation. What, in other words, are
The six smart rules will require managers the goals, resources, and constraints that
of these organizations to think and work make current behaviors rational?
differently.
Once they understand these obstacles,
When we advise companies on smart sim- companies can find ways to change the
plicity we suggest that they start with their context to make engagement and coopera-
pain points and imagine the difference that tion useful for employees. Changing the
cooperation would make. Pain points can context almost always entails changing as-

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pects of the organization such as budget- In the process, companies can create a new
ing, evaluation and reward systems, deci- social contract with their employees. By ap-
sion rights, and, of course, digital tools. plying the simple rules described above
When properly integrated into the organi- and smartly deploying digital tools, compa-
zation, digital tools can become the back- nies can give their employees a sense of
bone of cooperation. autonomy and community that has long
been missing from many workplaces. This
social contract will be built on new ways of

A s Paul Krugman has written, “Pro-


ductivity isn’t everything, but in the
long run it is almost everything.” In the last
managing—more coaching and less direct-
ing—and new ways of working. For the
first time in a long time, companies have a
century, bureaucratization was perhaps the chance to improve both their business and
price that had to be paid for rapid econom- their relationship with their employees.
ic expansion and productivity growth. But
as productivity growth has slowed, it is
time to reexamine the modern corpora- Notes
tion’s roots in Taylorism. The rigid hierar- 1. George Westerman, Didier Bonnet, and Andrew
McAfee, Leading Digital, Turning Technology into
chies and rules of the industrial era have Business Transformation, Harvard Business Review
run their course. Smart simplicity, support- Press, 2014.
ed by digital tools, can help unleash the 2. See Yves Morieux and Peter Tollman, Six Simple
Rules: How to Manage Complexity without Getting
productivity and engagement so desperate-
Complicated, Harvard Business Review Press, 2014.
ly needed in the modern economy.

About the Authors


Elsy Boglioli is a partner and managing director in the Paris office of The Boston Consulting Group and
the regional leader of the Strategy practice in Western Europe and South America. She works with leading
pharmaceutical companies on commercial strategy, M&A, organizational issues, and large-scale transfor-
mations. You may contact her by e-mail at boglioli.elsy@bcg.com.

Vanessa Lyon is a partner and managing director in the firm’s Paris office and the global people leader
of the Technology Advantage practice. She specializes in large-scale transformations, especially in the digi-
tal and IT areas. You may contact her by e-mail at lyon.vanessa@bcg.com.

Yves Morieux is a senior partner and managing director in BCG’s Washington, DC, office, the coauthor of
Six Simple Rules: How to Manage Complexity without Getting Complicated, and a popular speaker in the TED@
BCG talks. You may contact him by e-mail at morieux.yves@bcg.com.

The Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading advi-
sor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all
regions to identify their highest-value opportunities, address their most critical challenges, and transform
their enterprises. Our customized approach combines deep in­sight into the dynamics of companies and
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achieve sustainable compet­itive advantage, build more capable organizations, and secure lasting results.
Founded in 1963, BCG is a private company with 82 offices in 46 countries. For more information, please
visit bcg.com.

© The Boston Consulting Group, Inc. 2016.


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