In today’s fast-changing world where there is often pressure to get results faster, it is tempting for leaders to focus their thinking on the short-term and define goals and projects that will deliver results quickly. Indeed, the move in recent years towards ‘agile’ business thinking and ‘agile’ working can encourage leaders and managers to think in such terms. However, the best route actually to sustained organisational performance is for leaders to manage their organisation for both the long-term and the short-term at the same time. Leaders need to be artful spinners of plates of different time frames!

On the business development front, for example, good strategic leaders know this twin focus requires them to be planning new product development for several years ahead whilst at the same time today selling existing products or launching recently developed products. What is less appreciated by many leaders, though, is that they need to be thinking about and managing their company’s longer-term ‘organisational health‘ whilst they are also managing short-term operational performance.

What is meant by ‘organisational health’? It’s a term that goes beyond the physical and mental state of people in a workplace. It’s also more than just culture, employee satisfaction, or employee engagement. It refers to an organisation’s overall ability to align around a defined vision and strategic direction, execute against that vision, and then renew itself in response to fresh opportunities. In other words, how well it runs and adapts – no matter who is in charge and what strategy has been chosen.

The concept of organsiational health has been particularly promoted by leading consultancy firm, McKinsey, who have monitored the health of hundreds of different companies across dozens of countries over the last ten years or so, using a measure they developed called the “organisational health index” (OHI). This is a composite ‘score’ based on asking employees and managers about their perception of how well they think their organisation performs against nine specific dimensions of organisational health (see below) and what supportive management practices they see or don’t see being used.

The notion of organisational health was well set out in the book Beyond Performance back in 2011 by McKinsey consultants Scott Keller and Colin Price. In contrast to the very slender research evidence of earlier ‘classic’ books that tried to identify the keys to sustained company performance (e.g. In Search of Excellence, 1982, based on a study of only 43 companies, and Built to Last, 1994, which looked at – remarkably- just 18 companies!), the research base used by Keller and Price has been wide and deep – including responses to OHI surveys from more than 600,000 employees at more than 500 organisations, 6,800 senior executives who subscribe to ‘McKinsey Quarterly’, data from 100+ projects of McKinsey’s own clients, and reviews of more than 900 publications.

From their many years of research, McKinsey have consistently seen a strong correlation between organisational health and the financial perfomance of the companies they monitored. Key findings have been:

  • Almost all companies perform better if they improve their health. Around 80% of companies that took concrete actions on health saw an improvement in performance (in terms of earnings and total returns to shareholders). The majority of these comapnies moved up an entire quartile against all other companies on McKinsey’s database.
  • The top quartile of publicly traded companies in McKinsey’s OHI delivers as much as three times the returns to shareholders as those in the bottom quartile.
  • Those companies that rise to the top quartile achieve the biggest financial rewards. Companies whose health improvement efforts took them from the second quartile of the OHI to the top quartile recorded the biggest financial performance boost: a clear indication that working on health is a key factor in going from “good” to “great”.

In more recent, complementary research, McKinsey looked at the relationship between organisational health and performance over the long-term at 51 companies where they had a rich set of data on both fronts. Factors they used to assess long-term performance included earnings history, consistency of investment pattens, and the extent to which companies focused on long-term ‘value creation’ rather than short-term targets. The research found a strong, two-way correlation between health and long-term performance – with the healthiest companies being the ones that focus on long-term value creation and, in the other direction, those companies focusing on long-term value creation outperforming their peers on all nine of the key dimensions of organisational health.

Another noteable finding from all of McKinsey’s research over the years is that organisations can see tangible performance improvement in as little as 6 to 12 months. This holds true for companies across different sectors and regions, as well as in contexts ranging from wide-ranging turnarounds to more specific improvment initiatives.

So, given this evidence favouring organisational health, what exactly makes up ‘organisational health’? In a nutshell, good health has three key attributes: good internal alignment, good quality of execution, and good capacity for renewal. Supporting and enabling these attributes are “nine elements of orgnisational health”:

  • Direction – a clear sense of where the organisation is heading and how it will get there
  • Leadership – the extent to which leaders inspire actions by others
  • Culture & climate – the shared beliefs and quality of interactions within and across an organisation
  • Accountability – how well individuals understand what is expected of them, have sufficient authority to carry it out, and take responsibility for delivering results
  • Co-ordination & control – how well an organisation is able to evaluate performance and risk and address issues and opportunities as an when they arise
  • Capabilities – how much an organisation has the skills and talent required to execute strategy and create competitive advantage
  • Motivation – how enthusiastic employees are to put in extra effort to deliver results
  • External orientation – the quality of engagement with customers, suppliers, partners, and other external stakeholders
  • Innovation & learning – the quality and flow of new ideas and the organisation’s ability to adapt and shape itself as needed

Each of these nine elements has been broken down by McKinsey into a small number of specific, helpful management practices. Altgether, thirty-seven practices – too many to list here and, anyway, many are fairly obvious or basic in terms of good people management. However, some quick examples: relating to ‘direction’, one of the recommended practices is “articulating a clear direction and strategy for winning, and translating it into specific goals and targets”; for ‘leadership’, one practice is “involving and empowering employees through communication, consultation and delegation”; for ‘co-ordination and control’, a practice is “focussing on operational KPIs, metrics, and targets to monitor and manage business performance”; and for ‘capabilities’, one practice is “embedding capabilities and know-how through codified methods and procedures e.g. training manuals and SOPs.”

The key to gaining from the concept of organisational health is for leaders to put the notion at the very heart of how they direct and run their organisation, managing it as rigourously as their financial and operational performance. It means maintaining that ‘twin-track’ mind-set of concern for both long-term health and shor-term results, at the same time. It means leaders thinking about and developing their organisation’s health proactively and strategically, not being passive bystanders watching the organisation shape itself. However, don’t just think about health in overall terms: leaders need to look at each of the individual consitutuent elements that make up organisational health (as summarised above) and seek specific opportunities for improving practices, processes or behaviours. Then check, of course, that policies in each area will support each other and work holistically together.

Three ‘must-do’s’: Firstly, be sure to set some targets for key areas of your organisational health and integrate health into your company’s overall performance scorecard and regulary performance reviews, with data to show how you’re doing against targets (consider that organisational health is a useful ‘leading indicator’ i.e. advance signal of performance, compared to financial results which are a ‘lagging’ indicator). Secondly, be sure to weave health into the design and planning of all critical business and operational initiatives and projects. And, thirdly, guide and motivate individuals to value and support organisational health by including guideline behaviours and practices in people’s individual job descriptions and using appropriate personal incentives and recognition tactics.

Overall, the concept of organisational health is a very valuable and research-justified aid to guiding and achieving effective organisational leadership and performance. To be honest, though, it’s still not a phrase or model that I come across regularly in my various consulting or executive work, which is curious. I suspect that the slight complexity in the McKinsey model – with nine elements and 37 exemplar practices – has not helped. Nevertheless, it’s a model leaders should take note of for – not least its overall message that the key to stronger organisational performance is to pay as much attention to the long-term ‘health’ of an organisation as short-term operating performance.

Written by Mike P. Owen, CEO at The Owen Morris Partnership