Organizational effectiveness has become an increasingly important topic since the emergence of the COVID-19 pandemic. The unprecedented disruption in travel, consumer behavior, and work processes has proven to be an impetus for businesses around the world to rethink their current approach to leadership and change management. As a result, many companies are evaluating what organizational effectiveness means in today’s complicated and changing landscape.
The management consulting firm McKinsey has developed an Organizational Health Index (OHI) that seeks to define the abilities of a company across 37 dimensions. In a recent study, McKinsey found that the top tier of businesses, meaning those that are most effective, generated shareholder returns that were three times greater compared to the average companies. Organizational effectiveness frameworks provide valuable context and guidance for how top-performing businesses can develop and protect their strategic advantages by setting their organizations up for success.
But, what does it mean to be “effective”? In this guide, we’ll review various aspects of organizational effectiveness from the perspective of the business leader. Leadership is tasked with influencing the organization in a way that adds greater value and improves performance, which can be quite complex. We’ll look at definitions, models, and best practices for organizational effectiveness and how a business and its leaders can implement change initiatives successfully. You will also find several helpful resources and information to guide your own research into organizational effectiveness in today’s complex business climate.
In this guide to organizational effectiveness, we’ll cover:
- The Definition of Organizational Effectiveness
- Organizational Effectiveness Models
- Leadership Responsibilities for Organizational Effectiveness
- Measuring Organizational Effectiveness
- Organizational Effectiveness Best Practices
- Further Reading on Organizational Effectiveness
The Definition of Organizational Effectiveness
Organizational effectiveness refers to a company’s ability to achieve its goals while developing employees, processes, and infrastructure. There is no single, all-encompassing definition of organizational effectiveness, largely because each organization is so unique and varying contexts often require tailored approaches. While each business must determine its own path to success, there are some essential areas to consider:
- Goal Setting. One of the first things that come to mind when thinking about organizational effectiveness is goal setting. Strategic management is a complex topic in itself. That said, company leaders seeking to improve effectiveness can benefit from taking a close look at their internal processes. How a company sets goals, measures performance, and manages resources all play a significant role in the company’s success.
- Core Competencies. Another important component of organizational effectiveness is the ability to develop an organization with the right mix of abilities, personalities, and talent. A company that achieves its goals but fails to develop a strong competitive advantage may see its business dwindle due to competition or unanticipated market conditions. Company culture is also an important element of any company, and developing clear and meaningful values for an organization to align around is critical.
- Organizational Structure. It is often said that a company should organize around its long-term goals. In other words, form should follow function. An effective organization must understand the importance of different employee and group connections, and be able to coordinate work across locations, departments, and teams. Organizational development and change management are important considerations for HR resources and company leadership.
Organizational Effectiveness Models
Company leaders are constantly thinking about processes, goals, and resources. There is often a delicate balance between responding to urgent requests and throughtfully preparing for the future. To better understand how a company can develop greater organizational effectiveness, it’s helpful to consider popular models that are used by experts and practitioners today. These models each provide a useful framework for understanding organizational effectiveness, developing improvement plans, and measuring results.
Organizational System Model
This model for organizational effectiveness uses the structure of the company as the basis for strategic management. Because many aspects of business structure and operations have often been in place for decades, this is a framework that will be very familiar to leaders who have been in the workforce for some time. In this model, a business is broken down into the following components:
- Strategy – The mission, vision, and values of the company combined with goals and communication plans.
- Inputs – People, equipment, materials, and finances.
- Performance Capacity – The design of your workforce practices, budgeting, and general workplace processes.
- Performance Actions – Specific activities that the business performs in order to achieve an expected output such as product development.
- Outputs – What the company has achieved as a result of its efforts (products, services, etc.).
- Outcomes – The impact of the company’s actions on the lives of those involved (employees, customers, partners).
- Feedback – How the company learns from what it has achieved in order to improve the future strategy.
The most important aspect of the Organizational System Model is the fact that it’s iterative and a continuous loop, allowing for ongoing improvements and optimizations over time. It’s critically important for leadership to take time to reflect on a regular basis how they can better inform decision-making and performance management.
Experiential Learning Model
This model is focused on individuals and suggests that the best way to improve performance is to immediately apply key learnings from your work. Adapted from the work of David Kolb, it involves four discrete components, including experience, reflection, concept development, and testing. This framework can be used by HR, leaders, and individual employees to better understand the mechanics of learning.
Learn by Doing Model
The Learn by Doing Model focuses less on reflection and more on the application of skills to challenging projects. Individual and organizational effectiveness can be developed by facing difficult challenges and overcoming them. Capabilities such as team building, needs assessments, and job performance measurement are especially critical.
The American Public Human Services Association (APHSA) has developed this model as a benchmark for facilitating organizational effectiveness. The acronym DAPIM stands for the five steps outlined in their process. This is an excellent change management structure that can help you define a reasonable scope and effective plan. The five steps include:
- Define – Choosing a specific organizational quality to improve.
- Assess – Outlining the current and desired state.
- Plan – Creating short and long-term improvement plans.
- Implement – Taking action to achieve the desired improvements.
- Monitor – Tracking performance and improving the plan.
Together, these four models represent different ways of looking at the same basic mechanics involved with change management for the purpose of improving effectiveness across a company. As business leaders, we must remember that organizations are complex, and as such, any improvement plans need to be understood in the context of the overall company.
Leadership Responsibilities for Organizational Effectiveness
It is true that leaders can come from anywhere within an organization but there are a few important roles that can have a significant impact on organizational effectiveness. Some companies may not have the capacity or resources to create all of these positions, but these descriptions of key roles provide a useful guide for understanding how to define the responsibilities of your own team.
HR plays a central role in organizational effectiveness as the primary department for facilitating corporate communication, employee experience, and performance management. Especially today, there are several digital tools that can be used to better understand how a company is performing and what changes may be necessary to make improvements. One example is Humanyze’s Organizational Health Score (OHS), which gives HR professionals and company leadership direct access to data-based insights into organizational effectiveness.
Organizations are generally structured around distinct business functions. Business unit leaders may control many resources and are in an ideal position to improve effectiveness within their own teams and departments, as well as drive necessary collaboration across different teams and departments. One way to engage and create synergy across the entire company is to divide up change initiatives and have each group or department develop and execute relevant parts of the plan.
Employee Experience Managers
Many companies invest in customer experience resources, but the employee experience is just as important. Not only does an exceptional employee experience improve employee retention and engagement, but it also bolsters performance and contributes to greater customer satisfaction as employees are motivated to exceed expectations.
In addition to data systems and traditional HR resources, businesses are beginning to create roles dedicated to improving the employee experience. By removing performance barriers and optimizing incentives and other tangible benefits, employee experience managers can have an indirect but significant impact on organizational performance.
This role is especially important in large organizations that have become complacent with existing department structures and team dynamics. A change manager can often bring a fresh outside perspective to business processes, and many companies seek out the help of change management consultants, particularly during periods of unanticipated or unprecedented change. For example, the COVID-19 pandemic forced businesses around the world to shift their operational processes, procedures, and even work locations practically overnight to adapt to supply chain disruption, market changes, and government shutdown orders that forced companies to shift suddenly to remote work.
Whether you hire talent for dedicated roles or assign these responsibilities to existing team members, it’s crucial to ensure that you define clear roles and responsibilities for your organizational effectiveness improvement plan.
Measuring Organizational Effectiveness
There is no single metric that measures organizational effectiveness, and it’s important to develop a suite of measurements that, together, paint an overall picture of company health. Overall organizational health scores may be used as a benchmark for overall progress, alongside more detailed measurements that will help you understand what is happening within the company.
One of the best things you can do is clarify which leading and lagging indicators you would like to influence over time. Lagging indicators are related to output at a company or department level and may include the following:
- Project milestones
- Stock price
- Inventory turnover
These measurements are vital considerations because the goal of developing a more effective organization is to achieve greater success. There will not always be a direct correlation between your change initiatives and these metrics, but you can likely gain some useful insights by measuring these metrics over time.
Leading indicators are necessary because they help give a sense of the effort involved in performing work. You can collect metrics that are most relevant to your particular business and industry, but these are a few ideas that illustrate the point:
- Pitches presented
- Proposals sent
- Customer calls made
When defining leading indicators, it can be helpful to focus on the activities that you expect to have the largest impact on your lagging indicators. Once your measurements are in place and a baseline is set, you can monitor performance over time. When these basic metrics are combined with other employee and organizational data, it can create a powerful, data-driven system for improving organizational effectiveness.
For example, one large European bank was experiencing performance disparities between two branches and wanted to pinpoint the driving forces leading to the differences in performance. One branch consistently outperformed the other by 300%, despite having similar business structures and customer segments. The bank deployed the Humanyze Platform™ to measure team communication patterns, physical activity within the office, and other corporate communication data, then segmented the data by compensation and tenure.
Analyzing the data revealed that the higher-performing branches had significantly more face-to-face interactions throughout the day, while underperforming branches weren’t given the same opportunities for team collaboration or to build trust. Analyzing office layout data revealed that the office layout of the underperforming branches restricted communication patterns and limited opportunities for collaboration compared to the layouts of higher-performing branches.
Armed with this data, the bank took a number of steps to improve collaboration, such as redesigning office layouts, implementing group performance incentives, and allocating funds for team-building activities, resulting in an 11% increase in sales.
In another case, a leading multinational technology firm leveraged Humanyze’s Organizational Health Platform™ to identify data-driven ways to improve organizational efficiency and improve the employee experience to foster team collaboration and improved performance. The company focused on measuring four key areas, including team collaboration, generational gaps, meeting culture, and physical space utilization. Analysis of the data revealed several valuable insights:
- Proximity was a critical factor in fostering collaboration.
- Employees were most engaged in meetings less than 60 minutes in length.
- In-person collaboration had a significant impact on performance.
- Greater use of digital tools among younger generations was likely a driving factor in collaboration gaps across different generations of employees.
Not only was the company able to identify the likely drivers of ineffectiveness, but it was also able to implement data-driven initiatives designed to close gaps and overcome the identified issues. What’s more, the company now has the capability to measure how organizational behaviors are impacted by strategic change to inform future decision-making.
Organizational Effectiveness Best Practices
When reviewing and developing your organizational effectiveness improvement plans, these best practices may be helpful. While there are hundreds of different areas that could be improved at any given time, it’s crucial to focus your efforts. These four areas play a central role in company performance and are often an excellent place to start:
- Improve Decision Making. Business delays are often the result of miscommunication, slow approval processes, and unclear procedures. Successful change management requires leaders to look inside departments and cross-functional teams to understand how decisions are made and communicated to others. Removing barriers to decision-making can often have a dramatic impact on effectiveness.
- Focus on Employee Growth. Your employees are your most important assets when it comes to organizational effectiveness. Even with the high levels of digitization and automation seen today, it is people who make the critical decisions that shape a company’s progress. Developing strong programs for leadership development, performance incentives, and employee education can go a long way toward improving the quality of your work.
- Clarify Strategic Priorities. Your organization’s strategy is much more than a set of goals or priorities. Leading businesses leverage the hard work spent planning by involving employees at all levels of the company. How you create, communicate, and monitor progress toward your short and long-term goals can often mean the difference between success and failure.
- Leverage Technology. Digital technology has drastically improved our ability to understand and interpret large quantities of data. Organizational effectiveness is much easier to influence when you have a complete set of metrics and data to review. Today’s HR and business management platforms integrate real-time data with advanced metrics and reporting to create a powerful suite of change management tools.
Organizational effectiveness is a top priority for every business leader. Understanding what drives progress within your organization, clearly defining goals and objectives, identifying the right metrics to measure, and leveraging the right technologies to facilitate data-driven decision-making are key for successfully improving organizational effectiveness in today’s complex business landscape.
Further Reading on Organizational Effectiveness
For additional insights into organizational effectiveness take a look at the following resources from other business leaders.
- Driving Organizational Effectiveness Webinar (Humanyze)
- Organizational Effectiveness Evaluation Checklist (Dr. Wes Martz)
- Organizational Design: A Complete Guide (AIHR Academy)
- Enhancing Organizational Effectiveness by Performance Appraisal, Training, Employee Participation, and Job Definition (European Journal of Business and Management)
- Measuring Organizational Effectiveness with the Latest Workplace Analytics Whitepaper (Humanzye)
- Organizational Effectiveness: 7 Ways to Improve Work Performance (Hirebook)
- Organizational effectiveness for sustained performance and health (McKinsey)
- Organizational efficiency and effectiveness: The winning bank’s secret weapons (McKinsey)
- 4 Organizational Design Issues That Most Leaders Misdiagnose (Harvard Business Review)