###### tags: `Managing Social and Human Capital`
# Designing and Changing the Organization's Architecture
## DESIGNING AND CHANGING ARCHITECTURE
Designing and changing. So you want to think about design and we going to think about the, in some sense, even more difficult problem of changing a design once we have it in place. So we're going to begin with design and really it's nothing more than thinking about, I like the word architecture for this. How people are organize divided how they report up to one boss or maybe several bosses. And we're not going to touch on more on a few concepts on a particular slide you see right now, I have several those in red that will be in our conversation as we go forward. But I'd put that in front of us, all those concepts just as kind of a reference to issues you're going to want to think about as you do think about organizational architecture or changing the design that you have in place.

And to get us going on this, I'm going to have you work here for a company called Rose Company. It's a manufacturing firm and it has just used the nomenclature of the field here. It has a very functional organization. In a sense that there are a number of production facilities and the VP for, let's say, finance in a given facility reports directly up to the executive vice president for finance at headquarters. The plant manager has some influence on control over that the local VP for finance but not completely. And as result to that, in this particular case, some of this production facilities aren't doing too well. And the company does decided, looking now, moving from the top diagram to the bottom diagram to change the organizational design by grouping all those functions. By which we mean these more technical skill areas like accounting and finance and marketing and operations, to group them together under an umbrella at the top of which is the plan manager. So it's a rather significant and almost radical break from the past. The plant manager can hire and fire his or her own chief financial officer. The CFO at headquarters is going to weigh in on that of course but the plant manager is delegated responsibility for everything and they have to think, to use a phrase here, like a general manager. They've gotta manage everything about the people in their setting, and to make it a bit more challenging, they're also responsible now for results. So we're going to pinpoint accountability and responsibility. And a new plant manager, it's called the Jackson Plant there. And as we make that move, everything else being equal, you've got motivated employees, you've got a pay system that makes sense. You're set to make good and timely decisions. The work is interesting. How you organize people? What the reporting relations are separately? Also, has a profound impact on the willingness of people to give their all, to get the right job done.

With that being said as a kind of a preamble for where we're going, I'm going to take us into a particularly difficult situation at a processed food maker. If you've ever bought a bottle for a child of pureed carrots or potatoes, the company here, name changed to protect the identity of the company, makes that kind of product. The problem that the company is facing at the very top is that the market for this form of baby food is, quote, mature. Growth is slow.

Investors, especially those that love to see companies grow are beginning to get out of the stock because there's company's doing fine, but there's not much growth, a couple percent per year compared to some companies that can grow 5% or 8% or 12% per year. Now, to bring this down to a particular setting, there is a lot of pressure on a regional sales manager. Her name is Brenda Cooper. She's in the ten box on the right-hand side of the image there, and she takes over the job here of running the southeast region for Hausser Food. She's got a great job, she's been trained in management, she is new to the company.

But it's a great job because if she does well, she's on a track to move up, be paid more, and take greater responsibility over time. Within her operating area, here's an organizational design statement, the teams are organized, the sales team are organized state by state. You see right here, the Florida sales team, for example. That's the way it works. It kind of makes sense, because we sell geographically, Florida, South Carolina, Mississippi, and so on. And so, each sales team is responsible for the sales in any given region. Brenda's job is to ensure that the nationally set targets for a given year, maybe a 4% growth, are achieved by each of her state sales teams. So she's at the office, let's make it Atlanta, Georgia headquarters for that region, and she looks at the sales numbers for the various state sales teams in her region. And she's startled to learn that one in particular, Florida, is just a wonderful success. They, for the last several years running, have always had the best sales results. Which means they get a free trip. The whole team, complements of the company, is sent to Las Vegas for a week. As a reward for setting the best growth and sales for that year.

And she also notices something a little bit odd, doesn't really in a sense lead to more than kind of a well, I wonder what that is. She notices that this sales team always is number one, but a little bit oddly they always get to 10% above the nationally set sales quota for that year, 10% above what they were expected. But oddly, they don't get to 11% or 12%. Our bigger concern though today, your concern, is what is it about this team that you might learn from how it manages its own work? The job design, the pay for performance, everything else that might be out there that leads some people to perform better than others. If you can find out the secret of their success, the Florida sales team, well, they'll take it to South Carolina and over to Louisiana. And thus, Brenda for career but maybe more importantly for the stockholders and owners and really the customers of the company. You have a lot of potential now there if you can unlock the secret of the human and social talent management that Jan Boyer take a look at her team there, has somehow brought to the table. At least, we know what the results are. We don't know the inner secret. So Brenda Cooper calls up Jan and says, hey, Jen, I'm your new boss. Nice to meet you by phone, hi, you guys down there in Florida, you're an amazing team because you always get way above nationally set quotas which go up every year. You always seem to do at least 10% better, in fact you're always right about 10% better. What's the secret of your success? So think what Brenda, this is you. I'd like you to be in Brenda's shoes now. What you're doing, you're going to look for some good ideas, call them, Better Human Management Practices that you might export once you can find out what they are. Unfortunately, Jan, who's got a phone next to her ear, eyes kind of rolling up, looking at the ceiling then he floor says this, Brenda, good to meet you by phone.

To be honest down here in Florida, we get those sales figures by hard work. Well, everybody works hard that's told you nothing about a better human and social capital practice and so think about this. Many of you have done exactly this. If people won't tell you on the phone, maybe won't even tell you in person. You've gotta go down, in this case, spend time with them. Look them in the eye, talk with them for a couple obvious reasons they may not want to tell you what the secret is. And of course a lot of people have no idea what the secret is because they're just doing what they're doing without quite appreciating they've got a pretty clever set of steps for motivating the team and getting the job done. So Brenda Cooper just to make this a bit more physical gets on a hog, a big Harley Davidson motorcycle, she's got one, big jacket. Tears down to Florida, arrives and says to Jan, Jan, here I am. I'm the new regional sales manager.

Tell me face to face how you guys do it. Well, she gets the same brush off from Jan.

And thus, she takes the next almost predictable, logical step of saying Jan, I'm going to be here for a couple weeks. Suppose I join you and your sales teams when they start making sales calls to wherever you sell the darn stuff. Jan says, fine, that's great, come on along, couple weeks later, Brenda, that's you, you found nothing when it comes to people practices, some idea of how to get the best behavior, the best results out of the people that you're responsible for, nothing that's tangible and helpful. And after really three weeks, the end of the third week, everybody's out one evening. Mary, at the very bottom of the chart there, turns to Brenda and says, Brenda, you're pretty hopeless down here. You've got to appreciate I know what you want to know. That hard work of course is part of it, but a huge part of it is the following.

Now, before I give you what Mary says, I'd like you to think about how Mary's going to explain the extraordinary, the exceptional, the way above average performance this one of several state sales teams.

Mary says this is Florida. I think who's in Florida demographically. We got lots of babies of course, we have lots of retried people and we have discovered it's amazing, that if we go into a retirement home, an assisted living headquarters, and say, look, we got great food for those whose dentures are not great. We can sell a whole lot not to babies but to the elderly. We've also discovered that the body builders like the kind of puree products that we create thus we're going to gyms.

Homesick college students amazingly true but it is true sometimes by baby food I guess that's somehow takes them home, I'm not a quite certain what's the explanation. Dog owners, sometimes buy baby food for their pets. And it's also a fact that some gourmet restaurants five stars, they occasionally more buy our products adding something else that they list on the menu. That's always worried me about what restaurants might be serving. But the point that Mary has made is she and her team led by Jan have discovered five markets for baby food that in a sense logically don't go with the label, baby food.

And Brenda has two conflicting thoughts. I'd like you to work through your own thoughts and conflict and resolve them. The first thought is fantastic, I've kind of stumbled over now in an innovative team. They've opened up new markets. This is great. I'm going to take their ideas. I might even send Jan to train teams throughout the region. I've got a best practice. I don't know how they become knowledgeable about these other markets, I'm going to find that out because after all in South Carolina, there maybe still other customers you wouldn't think of. But then Brenda Cooper second thought is this, hold on a second, Jan Boyar has known about these markets, and has never told my predecessor, and has not even told me. And by the way, who does Jan work for? Well, for me, and I work for a VP who ultimately works for the owners and the stockholders of the company. And thus, Jan Boyar, a little bit problematic because that person's been holding off, holding out.

And now, coming back to that 10%, we always get to that team, always get's 10% above quota, but not more.

Brenda says, well, why do you guys always stop at 10%? And the answer from Mary is that, well, look, if we get to 12%, next year the big VP for Marketing and Sales is going to require us to do that much better next year. We're going to work a lot harder and we don't get anything more for it. Right now if we get to 10% we know that's going to be best state in the region. We're going to get the free trip to Las Vegas, which by the way is fantastic, and thus we hold back. And so, Brenda Cooper, to add to the second half of the thinking here, is thinking, whoa, not only have I got a sales team whose mangers somehow are working against the company by holding back innovative information. They're actually holding back sales. So let me make that a more sharp edge question to you. If you're Brenda Cooper and think about the theories behind your thinking right now, would you keep Jan Boyer or would you fire her?

The second half of the argument I made, well, maybe she ought to be pushed out kind of unethical behavior, the first staff is an amazing innovator, and you want to get out what that is. Just work on that for a couple of seconds here and ask yourself what are the underlying precepts or concepts that lead to one outcome or another?

As you work that through, I'm going to offer up what I've seen in many many settings both classroom and in with organizations like your own, in a room, let's make it 50 people.

Typically about a quarter or maybe a third say, Jan Boyar is of a temperament that won't work at this company. Unethical behavior, you have to send a message. She is gone. The other, wherever the remaining fraction might be, two-thirds, three-quarters, somewhere in there will say, no, there is something about this company, something about the design, the organizational architecture of this company, that led Jan to do what she's doing in a logical, almost predictable way. The problem is not Jan. The problem really is the company.

Brenda Cooper comes down on the side as a modest majority of most will. On working with Jan on two premises that are very important for this module which is, number one, people bring in a host of ideas, they have an ethical compass. They know how to do their job, but once they are in our architecture, our system the way we reward, the way we promote separately has an independent impact on what they do. So we are what we are when they arrive but the architecture can encourage the right kind of action or discourage or misaligned it, in this case, and does change the organization, change the design, the architecture, we're going to change the people. Most people, a majority anyway, will come out with a ladder, not going to take a strong stand on this myself, but let's just take the implication of what we've said for the latter, and that is organizational design. The fourth part of of this course here is about how we can make for better arrangements so that people work hard, bring ideas forward, don't goldbrick, don't hold back and do the best for the company.

With that being said, let's take one more look at this chart, and if you look at the education background of the sales people in Florida, here's what's striking, at least to my eye. I'd like you to reach your own conclusion on this, and that is Brenda Cooper has not come up through the best sales team. She actually is a horizontal, a lateral hire, she came in, she actually did an MBA degree in a business school at university brought in. She's actually never sold baby food in that particular sense. That's fine, we often hire people. We see people come in above us, it happens all the time, it happens to me many times. That being said, what's striking to me is we look at the education column, and then the left column just to the left of that on the years with the company, Jan Boyer has been there for 30 years and runs the best sales team in the company, actually in the whole not just the region. And yet she's never been promoted. Maybe she didn't want to go up, but on the face of it, it looks to me like we may be looking at a glass ceiling to use that well known phrase. People can look up, but because they are not a college graduate, they're not going up. Probably not gender in this case, but who knows, that may be a factor. Maybe there's other demographic inhibitors in this particular company. And thus, to turn this around, maybe the first statement about organizational architecture we ought to hang onto is this. That the way we put incentive systems in place, the first topic of our course.

And then number two, the way we promote people up through the hierarchy. However, it's defined, can have profound independent impact on their actions. Their behavior. And thus organizational designs for better or for worse, can indeed make their actions on behalf of the company.

## PERFORMANCE
Organizational design. If we want performance, we want to reward people for performance. If we want performance in our organizational design, we want promotion. Not just pay to go with the performance that we're expecting. And arguably the pay and promotion policy at this company glass ceiling. That 10% quota were not the kind of design elements that led to optimal action on behalf of this Florida sales team for the company as a whole. With that being said, we now run into a new problem, something we also have to manage. And to get to the problem, I'm going to have you all think for a moment, even if you've never seen a National Basketball Association game. I'm going to have you think about what happens on a floor of the NBA or maybe a college or high school team that you've seen. But least focus on the National Basketball Association and the fact that now focusing on pay and not promotion for performance that NBA players are relatively, we will all say, well compensated. In recent years a floor has been $500,000 if your uniform, you never see playing time but you're there at the bench. Your compensation is half a million dollars a year. Nobody's going to shed a tear if we say some players are underpaid, but some players feel underpaid. Because of a contract they've been locked into or maybe an agent that wasn't very good. That is now compared to the metrics we would use to appraise their performance. The metric an NBA player would use to perform his own performance, think about the women's league as well. The underpaid quote under paid players are looking at other players say on the team or elsewhere. And they're paid quite a bit more, but the key statistics points scored, rebounds taken, assist provided. Would say just statistically look at the numbers, I'm underpaid compared to Fred Jones over here who had a better agent.

So here's my question with that felt sense of inequity. And by felt I mean we look at others that we respect to maybe compare ourselves to. And not a whole lot of other possibilities like your average person out there like myself. When it comes to knowing if you're under or even overpaid for that matter.

Question, let's think now about behavior, the topic here is how organizational architecture can drive behavior or misdirect it. If you're an underpaid NBA player and you get on the court, what are you going to do? This maybe a little bit different from the NBA player whose statistics from the last season might pretty well into the pay for this season. My guess is you're thinking in some cases, the player who is underpaid is going to get out there and want to show certainly the team management. The people upstairs, that they're actually worth more than they're getting paid.

Others might think and it's a completely legitimate argument as well, I'm kind of drawn to them both. Look if they're going to underpay me, I'm going to underperform. So if I'm not getting paid with what I'm able to do I'm going to do less.

Either way that goes we got a problem.
### Inquity De-motivates People
The evidence is one of those nice research questions where the answer is not necessarily easy to forecast. The evidence goes this way that quote underpaid NBA players on the court do tend statistically speaking do want to prove to the team management that they are worthy a better compensation. How they do that? They take the ball more often, they shoot more frequently.

Unfortunately, because they've taken the ball more often than statistically might be appropriate. They shoot more often for the same reason with that same downside. They shave about a point off the team score in a given game. They cost the team about a point. That's a way of saying as we move to pay and promotion as a design feature of the organization that we run. We want people regardless of background, gender, racial identity, anything you can think of that doesn't relate directly to performance. Once we move in that direction, lots of evidence says it's a great way to go. Companies all over the world are moving in that direction as well. We open up a kind of Pandora's box of the de-motivation that can come with inequity. And just to now reflect on the fact that this is a two sided problem in the NBA it has one side.

A wonderful study that look to what happen temporarily when insurance underwriters had have specific company had to move out of their offices. Which were allocated according to their performance and seniority into temporary offices while their original offices were being remodeled. It's that simple as a rationale for what's happening. Some of those underwriters ended up in a very big office, just they have to go somewhere. Some ended up in a very small office. And then the question was, over time, do the underwriters change their underwriting, do they become more or less successful. Well, an amazing product, you can see it right in front of you right there of the inequity in the positive sense or in the negative sense. Those who are suddenly over-rewarded start performing better and those who are under-rewarded start performing less well. My guess is most people never thought about that, never said anything about I’m going to just hold back or I’m going to be really good because I got a large office. But going back to Behavioral Psychology, Behavioral Economics and Daniel Coleman and his great book that sums a lot of this up. One more example of how we need to be in our organizational design. Mindful of the shortcomings and the assets on the positive side of how people will behave. According to our pay for performance, promotion for performance or in this case, literally the size of the office.

## Organizational Design
That organizational design along with the way we create jobs, the way we incentivize people, the organizational design, think the people at Hauser Foods, Jan Boyar in particular, can be altered, or misdirected, or align. Or maybe in the more positive sense, we can get a lot more. Pay no more, not really changing the job, but just the way we knit all these pieces together. How people report, how we promote up through a hierarchy, all part of the, just to use the phrase, of the design of the organization, the architecture of the enterprise. With that being said, here's the last problem I'd like us to think about in this general area of putting in place an organizational design that serves you.

Sometimes though what we have serving us well, maybe even not perfectly a couple years ago may no longer do so.

And now we run into just a classic problem of organizational life. Everybody knows about it, I'm just going to say the blindingly obvious here. That as we solve a problem this year and build out, we hire people, build out a design, create jobs, provide an incentive system that seems to solve the problems of, let's say, last year. Go ahead five years, market changes, the Internet arrives, digital everything is here.

We've now got to serve customers in India and China, and not just the US. The problem we've got now is we've built an architecture which serves the problem of last year, or five years ago. And an architecture once constructed, add on a culture to go with it, a topic that another of my colleagues is going to take up, we now face the problem of call it inertial guidance. If you think about a big flywheel, just a big steel wheel that's turning. Once that gets turning, very hard to slow it down. It has a lot of inertial momentum to it.

And thus in a sense, once you got architecture going for you, as the manager, you can actually take off Fridays for a while because it just kind of manages itself. That's inertial guidance. That's what good architecture does. But when the world changes, that architecture of yesteryear may no longer work so well. Now we've got just a huge impediment. That is just what we do, the flywheel rotating, the inertial momentum that's been built up that makes it difficult to change. To say the obvious, we've hired people because we're doing X, we're focused on the US. But now we want to open up in India, or let's make it Brazil. Well they didn't come to work for you because they thought one day they might be transferred to India. But now you need people to run the office New Delhi or Mumbai. And if we start going down that particular avenue, the problems multiply quickly. If we don't make the change, aren't ready to have people take on these new tasks, but the people we hired, almost everything we do militates against that kind of change. Change is one of the great enemies of organizational design. So we're going to take a few minutes now and think briefly about what gets in the way of the design we've created. Such that as the manager, once we recognize what gets in the way, we can do something about it. So let's go right here to the work of a well known observer and consultant on organizational change. Again, what does that mean? We got a design, we want to make it better.

### Why Organizational Change Often Does Not Work
John Cotter has identified eight forces, just to pull them out and make them more managerially relevant, that seem to get in the way of making changes. So take a look at number 1 here, for instance. You, the manager, don't make a compelling case. Look everybody, we've got a change because the world's changing. And everybody salutes, great idea and goes back to work the way they've always done it. Let's go down to number 4. He has found, I've seen the same thing myself, that for people who are saying we've got to really just flatten the organization, put people more in touch with the customers. Maybe reorganize like we saw at that Rose Company making plants independently responsible for everything, that we have to say what we want again and again. Because the first time it's not believed, or it's questioned second and third time. It takes on a certain traction. And people are wondering, okay, boss, do you really want this? because the costs are going to be high making a change. So, that's the number 4.

Just briefly take a look, I'm not going to enumerate or expand out word-wise what the other six say.

But for our purposes right now, we're going to try to do an organizational restructuring or redesign.

## DAVID POTTRUCK AND CHARLES SCHWAB EXAMPLE
Let's go very briefly out to San Francisco and we see there the chief executive of a company, I think we all know it because there are many ads that asked us to talk with Chuck Charles Schwab, a very, very large what's called discount retail broker.

Most famous company historically in this category is Merrill Lynch. To make it straightforward, if you wanted to buy 1,000 shares of let's make it Cisco, can't call up the New York Stock Exchange to acquire the shares. You call up Merrill Lynch. I want 1,000 shares. Merrill says, great.


At that time, cost to rent $129. Charles Schwab is a discount broker offering the same services, more efficient. A little bit like Walmart that offers high quality goods given the price point they're at very well. But they're not a high end retail store. They do something different. That's what retail brokerage here is. They're providing service that is full but more efficiently and less expensively.
Such that Schwab can charge $80 for a 1,000 share purchase of a given stock. At the time David Pottruck, gentleman on the right, Chief Executive Officer, Charles Schwab himself is the Executive Chair which means he comes to work every day as a big voice at the table. But so much day to day action with 15,000 employees goes through this manager that we're looking at, David Pottruck, in his office in San Francisco. And what David has [LAUGH] begun to mull over is the fact that he had advocated that Schwab develop at that time a very simple Internet service where you can go on is called e.Schwab. Order 1,000 shares of make a Cisco and because it's the Internet now, $29.
Well, who doesn't want to pay 29 when you could have paid 80? Of course, there's less there, and as the business model, if it's e.Schwab where you buy your shares, you can talk to one of the customer service experts per month.

Now, if you're a full service costumer at $80, you can call him up 8 times today and I'll take the call and give you some guidance. So a little bit less expensive, quite a bit less expensive, and less service. There's a logic to that.

David Pottruck, excellent manager that he is, is acutely sensitive about a past function that he has performed.

He comes out of marketing, is in touch with a lot of customers as a result. Always a good idea for anybody, regardless of the kind of organization and he's hearing this. Customers are saying, David, we've got a problem because with e.Schwab we'd love to save the money about a 70% discount over $80 and you're better than some of the competition of the high end. That's true but since you've already got your customer service representatives well trained, they're expert they pull out reports, why can't we talk to more? Why can't we at least read their research?

And David says, well look, if you want the full service you gotta pay $80, that's our business model.

Well, some of the customers are saying but it says Schwab in both programs. Aren't you one company?

Even more worrisome is this. Most people don't see it. David's already spotted it because he's a very analytic guy, he works the numbers. He sees that some of the customers, clever people they are, or keeping open a full service account leaving a few dollars in it, moving $995,000 into the e.Schwab account where they're doing their active trading. They got it both ways. Full service, they can talk to a customer service representative. They can get all the reports, but then they use that information to trade actively at $29. Just to borrow a well known phrase, we've got cannibalism but in this case it's internal. It's not somebody eating us out from the outside as happened for example to eBay and China was really attacked directly by Alibaba, in this case we got a problem on the end side, we're cannibalizing ourselves. David turns around though and being mindful not explicitly with the eight factors they can get in a way of organizational redesign.

Knows or as concluded that this company has to make a radical change. Or somebody else is going to change the company and in particular now he's worried about a bunch of young upstarts, companies that got names like E-Trade, that are full online traders, there's no bricks and mortar to go with them. And they're offering trades often at $19 a trade. Not much research. Not much behind it. But for people who are thinking about keeping a few dollars in a Schwab account, why not even go over to E-Trade. Sooner or later, with the boom of the Internet it's going to change everything as we know so well. David figures we're going to be out of business. Unfortunately, being mindful now of the factors on a prior image, he's also thinking, wow, nobody's going to want to change here because I've looked at the numbers for the last four years and we've been doing extremely well.

This goes back to an earlier idea on good and timely decision making. When we're doing well, we tend to become more sub optimal in how we think about decisions. Well, David is saying, we got that problem now. We're getting 24% year on year growth in revenue. Customer assets are up 40% in the last year.

Everybody is thinking, we got a great business model, don't foul it up they would say privately. Since David's Chief Executive, they probably won't say that to his face.

With that being said, let's move it on now, and I'm going to ask you to think ever so briefly after you've decided your David Pottruck, gentleman in the middle of the screen, Chuck Schwab, Charles Schwab his boss to his right, both smiling. Before you say what you're about to say, Chuck is smiling because you've decided that this company has to go from $80 full service overnight on 1 day down to $29 full service. You've gotta take your product you're selling, and now imagine an airline discounting a seat from New York to Los Angeles by 70%. That's going to be a huge draw for customers, it's also going to be a huge hemorrhage in terms of money coming in. Keep that in mind.

David Pottruck decides, literally, in the privacy of his office, he talks to his direct reports, about a dozen people that report directly to him as Chief Executive, he decides, tells them, informs them, ask for their guidance, of course, on how to enact the decision. He says, everybody, January 15th of the coming year, we're going to have to cut our service costs, we're going to have to cut the price of the service by 70%, got to cut our costs as well obviously by 70%. Imagine if American Airlines cut by 70% the cost of a seat from New York City to Los Angeles. Well, there be a boom in air travelers of course. Everybody can see that's a great attraction. On the other hand, you got 70% less revenue coming in to hire a pilot and put gas in the aircraft. So you're going to have to think about this on both sides. Even worse, when it comes to the way the world works, if you're a publicly traded enterprise and everybody's got a kind of a public to worry about even if you're not publicly traded, publicly traded companies are listed on the New York Stock Exchange or elsewhere.

I have a particular problem and that is investors have come into you for what you've been doing and not necessarily where you want to go.

And thus, David concludes that as they go to a 70% discounted full service trade, $29 per trade, January 15th the following year that the equity analysts that appraise companies. The big investors, some of the big pension funds, for example, that invest in companies, aren't going to have any confidence that this 70% cost or loss of income is somehow going to be made up for by the move that David has made. And as a result of that David Pottruck forecasts that the pretax drop in profits will be at least 20%, let's make it Apple if Apple takes a 20% sudden drop in its after tax profitability, the market's going to have a lot of negative reaction on that David forecasted as it turns out correctly here to be about 20 to 25%. The day he announced it in January 15th full trade, going to be a lot of seller orders going out. Companies investors are stampeding to get out of the stock.

So he sits down and let's think about now the art of managing, that's our topic, managing people, he sits down with probably the most important person he has to manage. Oddly, his boss.

## MANAGING PEOPLE
When we look at the dictionary definition of manage or management for that matter, it's all about getting to people below us, may be in some other unit to do well. We promote them if they have succeeded. But management in my view is a kind of a 360 in reverse. We've gotta manage people below, of course. We gotta manage partners, joint venture people that we're working with. Providers out here that may have on our part picked up some of the outsourced functions that they can do better than we can do. And today, we also have to be able to manage our boss, manage with our boss. That's not about currying favor, it is about making certain that Chuck Schwab is going to be on board. We gotta manage that, if we're actually going to do it. If he gets in the way, it's not going to happen.
Thus, David, look at the photograph there at the bottom, sits down with Charles Schwab. They talk for a couple weeks, knowing your boss so you can manage. Charles Schwab is a very analytic guy, along with all the other ways we think, of course, the intuition's very powerful. But he says to David, David knew it, show me the numbers. If we cut our revenue by 70% with that price cut, what's the evidence that we are going to make up for that in a huge new flow of new customers. We'll make up for price cut in radically rising volume. The two of them talk about that that for two and a half weeks, lots of going back and fourth. It is pointed out, that a 20% or 25% loss of stock price by the company Charles Schwab may cost Chuck Schwab himself close to $500 million, maybe even $1 billion. Because so much of his own net worth and that of his family is Charles Schwab's stock. Probably not a billion, but maybe at least a couple of 100 million. And that loss by the way might happen in just a couple of days when the stock price plummets maybe by 22% in line with the drop in pre-tax profits.

And at this point, the question for Chuck Schwab, an obvious one, David, you're asking me to kind of bet my family fortune.

Should I trust you?

And the answer is, well, you should. I have been working with you for quite a while. You've seen make management decisions before. I've explained them to you unlike our firefighter and man Golgi who didn't explain almost anything. David Pottruck of a school that he had an opportunity to think through has been explaining to people below, outside and above this case Charles Schwab, how he makes decisions. With that, Chuck says, let's do it. Now, we're not quite done as we begin now to push this through, though, because we've got two areas of people that we still have to manage not yet articulated or identified. The first is the board of directors itself. We tend to think if you're in a big company it's way up there, but this is a kind of bet the company decision. Do they want to know about it? Of course. And we have to not only take it to them, we actually have to manage how they think about it in the best sense of management. Not to manipulate, but to put the facts out so they can make their own independent, reasoned, judgment call. At the next board meeting thus Charles Schwab says to David Pottruck, David the Board has to look at this of course, has to approve it, for sure, and I'd like you to take it into the next Board meeting. David walks in and in about two and a half hours at the next Charles Schwab Board of Director's meeting, lots of non executive directors people from the outside there, it takes David only a couple of hours to make the case and to find approval. And that quick, talking good and timely here of course, yet again, that quick decision came in part, because David had earlier, won't go into it now, but had earlier forced himself to master the art of managing not only in the direction of the Chief Executive. I gotta get better managing my relationship with Schwab. I've gotta get really good at managing with all these non executive directors. By the time they got to that meeting thus it went extremely well, two and a half hours, it's a go.


And now for the final group of people, all part of our question here, how do we build an organization, design a well, and then change it when the world is changing around us as the Internet is doing that to the retail brokerage market in spades.
Play video starting at :5:2 and follow transcript5:02
He now appreciates going back to that earlier eight-item set of warnings. What can get in the way that 14,990 people don't know about this and most of them are probably going to be skeptical, if not outright hostile to it. Why is that? Just work the logic. If we cut 70% of our income, how are we going to pay people's salaries at the end of the month? Sounds like cut backs. Maybe even store front closures, the Schwab offices are all over the country. Maybe people are going to get no bonus, maybe we're going to get cut in the people's retirement. And thus, even though intellectually it might sound appealing as people think about the home mortgage and the family they probably do think this better be good otherwise, it’s going to be a personal catastrophe. So, David does this, mindful of all the above, despite on that earlier chart.

He arranges for everybody in the top several hundred ranks of the company. He’s gotta be careful because if you publicly announces this or privately but in a public way through the company announces this plan all the competitors are going to get wind of it and they may jump the gun. They maybe announcing cuts before his own cut on January 15th is announced. So secrecy that's something that's another management function here. Keeping the secret critical, thus, on an early San Francisco morning, David asked his top several hundred people to meet him essentially over breakfast at a hotel near the San Francisco airport.

Now San Fransisco, we all know three hours behind New York, New York Stock Exchange open, big customers are calling, I want to buy and sell stock. So there's some question, why are they, in the middle of a trading hour, going off to have a breakfast at a hotel? Even worse, one of the speakers that David brings on the podium, is a historian that's going to tell about the history San Francisco.

And he begins to say, everybody's kind of blinking on this one, that the decision to build the Golden Gate Bridge goes back to 1917. Took 20 years, it opens in 1937. Along the way, there were a lot of people said it could never be done. There were a lot of people whose lives were at risk, it's a dangerous business. But the people who decided to build the bridge, pushed through, against all those sources of organizational inertia.

The ferry operator, for example, violently opposed building a bridge, you can see where they're coming from and the company that built it took special measures to protect the life of construction workers.

Okay, so where is this going? Everybody's thinking. And Pottruck himself, stands up at the podium and says look, it took 20 years for that to happen. Of course, when it did happen it transformed San Fransisco from what it was to an icon of American life. What's across the bridge, Marin county, just a huge development that would've never prospered like it would without the bridge. The bridge transform San Francisco, California it is an icon of American life. And by the way, almost no life was lost during construction.

So we can see where that is going. He then says I am here to announce today that on January 15th this is October 15th, we're going to go full service trading at $29, kind of a gasp out there in the audience. And in doing that, we're going to make every effort to avoid layoffs, hence that illusion back to the worker's loss on the bridge but in doing that we're going to transform the industry before it transforms us. Back to this somewhat bland words of this topic, we're going to redesign our architecture before we're force to do so. I know there are a lot of forces of inertial resistance to that, but he then two final steps here to get it those, he asked all the assembled managers, quite senior, arranged, though, cross-functionally. Let's go back to that idea. People in finance, next to the people in sales, next to people who were back office, next to people who were information technology. And he asked each table there to take a few minutes talking privately. Everybody is going to have a chance now to talk. This is how we make for organizational change. He asked each of the tables for the eight people around them to take about ten minutes and identify the points that resistance, that they're going to encounter.

Well a course was on Earth that's really interesting has to be managed as a topic, managing people. And by the way, the other great value of that method to say the obvious here is that in asking people to refer not to their own reason to fight it, but to those below them they also have a chance to put in their answers what other people are going to think, their own thinking. Because David Pottruck is Chief Executive. Knowing that a chief executive one time told me that the higher he goes the better the information gets because nobody wants to bring up resistance or bad, bad news. This was David's way of understanding from his top people, the top 200, why would they resist? Equally importantly why would people below them push back as well.
Play video starting at :10:41 and follow transcript10:41
With that then and I'm going to really kind of bring this to a summary point right here, Davis says great, thank you for all the input. You've heard from our historian and now have a bunch of luxury coaches out the door of this hotel and we're going up to the San Francisco side of the Golden Gate Bridge. There it is, seen from across the Golden Gate, Marin County. And they begin at the far end, they get off the buses, everybody, David has got this plotted out. Gets a nice warm blue jacket. Unfortunately, turned out to be one of the warmest days ever in October.

But David says then, we're now going to walk from the San Francisco side of the bridge all the way across to the Marin terminus of the bridge. A few of you have done that, most have not. I've been out there many times, I've never made that walk. It's a long walk just look at it. And then they get up on a hill at the far end and they take the following photograph. You see it right there, captioned as it now is going to hang on office walls, all through Schwab, is Crossing the Chasm, October 15. What's that got to do with new pricing, and re-doing back office algorithms, and how we charge a customer? Well nothing, technically, but everything with the fact that we got people who have a head, gotta go for that, and they also have a heart. It's a way of saying we gotta get to the cognitive side of the brain. We also have to get to people's emotions. Is this a big deal? Of course it's big. Just look at this, we're crossing this chasm.

Epilogue. January 15th. It is a shock. It is a well-kept secret. Everybody, all the people you see right here, pretty much on board. They made all the changes required. And in the days that follow, Wall Street, even though it's explained by David what's going on the stock drops about 25%, huge losses. In the middle of all this, I happen to work with David Pottruck. Along the way I call him up, I say hey David, how's this going? I've read all about this. He said, well it's going. He said, you should know, actually I'm sleeping like a baby. I said, really?

And he said yeah, I'm actually waking up every two hours and crying. So it was a tough very stressful period. Go back to our previous topic, when's a great team most vital to for a group, a team to work well or a group of people to work well? During the period of high stress, this team was well built, they all had the same jacket, they knew each other. And over the next nine months actually the next 12 months, really, with the loss of 70% revenue, it's more than made up for by new customers. They just came pouring in. Pretty hard to resist buying a seat on an airline that's going to do 70% discounted ticket. Or in this case, sell you a 1,000 shares of Cisco for 70% less than you could do it the day before on January 14th.

### An Eight-Step Model for Leading Change
That's gets then to a summary. More affirmatively you've taken those eight opening thoughts on what gets in the way. And here we have a more affirmative model for you.

The kind of steps, this is from John Kotter, in my view when it comes to managing then, we said that this also that the course, it really is the matter of the judgment and having a dozen or so, a couple dozen working concepts that you apply. I say all that as a intro into this particular Eight-Step model for Leading Change. Take a look at these, I recommend you grab a few like a burning platform, that's what David did. He set up this event at the hotel, look, this industry is changing e-trade is coming along, if we don't change now we're going to be out of business. There's a burning platform. And the other factors, look at number four getting buy-in, taking the top 200 people across the bridge. All part of the enactment, but look at the eight points here as guidance for your own judgement. That concludes our thinking here on the fourth and final topic of human and social capital managing people at work.

## MANAGER’S TEMPLATE FOR HUMAN AND SOCIAL CAPITAL
And by way of summary, briefly just to put words in what you see there. Going back to John Chambers at Cisco, our topic was making good and timely decisions. Finding people around you to whom you can turn for offline trusted feedback. You do need to think about where you want to go. Let people below you well picked, well trained, good job design, appropriately paid to work out the execution.

Breathing down their neck is going to undercut that, so convey intent with no micro-managing. Number three, think about that firefighting team that went into that fire setting in Montana. They had never worked with each other before, and there's an argument, I think it's right. Had they known each other, had they trusted each other before they got there, the number two person, name was Robert Sallee, would have more likely followed the huge management decision by the Incident Commander, Wagner Dodge, when he created a life saving fire. What's called an escape fire now, but he couldn't manage people to get into that, because they barely knew Wagner Dodge, the boss.

And the fourth and final piece on making good and timely decisions, which is, think about Charles Elachi and Ann Livermore. More broadly, big companies creating just a mindset of learning to make good decisions, making a first time mistake, making decisions good enough but not making them necessarily perfect, to use Ann Livermore's commentary there. As we turn to architecture, the design, it's an independent force. Good to think about how we reward people, good to think about how we promote, good to think about designs that animate or discourage people. Separately, the way we'll put people together. Do we put them together in a division, stand alone? Do we have people reporting, call that a profit and loss design? Or within a given division, do we have all the functional specialists, like the marketing people, reporting up to the central VP for marketing? As, by the way, was largely case there back at Hauser Foods. Alignment might be the word that really captures this point. To be a manager, to be a general manager means we got to grab all these pieces. That's the essence of this section of the course and they need to work together. If they're pulling in different directions, we saw that actually at Hauser Foods, we've got a problem.

With a problem of that kind solved though, inequity is a haunting fact of the human condition, it's just there. And as a way of I'm saying, people, if it's pay, promotion, or anything else for performance, if it looks like somebody's getting promoted, or paid, or somehow treated better with a better office for performance, if they feel an unfairness has been committed by you, the manager, you got a problem here. We need to solve it.

First point, gotta be aware of it, and then we gotta be, obviously very good at ensuring a very close tie between what we actually reward and what we want from people. Finally, we need to build a bigger scaffolding. We got a lot of people, more than 10 or 15, in many cases. Thousands, some companies, take Walmart, 2.2 million, we have to find ways of putting people together, organizing teams so that they work with other teams. Having done that, critical to get that right, a whole scaffolding for doing that well. We then face just a lifelong problem of needing to change, to restructure from time to time, how the design does work. For that, we've ended with a basic notion when you take a design, as a manager, that maybe you've been given, maybe you've even helped create, to get people to go with you, a burning platform, and going for their head and their heart. Probably, pretty important for your future. So may you all manage and here are some of the tools we hope that will help you do so.