People & Strategy Winter 2015 Vol. 38 Issue 1 - 56

PERSON

What if there were a way to measure and track the elements of organizational
effectiveness directly related to financial and operational performance that
also offers actionable insights into areas of improvement? Turns out, there is.
People & Strategy executive editor Anna A. Tavis, Ph.D., interviews Chris Gagnon,
M.B.A., solution partner at McKinsey & Co.'s Organizational Health Index, about
healthy organizations.

In First Person: Leading Healthy
Organizations
Anna A. Tavis, Ph.D., in conversation with Chris Gagnon, M.B.A.

Anna Tavis: How do you define "healthy organizations," and why does it matter?
Chris Gagnon: Here's the key thing: organizational health doesn't just mean ensuring
that "people are happy." Nor is it about corporate culture for culture's sake. The underlying concept is that performance and
organizational health are inextricably linked.
There is no lasting, long-term performance
without real organizational health. It's all
about driving performance.
So I've said what it's not. I should say what it
is! We define organizational health as the
ability to sustain performance over the longterm by having employees who continually
demonstrate three key competencies. They
understand where the organization is going
and how it plans to get there - in other
words, they "get" the vision and the strategy.
They have the tools, capabilities and motivation to put those plans into action, helped by
the fact that the organization has the right
processes in place. Last but not least: they're
encouraged to innovate and adapt to change
in order to keep the organization ahead of the
game.
Let me push harder on the point about performance, and give you some numbers. Too
often, the tendency is to look at financial performance only, but that's only half the equation. You have to manage financial
performance and long-term organizational
health with equal rigor. Our research underscores that: the healthiest companies in our
database have total returns to shareholders
56

PEOPLE & STRATEGY

(TRS) that are nearly twice the TRS of companies in the middle of the pack.

AT: So, tell us how McKinsey came up with
the idea of organizational health. What was
the motivation?
CG: Well, over time, our consultants had
been getting more and more questions from
our clients about how they should tackle the
nontechnical, "softer" aspects of their businesses. Increasingly, we were hearing CEOs
and other business leaders say things like "We
know there's more to achieving and sustaining performance with our people, but we
don't know exactly what it is or how to make
it better."
In answering this quandary, McKinsey was
really fortunate to have two people with
Ph.Ds. in management and organization as
statisticians, each of them deeply trained in
quantitative methodology. They set out to
devise a tool that would help us talk about
these issues in a way that top executives
could relate to. They built the tool called the
Organizational Health Index (OHI) that my
Solutions team now runs. The first version
was designed more than a decade ago; as we
got more performance data from our clients,
we refined the tool to get better and better at
both describing the situation and predicting
performance. We're getting really good at
knowing what organizational health looks
like; we're gathering more and more OHI
data to help us deeply understand the linkage
between performance and health, and to
make it easier for companies to act on those

findings. So far, OHI has helped literally
thousands of companies to perform better,
allowing them to see how they stack up
against industry averages-and more importantly, how they compare with the healthiest
organizations in the world.
Over time we came upon the realization that
we could leverage big data, software and
expertise, rather than capital, to help our clients make better decisions about that "soft"
side of their businesses-and take more decisive action on those issues. That led to the
formation of our Solutions offerings-which
enables us to serve clients in a variety of ways
with both McKinsey consulting teams and
independent of them.
You can probably tell that measurement of
organizational health is a real passion for me.
You know, the only way to manage something like this is to measure it. So the Solution
tool is not just a great way to do research, get
insights, and understand an organization's
health, but also a way to manage and improve
health so it helps to deliver sustained performance and competitive advantage. I'd go so
far as to say we're on a mission to get organizational health measures widely accepted as
drivers of long-term performance.

AT: Could you please say more about the Organization Health Index and how you use it?
CG: The OHI has four elements to it. First,
we're able to give a single score for how
healthy an organization is. This is a single
number that boards, management teams, and
financial markets can all look at-a measure
that quantifies the overall performance capability that an organization is building for the
long term.
This is a really crucial point. As I said, anyone
who's looking only at the raw financial metrics is getting only half the equation. Dominic
Barton, McKinsey's worldwide managing

People & Strategy Winter 2015 Vol. 38 Issue 1

Table of Contents for the Digital Edition of People & Strategy Winter 2015 Vol. 38 Issue 1