Using Commitments to Manage Across Units

To coordinate work across different business units, executives should think of the organization as a nexus of commitments, or personal promises between employees, that must be actively managed.

Executives must often manage nonroutine projects, such as integrating company mergers, filling market gaps that fall between current business units, rolling out large-scale IT systems and developing innovative solutions to new customer needs. For such pioneering work, a company’s installed business processes are frequently ineffective because they’ve been designed and optimized to execute routine activities. As such, organizations often experience much difficulty handling novel initiatives, particularly when important work needs to be coordinated across different business units, functional groups or geographic locations.

Problems with horizontal coordination are not necessarily a sign of bad management. Instead, they are nearly inevitable in any complex organization with multiple, specialized divisions. Business subunits adapt and fine-tune their metrics, language and incentives to excel at their required tasks. This very specialization, however, increases the difficulty of integrating activity across units.1 Salespeople talk past manufacturing engineers, and neither understands the scientists in research and development. The standardized work and information flows that cut horizontally across an organization can help coordinate action, but such flows work best when executing routine activities. In fact, their very reliability and efficiency limit their flexibility in doing new things.2 How then should companies perform nonroutine activities that require cross-unit coordination?

From our research, including case work at more than 100 organizations, we have found that managers can better execute novel initiatives across units by viewing the organization as a nexus of commitments — or personal promises that employees make to each other (see “About the Research.”). Using that perspective, they can take practical steps to identify critical commitments within the organization, locate and diagnose breakdowns and intervene to fix them. Managing by commitment increases organizational flexibility because managers and employees can exercise discretion in selecting the best people to work with and negotiate terms tailored to the task at hand. Commitments also increase the effectiveness of execution. Before employees personally commit, they can demand a deeper understanding of what is required and the consequences of failing to deliver. To the extent that they see a promise as a personal pledge, they work harder to honor that commitment.

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References

1. See P. Lawrence and J. Lorsch, “Differentiation and Integration in Complex Organizations,” Administrative Science Quarterly 12 (1967): 1–30.

2. See R.R. Nelson and S.J. Winter, “An Evolutionary Theory of Economic Change” (Cambridge, Massachusetts: The Belknap Press of Harvard University, 1982); and M.T. Hannan and J.H. Freeman, “Structural Inertia and Organizational Change,” American Sociological Review 49, no. 2 (1984): 149–164.

3. We use the words “promise” and “commitment” interchangeably. Our core argument extends to a range of promises including those made to individuals outside a firm’s boundaries and budget commitments made inside a firm, among others; but we focus on horizontal commitments across organizational subunits in this article. A commitment resembles an implicit contract, which plays a central role in several streams of theory, including agency theory: see M.C. Jensen and W. Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” Journal of Financial Economics 3 (1976): 305–360; transaction-cost economics: see O.E. Williamson, “The Economic Institutions of Capitalism” (New York: Free Press, 1985); and psychological-contract theory: see D. Rousseau, “Psychological Contracts in Organizations: Understanding Written and Unwritten Agreements” (Thousand Oaks, California: Sage, 1995). We share with these literature streams a focus on agreements between parties — whether they are called “implicit contracts,” “psychological contracts” or “commitments” — as an important alternative to processes for coordinating activity within organizations and across their boundaries. These research streams have, by and large, focused on a specific dyadic relationship as the focus of analysis, for example, between an external supplier and customer in transaction-cost economics, between principal and agent in agency theory and between senior executives (as representatives of the firm) and employees in psychological-contract theory. We differ from this literature first in using commitment as a general construct that can be used to analyze a broad range of promises. More importantly, our focus is the ongoing discussion required to make effective commitments rather than the specific content of the agreement.

4. D.N. Sull, M. Escobari, T. Sugata and J. Cabera, “Spinning Steel Into Gold: The Case of Ispat International N.V.,” European Management Journal 17, no. 4 (1999): 379.

5. Activities are nonroutine to the extent that individuals cannot fully specify in advance the desired outcome or most effective process to achieve that outcome. Difficulty in specification stems from three sources: complexity arising out of a large number of variables and interactions among them, tacit knowledge required to articulate the desired outcome or optimal approach, and emergent knowledge that arises during the process. Nonroutine activities also include initiatives that can be specified but are not customary in a specific context.

6. Recent scholarship has distinguished between problems of cooperation (agents know the optimal action but lack incentives to pursue that action) and problems of coordination (agents have incentives to cooperate but don’t know what to do). See C. Camerer and M. Knez, “Coordination, Organizational Boundaries and Fads in Business Practices,” Industrial and Corporate Change 5, no. 1 (1996): 89–112; and C. Camerer and M. Knez, “Coordination in Organizations: A Game Theoretic Perspective,” in “Organizational Decision Making,” ed. Z. Shapira (Cambridge, U.K.: Cambridge University Press, 1997). Joint action across specialized subunits often poses both cooperation and coordination challenges.

7. Collaboration across organizational subunits can be viewed as a public good or a resource that all parties benefit from regardless of whether they have contributed to its creation or maintenance. Public goods create a temptation for employees to obtain a free ride and benefit from the fruits of collaboration without helping to create or maintain them. In multiunit organizations, the free-rider problem is aggravated when multiple parties are involved. Employees can free-ride with greater anonymity and spread the cost of their free-riding across many people as the number of individuals involved increases. See P. Kollock, “Social Dilemmas: The Anatomy of Cooperation,” Annual Review of Sociology 24 (1998): 183–214.

8. Gerald Salancik argued that commitments in general are binding to the extent that they are explicit, public, voluntary and irrevocable. See G.R. Salancik, “Commitment and the Control of Organizational Behavior and Belief,” in “New Directions in Organizational Behavior,” eds. B.M. Staw and G.R. Salancik (Chicago: St. Clair, 1977): 1–54. We agree with Salancik (and a large body of empirical evidence from social psychology) that individuals consider their promises more binding to the extent that they are public, explicit and voluntary. Revocability applies to a set of actions — Salancik uses the examples of shooting a friend or having a vasectomy — that are not generally relevant for speech acts, which are rarely irrevocable. We add the characteristics active and motivated because they apply to promises (a subset of all commitments) for reasons we elaborate on in the text.

9. See L. Festinger, “A Theory of Cognitive Dissonance” (Stanford, California: Stanford University Press, 1957) and C.A. Kiesler, “The Psychology of Commitment: Experiments Linking Behavior to Belief” (New York: Academic Press, 1971).

10. B.R. Schlenker, D.W. Dlugolecki and K. Doherty, “The Impact of Self-Presentations on Self-Appraisals and Behavior: The Power of Public Commitment,” Personality and Social Psychology Bulletin 20 (1994): 20–33.

11. For discussion of the ethical obligations arising from promises, see J.R. Searle, “How to Derive ‘Ought’ From ‘Is,’” The Philosophical Review 73 (1964): 43–58.

12. Psychologists have found that individuals feel more obligated by their commitments to the extent that they actively discuss them prior to making a promise. The investment in effort required to clarify the conditions may also contribute to the strength of perceived obligation. For a recent review, see R.B. Cialdini, “Influence: Science and Practice” (Boston: Allyn & Bacon, 2000), 52–97.

13. Research on intrafirm strategy-making processes has found that distributing resource allocation decisions throughout levels within large, complex organizations allows them to better harness specific knowledge dispersed throughout the firm. See J.L. Bower, “Managing the Resource Allocation Process” (Boston: Division of Research, Harvard Business School, 1970) and R.A. Burgelman, “A Process Model of Internal Corporate Venturing in the Diversified Major Firm,” Administrative Science Quarterly 28 (1983): 223–244.

14. For a comprehensive overview of agile project-management methods, see J. Highsmith, “Agile Project Management: Creating Innovative Products” (Reading, Massachusetts: Addison-Wesley, 2004) and C. Larman, “Agile and Iterative Development: A Manager’s Guide” (Reading, Massachusetts: Addison-Wesley, 2003). Commitment-based management shares many features with agile project management, particularly the emphasis on satisfying the customer and the importance of frequent, face-to-face conversations.

15. One can think of commitments as a mechanism for converting the interunit coordination problem from a multiplayer game to a two-person game, which simplifies both the incentive and information challenges required for effective collaboration.

16. T.H. Davenport, “Process Innovation: Reengineering Work through Information Technology” (Boston: Harvard Business School Press, 1993) and M. Hammer and J. Champy, “Reengineering the Corporation: A Manifesto for Business Revolution” (New York: HarperCollins, 1993). For a recent review of process research, see D.A. Garvin, “The Processes of Organization and Management,” Sloan Management Review 39 (summer 1998): 33–50.

17. G. Hall, J. Rosenthal and J. Wade, “How to Make Reengineering Really Work,” Harvard Business Review 71 (1993): 119–131. Since 1993 Darrell Rigby of Bain & Co., a global management consulting firm, has conducted a survey of the use of management tools. The 2003 survey revealed that reengineering ranked 19th out of 25 tools in terms of usage by firms, 20th in terms of satisfaction and fourth in terms of customers abandoning the tool. See D. Rigby, “Management Tools Survey 2003,” Strategy & Leadership 31 (2003): 4–11.