People & Strategy Winter 2015 Vol. 38 Issue 1 - 57

director, put it well in 2011 in an essay in
Harvard Business Review. The essay was
titled, "Capitalism for the Long Term." He
said today's governance systems are biased
toward short-termism; the unintended upshot
of striving to meet quarterly targets is that
executive teams manage for only a small portion of their companies' value. I'll quote him
here: "If the vast majority of most firms'
value depends on results more than three
years from now, but management is preoccupied with what's reportable three months
from now, then capitalism has a problem." In
other words, we've got to use metrics that
reward the long-term view of performance.
The second element breaks that single number down into nine sub-scores called
outcomes-measures of how well an organizational approach is doing at different aspects
of organizational success. It might be the way
the company drives accountability throughout the organization; it might be how it inno-

There are different ways to run companies, not just stylistically,
but in terms of the actual mechanics of management practice and
running the organization on the day-to-day basis.

vates. We use a proprietary algorithm to
combine those nine outcomes into the one
number: the company's OHI score.
The third element is actually the meat of
what we do with our clients. It's what we call
practices. There are currently 37 practices,
each developed as a way to figure out how
management teams spend their time. This is
really the key to how the OHI works. It
doesn't ask questions about how people feel,
where the answers are often clouded in individual perception bias. Instead, we ask how
people spend their time. That way, we're
talking about the actual work of running

organizations-not about personal work
styles or preferences.
The fourth element of OHI is the ability to
learn from the best models out there. We're
serious about our focus on performance; we
continue to compile statistics, and we have to
say they're getting pretty interesting. The statistics we've published broadly so far clearly
underscore the connection between organizational health and performance. They tell us
that the upper quartile of public companies in
our database-the upper quartile measured
by their OHI scores-have extraordinary
total returns to shareholders (TRS): 26 percent a year over nine years. That's three times
the TRS of those in the bottom quartile, and
almost twice as much as the TRS of the middle 50 percent. We're not talking about a few
examples; this is representative of a large
number of companies. We're doing this with
hundreds of companies a year; OHI is probably the tool that McKinsey uses most widely
with clients.

AT: So is everyone at McKinsey using the same
tool? And do all clients use it in the same
ways?
CG: Yes, this is how McKinsey discusses organizational health with our clients all around
the world. We can use OHI to produce some
fascinating performance metrics, starting at the
micro level. Let's say a company has got
10 plants. If we get the OHI scores for each of
the 10 plants, we can tell the company's business leaders how the 10 plants are going to do
next year. We rank them, and we are getting
very, very close to correct.
That's not to say that all companies are following every facet of OHI. A few of the bestperforming companies did track against all
37 organizational health practices, but what
was interesting was that none of the healthiest companies we looked at used all 37 practices at a high level. As a matter of fact, none
of them did even 20 with great frequency. So
it looks like companies only need to get seven
or eight practices 'right'-just those practices
that hang together in a consistent management philosophy.
VOLUME 38/ISSUE 1 - 2015

People & Strategy Winter 2015 Vol. 38 Issue 1

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