Why do companies need to be more nimble? McKinsey’s Aaron De Smet and Chris Gagnon explain what’s driving organizational agility, why it matters, and what to do.

Here is a brief excerpt from their interview conducted for the McKinsey Quarterly, published by McKinsey & Company. To read the complete interview, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, please click here.

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Rapidly changing business conditions are demanding more flexible organizations, say McKinsey principals Aaron De Smet, who co-leads our organizational-design efforts, and Chris Gagnon, who oversees our Organizational Health Index (OHI) research. In this episode of the McKinsey Podcast, they talk with McKinsey Publishing executive editor Luke Collins about their work, explaining why agile companies outperform others, how organizations are reacting, and what leaders should do. An edited transcript of the conversation follows.

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Luke Collins: Hi, I’m Luke Collins, an executive editor with McKinsey Publishing. I’m in Miami with Aaron De Smet, a principal in our Houston office and the co-leader of our Organization Design Practice globally. With Aaron is Chris Gagnon, a principal in our New Jersey office. Today we’re discussing one of their favorite topics—agility. More specifically, we’ll look behind the issue of organizational agility, which has been the subject of several recent McKinsey Quarterly articles. Aaron, Chris, thanks for your time today.

Chris Gagnon: Nice to be here, Luke.

Aaron De Smet: Thank you.

Collins: So why is this a topic now? Companies have obviously always had to adapt to the environment in which they operate and change over time. But it seems like, suddenly, the need to be agile is more important than ever. What’s happened?

De Smet: The pace of change has gotten a lot faster. It’s just a lot more intense.

Gagnon: Look at the statistics on how long companies last in the Fortune 500. They’ve dropped so precipitately that all of our clients are talking to us about the pace of change. Doesn’t matter industry, doesn’t matter geography.

De Smet: CEO tenure is way down.

Gagnon: Way down.

Collins: And is that a result of . . . I mean, we can run through the gamut of reasons—digitization, increasing globalization, companies looking well beyond their traditional borders, short-term thinking. Is it just a confluence of factors?

Gagnon: Well, I’ll tell you, I’ve tried to lay out the arguments for why that is, in a number of talks, and I get short-circuited every time because as soon as you say it, everybody nods their heads. I mean, everybody knows and feels what’s going on—and it’s all the things you described.

Collins: So against that backdrop, McKinsey’s been doing a large amount of research, utilizing a big tool that we have—the Organizational Health Index. Tell us about some of the research that’s been undertaken and what that seems to be finding about how companies should be operating.

Gagnon: I lead the team that runs the OHI globally, which is a fascinating database. I would argue it’s the largest database in the world on how companies run themselves. People suggest things, all the time, that we might want to measure or add to it, and most of them don’t actually add much to our predictive ability or our ability to explain things.

The true answer here is, we’re looking at this more because clients suggested it. And when we created a simple index for speed, clients said, “boy, we need to look at speed. We need to pay more attention to it.” At the same time, or shortly thereafter, we said, “well, if we’re measuring speed, we ought to measure stability as well.” We created an index there.

What did surprise us is that we kind of assumed that speed and stability would be antagonistic. And there were, sure, a set of companies that are so fast and crazy and chaotic, you know, that you think of them as typical start-ups. And there are companies that are bureaucratic and so stuck in their ways that not much changes. But there was this really neat group of companies which had both.

Collins: And in fact, that neat group of companies seem to be arguably the best performers.

De Smet: Oh, by far. I mean, the thing Chris said that’s really noteworthy is that we can test things all the time. And if you just want to find something that correlates with something else, that’s easy. If you want to say, “this actually is predictive and explanatory of what we find, above and beyond what we already know,” almost nothing turns out. People say, “oh, test this.” Nope. “Test this other idea.” Nope. “Well, does it not correlate?” Well, it correlates, but it looks like it’s just correlating because good companies do lots of good stuff.

But this one [speed and stability] is different. This one looks like it’s actually driving completely different behavior and experience and performance levels. If you emphasize speed—and we have some very specific questions on that—and if you at the same time emphasize stability—and we also have some very specific questions on that. . . . If you can do both, you have hit a sweet spot that will lead you to far and away outperform anybody who’s just doing one or the other.

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Here is a direct link to the complete article.

Aaron De Smet is a principal in McKinsey’s Houston office, and Chris Gagnon is a principal in the New Jersey office. Luke Collins is a member of McKinsey Publishing and is based in the Stamford office.