In brief
Red tape, rigamarole, friction—however you refer to it at your organization, it boils down to the same thing: sludge. Organizational sludge—a term popularized by Nobel laureate Richard Thaler and Harvard Law School professor Cass Sunstein—encompasses the bureaucratic inefficiencies and unnecessary obstacles within an organization that slow decision-making, hinder innovation, and impede productivity.
Sludge seeps into a company in seemingly innocuous ways.
It’s the complex approvals process that requires multiple layers of sign-off, even for minor decisions. It’s the email chains,
Calculating the hidden costs of letting inefficiencies slide
1. The sludge-tax burden
2. The reinvention opportunity
The road to business renewal starts when CEOs step in to reduce organizational friction.
In depth
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Sludge isn’t always a bad thing. Sometimes friction can safeguard against hasty decision-making or reckless actions. For example, in highly regulated industries, such as healthcare or finance, certain bureaucratic processes and compliance requirements may create sludge, but they also ensure adherence to legal and ethical standards, protect consumer interests, and maintain overall system stability. It’s important for leaders to distinguish between good friction—like road-surface tension designed to slow a runaway truck—and true sludge that gunks up the works.
It can be frustrating when things aren’t moving as quickly or smoothly in your company as you’d like. But sludge doesn’t have to be a permanent state. By wading in personally, C-suite leaders can help clear out inefficiencies and better position their teams and organization for a more productive future.
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June 2024
Illustrations by Aad Goudappel
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Dive deeper:
The big power of small goals
1. The
sludge-tax
In a perfect world, your company would be a well-oiled machine. In reality, most companies have sludge in the engine that’s keeping them from moving as quickly as they want. Call it sludge, friction, or transaction costs, getting things done at work—whether that’s small tasks, such as sending emails, or bigger initiatives, such as developing a generative AI approach—often takes longer than anyone would like.
What if that could change? In PwC’s 27th Annual Global CEO Survey, CEOs said 40% of time spent on activities including emails, meetings, and administrative processes is inefficient in their organizations. That’s a significant drain on money, morale, and time that could be better spent on transformation, business model reinvention, or just about anything else.
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3. Escaping sludge
EXPLORE
Focusing on efficiency is just one way high-performing companies get ahead, with the top 20% achieving more than 13 times the performance premium
of their industry peers. Discover their secret to success and how you can
join them.
—Peter Drucker
The only things that evolve by themselves in an organization are disorder, friction, and malperformance.”
Here’s the rub: many of the tasks that CEOs called out as inefficient are ones that senior executives can influence. In other words, if your company is mired in sludge, it’s within your power to help pull it out. Even better, there are clear upsides to reducing friction. Recent PwC research suggests companies that tackle sludge are better positioned for reinvention than those bogged down by bureaucracy.
So, how do you start clearing bottlenecks? We recommend addressing sludge on two fronts: culture and technology. Here are four ways to get started.
burden
nine deep with a dozen people on cc. It’s a micromanager who hovers over their team, and excessively customized tech solutions that are difficult to maintain and lack interoperability with other systems. It’s the meetings. Meeting overload is so pervasive that 68% of people say they don’t have enough uninterrupted focus time during the workday, according to a workforce study from Microsoft.
Nobody sets out to create a “sludgy” organization. It’s often a by-product of growth, accumulating as a company becomes more complex and expands. But left unchecked, sludge can suck up morale, resources, time, and money. Think of the lost hours that could have been better spent on a critical operating model transformation; building strategic partnerships; rolling out new digital tools; or upskilling employees. Consider the missed opportunities for innovation and creativity that stem from employees feeling too demotivated to navigate the convoluted procedures involved in trying something new.
Then there’s the “sludge tax”: the financial cost of inefficiency. By our conservative estimate, this adds up to a self-imposed US$10 trillion tax on productivity. Applied around the world and adjusted for individual economies, that’s about 7% of global GDP.
Dive deeper:
Tapping ecosystems to power performance
At a time when almost half (45%) of respondents in PwC’s CEO Survey are worried their current business won’t be viable in ten years if it stays on its current path, every hour can feel precious—and inefficiency particularly painful. But tackling sludge might turbocharge your reinvention efforts.
Advanced analysis of the survey data suggests business model reinvention actions are more successful in companies with less sludge. PwC previously reported a positive association between profit margin and reinvention moves such as initiating strategic partnerships and developing proprietary technologies. Now, further analysis shows that the association is even stronger among companies with higher time efficiency.
To put it simply: a company with more organizational sludge will not operate as efficiently, or be as successful at business model reinvention, as a company with less sludge—even if they’re taking the same actions.
PwC research into differentiators that set apart high-performing companies found that those at the top are 1.2 times as likely as peers to have upleveled their operating models to reduce transaction costs—aka, sludge. One step they’ve taken is to upgrade their legacy technology to reduce inefficiencies, such as downtime for troubleshooting or challenges integrating with other systems or platforms.
Reducing sludge means higher profit margins and more effective ecosystems
opportunity
reinvention
2. The
These front-runners are also faster to market, more agile, more innovative, and more than twice as likely to generate greater than 60% of their income from ecosystems (and they expect that to increase in the future).
The bottom line: companies reducing sludge are making stronger progress on their objectives than those mired in muck.
Start clearing out your sludge
Click each icon to explore.
Don’t be part of the problem
You could be contributing to sludge without even realizing it—take an honest and critical look at how you’re using your team’s time.
Be willing to invest in the time to build and maintain your team’s trust through prioritizing upskilling and encouraging a strong feedback culture.
Empower your people
Audit your technology drains
AI can be a powerful tool in eliminating inefficiencies. Look to algorithms, predictive analytics, and chatbots to improve productivity.
Put AI to work
Dive deeper:
Uniting a divided workforce
If you really want to reduce sludge, you’ll need to engage and empower those who are most stuck in it—your employees. There’s a technology component to this and a cultural one.
On the technology side, one way to empower employees is to enable citizen-led innovation, an approach focused on helping your workforce build skills, surface new ideas, and apply them immediately in their work. That way, employees who see opportunities to increase efficiency can propose and implement solutions.
On the culture side, start with a concerted effort to increase your awareness of the challenges and friction points faced by employees within your company. That could include spending time observing workflows, soliciting feedback, and actively listening to employee concerns—as well as personally helping them troubleshoot.
Even well-intentioned leaders can inadvertently contribute to sludge, whether they cause it or are unaware of friction points they could smooth out. Consider: do you have special privileges allowing you to bypass inconveniences that less senior employees must deal with, such as an executive assistant to set up meetings or book travel? Do you insist on being involved in decision-making meetings but are too busy to attend?
If you answered yes (or even maybe), you might be guilty of what authors Robert I. Sutton and Huggy Rao call power poisoning in their book The Friction Project: How Smart Leaders Make the Right Things Easier and the Wrong Things Harder. The authors note how “power poisoning can render leaders oblivious to the compound effects of the small (and unnecessary) burdens that they heap on employees and customers—especially when their cone of friction includes many people they can influence over long stretches of time.”
Correcting course starts with an honest accounting of how you might be contributing to sludge. Review any privileges you may have, and relinquish any that aren’t essential or that create unnecessary friction for others. Then it’s time to find out how others see you. Collect feedback from your employees to understand how your actions are perceived and how you may be causing friction. Gathering this insight—and undertaking an unflinching self-assessment—is the first step to becoming part of the solution.
Tackling inefficiency through culture and technology
sludge
3. Escaping
1. Don’t be part of the problem
It’s critical to address sludge on two fronts: culture and technology. First, shift the processes and behaviors—including your own—that are holding back efficiencies. Then, focus on eliminating technology pitfalls to streamline work.
2. Empower your people
In companies where employees don’t feel safe to voice concerns, leaders must prioritize building trust by demonstrating integrity, authenticity, and a genuine commitment to listening to and valuing employee perspectives. This may involve creating channels for anonymous feedback, implementing formal mechanisms for idea generation and recognition, and consistently modeling open and transparent communication behaviors.
3. Audit your technology drains
Meetings, processes, and emails may be common sources of sludge—but don’t overlook the friction caused by technology. For example, outdated software systems that lack compatibility with newer technologies can result in inefficiencies, increased downtime for troubleshooting, and difficulty integrating with other systems or platforms. Data silos, in which different departments or teams manage data independently without sharing it, can lead to duplication of efforts, inconsistent quality, and difficulty in accessing and analyzing data across the organization.
Start by identifying and phasing out legacy IT applications that are bogging down your processes. Then, streamline and modernize your technology systems. PwC research found that top-performing companies are taking two critical steps to combat sludge in this area:
Embrace cloud and digital technologies
to cut down on tech-related sludge.
Top-performing companies are at least 1.2 times as likely to have become cloud-native—an effort that is specifically aimed at reducing transaction costs, as well as supporting their ecosystem strategy and improving employee and customer experiences. Specific actions they’ve taken include migrating legacy apps to the cloud and converting them to cloud-based applications and using industry cloud for core operations in their back, middle, and front offices.
Portrait by Bonnie Morrill
When you are at the top of an organization… you can unwittingly waste an enormous amount of time.”
—Robert I. Sutton, coauthor of The Friction Project: How Smart Leaders Make the Right Things Easier and the Wrong Things Harder
Listen to Sutton discuss how leaders can take action to address inefficiency.
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“All of us, no matter where we are in an organization, we have the ability to make things easier or harder for other people. And when you are at the top of an organization, and you have hundreds or thousands of people reporting to you, you can unwittingly waste an enormous amount of time. And I think what great leaders do, is that they’re really aware of how they’re using other people’s time—in terms of their personal behavior, and also in terms of the organizations that they design as well, too.”
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Leverage APIs to integrate data seamlessly across various systems. APIs act as automated sludge-reduction tools, facilitating smooth communication between different parts of your organization and with external partners. Consider using APIs to optimize data-exchange processes, making tasks more efficient and reducing unnecessary blockages.
FLIP TILE
2
As you roll out new technology, don’t skimp on helping people learn how to use it. This step is often overlooked because it can add costs, but it can pay off in the long run by helping employees move away from using their older, “sludgier” tech and adopt the newer, more efficient technology more quickly.
4. Put AI to work
When used responsibly, AI can offer organizations a number of innovative ways to help cut down on sludge. Among the many use cases:
Uncover sludge with AI algorithms that analyze complex workflows and processes to identify bottlenecks, inefficiencies, and areas for improvement. Then, use AI as part of the solution to refine the process.
Use AI-powered predictive analytics to analyze large volumes of data in real time, enabling proactive decision-making, mitigating risks, and preventing sludge-inducing problems.
Look to algorithms to help manage and integrate diverse datasets from different sources, formats, and systems.
Deploy AI-powered chatbots and virtual assistants to help employees address customer inquiries and access organizational knowledge more easily—reducing friction points and saving time.
PwC’s analysis of CEO Survey data found that companies with a higher rate of AI adoption also reported higher levels of efficiency in addressing technology issues.
Though this relationship represents a correlation and not proof of causality, it nonetheless suggests the sorts of costs and productivity benefits that AI could bring to your sludge-scouring efforts.
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Trust between leaders and their workforce is critical to effecting change. Employees who feel it’s safe to speak up and who trust their leaders are more likely to raise issues around inefficiencies and suggest improvements to streamline processes and reduce sludge. Be willing to invest time to build and maintain your team’s trust.
Start now
Your legacy tech could be dragging you down. Embrace the cloud and leverage APIs (application programming interfaces) to aid sludge reduction.
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©2024 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. Strategy+business is published by certain member firms of the PwC network. Articles published in strategy+business do not necessarily represent the views of the member firms of the PwC network. Reviews and mentions of publications, products, or services do not constitute endorsement or recommendation for purchase. Mentions of Strategy& refer to the global team of practical strategists that is integrated within the PwC network of firms. For more about Strategy&, see www.strategyand.pwc.com. No reproduction is permitted in whole or part without written permission of PwC. “Strategy+business” is a trademark of PwC. Cookie Policy
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In brief | Sludge tax | Reinvention opportunity | Escaping sludge | Top
2 min
In brief
Your legacy tech could be dragging
you down. Embrace the cloud and leverage APIs (application programming interfaces) to aid sludge reduction.
8 min
In depth
Red tape, rigamarole, friction—however you refer to it at your organization, it boils down to the same thing: sludge. Organizational sludge—a term popularized by Nobel laureate Richard Thaler and Harvard Law School professor Cass Sunstein—encompasses the bureaucratic inefficiencies and unnecessary obstacles within an organization that slow decision-making, hinder innovation, and impede productivity.
Sludge seeps into a company in seemingly innocuous ways. It’s the complex approvals process that requires multiple layers of sign-off, even for minor decisions. It’s the email chains, nine deep with a dozen people on cc.
In brief | Sludge tax | Reinvention opportunity | Escaping sludge | Top
In brief | Sludge tax | Reinvention opportunity | Escaping sludge | Top
In brief | Sludge tax | Reinvention opportunity | Escaping sludge | Top
