TL;DR
- Organizational health is a company's ability to align around a shared vision, execute strategy efficiently, and create new knowledge, going beyond financial metrics to include cultural and leadership conditions that determine long-term performance.
- McKinsey's research across 1,500 companies found organizational health to be the single best predictor of long-term value creation, with healthy companies delivering 3x the shareholder returns of unhealthy ones.
- Over-relying on AI for decisions causes what researchers call "cognitive surrender"- a collapse in a team's collective knowledge-creation ability. Healthy organizations keep judgment work human.
- Healthy companies are 59% less likely to face financial distress and can see EBITDA gains up to 18% in a year.
Organizational Health in the Age of AI
In the fast-moving age of AI, companies are being put to the test on their ability to last and thrive in changing environments. The companies that survive are those with good organizational health- the ones who can continue to meet goals consistently through time, even in rocky landscapes. This writing explores the concept of organizational health and how it has changed with AI, from its definition to its importance, and how it can be applied tangibly within a real organization in this day and age.
Why is organizational health important as AI is increasingly adopted?
Organizational health is important for a company to be successful in the long term. With over 20 years spent studying this topic, and drawing from more than four million survey responses across 1,500 companies in 100 countries, McKinsey's Organizational Health evaluation found organizational health to be the single best predictor of value creation and the most reliable predictor of long-term performance, with healthy organizations consistently demonstrating greater resilience, and performing better during times of uncertainty.
Healthy organizations were found to:
- deliver roughly 3 times the total shareholder returns compared to unhealthy ones,
- be 59% less likely than unhealthy organizations to show signs of financial distress,
- and see increased EBITDA up to 18% in one year.
These findings highlight why organizational health matters in changing environments- and the environment is currently changing faster than ever. Menlo Ventures' data analytics found that AI has become the fastest-growing software category ever recorded, with enterprise gen AI spend growing from $1.7 billion in 2023 to $37 billion in 2025. At the same time, The US Census Bureau recorded 5.48 million new business formations in 2023, setting a new record. In a quick changing environment with increasing competition, organizational health has become more and more essential as a competitive advantage. As management expert Patrick Lencioni argues in his book, The Advantage, every business today is smart. What separates those who become successful is whether they can also be healthy.
What is organizational health in the age of AI?
Organizational health is a company's ability to align around a common vision, execute strategy efficiently, and create new knowledge, going beyond financial metrics to include cultural and leadership conditions that determine long-term performance. Now with AI changing the landscape, there is an emphasis on balancing human vs. AI work and maximizing output while reducing burnout in human employees.
Organizational health is evaluated across three interconnected dimensions: alignment, execution, and knowledge creation.
Alignment
Alignment refers to how well the entire organization is united around a shared vision, strategy, and purpose. Typically, this is done using a set of shared goals. These goals, and their associated knowledge, must be clearly communicated across the whole team, not just executives, to make sure everyone is of one mind and the work being done is actually useful in achieving desired results. Alignment is a prerequisite for good execution.
Execution
Execution is an organization's ability to turn goals into efficient and productive work. Being efficient involves knowing the difference between executional work (routine, procedural, or information-gathering work that does not require human judgment or deliberation) vs. judgment work (the exercise of taste, creativity, values, and deliberative decision-making), and offloading the right tasks to the right mediums - whether that's AI or a person. Being productive involves spending uninterrupted time on focused deep work to produce high-quality output. Execution is important for a company to produce tangible results.
Knowledge Creation
Knowledge creation refers to a company's ability to create new knowledge via the process of decision struggle (the process of exercising effort in order to come to the right conclusion about how to solve a problem) in order to adapt and serve the changing needs of customers. True knowledge creation is something uniquely human: tying into execution and knowing where to delegate work for the best results. Healthy companies must retain the ability to make good, reasoned, and most importantly, human decisions to stay ahead of competitors and deliver something truly valuable.
Without these three pillars, it is much harder for an organization to thrive in the long term:
- Without proper context and alignment, decisions are more likely to be made within silos using conflicting criteria, leading to misspent resources and counterproductive work. Teams using AI tools independently, without shared context, compound this silo problem.
- Lacking in execution would mean employees are delegating the wrong work to AI and constantly distracted by things like notifications and meetings, reducing their time spent on meaningful work, leading to lower company outputs and heightened rates of burnout.
- If knowledge creation is not prioritized or if judgment work is delegated to AI, companies will reach a state of knowledge collapse where all innovation is essentially destroyed, causing organizations to lose their ability to meaningfully differentiate from competition.
How can I protect organizational health with AI in the picture?
While there is no single playbook to guarantee improved organizational health, certain research-backed practices can help teams stay healthy as AI is increasingly adopted.
Demonstrate Trust
Trust is the single most important element in any organization, foundational to achieving group alignment, efficient execution, and knowledge creation. There are 2 forms of trust, both of which must be present: trust in competency, and trust as a human. There must be mutual trust in the people of your organization to produce good work and have good judgment, as well as trust in them to be good people with good intentions. In addition, our research on the impact of trust and AI capability found that without trust, AI adoption happens far slower, which puts organizations into a vicious cycle of overwork and depleting trust.
Achieving trust starts at the top with demonstration from leadership. This looks like being vulnerable- knowing your strengths, admitting to your weaknesses, being willing to ask for help, taking accountability for your mistakes, and being open to feedback. When trust is achieved, constructive criticism, healthy conflict, and better decisions will naturally arise, leading to better execution and more knowledge creation.
Share Context Across Teams
For a team to reach alignment, it is important for strategy context like the team's values and goals to be understood and recognized by all. This can be achieved by having all the content be visible and progress be transparent. Having goals and progress public for everyone across teams to see and collaborate on minimizes redundant work and the creation of harmful silos, helping to reach organizational alignment.
It is also important for employees of all levels to have access to relevant information to make decisions within their roles, including information across functions. This can be done by keeping a searchable record of shared knowledge throughout the entire organization, typically done using a new category of software called a company brain. This reduces time wasted by needing to ask a team member and interrupting their work, and reduces the risk of redundant work due to a lack of insight.
Make Deliberate Human Decisions
A company is essentially the sum of all its decisions. To ensure those decisions are good ones, they should be deliberate and well thought out, with reasoned discussions with the right people and data to back them. After a decision is made, it should be documented somewhere visible to refer to when making future decisions for more insight and to avoid repeating mistakes.
With AI capabilities reaching such a powerful state, it can be tempting to over-rely on it for everything possible at a company, including making decisions- something Shaw and Nave refer to as Cognitive Surrender in their research paper 'Thinking—Fast, Slow, and Artificial: How AI is Reshaping Human Reasoning and the Rise of Cognitive Surrender'. Through their research they find that cognitive surrender causes knowledge in groups of people to completely collapse, showing why it's important not to rely on AI for judgment work. By having humans make deliberate decisions, organizations can improve their execution by working on the right things, and maintain knowledge creation.
Create Space for Focus
Focus is important for optimizing execution outcomes. A study on the cost of interruptions found that a single interruption can increase work errors by over 12%, while also increasing stress and frustration. More recent research has also found that workers now switch tasks every 3 minutes on average, while it takes an average of 23 minutes and 15 seconds to fully refocus on a task after an interruption. Our paper on the cognitive cost of distractions concludes that we never reach full cognitive recovery before the next interruption arrives, impacting our ability to think clearly about the task.
To reduce interruptions and create space for focus, it's important to set clear communication expectations to minimize unneeded notifications, pings, and meetings. Having a company brain to minimize the need to ask questions helps reduce pings. Differentiating between urgent and non-urgent replies can also help with this, as can blocking out time for deep work with no meetings or notifications expected. When people are given the space they need to actually do work, employee health and execution quality increase.
Maximize Human Performance
With AI, work is speeding up and the number of tasks a single person works on at once is continually increasing. This means knowledge workers are constantly context switching between tasks, increasing the rate of burnout, which can decrease the quality of execution.
To prevent this burnout, many companies are moving towards a 4-day workweek. A study published in Nature's Human Behaviour journal followed close to 2,900 employees across 141 organizations in six countries who made the switch with no reduction in pay. After a 6-month trial, the results showed real improvements in burnout, job satisfaction, and mental and physical health, mostly explained by better sleep, less fatigue, and people feeling more capable of doing their jobs well.
One easy way to implement these practices is with organizational health software. Convictional is the first of this category, with features like goal alignment and decision logging.