How much “structure” do you need in an organization?
This is one of the eternal debates in the field of management & organization.
Unfortunately, the debate is often based on ideology and personal preferences. One example is the movement that advocates an organizational form called “holocracy”, which is a concept for an organization without bosses.
This idea has received a lot of attention (see here for one example).
But shouldn’t we start by trying to understand the challenges facing a particular organization, before recommending a solution?
In my work as a consultant, I do find that some organizations are “overspecified”, that is, that they rely too much on hierarchy and formal procedures.
For example, I have observed this in some public sector organizations.
Those who work in such organizations are supposed to be aware of – and comply with – a large number of guidelines, procedures, regulations when carrying out their work.
Their roles and duties are typically highly formalized (i.e., specified in writing); decision making authority is often centralized; and there are several layers from the bottom to the top of the pyramid.
But in many other organizations that I work with, the opposite is the case.
People in these organizations complain that they don’t know what their role is or what they are responsible for.
Work processes are ad hoc or informal – or highly political – even in cases where everybody would agree that it would be fairer and more effective to have a formal, standard way of performing them.
In such organizations, people may participate in a lot of discussions, but nobody seems to have the authority to make a decision (let alone follow through and implement it).
People can’t make choices and set priorities because they don’t know what the overall direction of the organization is.
In the words of author Stephan Haeckel, “They feel like they are on board a rudderless ship that is drifting at sea”*.
Such organizations are “underspecified”, that is, they lack leadership, structure and governance.
Of course, most organization would fall somewhere in the middle of such a continuum.
But the point is that one has to find out where on the continuum one is, because the solution – if one wants to become more effective – is radically different.
We also need to understand the particular external demands facing the organization.
A bank, for example, typically is on the extreme end of the continuum, with a lot of focus on formal processes.
But this is not necessarily because bank managers believe in a “control and command” philosophy. It is because all banks need to comply with externally imposed regulations – and manage its own financial risk. (And, by the way, as a customer, would you want to deal with a bank that didn’t focus on risk management and compliance?)
But I am not saying that the business environment determines everything.
In some cases we do observe that an organization is indeed overspecified. And that people in the organization believe that this is a real obstacle to increasing effectiveness. If so, we should of course try to introduce more flexibility and more informal ways of working.
We may try, for example, to reduce the number of detailed specifications of policies and procedures, and instead focus on outcome-oriented goals. This will reduce the number of rules and provide employees with more autonomy in selecting the course of action to take to reach the goal.
But if the organization is underspecified, we need to follow a different approach.
Depending on the situation, the right intervention may involve clarifying unit mandates and defining individual accountabilities, introducing some standards for how to perform key work processes, establishing basic principles for decision making, or re-organizing people into a new reporting structure with a more logical grouping.
*The phrase is borrowed from Stephan Haeckel’s excellent book “Adaptive Enterprise” (HBS Press, 1993).
A seemingly small change in the formal structure of an organization may greatly simplify – or complicate – the way we work.
The problem is that when we move boxes on the organization chart, we don’t easily see how a formal regrouping will affect the work processes – because they are in the “white space” between the boxes.
In particular, a change in the formal structure can lead to a sharp increase in the number of interfaces between units – which in turn leads to an increase in coordination costs.
Yes, you may say, but isn’t it good that people coordinate with each other?
You may certainly want people to coordinate across units – and to “collaborate” on certain initiatives.
But you probably don’t want your people to have to send 15 emails or conduct 15 meetings every time they need to do something – IF it could have been accomplished with 1 email or 1 meeting.
But that is the consequence of getting the structure wrong.
In the video, I discuss this challenge (the video lasts for about 6 minutes).
I use some slides that show the formal structure of a hypothetical firm with three divisions – each responsible for one product.
The key issue I discuss is whether the firm needs to organize itself in a uniform way – that is, whether each of the three divisions needs to adopt the same formal structure.
If one division (business area) chooses to organize itself differently from the others, does that have a positive, negative (or no) impact?
It all comes back to the effect that our choice has on the number of interfaces.
I first encountered the expression “white space on the organization chart” in Rummler and Brache’s 1991 book (which is still relevant, by the way!)
Few organizations can remain static in today’s business environment.
So for leaders, there is a need to periodically examine (or re-examine) the design of their organizations, to make sure that one has the right structure in place, given the current goals and priorities.
When you have concluded there might be a need for a reorganization – how do you proceed?
Even though a reorganization may be needed, it is a challenging task for every leader, and few get the chance to do it very often – so it’s not easy to learn systematically over time, either.
In the video below, I describe three key tips to help you avoid the most common mistakes – and increase the chances that you will succeed.
For a more detailed discussion of this and a proposed methodology – see the third chapter of my book.
Picture: Lady Justice (Photo credit: Photopin.com)
Last year, I was kindly invited to attend a workshop in London held by Greg Kessler and my friend Win Dhat, from Kates Kessler Consulting. The purpose of the workshop was to review key organization design principles and methods.
During the lunch break, I was seated next to another participant who worked for The Crown Prosecutor (similar to the Attorney’s office or State Prosecutor in the U.S.)
Since I have never been the subject of prosecution (so far…), I had to admit I knew little about the institution.
So I asked him what its purpose was.
He gave an interesting answer: “Well, basically, our job is to help avoid that too many people are arrested, or that too few are arrested”.
In other words, if the Crown Prosecutor decides to prosecute 100% of the people that the Police arrests, that would be an indication that too few are arrested. On the other hand, if a low percentage of those arrested are prosecuted, it means the police arrests too many people, for example, without reasonable suspicion or with poor evidence.
I then asked him whether they had always been a separate institution. He responded that, in fact, they had recently celebrated 25 years as a unified institution in Britain. Historically, prosecution was the responsibility of the police itself.
So what we have here is an example of an institution that carries out a function that has been separated or “decoupled” from another institution.
The reason is of course that people, over time, realized that there’s a potential role conflict here: It is not ideal having the same people investigating and prosecuting a case.
The need to separate incompatible functions is well accepted in law and political science. All western democracies are today based on separation of powers (with different responsibilities allocated to the legislative, judicial, and executive branch of government).
We know that it matters a great deal.
There’s a strong link between the design of governmental institutions and key variables used to measure progress and prosperity across countries, such as economic growth, security, and quality of life. Look at the countries on the bottom of the lists, and you will usually find countries with dysfunctional institutions and a lack of separation of powers.
Now these examples are at the institutional level, but you can find similar examples within business firms.
There are many units within business firms that perform work that was traditionally done by line managers in the organization (think about Health, Safety and Environment, or Internal audit, or Procurement) but that today – for good reasons – are carried out by separate units.
Interestingly, the need for separation of incompatible roles seems to be recognized in all cultures:
- They say “don’t let the fox guard the hen house” in Britain.
- They say “don’t let the thief guard the keys” in India.
- They say “don’t let the dingo take care of the kids” in Australia.
- We say “don’t let the ram guard the bag of oatmeal” here in Norway.
The problem is that it is largely ignored in books on organization design. Most organization design books focus on how to achieve better integration and coordination.
More generally, there are more than 8,000 books listed on amazon.com with “collaboration” in the title, and another 4,600 with the word “integration” (I am here only counting business and management related books). There are very few books on “how to separate roles and sub-units”.
But if we want to design an effective organization, we need to pay equal attention to both.
If Francis of Assisi was a manager, his prayer would be: Help me integrate what I can, and separate what I should, and have the wisdom to know the difference.
During Fall 2013, I conducted interviews with 23 senior executives in 16 international firms, together with colleagues from Deloitte Consulting.
The purpose of the interviews was to understand how the firms had organized their international operations.
I will summarize the official results in a brief report, which I can include a link to a bit later.
But let me tell you about something that won’t be in the report – namely, my own, personal observations from the interviews.
I thought this might be relevant because people often make assumptions about how executives think about organization design.
I have found that some of the assumptions are wrong – or at the very least, they don’t seem to apply to this group of people.
But before I go on, let me first say that it was a great privilege to have these conversations. The participants seemed genuinely interested and willingly shared their views and experiences, and described both opportunities and challenges.
Here are three observations I made:
Organization design is considered a key strategic issue.
Some people claim that “formal structure doesn’t matter anymore” and that leaders are preoccupied with other things.
But from what I could tell, executives spend quite a bit of time considering organization design issues.
As an example, with the EVP in a bank, we discussed alternative ways of allocating responsibility between branches abroad and the headquarters. He remarked:
“I discuss these kinds of issues with people internally in the bank, and even with people in other banks, at least once every month.”
All of the participants were able to explain the relationship between their strategy and their organization very well.
Some also described adjustments to their overall organizational model that had been made recently.
In a couple of cases they described what a possible next step could in the development of the organizational model.
The CFO in one firm stated:
“Leaders in every firm should, from time to time, ask themselves whether they are organized in the right manner, particularly when the external conditions are changing.”
By the way, the fact that leaders are interested in structure does NOT imply that they think narrowly about organizational issues. On the contrary, they think broadly.
As one example, all of them (even the CFOs!) touched on important cultural factors that had to be taken into account when considering how to organize the firm internationally.
Senior executives are not “trigger happy”.
Some employees and consultants claim that executives enjoy re-organizing firms, just for the sake of it, or to show that they are action-oriented.
I can’t speak for all executives in the world, but there was little proof of such an attitude among the 23 people I met.
If anything, they rather seemed too reluctant than too eager to introduce organizational changes.
Here’s a quote from one participant, a CEO:
“The board kept asking me when I would make the decision about a new organizational structure, but I held it off. When we finally did make the decision, earlier this year, we were surprised by how quickly it was accepted and implemented. But after all, we had been discussing an alternative model for five years, so everybody knew that we were considering making this change”.
This is not to say that there aren’t cases of bad decisions and poor implementation processes.
I was told of a couple of reorganizations that had created a lot of frustration and achieved very little.
It’s not difficult to do this thing wrong, to put it that way.
But in general, my overall impression is that most senior executives are quite careful and fairly averse to risk.
So most of the time, they wait until there is a real need – and until they have a good plan –before they execute.
Nonetheless, most senior executives are quite intuitive decision makers.
From the conversations we had, I got the sense that executives develop new organizational models in a fairly intuitive manner.
New designs gradually take shape in their minds as they consider strategies, feedback from customers, and internal challenges.
As I mentioned, some of the firms had recently re-designed the organization. From what I could tell, there had been a real dialogue between stakeholders leading up to the decision in these cases.
At the same time, my impression was that there had been a somewhat limited exploration of options: Typically, only one solution alternative had been discussed, as far as I could ascertain.
Nor do I recall any participants mentioning the use of facts-based analysis of markets, work processes, or other relevant factors as an input to the decision process.
So if my interpretation is correct, this may be an improvement point.
During the last few years, many firms have become more systematic in terms of change management, and some even have a standard process for managing the transition to a new structure, once the decision has been made.
The next step may be to consider how we can improve the actual design and decision process.
I am not talking about removing the prerogative of the leader to make the final decision. But these are complex issues. A systematic and data driven approach will help leaders become more effective – by increasing the odds of making the right decision.