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.
Everybody is talking about integration and collaboration and participation these days.
Down with the silos of yesterday. Away with the walls that prevent ideas and information from flowing through. Let’s all work together. Collaborate. Be like one.
It’s good in theory.
The hard truth is that there will always be a division of labor in an organization . If there aren’t any silos (or departments or units), everybody will interact with everybody.
Now think about that possibility for a moment.
Do you really want to receive a meeting invitation every time ANY unit in your organization decides to discuss an issue?
Do really want to coordinate with EVERY other unit before you respond to a request from a customer?
Do you really want to involve EVERYBODY ELSE in your project?
I assume you answered “no” to the above questions. So, on closer inspection, we do not want to be connected to everybody.
It would be impossible, even if we wanted to. Ten people can be connected to each other in 90 different ways (n (n-1))=10×9). For one thousand people, it’s nearly one million (1000 x 999).
That’s a lot of Outlook invitations to respond to.
Yet some large firms design their organizations as if this mathematical axiom didn’t exist.
Which is one reason why our inboxes are overflowing and most of us spend 70% or more of our time in meetings.
Now before I go on, let me stress that I am not saying that the intent is always wrong.
The key strategic rationale is often to achieve some sort of synergy, or develop and sell “solutions” (combinations of products and services from multiple units). For some firms in some industries, this makes perfect sense.
But some firms also experience that customers simply don’t want solutions, but rather specialized offerings.
We also seem to forget that collaboration is costly. It takes time to set up and participate in meetings and to negotiate with people from other units who pursue different goals.
I would suggest an alternative approach.
The first is to confirm that there in fact is a potential for achieving synergy of some sort.
But assume that we confirm this.
Then I think the idea of a starting with a well defined mandate and setting up a managed team is a better alternative (something Andrew Campbell proposed in this interview I did with him).
It’s basically about creating a reporting structure to support coordination around a specific initiative, instead of issuing general calls for more collaboration.
(I would add one thing: Such efforts should be resourced. Since it takes time and money to collaborate, the money has to come from somewhere.)
In some firms that suffer from fragmentation or a lack of resource sharing, the real problem is not that people are unwilling to “collaborate” but that the current systems or incentives make it nearly impossible to combine or share resources.
In such cases, the solution is to remove these barriers. Only senior executives have the authority to do that, so they need to take the lead.
Finally, one may need to consider a re-design of the formal boundaries between units. A “light” solution would be to add an integrator role or managed team to coordinate across two or more units, but with a strong and frequent need for coordination, one may need to formally integrate the units (or parts of them).
It’s not a realistic goal to remove silos. But, like in the image above, we should connect the silos to each other, and install some windows, so people can see what’s going on outside and communicate with each other.
When we are planning a reorganization, we know that the stakes are pretty high.
The changes we are planning may well be overdue. Implementing them will create a more effective organization, and over time, lead to gradually improving operational and financial performance.
But the reorganization will also create uncertainty among employees. Some will question the need for change. Some will resist moving to a new role (or be unable to). Those who are not selected for key positions may leave the firm. People may even threaten to sue you.
So when designing a new organization, there is a natural tendency not to share information too early about things that may create uncertainty: “Let’s wait until we have everything worked out before we go public with this”.
There are certainly some types of information that we should keep to ourselves.
We may not want to share every speculative idea we come up with about future options for the organization. And we should of course be careful about sensitive or confidential information. One example may be our assessment of individual candidates for positions in the new organization.
But keeping the process as such secret may undermine the purpose of the reorganization.
As I have discussed before, you need valid information about how the organization works in order to make the right decision about a future organizational model. You also need early involvement in order to start building support for the change.
I once discussed this challenge with Gil Steil. He is a leading expert on large group methods. I challenged him a bit, and asked whether it’s realistic to involve a broader group of people even when unpopular decisions need to be made.
Here’s what he had to say:
The fear of discussing uncomfortable issues prevents some leaders from working with a large group. But a part of my practice has been handling these things with representatives of all the key stakeholder groups in the room – with the clients that summon the courage to confront hard issues openly.
The people having coffee in the cafeteria in the morning somehow know months ahead of time when a downsizing is a possibility or when benefits might be cut.
So it’s a great relief to everyone when these feared issues are actually openly discussed – and involving people with lots of different perspectives can produce better ways of proceeding than what the leaders think up on their own.
Also, a well-designed meeting keeps the leadership in control of the discussion. When the discussion is underground (in the cafeteria) the leaders don’t even know what’s being discussed.
Think about that next time you close the door and lower the curtain to work out the new org. chart.
I once asked a project manager how he divided up the work when he started a new project.
He responded that you only have two choices: You can slice a cake vertically or horizontally.
Well, those are the main choices, yes. But there are also some variations and combinations (you can make one vertical and two horizontal cuts, for example.)
But no matter which way you prefer to slice it, the problem is that we tend to see only way of doing it – our preferred way, even though there may be other possible solutions, and even if the way we do it today is not the most effective.
Let me borrow an example from Eric von Hippel, an MIT professor.
Imagine that you have to decorate two rooms, and that you have hired two interior decorators to do the work. How are you going to divide up the work between them?
The most natural thing is that they do one room each. Indeed, some will claim it’s the only solution that will work.
One may obviously give each of them the responsibility for one-half of each room, but that seems like an inefficient solution.
One assumes that both will have to coordinate with each other, if the room is to be decorated in a consistent manner: The solution that the first interior decorator selects for his/her part of the room has to fit with what the other interior decorator selects for the other part.
But imagine that both work for a hotel chain that has standardized the way its hotels are built.
Then the option of splitting the work up in half-rooms suddenly becomes feasible. The two interior decorators may agree on style and colors on beforehand. Or maybe one can be responsible for floors and walls, and the other one for furniture.
The same goes for projects (or indeed, for entire organizations).
If you are to design and build two aircrafts, you can divide up the work between two manufacturers by asking one firm to design the engines, and the other firm to design the aircraft bodies.
But an alternative is to have one firm do the front half of the aircraft body of each aircraft, and the other firm the back half of each.
This way of dividing up the task actually resembles the way Airbus does it, with complete modules manufactured first, which are then attached to each other to form a complete aircraft body.
In other words, you can slice it vertically or horizontally.
The question is of course how we can know what the most efficient way of organizing things is. You can see (or guess) the ingredients of a cake – but you can’t tell from looking at people who should work with whom in a project team or unit in the organization.
But let’s assume that work is basically about solving problems while exchanging information with other people, in order to coordinate the work in the best possible way.
One can then identify how information is transferred (or should be transferred) between people, and adapt the formal organization to the way people actually work.
In a small project, this can be done by developing a project plan, identifying how the different activities relate to each other, and spending some time in a workshop discussing the best way to organize the teams.
In a larger project or a larger organizational unit, another approach should be used, as it will be difficult for leaders to get a good understanding of the entire system (I recommend using a questionnaire to collect data in this situation.)
It is by now well documented that by aligning the organization with the work processes (or more specifically, with the information flow and the interdependencies), you can reduce complexity, increase productivity, and increase the ability to adapt to change.
You put the people who have the greatest need for coordination in the same unit or team. That way you create more meaningful unit mandates, reduce the number of interfaces, and cut down on the number of meetings needed to coordinate the work.
P.S. See chapter 5 of my book for a detailed discussion of this issue.
We first identified key design criteria, based on interviews with more than 40 managers.
The most important criterion was to design an organization that would help the firm achieve growth for one of the key products. It was also important to find a model with the right “balance” between different business areas.
At the same time, there was a need to simplify the structure, and reduce the number of management layers.
We then started developing a couple of alternative models.
It was pretty hard work, trying to identify a model that would meet the different criteria, while avoiding an increase in costs. But one evening, in a meeting with the VP of Human Resources, we thought we had found at least one possible solution.
We went through the criteria and could check off one after another. We concluded the meeting on an optimistic note.
But as we were about leave, the VP remarked:
Wait a minute…this alternative makes a great deal of sense. But let’s see…how many of the senior executives will move up, and how many will move downwards, if we go for this option?”
That question re-framed the discussion. Suddenly we were not talking about what you could call the “rational” criteria, but about the impact on individuals and whether the proposed model would get the support of a large enough coalition to be accepted (and once accepted, whether it would be implemented with some level of enthusiasm).
So we looked at the model, and considered the potential impact for each of those who currently held leadership position (and who would be candidates for key positions in the new model).
A simple count suggested that the balance would be negative: A lot fewer would move up than down in the management hierarchy.
So we went back to the drawing board. And in the end, we did produce three alternative models that were more attractive, both from the “rational”, and from the political side. One of the proposed models was then selected by the CEO. The subsequent implementation of the model went quicker than we had anticipated.
* * *
One word of caution here: I am not suggesting that you should “start with the people” in the sense that you should tailor the design to the personal interests of the current members of the management team.
The main design criteria should be derived from the strategy of the firm (see my book for a detailed description of a methodology you can use for this purpose).
The political test is an additional step that you carry out, once you have a potential solution that fulfills the main requirements, and satisfies the key design criteria.
But it’s a step that you shouldn’t skip– if you want your proposed model to be implemented.