10 Core Principals of Organization Design
Whether your organization is a tech startup, mid-size electronics manufacturer or a Fortune 100 organization, corporate re-organizations are commonplace – particularly within our global marketplace with a robust growing economy.
More often than not, the rational for a re-organization is due to a new CEO, an expansion of the business (whether it be adding new products/ services or expanding into new markets/territories), a new technological advancement/implementation or it’s simply the realization that the current organizational structure is no longer viable.
However, BEFORE any change is contemplated, it’s essential that the proposed changes have been vetted thoroughly to avoid a second re-organization down the road. As an HR Consultant with advanced degrees in HR and OD, as well as a unique work history that includes more than a decade of work within Fortune 500 environments and over a twenty year track record of success consulting early stage firms, reorganizations are commonplace yet – too often – many of those reorganizations don’t have the desired results; therefore, it’s important to understand the basics of re-organizational design.
Whatever the reason for a re-organization, the required changes go far beyond shifting the lines and boxes in an org chart; rather, it must change the company’s most fundamental building blocks: how people make decisions, adopted new behaviors and attitudes, reward performance, agree on commitments, managed information, allocate responsibility, and connect with one another. The most common mistake in any sort of re-organization is that those in charge lacked a full-fledged blueprint — they didn’t know where to begin.
As leaders look to stay ahead of these trends, they must recognize the need for change – especially with regards to their organization’s design. In today’s multi-national economy, the average tenure for the CEO of a global company is about five years. Therefore, a major re-organization is likely to happen only once during that leader’s term. Consequently, the chief executive has to get the reorg right the first time; he or she won’t get a second chance. Accordingly, for the redesign to succeed, a company must make change as effectively and painlessly as possible, in a way that aligns with its strategy, invigorates employees, builds distinctive capabilities, and makes it easier to attract customers.
It goes without saying that every company is different and there is no right or wrong way for determining the appropriate design for your organization; however, there are some common principles that apply to virtually any type of business, culture, environment or industry. The following principles are the result of decades of research and practice; theoretically, these basic principles provide a blue print from which leaders can create a unique framework in which to manage both their people and the business and they include the following:
- Declare amnesty for the past. No one is at fault for previous attempts at reorganizing the business! In short, the re-design should start with a corporate self-reflection: What’s the purpose? How will you make a discernable difference to your clients, employees, and investors? What will set you apart from the competition, now and in the future? What can you deliver on and how can you add value over the next two to five years?
- Design with “DNA. ”Organization design can seem unnecessarily complex; although, with the right framework, you can decode and prioritize the necessary elements; this is where the behaviors, traits, attitudes and conduct of your staff can make or break a re-org.Your re-org must take into account not only your customers, supplies, investors and staff, it must recognize that each of those populations have different motivators; therefore, the design of motivators might need to vary from one function to the next. For example: People in sales might be more heavily influenced by monetary rewards, whereas R&D staffers might favor a career model with opportunities for self-directed projects and external collaboration and education.
- Fix the structure last, not first. CEO’s MUST know and recognize that their current org chart doesn’t necessarily capture the way things get done (“it’s at best a vague approximation”). Nonetheless, they may still fall into a common (failure) trap: thinking that changing their organization’s structure will address their business’s problems.In an org redesign, you’re not setting up a new form for the organization all at once. You’re laying out a sequence of interventions that will lead the company from the past to the future. Structure should be the last thing you change: the capstone, not the cornerstone, of that sequence. Otherwise, the change won’t sustain itself.
- Make the most of top talent. Talent is a critical but often overlooked factor when it comes to org design. You might assume that the personalities and capabilities of existing executive team members won’t affect the design much; however, in reality, many of your employees, particularly those with long tenures with the organization, may not like and/or resist (if not sabotage) the changes. Therefore, you may need to re-design positions to make the most of the strengths of the people who will occupy them. In other words, consider the technical skills and managerial acumen of key people, and make sure those leaders are equipped to foster the collaboration and empowerment needed from people below them.For this to happen, however, it will require the skills of an organizational development expert skilled at providing leaders with the tools necessary to carry out the change you need. If your leaders haven’t had adequate leadership development or training, it’s essential that – as you’re planning for your re-org – you address the skills/competencies gap that exists within your team and develop programs (or training modules) that addresses those shortfalls in order to optimize your chances for success. You must ensure that there is a connection between the capabilities you need and the leadership talent you have.
- Focus on what you can control (NOT what you cannot). Make a list of the things that hold your organization back: the scarcities (things in short supply) and constraints (things that slow you down). Taking stock of the real-world limitations will help to ensure that you can execute and sustain your new organization design.Constraints on your business — such as regulations, shortages, and changes in customer demand — may be out of your control; however, don’t get bogged down in trying to change something you can’t change. Instead, the key is to focus on changing what you can. For example, if your company’s a global electronics manufacturer, you might first favor a structure with clear decision rights process that focuses on assembly and branding (because it is more efficient in global branding). On the other hand, if the needs or tastes for your product differ in other parts of the world, you might be better off with a structure that delegates decision rights to the local business leader.
- Promote accountability. It’s important that you design with clear lines of accountability a micro-manager; make sure that decision rights are clear and that information flows rapidly clearly from the executive committee to business units, functions, and departments. According to the latest research available, information and decision rights had the strongest effect on improving the execution of strategy. In fact, those two factors are more than twice as powerful as an organization’s structure or its motivators.For example, a small global electronics manufacturer was struggling with slow execution and lack of accountability. To address these issues, it created a matrix that could identify those who had made important decisions in the past few years. It then used the matrix to establish clear decision rights and motivators more in tune with the company’s desired goals. Sales directors were made accountable for dealers in their region and were evaluated in terms of the sales performance of those dealers. This encouraged ownership and high performance on both sides, and drew in critically important but previously isolated groups, like the manufacturer’s warranty function. The company operationalized these new decision rights by establishing the necessary budget authorities, decision-making forums, and communications.When decision rights and motivators are established, accountability can take hold. Gradually, people get in the habit of following through on commitments without experiencing formal enforcement. Even after it becomes part of the company’s culture, this new accountability must be continually nurtured and promoted.
- Benchmark sparingly, if at all. One common mistake is to look for best practices. In theory, it can be helpful to track what competitors are doing, if only to help you optimize your own design or uncover issues requiring attention. But in practice, this approach has a couple of problems.First, it ignores your organization’s unique capabilities system — the strengths that only your organization has, which produces results that others can’t match. Obviously, you and your competitors aren’t likely to need the same distinctive capabilities, even if you’re in the same industry. While you and your competitor in another state might look similar on the surface. In fact, you might even have sales folks covering the exact same territory and calling upon the same companies. However, one of you might be catering to millennials, who are drawn to low costs and innovative online banking features. The other could be regionally oriented, serving an older customer base and emphasizing community ties and personalized customer service.Accordingly, these different value propositions obviously require different capabilities which can translate into different organization designs. The larger organization might be organized primarily by customer segment, making it easy to invest in a single leading-edge technology that covers all regions and all markets. The smaller organization might be organized primarily by geography, setting up managers to build better relationships with local leaders and enterprises; therefore, if you benchmark the wrong example, the copied organizational model will not have the desired results.
Moreover, even if you share the same strategy as a competitor, who’s to say the other organization is a good fit with its strategy? If your competitor has a different value proposition or capabilities system than you do, using it as a comparison for your own performance would be a mistake. Therefore, if you benchmark, focus on a few select elements, rather than trying to be best in class in everything related to your industry. In other words, choose those companies you want to follow; the indicators that you track and analyze should line up exactly with the capabilities you prioritized in setting your future course.
- Let the “lines and boxes” fit your company’s purpose. For every company, there is an optimal pattern of hierarchical relationship — a golden mean. Obviously, this won’t be the same for every company; rather, it should reflect the strategy you’ve chosen, and it should support the critical capabilities that distinguish you from your competition. This means that the right structure for one company will not be the same as the right structure for another, even if it’s within the same industry.You can often hasten the flow of information and create greater accountability by reducing layers. That said if the structure gets too flat, your leaders will be required to supervise too many people. While the type of industry make influence the span of control, most academic scholars and business leaders believe that an optimal span of control “should” be 6 – 8 (“maybe” 9) direct reports (which is approximately the ideal optimization for a small group); once you get beyond 9, not all parties get an equal share of the leaders’ time and “problems” can more easily go undetected until there’s a crisis.For example, having been accountable for nine geographically separate call centers for many years, it was not uncommon for Supervisor(s) to have 15 or 20 direct reports due to the work being routine and heavily automated. On the other hand, a software implementation team (made up of specialized knowledge workers) would require a narrower span of control, such as six to eight employees.
- Accentuate the informal. Formal elements like structure and information are attractive to companies because they’re tangible and can easily be defined and measured. With many reorgs, however, they reassign decision rights, rework the org chart, or set up knowledge-sharing systems — yet don’t see the results they expect.Why? Because they’ve ignored the more informal, intangible building blocks (i.e. the cultural traits that include norms, commitments, mind-sets, and networks that are essential to getting things done). What all too many leaders don’t fully appreciate is that neglecting to present, represent (and, thereby influence) the ways people think, feel, communicate, and behave, they’ve neglected the manner in which people learn and function day-to-day; thus, when these intangibles are not in sync with one another or the more tangible building blocks, the organization falters.For example, at one professional services company, it was common practice to have multiple “meetings before the meeting” and “meetings after the meeting.” In other words, the constructive debate and planning took place outside the formal presentations that were known as the “official meetings.” The company had long relied on its informal networks because people needed workarounds to many of the official rules. Although, as part of the redesign, the leaders of the company embraced its informal nature, adopting new decision rights and norms that allowed the company to move more fluidly, and abandoning official channels as much as possible.
- Build on your strengths. Overhauling the organization is one of the most difficult tasks for a chief executive or division leader to do, especially if he or she is charged with turning around a poorly performing company. However, there are always strengths which to build upon with the existing practices and culture.Perhaps your company has well-defined decision rights, wherein each person has a good idea of the decisions and actions for which he or she is responsible. Yet in your current org design, they may not be focused on the right things; thus, you can leverage the accountability practices and redirect people to the right decisions to support the new strategy.
A 2014 SHRM (Society of Human Resources Management) study found that nearly 50% of CEO’s felt their organization was not aligned with the strategy; they also believed that parts of the organization resisted and/or didn’t understand it. If this sounds like your organization, the principles in this article could help you develop an organization design that supports your most distinctive capabilities and supports your strategy more effectively both now and five years from now.
Remaking your organization to align with your strategy is a project that only the top executive of a company can lead. While it’s not practical for a CEO to manage the day-to-day details, the top leader of a company must consistently work through the major issues and alternatives, focus the design team on the future, and are accountable for the transition to the new organization. The chief executive will also set the tone for future updates: Changes in technology, customer preferences, and other disruptors will continually test the new business model.
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