Leadership Change Capability: Organization Design

“Competitors are eating our lunch. Disruptive technologies are destroying our business model. We can’t figure out how to manage these darn millennial workers. We must need a new organization. Call a consultant.”

OK, maybe that conversation never happened, but in my 35+ years of consulting, I have observed that the single most frequently pulled “change lever” is organization design. Like most change consultants I have done my share of drawing “boxes and wires.”

“New CEO? We need a new organization. New strategy? We need a new organization. New processes? We need a new organization. We need to innovate? We need a new organization. We haven’t reorganized in 18 months? We must need a new organization.”

An organization is the implementation mechanism for strategy. Changing the formal organization produces two things:

• It communicates priorities - what’s important around here now.
• It clarifies accountabilities for those priorities.

Clarity of purpose -That’s it. That’s all a new organization does. Clarity of purpose is not nothing; in fact, it’s critical to change. But a new organization is not the only tool a leader has to create clarity of purpose.

I’ve come to believe most companies reorganize too much. That results in the opposite of the intended clarity and mobilization – confusion and inertia. “If my boss calls. . . get her name.” “Don’t worry about the new org – just keep your head down – it’ll change.”

So my first reaction when asked to help design a new organization is to ask why that is necessary. But there are real reasons to reorganize, e.g. changes in business model, post-merger integration, new market or product line expansion. Therefore, my second reaction is to try to teach leaders something about organization design, because if an organization implements strategy, then its design is too important to be left entirely to consultants and human resource professionals. Organization design is a critical leadership capability.

Here are some of the things I tell leaders about designing an organization:

First, stop doing “personality- based organizing.” “Since we outsourced payroll, Maureen in accounting won’t have enough to do, let’s give her the customer call center, too.” Design the jobs first, set the hiring specs, then put the people in roles based upon agreed specifications.

Second, stop doing “red-lining.” “Red-lining” is cost-driven organization design, so named for a phenomenon I have observed dozens of times. The CFO and one or two trusted advisors go in a room with an organization chart and draw red lines through people’s names. Then they calculate salary and benefits costs of those who are left. If the total figure doesn’t meet a preset number, they draw more red lines. If it does they cobble together what’s left and present it.

An organization should be designed rationally so you can explain it. How else would you achieve clarity of purpose?

 High Level Design

At a high level, there are two different design elements to designing an organization:

• Vertical – the accountability structure – The “boxes and wires” - who reports to whom – the objective of which is Clarity of purpose and clarity of performance accountability for the day-to-day, routine work.

• Horizontal – the integration structure – sometimes called the “Informal organization” -shared services and functions like finance and accounting and human resources, processes and systems, networks, forums, growth capabilities like systematic innovation and improvement. The objective of the horizontal organization is Unity or Alignment –how people can work together.

Vertical structure

The major  types of vertical organization, functional, product based, customer based, are aligned to strategic business drivers. For businesses driven by:

• Low cost - a functional organization reduces duplication and staff costs.
• Product innovation - platform or technology based or other product based organizations allows people with similar expertize to innovate together
• Customer loyalty – industry, geographic, or key accounts organizations allow companies to get “close to the customer.”

 This type of pure form organization often creates a lack of integration – popularly described as “silos,” where people of different functions, products or customer groups have difficulty communicating perhaps because they spend most of their time with others like themselves or perhaps because the local sense of “this team” is heightened by internal competition for resources.

 The “silo-busting solution” is cross-department communication. This can be achieved by discussion forums and networks and by shared processes, e.g. processes that affect everyone like strategic portfolio management, investment, operational budgeting, leadership development, procurement and sourcing policy, etc.

 Since the 1970s, most very large companies have been organized in some form of Matrix organization, a form juxtaposes two or more drivers. Matrix organizations attempt integration structurally. They create dual (or in some cases multiple) reporting relationships. Matrix organizations often compromise the clarity of the “pure” forms and require higher level influence and negotiation skills of everyone.

 All vertical structures and especially matrices get very complex when you add in multiple lines of business across international borders. In these environments carefully planning the horizontal structure is imperative.

 Horizontal structure

When I started my career as a change consultant, the vertical structure was the only thing talked about, even by consultants. In the mid-1980s, General Motors, had almost 49% of US car and truck sales, 850,000 employees, and the eighth largest budget in the world, (including countries.) The company was having cost challenges. Japanese competition was pressuring GM with lower priced vehicles. A very large consulting firm was given a million dollar consulting project to reorganize GM, a very rare, if not unprecedented, figure.

GM at the time was organized by five car divisions and two truck divisions. This organization has been created by Alfred Sloan, CEO in the 1930s to have “a car for every pocketbook.” Car buyers were meant to start out with a Chevrolet, graduate in turn to a Pontiac, Oldsmobile, Buick and finally end up with a Cadillac. Low end truck buyers bought Chevrolet trucks and business buyers bought GMC. Each division had its own manufacturing, marketing, and all functional services. There was a lot of expensive duplication and over time every marque had expanded offerings so that the original differentiation had long been lost.

The consulting firm created a new organization with two divisions, BOC, (Buick. Olds, Cadillac) and CPC (Chevrolet, Pontiac, Commercial -trucks), which shared design, manufacturing, marketing and functional services. The organization allowed plant closures and saved lots of money. It also facilitated the look-alike GM cars of the 1980s widely credited with the further decline of GM market share.

What the consulting firm apparently failed to consider was any attempt at interdivisional integration. The 850,000 person GM organization reportedly ran because the guys at the Chevy design and technical center knew the guys with the same jobs at the other marques, picked up the phone and solved problems together. The reorganization blew up the informal organization that made the place run and took several years to straighten out and rebuild.

These days, most organization design models are alignment models, the McKinsey 7S, the Galbraith Star, Burke-Litwin Model of Organization Dynamics – all make the point that all organization structures, systems, and processes should be aligned around purpose and strategy. Most consultants have discovered the importance of the thinking through integration between organizational groups.

 Planning of the horizontal organization has at least entered the conversation. Some practitioners emphasize more flexibility –e.g. R&D networks and leadership development forums. Many organization designers rely on formal constructs like information systems and formal processes to enable information sharing and joint decision making, e.g. Capital Budgeting processes. Two processes I think are really worth thinking through are how the organization innovates and how it improves, which I have written about elsewhere.

 Detailed organization design

The reason many reorganizations fail to achieve the intended results is that the work stops too soon. High level job “boxes” and integrative processes are not sufficient. Ultimately detailed job specifications must be prepared, candidates assessed, assigned, and trained if necessary. Jobs need clear definitions of roles and responsibilities drafted and then teams need to agree roles and responsibilities (perhaps using facilitated group processes like responsibility charting –RACI). Decision rights need to be agreed. A good tool here is the facilitated decision rights tool (RAPID, which works like RACI but is applied to decision-making as opposed to actions.)

 And like all change efforts you have to over-communicate about it. You are changing some people’s jobs, how some others will interact with them and you must re-contract with the entire organization.

“Sheesh – it’s enough to make my head hurt.”

Yup. So you can see why I think reorganizing because “we-haven’t-done-it-in-a while” isn’t a good idea. But as Mies Van Der Rohe said “God is in the details.” There are plenty of experts to help. You may hire an architect to help you design a building, but you have to be clear about what you need, want and like. And it helps to understand a little about architecture and design. Organization design is no different. That’s why I say Organization Design is a leadership change capability.

My Websites: www.alanculler.com       www.results-alliance.com

Some other articles I’ve posted on LinkedIn:

Herding Cats: The Critical Leadership Skill

How to Run a Company: Manage Climate

Visible Leadership

Boil it Down: The Leadership Art of Speaking Simply

Be Curious: The Leadership Art of Good Questions

Innovate, Integrate, Improve (repeat)

Leadership: Building Process Focus

Leadership: Thinking About Thinking