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Leaders Should Learn 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.

Okay, maybe that conversation never happened, but many leaders use organizational design as their go-to action to make change. It is the single most frequently pulled change lever – more than strategy, product-market innovation, operational improvement, and even more than training. The first thing many executives think of in a crisis is reorganization and they often hire an “expert” to do it. Like most change consultants I did 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 eighteen months? We must need a new organization.

I came to believe most companies reorganize too much and that the end result is 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.”

My view of the role of organization in a company is based on two fundamental beliefs:

  • An organization is the mechanism for implementing strategy. People implement strategy. How groups of people are formed and who reports to whom communicates a great deal about the strategy.
  • The job of organization is to impart clarity of purpose and accountability. Changing the formal organization produces two things:
  • It communicates priorities – what’s important around here now.
    • It clarifies accountabilities for those priorities.

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. Accountabilities are also important, but structure is only one of several available performance management tools.

So my first reaction, when asked to help design a new organization, was to ask why it’s necessary. There are, of course, real reasons to reorganize, e.g., changes in business model, post-merger integration, a new market or product line expansion. Then my second reaction was to teach leaders something about organization design. Why?  Because if an organization implements strategy, 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 leaders should know about designing an organization:

First, stop doing “personality-based organizing.” “Since we outsourced payroll, Maureen in accounting won’t have enough to do, so let’s give her the customer call center, too.” It’s like a giant game of pickup sticks. Design the jobs first, set the hiring specs, and 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 observed dozens of times. The CFO and trusted advisors go into 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 into an org chart 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 elements to designing an organization:

  • Vertical – This is the accountability structure – the “boxes and wires” – that details who reports to whom. The objective is clarity of purpose and performance accountability for the day-to-day, routine work.
  • Horizontal – This is the integration structure, sometimes called the “informal organization.” It includes shared services and functions like finance and accounting and human resources, processes and systems, networks and forums, and 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, and customer-based – are aligned to strategic business drivers. For businesses driven by:

  • Low cost – a functional organization reduces duplication and staff costs.
  • Product innovation – an organization based on platform, technology, or a product allows people with similar expertise to innovate together.
  • Customer loyalty – an organization based on industry, geography, or key accounts allows a company to get close to the customer.

This type of pure-form organization often creates a lack of integration, a scenario popularly described as “silos.” In silos, people within one function, product, or customer group have difficulty communicating across the organization, perhaps because they spend most of their time with others like themselves or because the “my team” mindset is heightened by competition for resources. As mentioned in a previous chapter, I spent much of my career in “silo-busting.”

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

Since the 1970s, most large companies have been structured in some form of matrix organization that juxtaposes two or more drivers. Matrix organizations attempt integration structurally. They create dual (or in some cases, multiple) reporting relationships, the accountabilities of each of which must be agreed upon or negotiated. Matrix organizations often compromise the clarity of the “pure” forms and require that everyone have higher-level skills of influence and negotiation.

All vertical structures, and especially the matrix, can 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 percent of US car and truck sales, 850,000 employees, and the eighth-largest budget in the world, including countries. But the company was cost-challenged because Japanese competition was gaining share with lower-priced vehicles. GM engaged a large consulting firm to reorganize GM in a million-dollar project – a very rare, if not unprecedented, figure at the time.

Previously GM was organized into five-car divisions and two truck divisions. This organization was created by CEO Alfred Sloan in the 1930s to have “a car for every pocketbook.” Car buyers were meant to start out with a Chevrolet, graduate to a Pontiac, Oldsmobile, or 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 design, manufacturing, marketing, and functional services. There was a lot of expensive duplication. Also, over time every marque had expanded offerings; the original differentiation had long been lost.

The consulting firm created a new organization with two divisions, BOC (Buick, Oldsmobile, Cadillac) and CPC (Chevrolet, Pontiac, Commercial – trucks). The divisions shared design, manufacturing, marketing, and functional services. The new 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 interdivisional integration. Previously, the 850,000-person GM organization worked because the guys at the Chevy design and technical center knew their counterparts at the other marques, and picked up the phone to solve problems together. The reorganization blew up the informal organization that made the place run, and it took several years to straighten out and rebuild.

These days, most organization design models are alignment models, i.e., the McKinsey 7S, the Galbraith Star, and the Burke-Litwin Model of Organization Dynamics. They all make the point that all organization structures, systems, and processes should be aligned around purpose and strategy. Now many consultants understand the importance of integration between organizational groups. I should add that while planning the horizontal organization has at least entered the conversation, some organizational designers seem stuck on hard structural solutions and are locked on the matrix as a solution. I have seen four- and five-way matrices that no one understands. 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., strategic planning and capital budgeting processes. (Two processes that are often overlooked are how the organization innovates and how it improves.)

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 necessary, but not sufficient. Ultimately, leadership must prepare detailed job specifications, and assess, assign, and, if necessary, train candidates. Leaders must clearly define roles and responsibilities in their job specifications, and then teams need to agree on roles and responsibilities. One option is to use facilitated responsibility charting – RACI – to determine who is Responsible, who is Accountable, who must be Consulted before the fact, and who must be informed after the fact. Further, decision rights need to be agreed upon. A good tool here is the facilitated decision rights tool RAPID. RAPID works like RACI, but is applied to decision roles as opposed to actions. The acronym stands for R, the person who Recommends; A is a person at a different function or level who must agree with the decision; P is for the performer who must carry out the decision; I provides input, and D is the person accountable for the decision. RACI clarifies action roles, RAPID clarifies decision roles.

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

You may be thinking, sheesh –that’s a lot of work; 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.

You may hire an architect to help design a building, but you have to be clear about what you need, want, and like. As Bauhaus architect Mies Van Der Rohe said, God is in the details.” Organization design is no different. It is a critical leadership change capability.

Alan Culler
Alan Cullerhttps://wisdomfromunusualplaces.com/
Alan Cay Culler is a writer of stories and songs, his fourth career (aspiring actor, speakers agent, change consultant, storyteller.) He retired after thirty-seven years as a leadership and change consultant. Alan was an executive coach, a leadership team facilitator, trainer, and project manager for innovation and improvement initiatives. Alan’s point of view: "Business is all about people, customers, staff, suppliers, and the community - pay disciplined attention to these people and rewards follow; ignore them and success will not last." Alan is “a seeker of wisdom from unusual places.” He is currently completing three books: Wisdom from Unusual Places, Is Consulting Wisdom an Oxymoron?, and Change Leader? Who me?. Alan earned a BA in Theatre from Centre College, an MBA from the London Business School, and a post-graduate certificate in Organization Development from Columbia University. Alan also builds cigar box guitars and wood sculptures, hikes, travels with his wife Billie, and gets as much grandchildren playtime as he can.

2 COMMENTS

  1. Great post Alan. You are so right to say that “I came to believe most companies reorganize too much and that the end result is confusion and inertia. “If my boss calls . . .”. Over-thinking and now over-organizing can be a source of great confusion.

    We need to simplify and yourt wo points on how to do this are illuminating and have a luster of wisdom.
    An organization is the mechanism for implementing strategy
    The job of organization is to impart clarity of purpose and accountability

    Complexity leads to chaos. This is why your post has such great value.

    • Thank you so much, Ali.
      I spent so long working in the business world and my tendency was always to try to make this simpler -I didn’t always succeed, of course. After all, I was a consultant and we all know that consultants create chaos.
      But I was fond of describing business as being about people and relationships -whether customers, staff, suppliers, shareholders or the community -we’re all just people.
      Thanks again for commenting here.

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