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ORGANISATIONAL DESIGN – THE PARADOX MINDSET – Issue 228 – October 2023 | Article of the Week

CEOs want to move fast in the market, while leveraging corporate assets, run a global brand, while delivering it with local relevance and build common platforms, while accommodating regulatory and technology differences across geographic boundaries. It’s possible to achieve both scale and agility within the same organisation through capabilities, structure, relationships, processes and people. The core organisation design challenge is to balance scale – the benefits of thinking big – with agility and the benefits of acting small.

CEOs want to move fast in the market, while leveraging corporate assets, run a global brand, while delivering it with local relevance and build common platforms, while accommodating regulatory and technology differences across geographic boundaries. It’s possible to achieve both scale and agility within the same organisation through capabilities, structure, relationships, processes and people. The core organisation design challenge is to balance scale – the benefits of thinking big – with agility and the benefits of acting small.

Virtually all large organisations use some form of matrix and work is achieved as much through collaborating across internal – and external – organisation boundaries, as it does up and down the hierarchy. These cross-boundary networks and connections don’t happen by accident and need to be purposefully designed. The opportunities presented by cloud, AI and data & analytics simultaneously increase internal organisational complexity, while helping organisations manage the external complexity in the business environment. In practice, we are seeing a combination of approaches – rapid experimentation, prototyping, flexible funding/resourcing – which might normally be termed as process changes or changes to ways of working, that supplement the more traditional structural levers to create the management capability of agility. Thus, in looking to design their organisations for agility, leaders are first and foremost making changes to elements of the organisation design, that relate to the vertical and horizontal alignment of objectives and effective functioning of the lateral organisation. Although matrix organisations are increasingly powered by lateral connections, modern organisations still need hierarchy. Organisational silos enable focus and the building of expertise – without a silo, you end up with grain all over the ground – however, hierarchy is no longer about command and control. Rather, aligning vertical structures helps organisations to focus on strategic choices and priorities.

Rather than focusing on achieving the right number of spans and layers, we should instead focus on eliminating unrewarded complexity and removing unnecessary layers. The following principles apply in designing the layers in the organisation. Each layer should add unique value and there should be no overlap in responsibilities between one layer and another or gaps where accountabilities are unclear. Managers at each organisational level should not be doing the work of the level below. There should be an ‘order of magnitude’ difference in managerial work between one layer and the next, in terms of the complexity involved and the time horizon of the work (managers at higher levels in the organisation should be making decisions with longer time horizons). One layer – the anchor layer – should be designed as the home of the primary operating units that have delegated authority to make the short- and longterm P&L trade-offs that are best for the business as a whole. If P&L responsibility is delegated at too low a level, local general managers may prioritise short-term local results – by offering short-term price reductions, for instance – that could compromise the organisation’s long-term objectives. But placing P&L accountability too high in the organisation can mean decision-makers are too far removed from the impact of their decisions to make the right choices. The anchor layer is likely to be different for organisations in different industries. For example, in consumer goods, where products tend to be adapted to local tastes, the anchor layer is likely to be much closer to the consumer than in, say, a technology company with a global product portfolio. Where possible, infrastructure and functional activities such as finance or HR should be consolidated to avoid duplication and maximise productivity.

The horizontal or lateral organisation is a path to achieving both agility and scale. Agility requires the assembly of assets, regardless of where they are created or produced, to meet unique customer needs. Scale is achieved by bridging services, platforms and processes across business units. Well-designed lateral mechanisms not only allow but also encourage people to join cross-boundary teams and networks and to take responsibility for results they cannot deliver on their own. They rely heavily on individual behaviour and the organisation culture to succeed. Jay Galbraith identified five types of lateral capability that can help an organisation to achieve the adaptability it needs to respond quickly to changes in the business environment. These capabilities sit along a continuum, reflecting the degree to which they are formalised. 1: Networks – interpersonal relationships that coordinate work across internal organisation boundaries. A network is a lighter form of organisational connection than a matrix, as the latter requires dual reporting lines. Increasingly organisations are using networks as an explicit design choice to build the lateral connections needed to balance agility and scale. Networks can be split into informal, relationship-based networks and formal organisation networks. Informal networks are formed between individuals who come together on the basis of trust or a common interest for cross-boundary work, for example communities of practice for technical specialists working in different business units. Formal networks are distinct entities with an organisation defined purpose and comprise of people who also sit in the vertical structure of the organisation. For example, an industry network can bring together product specialists and commercial leads to create industry-specific bundles of products, services and solutions to meet customer needs. A formal network is therefore woven into the fabric of the organisation. Like other design constructs, formal networks have to be reinforced – whether through reward systems and metrics and business and management processes. Decision-making forums are required to manage the trade-offs that serve company interests. 2: Management processes – move decisions and information through the organisation in a formal flow. For example, following a three-year review of the impact of its agile transformation, Dutch bank ING found that decision rights had to be redesigned. The new organisation model, which was designed for speed to market and customer focus was being held back by decision processes that were slowing down the organisation’s ability to move at speed. The solutions focused on developing clarity across the system around who was accountable for what and redefining the interfaces between agile delivery teams and central functions. 3: Teams – formal cross-unit structures bring people together to work interdependently and share collective responsibility for outcomes. 4: Integrative roles – co-ordinating or boundary-spanning roles that orchestrate work across units. For example, a global electronics company with a highly decentralised business unit structure appointed a commercial SVP with responsibility for developing solutions selling capability, developing large accounts and improving cross-selling across divisions. This role chairs a sales council which includes commercial representatives from each division. 5: Matrix structures – formalised dual or multiple reporting structures that place accountability for managing the conflicting needs of different dimensions of the organisation in one role.

Organisation design is often an underdeveloped capability for the HR function, yet HR leaders can play a central role, in particular encouraging leaders to pay attention to organisation design when developing strategy and implementing change. To do this, HR needs to anchor its efforts on customer and value (outcome measures) rather than just on spans/layers/cost (process measures). We need to coach leaders on how to bring together cross-functional teams and networks to solve customer problems and we need to adapt existing HR levers – such as flexible resourcing, performance management, developing leaders, capability building – to enhance horizontal collaborative mechanisms and ways of working.

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