Form That Follows Function – Physical Organisation and the Operating Model

By David Winders and Kirill Deverenski. July 2018

In this series of articles we have explored each zone or theme of the Operating Model Canvas in order to provide better guidance on how to use the themes to describe the operating model.

The main message that has been presented in this series is that the operating model should be based on maximising the value provided to the client of the firm. In other words, “we need to design the operation to deliver the most value in the most efficient way”. In many cases, it is a balance between providing the most value against the financial impact of doing so (whether in costs or revenues) where compromises have to be made; this has been seen in several of the preceding articles. Physical organisation is no different.

The organisational structure presents us with often the biggest challenge and is the theme that causes the most problems

The organisational structure presents us with often the biggest challenge and is the theme that causes the most problems. There are several reasons for this that need to be recognised and understood if we are going to do justice to aligning the organisational structure to deliver maximised value.

Often the transformation of an operating model starts with an organisational chart, and the objective, even if not explicitly stated, is often to move to a new chart. This over focus on structure is because it is about the people who populate the structure, not necessarily the need to support the delivery of value.

Organisation means people and people means politics and ego. The needs of individuals in advancing their career or maintaining power are not always in line with the best interests of good organisational design.

This is why the importance of the organisational chart as a design tool is overstated and should not be brought to the front of discussion far too early in the design process. The right message here is simply “leave it to last and create the structure that is best to support the delivery of value”.

So, how do we create an organisational structure that delivers this desired balance?

Traditionally, organisations were structured in a hierarchy within areas of expertise such as Sales & Marketing, Operations, HR, and Finance being typical vertical silos. Organisations were, and are, frequently designed for the convenience of those operating them top down; they take an internal perspective looking in rather than out.

Functional structures are technically efficient leveraging quality and economies of scale but they have their downsides. They are poor at delivering cross functional delivery and poor at communication, the ability to respond to change and adapt is slow as the cross-function cooperation occurs at the higher levels of the organisation, not at operational levels. Information and instructions pass up and down the silos of control, instead of flowing horizontally.

So, if traditional structures give efficiency and perhaps give greater hierarchical control, they hinder agility and end to end customer value of what do we do. By contrast, so called ‘organic’ organisations are interconnected through project teams and distinct centres of excellence, but are perceived as more difficult to organise and run efficiently due to relationship complexity within them.

Three factors need to be balanced and the need for each analysed before deciding on a final organisational structure. The three axes are:

  • Financial impact for the organisation (e.g. costs, revenues etc)
  • Management control
  • Impact on organisational value delivery chain to final beneficiaries

Form That Follows Function - Physical Organisation and the Operating Model

Each strategy and its resulting business model will have addressed value, cost and control. This tells us what is important and what degree, so we can plot where we are today and where we want to be.

If the choice is high on the value delivery and often this is what the analysis requires, then the structure need to mirror the value chains. If the requirement is control, perhaps because the sector is highly regulated, then the structure needs to reflect that in its division of duties and division of accountability. If it’s high on cost reduction and not high on differentiated value provision, then a traditional functional approach maybe more appropriate.

Some themes or principles help us here.

  1. Value is defined by the customer, not the organisation providing it. For example, the customer journey (the value delivery chain) defines what structure is required.
  2. Delivery of value should be made accountable for by individual responsibility.
  3. Avoid hand offs and mixed accountabilities along the process lines or value delivery chains.
  4. Delivery of end to end value should be measures and rewarded.
  5. Structures should mirror value chains unless control or efficiency drives the business model and therefore the operating model.
  6. Communication between people of different skills need to happen transversally at all levels of the structure with focus on delivering value.

In adopting these principles how do we recommend carrying out organisational design to optimise the operating model?

Steps:

  1. Ignore the existing organisational chart for now.
  2. Map the value chains to capabilities and their prerequisites and identify tasks to be undertaken to differentiate what is needed. Mapping out logical processes end to end will be helpful.
  3. Identify the volumes of these activities and the service levels within which to deliver them.
  4. Calculate frequency and intensity of activities in the operation to see what resources are needed.
  5. Identify the culture, skills and behaviours required to deliver the processes successfully.
  6. Design roles to deliver the tasks and benchmark their level and cost.
  7. Apply organisational spans of control applicable to the level of employees.
  8. Define team size and supervision in line with controls and cost based decisions.
  9. Create a logical organisational chart.
  10. Map existing personnel to the new logical organisational chart
  11. Identify gaps and new hirers or people not suitable for the new world.
  12. Consult with workforce hire and or restructure.
  13. Develop and implement a comprehensive Change Management programme to sell and manage change.
  14. Transform into new structure in line with technology and process changes.

In conclusion, organisation as an operating model theme is not just a reconfigured organisational chart – in fact, this should be avoided as an approach. Organisational structure choice should be an answer to an analysis of the three axes of value, control and financial efficiency, with default objective of seeking to align to maximum delivered value by mirroring organisational structure with value chains wherever possible.

Our final observation is to leave physical names in boxes to the last since a “true” value-aligned structure that fits with what the firm seeks to deliver to its stakeholders is the main driver for organisational improvement, not the politics of those running the organisation.

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