Ten-minute tutorial – Organisational design and structure

Keith
Rodgers outlines how organisational design can improve performance

What
is it?

The
concept of ‘organisational design’ is pretty much self-explanatory, although
the word ‘design’ gives it a far more creative feel than it often merits. Most companies
have evolved along traditional departmental lines, driven from the top down in
a classic management hierarchy with little novel thought applied to the way
that employees interact with each other, or with the outside world. Not
surprisingly, this approach rarely proves to be the best way to meet customer
demand, and it is certainly not the best way to leverage human capital.
Organisational design addresses these issues – it is all about shaping the
company to maximise its effectiveness.

The
story so far

Organisational
design has occupied the minds of the great and the good for decades. In 1937,
for example, British economist Ronald Coase published The Theory of the Firm,
arguing that organisations should stick with rigid hierarchical structures even
in agile markets, because that was the most cost-effective way of carrying out
transactions.

Coase’s
work, which won him a somewhat belated Nobel Prize in 1991, shot back into
prominence in the late 1990s. That, you’ll recall, was when the internet was supposed
to change everything. Cyber-gurus such as Don Tapscott, whose long list of
admirers included Bill Clinton, argued that the internet finally provided a
platform for cheap transactions between organisations, freeing companies to
experiment with new, more fluid structures. Suddenly, rigid hierarchies were
out and flexibility was everything. The concept of collaboration moved into
mainstream business thinking, describing the way in which highly-agile
organisations come together at will to form mutually beneficial relationships –
sometimes long-term, sometimes to tackle one-off projects.

This
approach turns organisational design theory on its head. When Henry Ford’s
motorcar business came to dominance, he owned his supply chain. Everything from
the rubber plantations that supplied material for his tyres, to the mahogany
forest that supplied the wood. By contrast, when Cisco became the most valuable
company in the world at the height of the dot com boom, it only owned a handful
of the different plants that make its products. They were primarily built and
assembled by others, and in some instances they were shipped directly to
customers without even going through Cisco itself. The reason? The internet
made this kind of approach cost-effective.

The
advent of the internet also accelerated another trend – towards empowering the
customer. Historically, organisations have been structured from a supply
perspective – what they sold was primarily driven by what their manufacturing
plants were geared up to make. Today, globalisation and internet-based
communications give the customer far more flexibility to shop around, and the
emphasis is now on supplying what the customer wants, when they want it. This
too has enormous implications for organisational structure. To understand all
the facets of customer need and provide comprehensive customer service, all the
different units within companies need to work together far more coherently.
That means departmental ‘silos’ are history.

The
promise

One
of the great things about flexible and agile business environments is that they
continually challenge the status quo. In practice, that means the largest, most
established organisations dominating today won’t automatically dominate
tomorrow – in fact in many cases, their sheer size and traditional structures
will play against them. Theoretically, therefore, organisations designed for
maximum flexibility can make their mark with a speed that historically hasn’t
been possible. But the flipside, of course, is that they can also lose it all
even faster.

Effective
organisational design holds out the promise for companies to transform their
ability to do business. By breaking down the barriers between internal
departments, they can maximise their human capital through better team-work,
improving customer management and retention, and maximising their supply
efficiencies by building truly collaborative relationships.

One
thing to bear in mind about organisational design, however, is that the promise
doesn’t always match the reality. Take Cisco – for all its organisational
flexibility, it hardly proved immune to the high-tech collapse. And look at the
whole business process re-engineering movement, started off in the late 1980s
by Dr Michael Hammer, and responsible in the 1990s for some hugely regrettable
corporate cock-ups.

Pros
and cons

The
good news is that the renewed corporate focus on organisational design reflects
business reality. Agility and collaborative capability are essential, and the
only question is the degree of change required in different sectors and the
speed with which it has to happen. From HR’s perspective, a further upside is
that today’s organisational design theory places a high emphasis on unleashing
employee value, and as such, it is a key plank of Human Capital Management
strategy.

The
cons, however, are both cultural and practical. Quite simply, building an agile
business is a momentous task. An organisation structured around product sets,
for example, will need to be fundamentally reorganised to become truly
customer-centric – instead of business processes designed to build and supply
individual products, it will require processes designed to fulfil individual
customer need from any combination of product. This kind of change management
programme is extensive.

Likewise,
for all their faults, hierarchical structures are comfortable for employees,
particularly in terms of management reporting, career structure and perceived
status. Agile structures that encourage cross-departmental activity,
team-working and project-based assignments present a whole host of new
challenges, which are likely to encounter resistance.

In
addition, new ways of working require new infrastructures. Business agility has
much to do with the way that information flows across an organisation, so information
technology plays a critical role. While vendors have been re-architecting their
product sets for years to meet the challenge of business agility, in practice
users will still face challenges, particularly in terms of integration between
systems.

Who
is on board?

Pretty
much everyone, from management theorists to the technology vendors that provide
much of the supporting infrastructure. Bear in mind that the key players may
not be visible under the guise of organisational design per se, but proponents
of business philosophies such as customer relationship management view
organisational design as a key plank of their thinking.

Dissenting
voices are most likely to be found within the ranks of organisations. They
won’t just be those of trade unionists anxious about the implications of
increased flexibility and fluidity in job roles. They will also include line
managers jealous of their power bases, and even senior executives.

Verdict

There
is huge momentum behind organisational design change to create agile,
collaborative enterprises, but the practical hurdles are significant.
Ultimately, organisations will be well advised to take a pragmatic approach,
seeking to gain benefits from a series of small change projects which improve
their business responsiveness while building towards a longer-term
collaborative goal.

The
HR contribution

Absolutely
crucial. Organisation design is an area where HR can exert great influence,
demonstrating both its strategic vision and its tactical prowess.
Fundamentally, organisational design is about processes and people – that’s
HR’s game.

Essential
reading

Organization
Theory and Design, by Richard L Daft

ISBN
0324021003

Competing
by Design: The Power of Organizational Architecture, by David Nadler, Michael L
Tushman and Mark B Nadler

ISBN
0195099176

Digital
Capital: Harnessing the Power of Business Webs, by Don Tapscott, David Ticoll
and Alex Lowry

ISBN
1578511933

The
Agenda: What every business must do to dominate the decade, by Michael Hammer
ISBN 060960966

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