Margins are thinning, decisions are made at a glacial pace and growth is beginning to slow while competitors are gaining ground. The CEO assembles the top team for a special meeting to “fix the organization,” points to statistics about the large number of layers in the organization and increasing numbers of middle managers, and informs direct reports that the business is about to embark on an “organization review.” A consulting firm is hired and they deploy a team of freshly minted MBAs— knowing little about the business—to descend upon the C-suite, armed with benchmarks, metrics and a list of areas for the business to “streamline” in order to drive desired growth and profitability. Recommendations about the spans, layers and redrawing of organization charts to achieve financial targets are left for the executive team to implement. They get partially implemented, and consequently the business achieves less than half of its targeted cost savings. Morale deteriorates, decision-making grinds to a standstill and profitable growth continues to decline. The CEO is left puzzled. The strategy is a winner! While competitors continue to grow, the organization and its leadership just can’t seem to effectively execute.
This story is a familiar one: the strategy is right and the team is energized but the organization can’t get out of its own way. Many businesses go through this scenario every couple of years, piling up scar tissue in the process and never really unlocking the full potential embedded in their organization. One of the reasons companies find themselves in this unproductive “organization transformation” loop is the false hope that optimizing managerial span of controls (“spans”) and reducing organizational layers (“layers”) to be more in line with peer benchmarks will fix their execution problems. It won’t.
Spans and layers analyses and cost benchmarks, the standard tools for many firms who advise CEOs, are now routine and ubiquitous yet can also be blunt instruments that provide limited insight about what’s really causing poor strategy execution. Can these tools point to “hot spots” in the organization that have become bloated over time with unnecessary managerial layers and reveal managers who are building kingdoms? Absolutely! In fact, members of the top team should be getting data at regular intervals to understand where the organization is bloating, if costs are aligned with strategy or whether protective measures are in order. But for the sake of argument, organizational hygiene—optimizing spans and pruning layers—may help improve short-term financial gains but will not deliver sustained business results and competitive advantage. Furthermore, making structural changes without understanding how other components of your operating model are impacting execution can cause more harm than good, putting your business on the restructuring treadmill every time cost pressures increase.
An Operating Model is the connective tissue enabling a company to effectively execute its mission and strategy. It clarifies “how, who and where” work gets done, both formally and informally, by holistically designing and aligning all elements to work in concert to deliver value.
For organizations looking to improve strategy execution, let’s consider three common misperceptions related to what structural changes will achieve:
Reducing layers in the organization will get us closer to customers and accelerate profitable growth. A particularly egregious misconception is that removing a layer in the organization, which usually results in increased spans of control through the redistribution of direct reports, will bring front-line employees and managers closer to the customer resulting faster and better growth and increased profitability. This structural change alone, however, won’t move the needle on improving strategy execution. In fact, it may further inhibit it and often does. Why? Because capabilities, accountabilities and governance must also be evaluated to understand how they contribute to current performance and to identify what changes are needed to drive more effective strategy execution. Only after this evaluation should span changes be evaluated to see what, if any, benefit they may bring.
Redrawing the organization chart will change how work gets done. Organizational structure, or how the boxes and lines are drawn on the organization chart, is a component of any organization’s operating model. Yet, in thinking about improving strategy execution, many organizations mistakenly make the chart the entire focus of their efforts when, in fact, it may have the least importance as structures should be designed to support the effective execution of the work. The organization chart should be designed to leverage differentiating capabilities, reinforce ways of working, enable effective governance and decision making and do so in a cost-effective manner—in effect hierarchy and structure are the “form” that is designed to follow and support “function.”Leaders often start with organization charts because they believe that information and ideas flow hierarchically. This is far from organizational reality. Companies with sustained track records of performance adapt to changes in the market through agile ways of working that leverage formal and informal networks within the organization. They evolve their ways of working and decision-making approaches, have networks of teams that can quickly mobilize around priorities, manage their talent as a strategic asset and have strong leaders who know how to clarify roles and hold others accountable. They recognize that hierarchy isn’t the lever that generates results – it’s the intentional design and reinforcement of social networks, fit-for-purpose governance and effective workforce management that enable sustained performance.
Achieving best-in-class structural and cost benchmarks will increase the probability of success. Benchmarks often become comfort blankets for nervous executives looking to rationalize structural changes. While benchmarks around cost structure provide a helpful reference point for the size and shape of an organization, they are not roadmaps for structural change. Numerous existing sources can provide data on spans and layers by industry, and some even profile competitor structures. Yet, while using peer benchmarks as a compass to navigate structural change can seem appealing, it will often lead to arbitrary, top-down structural decisions based on organizations that were designed to execute different strategies. Simply copying the different structural features of competitors in the hopes of replicating their results is an all too common occurrence leading to both incoherence and underachievement.
Designing structure and aligning to benchmarks should be the last consideration when designing an operating model. The “north star” of the design process must be an organization’s strategy, its context including values, culture and environment, and its differentiating capabilities. The structure must take into account how each business unit and team will collaborate to effectively accomplish the company’s goals. Decisions made regarding the components of your operating model—how to work horizontally, who makes which decisions, and how to drive accountability for results and measure success—should be used as the roadmap for making structural changes.
No shortcuts or magic benchmarks exist for getting structure right. Attempting to drive profitable growth through spans and layers is a fool’s errand that may produce near-term cost reductions, but not sustained performance. What is required is intentionally designing and fine tuning the linkages between capabilities, ways of working, accountabilities, governance, organization structure, social networks and information flows.