Organizational design is growing in prominence with every passing year. In a world derailed by geopolitics, economic volatility, and crises such as the Coronavirus pandemic, organizations have to find ways to adapt quickly.
From humble beginnings as a sub-discipline of HR, organizational design is fast becoming a survival strategy for every organization, no matter how large or small. Estimates are that 50% of S&P 500 listed companies will disappear within 10 years.
It’s time for businesses to fight back. Forget org charts and the 3-year plan. Organizational design and iterative business planning are your best hope.
This guide will show you how to get a practical handle on this essential discipline, so you can take your business to a position of strength.
- what is organizational design?
- rethinking organizational structure and business planning
- where does organizational design go wrong?
- organizational design challenges to overcome
- organizations are connected, living systems
- putting organizational design into practice
- approaching organizational design differently
- organizational design is a journey
what is organizational design?
Organizational design is the discipline of shaping an organization’s structure to become more effective in achieving its vision and purpose. It aligns people, work and competencies with business strategy and objectives.
Susan Mohrman, professor at the University of Southern California, says organizational design “is the process of purposefully configuring elements of an organization to effectively and efficiently achieve its strategy and deliver intended business, customer, and employee outcomes. (1)”
Organizational design consultant, Naomi Stanford, agrees that it’s driven by the business strategy and operating context, and requires holistic thinking around systems, structures, people, performance measures, processes, culture, and skills (2).
rethinking organizational structure and business planning
The world is becoming increasingly volatile and disruptive, which is changing the nature of business planning. Research has found even the best business forecasters are unable to plan reliably more than 400 days out.
Instead of working methodically to a 3-year plan, organizations will need to become more adaptable in how they respond to market changes and get used to the idea of incrementally adjusting their business plans on a continuous basis.
This is where organizational design takes on new importance. Until now, structuring an organization has been predicated on a certain predictability in market behavior. But today those assumptions have all but disappeared. The time to fundamentally rethink organizational structure has come. Accountability and preparedness have never been higher on the corporate agenda than now.
where does organizational design go wrong?
As companies develop and grow, systems and processes become more complex and may fall out of alignment with business strategy. Consequently, those organizations that don’t continuously monitor business performance are likely to experience a number of problems, including:
- Dysfunctional workflows that falter or break down
- Siloed, fragmented workloads with low quality output
- Duplication or redundancy of activities
- Poor accountability for activities and delays in decision making
- Poor information and lack of authority to solve problems as they arise
- Lack of trust between managers and employees
According to consultant, Ron Caruccio, these problems are symptomatic of underlying causes that are rooted in poor organizational design (3).
organizational design challenges to overcome
Designing organizations is always difficult because you’re dealing with a moving target. Whatever changes you make will have a ripple effect on your company’s ability to implement its strategy. This ‘connectedness’ gives rise to a number of design challenges and pitfalls that can be grouped as follows:
- People and politics. Designing around people and roles rather than business needs is the single biggest mistake you can make in organizational design. Don’t be tempted to keep the peace in the short term at the expense of business performance over the long term.
- Data and analytics. Aside from the technical challenge of collecting, merging, structuring, cleaning, and storing data, obtaining information can be difficult for ethical reasons. Employees may be fearful of data transparency and resist disclosure. This challenge will take time to overcome and relies on trust and behavior change.
- Design processes. Organizational design is about more than just structure, so make sure you apply the same rigor to all areas. Don’t just focus on org charts, be clear on the processes that make up the organization as a whole and understand how they connect.
There are no perfect answers to organizational design and every case is different. It’s a continuous process that works to sustain the organization over time and improve business performance.
organizations are connected, living systems
Underpinning successful organizational design is the idea that organizations are connected systems and not a static structure drawn on paper. They are complex organisms with many moving parts that are constantly changing and evolving, and are dependent on the ecosystem in which they exist.
There are many recognized approaches to organizational design that largely stem from the work of Kenneth Mackenzie and Jay Galbraith in the 1970s. McKinsey’s 7s model is another commonly used methodology.
Demonstrating that the effectiveness of organization systems is greater than their component parts isn’t difficult. What’s challenging is to understand exactly why this is. And to do that, you need to be able to visually represent those systems with data.
The orgvue platform uses a conceptual model to describe the relationship between people and work, so you can see how different activities combine to drive business performance. The model enables you to monitor and adjust the nature and flow of work in response to changing circumstances.
Our conceptual model is different from others in that it breaks down the organization system using data points to deconstruct people, roles, and positions, as well as perform gap analysis aimed at optimizing the system.
It begins by associating individuals with positions, which are grouped by role. For example, you may have several sales managers (role) for different regions (positions). This relationship helps to quantify the workforce demand of the business over time, which can then be compared with the supply that the current workforce represents.
Next, the roles are broken down into the processes and activities – in other words, the work – alongside the skills and competencies needed to do that work. By attaching accountability metrics to each role, you can compare how effectively the work is organized.
This puts the business in a position to manage workforce productivity by ensuring work isn’t duplicated unnecessarily, trimming back work where too much effort is being spent on particular activities, and redirecting effort elsewhere where it’s needed. Importantly, it also means the financial impact of any changes can be tracked.
This is far more insightful than tracking salary costs across the workforce, which can’t tell you the financial contribution the workforce makes, only how much it’s costing you. By shifting focus to the work, you can quantify the value your workforce delivers.
putting organizational design into practice
Designing an organization that’s more responsive and resilient to unforeseen changes, calls for a more precise understanding of its interconnecting elements.
Design methodology considers activities (work), competencies (knowledge and skills), roles (to complete the work), and human capital (people with the right competencies) needed to fulfil positions and meet objectives (targets).
Broadly speaking, there are three steps to successful organizational design. You begin with the big picture, then go into the practical detail, and finally focus on implementing the design. Then it’s a case of rinse and repeat. Organizational design is a habit, not a one-time event:
- Step 1: Macro designunpacks the business strategy and prioritizes objectives.
- Step 2: Micro designis all about the detail. You need to understand what roles you have and the rationale for those roles. What activities is each role responsible for?
- Step 3: ImplementationGoing from micro design to implementation is an iterative process. You won’t get micro design entirely right first time but that’s better than doing no micro design at all.
- Step 4: Continuous designOnce you’ve completed the design work, shift your focus to continuously tracking your organization and performance against plans. At this point, it’s about bringing everything back to macro level, so you can appreciate the direction of travel, what you’ve achieved, and what lessons can be learned.
Our book Data-Driven Organization Design explains this four-step process in extensive, practical detail with real-world examples. For more insight, you can download the introductory chapter here.
approaching organizational design differently
As well as rethinking organizational design’s role in business planning, we need to consider where it sits within the organization. Historically the responsibility of HR, this arrangement is clearly out of place in the new world order. Yet, HR is a useful starting point for how businesses might reinvent organizational design as a discipline.
Consider the relationship between HR and Finance. Both have an interest in strategic workforce planning but for different reasons. But when you compare these business functions, arguably Finance is more sophisticated and organized in how it approaches the work. To begin with, Finance separates operational work such as financial control from planning, which is done by the financial planning and analysis team (FP&A).
Conversely, HR has never had a separate workstream for organizational design and concerns itself with operational work 98% of the time. Whenever organizational design work is required, it’s usually packaged as a one-off project.
We firmly believe organizational design should be a continuous, cyclical process that needs a separate focus, just like FP&A – a new future-focused way of seeing things that’s not limited to one function. We call this new approach organizational planning and analysis. You can read more about our thinking here.
organizational design is a journey
In the short term, the single biggest change you can make in how you approach organizational design is to go from thinking about data as static snapshots to visualizing movement over time. Data is constantly changing, both for actuals and forecasts. Understanding the relationships between the two, where and what the gaps are, and how these ebb and flow is the key to improving business performance.
By organizing your data in hierarchies, then linking and visualizing it enables you to reach a remarkable depth of analysis into causal relationships that truly explain how your business operates.
For example, you’ll be able to identify connections between individual performance and business objectives. You’ll be able to understand whether an employee would benefit from specific training, whether they’re overloaded with work, or whether a change of manager has affected performance. These findings put you in a position to make positive changes.
Building an understanding of a new conceptual framework like this takes time. And it may be tempting to dismiss the idea of an interconnected, living organization system when so many businesses struggle to understand headcount alone.
But organizational design is a journey, work that’s never finished. We hope the thoughts and ideas presented here provide a starting point for whatever your organizational design challenge – whether answering the most basic questions or performing complex advanced analytics.
(1) Mohrman, S.A. (2007) Designing Organizations for Growth: The Human Resource Contribution, Centre for Effective Organizations 07-10 (52), p. 4 https://ceo.usc.edu/designing-organizations-for-growth-the-human-resource-contribution/ (accessed on 27.06.19)
(2) Stanford, N. (2007) Guide to Organisation Design: Creating high-performing and adaptable enterprises, Profile Books Ltd, London
(3) Carucci, R (2019) 4 Organizational Design Issues That Most Leaders Misdiagnose, 6 December, Harvard Business Review https://hbr.org/2019/12/4-organizational-design-issues-that-most-leaders-misdiagnose (accessed on 15.05.20)