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:
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.