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Understanding the Foundational Concepts of Organizational Design

September 24, 2020 Leadership
By Dom Nicastro

Human resources leaders say organizational design is high on their priority list. That's according to Gartner researchers, who reported that finding in late 2019. Has the playbook changed in 2020, given the pressures of a pandemic and subsequent radical changes for the workplace?

Not at all. In fact, some say organizational design has never been more critical, given the evolving workplace that’s likely headed for a hybrid reality in 2021.

What Is Organizational Design?

Deloitte defines organizational design as a model that allows organizations to accelerate in complex business environments by creating direct alignment of the organization to its strategy and business model. With success, the performance of people within the business is enhanced with corresponding benefits to results.

Edgar Arroyo, president of Cabo San Lucas-based SJD Taxi, a travel rental company, said he’s been part of teams implementing organizational design at multiple organizations.

Organizational design is a process to put organizational structures in place that allow a business to effectively achieve its goals, Arroyo said. It's important because business outcomes are shaped by how performance is rewarded and measured in the company, how decisions are made and how responsibilities are allocated, he added.

“If a company wants to be known for innovation but new product proposals still require multiple layers of approvals before a prototype is made, that can reduce the speed at which ideas get implemented and new products go to market while customer preferences may already have shifted dramatically,” Arroyo said.

To successfully implement organizational design, it's important to define objectives, take time to understand the organization, implement a few changes at a time and measure short-term and long-term changes as a feedback loop, he said.

Related Article: Is It Time for an Organizational Network Analysis?

COVID-19’s Impact on Organizational Design

All those principles, of course, were flipped on their head when COVID-19 started to spread globally and disrupted how people get work done and where. The obvious impact has been the design of a virtual workplace, said Ron Carucci, co-founder and managing partner at Atlanta-based Navalent, which helps companies implement organizational design. 

“The challenge is that most people just got shoved into working from home, and everybody had to pioneer their way into figuring out how to make a dining room into an office or their basement into a classroom," he said. "And we survived that."

Now, however, the design evolution continues for workplaces. Some employees are returning to work. Some are not. Some have 2021 target dates for the return to offices.

"We’re figuring out how to work through this hybrid model of having some people work remotely and have some people working not remotely," Carucci said. "What do we base that decision on? Is it based on safety? Is it based on employee preferences or fears? Is it based on economics?”

Working remotely was an easy choice to keep employees and families safe from COVID-19. And that’s largely still a reality for many organizations seven months into the pandemic.

However, when it comes down to figuring out where and when to make work happen, pandemic aside, many organizations take short-sighted approaches because they do not consider the most obvious criteria: what is the work? What’s the best place for it to be done to optimally to serve customers well and efficiently and to be able to provide quality products and services?

Organizational Design Concepts

So where does organizational design kick in? It helps to understand the foundational concepts before jumping in. Organizational design is not a reorganization, where you change a few titles and place employees under different managers in an org chart, according to Carucci. Org charts do not tell you anything about the workflow and design of organization. “All it tells me is who reports to who,” Carucci said.

Organizational design can be broken down to systems and strategy:

Systems: Hardware, Software, Culture

When designing an organizational system, think about the hardware and software: the structures, processes, technology and governance. Carucci said it's also important to think about the culture: the people, the norms of the organization, the mood, and the level of employee engagement. These all have to be connected to be successful.

“How often do you walk into a company and there's a team over there working on streamlining a process, a team over there working on compensation, a team over there redesigning the company values, a team over there working on training people on a new enterprise resource platform,” Carucci said. “And no one's talking to each other. That's the typical approach and then when you try to piece it all together, it doesn't work.”

Strategy: Ensuring Alignment Across the Board

The systems and culture are driven by a strategy, and often the breakdown happens because there's misalignment. Executives in the same company will often give different answers when asked about fundamental company strategies. “It happens when everybody at the top is leading the place in a different direction," Carucci said. "The hardware and software of organization is nothing more than the embodiment of a strategy. This who we say we are. If you get this right, you get a gold star.”

Related Article: Improving Employee Engagement in the Enterprise

Where Grouping and Linking Fall into Organizational Design

Two more important principles for organizational design are grouping and linking.

Grouping: Don't Be Afraid to Break Traditional Models

Traditionally, organizations group how they work by geography or function: finance, sales, marketing, supply chain, manufacturing. Other companies group employees around customers, processes and go-to market strategies. Most organizations do a decent job getting the grouping of the work reasonably right, according to Carucci.

One important distinction to note when thinking about grouping in organizational design is defining what type of work your organization does. Carucci said organizations should break down work into three categories:

  • Competitive work. This is the work that sets you apart. This is your “secret sauce” and should account for about 15% of work, Carucci said.
  • Competitive enabling work. These are support mechanisms to competitive work. “If your competitive work is customer service, and that's what sets you apart, your customer analytics is your competitive enabling work,” Carucci said, and is typically 30% to 35% of work.
  • Necessary work. The remaining work is grouped into the “necessary” category. This is work that keeps the lights on and keeps the organization in compliance. “You don't need to be better than anybody else here,” Carucci said. “But this is the vast majority of your work.”

“Necessary work has more immediacy and is more short-term and more urgent,” Carucci said. “So people will do that. And they don't protect their competitive work, and their competitive talent, or the competitive-enabling worker talent. Those things have to be separated and quarantined so that it can be done at their best.”

Linking: Connectedness of Cross-Functional Teams

Organizations won’t work and won’t have good quality design unless groups can work together. No one group is a sum of the total company. “It's the conductor's job to make sure that all sounds like one good symphony,” Carucci said. “So we have to link all this work together.”

Governance is how you link groups together. Identify what cross-functional teams are working together and link through processes. “Most companies fail to standardize,” Carucci said. “They say we can't do that."

"Standardization doesn't constrain agility. It liberates it. … You can link work through culture, a certain set of norms or ways you operate. There's lots and lots of ways you can link the work. The key is to do it on purpose.”

How can you link together East Coast and West Coast work in the most cost-effective way, for instance? What is the work you want to do and what is the competitive value of that work?

“You have to look at every place where your organization comes together and ask yourself when this seam gets stitched, what does good look like?” Carucci said. “And what's the best glue to use to bring that team together? And you have to do that for all of your work. Most organizations are just not willing to invest the time in doing the design work necessary to really think through the entire enterprise, and to group it and link it effectively, so that it can actually execute the strategy you've declared. That’s organizational design.”

Understanding the Organization

While there are formal documents that state how company processes should be, the underlying norms, mindsets and practices that shape how people do things are often different, according to Arroyo.

"Similarly, it's not enough to understand roles and responsibilities from an organizational chart as there are often many informal clusters of power and influence in the company as people connect beyond their teams and managers," he said. "Take the time to understand all the unwritten aspects of the organization so that the company can ensure that the target design can shape behaviors and practices to achieve the company's new goals."

To understand how these norms play out, implement a few changes at a time on a smaller scale and watch their effects before implementing them across the organization. Measure the short-term and long-term changes and add them to a feedback loop to help understand the progress. Set simple KPIs that measure whether the company is achieving the new objectives.

"This can help a company measure how the changes they are making is impacting their ability to meet their objectives, and either reverse or adapt their initiatives according to how well it's working," Arroyo said. "Short-term metrics are important so that the organization gets a timely pulse-check and can adapt quickly without investing more resources into something that may not be working effectively."


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