14 Jun Is your business design holding you back?
All organisations are looking for ways to improve their performance. Private sector firms are striving to beat the competition by providing more value to the customer at the lowest possible cost. Government departments and not-for-profit organisations are under pressure to provide increased stakeholder-satisfaction with ever-diminishing resources. These challenges require an improvement in effectiveness – doing only those things that the customer/stakeholder values – and efficiency – doing more with less.
The key to meeting these challenges could lie in taking a more systematic approach to business design. In this article, I will introduce a business design framework that, correctly implemented, has the potential to vastly improve business performance. ‘Organisational Architecture[i]’ is a simple, yet very powerful framework that seeks to improve an organisation’s performance by establishing alignment between the organisation’s environment, strategy, organisation design and culture. It all sounds like common sense, but it is amazing how many failures and near-failures can be traced back to getting this wrong.
In this framework, core organisational design has three elements:
· The assignment of decision rights within the organisation: How centralised or decentralised should decision-making be? Are decision rights more appropriately assigned to individuals or to teams?
· The evaluation of performance: What is the optimum balance between objective and subjective measures? Should performance benchmarks be absolute or relative? Is performance evaluated on an individual or team basis?
· The rewarding of individuals: What is the optimum balance between straight salary and incentive-based compensation? What incentives can be utilised when cash incentives are restricted?
While it is clearly important to get each of these settings right, it is compatibilityand balance that are the real keys to success. Where organisations often go wrong is that they see a particular technique that is working well in another organisation (for example, management by objectives, zero-based budgeting, participative management, total quality management, etc), implement that technique in isolation, and then wonder why it didn’t succeed.
The correct (that is, ‘effective’) approach to implementing a new organisational design is to start with the organisation’s environment and strategy, craft an organisational design to suit, and then use internal communication channels to establish a compatible corporate culture.
As I said, this is a powerful framework. It can be very useful for explaining why an organisation has failed, or is not performing as well as it should (and I’m sure we can all think of some case studies here). But more beneficially, it can be used to create an environment for superior performance, thus avoiding failure in the first place. The framework is also very flexible – it can be applied to whole organisations, or on any business unit that is seeking to improve performance. (And that’s all of them!)
Of course the devil, as they say, is in the detail. Some of the more important detail as I see it is:
· Is your strategy the right one for your business’s environment, and is it well understood by all?
· Who in your business has the information required to make value-enhancing decisions, and can they be given more decision-responsibility? Are corporate policies stifling creativity?
· How can these key individuals (or teams) be incentivised?
· What cultural changes are required to support the new approach?
We’d be really interested to hear your feedback on this framework. Can you see potential in this model for improving your organisation, or business unit? Do you have a similar (or even a very different) approach that you use? While this model is already well developed, we are currently looking for ways that it can be built upon, and to that end your input would be greatly valued.
The ‘Organisational Architecture’ framework has been developed by James Brickley, Clifford Smith and Jerold Zimmerman, and is described in their book, Managerial Economics and Organizational Architecture, fifth edition, Irwin, McGraw-Hill.