PREFACE

G ardenville had never experienced anything like the night of November 27. At 7:00 P.M. the main water line burst under Duggal Street, and the basements of many of Gardenville's shops and homes quickly began to fill with freezing water. At 9:00 P.M. a fire broke out during the second shift at the factory, which was located just on the edge of town where many of the town's Mexican immigrants worked. Most of the volunteer fire department was downtown blocking off streets and helping the utility crews when the call came in about the fire. Half the firefighters were sent over to the factory, and a call for assistance was made to neighboring towns.

Dan Roskobev was one of the first to arrive at the factory. In his twelve years on the first aid squad, he had never seen such confusion. The fire was blazing out of the upper windows on the east side of the building. People were milling about in the 20-degree temperatures, many without coats. Some people looked hurt and were bent over, crying. Others were calling out in Spanish for someone to help the workers who might still be in the factory. Everyone seemed stunned.

The leader of Gardenville's emergency services crew was away for the Thanksgiving weekend. The firefighters were preoccupied with the blaze. Dan decided somebody had to take charge. He asked one of the firefighters to break into a small restaurant that was dark and locked for the night. At least it was a place to get people inside, somewhere warm where he could begin to triage those who were hurt and needed to get to the hospital. Over the next four hours, he tended to minor burns, directed people to find blankets and supplies, and organized car pools among the onlookers to get people to the hospital. He coordinated translators to interpret when the other first aid squads arrived, and when the owner of the restaurant showed up, he convinced him to make coffee for everyone.

That week, an editorial in the county newspaper lauded Dan as “a true hero.” It also called for better emergency services resources, training, and coordination, noting, “Our county is not prepared for a major disaster. We can't always count on having a hero show up at the right time.”

This is not an uncommon story. When disaster strikes, people step up to the job that needs to be done. They pull together resources that are in short supply, coordinate the actions of others, and make fast decisions. We hail them as heroes. Of course, what works in a crisis is an inefficient and ineffective way to operate all the time. On a day-to-day basis, we count on organizations, not heroes, to ensure that resources are in the right place when needed, and that people have the right skills, tools, and support to carry out their jobs.

Many managers in businesses today complain that they feel as though they are “fighting fires” all the time. They are continually focused on short-term problems without a chance to pull back and think through the consequences of options and decisions. Rather than analyzing strategic opportunities, planning for business growth, or developing their people, they are caught up in day-to-day “doing.”

These pressures often come from external forces. As a manager, you may not face natural disasters with lives at stake in your everyday work, but you often must react quickly to challenges. If you're in a mature company, you probably need to respond to new competitors, consolidations, mergers and acquisitions, global expansion, and e-commerce. If you are a leader of a start-up, you may be struggling with building an infrastructure that will support rapid growth while trying to avoid unnecessary bureaucracy. On top of this, you may also be faced with higher than desired turnover and a shortage of talent to draw upon in the employment marketplace.

Too often, however, it is internal forces that keep managers from attending to long-term, strategic business challenges. Issues that should be resolved at lower levels and decisions that should be made at the front line float up to the leadership level. More time is spent on smoothing internal frictions than on customers, markets, and competitors. Yet, few managers feel confident in their own ability to shape their organizations to be more effective. A survey of the 441 fastest growing U.S. businesses conducted by PriceWaterhouseCoopers in the summer of 2000 found that 32 percent of CEOs believed that their inability to manage or reorganize their business could be “an impediment to growth” during the coming year. Only 10 percent of CEOs felt that way in a similar survey conducted in 1993.¹

As a leader, you have very few levers of change in your organization. Three key levers are setting the business strategy and vision, choosing the players on the executive team, and designing the organization. Your strategy provides the organization with direction and purpose. The quality of your executive team ensures leadership is evenly distributed and determines how well you sleep at night. The organization design defines the structure, processes, metrics and reward systems, and people practices that will ensure that individual and organizational energy is focused on those activities that support the achievement of the strategy. All levers are equally important, but organization design is frequently the lever given the least attention. If you're reading this book, you may already believe in the value of organization design. But you still may be wondering whether organization design is relevant in a world that is changing so rapidly.

The pace of change has been used as a reason for arguing, “If I hire the right people, they'll figure it out themselves.” The story at the beginning of this chapter illustrates that while good people are important, they don't act in isolation. Organization design is the means for creating a community of collective effort that yields more than the sum of each individual's efforts and results. The organization's structures, processes, and practices channel and shape people's behavior and energy. The values and culture of the organization influence interpersonal interactions and determine which decisions get made. The form of the organization can enable or inhibit people's innate desire to do good work on a daily basis. As a leader, you have the opportunity, and the responsibility, to structure these relationships so that people find it easy to collaborate, innovate, and achieve.

Throughout the 1990s, there were numerous articles in the business and popular press on the emerging organizational forms that were destined to replace the traditional organization. A number of works came out that applied what had been learned about systems in the physical and biological world to organizational systems. The interest in the fields of complexity and chaos theory introduced concepts of organic growth and change into the study of organization design and structure. In this theory, chaos is defined as the inevitable state of a system as it moves away from order. Although there appears to be turbulence without any predictable form, chaos theory predicts that forces will come into play that will create a new order, what some have termed “order without predictability.”²

The idea of self-organizing, self-renewing, and adaptive organizations is appealing to managers trying to create organizations that are responsive to a rapidly changing external environment. Some managers have used these new ideas to create more open, flexible organizations that have broken down hierarchical barriers to speed and innovation. Others, however, have used these ideas as an excuse to abdicate their management responsibility for designing and managing their organizations. As a result, many of these managers experienced chaos firsthand!

It is also clear that good ideas and a strong brand are not enough to compensate for the lack of a strong design. Companies that focus on growth without building an organization and without the capabilities that can leverage those good ideas (and abandon them for even better ideas when necessary) tend to fall into cycles of rapid expansion followed by retrenchment, cost cutting, and sometimes demise. For example, Cambridge Technology Partners (CTP), a corporate technology consulting firm specializing in client/server applications, recorded 61 percent compounded growth for its first seven years. Growth goals pushed the firm to pursue projects too large and complex for its capabilities, caused it to abandon a profitable pricing model, diverted attention from building its own technology and human infrastructure, and resulted in its not recognizing the potential of the Internet in the mid-1990s. With its stock price down and staff turnover of 39 percent annually, CTP was forced to pull back in the marketplace to rebuild its internal capabilities.³

This book makes the case that in the twenty-first century organization design is more, not less, important. A well-thought-out organization design empowers and enables employees to work in the highly interdependent, team-oriented environments that typify today's business landscape. Further, the clearer the rationale for the design, the more quickly design decisions can be reassessed and modified to respond to external forces.

A recurrent theme in this book is the need for dynamic, reconfigurable organizations that recognize and respond to rapid changes. Organizations exist to execute strategies. Yet few organizations are able to maintain their strategic advantage for long. Success formulas are quickly copied or even surpassed by high-speed competitors. Thomas Jefferson, speaking of the European laws and constitutions that had outlasted their usefulness in the changing world of the early nineteenth century, said, “We might as well require a man to wear still the coat which fitted him as a boy.”⁴ The same is true of organizations. When strategic advantages don't last long, neither should the organization design. “Ill-fitting coats,” as much as poor strategies or the wrong people, inhibit organizations from achieving their goals.

This doesn't mean that change renders the organization design disposable. Employees in many companies feel whiplashed by the constant reorganizations implemented without apparent rhyme or reason. The need for change does mean that the leaders of successful organizations will continually assess their capabilities and purposefully realign them to execute against the opportunities that arise. More important, they will design their organizations to anticipate and accommodate change with the fewest disruptions to customers and employees.

WHAT IS AN ORGANIZATION?

The word organization is used frequently throughout this book. An organization for our purposes can be a whole corporation or just one part of it. It can comprise tens of thousands of people or just a few dozen. Each reader will have a different definition depending upon where he or she sits within his or her business. If you are the CEO or equivalent, then the “organization” encompasses the entire business. If you are a division director or head of a function, then your “organization” is the part of the business you have authority to change and impact. Organizations are nested inside one another. A unit of ten people within a large company is an organization both distinct from and a part of the company itself. The smaller the organization, the fewer design choices and decisions there are to make and the more those decisions will be influenced by the surrounding organization. Regardless of size, there are still tremendous opportunities for the leader to shape the organization and improve its effectiveness.

We also use the term to apply to a variety of organizational types. Although the book assumes a business environment, all of the concepts apply equally to not-for-profits and public entities.

WHO SHOULD READ THIS BOOK

The need for this book emerged out of frequent requests to Jay Galbraith and to Downey Associates International, Inc. (DAI) to provide a hands-on guide to organization design. Midlevel and senior managers, in particular, asked for a design guide to translate the concepts that apply to a whole company to their own piece of the organization. This book will enable readers to:

• Make choices about which organizational forms will best support their business strategy.
• Understand the trade-offs and impact of each design decision.
• Introduce flexibility and continuous change without losing the clarity that employees need to function effectively.

This book draws upon Jay Galbraith's written work as well as his experience consulting to clients around the world. The book also reflects the extensive experience that Diane Downey and Amy Kates of DAI have had in assisting clients to assess their organizations, make decisions, and implement new designs. The book takes a consulting rather than a theoretical or academic approach. It is built around the questions we ask our own clients, and it provides the tools to allow managers to assess options and make their own decisions.

This book is written for those who lead an organization and want to be sure that it is aligned to achieve their business strategy, including heads of companies, divisions, or business lines, and midlevel managers responsible for a product, location, or functional area.

The book is also addressed to the human resources (HR) professionals and internal and external organization development consultants who support the organization design process. All of the tools and concepts will be of use to the HR professional assisting a business leader in redesigning the organization. Corporate trainers and other executive education providers will also find the book a straightforward reference to use in their programs.

ORGANIZATION OF THE BOOK

You usually don't have a choice about whether to redesign your organization. The business changes, the strategy changes, and you are no longer positioned to deliver what needs to get done. Too often, however, redesigns are limited to reorganizing the vertical structure—i.e., what can be shown on an organization chart. This book addresses the topic of organization design holistically. The seven chapters are structured around the key decisions that will guide you through the thought process of creating a dynamic, reconfigurable organization.

Chapter One, “Getting Started,” provides an overview of the design process and how to effectively involve people from the organization in that process. It answers the questions:

• What is organization design?
• What are the characteristics of dynamic, reconfigurable organizations?
• How do I know when I need to redesign?
• What are the steps in the design process?
• When and how should I involve others?

Chapter Two, “Determining the Design Framework,” helps you identify the desired future state, assess the current organization, and determine priorities for change. It answers the questions:

• How does our strategy differentiate us in the market?
• What specific organizational capabilities do we need to deliver on the strategy?
• How big is the gap from where we are today to where we want to be?

Chapter Three, “Designing the Structure,” provides a guide to choosing structures and defining new organizational roles. It also provides a case example of a participative process for generating design alternatives. It answers the questions:

• What are my options for organizing the work and people to best meet our strategic design criteria?
• How do we define the critical organizational and individual roles and clarify the interface among them?
• How should I structure participation for generating alternatives?
• What can I do to keep the design momentum going?

Chapter Four, “Processes and Lateral Capability,” focuses on how to build strong horizontal connections through networks, processes, integrative roles, and team and matrix structures. It answers the questions:

• How can we best coordinate work across business units?
• How can we create effective integrative mechanisms?

Chapter Five, “Defining and Rewarding Success,” summarizes recent thinking in the field of performance measurement, metrics, and compensation and reward practices. It answers the questions:

• How do we measure performance at an individual, team, and organizational level?
• What are the values and behaviors that should define our culture?
• How do we ensure our reward systems align everyone to our strategy?

Chapter Six, “People Practices,” highlights decisions in the design of HR systems that can shape the behaviors and mind-sets that support a dynamic, reconfigurable organization. The chapter also provides a case example to illustrate an effective process for staffing the new organization. It answers the questions:

• What is an effective process for placing people into new roles?
• How can we select, manage, and support the development of people who not only have the skills we need today but can be flexible and learn new skills in the future?

Chapter Seven, “Implementation,” provides guidance for the implementation process, both from a project management and from a change management standpoint. It answers the questions:

• How can I help my organization make the transition with the least amount of pain?
• What change management practices do I need to employ?

Throughout the book, we refer to a number of roles in the design process.

Leader. The leader is the business head of the organization and the assumed reader of this book. A leader may be the CEO, the director of a function, or the head of a line of business. Whoever is the most senior person in the particular segment of the organization undergoing redesign is the leader.

Executive Team. The executive team is the leader's direct reports. If there are a large number of direct reports, the executive team may be a subset, a “kitchen cabinet,” which the leader relies on for advice and counsel.

Leadership Team. We use the term leadership team to include a broad group of key positions in the organization beyond the leader's direct reports. In a very small organization, the executive team and leadership team may be one and the same. After the design framework has been determined, the leadership team typically undertakes the majority of the initial design work.

Work Groups. These teams are charged with detailing and reality testing the organization design after initial design work has been completed by the leadership team. They usually comprise representatives from all levels and areas in the organization. An organization may have several work groups, with each focused on a single project, or each work group may have multiple projects and be organized into subgroups. The groups may work on business topics, such as developing a new marketing approach or creating a sales support function, or they might focus on organizational topics, such as communication, metrics and tracking, rewards and recognition, and training.

Steering Committee. The steering committee comprises the heads of each of the work groups. It provides a parallel governance structure to ensure that the design and change processes move forward in an integrated way and do not get derailed by daily business activities.

In addition to these roles, HR is often a central player in the organization design process. As a member of the executive or leadership team, the HR professional provides an important contribution by raising the “people” implications of the strategy, identifying current state issues, and anticipating how design and implementation options will impact the organization from a human perspective. In addition, the head of the HR function may serve as a design facilitator of the overall design process, as a coach to the leader, or he or she may help to identify skilled external design facilitators who can assist the organization through the process.

The book includes tools (located at the ends of the chapters) to allow you to apply the concepts presented to your own situation and plan your own organization design process. Although the book is organized as a set of linear steps for the sake of clarity, it is not intended to be used as a recipe book. We cannot guarantee that even if you follow the directions exactly, a perfect organization, like a perfect cake, will emerge. Rather, the book should be used as a thought-guide to instill discipline around the questions that need to be asked, the options that must be considered, and the implications that should be planned for at each phase. In many ways reaching the right answer—the right structure, the right process, the right metric—is less important than the quality and depth of the discussions that lead to those answers. To quote Bartlett and Ghoshal, “The key organizational task is not to design the most elegant structure but to capture individual capabilities and motivate the entire organization to respond cooperatively to a complicated and dynamic environment.”⁵ What can be depicted on a piece of paper is only the beginning. The hard work is in developing the details and negotiating the differences. We envision leadership teams using this book as a catalyst to spark deeper discussions about their own organizations, and HR professionals using it as a guide to coach, challenge, and shepherd their business partners through the design process.

NOTES

1. H. de Lesser, “More Entrepreneurs Take Help of Executive Coaches: CEOs Hope to Gain Edge as Their Businesses Burgeon Amid Sea Changes,” The Wall Street Journal, September 5, 2000, p. B2.

2. See, for example: S. Brown and K. Eisenhardt, Competing on the Edge: Strategy as Structured Chaos (Boston: Harvard Business School Press, 1998); R. Lewin, Complexity: Life at the Edge of Chaos, 2nd ed. (Chicago: University of Chicago Press, 2000); R. D. Stacey, Managing the Unknowable: Strategic Boundaries Between Order and Chaos in Organizations (San Francisco: Jossey-Bass, 1992); M. Wheatley, Leadership and the New Science: Discovering Order in a Chaotic World (San Francisco: Berrett-Koehler, 1999).

3. J. Gordon, “Feeding the Monster: Cambridge Technology Was So Obsessed With Growth That It Forgot How to Build a Business,” Forbes, September 4, 2000, pp. 70–1.

4. Thomas Jefferson, “Letter to Samuel Kercheval,” July 12, 1816.

5. C. Bartlett and S. Ghoshal, “Matrix Management: Not a Structure, a Frame of Mind,” Harvard Business Review, July/August 1990.