CHAPTER 4

Organizational Design, DownSizing, and Right Sizing

4.1   Organizational Design Historical Development

It was in 1760 that Adam Smith set out the ideas that would shape businesses. He made the first symmetrical designs for how an organization should look and designed the first modern organizational structure; a company called Arkright in Cromford in the UK first used it in 1771. Then it was adopted by a factory called Smedley in 1784 which is still going—officially known as the world’s oldest factory.

Then it was adopted as the model for success by other companies worldwide and surprisingly this structure for organizations is still very much in evidence today.

Smith was also responsible for the new business titles of Supervisor and Manager and for the recommendation that the ideal span of management would be 1:7. This was appropriate in 1760—despite the technological and education revolution there is still a belief that people require close supervision and must be managed.

These two factors, old organizational design and 1760 supervision, have condemned us to the productivity and efficiency problems we have today. So why do so many managers and supervisors still want small ratios of control? The reason is that it’s less work for them and requires less skill; but it then begs the business question—what do we pay managers for? It is estimated that 95% of existing businesses are still structured on the design principles of 1760 and the pioneering work of Adam Smith, capability and type of work undertaken. This is still the predominate design in the world today as it’s easy to do.

4.2   The Three Current Types of Organizational Design

Symmetrical Organizations

The 1760 Adam Smith design, used by most average companies in the world, is simple, traditional, and easy to work out layers of pay, gradings, and promotion ladders. Layers in the organization can sometimes be 14 deep and in today’s fast-moving and fast-changing world this design is really out of date. Symmetrical organizations are however the best organizations to downsize.

Spans of control and organizational shape

Asymmetrical Organizations

The Asymmetrical principle does not stick to the same ratios of supervision to employee, but has different ratios for different levels and parts of the business, depending on the role, capability, and type of work undertaken. It’s a much better and commonsense approach to organizational design and will always work where the organization employs a mixture of average and smart people. It is difficult to pinpoint when this design first became used, but I guess it was in the late 1960s. The design has many advantages as it allows parts of the organization to have a very flat structure, while other parts are more in line with a Smith type setup. For the HR business partner this type of structure has so many advantages in cost and efficiency its certainly worth exploring as the main rival to the symmetrical design. Many Financial services that have call centers use this design with great financial benefit.

Asymmetrical

People Centric

It’s hard to believe that the founders of a people-centric organization were all connected with the IT business and were nearly all scientists or IT engineers. Although the design is not new, Dr Miller first coined the term people-centric organization at the Balkans HR summit in 2012.

The start of the People-centric organization happened perhaps by chance and was a spin-off of the way William Skockley worked. Shockley was simply a brilliant man. He has been credited with the revolutionary work on the transistor and later advancing semiconductors. Shockley coinvented the transistor, for which he was awarded the 1956 Nobel Prize in Physics.

Shockley’s attempts to commercialize a new transistor design in the 1950s and 1960s led to California’s “Silicon Valley” becoming a hotbed of electronics innovation. In his later life, Shockley was a professor at Stanford. Thus, over the course of just 20 years, a mere eight of Shockley’s former employees who formed Fairchild Semiconductors (named after its financier Sherman Fairchild) in Silicon Valley California later gave forth 65 new enterprises, which then went on to do the same. Shockley Semiconductor and these companies formed the nucleus of what became Silicon Valley, which revolutionized the world of electronics and, indeed, the world itself.

What Shockley had started was a new way of doing things and a new way of running efficient organizations based on a people-centric design; whether this was a design formed by analysis or by need we will never know—but the success of Silicon Valley speaks for itself.

The founding companies using this form of organizational design:

People centric

The people-centric organization is so different and is based on the concept that the organization should be designed and structured to get the best from the type of people it employs instead of designing a typical organization either symmetrical or asymmetrical and making the people fit the organization. If you are wondering if this works—take a look at the stock value of the companies mentioned.

The epitome of this design is Google. The organization was created to support those that would work in it—right from the start. The design was specific to meet the personality profile of Technological Engineers. What a change, instead of getting people to fit an organizational design, first deciding what people you needed (by profile) and then creating an entire organization to support that ethos. The design first became apparent in 2001 with the appointment of Eric Smitt as the new CEO. Google has always been good at recruitment (a lesson we should learn from); they had always valued people with high SAT scores and high grades from the best colleges and universities. You can’t graft on mental horsepower so it’s best to make sure you get it when you recruit.

The new Google organization had been created new, different, very functional, and almost free of bureaucratic rules which are endemic in symmetrical organizations—the skeptics of course said it would never work—just look at the track record of Google. This design innovation was quick to be copied by Apple, although the world at large has failed to capitalize on this type of organizational innovation.

The Future of Organizational Design

The future of organizational design will become a combination of asymmetric and people-centric designers, when re-engineering existing organizations will be subjected to a hard time, as all the existing managers will fight the change as the day of the conventional manager being essential has now reached a plateau. Many managers realize that their days are numbered and soon their numbers will inevitably decline.

When designing the organization or redesigning an existing organization remember that today people are educated to a very high standard, overmanage them and you will never see them reach their potential. Overmanaged people often find work boring and this creates a disconnect between the management and the workforce. This will become very apparent and will work against the organization if for any reason the organization has to change quickly.

To conclude—be bold with the organizational design, try not to use the past as a benchmark, the greatest strengths organizations have is the untapped potential of the employees—use the organizational design to capitalize on this.

4.3   Downsizing

Downsizing is a term used in workforce planning for altering significantly the structure of the organization. Normally it is done to both symmetrical and asymmetrical organizations at a period (midstage two) of the MILLER organizational maturity chart. Downsizing is a risky business as it involved taking out complete layers of management. Doing business process re-engineering normally but not always precedes downsizing.

The key to successful downsizing is to remove layers of management in the organization by finding out the answer to one simple question:

Where in the organization is the work actually done?

Although the question sounds simple—it’s often not that easy to find the organization. Every layer claims, “this is where the work is done.”

Organization before delayering (operations functions only).

Once you have established the truth then you can go about removing layers and completely restructuring the organization by delayering.

Organization after downsizing

Benefits

Although there are so many examples of this, recently British Airways delivered and took out of the structure 450 managers—it was reported “it had no operational impact on operational effectiveness.” So the question is—what exactly were they all doing—a very expensive and unneeded overhead.

In the Public sector, Essex County Council removed layers of management, by twenty percent. Reported on BBC and available on You Tube, in an interview Essex County Council said “the reduction of management will have no impact on ECC front line services.”

Downsizing is not without risk; my advice—employ a consultant who has done downsizing before and can provide evidence of its success.

4.4   Rightsizing

Rightsizing is a technique that is quick to do and involves using one of our mathematical formulas. Unlike downsizing it is almost risk free and gives very quick returns on investment. The methodology to do rightsizing is by using formula 10. How to do this is covered in Chapter 7.

The rightsizing exercise is always interesting to do as it give you a reality check on the size of the organization. Public sector organizations would be advised to do this on a yearly basis and measure the “rightsize” against the preset budget.

Rightsizing is quick, often from design to implementation it can be done in 4 months. Compare this to downsizing 1–2 years ago.

The main cause of organizations getting out of shape and oversize has been caused by two separate forces, Poor recruitment and lax Management. This combination has been shown to expand organizations and produce up to 50% more employees than is necessary. Getting the numbers right is a massive contribution the HR Business Partner can make.

The Traditional Method

When most organizations attempt rightsizing they tend to use the “Nibble” technique. Someone in the organization wants a more efficient organization so the game of playing with the structure begins. This is done in several ways but the most widely used is to nibble at the organization to reduce head count. This can be done by freezing recruitment, early retirement, or getting volunteers to leave with a golden handshake. Although this has been done for years, there is very little structure and science to this approach.

Rightsizing

New Shape

New Approach—New Results

In 2015 the mathematics, process, and software were in place to rightsize and to do it as a tabletop simulation before committing to putting the plan into action. This has made the entire process very safe and predictable.

In this chapter, we will now explain the entire process end to end with all the data based on a European Company employing 3,000 employees.

Step One

The process must start with two questions for the CEO:

Q1 Are you reasonably satisfied last financial year most of the work in the organization was carried out?

The reply is normally a guarded “yes, I suppose so.”

Q2 This is a quick question and you really want a fast response.

How many hours a year do our 3,000 employees work? They are contracted to work 40 hours a week.

The reply is normally given based on this assumption:

40 hours a week × 52 weeks a year × 3,000 employees = 6,240,000 hours a year

So we have it from the CEO that all the work is being done by 3,000 people working (and being paid for) in 6,240,000 hours.

This is the basis for starting our mathematical modeling for right sizing.

Step Two

We know a few facts already:

So all the work is done using our HR formula as follows:

8 hours a day × 226 (PWD) × 3,000 employees = 5,424,000 hours

So we have immediately lost (what the CEO thought people worked and what we pay for)—our figures based on PWD

6,240,000 – 5,424,000 = 816,000 (difference between theory and reality)

Step Three

As in all organizations there are other lost time variables. In our test example company, we find for each employee:

Average time lost through reported sickness	10 days per year
Average unauthorized absence*	5 days per year
Average for Training/ conferences	12 days per year
TOTAL extra time lost	27 days per year per person
* This figure is normally on the low side as Managers often turn a blind eye to recording all unauthorized absence.

To rebalance our standard PWD figure we will need to make an adjustment.

Revised PWD 226 – 27 days = 199 days

We now have to do a recalculation based on the actual days worked rather than on the forecast.

Actual hours worked in our company:

Days 199 × Hours per day 8 × employees 3,000 = 4,776,000 hours

Now we have a really accurate picture which shows us what is actually happening; all of the work is being completed in 4,776,000 people hours—what a difference from our CEO guess at the beginning.

Step Four

As we know employees are in three categories—poor performers, average performers, and talented. We also know from a large survey done in 2015 how much work they do.

In our organization

Step Five

We now know all the work done in our organization was done by 3,000 employees actually working 2,237,556 hours although we are paying them for 6,240,000 hours.

The question the management team must address is exactly how many hours a day do you expect your employees to work. This may be decided by the CEO or it might end up being a Management team decision. Remember this is NOT the end of the rightsizing exercise yet.

In our example company it was decided that all employees should work 7 hours a day. Therefore going back to our original PWD is 226, the final calculation would be:

This figure is referred to as our rightsized base line figure. It is our base line for you to decide what numbers you would need to run this organization with a small safety margin.

What we have gained so far while doing this simulation is valuable management information that we will use to make our strategic decision on what to do next.

Information we now know:

Step Six

Deciding on how many people you need—this is a Management decision—in the example we have been following, the organization had decided to go with an establishment of 2,000, as this was seen as only a medium risk strategy.

Removing people from the organization is in most countries very difficult. The groups who will never meet the new standards are the poor performers—they are your number one targets.

Other methodologies you may use could include:

Financially the organization will be in much better shape and will certainly be much more effective. On the overall saving, there are sufficient funds to introduce a sparkling bonus scheme, by now you will have reenergized the organization and become THE business partner.

Step Seven—Producing the financial case

Showing the financial case is the most important factor in getting management approval. So let’s look at the figures in our example that we would present to the CEO.

From step six we have decided to run the organization with 2,000 employees—releasing 1,000 people from the organization.

The group we would target is the poor performers and the bottom performing from the average group.

So let’s look at the costs

ESUC £46 × 8 hours a day × 226 working days a year × 1,000 employees	= £83,168,000
Training costs £125.00 cost per day × 10 days a year × 1,000 employees	= £1,250,000
Cost saved in 1 year	£84,418,000