Category Archives: Organization Structure

It’s Not Your People

It’s your structure. Peter Schutz (1930-2017), former CEO at Porsche quipped, “the successful companies are those that get extraordinary results from ordinary people.” It’s not your people, it’s your structure.

Structure is the way you think about your company. That includes your business model, who you think your customers are, how you think they use your product or service, why you think they use your company vs a competitor. It’s your structure.

Organizational structure is way we define the working relationships between people. The first level is every person playing their role. The second level is the way those roles work together. It’s your systems. The way we think about roles and the way those roles work together determines the effectiveness of the organization.

Every company has people. Every company thinks their people are special (and they are). It’s the structure that determines the company’s success. Extraordinary results from ordinary people. It’s your structure.

Appropriate Timespan of Goals

From the Ask Tom mailbag –

Question:
I would like to roll out a goal-setting program for my team. Management by objectives (MBO) is a process where everyone in the company is required to set annual goals. I think it will go a long way toward results based performance.

Response:
The big failure of MBO is the focus on annual goals. If you look at the sequence below, you can see that MBO is appropriate for only a small slice of your workforce, and some of the most important goals and objectives are beyond two years.

Goals Framework and Timespan

  • S-V business unit president – longest timespan goals – five years to ten years
  • S-IV executive manager, VP – longest timespan goals – two years to five years
  • S-III manager – longest timespan goals – 12 months to two years
  • S-II supervisor – longest timespan goals – three months to 12 months
  • S-I technician, production – longest timespan goals – one day to three months

Goals and objectives should cascade through the organization starting with the longest timespan goals first, most often from the CEO. Each successive layer should have shorter timespan goals that support the goals from the layer above. You can also see, based on timespan, that longer timespan goals are more strategic (conceptual) in nature, and that as timespan falls below 3-4 years, those goals become more tactical, below 1-2 years, exclusively tactical.

While we have a general orientation toward marking our lives in annual timeframes, goals and objectives require a more specific orientation in the timespan of each role.

Scalability

From the Ask Tom mailbag –

Question:
We have worked very hard to refine our core process. We believe we have the highest quality in our product offering and simultaneously have driven out extraneous costs. So, our customers enjoy a high quality product at the most competitive price. In spite of that, while sales growth is steady, our profitability suffers. Our gross margin is good, but by the time we get to the bottom line, the net is not so good. We have tried to cut SG&A, but that seems to make the net even worse. The more we try to take our company to the next level, the more frustrated we become.

Response:
You are in that No Man’s Land dilemma, too big to be small (amongst your competitors) and too small to be big (among those companies who have the biggest market share).

This is a classic integration issue. You describe your refined core process, which is clearly a step up to S-III. Your core system is well-honed, but scalability is elusive. Your core system creates your gross profit, right where it needs to be, but it sits among other systems that drag down the net profit. Companies at S-III have great products, but scalability only happens at S-IV.

  • S-I – Product
  • S-II – Process
  • S-III – Core system (sequenced processes, critical path)
  • S-IV – Integrated systems (multiple critical paths)

Your core system is critical, it is the product that your customers want, but it is now surrounded by other systems. Not only do these systems have to be effective and efficient, but they also have to be integrated together, and that is the challenge at S-IV.

Most core systems exist in a defined operation function, and are surrounded by a marketing function, sales function, project (or account) management, quality control, research and development, sustaining engineering, human resources, facilities and finance. You may have a strong core function in ops, but your company will never scale without the integration of all those internal systems.

Want to Scale?

From the Ask Tom mailbag –

Question:
We want to scale. We know scaling starts with sales, but every time we push our sales volume, things get wobbly. We spend time on the things that are wobbly and realize our sales have dropped. How do we get to the next level?

Response:
While we can be descriptive about the stages a company goes through, understand that in real life, those stages have blurred edges. Transitioning from one stage to the next often happens in fits and starts as you described.

No Man’s Land
Too big to be small and too small to be big. As your sales volume increases, it strains all the other systems in the company. Each system has an output capacity, limits based on its constraints for throughput. And, while each individual system has throughput constraints, so does the entire enterprise.

Except in rare technology business models, most companies that move to the next level also see an increase in headcount. It simply takes more heads to manage all the systems and sub-systems required to satisfy the increase in sales volume.

The complexity of one project sets a pattern. Two simultaneous projects can often be managed the same way as the single project. Three simultaneous projects requires more resources, but it is not much more complex than two simultaneous projects. But, 50 simultaneous projects is another level of work. A project manager cannot punch through 50 simultaneous projects the same way as three.

As sales volume increases, production struggles. As production struggles, some sales promises get delayed, substituted or broken. Sales volume silently recedes until somebody notices.

There is no magic bullet short of understanding what is different. When the organization is small, we keep track of things in our heads. When the organization grows, we have to create a system. And a single serial system is critical to profitability, but still, does NOT mean you have all the ingredients to scale. One system begets another system and soon we have multiple systems and sub-systems. Many companies stay stuck here, some fix it.

The Accountability Chart

From the Ask Tom mailbag –

Question:
For the past few years, I considered my company as a level V company. Your posts the past couple of weeks have made me question that position? I think I have organized the company, at least on paper as level V, but in reality, I may be wrong?

Response:
Most CEOs suffer from optimism. Optimism is required to forge a company against the odds, most startups fail in the first five years. And, those rose colored glasses cover the sins of organizational structure. We like to think our organizations are perfect renditions, we find the best in our people, sometimes ignoring deficiencies, both in structure and people.

An effective organization requires competence in leadership and management. Competence is a combination of Elliott’s four absolutes

  • Capability
  • Skill
  • Interest, passion
  • Required behaviors

Any element on the list can be a dealbreaker. We understand skills, interest and passion, we even understand required behaviors. It’s capability that often eludes us. I can train skills, I cannot train capability. Capability is born and revealed, naturally matures and is relatively predictable.

Your Organization on Paper
Elliott defined three versions of the org chart for his description of a Management Accountability Hierarchy (MAH), an accountability chart.

  • Manifest – the way we draw the org chart
  • Extant – the way the org chart really works
  • Requisite – the way the org chart should look using timespan and requisite principles

The org/accountability chart is an easy way to step through your optimistic thinking, to ground it in reality. An effective organization takes both a requisite structure, appropriately defined roles and competence in each role. Simple, right?

It is only the requisite accountability chart that considers the level of work required in each organizational function. With the level of work accurately identified, the managerial layers fall into place. And, that’s the structure part.

But, even a requisite structure will fail if not fielded with competent players in the right roles. A level V structure will fail lead by a CEO with capability at level III.

To the Next Level

From the Ask Tom mailbag –

Question:
As I talk with other CEO friends, they keep talking about taking their company to the next level or that they want to scale their companies larger. It sounds like they know what they are talking about. But do they? They are my friends, and I don’t want to disparage, but in many cases, I have my doubts.

Response:
No organization can ever grow larger than the CEO. If it does, the wheels will get wobbly and the organization will falter. The same is true as levels of work are built inside the organization. No level of work can exceed the capability of the manager. If it does, the wheels will get wobbly and the organization will falter. It doesn’t matter if the company is S-I, S-II, S-III, S-IV or S-V. Faltering can happen at any level.

Most who say they want to take their company, or department, or team to the next level has no clue what that means. Timespan and levels of work create the only framework that clearly identifies what that means.

Scalability doesn’t happen until S-IV, where multiple system integration occurs. Listen carefully to your friends, but judge not what they say, only judge what they do (or are capable of doing).

How Many Levels?

From the Ask Tom mailbag –

Question:
You recently described an organization as having five levels. You also said that some organizations don’t need five levels. I am trying to figure out how many levels our company needs?

Response:
Your question is similar to the manager’s span of control issue. The consultant’s answer, “it depends.” The number of levels in an organization depends on the complexity of the decisions and problems faced by the company’s mission. That’s why it is important to occasionally sit down and revisit the mission. We think of mission as “what the company does,” but it also includes which markets, geography of those markets, market segments, governing rules and regulations, availability of labor, incorporation of technology, availability of capital. All of these elements play in to the complexity of the organization.

The initial mission always exists in the individual eyes of the founder. In the beginning, that mission may be modest, simply to prove the concept is viable (minimum viability). With early success, the mission can grow, be redefined as the organization learns more about the environment it created. And we think, with more levels, the more success we see. That is not altogether true. You can have a successful organization at any level, with an appropriate number of managerial levels, even an organization with just one.

S-I (One level of work) – This is the sole practitioner, an individual technical contributor, whose mission is to solve a narrow market problem requiring only one mind, usually supported by technology. Successful sole practitioners could be an artist, writer, even a computer coder developing a single application to solve a market problem. A good living can be had by the savvy sole practitioner, though it is rare to reach any large scale by yourself. (Timespan 1 day – 3 months).

S-II (Two levels of work) – This is the sole practitioner who gathers surrounding assistance. There is too much work for one and that additional work is necessary to solve the problem. At this organizational level that additional work requires coordination for quantity output, at a given quality spec, according to a deadline time schedule (QQT). There is no system yet, because the quantity or complexity of work does not require it. This could be a entrepreneur with a small team. It could also be that the organization requires a system, but does not possess the internal capacity to develop that system. Many successful S-II organizations simply purchase their system from someone else, as a franchise or a license from a larger organization (who has a system for sale). (Timespan 3 months – 12 months).

S-III (Three levels of work) – But even a small franchisee, with one or two stores, who wants to increase to three or four stores, eventually requires an internal system. At three to four stores, an additional level of work appears. It is interesting that one of the larger franchisors, Chick-fil-a only allows one store per franchise. This may be an unconscious realization that the capability of their franchisees is limited to S-II. The hallmark of an S-III organization is a single serial system (single critical path). This is often an artisan craftsman, a subcontractor on a larger project. (Timespan 1 – 2 years).

S-IV (Four levels of work) – Consists of multiple parallel systems that have to be integrated together. S-III as a single serial system is limited in its growth. For an S-III company to scale, it requires the coordination of multiple systems. From its core production system, the S-IV organization also has to coordinate material purchasing, equipment procurement and maintenance, personnel recruiting and training, marketing campaigns, sales efforts, legal review, project management, quality control, sustaining engineering, R&D, human resources and accounting.

S-V (Five levels of work) – This is the enterprise in the marketplace. And, the marketplace is not just about customers. Marketplace includes regulation, labor, finance, technology, competition, logistics, supply chain. This is still within the Small to Medium Enterprise (SME) but also extends to larger organizations.

An organization can be successful at any level, it is governed by the level of their mission.

Maximum Number of Team Members

From the Ask Tom mailbag –

Question:
I read with interest your response on the number of levels in an organization. It sounds good, but as the organization grows, we need more and more managers. It is difficult for a single manager to handle more than 6-7 people on the team. With more managers, don’t we end up needing more layers.

Response:
I would first challenge your assumption on the maximum number of team members for whom a manager is accountable. Your number of 6-7 has no basis in theory or fact. Elliott was often asked this question, let me whisper his number, 70. It is likely that a single manager will begin to struggle when the number of team members reaches 70.

I know the blood just drained out of your face, so as your brain is restoring its circulation, let me explain. The maximum number of team members a manager can effectively be accountable for depends, not on an arbitrary number like 6 or 7, but, rather on the variability in the work.

Large call centers may easily have 70 people on the floor at any one time, with a single supervisor. How can a single supervisor be accountable for the output of 70 people? Look at what those people do. Most of the time, those call center team members do the same work day after day, there is little variability.

How many people on a Navy Seal Team? I would guess six. Why such a small team? The variability of the work is high. The number of people a single manager can be accountable for depends on the work.

Without a frame of reference, organizations do get bloated. I once worked with a company with 12 layers, but only needed 5. Levels of work creates the frame within which we can determine not only who should be whose manager, but how many managers are at the same level. The objective measurement of timespan takes out the guesswork and bias that inevitably creeps in. About once a year, you should round up your managers for a calibration meeting to make sure the bloat is not settling in.

Art Form or Detective Work?

From the Ask Tom mailbag –

Question:
Love it – the four levels of thinking directly related to the flow of inputs, manner and tempo. This helps so much in understanding an additional vector of complexity, in addition to future ambiguity (as measured by timespan).

Is there a measure that is commonly used and can be attributed to positions in a Requisite Organization design? Can we measure the amount of activity needed in each/any of the four levels to know what type of sophistication a) the org needs at that level and b) that a candidate has? Or is it intuitive only (we sense it and we know it when we see it)?

Can you use this to help bring clarity to the org chart?

Response:
Some would say that identifying capability is an art form, know it when we see it. My take is that it’s more detective work, assembling clues within a framework. The brilliant insight in the question is the focus. Typically, in an attempt to identify capability, we focus on the person. More brilliant, in the question, the focus is on the work, flow of inputs, manner and tempo.

I don’t judge people, I’m not very good at it. But, I DO judge the work. My calibration of level of work always ends with timespan, but at first blush, timespan might mislead, I need other clues, and then timespan falls in place. If all projects are one-week projects and we have twenty of them, it might seem the timespan is one week. But, to handle twenty simultaneous projects, the start time and the stop time begins much earlier and ends much later than the one-week project.

Before the projects start, we have to examine, in all the projects, what is the same? Can we apply the same solution to identical problems? In all the projects, what is different that requires a unique solution? What is our capacity to handle twenty simultaneous projects? Do we need two project managers or four project managers? If we only have two PMs and need four, where will we find two more? What steps in the project can be started immediately? What steps can be done at the same time? What steps must be done sequentially? When we start to answer those questions, we find the timespan is much more than one week?

Laying out the org chart, I generally use a pre-cursor document (spreadsheet) that has columns for each function on a team, or columns for each team in a department, or columns for each department in the organization. The rows in the spreadsheet designate level of work. If you would like a copy, just drop me an email. I use this spreadsheet to clearly identify the level of work before I translate the structure into an org chart.

How Many Organizational Layers?

From the Ask Tom mailbag –

Question:
When you talk about context, organizational context, I assume you mean organizational structure. We have team members and supervisors, managers and executive managers. How many layers should we have? Is it best to have fewer layers, a flat organization or more layers?

Response:
As any good consultant knows, it depends. First, an organization should have no more organizational layers than is necessary, so, it depends on what is necessary. And what is necessary depends on the complexity of the problems to be solved and the decisions to be made to effectively deliver the product or service to the customer.

I watch organizations blow up into morbid obesity because they have no framework on which to base that decision – how many layers? And, who should be who’s manager? How many team members can a manager manage? What do we expect from this manager vs that manager?

Timespan.
What is the timespan of the decisions to be made and the problems to be solved? Think about this pattern –

  • 1 day to 3 months – Level I
  • 3 months to 12 months – Level II
  • 12 months to 24 months – Level III
  • 2 years to 5 years – Level IV
  • 5 years to 10 years – Level V

That’s how many layers you need, and only as many as you need. But, now you have a framework in which to make that decision.

Most entrepreneurs stay within the first two levels, with goals and objectives that rarely extend beyond 12 months. Those with aspirations for larger organizations, with higher revenues, more market clout, have to consider the impact of decisions and problems that extend two years and beyond.

There is a subtle seduction that occurs, however. Any entrepreneur with the intent to take their company to the next level, must first achieve mastery at their current level while sowing the seeds of problems for the next level.