Category Archives: Organization Structure

Define Your Functions

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From the Ask Tom mailbag –

Question:
You say that management initiatives (like communication, efficiency, goal setting and teamwork) will flounder if laid on the wrong structure. How do you get your structure right?

Response:
Determine the number of layers (only minimum necessary).
Determine the functions required, and the level of work required in each function.

You are the captain of your business model, you get to decide. Think about core functions and support functions. Some functions will require more intensity than others, and some functions not at all. Quicklist –

  • Marketing
  • Sales
  • Account Management or Project Management
  • Operations
  • Quality Assurance or Quality Control
  • Research and Development
  • Logistics
  • Human Resources
  • Accounting and Finance

Your business model will determine the functions you need and the level of work in each function. Often, your core functions are related to operations, and carry more robust levels of work. Your support functions are there to support the core – business development, marketing, human resources, finance and may not require a full complement of levels of work.

How Many Layers?

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From the Ask Tom mailbag –

Question:
You say that management initiatives (like communication, efficiency, goal setting and teamwork) will flounder if laid on the wrong structure. How do you get your structure right?

Response:
There are a number of steps, let’s take them one at a time.

Limit the number of layers to the minimum required. Layers are necessary, but no more than necessary.

Stephen Clement (co-author Chris Clement) in their book It’s All About Work, describe the non-warfighting side of the US Army with 12-15 layers, but the warfighting side only seven layers. Tested in the crucible of combat, too many layers between the top and the bottom got people killed. The US Army is a very large organization and only needs seven when it counts.

  • S-I organization, typically a Mom and Pop who are self-employed only need one layer.
  • S-II organization, is a Mom and Pop, self-employed, but want a day off. They need two layers.
  • S-III organization, contains a single core function, does it well, with only a skeleton of support functions. Three layers.
  • S-IV organization, has a robust internal core function with healthy, mature support functions, integrated together. Four layers.
  • S-V organization, robust internal core function, integrated internal support functions, sensitive and responsive to external systems like market, regulatory, finance, labor, technology. Five layers.

Most domestic small to medium size businesses up to several thousand employees can be managed with no more than five layers between technical production (S-I) and the business unit president or CEO (S-V). Limit the number of layers to only what is necessary.

Why Structure?

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From the Ask Tom mailbag –

Question:
In your workshop, you say that everything starts with structure, or organizational structure. There are so many other management issues to focus on, like communication, efficiency, goal setting and teamwork. Why do you always focus on organizational structure?

Response:
You are correct. Communication is important, lean initiatives bring efficiency, goal setting keeps us focused and teamwork helps us work together. But, all of those efforts will underperform if undertaken on top of a faulty structure. You may even see short term improvement by setting goals, or being more efficient, but in the long run, a faulty foundation will rip those improvements apart.

Get your structure right, and many of your issues related to management and motivation will disappear (almost overnight).

Leadership Charisma

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Leadership is a billion dollar business, yet all around us, we rarely see effective leadership. There are books, seminars, groups and programs to build better leaders (that’s the billion dollar business), yet much of that effort is wasted and fruitless.

The effectiveness of an organization is based on its structure and the role of leadership is to design and build that structure. Effective leadership has less to do with charisma and personality, more to do with building an organizational system to get work done.

Structure begins with the founder, a structure of one. There is work to be done and the founder is doing the work. There is always work left over, so the founder hires three or four people. These people do a little bit of everything. The work is organized around the scarce resources of infant structure. At some point the founder realizes the work can no longer be organized around the people, the people have to be organized around the work.

Organizing the people around the work requires that specialized roles be defined, tasks, activities and expected outputs from those activities. This is the emergence of roles.

This organization is no longer a structure of one, but a structure of many. It is not enough for each person to play their role, the roles have to be designed to work together, more complex than a structure of one, a structure of many. And, organizational structure is born.

Organizational structure is simply the way we define the working relationships between people. The two things that must be defined are –

  • In this working relationship, what is the accountability?
  • In this working relationship, what is the authority? Authority to do what? Make decisions and solve problems the way I would have them solved.

And, so the structure of one becomes the structure of an organization. I don’t care about your personality or charisma as a leader. I only care whether you can design and execute the structure, to get some work done.

Communication Problem Only a Symptom

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From the Ask Tom mailbag –

Question:
Hi Tom. In the seminar I attended, you said something about communication not being an issue in an organization, and I was surprised at that, as I believe communication is often a problem in organizations. Maybe I misunderstood. Will you please elaborate?

Response:
Communication breakdowns are often a symptom of a deeper darker problem.  Companies believe they have communication issues, so they conduct a communication seminar that RARELY solves the problem.  Whenever a client reports a communication problem, I start with accountability and authority.  The identified communication problem is a symptom of an accountability and authority problem.  Communication breakdowns can help us locate the problem, but not to resolve it.

Most communication problems are between two people who have to work together, but are not each other’s manager.  This is the dotted line phenomenon on most org charts.  The problem with the dotted line is the undefined accountability and undefined authority.  As managers, we hope the two will be able to figure it out, which is where the communication breakdown begins.  Technically, these are cross-functional role relationships (two people who have to work together, but are not each other’s manager).  When we define the role relationship, we have to define the accountability and the authority in that relationship.

Example –
Would it be a good idea for sales to coordinate with marketing and marketing to coordinate with sales? Yes.
 
But, is the Marketing Manager the manager of the Sales Manager, and is the Sales Manager the manager of the Marketing Manager?  No.  

But, do we require they work together in a coordinating relationship?  Yes.  That sounds great until one begins to complain about the other, and so, we think we have a communication breakdown (or worse, a personality conflict).  What we failed to define in that working relationship is the accountability and the authority.

In a coordinating relationship between the Sales Manager and the Marketing Manager, who each are accountable for their respective budgets, can we require they consult with each other and coordinate their budgets to leverage that working relationship?  Yes.  Why?  

Because we said so, by virtue of a coordinating cross-functional role relationship.  They are required (accountability) to schedule meetings with each other to consult, share information, resources and tactics.  Each has the authority over their respective budgets, but they are required to coordinate.  When we make the accountability and the authority clear, the communication breakdowns disappear almost overnight.

It’s Not Your People

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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

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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

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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?

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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

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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.