Tag Archives: organizational structure

In Praise of Hierarchy

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Order and chaos. That is the balance beam, one foot in order and one foot in chaos. Order is what we know. Chaos is what we do not know. We bring order to chaos by exploring its value in relation to what we know. That value sorts into a mental construct called hierarchy. Human beings (and other life forms) do this as a natural process to determine what we pay attention to.

We assign something a value based on what we know. That value will be different for each person, if each person stops to think about it. Some people do not stop to think about what is of value and simply adopt the value chain of other people (without thinking). In this value chain, some things are more valuable than others and in the sort, a hierarchy emerges.

Organizationally, some mistakenly believe that hierarchy creates a rigid “command and control” sequence for making decisions. We don’t understand hierarchy in relation to its value chain. Organizationally, hierarchy is a value chain or value stream where managers bring value to the decision making and problem solving of their teams. This is the central role of management.

When I ask a group of managers if they have “direct reports,” all hands go up. I announce they have already fallen for the mistaken understanding that they are managers so people can report to them. The truth is, everyone in the company reports to lots of different people. But each team member can only have one manager, and the purpose of that manager is to bring value to the problem solving and decision making of each team member.

Organizational structure is simply the way we define the working relationships between two people. That most important relationship is between a manager and a team member. That is the beginning of the value stream naturally embedded in hierarchy. Bringing order out of chaos.

Levels of Work in an SME

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Why would small (SME) organizations have curiosity around the research of Elliott Jaques? Admittedly, Elliott worked with large organizations, containing multiple layers of management, which demonstrates that his research had relevance in very complex structures.

But, will it work for my SME company?
If a large organization has a problem, they have budget and people resources to throw at the problem. And if they miss, they have more resources left over to try again.

If a small enterprise has a problem, they have a smaller budget and fewer resources to resolve the issue. And if they miss, it might be fatal.

Why a structural approach?
Most people call me with one of two issues. They feel they have a communication problem or a personality conflict inside the company. I allow them to explain for about ten minutes before I interrupt and interject that I do not believe it’s a communication issue or a personality conflict. I think it’s a structural problem.

Most SMEs have a flexible organizational framework, which is the beginning of the problem. The company was organized, out of necessity, to focus on things that look non-structural, like sales. Every startup has to focus on sales. If there are no sales, the company dies, sooner rather than later. As the organization creates a sustained momentum of sales, things become more complex and the organizational structure takes shape, without forethought, without discipline.

Organizational structure is simply the way we define the working relationships between people, related to these two things.

  • Accountability
  • Authority

When we fail to define the accountability in a working relationship and fail to define the authority in a working relationship, we get organizational friction that appears to be a communication problem or a personality conflict. You can have all the communication seminars you want, do all the personality testing you want, until you get clear about accountability and authority, the problems will remain and become more persistent over time.

A Failure to Communicate?

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“I have a communication problem,” Sarah insisted.  “My sales manager doesn’t communicate effectively with the operations manager.”

“And?” I asked.

“Operations has been struggling.  Our backlog is best when we have about six weeks hard scheduled.  But, right now, operations has an eighteen week backlog, that’s five months.  My sales manager is apoplectic.  He says he can’t sell a project that we can’t start for five months.  He says the operations manager won’t listen to him, stonewalls him in meetings, doesn’t respond to emails.  I think we have a communications problem.”

“What have you tried?” I wanted to know.

“Well, we hired a communication consultant.  He came highly recommended.  We had four seminars, one week apart, but at the end of a month, the sales manager still had the same complaint.”

“What did the ops manager say?” I pressed.

“Oh, he says that the sales manager is unrealistic, that his operations team is working as hard as they can to keep up and the sales team has no appreciation for their effort.”  Sarah sounded a bit despondent.

“So, you think you have a communication issue, and you had a communication workshop, but the problem didn’t go away.  Do you think maybe it’s not a communication problem?”

Customers, Strategy and Structure

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Structure follows strategy. Strategy follows customers. It all starts with a customer.

  • Who is your target customer segment?
  • Who is your best customer?
  • What is your best customer’s profile? How do we recognize them?
  • What does your customer need? What is necessary in your customer’s life?
  • What does your customer want? What is your customer’s preference?
  • How will you collect that data? How much data do you need?
  • How will you analyze that data?
  • How will you verify the accuracy of your analysis?

Strategy follows customers?

  • Based on what your customer needs, what is necessary in your customer’s life, what product or service can you produce to satisfy that need?
  • Will your customer be willing to pay a price for your product or service that allows you to make a reasonable profit?
  • In the profit for your product or service, is there enough volume to sustain your company’s operation?
  • Is your product or service exclusive to your company, or do competitors offer a similar product or service perceived on an equal basis?
  • Based on your customer’s preference, what will make your customer decline your competitor’s offering and buy from you? What is your competitive advantage?
  • How can you create that competitive advantage in a way that is sustainable, difficult or impossible to copy by your competitor?
  • How can you effectively communicate the competitive advantage to your customer?
  • How can you operationalize your competitive advantage to make is real, observable and obvious?

Your responses to these questions will guide your structure.

  • What core functions do you need to create the product or service your customer needs?
  • What support functions do you need to meet your customer’s preferences in the way they want to buy?
  • In each function, what is the level of work required to sustainably produce the desired outputs?
  • In what way does each function need to integrate with its neighboring functions related to work handoffs?
  • What is the output capacity of each function, and how does its output match the output capacity of its neighboring functions?

Customers drives strategy, strategy drives 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.

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.

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.

Why is Culture Important?

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From the Ask Tom mailbag –

Question:
What is culture? Everyone talks about it, says how important it is. I know it is there, but it’s one of those warm and fuzzy concepts that’s like nailing jello to the wall.

Response:
Culture is that unwritten set of rules that governs our required behavior in the work that we do together. The culture cycle can be understood as a reinforcing system, recursive through four descriptive stages.

  • Beliefs and assumptions, the way we see the world.
  • Those beliefs and assumptions, typically unwritten, drive specific behaviors (for better or worse).
  • Driven behaviors, or cultural behaviors are tested by the consequences of reality.
  • Those behaviors that survive the test of consequences become our customs and rituals. Those customs and rituals reinforce our beliefs and assumptions, the way we see the world. The cycle begins again.

Every company (or social group) has a culture. That culture may be intentional or it just happens, but every company has one, and has the one they deserve. Culture is critical because it impacts the social structure, the way it operates and its impact on each individual. Culture determines the way you enter a group (company), how an individual is selected for the group. Induction includes the customs and rituals of orientation. Culture determines how roles are defined, assigned, formed, re-formed.

Culture determines any system of merit, performance management and review, individual development, career path, coaching and mentoring. Movement in the organization is impacted by systems of promotion based on accountability and authority. Compensation is designed, crafted and executed according to the way we see the world, the company and its business model in the competitive platform on which the company plays.

All of these elements are critical to a person’s understanding and self-perception. And most people in modern nation states exist inside a cultural system that impacts self-definition, not only the way a person sees the world (beliefs and assumptions), but the way they see themselves. Psychological healthy people are a product of psychologically healthy organizations.

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.