How you allocate talent and prioritize functions directly reflects your business strategy.
What is an organization, really? It’s almost that time when many companies begin hard discussions about budgets for next year. In most cases, that conversation crosses at least partially into the topic of organization structure, so it’s good to think about what an organization really is.
The old-school theory of the firm argued that firm structures form at the point where owning a service is more efficient and valuable than buying a service from another firm. It’s usually more efficient for you to own your own sales force than to try to get alignment with a third party to outsource sales (or to hire sales people like day laborers). Therefore, one discussion about organization structure must consider the own-vs.-rent decision.
On another axis, a firm really exists to do two things: capture opportunities and manage risks. Those two objectives aren’t always mutually exclusive to individual parts of the organization (for example, a CEO has to do both, as do many other people in the organization), but they are the two considerations when designing an organization.
A third axis of organization decisions involves what I’ll call centering. In a given company, there is efficiency to creating centers of skill in some cases, and to distributing skill in others. You might easily centralize procurement operations, but you might need to keep your sales force distributed and close to the customer in order for it to be most efficient. This is the old division-of-labor argument that is subtly written into every organization: Do you expect your general managers to be great at HR and IT, or are those functions better handled by true experts elsewhere in the organization (or by outsiders, if you’re thinking about own vs. rent as noted above)?
The interesting discussion during the annual budget cycle should then be on four levels:
- Have we established the right boundaries for our firm? Should we stop doing some things in house that somebody else can do effectively? Should we rent vs. own? Many companies have decided to outsource activities that were traditionally in house. Information technology is an example of a function that is easily outsourced to a third party that is both better and more cost-effective than in-house operations. One cautionary note: Don’t outsource your competitive advantage.
- Have we covered key risks with the right organizational investment? Legal, human resources, accounting, finance, credit, and many other areas are examples of risk-management functions (in most cases). They are investments made to manage risk, not necessarily to capture opportunities.
- Have we covered opportunities sufficiently? This is usually the toughest of these questions for companies to answer with confidence. Do you have the right investment in product development, engineering, sales, and other potential revenue-producing resources. I’m always struck by companies that consistently operate understaffed—at least a person or two down—on their sales force, but never allow their accounting function to be shorthanded.
- Have we centered and distributed functions appropriately? Are there competencies that need to be concentrated and improved? Are we properly structured to ensure we get the best of those competencies and the best distribution of their use across the company? A good example of this can be R&D staff. They may be best placed in a center that can allow quick knowledge sharing and effective processes vs. having a broad set of individual researchers spread throughout a company. But they also might be best positioned right next to the customer in a distributed form. Your mileage may vary.
As you look at your organization, can you answer these questions? I’m not sure most management teams can. Like my anecdote about companies with fully-staffed accounting functions yet people-starved sales functions, I see resource imbalances in organizations all the time. One company I encountered had an accounts-receivable function that was staffed with excellent people, and many of them. In fact, the company had more and better talent evaluating customer-credit decisions than it had in pretty much any sales function. That allocation of talent says a lot about management’s priorities.
I’ve noted in past posts that your budget is the best expression of your strategy. It turns out your organization is a pretty good approximation of your budget.
Now, what do you think? Share your thoughts on this topic.