The Economic Times

Redraw the chart, but make it decision-centric

As Indian businesses build capacity and enter new sectors, changing an organisation's structure can seem like an effective way of shaking up the entire operation and, thereby, unlocking even better performance.

Par Paul Rogers

First published on novembre 22, 2010
min


Only some structural reorganisations by companies succeed as most fail to sharpen critical decision-making and execution New CEOs often feel compelled to reorganise their companies. In fact, nearly half launch some kind of reorganisation during their first two years on the job. Even that brisk pace seems to be accelerating, with Hewlett-Packard, Nokia and Caterpillar announcing organisational overhauls in 2010. In India as well, several major and wellknown companies have undergone significant reorganisations in the recent past, ranging from Tata Consultancy Services to ICICI Bank. The spike in ambitious plans to reorganise reflects the economic cycle. Domestic companies are now riding on the crest of a strong economic wave at home, while still facing uncertain and difficult global economic conditions. As Indian businesses build capacity and enter new sectors, changing an organisation's structure can seem like an effective way of shaking up the entire operation and, thereby, unlocking even better performance. But corporate reorganisations are risky investments of time, energy and resources, and many do little to improve the business. A recent Bain & Co study of 57 major reorganisations found that less than a third produced a meaningful improvement in performance. Some actually destroyed value. For instance, US auto giant Chrysler restructured its organisation three times in the three years preceding its bankruptcy and eventual combination with Fiat. None of those reorganisations had much effect. Bain Book Decide & Deliver Learn more about the five steps that leading organizations use to make great decisions quickly and execute them effectively. What do the few successful reorganisers know that so many others don't? The reorganisations that work best don't just reshuffle the boxes and lines on an organisation's chart. Rather, they improve a company's ability to handle its most important decisions. They enable people in the organisation to make better decisions. They speed up decision-making. They also increase the 'yield', or the proportion of decisions that are executed effectively. An example is ABB, the big Zurich-based power technology and automation company, which came close to bankruptcy in late 2002. One reason for its near-failure: key decisions about big power-project bids involved negotiations among dozens of ABB units, each with its own profit goals and incentives, and the process dragged on, often failing to produce competitive bids. A new ABB CEO, Jürgen Dormann, analysed the decision failures and then cut through the tangled web by consolidating divisions and centralising profit-and-loss accountability. The reorganisation worked—it restored ABB's ability to generate fast, competitive bids—because Dormann's team knew that the purpose of the new structure was to support and smoothen the progress of those decisions and others that were equally important. Why are decisions so central? When you think about it, an organisation's performance is really no more and no less than the sum of the decisions it makes and executes. A new organisational chart can't make much difference unless it somehow leads to better, faster decisions and execution. In fact, redesigning the organisational chart is almost always counterproductive if leaders fail to think through what the critical decisions are for the business, who should be responsible for them and how the new structure will help people make and execute them better. Some years ago, for instance, Internet company Yahoo! reorganised itself into three groups: Audience, Advertisers and Publishers, and Technology. But important decisions got bogged down, and Yahoo! executives wound up having to create new roles and management levels to coordinate the three units. Product development slowed, and costs increased. Compare that approach with Ford's recent reorganisation under Alan Mulally. Mr Mulally had already mapped out a simple schematic depicting the key decisions that had to be made at each stage in Ford's value chain, along with the infrastructure required to execute them effectively. Every week, he and his team tracked their progress in making and executing these decisions. They divested non-core brands such as Aston Martin, Jaguar, Land Rover and Volvo, reduced the number of production platforms, began consolidating both suppliers and dealers and so on. Along the way, they decided to reorganise the company, moving from a structure based on regional business units to a global matrix of functions and geographies. This new structure enabled Ford's leadership team to make some of those critical decisions better and faster: creating global car platforms, for instance, which had been painfully difficult under the old structure. Ford still faces challenges, of course, but so far, Mulally's approach has helped Ford ride out the hurricane that lashed the global auto industry and turn in a stronger performance than its US competitors. Determining where critical decisions 'sit' in the organisation requires an unbiased assessment of the benefits of scale and coordination versus the benefits of tailoring to local needs and staying close to the customer. In which decisions is scale a critical factor? Which decisions are better made by business units or functions? Which need coordination across many businesses? Some decisions are usually fairly easy to place. Big capital-allocation decisions, for instance, are typically best made by the corporate centre, so that senior leaders can design and execute a coordinated portfolio strategy across the company. IT investments can usually be left to functions or business units. Decision placement is more of a challenge for product, customer and channel decisions, which typically involve complex tradeoffs. Pricing decisions, for example, need to be coordinated across customer segments and channels. If reorganisation was only about identifying and placing key decisions, you might have little difficulty in getting your next reorganisation right. But the messy reality of business is that big changes often entail a whole host of micro changes. A new structure may require different decision roles, incentives, information flows, performance metrics and processes. And you may need to help managers develop the skills they need to make decisions quickly and translate them into action consistently. Smart companies mesh individuals' capabilities with the organisation's decision-making demands. The still-turbulent global economy means that more companies will continue to scramble to reorganise in the months ahead. In India, with marketplace competition intensifying as the economy grows strongly, companies need to adapt their organisations swiftly to meet rising consumer demand and investor expectations. CEOs and senior management must keep their eyes on results. The companies that manage to keep critical decisions at the centre of their efforts are likely to emerge far stronger than those that merely reshuffle the organisational chart one more time. The author is a leader of organisation practice at Bain & Co and managing partner at Bain UK. Co-authored by Ashish Singh, managing director of Bain in India, and David Mountain, a partner and a member of the firm's organisation practice.

Only some structural reorganisations by companies succeed as most fail to sharpen critical decision-making and execution

New CEOs often feel compelled to reorganise their companies. In fact, nearly half launch some kind of reorganisation during their first two years on the job. Even that brisk pace seems to be accelerating, with Hewlett-Packard, Nokia and Caterpillar announcing organisational overhauls in 2010.

In India as well, several major and wellknown companies have undergone significant reorganisations in the recent past, ranging from Tata Consultancy Services to ICICI Bank.

The spike in ambitious plans to reorganise reflects the economic cycle. Domestic companies are now riding on the crest of a strong economic wave at home, while still facing uncertain and difficult global economic conditions.

But corporate reorganisations are risky investments of time, energy and resources, and many do little to improve the business. A recent Bain & Co study of 57 major reorganisations found that less than a third produced a meaningful improvement in performance. Some actually destroyed value. For instance, US auto giant Chrysler restructured its organisation three times in the three years preceding its bankruptcy and eventual combination with Fiat. None of those reorganisations had much effect.

Bain Book

Decide & Deliver

Learn more about the five steps that leading organizations use to make great decisions quickly and execute them effectively.

What do the few successful reorganisers know that so many others don't? The reorganisations that work best don't just reshuffle the boxes and lines on an organisation's chart.

Rather, they improve a company's ability to handle its most important decisions. They enable people in the organisation to make better decisions. They speed up decision-making.

They also increase the 'yield', or the proportion of decisions that are executed effectively. An example is ABB, the big Zurich-based power technology and automation company, which came close to bankruptcy in late 2002. One reason for its near-failure: key decisions about big power-project bids involved negotiations among dozens of ABB units, each with its own profit goals and incentives, and the process dragged on, often failing to produce competitive bids.

A new ABB CEO, Jürgen Dormann, analysed the decision failures and then cut through the tangled web by consolidating divisions and centralising profit-and-loss accountability. The reorganisation worked—it restored ABB's ability to generate fast, competitive bids—because Dormann's team knew that the purpose of the new structure was to support and smoothen the progress of those decisions and others that were equally important.

Why are decisions so central? When you think about it, an organisation's performance is really no more and no less than the sum of the decisions it makes and executes.

A new organisational chart can't make much difference unless it somehow leads to better, faster decisions and execution.

In fact, redesigning the organisational chart is almost always counterproductive if leaders fail to think through what the critical decisions are for the business, who should be responsible for them and how the new structure will help people make and execute them better.

Some years ago, for instance, Internet company Yahoo! reorganised itself into three groups: Audience, Advertisers and Publishers, and Technology. But important decisions got bogged down, and Yahoo! executives wound up having to create new roles and management levels to coordinate the three units. Product development slowed, and costs increased.

Compare that approach with Ford's recent reorganisation under Alan Mulally. Mr Mulally had already mapped out a simple schematic depicting the key decisions that had to be made at each stage in Ford's value chain, along with the infrastructure required to execute them effectively. Every week, he and his team tracked their progress in making and executing these decisions. They divested non-core brands such as Aston Martin, Jaguar, Land Rover and Volvo, reduced the number of production platforms, began consolidating both suppliers and dealers and so on.

Along the way, they decided to reorganise the company, moving from a structure based on regional business units to a global matrix of functions and geographies. This new structure enabled Ford's leadership team to make some of those critical decisions better and faster: creating global car platforms, for instance, which had been painfully difficult under the old structure.

Ford still faces challenges, of course, but so far, Mulally's approach has helped Ford ride out the hurricane that lashed the global auto industry and turn in a stronger performance than its US competitors.

Determining where critical decisions 'sit' in the organisation requires an unbiased assessment of the benefits of scale and coordination versus the benefits of tailoring to local needs and staying close to the customer. In which decisions is scale a critical factor? Which decisions are better made by business units or functions? Which need coordination across many businesses?

Some decisions are usually fairly easy to place. Big capital-allocation decisions, for instance, are typically best made by the corporate centre, so that senior leaders can design and execute a coordinated portfolio strategy across the company. IT investments can usually be left to functions or business units.

Decision placement is more of a challenge for product, customer and channel decisions, which typically involve complex tradeoffs. Pricing decisions, for example, need to be coordinated across customer segments and channels.

If reorganisation was only about identifying and placing key decisions, you might have little difficulty in getting your next reorganisation right. But the messy reality of business is that big changes often entail a whole host of micro changes. A new structure may require different decision roles, incentives, information flows, performance metrics and processes. And you may need to help managers develop the skills they need to make decisions quickly and translate them into action consistently. Smart companies mesh individuals' capabilities with the organisation's decision-making demands.

The still-turbulent global economy means that more companies will continue to scramble to reorganise in the months ahead. In India, with marketplace competition intensifying as the economy grows strongly, companies need to adapt their organisations swiftly to meet rising consumer demand and investor expectations. CEOs and senior management must keep their eyes on results.

The companies that manage to keep critical decisions at the centre of their efforts are likely to emerge far stronger than those that merely reshuffle the organisational chart one more time.

The author is a leader of organisation practice at Bain & Co and managing partner at Bain UK. Co-authored by Ashish Singh, managing director of Bain in India, and David Mountain, a partner and a member of the firm's organisation practice.