Designed for growth

Business strategies of companies are fast outpacing their organisational design.

Here’s how HR can help reshape organisations to drive growth.

It is a hard fact that business success is strongly impacted by the design and processes of an organisation’s structure and its alignment to business strategy. It is also true that the economic backdrop in which the organisation operates challenges it, influencing its ability to make significant changes. To succeed in a hyper-competitive environment, it may not always be enough for companies to acquire best-in-class assets and talent. It is not how good the assets are in silos but the pattern in which they all come together as moving parts of the organisational engine that drives successful business outcomes.

 

Companies will have to work harder and restructure themselves far more effectively to leverage growth opportunities. The workforce architecture of any organisation is finite, and always highly dependent on the level of uncertainty in the external environment and the need to develop or change accordingly. This is particularly true for large Indian companies which are currently witnessing unprecedented levels of growth, both organic and inorganic. This environment will therefore create a dilemma for many organisations. On the one hand, they will need to face critical issues such as strategic redesign or the retention, motivation and development of talent.

On the other hand, cost pressures are likely to continue. Any time of great change offers unique opportunities to organisations. We believe that organisations that make wise investments in human capital now are more likely to build a sustainable competitive advantage.

The role of HR
How can HR help organisations respond to these opportunities? Reshaping the organisation for sustained growth while aligning organisational design to business strategy is one of the most significant challenges that HR faces. A robust structure is therefore a fundamental pre-requisite to the creation and sustenance of strong HR systems and processes. People make a powerful difference when an organisation’s business, workforce and HR strategy come together to create a focused, integrated system. In terms of HR capabilities, this could be particularly taxing. Opportunities for complete renewal of an organisation’s design are historically rare, making experience and expertise in this area limited.(Click for Aligning Structure to Strategy)

HR needs to work closely with the organisation’s leadership to chart out a clear path to business success. It also requires a proactive approach to balancing headcount, responding to cost pressures while improving productivity, creating an architectural framework based on business strategy, and making it alive and responsive to evolving requirements. We find that a 12- to 18-month planning horizon is usually the best balance between immediate pressures and long-term development.

What clients want
Organisations have been impacted differently by the slowdown. For instance, pharmaceuticals and FMCG are less impacted than real estate and financial services; therefore, the action plans for these sectors will necessarily be different. The key to effective management and business results lies in the balance between the focus of individual departmental units in an organisation and the unity of effort between differentiated units in working toward the organisation’s goals. Years of growth have turned the attention of organisations to external growth opportunities. Clearly, for most of these organisations, it is time for introspection. Let us take a few examples to explain:

 

 

The first case is the growth of the single-product category organisation with a significant market share to a multiple-product company. The tremendous growth opportunities propelled the company to leverage its distribution and retail network to sell associated products. All the additional product categories showed strong demand growth. On introduction, initial response to these products was good and some market share accrued within a year. However, in early 2007 as sales were gaining momentum, signs of a slowdown in market growth emerged. Revenue fell and the organisation started losing market share as other competitors introduced upgrades to their products. Unable to respond swiftly, problems in product commercialisation and product launch coordination became evident. Here there is a clear mismatch between the competitive strategy and the functional structure of the organisation. Competing product priorities within each function paralysed the company. Lack of a coherent response to a product across functions drove up costs, and different units worked at cross-purposes so that no one seemed to be in charge for any of the product lines. The organisation finally restructured itself as a strategic business unit. This brought about a clear profit and loss focus around each product and, over a period of time, it improved the organisation’s capability to manage multiple product lines. 
 

The second case is of an organisation that took exactly the opposite route. It focused on significantly expanding its geographic reach with an underlying principle of empowerment of geographic divisions. The intent was to capture the growing demand and the fast growth in revenue potential. For a couple of years, they made good progress, but as the downturn set in, competition started dropping prices to gain market share and the organisation found its products becoming increasingly uncompetitive. The fundamental issue was an expensive and unproductive duplication of resources and lack of standardisation. Each location created its own ways of working and functional expertise deteriorated. This weakened control of work cultures across geographic divisions drove the organisation to embark on an initiative to centralise and focused it on standardisation of products and processes. 
 

The third example reflects yet another kind of challenge that organisations experience. In this case the organisation expanded its sales force to an extent that even the productivity numbers indicated that the resources were used ineffectively. Overall strong revenue growth kept the problem dormant for a while but the slowdown in early 2008 forced the organisation to revaluate headcount. The dilemma the organisation faced was that while productivity was low, everyone in the sales department seemed stretched and resistance to change was very strong. In this case, the issue was the distorted underlying processes. Our analysis showed that the sales force spent as much as 25 per cent of its time on internal issues, ensuring that the product supplied by the factory reached its distributors on time. The production and sales planning process were at loggerheads. The problem was masked by adding resources which finally proved detrimental to the company.

These examples demonstrate the single reality that the business strategy for many organisations has outpaced the initial organisation design. Two of the primary themes that emerge for many organisations are: 

Reassessing the alignment of the organisational structure with the strategy. 
 

Reassessing internal efficiencies to manage emerging cost pressures.

Cost reduction 
The strategies an organisation deploys to reduce costs reflect the filter through which senior management views the company and the depth of understanding and knowledge of the actual processes that deliver value. Typically, there are three different kinds of cost reduction strategies associated with human resources:

Across the board reduction of headcount. The underlying thought process is usually based purely on financial analysis, and the point of view, in isolation, is myopic and therefore least effective. 
 

A tendency towards setting targets based on operational analysis of the business. This includes operational measures of performance: Capacity utilisation, revenue-employee ratios and total process cost. Here a good macro-level understanding of the processes drive a focused reduction strategy, but the internal dynamics of processes are sometimes not be taken into account. Hence the risk of dramatic errors is lower, but the full potential is rarely explored. 
 

A focus on process analysis based on how they can be modified to drive better productivity. Such a strategy tends to give a much deeper understanding of the processes and the dynamics by which they are governed. More importantly, companies are able to grasp the relationship between headcount and process performance. These organisations are the most likely to capture the full potential of productivity improvement.

To change from a headcount-driven organisation to a process- driven organisation, companies need to go through two stages of evolution. In the first stage, they need to examine the processes and how they are driven; and in the second, they must understand the linkage between jobs and processes. The results from such an exercise can significantly improve the operational abilities of an organisation beyond headcount reduction.

Productivity improvement
Most companies look at productivity from the ground up in headcount terms and do not sufficiently analyse the inherent inefficiencies of systems and processes. Organisations should follow this four-step process for productivity improvement: 

Identify processes: As a first step, identifying the processes in the organisation is vital. An inventory of detailed processes, including critical people-intensive processes, needs to be created, followed by a complete process mapping. 
 

Identify improvements: The focus here is on identifying a process performance matrix, thereby isolating work processes and pieces that do not add value. An important part of this step is to analyse root causes and conceive possible solutions, with special attention to issues that affect designing of roles. 
 

Map role processes: The third and critical step involves an examination of the fit between the roles and the processes. First, establish what the role contributes to the process and within what time frames. Once a role-process contribution process matrix is clear, opportunities can be identified and leveraged in order to redesign roles, improve productivity, and save time and cost. 
 

Redefine: The final step is capturing changes in the roles into job descriptions and putting into place a communication process, process-change initiatives and transition plans. The creation of interfaces between roles and an analysis of the impact on role productivity underlines redefinition.

Aligning structure to strategy
Organisational structure closely mirrors the choices that are made around the customer-value proposition. While this provides clarity on the direction that the structure must take, in today’s complex world, companies rarely turn around a single axis. To maintain an optimal level of performance on other parameters, they must also consider secondary alignments. For instance, while the organisation might focus on product innovation (divisional structure), it will also centralise some of the key business processes into a functional structure. This would ensure that the costs remain under control by garnering economies of scale and standardisation. This has become especially important, because the present phase of recovery will require organisations to focus on multiple, competing priorities. The art of designing complex organisation often deals with: (Click for aligning structure to business priorities (An example))

Balancing the different axis around which structure must be built. 
 

Creating interlinking mechanisms which keeps them connected to maintain coherence of direction.

Let us explain this with an example from an automobile company which manufactures both light and heavy commercial vehicles. The clear direction that this organisation took was towards product innovation, which would make the divisional structure the most natural choice. However, the organisation needed to balance this with a number of other operating factors and a slow manufacturing process, which was exerting pressure on its operating cost and capital investments. This meant that while the organisation wanted to drive product superiority and speed to market, it also had to deal with a number of constraints to contain its costs. Some of the key constraints were: 

The need to develop common parts across its range of vehicles, to reduce development cost and improve bargaining power with vendors. 
 

The products had to share some parts of the manufacturing process because deployment of new capital was difficult. 
 

Currently the volumes did not justify separate sales and service networks.

Eventually, the organisation designed a structure that balanced these competing forces. It created a product-functional hybrid structure that tried to balance the pressure for cost optimisation against the underlying value proposition of product superiority. To make sure that the product organisation worked in tandem with the functional organisation, the organisation redesigned its planning process and created a matrix structure to ensure coordination, that is, people with similar skills were pooled for work assignments.

Even before structures are redesigned, organisations need to rethink business models and competitive strategies. Clarity on the value proposition can lead to analysing what characteristics are critical to the value chain and how processes need to be structured around these. Design of the enterprise architecture is highly dependent on a definition of the primary axis, and top-level roles, team structures and planning processes reflect this. The organisation design permeates down to the individual roles and accountabilities that support the entire structure and combine with the process to work toward the goal of ensuring successful business results. Organisations in India are no different, and most with an eye on the future have already embarked upon the restructuring journey.

Gopal Nagpal is principal for Mercer’s human capital business in India