Optimizing Organization Design

A Proven Approach to Enhance Financial Performance, Customer Satisfaction and Employee Engagement

Ronald G. Capelle

• Editorial: Jossey-Bass
• Año: 2013
• ISBN:
  9781118763797
• Edición: 1
• Categoría: Negocios y empresa
• Categoría: Desarrollo organizacional

Optimizing Organization Design offers a comprehensive resource and valued guide for anyone interested in improving organization performance. The book presents an approach to optimizing organization design that is based on over 100 large scale projects and 23 research studies that have been completed by Capelle Associates over the past 25 years. In addition, the book includes insightful comments from executives on their success in using this approach. Capelle's research and client experience reveal that optimizing organization design leads to better financial performance, customer satisfaction and employee engagement. It can provide a competitive advantage and a significant return on investment. It can also become the foundation of both strategy implementation and human resources management.

Capelle shows that organization design includes the alignment of a number of critical factors, including positions (vertical and functional); accountabilities and authorities (managerial and cross functional); people; deliverables and tasks. He shows that manager – direct report alignment is the single most important organization design variable. His research also shows that it is suboptimal nearly half the time. This is a horrendous waste of talent and capability, but also provides a significant opportunity for improvement in organization performance.

Optimizing Organization Design clearly explains how to implement organization design improvements. This approach includes people change management, project management, and a cascading, iterative approach that is based on teams and involves education, doing real work and feedback. In addition, Optimizing Organization Design includes special sections on the role of the Board of Directors, project management, process management and compensation. In addition, the author has included four case studies and a useful glossary.

Chapter 1

Why Organization Design Matters

Organization design, as we define it, is one of the most powerful tools available for improving organization performance. Our Optimizing Organization Design® approach

• is related to better employee satisfaction
• is related to better customer satisfaction
• is related to better financial performance
• can give you a competitive advantage that is more sustainable than most
• provides a significant return on investment
• provides a foundation for strategy implementation
• provides a foundation for human resources management

We define organization design as the relationship of an organization to its environment and the interrelationships of its parts. This includes the alignment of positions, accountabilities and authorities, people, deliverables, and tasks.

Within organization design, there is one factor that is powerful enough to be directly related to improved outcomes. That factor is the manager–direct report alignment. Following on the work of Jaques and his colleagues (Jaques, 1996), the basic idea is that every employee should have a manager exactly one level or “stratum” (our technical term which will be discussed shortly) above. We believe that this precise stratification is a necessary but not sufficient condition for an optimal manager–direct report relationship. Buckingham and Coffman (1999) have conducted significant research showing the importance of relationship with manager and how it is related to productivity, profitability, retention, and customer satisfaction.

The important relationships among these factors have also been demonstrated by Heskett and his colleagues in their development of the service profit chain (Heskett et al., 1994; Heskett, Sasser & Schlesinger, 1997; Heskett, Sasser & Schlesinger, 2003; Heskett, Sasser & Wheeler, 2008). They have shown that there is a relationship between the employee (satisfaction and loyalty); the customer (value equation, satisfaction, and loyalty); and financial performance (revenue growth and profitability). This research is further discussed in Appendix B.

Employee Satisfaction

Productivity in the department has improved, and user satisfaction has increased remarkably while employee morale and team work have shown exceptional gains.

—John W. Young, Executive Vice President, Human Resources, Four Seasons Hotels and Resorts, April 2002

We would expect that better organization design would lead to better employee satisfaction. Organization design provides better manager–direct report alignment (as well as overall better position alignment), better clarity of accountabilities and authorities, better matching of people to positions, and better alignment of deliverables. Any one of these alone might have a positive impact on employee satisfaction. The combination of all or most of them would seem to significantly improve that probability.

The relationship between organization design and employee satisfaction is strongly supported by our research (see Appendix B).

While these outcomes would have been expected, we have also shown the power of the manager–direct report alignment. Manager–direct report alignment also is based on the work of Jaques (1996) and his colleagues. They developed a measure of the complexity of work called “time span.” With it, one can determine how many layers or strata an organization should have and place every position in the correct layer or stratum. More specifically, one can develop optimal manager–direct report alignment. This is a situation in which a manager is exactly one layer or stratum above a direct report, in terms of both the complexity of work done and capability to work at that level.

While there is one optimal situation, there are two suboptimal situations. The first is when a manager and direct report are operating at the same level or stratum (called “compression”). We would expect that the manager in this situation would be micromanaging and not adding sufficient value and that the direct report could not use her full capability. The second situation arises when a manager and direct report are operating more than one level or stratum apart (called “gap”). We would expect that the manager in this situation could feel “pulled down into the weeds” and see the direct report as having no “initiative” while the direct report would see the manager as providing inappropriate direction.

This manager–direct report alignment would therefore appear to be fundamental to manager and employee satisfaction. One can see how it could be related also to customer satisfaction and financial performance. There are relationships among all of these factors. Quite frankly, we have been surprised at the robustness of manager–direct report alignment. While we would have expected that organization design would be related to these outcome measures, we would not have expected that any of the sub factors would be robust enough to have a similar effect. Our experience with manager–direct report alignment has proved us wrong.

The relationship between manager–direct report alignment and employee satisfaction is shown in our survey of top 2000 Canadian companies (Capelle Associates Research Paper #9, 2003b). Nine other studies reinforce these findings. The first six are organization design assessment and implementation projects (Capelle Associates Research Paper #1, 1999; Capelle Associates Research Paper #3, 2000b; Capelle Associates Research Paper #4, 2000c; Capelle Associates Research Paper #5, 2000d; Capelle Associates Research Paper #13, 2005b; Capelle Associates Research Paper #15, 2011). In each of the studies both the manager–direct report relationship and employee satisfaction improved following the organization design intervention. Three more studies focus on situations where there was no organization design intervention. Capelle Associates Research Paper #14 (2005c) shows a significant relationship between manager–direct report alignment and employee satisfaction. Capelle Associates Research Paper #21 (2012f) looks at one role (analyst). It shows that individuals in analyst positions, who have requisite or optimal alignment with their managers (exactly one stratum below), have higher satisfaction than those who are in gap or compression situations. Finally, Capelle Associates Research Paper #22 (2012g) shows a significant relationship between manager–direct report alignment and employee satisfaction in three interrelated organizations.

It is clear that organization design in general, and the manager–direct report alignment in particular, are both directly related to employee satisfaction. We believe that better organization design and better manager–direct report alignment both lead to better employee satisfaction.

Customer Satisfaction

We found that better aligning positions, clarifying accountabilities and authorities, matching people to positions, and developing business plans has resulted in improved employee performance and customer satisfaction.

—Naseem Somani, President and CEO, Gamma-Dynacare Medical Laboratories, October 2011

We would expect that better organization design would lead to better customer satisfaction. Improvements in alignment of positions, accountabilities and authorities, people, and deliverables should provide better clarity and a foundation to focus on customers. Our research supports the relationship between organization design and customer satisfaction. This is shown in our survey of top 2000 Canadian companies (Capelle Associates Research Paper #9, 2003b), as well as one additional study (Capelle Associates Research Paper #3, 2000b). We also find that there is a relationship between manager–direct report alignment and customer satisfaction (Capelle Associates Research Paper #9, 2003b; Capelle Associates Research Paper #3, June 23, 2000b; Capelle Associates Research Paper #14, 2005c).

In addition to our research studies, Heskett and his colleagues have developed the service profit chain (Heskett et al., 1994; Heskett, Sasser & Schlesinger, 1997; Heskett, Sasser & Schlesinger, 2003; Heskett, Sasser & Wheeler, 2008). They have shown that there is a relationship between the employee (satisfaction and loyalty), the customer (value equation, satisfaction, and loyalty), and financial performance (revenue growth and profitability). We believe that this adds further credence to the impact of better organization design and better manager–direct report alignment on both employee satisfaction and customer satisfaction.

Financial Performance

We were indeed able to establish a statistically positive relationship between organization design and performance using our performance data and your organization design framework. We found that Capelle Associates' approach to better organization design is related to better financial performance in the global pension fund industry. This includes governance, layering, and delegation.

—Keith P. Ambachtsheer, President, K.P.A. Advisory Services, and co-author, Pension Fund Excellence: Creating Value for Stakeholders, October 1999

We would expect better organization design in general, and better manager–direct report alignment in particular, would lead to better financial performance. There are three factors related to this.

First, it seems logical and reasonable that improvements in the alignment of positions, accountabilities and authorities, people, and deliverables should lead to better financial performance. As well, the absence of optimal or requisite manager–direct report alignment leads to problems such as gaps or compression. These elements are fundamental to the operation of an organization. Our research supports this expectation. It is shown in our survey of top 2000 Canadian companies (Capelle Associates Research Paper #9, May 12, 2003b). It is also shown in a longitudinal study (Capelle Associates Research Paper #1, 1999) and a previously published study of financial performance in the global pension fund industry (Ambachtsheer, Capelle & Scheibelhut, 1998).

Second, organization design assessments can produce cost savings. These are all directly related to the manager–direct report alignment. The Capelle Associates Benchmarking Database shows average potential annual cost savings of $2,505 per position (Capelle Associates Research Paper #23, 2012h). The total in each case would be found by multiplying this number by the number of positions in the review (e.g., in a 1,000-employee organization, the average potential annual cost savings would be $2,505,000).

The third factor comes from related research. Buckingham and Coffman 1999 show a relationship between the manager–direct report relationship and profitability. Heskett and his colleagues (Heskett et al., 1997) have developed the service profit chain showing the relationship between employee satisfaction, customer satisfaction, and financial performance (revenue growth and profitability). So, not only do we show a direct relationship between organization design and financial performance, we would also expect that improvements in relationship with manager, employee satisfaction, and customer satisfaction would further drive financial performance. This hypothesis is further supported by the statistically significant relationships found in our survey of top 2000 Canadian companies (Capelle Associates Research Paper #9, 2003b).

In conclusion, we have three streams of support for the relationships between both organization design and manager–direct report alignment with financial performance: three studies showing direct relationships; one study showing cost savings; and a number of related studies showing that the relationships between manager, employee, and customer satisfaction align with financial performance.

Competitive Advantage

The advice came at significant turning points in our history and helped to keep the fund competitive and focused on identifying unexpected risks while remaining at the top of our game.

—Bob Bertram, Executive Vice President, Investments, Ontario Teachers' Pension Plan, November 2007

Better organization design, as we define it, can provide a competitive advantage. It is clearly related to better organization performance, as shown by employee satisfaction, customer satisfaction, and financial performance. However, there is more to the story. This Optimizing Organization Design® approach can and should be done in such a way as to be sustainable. Much of my focus in this book is on how to accomplish this. Further, because this approach requires both skill and commitment, I contend that it can be a more sustainable competitive advantage than many that can be more easily copied.

Significant Return on Investment

The icing on the cake is that, although organization design did not start for us as a cost cutting exercise, it ended up paying for itself within the first year of implementation and that's a recurring benefit.

—Gerry Savaria, President and CEO, LS Travel Retail North America, July 2011

Improvements in organizations generally require some forms of investment. The critical question then becomes, “What is the return on investment?”

We track this information in our consulting work. We have information on 19 organizations. There were significant potential annual cost savings, mainly resulting from the elimination of redundant managerial positions (i.e., positions that are in the same stratum as their immediate manager). The average potential annual cost savings was $2,994,298 per organization. The average investment in the assessment was significantly lower at $454,779. The average potential annual return on investment (ROI) was 589 percent. It should be noted that while the investment is one time, the savings recur on an annual basis (e.g., if there are savings because a position is eliminated, those savings recur each year). The average potential annual cost savings per employee was $2,505. This number is calculated by dividing the annual cost savings by the number of employees in the organization.

Two of the 19 organizations we tracked had no potential annual cost savings. It is important that these numbers have integrity, and be based on the best interest of the organization. In these two cases, the organizations were in a significant growth mode. Not only were there no redundant positions, but there were requirements to add positions. We have included these numbers in our averages because these are actual situations that one might also encounter.

We believe that the number of redundant positions that we identify is quite conservative ...