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Management fads lead to a false dichotomy in structuring your organisation when all you need is to structure for ‘economies of differentiation’.
The false dichotomy
In the current market, there is ever-present and increasing pressure on revenue, cost and customer service. A part of most organisations’ response is to change their organisation structure. When looking to re-structure, two structural options are generally pursued:
Agile / Federated:
Our experience leads us to conclude that neither approach works on its own. Why? Humans and economics, that’s why.
Firstly, the human reason
Dunbar’s number of 150 helps us to understand that. As humans, groups of people larger than 150 struggle to operate efficiently and effectively. Our brains, specifically our neocortex, isn’t large enough to sustain larger cohesive social groups.
This manifests throughout history, from Roman times to Facebook, we have sized our societies and groups at about 150.
Secondly, the economics
Centralisation produces economies of scale, but the rate of return diminishes as size grows. Indeed, too much growth can actually result in diseconomies of scale – so big is better, but bigger or biggest isn’t necessarily better.
It’s easy for us to understand that centralising 10 small teams of 3-6 into a single team will generate economies of scale. However, if you centralise 10 teams of 50-100 into one, that doesn’t really guarantee economies of scale benefits that outweigh the risks as these groups can be too big. It is likely that this scenario, would create diseconomies of scale.
Agile structures create economies of knowledge around customers or other relevant domains. They also create sub-scale business functions where common ways of working and scale are needed – which manifests in the operation through additional managers and divergent ways of working.
Agile structures create economies of knowledge around customers or other relevant domains.
The Answer – Structuring for economies of differentiation
By taking into consideration the human and economic factors, we recommend re-organising around clusters of competitive differentiation and advantage that leverage scale, what we call ‘economies of differentiation’.
Clarifying your points of differentiation
This requires a healthy dose of self-reflection, reality and truth serum. Better yet, talk to your customers and clients; they’ll tell you. Don’t take their first or fourth answer, dig into the why.
What you will learn from customer feedback is that there will be different elements of your business’ value proposition that rely upon different organisational responses. A one sized fits all approach won’t harness the three quite different outcomes that result from choice of organisation design; the ability to realise economies of scale, skill and knowledge.
What you will learn from customer feedback is that there will be different elements of your business’ value proposition that rely upon different organisational responses.
Economies of Scale: Accessing benefits by removing management layers and resource duplication pulls the cost lever of enterprise value. Leaving a lot of value on the table.
Economies of Skill: Can be accessed by merging roles, cross-skilling within new teams, instilling cross accountabilities for geographies or customers. It can allow for the reduction of key resource risk through increased resource redundancy, improve employee engagement through new career pathways while also increasing customer service due to more people being able to service a single customer.
Economies of Knowledge: When organisations can tap into economies of knowledge where people cross-skilled, knowledge is shared between people and across systems then increased enterprise value can be realised, including improved customer service, revenue opportunities, cost reduction and improved customer onboarding.
B2B Services industry case study
What differentiates the leaders in this space, regardless of industry, is their ability to leverage learnings across clients within an industry to develop industry-specific solutions to offer the market. Better yet, they also take learnings from outside of an industry and apply to comparable industries to further these products and services.
By doing this they tap into economies of skill and knowledge. At the most granular, the industry is the differentiator – and therefore this should be the clustering point of the org structure, no lower. Yes, you read correctly, customer-specific teams are not the answer to achieve differentiation.
Re-organising for economies of differentiation can unlock the benefits associated with economies of scale and more importantly economies of skill and knowledge. Best of all, the enforced remote working that COVID has required has proven to even the most jaded critic that we don’t need to have people at arms reach for them to produce timely and high-quality outcomes. People can be anywhere to achieve that.
Re-organising for economies of differentiation can unlock the benefits associated with economies of scale and more importantly economies of skill and knowledge.
If you have a case for re-organisation that you’ve been trying to get traction with, now might well be the time. We’d be happy to share our experience and discuss it with you further.
First published on Structured Creative.