Organizational structures: The benchmark indicators you cannot ignore

Organizational Strucuture Definition

An organizational structure is the hierarchy of an organization and how the components of this hierarchy work together to achieve the strategic objectives of the company (Ahmadya, Mehrpourb & Nikooravesh 2016). If the structure of the organization and the underlying design principles that construct it are not in alignment with the core purpose of the organization and its operating environment, then it is likely the organization will find it difficult to achieve its strategic objectives (Arabi 2007).

The Importance of Aligning The Structure With The Business Strategy

The key to profitable performance is the extent to which leadership, organization, jobs, and people are aligned. An understanding of the interdependencies of these business elements and the need for them to adapt to change quickly and strategically are essential for success in the high-performance organization. When these four elements are in harmony, outstanding performance is more likely.

1. Leadership - The individuals responsible for developing and deploying the strategy and monitoring results.
2. Organization - The structure, processes, and operations by which the strategy is deployed.
3. Jobs - The necessary roles and responsibilities.
4. People - The experience, skills, and competencies needed to execute the strategy.

The organizational design process is the pivotal connector between the business of the organization (e.g., top-level leadership and organizational strategy and goals) and forms of HR support (e.g., workflow process design, selection, development, and compensation). The strategy must continually drive structure and must reflect and enable effective leadership.

Organisational Structure Design & Benchmarking

Benchmarking is the process of studying industry or competitive practices, functions, and products and finding ways to meet them or improve upon them. Companies from all different industries use benchmarking to gauge their successes and pinpoint their shortcomings. The general process of benchmarking involves identifying problem areas, selecting top competitors who excel where a company falls short, and making the necessary changes.

There are several key advantages to using benchmarking in an organization. However, it is important to benchmark the organizational structure against universal benchmarks. The downside of benchmarking your organizational structure against competitors is that you might inherit weaknesses inherent in their organizational structures.  When benchmarking an organizational structure, pay particular attention to the following metrics;

1. Span of Control - This refers to the total number of people (subordinates or employees working under an individual) whom a manager or an administrator can effectively control and supervise. The average span of control is preferred for measuring the span of control. The average span of control is measured using a ratio of the number of managerial nodes and the total population. The ideal benchmark for this is 8-12.

• Reporting Layers – This is the hierarchical arrangement of lines of authority, communications, rights, and duties of an organization.  Organizational structure determines how the roles, power, and responsibilities are assigned, controlled, and coordinated, and how information flows between the different levels of management. It is useful to test managerial structures against an ‘ideal’ benchmark. We usually set this at a maximum span of eight, with an ‘ideal’ of not more than five layers – usually referred to as the ‘8 x 5 test’.

• Manager to Non-Management ratio – This is a key performance indicator that shows the ratio between the total number of managers and supervisory employees and the total number of full-time and part-time non–managerial (non-supervisory) employees. The ideal benchmark for this is 10:1.

• One on One Reporting - This is an effective barrier to proper oversight, communication, and flow of information up and down the chain of command. It may block the main boss’s vision of the work being done or not being done.

• Duplication -This is the repetition of the same task. Duplication of tasks results in a waste of human resources as the organization is paying employees to do the same task. To optimize operations of an organization’s various departments, all duplicated tasks should be identified and appropriate recommendations made to ensure all employees are in positions where they make the greatest positive impact towards achieving the organization’s strategic goals.

It is important to note that benchmarking cannot be done in isolation. For an organizational structure review exercise to be successful, there is a need to follow the steps outlined below/

Step By Step Guide on Organisational Structure Review

Step 1. Baseline Review of Current Structure

The baseline review should define the critical stakeholders and assess the company’s operations with regards to:

1. Strategy
   1. Main services provided by the organization
   1. Main stakeholders of the company
   1. Legislation (including statutory instruments), policies, and regulators governing the company
   1. Trends affecting the company (revenue, costs, industry factors)

Step 2: Value Chain Analysis

A value chain analysis should be conducted to identify the level of business complexity. Value chain complexity will inform the optimum number of reporting layers an organization should have. The value chain complexity can be determined by assessing the organization against the dimensions explained below:

Table 1: Dimensions for Value Chain Analysis 

Dimension	Explanation
Type of value chain	Assess the activities that the organization performs to deliver a valuable product for the market.
Geographical footprint	The physical presence of the organization i.e. Local, regional, national, international or global
Financial position	The total operating revenue amount
Product portfolio	We assess the organization’s breadth of products and market position
Brand	If its image and reputation are key business drivers
Organizational design	If it has several functional departments, corporate services, and shared services
Governance	The level of focus on quality, safety, cost reduction, control, efficiency, and best practices
Strategic intent	The organization’s focus on value control, value creation, and improving efficiency

Step 3: Determining Role Complexity (Levels of Work)

According to the theory on the level of work complexity, work in organizations occurs in distinctive layers of increasing complexity that can be distinguished from one another. The work required in each layer, called stratum is qualitatively different from work in another layer. The level of work in a stratum, according to Jaques is the “target completion time of the longest task, project or program assigned to that role”.

Link each organizational layer to a specific time-horizon and differentiate by clearly defined work-themes, discretionary capabilities, and varying time-spans for review as shown in figure 1 below. Measure the level of work according to the individual’s time-span of discretion, i.e. the time horizon measured in months or years. The longer this period, the greater the scope and responsibility.

Figure 1: Stratified Systems Theory

Source: Weatherby (2017)

Step 4: Role Profile Analysis

Assess the nature of all jobs within the current organizational structure. Assess the nature of work and how it is divided into roles.  Each role is to be analyzed using a role description profile covering:

• Accountabilities
• Authority Levels
• Role Relationships (Vertical and Horizontal Relationships)
• Knowledge/Skill Requirements

Step 5: Functional Alignment

Functional Alignment is one of the techniques for examining the leanness of a structure. Functional Alignment enables you to quantify a population by its location, functions, and professional classifications. For example, in some organizations, jobs in finance, HR, logistics, engineering, and other generic occupations can be found scattered across a wide range of territorial locations or business units.

Conventional business reporting rarely provides any analysis from this perspective, when such data is exposed for the first time it can reveal a worrying profile of jobs scattered randomly without process logic or functional theme. This can be the key to opportunities for making the organization leaner by realigning the structure so that the same or similar jobs are given more effective managerial cover and perhaps assembled into more robustly designed and effective processes. The ideal proportions are usually thought to be in the region of 70% (Core) and 30% (Support). 

Key Considerations

There are key elements that should be considered when designing the appropriate structure:

1. The organization’s strategy - Assess, what are the strategic imperatives for the client? The starting point for the design of the organization process is typically the identification of the main outputs that the organization intends to deliver (Daft 1998). You should assist the client to subsequently structure the organization in a way that reinforces the strategic imperatives of the organization. For the organization to achieve its strategic goals and objectives, the organization's structure and strategy should be properly configured.

• The organization’s size - In developing the appropriate structure, you should consider the size of the organization and headcount for all departments. In doing so, you should watch for duplication of roles and job redundancy. At this point, you should consider which skills the client should have permanently or casually.

• The organization’s technology - Technology impacts the structure of the organization. Heavily mechanized organizations tend to be more inclined towards increased productivity. However, if management does not properly adjust its structure, this envisaged result may not be achieved (Rabbinz 2012). One of the reasons attributed to low productivity is the organizational structure that remains mechanistic and not compatible with the technology. Management should properly structure the organization to achieve superior performance and higher productivity through the use of available technologies.

• The organization’s operating environment - A critical consideration in structuring the organization is the environment in which the company operates. The environment here refers to not only the physical environment but the political and economic environment as well. The environment also refers to the key stakeholders (shareholders, customers, community, government departments & agencies, etc.) that the business interacts with. The company should be structured in a way that assists in effectively managing relationships with key stakeholders. The structure of the company should also assist in efficiently and effectively adjusting to the changes in the operating environment.

• The organization’s culture - Organizational structure defines how job tasks are formally divided, grouped, and coordinated. Critical to this is the type of culture that management wants to reinforce. The culture of the organization is reflected in the hierarchical relations among members of the organization and is viewed as facilitating interaction and communication for coordination and control of the organization’s activities. Management should be clear about the culture that the structure will support. Assist them in doing so.

Carl Tapi is a Consultant at Industrial Psychology Consultants (Pvt) Ltd, a management and human resources consulting firm. https://www.linkedin.com/in/carl-tapi-45776482/ Phone +263 (242) 481946-48/481950 or cell number +263 772 469 680 or email: carl@ipcconsultants.com  or visit our website at www.ipcconsultants.com