The Hindu Business Line : Functional structure, core to hi-growth organisations

Having studied the design of hundreds of organisations and facilitated many redesign efforts, I am convinced that preserving the foundation of a sound functional structure is crucial for a high growth organisation. While these organisations may overla y other structural forms such as matrix, process, division, team, network and project over their functional structures, they should not replace them.

Organisation structure is about managing complexity

In designing an organisation and choosing a structural form, leaders are influenced by input factors on the one side and output factors on the other side. The input factors include the functional skills, expertise and technologies required to build the business and deliver great products and services.

In the early days, leaders built organisations along these input dimensions through some form of a functional structure.

As the business becomes more complex, organisations are required to pay far greater attention to a wide variety of output factors. They may see the need for dedicated attention to each of their business lines or dedicated resources and leadership in their chosen geographies. They may realise that different customer groups or verticals demand special attention and dedicated focus and that some of their large customers demand a dedicated structure to address their special needs.

As a result of these pulls and pressures, leaders start to tinker with their original functional structures and put in place divisional structures, business verticals, dedicated units for customers, geographical territory structures and so on.

What goes wrong in structural changes?

While it is necessary for leaders to respond to environmental demands by making their structures a lot more flexible and aligned, the biggest price that they pay is in the gradual compromise and neglect of the input factors which, in many ways, forms the foundation of the organisation.

Let me give you an example. A manufacturing organisation started with a single product for one segment of the auto industry. At this stage, it was a simple functional structure with functional heads to manage sales, production, engineering, maintenance, materials, quality, design, and, so on.

As the business grew, the organisation started adding new product lines. Some of their customers also became strategic partners demanding special and dedicated attention.

In the interest of focus and clear accountability, the organisation set up new units for the new product lines and carved out a dedicated unit for each of their key customers.

While the business grew, problems cropped up. The business heads of these discrete units who were measured by revenue and profitability focused entirely on getting work done and delivering the quarterly results. When they needed talent, they adopted an exigency approach and hired from outside. When experienced resources left, they were often replaced by junior resources in the interest of containing costs. Soon, the divisions were bereft of any depth of functional skills and expertise and as a result their ability to solve problems and achieve scale was inhibited.

The functional heads within the SBUs were helpless because they were governed more by business goals and less by their functional goals. The organisation as a whole found itself out of depth in being able to solve the emerging complex functional problems because it had failed to build the necessary functional expertise and leadership over these years.

Why global giants preserve their functional structures

Look closely at any of the global corporations and you will find that at their heart is a very strong functional organisation. In fact, global organisations are so obsessed with respecting functional discipline and expertise that they have functional verticals that are aligned globally, cutting across geographical and business division boundaries.

These organisations have recognised that building functional depth and deep expertise is a great source of competitive advantage as the organisation becomes large and goes global.

These organisations have also learnt to respect their functional leaders as much as they respect their business leaders. There are lessons to learn from them.

Building functional depth in a complex global environment

Business leaders can rely on many innovative solutions to preserve functional depth and expertise even as they overlay other structural forms over their original functional structure in response to growing business complexities. Here are a few ideas:

Centre of excellence

Many technology companies have successfully leveraged the centre of excellence concept to build functional depth. While they might have multiple businesses and geographies, they make all or some of them a centre of excellence for a specific skill, competence, technology or practice. This way, the dual focus is emphasised and the expertise is preserved.

Functional cadres

Many organisations have used functional cadres to build and preserve functional expertise. Take the example of our Civil Services or our Special Protection Group. These special cadres have served the purpose of creating expertise that no individual state will be able to replicate. Many global organisations are building these cadres by locating them close to supply sources (read India) and offering them to solve problems across the globe. Building these cadres calls for centralised hiring, training, allocation, rotation, on-going development, rewards management and so on.

Horizontals

IT service companies have quite successfully leveraged horizontals to build and preserve specialisation even as they have had to organise themselves around industry verticals. While each vertical focuses on a certain industry group, the horizontals focus on building precious and hard to replicate functional/ specialist capabilities that can be deployed across the verticals.

The functional organisation has long been criticised for creating silos, overspecialisation, fiefdoms and control from the top. While some of this might be true, the solution is not to kill it. The solution is to harness its power through new strategies. In attempting to build a responsive structure, we should not kill the goose that lays the golden egg — the functional structure!

(The writer is the founder and CEO of totus consulting, a strategic HR consulting firm. He is also the co-founder of the Executive & Business Coaching Foundation India Ltd. He can be reached at ganesh@totusconsulting.com)

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