Aligning Corporate Organisational Design to Company Culture & Markets (Part I)

In the immortal words of Monty Python, "And now (as promised in our last blog post) for something completely different."

When was your organization last restructured, and what type of structure did you adopt, such as matrix, global, glocal, central, de-central or regional? Furthermore, how does the current organizational structure complement the previous one, if at all?

When working in business divisions or regions, how do you evaluate the performance of those in headquarters? If you are in headquarters, from your perspective - do you believe the regions and divisions perform well? Should each region or division have its own Finance, R&D, HR, Procurement, sales, and Real Estate departments, or should they be centralized and accessed when necessary?

Lastly, who has ownership over customer relationships? Is it the country, business unit, division, corporate, region or sales as a function? As a former Chief Procurement Officer, it was easy to identify companies that had not done their organizational design homework, as too many regional, country, corporate or function representatives would be present at meetings - what a waste of good resources.

This mini-series on organizational design will examine the following three dimensions: Corporate Headquarters design (Part 1), Functional design (using Procurement as an example) (Part 2), and Roles & Responsibilities, Competencies and Job Design (Part 3).

Enjoy!

Part 1: Designing Corporate Headquarters - Once and for All

Numerous management and strategy books, as well as academic articles, have been published on the subject of designing companies effectively, many of which offer valuable insights. The significance of this topic is underscored by frequent large-scale reorganizations and downsizing efforts pursued by management teams seeking to establish an optimal structure for enhancing competitiveness. Recently, companies such as Coca-Cola, Siemens, ABB, Honeywell, Kraft, GE, and BASF have undergone changes in their centre- versus business- or region-led structures.

In this article, we will concentrate on one specific aspect of organizational design, namely the Corporate Headquarters (CHQ). CHQs are typically a crucial element of any reorganization and often act as the hub for organisational change. Our argument is that the need for subsequent reorganisation can be minimised by getting the CHQ design right, which involves determining the internal and external relationships, roles and responsibilities, and other factors.

Background (with an excursion into academia)

In general, achieving the optimal allocation of tasks between Corporate Headquarters (CHQ) and country subsidiaries, divisional or functional structures can be challenging. This requires balancing global efficiency and dynamic arbitrage with the flexibility to adapt to local market demands. Several studies have offered specific recommendations on CHQ design, which aim to strike a balance between centralization and decentralization. These studies highlight how the relationship between CHQ and its subsidiaries depends on the company's international strategy and the underlying nature of resources that contribute to its competitive advantage.

Moreover, many of these studies suggest that certain functions, such as general management, legal, financial reporting and control, treasury, and taxation, are better suited for a headquarter. However, determining the appropriate placement for the remaining "discretionary functions," i.e., all operational functions, is not as straightforward.

Once the design stage is complete, transitioning to the execution phase requires sensitivity and discipline from company leaders. Sensitivity is required towards individuals who have performed admirably in the current set-up. At the same time, discipline is necessary to maintain course and not succumb to individual or sub-group pressures during the change process.

Implementing a significant change in the CHQ model also necessitates rediscovering the governance structure. Additionally, it is not uncommon for 10-20% of the company's leadership to resist change, which presents an opportunity to refresh the competence level of the organization. Part 3 of this mini-series will delve deeper into this topic.

Companies emerge more successfully from a company redesign when they:

1. Clearly state the to-be situation (EBIT improvement by X%; gain market share by X%, improve growth by, improve productivity by x%)

2. Do their homework about understanding the status quo of the current state 

3. Align their organisational design with their culture/purpose

4. Create a "pure play" design focused on customers/markets/products without giving in to any political manoeuvring by the different organisational dimensions.

5. Implement the design, including roles & responsibilities/accountabilities of every organisational dimension (business, function, country) down to the individual contributor level and finally,

6. Put guardrails in place to ensure that the new governance set-up is adhered to, and create a bi-annual review process on the board level to agree on needed adjustments.

CHQ design is no cookie-cutting exercise

The study “The Size, Structure, and Performance of Corporate Headquarters” by D. J. Collis (HBS), D. Young, and M. Goold (both Ashridge Strategic Management Centre, London, UK) from 2003 (building on more analysis done going back to the 1990s) is in this context very impressive. The authors analysed over 600 corporations about corporate headquarters design in Europe, the USA, Japan and Chile. When defining the size and responsibilities of corporate headquarters, the following hypotheses were proven in their research. Here is a selection from the over 20 hypotheses the study proved:

1. Larger companies will have proportionately smaller headquarters (measured as a share of total employees) than smaller corporations.

2. The size of corporate headquarters will vary with the industry sector.

3. Firms whose operations have wider geographic scope will have larger corporate headquarters.

4. For a given size and diversity of firms, those with more organisational layers above the businesses will have smaller corporate headquarters.

5. Privately owned companies will have smaller corporate headquarters than publicly quoted companies.

6. Government-owned companies will have larger corporate headquarters.

7. Regulated public companies will have larger corporate headquarters

8. The size of corporate headquarters differs from country to country.

9. The determinants of headquarters size are the same for all countries.

10. Greater profitability will lead to larger headquarters.

Additionally, there is enough evidence from other studies and real-life experience to suggest that changes to the organisational design are needed depending on where a firm is in the corporate lifecycle. You outgrow your organisational “clothing”.

With this knowledge in our back-packs, as usual in this “close the gap” blog, we do not just marvel at the complexity of a topic but as well see whether we can identify a gap and use this as an opportunity to close it.

Let’s start by identifying where your company is on the spectrum of corporate headquarters design and whether a gap reveals itself when you review the statements below.

How many of the below nine statements can you support with a resounding, fact-based "yes" for your company?

1. You do not have long-term significant performance differences inside the organisational dimensions (regions/functions/businesses).

2. Roles & responsibilities of each large organisational dimension are clearly defined and documented for everyone to see.

3. Directions from Corporate Head Quarter are executed swiftly in each operation.

4. The "record-to-report" process runs smoothly, and surprises seldom impact the market's perception.

5. There are only infrequent issues about supply chain, marketing & sales, and service in your businesses/regions. 

6. New acquisitions are integrated in 12-18 months and perform at the same or better levels than before the take-over

7. There is little to no animosity between Head Quarter staff and business / regional head offices.

8. Customers are satisfied with the marketing and selling channels you use. No competitor so far has gained market share due to a changing channel in the last five years.

9. Senior management positions in corporate headquarters are filled with personnel from regions and businesses. There is a regular rotation on lower hierarchy levels.

If you answered „yes“ to most statements, great:  you have your corporate HQ design under control. Congratulations - well done! Do not read any further. Better to focus on other topics.

Size of the prize

A value-enhancing corporate headquarters' strategic design and effective operation have wide-ranging implications for all company areas. The degree of centralization or decentralization can have significant and far-reaching impacts on costs, speed, and revenue. A customer and market-focused approach, with a well-designed value chain that supports the efficient delivery of goods and services, is critical. Determining the potential benefits of a new direction requires a thorough analysis of the current state, including financial data and input from all stakeholders across the corporate ecosystem. Such an analysis is necessary to gain a comprehensive understanding of the organization's perception and identify improvement opportunities.

Now, to the two (plus one) design opportunities and their prizes:

Decentralizing a large corporate headquarter can create an opportunity for 5-10% overall headcount reallocation, shifting 90% of costs and tasks from the centre to regions or businesses. This can optimise former "cost allocations" by up to 50% within 18-24 months.

On the other hand, centralizing resources, either at the corporate, regional or business headquarters level, can have a larger headcount reallocation impact, requiring investments in IT, process and real estate infrastructure. Such an initiative can help to reallocate up to 30% of resource cost locally over a 2-3 year period.

The third form of change is data-driven organizational design, which involves identifying issues with how the organization is run instead of its design. This can be achieved by leveraging software tools to lean out processes, reduce waste, increase control span, and de-layer hierarchies. The result is high transparency, making it easy to comprehend for decision-making. Typically, 10-20% of personnel analyzed, particularly at the management level, can be reallocated to growth opportunities.

Note that employee re-allocation, not reduction, is the paragraph's focus. Evidence suggests that most employees can be successfully moved to other organisational roles. An internal "trade fair of talent" can be included in any reorganization project, with clearly defined swim lanes aligned with worker representation as required. This helps to retain well-educated people with company experience. If overall headcount is uncompetitive in the market, other methods may be necessary, and former employees should be supported to find new gainful employment.

How to set up an organisational alignment project

Time plan: ~18 months (speed is important to maintain momentum)

Board Sponsor:  CEO for the design; CEO and/or CFO for the execution stage. The supervisory board needs to be fully on board as well.

Lead: Experienced Senior Leader with experience in all parts of the organisation

Project set-up: small core team with representatives of all organisational dimensions, the broader team with leaders from all dimensions, who provide design input and oversee the execution of direction in their responsibility. Daily core team meetings, bi-weekly extended team communication meetings, monthly reporting on board level by Project Lead with clear output KPIs (i.e. current state definition, design stages, cost, HC, governance changes, implementation status)

Sustain success: After the change, integrate the core team in the lead dimension (Centralization: HQ; de-centralization: business or region). Governance performance needs to be traceable with metrics and audits. Deviations require swift and relentless action.

Digitalisation/Automation opportunity: Medium (details in project discussions)

Risk: HIGH - the project is "open heart surgery while running" - all aspects, from communication, and change management, to risk management, need to be carefully planned and executed. The daily project meetings ensure quick response time to deal with reality, which is normally not the same as the plan.

Cost: Restructuring costs depend on the size of the change. Return on investment generally in 2 years after the start of the project.

Watch out for

• Continued alignment in the board during the transformation; 

• smart but counterproductive jockeying of board members to maintain the status quo for their entities;

• declaring "victory" after the organisational changes were made but before the new governance processes were embedded in the organisation;

• eliminating organisational memory regarding processes that work well for customers; 

• Over-communicating the change: it should go smoothly, while the customers and most employees should not be involved in the intricacies of the change process - they should focus on the business.

Thank you for making it to this point in the first part of the mini-series about organisational design. Hope you continue reading part II, when we talk about functional design (using procurement as an example).

Stay safe. Be bold.

Daniel

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