The operating model and organization design strengths and weaknesses

Co-authored with?Dr. Johanna Anzengruber

This is article 3 of 6 in the Organization Capability series. The first article,?Organization capability: The missing piece connecting organization design and the operating model, introduced the series. The second article, Resolving confusion about organization design, the operating model, and organization capability defined the three domains.

Operating model strengths and weaknesses

The operating model defines the framework and components that an organization uses to operate and deliver value. The operating model defines, at a high level, conceptually how an organization’s resources, processes and activities are organized, coordinated and aligned to execute the strategy.

Strengths

A well-defined operating model

• Provides a set of guiding principles – design criteria – for the organization design and organizational capability, so we know what we’re supposed to be aiming for.
• Provides a clear statement of the core activities that are essential for successful strategy execution.

Weaknesses

Because the operating model focuses on higher-level design criteria

• There are few to no details on how it is supposed to work in practice.
• It is more focused on storytelling than resolving conflicts that arise from the organization design (e.g. centralized versus decentralized decision making) and conflicting business priorities (e.g. faster, better, cheaper).

Many of the weaknesses of the operating model are left to be addressed by the organization design.

Organization design strengths and weaknesses

The organization design addresses how the organization is structured, including roles, responsibilities reporting lines, and other formal relationships. It establishes the hierarchy, division of labor, and coordination mechanisms, including lateral-integrating structures (functions; teams) and processes.

Strengths

The organization design directly addresses the challenges of designing a complex system with competing priorities and lots of moving parts, including:

• Potential conflicts in decision making, via the organizational chart and matrix reporting relationships.
• Tensions between business processes and rewards: what can be more easily measured and people can be held accountable for, versus what’s important but much harder to measure and respond to in a timely fashion.

The organization design directly addresses the first shortcoming of the operating model, providing many of the missing details on how the operating model is supposed to work in practice. Included are the rules determining who makes what kinds of decisions (decision rights), and how to reward people. On the flip side, upfront organization designs lack many of the critical details on how those structures, decision making rules, and rewards are supposed to work in practice in harmony, so that the whole is greater than the sum of its parts.

Weaknesses

• All the main design decisions have to be made up front so there is clarity in who is responsible for what, and how conflicts are supposed to be resolved. This all has to be specified before the work starts and we learn the strengths and weaknesses of the organization design. Conflicts that arise in the operating model can be easier to address quickly than conflicts in the organization design, since the former is more conceptual and high-level, while the latter is more structural and based much more on defined rules, roles and responsibilities.
• Processes cannot be perfectly designed ahead of time, and have to be ironed out and optimized while the work is taking place. In practice, processes need to be an intricate part of each of the three pieces: operating model, organization design, and organization capability. Which means process design, piloting, rollout, scaling, and optimizing are related to all three. Yet process maturity only happens over time, and can never be accurately predicted in terms of all the twists, turns and unexpected challenges. Which is why processes cannot be perfected at the initial organization design stage.
• Rewards can be designed in principle, but there are big limits on how to use formal rewards systems to encourage and enable the desired behaviors at the individual level, team level, business process level, and enterprise-wide. The formal rewards have to be coupled with informal rewards, culture, leadership behaviors, etc. to create a cohesive system that reinforces the design criteria of the operating model and organization design.
• There rarely are good real-time measurements or KPIs for most of what we want to know about individual behaviors and how they contribute to team and business unit performance. Only after the fact can we sometimes tell if work was done the right way for the right reasons. This is a version of the classic economics or game theory principal-agent problem: the organization (or leader) needs the staff to behave in certain ways but cannot just compel them to do so. No amount of before-the-fact engineering of the organization design can solve these challenges or make them go away. They ?have to be addressed in real time, or after the fact, which makes alignment quite difficult.

Next article: Challenges of system design and optimization

For more details and a deeper dive into this topic, please join us for the workshop?Optimizing Capability to Drive Business Performance?in Chicago November 7-9, 2023.