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  • Danny Bearzatto

Avoid management fads and structure your organisation for 'economies of differentiation'

Why 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:

  • What and how: Aims to achieve a delivery focus with organisational units containing the many functions required to deliver to a single domain, which is typically a customer, product, industry or geography

  • Why and why not: Intensified focus on the delivery to the specific domain, e.g. customer. The risk here is that functional areas within the Agile team are subscale resulting in a loss of economies of scale, skill and knowledge


Centralised:

  • What and how: Create sizable specialist units that can exploit economies of scale, skill and knowledge without de-specialisation. Typically achieved by implementing a functional structure with branches such as finance, HR, planning, scheduling, etc. Each branch containing all people required to execute the function across the business. This may be achieved through physical people moves or through a virtual centralisation

  • Why and why not: Focus on functional excellence that reduces the cost of delivery by tapping into economies of scale and improves service through economies of skill and knowledge. Risk is that centralisation creates amorphous operating units that lack specialisation


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.


Historically:

  • In Roman times a military battalion (mantle) was 130-140

  • From 11th to 18th centuries English villages had a village size of 150-160 before new villages organically sprung up

  • Average UK Christmas card network size is 153.5

  • Average wedding guest total was 148 in 2008

More recently:

  • A modern military company is 150

  • Bill Gortex built new factories when employee numbers reached 150 to ensure personal cooperative relationships

  • Modern tribal societies have a mean clan of 153

  • Average number of Facebook friends is 150-200


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.



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:

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

  • Customer Service: Increased customer service due to the depth and breadth of expertise that can be offered.

  • Revenue Opportunities: Revenue can be assured by increasing the value delivered. Additional revenue generation opportunities are created by allowing the provision of new and more specialised services and fewer commodity services.

  • Cost Reduction: Costs can be further lowered as this knowledge can facilitate process automation, continuous improvement and adoption of internal best practice.

  • Customer Onboarding: For outsourced services businesses this can enable easier new customer or contract onboarding/mobilisations as there is a readily available collective of people who know how to deliver the service intimately. What is required is additional people to grow the team within the existing and well-established ways of working – rather than creating a new team.

 

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.

 


In Conclusion


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.


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.


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