Organizational Design: An Ultimate Guide

Our world is in constant change. Industry reinvention, a tough labor market, inflation, and other challenges have impacted every company. Businesses are struggling to hire and retain talent, up skill employees, and combat burnout. Customers and employees demand more from companies that need to adapt to new products and services quickly. 

Today's organization looks nothing like yesterday's. A key challenge for Human Resources (HR) Leaders and Executive Teams is how to structure our company to be more adaptable, efficient, and capable of growth. And this is where organizational design comes in. This guide will provide comprehensive details on organizational design and its best practices.

What is Organizational Design?

Organizational design is the process of optimizing a company’s structure and processes to achieve its goals. It involves identifying the organization's goals, analyzing its current structure and procedures, and designing a new structure and processes that will enable the organization to achieve its objectives. 

Organizational design, or redesign, is an ongoing process, as organizations must continually adapt to changes in their environment.

The Importance of Organizational Design

Effective organizational design is crucial for ensuring the competitiveness and adaptability of companies. It comes with numerous benefits, such as:

• Increased efficiency
• A quicker and more effective decision-making process
• Enhanced quality of products and services
• Higher profits
• Improving customer relations
• Safer working conditions ensured
• A healthier and more motivated workforce
• Greater preparedness for future challenges

The Josh Bersin Company's 2022 report reveals that organizations with highly mature organizational designs are 30 times more likely to adapt to changes, 5.3 times more likely to be a great workplace, and 2.3 times more likely to exceed financial targets. 

However, only 11% of organizations have reached high maturity in organizational design. Over the past years since the pandemic happened, the world has radically changed in the ways we work and how we run businesses. Yet, surprisingly, over 70% of companies have operated under their current organizational structure.

An inefficient organizational design could cause companies to suffer serious issues, including:

• Irresponsible headcount growth
• Inability to meet business objectives
• Failure to sustain the business
• Higher staff turnover
• Poor organizational health
• Overspending
• Inconsistent quality of work
• Reputational damage

It’s important to understand that even if an organizational design was established successfully in the past, that doesn't mean it'll always work. A heads up: frequently monitor the progress to avoid ineffective organizational design.

What Triggers Organizational Design?

Various scenarios may trigger organizational design or redesign. Here are three common situations where it may require more attention.

• External and internal changes in the business environment

Changes like new direct rivals entering the market or macroeconomic conditions can lead to the need for organizational redesign. While some changes may be thrilling, others can be concerning. Regardless, it's crucial to respond appropriately and adapt to the new circumstances. This will likely involve making adjustments to your usual operational practices. 

• The launch of a new strategy

As the business landscape evolves, companies are constantly reevaluating their strategies and adapting to new trends. Businesses may need to restructure their organization and set new targets to stay ahead of the curve, which will help them position themselves for long-term success.

• The need to improve operational efficiency

It’s crucial for Executive Teams to regularly evaluate the company’s operational efficiency and redesign the organizational structure as needed. This entails carefully identifying and eliminating unnecessary roles, ensuring that the employees are performing their best, and keeping the headcount spend in line with the expected figures. By doing so, businesses can strive towards optimizing profitability.

5 Organizational Design Principles

Once you start your organizational design process, consider these five principles to achieve success.

1. Use data to your advantage

Data is king! Data visualization is beneficial for understanding complex organizational structures and headcount distributions. Having an interactive org chart as a visual representation of who reports to whom makes it much easier to identify patterns and areas for improvement in your organizational design. Lucky for us, the workforce planning sector is growing, and there is excellent software in the market that could help your process.

2. There is no “one size fits all”

Many business leaders find comfort in benchmarking, as it ensures that they follow industry standards and avoid major missteps. However, mindlessly copying others' success is not a sustainable approach to business organizational design. 

3. Start with a clearly-defined strategy

To ensure your business is successful, you need to develop a specific strategy that forces leaders to make clear decisions and trade-offs, including those related to resource allocation and competitive differentiation. This may require saying 'no' to certain things that don't align with your strategy and organizational design, which can lead to disagreements. However, by making these trade-offs upfront, you'll avoid potential roadblocks down the line.

4. The answer is within your team

Don't look to big consulting firms or analysts for the answers when solving your organizational design challenges. The intelligence and experience needed to create the perfect design already exist within your team. 

Keep in mind that there are always multiple solutions to any problem, and the best option for your business will depend on your overall strategy. Yet, there are still reasons to seek outside help. Experts can provide a rigorous methodology, an understanding of organizational psychology and behavioral science, and an independent voice to guide your decision-making. Additionally, they can help manage the emotional and cultural challenges that often come with change.

5. Organizational fit and integrity matter

Organizational design cannot simply be approached as a task to be completed. It needs a conscious effort to ensure that the process is conducted ethically and aligns with the values and norms of the company culture. While it can be challenging, leaders must take charge of this process and make the ultimate decisions in the business's best interest.

Organizational Design Best Practices

Organization design is a complex and extensive process that executive teams usually oversee. However, companies have found that involving all levels of employees in a collaborative approach is necessary for long-term effectiveness. 

If you have the opportunity to shape the Organization Design process, what steps should you take?

1. Evaluate the impact

First, you would want to consider the impact of a change in your organizational design. Here are a few factors to take into consideration:

• Strategy: A hierarchical structure might not be the best fit if your company’s strategy is innovation-centric. On the other hand, a rigid structure would not be suitable if you focus on low-cost, high-volume delivery.
• Size: Creating too many specialized teams could potentially harm a small organization. However, specialization can lead to economies of scale in a larger company. As your business grows, you will need to adjust your organizational design accordingly.
• Environment: Businesses need to be flexible and react quickly in an unpredictable or volatile market environment. Yet, a hierarchical structure can still be valuable to protect against turbulence and ensure accurate and timely performance of key functions, such as compliance and financial accounting.
• Technology: In today's world, technology plays a crucial role in enabling decision-making, as well as the design of organizations. When a company has well-functioning systems that enable data-based decision-making, the organizational structure and design will likely differ from those where data is stored in unorganized Excel sheets.
• Incentives: It is essential to adjust your incentives to accommodate a new organizational design. For instance, if you plan to expand your customer base through acquisition, your sales team may need to be incentivized differently to ensure they are aligned with the rest of the company. Failure to do so could result in a lack of coordination between teams.

2. Develop a collaborative action plan

After taking into account all relevant factors, you'll probably have an appropriate structure in mind. The next step is to ensure you've chosen the best options and create an action plan to implement the new design. Make sure it meets the needs of both the organization and its employees.

3. Ensure effective communication and offer support

Clear and effective communication and fair performance management approaches are essential when it comes to organizational design. 

Once you have an ideal design, create a clear plan that outlines how it will function within your company. This should include specific roles and responsibilities and a detailed explanation of how your new systems and processes will operate. 

Finally, organize your employees to adhere to this new design, which may involve personnel and working location changes. Ensure that everyone's practical needs are met so that they can perform their roles effectively. 

Conclusion

Organizational design is essential for any business that wants to adapt to changes, stay competitive, and achieve its goals. In this guide, we have explored the importance of organizational design, the triggers that may require redesign, and the five principles of organizational design. We have also discussed the best practices for organizational design, evaluate its impact, develop a collaborative action plan, and ensured effective communication and support.

Book a demo call with us and start building the org design process you’ve always dreamed of!