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4 Keys To Creating Value By Reducing Fragmentation

Too often companies choose an overly fragmented model, paying the price in terms of lost productivity and unhappy customers

30Jun

Without a doubt, the right organizational design can make the difference to a company’s success. But not all designs are created equal.

In particular, too often companies choose an overly fragmented model - and pay the price in terms of lost productivity and unhappy customers.

It’s not hard to understand why leaders make this mistake. They initially see this extreme fragmentation as a focused approach, drawing useful lines around different functionalities within their organizations, like sales and production. But that results in a number of problems.

First, it creates silos: small divisions within the company in which the power and decision-making abilities flow only vertically, from the top of each silo down, without the ability to easily share with other divisions.

Too often, employees pass work from one silo to the next and overlook any problems or quality issues with the work. When problems are finally identified, they require emergency fixes that drain attention and resources.

In response to these problems, the natural tendency is to double down. Leaders attempt to fragment the company even more, thinking of it as refocusing when they’re really just making the situation worse. It’s a downward spiral to increasing dysfunctionality.

Complexity and Complication

Of course, no one is recommending total anarchy, either. Some flexible partitions and specialization within the company is critical. Look at the distinction between complexity and complication, two features of every large business.

Complexity is the result of the dynamic interactions of the product line and the customers. That complexity increases as product lines diversify, customer bases grow, and the speed of commerce increases. Complexity is the 'what' of your business.

Manufacturing one product seasonally for a small base of loyal customers is not very complex. Manufacturing a large line of products year-round to the widest possible swath of consumers is another story entirely.

Complication, on the other hand, is the interplay of all the components necessary to meet the demands of that complexity. It’s the 'how' of your business - all of the behind-the-scenes decisions, actions, and results that customers can happily ignore.

In today’s world, you can’t avoid a good amount of complexity in large business arenas. But you can take ownership of your complication - and reduce it significantly. Unfortunately, I’ve watched unnecessary complication being ignored 90% of the time.

The Cost of Unnecessary Complication

Here’s an example from a very large multiproduct company I worked with. Its design had five different product lines, each cordoned off from the others. This meant it had several reps for each major retailer, one for each product line, resulting in extreme inefficiency. Retailers didn’t like it because it forced them to interact with multiple points of contact instead of negotiating discounts across all products easily. Understandably, they wanted unification of action.

After I worked with the company on a redesign, those five product lines were replaced with five customer groups, one for each of the company’s big box retailers. This simplified retailer interactions - just one person to deal with (and build a relationship with) for the whole company. But it also kept the manufacturer’s complications out of sight, creating a smooth and highly professional process.

Customer is primary, and product is secondary. When you ignore that guiding principle, overly complicated designs happen.

In fact, that last example was actually a fairly simple case. It gets worse. I’ve seen companies with not just many boundaries, but also what we call 'sub-sub-boundaries.' It’s like a series of Russian nesting dolls, with one division inside another and so on - all because the company organized by function or expertise instead of customer needs.

I once worked with that sort of scenario. A company had a set of call center sales attendants, all working in separate groups. Each day, a customer might talk to a rep who belonged to a different group from the rep who handled his previous call and might be told conflicting information - the ultimate in customer frustration. After consulting on the customers’ needs, we changed things to be customer-centered, finally unlocking coordinated knowledge within each group.

An important concept here is the distinction between 'bounded' and 'entire' work. Bounded work has these little cells, with people working within them, and then all this extra effort is needed to glue the work across boundaries.

That uses up resources as work moves from point A to B to C and beyond. But what happens when a problem arises? Those problems can flow only downstream, and fixing them becomes a nightmare that requires traversing the chain of command through multiple divisions and coordinating among teams that were never designed to interact effectively.

Avoiding Fragmentation

We find the cost in highly fragmented companies to be about 15-25% of the day-to-day cost of doing business. It’s a massive and unnecessary waste, with people throwing their time away in meetings or trying to get work coordinated across the organization rather than doing real work. So how can we avoid all this fragmentation?

1. Go cross-functional.

Organize people around work with cross-functional teams so that they can complete the entire work, not just one small aspect of it. This encourages more accountability and engagement of workers than extreme overspecialization, such as that seen in a traditional single-task assembly-line model.

With Apple products, for example, the company may have a team focused on cameras. Another team has gurus on touch screens or memory. Sure, you need that deep expertise, but ultimately those functional experts have to be brought into some kind of cross-functional team to put it all together. You have to have experts as well as lateral thinkers who can envision a project end-to-end because ultimately we’re building a phone - we’re not selling a collection of phone parts.

2. Demand effective meetings. 

What you hear over and over in these complicated designs is just how much time people spend in meetings doing what we call “glue activities,” trying to patch up the lack of coordination among divisions instead of doing real work. Ask yourself: If my company were organized differently, with less fragmentation, would we require this many meetings? Or could the current number be cut in half?

3. Focus on the customer’s perspective and the value stream.

When planning a redesign, keep the customer experience as the building blocks. It’s too easy to lose sight of this fundamental issue: that we’re not designing around leaders or personalities but around what creates value for customers.

4. Don’t ignore redesign governance.

Excessive fragmentation is a major hindrance to the progress of many large manufacturing companies. Fortunately, emphasizing the need for reducing complication, meeting complexity effectively, and minimizing fragmentation is the first step in removing that hindrance.

By starting with these four steps and keeping a vision of a more unified organization in mind, companies can begin to create a more cohesive operation to the benefit of workers, customers, and revenue across the board.

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