Structure Follows Strategy?

Those three simple title words have sparked much debate over many years, as the converse, the idea that strategy follows structure, has been promoted as valid as well. So which is it?

To be sure, the structure of an organization influences the efficiency, effectiveness and agility of its operations. Too many levels to the hierarchy and the good ideas of the folks in the trenches – who can with authority opine on the processes in which they’re engaged – are muffled, if not entirely lost. Too flat an organization, and you have controlled chaos at best, anarchy at worst. (Note that structure is part of the organizational context in which we view processes, a component of “environment”.)

An organization with multiple, highly autonomous functional divisions might have a tough time bringing together multi-discipline project teams for new product launches. On the other hand, an organization that adopts a pure matrix form, where ad hoc teams are assembled for specific projects, might be ill-suited for the demands of highly repetitive processes delivering uniform outputs. The divisionalized structure may have come about as a result of the need to have highly specialized functional units that rarely collaborate (e.g., a property & casualty division, a life and health division, etc.), and best characterizes larger organizations that have, with time, required self-contained divisions to address the unique needs of a certain customer base. The matrix form might come about as a matter of necessity to facilitate growth in a younger, smaller organization, one that is perhaps more focused than its divisionalized counterpart (e.g., personal auto insurance only) and working to create a niche for itself. These cases support the notion that, indeed, structure follows strategy.

But another perspective turns this idea on its head: the notion that strategy follows structure, too, is valid, when you contemplate those organizations that take “inventory” of their available resources and respond by introducing new products or breaking into new markets as a consequence of such availability, and the structure in which they operate. In this instance, strategy follows structure.

So which is correct? What factors influence the “direction” of the title statement?

Process-Centered vs. Process Thinking

There’s naturally a ton of hype surrounding BPM, and I’m proud to be among its staunchest promoters both within my organization and among our clientele. There’s seems to be a disconnect, however, regarding what the implications are for the adoption of BPM, and I think it’s important to draw a distinction here. The greatest pushback against BPM initiatives is the idea that its adoption requires wholesale changes in every aspect of the organization. But change, to be effective, should take place incrementally, with a process-focus being embraced over time as a series of small successes add up to validate the BPM approach. This evolution requires staff to become process thinkers, seeing processes in their organizational context and paying attention to the influences that make or break excellent processes. (Excellent processes being those that are efficient, effective and agile.) (See, for example, my entry, The Big Picture from November 7, 2006.) This is purely an educational endeavor, and the establishment of well-defined and widely communicated organizational goals, uniform process frameworks and aligned compensation creates the foundation for an organization of process thinkers.

A process-centered organization, however, is an entirely different thing. A process-centered organization has organized around processes; that is, processes have primacy in the design of the organization. This means that process owners have much authority, responsibility and accountability for the conduct and output of the processes they supervise. Truly an organizational form, a process-centered organization may not, in fact, be the best choice for organizational design. Other design choices, including organizing around customers (e.g., large corporate customers, individual consumers), geography (e.g., Northeast, Southwest, etc.), functions (e.g., sales, production, research, finance, etc.), products and services (e.g., consumer products, commercial products, etc.), or projects (i.e., a matrix structure) are just as valid as organizing around processes. The choice of organizational design, however, depends heavily on a number of factors, including the industry in which the organization operates, the type (professional, skilled, semi-skilled) and number (small, large, huge) of employees, the age of the organization, the markets it serves, and other factors. To be sure, a process-centered organization will encourage process thinking, however, any one of the other generic organizational designs stands to benefit greatly from a coterie of employees who are process thinkers as well.

The Hard Work of Excellence

If I have one personal mandate, one overarching goal rooted deeply in a personal philosophy, it’s to make this BPM stuff manageable, understandable and accessible to the decision makers – those C-level executives – who are wrestling with how and why to take on a BPM initiative. The average executive who dares delve into the world of business process management is bound to be overwhelmed. The preponderance of professional associations, vendors, consultancies and “standards” is enough to make anyone’s head spin. The poor soul who’s charged with figuring out the best way to attack a BPM initiative in addition to their day job is in for a rude awakening; the tangle of choices is made more exasperating by having to suffer the wrath of all those in the organization who are “experts” at their own work processes and reticent to change anything. Overwhelm. Change resistance. Why bother?

There’s a simple answer: because this stuff works. The benefits are truly astonishing. The success rates, in terms of sheer ROI, have been mind-boggling. But the major reason is that some forward-looking companies are taking the time to learn, to embrace the new, to accept the inevitable change that accompanies any wholesale improvement effort and doing the hard work to achieve. The technologies are there, ready to go, out of the box. The army of consultants available, knowledgeable and able to enable truly superior process environments using modeling tools and simulation environments and process design and execution products that make far easier the job of joining disparate systems, neatly knitting them together to enable an efficient workflow, regardless of the underlying technologies. All that’s missing is an educated audience, a cadre of senior executives ready to take on the new in an effort to remain competitive. And so, friends, it’s my job, and that of my peers, to make available to those good people at the helm who toil daily to manage and motivate, to produce products and capture markets, to increase revenue and decrease costs, a facile means to accomplish just that, to remain competitive, by making this BPM thing accessible, by alleviating the stress and strain of treading through an endless sea of choices.

Faced with the seemingly unending maze of systems and their competing technologies, competing standards, competing professional organizations and competing opinions of those who promote them, the decision-making environment has become more hostile than ever. There is no clear path. There is no right answer. There is, however, light at the end of the tunnel, and there is a strong motive for taking on this challenge, for doing the hard work to remain a competitor.

“We choose to go to the moon not because it’s easy, but because it’s hard.” Those words from JFK some 45 years ago inspired perhaps the single greatest engineering feat of all time. How much more market share do we have to lose to foreign competition before we realize the call of a new generation of leaders – leaders who do the hard work because they choose to, because they have to. Not because it’s easy, but because it’s hard.

The Laws of Process Optimization

Two major ideas should drive process improvement efforts, two ideas that, taken together, form a core philosophy that underlies effective improvement initiatives. As such, they might well be thought of as “Laws” of process optimization, inasmuch as those who accept these as fact – as fundamental principles behind their improvement programs – will enjoy far greater success for their efforts. Conversely, those who ignore them or fail to recognize them as important foundational principles will more often than not fail in their quest for operational excellence.

The First Law of Process Optimization is also commonly known as the first law of ecology; that is, that everything is connected to everything else. This notion has been variously attributed, sometimes to Lenin, other times to Goethe; I’m sure some other folks have grabbed credit as well. But the idea is a strong one and one that is too often overlooked when attacking process improvement efforts. A quick read of some earlier entries in this blog will reveal that I believe wholeheartedly in this concept, and that the very idea is carried throughout the methodology I employ in my process improvement engagements. (See, for example, my entry, The Big Picture from November 7, 2006.)

The next idea, the Second Law of Process Optimization, is a simple engineering tenet: that a collection of local optima do not yield a global optimum. This, of course, is related to the First Law when one considers that the global process environment (e.g., the enterprise) comprises a web of local processes and process environments (e.g., divisions, departments or other business units).

These Laws support the contention that process improvement efforts are best accomplished by taking a top-down approach, where strategic imperatives quantified by specific, measurable, well documented and widely communicated objectives, are the light guiding improvement efforts, and like all roads leading to Rome, all processes lead to the fulfillment of organizational objectives.

The Criticality of Operational Excellence

The line between business and IT continues to blur as new technologies provide increasing support for business users to design, modify and even implement some critical systems. Business operations and technology are deeply interdependent, and an alignment of IT with organizational goals has become the new Holy Grail of business performance enablement.

Business culture has traditionally undervalued operations as an unglamorous necessity. The allure of dealmaking and the excitement of new technology deployment have all but trumped operations as a strategic imperative. Worse, while “continuous process improvement” has been overused to the point of now being a cliché, it’s remarkable how few companies actually practice it.

The design of the organization, as well as workflow optimization, technology selection, key performance indicators, policy development and hiring, training and compensation practices sit squarely in the domain of operations, creating the context in which technology deployments take place (i.e., the domain of the CIO) and real organizational value is built and maintained (i.e., the domain of the CFO). The commoditization of so many products and services has created a new mandate for operational excellence – low cost operations that drive pricing flexibility requires some real attention to internal cost reduction. “In this environment,” writes process improvement guru Michael Hammer, “the only way to grow is to take market share from competitors by running rings around them: by operating at lower costs that can be turned into lower prices and by providing extraordinary levels of quality and service. In other words, the game must now be played on the field of operations.”[1]

You best believe tomorrow's leaders will be those with exemplary operations. Traversing the path to excellence means constant attention to key performance indicators, ever-raising the bar and leaving competitors in the dust.
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[1] Hammer, M. (2004, April). Deep change: How operational Innovation can transform your company. Harvard Business Review.

An Important Idea

When designing (or re-designing) processes, you might find that individuals often insist that their way of performing a set of tasks is the best way. Having systematized their workflow over the course of months or years, you’ll uncover all kinds of process innovations that personalize the workflow to accommodate individual preferences. This is perhaps the biggest single impediment to process improvement initiatives: the idea that an individual’s performance of certain activities related to a process, no matter how evolved, documented or automated, most effectively contributes to the efficiency and effectiveness of the process as a whole. Likewise, the “perfection” of individual processes within an organization does not guarantee the organization as a whole is operating perfectly. Said another way, a set of local optima do not produce a global optimum.

This idea is terribly counterintuitive to the average process participant. Having meticulously tended to the tasks with which they are daily charged, how can an apparent step backwards in the conduct of their workflow contribute positively to the betterment of the organization?

The seemingly intractable integration issues that plague enterprise system deployments are firmly rooted in precisely this notion. Autonomous work units yield incompatible methods and inconsistent data structures that simply do not mesh. Bringing them together is plausible, but only with substantial effort that is made only more distasteful by the compromises (i.e., changes to an individual’s “best” known way of doing things) required to fulfill the larger objectives of the organization.

Real leadership is called for to overcome this quagmire. Only a strong vision, widely communicated and reinforced with the appropriate acknowledgments (e.g., aligned compensation) will bring staff together to work in lock-step, purposefully marching toward the fulfillment of objectives larger than their individual interests.

The Big Picture

To be effective, process improvement efforts must consider processes in their proper organizational context and, as such, consider not just the workflow and systems that typify traditional process audits, but include assessments of the metrics, governance, personnel and environment that impact the process as well. Further, an organization's mission, vision, values and culture can have a profound influence on any change initiative. As such, they, too, should be considered.

The diagram below illustrates this point and is the "logo" for process improvement engagements we undertake at Perr&Knight.

Workflow, or the sequence of activities that yield a particular result within the organization, should be mapped in an effort to deconstruct the process. This initial process analysis seeks to identify excessive handoffs, sources of error, causes of delay and rework and other impediments to efficient process flow.

Systems are an increasingly critical consideration when improving processes. The intensity of information flows and criticality of document management in insurance operations is a big concern. Which systems are currently in place to support the process? How are they supported? Are they integrated? What innovations should you be aware of?

Metrics – those numbers management so diligently monitors to indicate whether the company is on the right track – provide important guidelines for process improvement objectives. An insurance company focused on being a low-cost provider to its customers will have a different take on key metrics than one that is committed to super-servicing theirs. Some will watch the top line – pushing for growth in premiums as a prime objective – while others might emphasize cost savings, operational efficiency and better margins. Those metrics that are given the most weight will have a significant influence on the direction of process improvement initiatives.

Governance also impacts improvement efforts. Many processes suffer inefficiencies due to statutory imperatives. There’s not much you can do about those, and they must, of course, be considered when designing an improvement initiative. Internal policies, however, are often malleable, and as such should be looked at with an open mind to see if any are unnecessarily constraining. Policies, rules and regulations all exert influence on process effectiveness and efficiency.

Personnel functions are also major enablers of excellent processes. Good hiring practices facilitate the identification of process thinkers from any pool of available resources. A thorough, methodical approach to training will ensure a level of uniformity in the way work gets done, and in organizations that embrace continuous process improvement, that uniform way is a best practice. Further, how are employees being compensated or otherwise rewarded for working in a manner consistent with the larger goals of the organization? All good work begins with the quality of the people who are charged with performing it. The quality of those who perform the work is enhanced through good, selective hiring practices, well thought-out, formal training and rewards that are solidly aligned with corporate objectives.

Environment must be considered as well. Internal factors, such as the corporate structure and physical facilities, as well as external factors, including target markets and the economic factors that influence them, will all play a hand in shaping processes. The deliverable from this audit includes basic floor plans and organizational charts and discussions of the facilities, markets and economic factors impacting the process.

Taking a holistic approach to the enterprise greatly increases the efficacy of the program and typically yields in far greater improvement, better departmental integration and enthusiastic support for organizational change initiatives.

Top-Down Design: Process Abstraction

Just what is abstraction and why is it important in process improvement initiatives?

Many improvement efforts fail because the vox populi has too much influence on the design strategy. Organizations are not democratic institutions; for all of the freedoms it affords, democracy is an inefficient means of delivering a specific set of objectives. Imagine if an Army field commander put a vote to the troops in his charge whether they should head over a hill and into enemy fire? Top-down thinking is what compels strategic plans. The abstraction is the common framework that accommodates the majority of cases and should be designed first. Exceptions are dealt with afterwards.

For processes, this abstraction is represented by the familiar "supplier, input, process, output, customer" (SIPOC) diagrams used in Six Sigma initiatives. Any process can be comfortably fit into this abstract model. Beyond that is where the real design challenges begin as you get increasingly granular to accommodate the nuances of each function, department or individual. To alleviate those challenges, start with big picture thinking that brings consensus to the high-level abstract process that accommodates 80% of cases.

Further, always maintain the integrity of the data related to the process, whether it’s customer data, activity-related data, or any other. This means maintaining a central data store from which all functions derive the data that populate various process steps.

The wrong approach is to build from the ground up at a granular level, attempting to address the needs of individuals before defining the abstraction. Top-down process design promotes consistency as a solid foundation is developed to address the vast majority of process cases. Bottom-up design breeds chaos and results in the need for all kinds of "spaghetti code" to integrate independently developed disparate systems.

Baselining Improvement Efforts: PML

Organizations need a standard form of baseline for process improvement efforts. Kevin McCormack has written extensively about process maturity (see his book written with W.C Johnson, Business Process Orientation: Gaining the E-Business Competitive Advantage from St. Lucie Press, 2001). Other models, including SEI’s CMM designations and IPS Associates’ project management maturity model are also excellent tools for assessing organizational excellence in a particular discipline.

Processes, of course, are the core functional components of an organization’s operations. Given that operational excellence is a key competitive differentiator (e.g., Amazon for online order entry, Dell for inventory control, Progressive for insurance claims management, etc.), having a good handle on where your processes stand (“as-is”) is critical for effective improvement efforts necessary to get them to where they should be.

So I propose here a process maturity model of my own, in order to form a more perfect definition of the state of processes – and by axiom the state of operations – in a particular organization. The numbers following each process maturity level (PML) provide a means to quantify the process state, a baseline for process improvement initiatives. The goal of any such initiative is, of course, to elevate the organization to PML5. The maturity levels are:

PML1: Ad hoc. Organizations at PML1 allow staff to undertake key operational processes almost indiscriminately. The value of documented procedures and uniformity in workflow is not understood. (1.0 – 2.0)

PML2: Mapped. Organizations at PML2 have mapped and documented their processes and associated procedures, however, have not established metrics or attempted to respect the interdependencies of cross-functional processes. (2.0 – 4.0)

PML3: Modeled. In addition to complying with PML2 criteria, organizations at PML3 have established base metrics for each activity step in their processes, including average cycle times and error rates, and have created extensive process documentation, business rules and procedural manuals. Organizations at this maturity level understand the benefits of process uniformity. (4.0 – 6.0)

PML4: Integrated. In addition to complying with PML3 criteria, organizations at PML4 have established clearly-defined interactions between and among parallel and serial processes, regardless of function, department or deliverable. In addition, process improvements are undertaken in a holistic manner that respects the entire organization. Organizations at this maturity level effectively manage the “white space” on their organizational charts. (6.0 – 8.0)

PML5: Aligned. In addition to complying with PML4 criteria, organizations at PML5 understand the relationship of their processes to customer satisfaction, strategic success criteria, employees and employee rewards. Organizations at this highest process maturity level enjoy a workforce that works purposefully, in a uniform manner, toward the fulfillment of the organization’s overall objectives. (8.0 – 10.0)

Where does your organization fit in this model?