Don Purdon: When old-style structures just won't work, the answer lies in the matrix

Complex organisations require complex structures to make them work effectively.

The challenge in today's fast-moving business environment is to have an organisation structure that can quickly co-ordinate its activities across channels, products, markets and geographies. This requires a structure which co-ordinates multiple inputs to decisions rather than the old-style "single accountability" model. This type of vertical and lateral structure is called a matrix structure.

Although the knowledge of how to make the matrix structure effective has advanced considerably in the past 20 years, there is still a yawning gap between having this knowledge and putting in place an effective company matrix structure that works.

In my experience there are two main reasons for ineffective matrix structures:

* The choice of structure type does not match the strategy.

* The organisation does NOT have formalised lateral structures which link the vertical structure - the result is that the "matrix" does not work.

Let's examine point one, the strategy-structure fit, before talking about the types of lateral structures a business can put in place to make the matrix work.

It is typical for an organisation to undertake small restructures in an ongoing way, and to undertake a large one periodically - say every five to seven years. When undertaking the large restructure the CEO has five high-level structure choices:

* The functional structure - group people according to skill and expertise (eg, engineering, marketing).

* The geographical structure - group people according to location (eg, Auckland, Wellington).

* The product structure - group people who work on the same product(s) (eg, cars, motorbikes, trucks).

* The market structure - group people by the markets they serve (eg, corporates, medium businesses, small businesses).

* The process structure - group people according to the process or part of the process they work on (eg, demand generation, order fulfilment, billing).

Nine times out of 10 the outcome of the redesign is not one structure type but a combination of structures - a hybrid.

The most common is to a have a functional corporate group of, say, IT, human resources, finance; and then an operational group organised according to one or more of the other types of structure. The choice of this "vertical" structure should match the strategy, and there are now reasonably well-established principles to guide the design of strategy-structure fit.

The CEO will make his structure choices and put in place a layer of reports to himself - in structure terms called level 2. When designing the next level down, level 3, the choice will now be between the same five alternatives, and so on down the levels.

Although the choice of a new structure is often quite emotional, intellectually it is the easy part. The more difficult and vital next step is for the CEO to ensure that the organisation design team puts in place the lateral structures and processes to link these vertical groups. So what are lateral structures?

Lateral structures are processes or teams that cut across the vertical structure to co-ordinate activities. The most common lateral structure is the management or executive team. This team co-ordinates the work of the reports to the CEO.

Let us look at an example. A bank needs to deliver services to various markets - retail, businesses, corporates. In each of these markets the bank needs to co-ordinate the service delivery of products (loans, banking, mortgages); through channels (branches, web, phone, money machines); and across regions (Auckland, Wellington, South Island). Part of its level 2 vertical structure will be based on these market groups - retail, businesses, corporates. So the top team will consist of these three roles, plus the usual functional groups of IT, human resources, finance and possibly some others, such as risk.

In some cases these functional groups may come under one corporate services role. The CEO will also have a products manager reporting to him, and there may also be a channel manager or these roles may be combined into "products and operations". These roles when grouped together will make up the first lateral structure - the executive team.

The CEO may think that because he has the key players linked via an executive team, this will be enough to co-ordinate the company's myriad activities. Or at the least, his managers, all very senior, will have the common sense to put in place the co-ordination mechanisms that are required. This is a mistake. The risk of the CEO's direct reports getting this design wrong are too high for the CEO to ignore.

If lateral structure design is left to the managers the result may be ineffective co-ordination of the required tasks across the vertical structure. Let's look at a few of the co-ordination issues required of this banking matrix.

The bank needs to ensure it co-ordinates development and delivery of services and products, via various channels, into each of its markets. For example, it is developing a new product - a low-interest credit card targeted at retail customers, sold via the branch network, call centre and internet.

This requires co-ordination across the retail market group and the call centre and internet channels. A lateral team should be in place to co-ordinate product development in general across the vertical groups (let's call it the product to market team). It would be chaired by the products group, would include members of the market and channel groups, would have a formal agenda and minutes circulated to an agreed list of staff, and have clear processes for risk management, decision-making and escalation of issues if agreement cannot be reached.

This team would meet regularly and oversee any project team set up to develop a product. In this case the project team would be developing the new credit card. This project team would select members from all relevant areas. That team would use a product development process agreed on by this product to market team. Any changes to that process would need to be signed off by that team.

The product to market team would have an accountability matrix to guide who needs to be involved in what decisions. Escalation to the CEO would occur if there was a deadlock. The performance of team members would be formally included in their performance review process.

Once the new credit card has been designed, built and approved, then it needs to be brought to market. Another lateral structure needs to co-ordinate this. This will need a broader set of members, probably including HR, finance, and, given this is about implementation, some of the more "operational" roles from the vertical groups. Similar formal processes and reporting should guide this team's work.

In addition to putting in place the executive team, these are types of formal lateral structure/processes, among others, the CEO should design.

The takeout is that the organisation structure design process should ensure it designs down past level 2. It must also ensure that it designs the lateral structures to "hard-wire" the matrix and ensure co-ordination of the vertical groups and activities.

Don Purdon is an Auckland management consultant.