Dutch business executives and government administrators are digesting the findings of a recent study addressing how to best organize departments, functions and divisions for the 21st century. The report, “The Emergence of the Multidimensional Organization,” from the Universiteit van Amsterdam’s business school, revealed through field research with 40 Dutch organizations that there is a shift in thinking. Most firms or government agencies traditionally organize around a unit, sometimes a profit center concept, where managers have both authority and accountability for what they can locally control. But is this suboptimal?
Economists have struggled to determine the appropriate organizational structure for implementing business strategy. In the 1970s professor Alfred D. Chandler of the Harvard Business School led the field with research and published articles that explored the three “S’s” of management: strategy, structure and systems. He proposed that organizations should highly value fit-to-market and fit-to-strategy tests. Businesses have constantly shifted organizational (i.e., human) structures to attempt to achieve better performance. Why might a new shift be needed? What role does IT have to enable or accelerate this shift?
The Dutch study observed that overall enterprise performance is improved by defining accountability for sales volume, profit and loss simultaneously over multiple dimensions (e.g., by product, region, account, market segment and industry). This multidimensional concept means that a separate manager is held accountable for each dimension - and with consequences of reward or punishment. (To learn more about incentives, read “Accountability and Incentives for Rewards: How Disconnected Are They?”) However, commensurate multidimensional management information and reporting with multidimensional coordination and control processes is required. A major enabler is the dramatically reduced cost of information storage and the capabilities of business intelligence software with multidimensional data analysis and modeling. Examples cited by the study’s authors are IBM, Tesco and Nokia.
This multidimensional concept is fundamentally different from matrix management with an employee team reporting to two different supervisors. An individual employee may serve three or more functions or processes. An individual in the multidimensional organization will be held accountable for his (specialized) contribution to the common objective (whereas the unit manager is held accountable for the financial bottom line profit of his unit). In practice, what does this mean to pragmatic managers with little time for theory? What are the decision rights and financial budget authority of managers in this new arrangement? How does a performance management framework contribute to put this multidimensional organization into practice?
A primary force influencing this emergence of a multidimensional organization is the increasing amount of required resources outside the boundaries of an individual manager’s control or authority. An example is shared services, especially the increasingly expensive IT function. Another force is that customers themselves are increasingly multidimensional, such as with locations in different countries or different markets. This means that a divisional unit, not a global one, of a larger organization only having a product manager or customer account team accountable for results will be suboptimal. The customer expects to trade with a single organization, not many.
Some characteristics of a multidimensional organization are:
- The customer becomes the central measure for profitability measures - the primary profit center (with politically influenced internal transfer prices and derived profit margins replaced with only transfer costs).
- Transaction data, both internal and external, is centrally recorded and administered yet distributable to managers in any dimension. The transactions, physically or through interoperability, are recorded with multiple attributes according to standards set by corporate policy. These transactions allow for multidimensional financial and non-financial consolidation reporting of performance. Traditionally flawed, broadly averaged cost allocation practices without causal relationships are replaced with activity-based costing principles.
- Market opportunities and resources are flexibly and quickly matched. That is, market opportunities and resource utilization are made corporate issues - visible for all. Resources are opportunistically allocated to optimize customer profits.
How do the various components of a performance management framework enable the shift to a multidimensional organization? An obvious component is the introduction of reliable customer profitability and management reporting with visibility (i.e., transparency) to all dimensional managers of their dimensions’ consumed costs. (To learn more, read “Why Don’t Companies Measure Customer Profitability?”)This also entails applying activity-based costing principles.
Advocates of a strategy map and its companion balanced scorecard (with measures as key performance indicators that are determined by linked cause-and-effect organizational objectives in strategy maps) believe that there may never be a perfect organizational structure. The essence of the balanced scorecard is to focus less on the organizational structure and concentrate on designing a managerial system that aligns an individual’s behavior directly with the executive team’s strategic objectives through cascading and linked KPIs. (To learn more, read “How Is a Balanced Scorecard and Dashboard Different?”) Regardless, the role of strategic and operational measures is essential to driving transformational change - you get what you measure. This is human nature.
The Dutch study implies that reshaping an organization’s social structure with multidimensional principles is emerging as a trend. Implementing a performance management framework most certainly is an essential enabler to make such a vision a reality.
About the Author
Gary Cokins is a strategist for SAS, a market leader in data management, business intelligence and analytical software. He is an internationally recognized expert, speaker and author on advanced cost management and performance improvement systems. He is the author of five books, An ABC Manager's Primer, Activity-Based Cost Management: Making It Work, Activity-Based Cost Management: An Executive's Guide (Wiley), Activity-Based Cost Management in Government and his latest work, Performance Management: Finding the Missing Pieces to Close the Intelligence Gap (Wiley). You can contact him at firstname.lastname@example.org.
This article was originally published in the DM Review, reprinted here with the permission of the author.