The 2007-08 financial crisis taught the world that we have not yet mastered risk. In fact we never will; that's why it's called risk. The crisis also illustrated over and over that if people can profit by taking outsized risks at someone else's expense, they will. This should remind us that the benefits of giving employees wide decision-making latitude and strong incentives must be balanced against the risks of decisions that undermine the organization's objectives or even its very existence.
My own research (Frank and Obloj, Strategic Management Journal, forthcoming) shows that this risk may be highest in those firms that rely on high-valued human capital. Organizations must think carefully about who is allowed to decide what, how they will be rewarded, and what checks and balances are needed. These are all essential elements of organization design.
Since 1997, large firms (over 1,000 employees) have accounted for an ever-growing share of total US employment, especially in the services sector. With size comes increasing complexity: greater range of markets, more activities that need to be coordinated, and more difficulty figuring why the organization is performing well or poorly. As the firm grows, the organization design must evolve to deal with this increased complexity.
Worldwide merger volume in the second quarter of 2013 was half a trillion dollars, with 40% of that in the US alone. While merger activity is highly cyclical and is well off pre-crisis peaks, the overall trend is up and we can expect it to accelerate as economic conditions improve.
Yet one consulting firm estimates that 70 percent of mergers fail to increase shareholder value. This may be due to the fact that mergers often bring together two organizations with distinctly different designs and cultures, and harmonizing these is a serious challenge. This may be one reason why companies typically experience high turnover after a merger.
Careful attention to the organization design can help ensure that mergers achieve their intended results, and may even flag mergers in the future that have a good chance of failing due to fundamental organizational incompatibility.
Research shows that average CEO tenure has declined by a full year since 1992 and that performance-related dismissals are more likely today than in the past. In other words, CEOs have less time to put their organization together and produce results. They rarely get a second chance. New CEOs need to quickly make sense out of an organization and decide what changes, if any, are needed. Successful CEOs know the right questions to ask.
We all know that technology has been changing the way we work for many years. As the cost of information falls, the volume of information increases exponentially. This creates a whole host of problems that the organization design needs to address. How do we prioritize our information sources? Who should have access to privileged information? Should we adopt a more consultative decision making process? Should we adopt a flatter structure with more empowered employees? What are the offsetting risks (see Key Trend #1)? Are certain employees or business units hoarding information in order to increase their power and influence? The answers to these questions will indicate whether an organizational redesign is appropriate.