Here’s a sneak preview from this year’s McKinsey Global Digital Survey: organisational structures are now the biggest barrier to digital success, replacing talent shortages at the top of the list of challenges for larger companies. Digital leaders are finding that today’s structures don’t support tomorrow’s business. In my conversations with digital leaders, five issues surface repeatedly:
First, organisational structures tend to favour legacy over emerging channels. The digital channel has to compete for talent, investment & customers with physical stores, call centres and other channels (e.g. agents). Digital channels often deserve the lion’s share of these resources, as they are faster growing and more productive. But physical channels usually have stronger organisational power for historical reasons, so can block the growth of the digital channel.
Second, organisational structures impede delivery of a seamless digital customer experience. P&L units are often aligned by product (e.g., mortgages in banking, motor in insurance, pre-paid in telco), often resulting in a disjointed digital experience. Within each product group, sales and servicing/operations may be in separate structures, creating further challenges. In extreme cases, each P&L unit may have multiple digital channels of its own.
Third, organisational structures don’t drive economies of scale from digital assets. Digital assets (e.g., digital customer authentication processes) are often duplicated across processes or businesses, leading to inefficiency and inconsistency. For example, data often remains ‘trapped’ in product or channel units, making it difficult to create an integrated data set (e.g., unified customer view) that can be utilised by the whole organisation.
Fourth, organisational structures slow down execution. Capabilities that need to collaborate (e.g., IT and marketing), often struggle to work together as they are housed in different organisational groups with poor interfaces. This leads to formalised collaboration that is often time consuming to organise.
Finally, organisational structures constrain strategic agility. Digital enables rapid evolution of the business model, as new products/services and channels (e.g., social media) can be quickly easily integrated, as discussed in my previous post on plug and play business models. But many organisation structures still combine product and channel functions, so there are no clear product or channel interfaces to plug into.
To tackle these issues, leaders are experimenting with a wide set of organisational structures: There are many variants, and no clear ‘winning model’ but some themes are emerging:
1. Separate channel and product organisations. Creating a clear split between channels (digital and physical) and products paves the way for channel integration, and enables new products/channels to be more easily integrated.
2. Integrate channels into a single organisational unit. Creating a single unit to manage all channels (physical and digital) facilitates a seamless cross-channel experience and enables investment to be allocated to channels based on economic returns instead of old power structures.
3. Build digital shared services. Creating (or expanding) a unit to manage digital shared services allows digital assets (e.g., data, algorithms, processes & other capabilities) to be deployed across businesses. This enables a consistent customer experience and delivers economies of scale.
4. Simplify & standardise interfaces between organisational units. Improving clarity over ‘who does what’ and how processes and data move across organisational boundaries reduces bureaucracy and accelerates innovation (e.g., by reducing the time it takes a new product to be plugged into channels).
5. Reduce hierarchy. Delayering the organisation breaks down siloes and enhances collaboration on the front-line. Todays tools (e.g., internal social networks) make it easier to manage with flatter structures.
6. “Disorganise”. Rigid structures are ill-suited to digital business, as they impede collaboration and sharing of data, skills, etc. Structures can be ‘softened’ in various ways including a) tilting incentives towards collaboration b) increasing funding for cross-functional work c) rotating colleagues between organisational units d) moving to professional-services style project-based resourcing models
In summary, today’s organisational structures look increasingly ill-suited to digital business. Tomorrow’s models are still evolving, but structures will likely be less important altogether in future, as firms find more flexible alternatives to formal hierarchy.