Complexity and Organizational Design

I’m staying with the theme of Organizational Design of my last few posts related to strategy frameworks. The issue of complexity is an important one in organizational design considerations. Often one of the goals of an organizational design project is to “simplify” structures and process so that people can do their jobs more effectively. But you can’t just eliminate all complexity and oversimplify everything. Complexity is a fact of life, and often the better question to ask is how it can be managed most effectively.

The framework below, based on a McKinsey Quarterly article (link), describes some of these trade-offs. It distinguishes between:

• Institutional complexity, which is driven by the number of links to and interfaces with others within and outside the organization. The degree of institutional complexity is largely influenced by strategic choices and the external (e.g. regulatory) environment.
• Individual complexity, which describes the way managers and employees perceived their jobs, whether or not they have a limited and easy, or extensive and complicated set of tasks to accomplish. The degree of individual complexity is driven by organizational and operational choices.

The two types of complexity are closely linked, and there is usually a significant trade-off. Companies tend to focus a lot of institutional complexity, but designing a simple org chart may result in employees jobs becoming more complex, as they have to deal with more interfaces.

To use an analogy: An airport is a system with low institutional complexity (only a few runways to use), but high degrees of individual complexity, since many critical decisions are concentrated in the hands of a few expert air traffic controllers. A road system is the opposite: High institutional complexity, with many roads and many different ways to get from A to B. But low individual complexity, with fairly simple decisions being made by a large, distributed group of drivers.

Key influencing factors:

Strategic choices:

• Number of products and services
• Number of geographies covered
• Sources of competitive differentiation

External context:

• Regulatory environment
• Intensity of competition
• Speed of competitive evolution and market changes

Organizational choices:

• Structural design
• Role definitions
• Process refinement
• Capabilities
• Culture

Operational choices:

• Complexity of the value chain (manufacturing, R&D, etc.)
• Use of technology

The authors of the McKinsey article state that their research highlighted a few factors that are critical to managing individual complexity. Among them were issues like:

• Effective organizational design at the individual level. A company may have a complex matrix structure, but still minimize organizational complexity at the individual level by making sure that activities are not redundant, that targets are clear, etc.
• Well aligned processes. Not surprisingly, processes have a big impact on individual’s job complexity.
• Strong capabilities: Building both basic management skills (functional skills, change management skills, etc.), but also the ability to deal effectively with ambiguity had a strong influence on people’s perceived individual job complexity.