“Every company has two organizational structures: The formal one is written on the charts; the other is the everyday relationship of the men and women in the organization.” – Howard S Geneen
Last week I opened a discussion focused on demand and resource management. Throughout the conversation, the overriding theme was the management of PEOPLE. It is almost silly to state it, but without people, companies cannot function. People can compensate for the wrong process or wrong technology. Process or technology cannot compensate for having the wrong people in place.
Often, we hear the phrase, “people are our greatest asset.” You will even see it stated as a core value or culture statement on some of the most visible companies’ annual reports and websites. My interpretation of these core values recognizes the essential importance of people to the success of their business based on mutual respect and benefit. It is employees who deliver value to customers and customers who bring profits to the business. Profits, in turn, result in growth and growth returns opportunity to the employees. It is all very circular. On a side note, I don’t believe this business cycle assumes job stability or entitlement. The reality of business cycles and circumstances no longer allow for that promise.
With that, we will continue our discussion about IT people. As much as many of us would like to ignore it, the overall organizational model or structure is fundamental. Organizational structure provides the foundation of how people work and interact with each other. It also provides the foundation for the way work is divided and how the IT resources interact with the business. Despite variations of flavors, there are only three basic structures – centralized, decentralized, and federated.
Let’s get started by providing an overview of the basic structures:
Centralized IT brings all technology decisions, cost, and management into one shared service operation. This structure is favored by some CIO’s as there is the perception of retaining the most control. The promise of a centralized IT organization is reduced costs and risk, as well as increased information visibility and business process consistency across the enterprise. Unfortunately, the benefits are rarely realized. Successful centralized IT Service Delivery is dependent on IT’s ability to respond to the business units and local operations’ needs without sacrificing the benefits of centralized control and prioritization.
Decentralized IT organization is the exact opposite of centralized. You will most often see this structure in large organizations built through acquisition. It was most common in the ‘80s and ‘90s during the height of the merger and acquisitions era. IT operations are allowed to remain intact under businesses operating as wholly owned subsidiaries. Basically, the only central IT function is financial reporting. The promise is a faster time to delivery due to decisions residing locally. This promise drives expenses 40-60% higher due to increased technology costs, labor costs, and decentralized procurement. At the same time, inconsistent functionality impacts integration between business units. There is generally a divisional CIO with a dotted line reporting back to a corporate CIO. Having sat in this divisional CIO seat, I can attest that it is a tough seat to fill.
Federated organizational structure is an approach that allows interoperability and information sharing between semi-autonomous decentralized business units through shared information technology architecture. The intent is to provide the highest level of autonomy to manage complexity and costs, while at the same time allowing agility at the local business units whenever possible. A Federated model has a small core team that manages technologies to be shared by all the business units.
One of the largest issues the CEO has is frustration with CIOs when IT is not in touch with the business. If all IT resources are pulled into a single shared services group in the name of greater cost control, production control, and risk management, they risk losing connection to the business. A federated structure is sought out to preserve the strengths of the centralized models (economy of scale) and the decentralized (flexibility) models. It promises centralized cost and control benefits, but maintains alignment contact through business-relationship managers who make sure that business needs are heard and addressed.
Each organization’s unique business needs will determine what IT functions are centralized and what functions stay within the business unit. In a federated organization, you centralize those things that everybody would agree make sense to centralize – infrastructure, networks, databases, common systems such as email, collaboration, financial, payroll, HR, etc. The things you decentralize are the applications that are directly in support of meeting unique business objectives. Then there’s a whole bunch of stuff that people could debate over whether they make sense to centralize or decentralize, like help desks and application maintenance.
While an organization’s structure is in design, an important parallel activity is to address the IT governance process. In a federated organization, you will also need a federated governance process. Such a process says that IT decisions, such as what projects are done, what projects aren’t done, and how much money is invested in certain projects, are made jointly by IT and the business units.
There is no right or wrong design, nor will one design always be static. Organizations are always evolving. These structures are NOT exclusive to IT nor are they driven by CIO’s decisions alone. The business organizational structure and practices will provide the first clue as to which IT structure will make the most sense. I’ve personally witnessed the chaos created when IT leadership attempts to move a highly decentralized IT organization to a federated model while trying to avoid the challenges of addressing the overall governance model at the business leadership level. It just doesn’t work.
This was just a high–level view of the basic structures. Please feel free to contact me if I left questions in your mind.
From here we will weave our way through the back alleys of recruiting, sourcing, team building, performance management, and where ever else our interests might take us. I am really looking forward to our conversations about these topics and more! This is about you. Not about me. So please – talk to me!
Until next time, have an effective week!
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