Alternative Organization Models for the Services Business Ward Roofthooft, Ph.d. Abstract What is the suitable organization model for services firms? The conventional organization with long lines of authority and communication may impede close customer contact. Four alternative models picked up from the literature and management practice are discussed. They are linked to the Four Value Business Model Framework. The Virtual Organization operates from a small core and outsources other business functions. The Boundaryless Organization replaces departments by project teams. The Flower Organiza tion unites functional managers in the “general management” for clarity of communication and maximum com mitment to decisions. The Networked Organization pools the expertise of all the companies in a group. 1. INTRODUCTION “The basic functions of organizations are to provide (1) a route and locus of decision making and coordination and (2) a system of reporting and com munications. Authority and communi cation are typically depicted in the organizational chart”1. “A business model, from our point of view, consists of four interlocking elements that, taken together, create and deliver value. The most important to get right, by far, is the first. Customer value proposition”2. “Value” for the customer is going to be the primary concern in this article. Business structure and organization models only have meaning if they lead to this all-overruling idea: providing customer value. 2. THE CONVENTIONAL ORGANIZATION, MODELLED AFTER THE MILITARY The archetypical organizational chart is the one used by the military. It covers perfectly the description of functions, processes, and responsibilities described above. The military seems to be satisfied with it considering the fact that the same scheme has been in use since Roman times and will probably stay in use for the foreseeable future. Here is a comparison between the ranks in the Roman army, today’s military ranks, and ranks in a conventional business organization: – Legatus / General / CEO – Tribunus / Colonel / Director – Centurion / Captain / Senior Manager – Optio / Lieutenant / Operation Manager – Decanus / Sergeant / Supervisor – Legionair / Soldier / Worker, employee There is little doubt about the clarity of authority in the military organization model. From the four-star general down to the simplest private, everybody seems to know exactly what to do, when to do it, how to do it, whom to ask for permission to do it, and whom to tell if it has been done or not done and why. In 2007 the US military used 542 manuals. Through the “Army’s Doctrine 2015 Initiative” this astronomical number should be reduced to 50 manuals. (Global Security.org n.d.) Surely, that should still be sufficient to tell every person in the service where he or she stands and what to do or not to do. However, will these 50 manuals still © FINANCIAL MANAGEMENT INSTITUTE OF CANADA 2015. ALL RIGHTS RESERVED. offer the necessary legroom for initiative and creativity, both of which have shown to be of the utmost importance in the frequently unexpected situations of military action? Communication should be no problem in the strictly hierarchal military organization. Or is it? On the 7th of December 1941 at Pearl Harbor, the military organization chart appeared to be not as watertight as most military men thought it was, especially not in terms of communication3. . . Nonetheless, many companies, especially large industrial companies have chosen to adopt this model for their organization. But while the military seems to be able to stick to 6 levels of functions, responsibilities, and reporting stations, some companies have seen fit to go as far as 12 or even 15 levels between first line supervisor and company president3. Even when leaving out this kind of aberration, one can ask the question if this age-old form of organization serves the purposes of today’s companies well. Is hierarchal clarity really the most valuable asset of a company that has to confront today’s challenges of globalization and run-away technological revolutions? Is even the largest multinational company a unit in which all ideas are born on the top and all work has to be done at the bottom? Or has JULY 2015 FMI*IGF e-JOURNAL 1 ALTERNATIVE ORGANIZATION MODELS FOR THE SERVICES BUSINESS maybe the conventional organization degraded into “Along this tree, from root to crown, ideas flow up and vetoes dawn” (accredited to a “senior Unilever executive” by Drucker 19743)? If one can rightfully question the wisdom of organizing a large, mostly industrial business the same way as a successful army two millenniums ago, how much more should one be cautious when organizing today’s services businesses! In order to confront the traditional organization model described above with the organizational needs of services companies, let us consider the four most salient differences between a “products” and “services” business as described by several authors1, 4–8. Contrary to products, services are: – Intangible Services cannot be seen, heard, tasted, or smelled, yet a services business can only attract customers by performing its “intangible” services in appealing tangible circumstances e.g. the cozy interior of a restaurant or the comfortable seats on an airplane. – Inseparable Provider and consumer of a service are typically acting simultaneously. Mostly the service will be rendered by a person. It is therefore important to show “the best side” of the provider, e.g. a sympathetic smiling face or tangible proof of the professional capabilities of the service provider. – Variable Each service is a unique happening. “KLM has only ONE customer, 20 million times but each time only ONE”8. And since humans are such a strongly variable item of creation, both the service provider and the consumer of the service will be different each time, even if the same service is rendered hundreds of times over. – Perishable A service not rendered is a service lost… Forever. A room not occupied in a hotel, or a patient not showing up for a surgical procedure are lost forever as an opportunity for generating income. 2 FMI*IGF e-JOURNAL JULY 2015 These important differences have inspired several authors to add 4 more “Ps” to the classical price, product, promotion, and place of McCarthy- Kotler4: – People People are obviously the most important element in the interface between service provider and service receiver. This has caused two switches of emphasis in the marketing process. Firstly, companies have become aware of the high need for “Internal Market ing” i.e. the development of customerconsciousness in ALL employees. In order to achieve this, recruitment, train ing, coaching, management, and leader ship have all acquired new intensity in services businesses. Secondly, “Customer Experience Management” (CEM) i.e. managing each customer experience in such a way as to make it consistent and valuable to the service receiver. Companies use CEM to differentiate their services from those offered by other services providers. – Physical Environment This is another way to highlight the need for proper “tangibles” at the place and time of the delivery of services. – Process One could consider the “process” factor in services tantamount to “product” in the classical “4Ps” model. But there is a real difference; in services, it is not only WHAT the customer receives, as with a product, but also HOW he receives it, as with a service. Nobody is interested in whether or not the girl in the Coca-Cola bottling plant was smiling while she was operating the machine, but all customers are very keen on a friendly smile when another girl is serving the same bottle of CocaCola in a restaurant. – Productivity This calls for “Capacity Management”. In services, a capacity not used is a full loss. Planning the balance between demand and supply is therefore much more important in the services business than in product-related business. Seasonality becomes a primary concern. The arch-examples are airlines and hotels. They have to compose their portfolio of offerings wisely between fixed, predictable business, high season and low season business, individual guests and groups. All marketing efforts will be affected by these considerations, but most of all the price. That is why one can sometimes go on vacation to Rio on a shoestring, but NOT around carnival or during the World Cup football. How can one contemplate to deal successfully with the above described idiosyncrasies of services when the process of conceiving, planning, and executing a service has to be taken into account? How to deal with the adjacent issues of taking responsibility, asking and giving permission, reporting the outcome, and insuring the quality of a service? How to do all that while having to follow the long-winding road of blocks, lines (straight and dotted lines), vertical and horizontal interferences of a conventional organization chart? The most daunting question is whether the conventional organization structure can deal with the specificity of “value” as the cornerstone element in the structure of a services company. In the discussion of the four alterna tive organization models that follow, it will become apparent how they of fer a better chance to realize a “Value Business Model Framework” made of Value Proposition, Value Architecture, Value Network, and Value Finance9. It will also be demonstrated how in each of the four alternative models, one of the “4Ps” of the marketing mix business tool plays a major role in each of the four value structures. 3. ALTERNATIVE ORGANIZATION MODELS 3.1 The Virtual Organization The virtual organization is defined as: “A small, core organization that outsources major business functions”. (Robbins 2001). A services business following this principle of organization sticks to the functions that are absolutely essential to rendering the service. Such a company farms out the “generic” functions that are common to any kind of business such © FINANCIAL MANAGEMENT INSTITUTE OF CANADA 2015. ALL RIGHTS RESERVED. ALTERNATIVE ORGANIZATION MODELS FOR THE SERVICES BUSINESS as gardening, cleaning, security, serving meals, etc. But they can also let go some really important functions as long as they are not absolutely essential to the full control over their core business i.e. rendering the service. Thus, they may entrust a “social secretariat” with personnel administration or a training consultant with the professional devel opment of the Sales Force. Above all they want to avoid imperium building with thousands of employees; taking care of each function a business needs, from the most essential one to the most generic one. They want to “stick to the knitting”10 i.e. the service they sell and which is their very reason for existing. It is clear that in services business, the quality of the one-on-one contact between service provider and service receiver is of paramount importance. All the attention should go to that contact. This is only possible if the company organizes a maximum of flex ibility in all its other functions. The fastest, the surest, and possibly the least expensive way of achieving this is to rely on outside competencies. Recruiting, selecting, hiring, training, controlling, and administering people who are not directly involved in service rendering seems to be an exercise in futility, more so because on the labour market one can find already highly qualified people who can be used only for the time one needs them. In a Virtual Organization, the words of Thomas Jefferson: “Never put off till tomorrow what you can do today” are contradicted by the principle: “Never put off till tomorrow what today someone else can do better and cheaper for you”. The Virtual Organization has some less obvious but by no means less precious advantages for a services business where the “Value Proposition” is indeed of utmost importance. It can be rightfully said that in no other kind of business the “P” of Product (although here of course a service!) is totally in the hands of the person in contact with the customer. Not having to deal with the complications of conventional authority and communication seems to be an absolute prerequisite for the service provider to offer a high level of value, time after time. To illustrate the virtual organization one could playfully explain the logo of KLM as being their organization chart. 1. The little cross on the top is not the president, nor is it a reference to the royal interest in the company. It is the real boss of the company: the customer. Notice: THE customer. Remember that KLM has only ONE customer, more than 20 million times but each time only ONE! 2. The 4 circles are the “front people”: the lady at the check-in counter, the steward or the stewardess. They are Photo courtesy: KLM Royal Dutch Airlines the only real “service people” of (nieuws.klm.com/en/) KLM. They are the ones that make KLM a services business. 3. Under the service people is the line of “supporting people, i.e. all those who directly make the rendering of service possible: pilots, technical maintenance personnel,... theoretically their functions could be farmed out, but in practice it would be difficult and probably more costly than using KLM personnel. 4. “KLM” stands for are all the people who make KLM a business, with or without services. If KLM were a virtual organization all these functions could in theory be farmed out, from the cleaning women up to the president. No passenger would notice in the least a difference in service quality when a cleaning women or the president have been replaced by someone else. But for the sake of continuity, KLM will of course hold on to some key functions such as the post of president. 3.2 The Boundaryless Organization Some companies want to escape completely from the straight jacket of conventional organization. Instead of designing an organization and allocating responsibility, authority, and consequently power to every specific level, such companies seek to define first the task at hand and then worry about how it will be performed. This is a form of organization that seeks to eliminate the chain of command, have limitless spans of control, and replace departments with empowered teams. The Boundaryless Organization is about two concepts: “blurring organi zational boundaries” and “networked computers”. “Blurring organizational boundaries” does away with the conventional organization chart. When an opportunity arises or a problem appears, the company creates a team to address the situation. This happens by allowing the formation of spontaneous alliances among stakeholders throughout the company. © FINANCIAL MANAGEMENT INSTITUTE OF CANADA 2015. ALL RIGHTS RESERVED. “Departments” lose their meaning. No more funnels in which groups of people are more concerned with protecting their power base or extending it to the detriment of other departments. Stakeholders from outside the company can also be drawn into the alliance. Regulators, suppliers, customers, con sultants are welcome to join if they can contribute usefully to the task at hand. In other words, the Boundaryless Organization makes it possible to put on the field the most competent team using competencies from inside and outside of the company. The “networked computers” are necessary because of the need for accurate communication. Even in this radically new organizational landscape, a number of conventional communication channels will still be in function. In addition, there will be a host of new channels that have to be supported by a well-oiled computer network. New lines of communication will emerge between the members of the team, between the teams, between each team JULY 2015 FMI*IGF e-JOURNAL 3 ALTERNATIVE ORGANIZATION MODELS FOR THE SERVICES BUSINESS and whatever higher authority may still be maintained, and finally between the teams and whatever external support they have enlisted in the project. A Boundaryless Organization can be very appealing to many services companies because of the volatile nature of their offerings. Indeed, instead of producing thousands of units of products in a well-organized way, a service is each time a unique occurrence calling for the total involvement of whatever assets of the company are needed. In the services business everything happens NOW and it happens for the first and the last time. A company burdened with the overweight of a conventional structure cannot hope to respond with the speed and flexibility that are required to compete successfully in the services business. A structural worry of any company is that of “Value Architecture”: How are we making sure that our value offering is reaching the target customer, fast, conveniently, and at an acceptable cost? In an industrial firm, that is a matter for the value chain: inbound logistics, operations, outbound logistics, marketing and sales, pre- and postsale service. The goal is to provide a holistic structural design for ensuring a valuable offering to the customer. That puts the “P” of Place at the endpoint of the chain. In a services firm, the “P” of Place is the end AND the beginning of the process. The value of the offering is discharged not only NOW but also HERE. This puts a severe demand on the intangibles surrounding the delivery of the service. If ever there was truth in the saying: “You get only one chance to make a first impression”, it was in providing a service! Here is an example of a successful Boundaryless Organization: Five marketing executives had done so well in their career that they could retire long before the official retirement age. They were all in their early fifties and soon found out that life was boring with nothing really exciting to do. They met by chance at a ski resort in Switzerland. Over “aprèsski” drinks they discovered that they had been working in different 4 FMI*IGF e-JOURNAL JULY 2015 disciplines of marketing. One had been in Marketing Research, one was in Marketing Strategy, one was an expert in Advertising and Promotion, one was a Group Product Director, and one had been a Marketing Planner. Since they had such diverse track records they decided to form a team of Marketing Consultants. They agreed that with whatever assignment that required more than their own expertise they would first turn to each other for help and then to the network of the entire team. They incorporated the team under the name “The Five Aces” (fictional name for the sake of confidentiality). They decided that they would never employ any personnel except themselves and that every normal business function was going to be outsourced. Not surprisingly the expected success did materialize. After all they were top-notch marketers. Here was a “company” of five people. They did not reach the revenue of “The Big Five” consulting companies, but they far out-performed them in profits per employee! As apparent from the example above, with services that require such a high concentration of providerreceiver interplay, something else has to give way. It may not always be possible to go as far in breaking down all barriers, but surely many services businesses would become more flexible and more accomplished by eliminating the “departments” as much as possible. This project was a pure “Value Finance” structure: high quality of service because of the competency of the providers, no overhead costs, and operating costs restricted to “when needed only”. The “P” of Price was what it should be: a perfect harmony between price and value. 3.3 The Flower Organization In his book “Management”, a monument of business literature, Peter Drucker cites two major symptoms for the malfunctioning of an organization. The first and most serious symptom is the multiplication of management levels. The second most serious symptom is the recurrence of organizational problems. “No sooner has a problem supposedly been solved than it comes back again in a new guise”11. Drucker thinks that a company can be successfully organized with a minimum of management levels. Drucker makes his point by leaving the world of business. He cites the Catholic Church which has over one billion members and a history of two millenniums, and all that with only three levels of authority: the pope, the bishop, and the parish priest. He is right. When it comes to the core business (with due respect) of the church: preaching the gospel and administering the sacraments, those are the only functions that matter. All other titles are honorific, task-oriented, or other names signifying one of the two primary functions: prelate (honorific); cardinal (procedural: choosing a pope); archbishop (coordinating the dioceses of the bishops); canon (task oriented: assisting the bishop); abbot (in reality a bishop). Surely, an organization that big, that old, and with such a tumultuous history should deserve some closer study in order to find out what the world of business could learn from it. Drucker stated convincingly that a company could be run with a minimum of levels of authority. Some managers carried this principle over into a practical model of organization. It became known as the “Flower Model”12. Rather than having the highest authority at the top of the organization, this model puts it in the center. All functions are attached to this center like the petals of a flower. The center is called the “General Management Team”. It is composed of all functional heads plus the general manager who is the coach of the team and the ultimate decider in case of deadlock. By far the most important benefit of the Flower Organization is “controlled commitment”. “Commitment” stems from the function heads making all the decisions which they also have to implement. It is also “controlled” because team decisions reduce the risk for “Escalation of Commitment”, a state © FINANCIAL MANAGEMENT INSTITUTE OF CANADA 2015. ALL RIGHTS RESERVED. ALTERNATIVE ORGANIZATION MODELS FOR THE SERVICES BUSINESS Production Marketing IT General Management Finance Personnel Logistics that leads to the stubborn continuation of failed strategies so masterfully described by Barbara W. Tuchman in “The March of Folly”3. A word of warning: The general manager should be aware of the “democracy trap”: When there is disagreement, we will take a vote and the majority wins. Wrong! The majority may be mistaken. It matters to make the right decision and that it may not always be the most popular one. If necessary the general manager will have to resort to old-fashioned: “I do not want yesmen. When I say no, it’s no”. One convincing demonstration of the benefits of the Flower Organization was the return to profitability of a Belgian paper distribution company after losses for 12 consecutive years. The formula allowed the successful mix of managers with a long-term investment in the company and new managers joining the company from very diverse businesses without a shred of experience in this type of organization. It is easy to imagine how well the Flower Organization would fit a services company. Because of the collegial nature of decision-making and the direct responsibility for implementation, there is a high level of coherence which should logically lead to services of the highest quality. There can be little doubt that the customers of such a company would be aware of this coherence and hence experience the services rendered with great satisfaction. Of the four alternative organization models discussed in this article, the Flower Organization responds best to the “Value Architecture” structure-type. Indeed, this model distinguishes itself most radically from the conventional military-style model with its long lines of communication and command. The “P” of Place describes the way from product (or service) concept to the value brought to the customer. Surely the Flower Organization provides the shortest and most reliable way to make this happen. 3.4 The Networked Global Organization Selling services on a global scale is usually a lot simpler than selling products. The permission for starting a services business is, in most countries and for most services, a lot less complicated than the requirements for starting a products business. Compare the process of establishing a law firm (especially when the lawyers are locals) with the registration of a pharmaceutical company. The law firm can start its activities almost immediately. The pharmaceutical company, once approved, may need years to have its products registered by health authorities. Another advantage of services over products is the virtual absence of logistics in the case of services. No shipping, no discussions over FOB (Free On Board) or CIF (Cost, Insurance and Freight) prices, no customs bureaucracy, no worries about warehousing, inventory control, physical distribution, etc. . . All this makes a Networked Global Organization13 a very attractive proposition for a services business. But there is more. Any business operating on a global scale will have to answer this inevitable question: To what extent will this business be run in a centralized or a decentralized mode? A services business can largely escape this dilemma because it can easily operate in both ways simultaneously. Indeed, information, instructions and knowhow can flow from headquarters to the peripheral units and back. That is centralization. However by applying the principle of “subsidiarity”, i.e. lodging every decision at the lowest possible implementation level, it is also a decentralized organization. In addition, © FINANCIAL MANAGEMENT INSTITUTE OF CANADA 2015. ALL RIGHTS RESERVED. peripheral units can be encouraged to communicate and to operate among them, without the necessary intervention or even the blessing of headquarters. This presupposes of course a high level of competence in the peripheral units and a high degree of confidence and trust from headquarters in the ability of the peripheral units. Can this function without derailment when there is so little control from a central point? Yes, it is possible. A company can give a lot of leeway to its peripheral units, but it should stringently stay master over strategy. One way to achieve this is through regular strategic meetings, often called “strategic workshops”14. A workshop is most often organized per continent for reasons of convenience, language, and strategic similarities. A strategy worked out by headquarters on the basis of inputs from the periphery is submitted for discussion and refinement. After an agreement has been achieved, the tasks for implementing the strategy are divided among the participants. There is a right for dissent, but the dissenter will be sentenced to success if he/she wants to keep his/her position. The most important benefit of the strategic workshop formula is the high degree of commitment that comes from the fact that strategy is based on the input of everybody. That, in itself, is already a guarantee for success. The workshop formula also invites a high degree of internal benchmarking. After the strategy has been agreed upon, the various aspects of implementation can be entrusted to the companies most competent in this or that area. This way, all companies enjoy the best implementation at the lowest cost and, if they are just a little bit inquisitive and eager to learn they will pick up a great deal of knowhow from the more competent companies. The workshop formula is for many reasons a good example of a “Value Network” structure. The input of every member of the network is almost a guarantee for quality. Nobody likes to put in a poorly conceived, sloppy idea as his contribution to a workshop. The result should be a well-thought out JULY 2015 FMI*IGF e-JOURNAL 5 ALTERNATIVE ORGANIZATION MODELS FOR THE SERVICES BUSINESS strategy which has the commitment of the whole network since everybody will recognize his contribution to it. Inevitably every contributor will compare his input with that of others. Sound internal benchmarking is therefore a precious by product of a strategy workshop. It also takes the best care of the “P” of Promotion. The lead for the promotion will be entrusted to the member(s) most competent in promotion. That saves cost and it may inspire all members of the network to attain the promotion quality level of the leader(s). 4. HOW TO CHOOSE A BUSINESS STRUCTURE AND ORGANIZATION MODEL? All successful services company, even the gigantic multinationals, started once upon a time as a tiny SME. How did they become successful? Well, they broke out of their old paradigms and put new ones in place. Surely, they did this by working harder but more than anything they did it by working smarter. They did something different, or they did something differently. They applied good old creativity to their business. And in the context of this paper it can be taken for granted that they constantly adapted their structure and organization to new circumstances and to new ways to provide value to their customers. What about the small SME? The terms “small” and “medium” are only acceptable if they refer to the number of employees. They should never mean: small or medium in ambitions, quality, and performance. No SME is too small to be ambitious! “Subsilire in caelum ex angulo licet”, said Seneca (4 BC- 65 AD). (“You can storm the heavens from a small corner.”) But change must be a planned process. Managers are usually quick at unfreezing and moving. What they often forget is “refreezing”, to make the employees not only accept but even embrace the new situation. Choosing the appropriate Business Value Structure commensurate with the company’s Credo, mission, and strategy will be the first step. Once that is done, the most suitable organization model can be put in place. This will often be an alternative model such as the ones described above, rather than the military-type conventional model inherited from the Roman legions. A company which has planned its future this way will be doing the right thing and doing things right. References 1. M. R. Czinkota, I. A. Ronkainen, and M. H. Moffett, “International Business,” pp. 513–536, 1999. 2. M. W. Johnson, C. M. Christensen, and H. Kagermann, “Reinventing Your Business Model,” Harvard Business Review, p. 60, 2008. 3. B. Tuchman, “The March of Folly,” p. 218, 1984. 4. R. A. Kerin, S. W. Hartley, and W. Rudelius, “Marketing,” pp. 296–318, 2011. 5. D. Jobber, “Principles and Practice of Marketing,” pp. 791–832, 2004. 6. P. Kotler et al., Marketing Management. The Millennium Edition. Prentice-Hall Upper Saddle River, NJ, 2000. 7. C. Lamb, J. Hair, and C. McDaniel, “MKTG2,” pp. 160–173, 2008. 8. W. Roofthooft, “Customer equity: a creative tool for SMEs in the services industry,” 2009. 9. M. M. Al-Debei and D. Avison, “Developing a unified framework of the business model concept,” European Journal of Information Systems, vol. 19, no. 3, pp. 359–376, 2010. 10.T. Peter and R. Waterman, “In Search of Excellence,” pp. 292–305, 1982. 11.P. Drucker, “Management: Tasks, Responsibilities, Practices,” pp. 546–547, 1974. 12.W. Roofthooft, “South-South Marketing,” p. 225, 2007. 13.M. R. Czinkota, I. A. Ronkainen, M. H. Moffett, S. Marinova, and M. Marinov, “International Business,” pp. 705–707, 1999. 14.W. Roofthooft, “South-South Marketing,” pp. 303–305, 2007. About the Author Ward Roofthooft, Ph.D. was a former international marketing consultant at L’OREAL and Janssen Pharmaceutica. Since 1989, his own company ERI-X offers consulting to several Fortune 500 companies and UN agencies such as ITC of WTO/UNCTAD, ILO and UNDP. Additionally, he lectures in MBA programmes in Europe, the Americas and Asia and is author and co-author of books and articles on these subjects. Ward Roofthooft can be reached at WR@ eri-x.com. Master of Accounting Fast track to the CPA designation. Full and part-time streams. sprott.carleton.ca/macc 6 FMI*IGF e-JOURNAL JULY 2015 © FINANCIAL MANAGEMENT INSTITUTE OF CANADA 2015. ALL RIGHTS RESERVED.
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