Zero-based productivity—Organization: Using zero-based principles to forge a
purpose-built organization
By redirecting resources and employees to
higher-value areas, companies can ensure that organizational structure and
spending align with business strategy.
Single-minded
pursuit of growth and scale can produce impressive
top-line revenues. However, executives can discover that, along the way,
organizational issues—including siloed functions, redundant capabilities across
business units, and gradual mission creep as functions take on added
responsibilities—have impeded greater profitability.
Achieving a successful organizational
transformation is far from an easy feat. According to the McKinsey
Transformation Change survey, just 26 percent of companies accomplish their
performance objectives and can lay the groundwork for sustained results. A
range of barriers, from assuming the current organizational structure as a
starting point to overlooking external spending, can hinder efforts to improve
efficiency and reduce costs. Further, traditional approaches to operations can
miss opportunities to harness technology to boost efficiency.
Zero-basing organizations, which use
zero-based principles as a lens to reshape organizational structure and
operations, can unleash greater productivity. The resulting purpose-built
enterprise ensures that staff and resources are allocated to the highest-value
areas of the business.
Applying
zero-based principles to the organization
A zero-based approach to assessing and
redesigning an organization shares
many of the fundamentals of zero-based budgeting.
However, their application is tailored in four
ways to build the core elements of the new organization from scratch and
capture new opportunities.
Establishing structural visibility and
consistency.
Business-unit leaders aren’t typically
monitoring the growth of other departments or the roles of employees to
identify redundant positions. Companies should focus on gaining visibility into
where resources are allocated throughout the organization, determining staffing
levels, and assessing role definitions. And by establishing governance
processes, companies can monitor variances in staffing over time.
Ensuring comprehensive benchmarking.
By conducting a 360-degree review,
companies can gain insights into multiple dimensions of productivity, including
organizational size and
structure, pay grades, spans and layers,
automation, the mix of activities, and function-specific
productivity factors (such as a shared-services center). Using both internal
and external data sets for benchmarking enables intelligent target setting by
comparing productivity levels within an organization across units on both
efficiency (for example, cost per full-time equivalent) and effectiveness (such
as error rates).
Understanding and exploring linkages to
strategy and capabilities.
A zero-based approach seeks to link
organizational designs to strategic priorities (for example, areas for
investment compared with efficiency optimization) instead of a
“one-size-fits-all” solution across the business. By implementing
organizational designs that, instead of simply evaluating existing talent,
reflect the talent and capabilities required in
the future, zero-based organizations create structures that can evolve as
business priorities change.
Exploring the ‘art of the possible.’
A program featuring zero-based principles
can catalyze transformative idea generation as to how the business is
organized. In addition, companies should create a culture of innovative
solutions that moves beyond boxes on the organizational chart to focus on
changing the way work gets done (often through stretch targets). The result can be a more agile, responsive organization that is better positioned to pursue new
opportunities.
Zero-basing the organization addresses
common transformation hurdles: it uses a cleansheet approach to design, gathers
a solid fact base, and takes a holistic view on costs. By drawing on a
comprehensive set of design levers, companies can embrace an agile, iterative
way of working to identify and address the needed shifts in both behavior and
mind-sets.
Applying
zero-based principles to your organization
Using zero-based principles as a lens to
assess organizational spending and capabilities combines both effectiveness
(What do we expect people to accomplish for the organization?) and efficiency
(How do we create a lean, agile, and responsive organization?). With this
approach, companies can capture significant efficiencies while upgrading
capabilities and increasing value across functions. Moreover, these principles
can ensure that the highest-value roles within the organization are clearly
identified and staffed with the most qualified workers.
Zero-based organization goes far beyond
the incremental improvements of typical performance improvement programs to
create a fit-for-purpose organization (exhibit). This shift often produces a
new operating model, empowers employees, and enables the reallocation of up to
20 to 40 percent of staff spending to other areas. Zero-basing an organization
can be accomplished through a five-step process.
Exhibit in the original
article
1. Create transparency by taking an end-to-end perspective on both staff
and nonstaff costs. Companies can use this transparency to understand overall
budgets, compare their organization with peers’, and highlight opportunities to
apply approaches such
as shared services, process redesign, and automation to reduce costs.
2. Determine a survival minimum, defined as the organizational capacity needed to
keep the lights on for the business. Often, companies convene senior leaders to
gain consensus on the activities vital to operations. Factors such as
regulatory compliance and shareholder commitments should also be considered
during this step.
3. Build a strategic optimum consisting of activities required to support
function-level strategy. This step involves reinstating activities—for example,
investments in company culture or the creation of an analytics center of
excellence—that are deemed critical to pursuing business objectives.
4. Align on design principles to guide organizational decisions—including
structure (the number of spans and layers in management), governance, people,
and technology (such as automation). Using a core set of design principles and
architecture, companies should create templates for specific functions while allowing
organizations to scale up or down based on their needs. A discussion of these
factors often leads companies to redesign the organizational chart to reflect
greater clarity on management and direct reports as well as add a
shared-services function.
5. Stress-test the organization before going live and then develop a
change-management plan. Companies must verify that the new organization
structure can function properly and support business operations. Once these
exercises are conducted, business leaders should be prepared to communicate to
employees how the approach will improve operations—as well as how their actions
tie to the organization’s overarching goals.
One major retailer with more than 1,000
locations, 100,000 employees, and $15 billion in annual revenues sought to
support its organizational transformation by starting from a clean sheet. It
followed a zero-based organization approach in an effort to reduce costs and
increase organizational agility. As a pilot, it sought to develop new operating
models in its HR and marketing functions, with the goal of building the
capabilities to support an enterprise-wide rollout. The retailer relied on
frequent iteration to ensure it could adapt quickly to new information and
analysis.
Initial results were impressive: the
retailer identified opportunities to reduce costs by 30 to 50 percent across
functions and developed practical blueprints to rebuild the HR and marketing
functions. Further, a cleansheet approach to indirect marketing spending
uncovered cost savings of 20 to 30 percent—resources that were reallocated to
higher-value areas within the functions and throughout the organization.
Over time, companies can find themselves
saddled with an organization that is misaligned with its business strategy.
Organic growth and the pursuit of new opportunities can result in a lack of
visibility across departments that hides unnecessary spending. Using zero-based
principles to assess organizational spending can bring much-needed clarity
while directing resources to where they can have the greatest impact.
By Onno Boer, Shaun Callaghan, Mita Sen,
and Alexander Thiel
https://www.mckinsey.com/business-functions/operations/our-insights/zero-based-productivity-organization-using-zero-based-principles-to-forge-a-purpose-built-organization?cid=other-eml-alt-mip-mck-oth-1812&hlkid=08f0900a4840415eb78a86c6cb41d181&hctky=1627601&hdpid=10acb4f8-231f-4260-85b3-d469e0e463cc
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