Tag Archives: N. Dean Meyer

Costs, Managing Expectations, and Value Delivered

A guest blog with N. Dean Meyer, author of Internal Market Economics, as well as six other books on organizational design. He’s a consultant, speaker, and executive coach on how to implement the business-within-a-business paradigm

Tackling budget problems with internal market economics

You don’t need to promise the impossible, like “do more with less.”

You don’t need to accept customer expectations far beyond what your resources can deliver.

You don’t need to live with a lack of executive perception of the value you deliver.

You don’t need to tolerate vague accusations that you cost too much, or unfair comparisons to outsourcing or benchmarks.

You don’t need to engender mistrust for lack of cost transparency.

You don’t need to get dragged into political debates over cost allocations.

You don’t need to hold your breath and pray for year-end money to fund critical infrastructure and innovation investments.

And you don’t need to design bureaucratic chargebacks or complex governance processes to solve these problems.

All these challenges are created by traditional financial processes. As the old paradigm goes, you get a budget to cover your costs. You’re expected to manage your own resources, perhaps with input from your internal business clients on priorities. Meanwhile, to your clients, everything appears free. And when price is zero, what happens to demand? Basic economics tells you this cannot work.

The solution is found in thinking of your job, and your budget, in a different way….

Consider your organization as a business within a business. Its purpose is to serve customers – be they within your immediate organization, elsewhere in the enterprise, or external customers – with your products and services.

From this perspective, there’s a science that explains how to solve your resource-governance challenges: economics. With or without money actually changing hands (chargebacks), the application of market economics inside organizations has profound impacts on the way you handle your budget.

Think of this: As a business, nobody gives you money to pay your costs. People give you money to buy your products and services.

So think of your budget as an escrow – money put on deposit with you at the beginning of the year to pay for your products and services throughout the year.

A common real-life example is your mortgage escrow. You pay money into escrow each month. Then, when you get an invoice for property tax or homeowners insurance, you pay using the money in your escrow.

When you think of your budget this way, resource-governance processes fall into place….

Your budget (the escrow account) creates a “checkbook” that belongs to the enterprise. So your customers must decide what “checks to write.” You don’t need a steering committee to micromanage you. The purser’s only purpose is managing that checkbook.

Of course, all your products and services have a true, full cost to the enterprise. Sure, you may get more efficient over time; but at any point in time, things cost what they cost. There is no “do more with less.” The checkbook only pays for so much.

Your customers manage demand within the finite limits of their checkbook (your budget, which equates to your resources). If they want more than they can afford, customers must find more money to buy more – whether that takes the form of a budget increase or the transfer of money (chargebacks). As a result, customers’ expectations match your resources.

Furthermore, everybody understands the value you deliver for a given level of budget. That perception of value counters many of the complaints that you cost too much.

Of course, this demand-management process is predicated on knowing the costs of your products and services. Your rates becomes a basis for like-to-like comparisons with outsourcing and benchmarks.

With a transparent cost model, you build trust. You can base any allocations on utilization. And you can build into your rates any necessary sustenance activities like training, process improvements, and innovation.

Learn more about how to apply market economics inside your organization with the SoundviewPro course here.

Copyright 2014 N. Dean Meyer and Associates Inc.

The Science of Organizational Structure

The Science of Organizational Structure:
how to design entrepreneurial, customer focused,
team-oriented organization charts

A guest blog with N. Dean Meyer
(copyright 2014 N. Dean Meyer and Associates Inc.)

Many executives don’t realize that there’s a science of organizational structure. But the truth is, once you understand some basic principles, you can read between the lines of any organization chart. You can see who’s fighting with whom, who is not achieving his/her objectives, and who has ulcers! And, of course, those principles can guide you as you design new organizational structures.

The first, and most important, principle of organizational design is so important that I call it the “Golden Rule” of organizational design: authority and accountability must match. If ever they’re separated, then the person with authority becomes an unconstrained tyrant, while the one with accountability is disempowered and can’t get the job done.

Second, consider that people can only process a finite amount of information per day. We can only know so much. We can use our precious brain-cycles to know a little bit about everything – the generalist, a jack of all trades and master of none. Alternatively, we can focus our brain-cycles on a specialty, and perform far better – higher quality, lower costs, quicker, more flexible, and more innovative.

The very reason organizations exist is to allow people to specialize. (An organization of generalists performs little better than an equal number of individuals.) Great organizational structures focus people on clearly defined specialties, and build the cross-boundary teamwork processes that make specialization possible.

Third, boundaries must be clear. If boxes on the organization chart are defined in vague terms, and, as a result, boundaries are unclear, you’re paying people to fight with one another.

Fourth, the way you define people’s specialties is critical. A high-performance organization empowers its staff as entrepreneurs, running little businesses within the business. A healthy structure embodies this philosophy by defining boxes based on lines of business (not “roles and responsibilities” or tasks and processes).

There are five types of business within organizations:
• “Service Bureaus” keep things running. This includes manufacturing, service delivery, customer support, and internal support functions.
• “Technologies” are engineers who design, build, repair, and support solutions.
• “Consultancy” is the sales and marketing function, as important to internal service providers as it is to companies.
• “Coordinators” help others come to agreement on policies, standards, plans, and responses to crises.
• “Audit” inspects and judges others. If this function is necessary, it must never be confused with any of the above customer-focused service functions.

Of course, there are many specific lines of business within each of those five categories. Those lines of business are the building blocks of an entrepreneurial organization chart.

Four questions will tell you whether an organization chart is getting in people’s way:
1. Gaps: If any necessary lines of business are missing, or are fulfilled by many groups but without anybody’s full-time attention, they probably aren’t happening reliably, or with world-class effectiveness.
2. Rainbows: Imagine color-coding an organization chart by line of business. A “rainbow” group is one fulfilling multiple lines of business. At a minimum, it will be stretched to deliver excellence in any one. Furthermore, this may expose staff to conflicts of interests. Examples include mixing up operations and innovation, or business-driven sales and product management.
3. Scattered campus: If a line of business scattered among many groups, no one leader is looking after it in its entirety. This often results in missing specialties (gaps) or overlapping domains (paying people to fight).
4. Inappropriate substructure: The way you divide jobs at each level of the chart tells people what they’re supposed to be good at. If you choose a basis for sub-structure that differs from their line of business, you’ll reduce specialization. An example is a Technologist function subdivided by customer market; each group has to replicate all needed technical specialties, moving people toward becoming generalists.

These same diagnostic questions can help you design a great organization chart that helps everybody succeed.
Learn more about the science of organizational structure with the SoundviewPro course: Structural Cybernetics.

Dean Meyer is the author of Internal Market Economics, as well as six other books on organizational design. He’s a consultant, speaker, and executive coach on how to implement the business-within-a-business paradigm. More at ndma.com.