Flow or silo – the structure of an organization

Most organizations talk first about the organizational structure or hierarchy and structural units or silos. The most important goal here is efficiency and resource utilization, and for many years that was almost the only consideration. The reason for this is simply that it is an optimal structure when markets and environmental conditions change only slowly.

As that has changed, another principle has taken on ever-increasing importance: flow or process organization. When a workflow is spread across multiple departments, a need for coordination arises at each departmental boundary, and with it a limit to how quickly changes can be implemented. So when you make process organization the dominant principle, you tend to value the speed at which you can implement changes over cost optimization and resource utilization.

A question of cost

It is, as so often, a question of costs – where it makes sense to include the types of costs that are most affected by the decision: the opportunity costs, especially the costs of missed opportunities due to too long times to implement changes versus the transaction costs, especially the costs incurred each time a change is made.

In other words, yes, being faster reduces latency and decreases the risk of missing out on business, but it comes at a price.

In addition to this blanket consideration, one can develop a few more criteria that juxtapose the two basic ideas. Mind you, these are not either-or decisions, but questions of trade-offs.

The target system

First, we want to trace the question of which problems the respective approaches solve, i.e., what they want to be measured against:

is the central KPI when it comes to costly resources.
counts all the more when requirements change quickly and when response time becomes important.
Cost optimization is closely linked to standardization and economies of scale. They are also an important driver for standardization and series production.
Cycle time
is rightly one of the central metrics in the lean universe. It is also a powerful tool for identifying optimization potential.

Open questions

If you look at the priorities from the other side, i.e. try to name the deficits, some aspects become even clearer:

Lead time
Different planning entities need a lead time to coordinate

Tracking consistent goals across the organization requires centralized guidance or agreements. This leads to a hierarchy in larger organizations to keep the communication effort under control
Agility/ response time
Coordination effort when a workflow crosses departmental boundaries.

When people with the same competencies are scattered in different cross-functional teams, it is important to ensure that further development and the sharing and adoption of experiences (i.e. also standardization) are driven forward.

How scales the structure

Find the kidney
This is a catchy phrase from the SAFe Framework. He says it’s sometimes hard to locate value streams in a large organization with many products and shared services.

Flows network
On a larger scale, multiple value streams or flows can be found, with different cycle times and again complex dependencies. A major challenge is to simplify these relationships with the guiding principle of looking at the entire process end-to-end.

It turns out that one of the decisions with the deepest consequences, the one about the structural orientation of the organization, is not so easy to make. It is not the question of good and evil that it is sometimes stylized as.

On Key

The VSM Quick Guide: the model

The introduction to the series on Jon Walker’s VSM quick guide. It describes the simplified VSM vocabulary as used in the rest of the steps.