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Organizational simplification: A conceptual framework based on systems

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Working Paper · January 2018

DOI: 10.13140/RG.2.2.14446.31049

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 Organizational simplification:
A conceptual framework based on systems theories

Working paper, January 9, 2018

Nicolay Worren
Norwegian University of Life Sciences (NMBU)
School of Economics and Business
P.O. Box 5003
1432 Aas
Norway
Tel: +47 91 000 693
E-mail: [Link]@[Link]
 Abstract

Increasing organizational complexity has been identified as a key managerial challenge in

several surveys. The purpose of this paper is thus to outline a theoretically grounded framework

for understanding complexity and for identifying opportunities for simplification, particularly

with regard to organizational structures. The framework integrates three different systems

theoretic perspectives that address different aspects of complexity. The functional perspective

focuses on the relationship between the purpose or function of the organization, and its structural

design. The information processing perspective focuses on the work processes and the flow of

information in relation to the formal structure. Finally, the stratification perspective addresses

the governance structure and vertical reporting relationships in organizations. Specific design

principles are derived from each perspectives. The principles essentially operationalize the

concept of the modular organization by specifying how one can create semi-independent sub-

units that reduce goal conflicts and coordination costs.

2
INTRODUCTION

(…) hard problems with many linked variables and loads of

conflicting constraints can be well solved by breaking the
entire problem into nonoverlapping domains.

- Stuart Kauffman

Organizational complexity is a key managerial challenge. This has been confirmed by

several surveys that have included thousands of managers around the world (e.g., Economist

Intelligence Unit (EIU), 2011, 2015; IBM, 2010; KPMG, 2011; PwC, 2006). The general

perception is that the level of internal complexity is increasing. The respondents also believe that

complexity has a negative effect on their organization. They indicate that there are conflicting

priorities, that too much time is spent on coordination, and that they are unable to make timely

decisions. The end result is decreased organizational performance. Based on a study of 200 large

firms, Collinson & Jay (2011) estimated that these firms loose on average 10% of their EBITDA

each year due to internal complexity. Although there are several sources of complexity,

organizational structure has been singled out as a key factor. In the 2015 EIU survey, 55% of the

respondents indicated that the organizational structure in their firms were very or extremely

complex (only 1% indicated that it was not complex at all).

Given these results, it is not surprising that firms are attempting to simplify. In one study,

no less than 97% of the respondents indicated that they were engaged in at least one

improvement programme to reduce internal complexity (PwC, 2006). A number of practitioners

books have been published that offer advice to managers, including Ashkenas (2010), Collinson

& Jay (2012) and Maeda (2006). Consulting firms such as BCG and Bain have also seen this

3
need and have developed specific offerings related to complexity reduction that promise their

clients a simpler, flatter, and more effective organization (Morieux & Tollman, 2014; Torsten

Lichtenau, Smith, & Horrock, 2015).

Unfortunately, there is little academic research on this topic and we lack systematic

knowledge about the effects of simplification efforts. But the indications that we have from

surveys with managers suggest that these efforts have, at best, a modest success rate. As an

example, in the 2011 KPMG study, 90% of the 1400 senior executives who participated said that

their organization’s success was dependent upon managing complexity, yet less than half

believed that the actions they were taking to manage complexity had been very effective (the

2015 EIU survey came to the same conclusion) (Economist Intelligence Unit, 2015; KPMG,

2011). This may be contrasted with the results from simplification efforts in other areas, such as

in product design and manufacturing, where studies show that modularization - a key means of

managing complexity - has generally had a positive effects on costs, flexibility and overall

financial performance (e.g., Jacobs, Vickery, & Droge, 2007; Piran et al., 2017; Worren, Moore,

& Cardona, 2002).

Numerous suggestions have been offered for managers who seek to simplify their

organization. A common theme is that of “variety reduction”. The underlying assumption seems

to be that complexity is related to excessive variety or differentiation, and that one can simplify

by reducing variety, for example, by discontinuing some products or minimizing the number of

steps in a work process. Related more specifically to organizations, some authors focus on

complex roles or management processes. On the [Link] blog, Ashkenas & Bodell (2013)

suggested the following:

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 “An easy starting point for simplification is to get rid of stupid rules and low-value
activities, time-wasters that exist in abundance in most organizations. Look, for example,
at how many people need to review and sign off on expense reports or small purchases; or
how many times slide decks need to be reviewed before they are presented”.

Other authors point to information overload and “overcollaboration” as a sign of complexity.

Cross & Gray (2013) conducted a detailed social network analysis in a firm where they identified

how people requested and provided information to each other. They found that 150 people

indicated that frequently sought out one specific manager for information, and that another 77

said that they needed even more of this manager’s time to meet their business goals. They

concluded that managers and internal experts can easily become overloaded in modern

organizations. As help to individuals in the same situation, they suggest that one should “not be

too responsive or quick to help out with issues” and the one might try to “co-create solutions

with employees so that they take ownership and need fewer interactions with you over time” (p.

10). A third area that is frequently mentioned is the reporting structure or the vertical

management layers within the firm. As stated in Couto, Caglar, & Plansky (2016) “unless

periodically reviewed and adjusted, unwieldy organizational structures burden a company with

high management costs and stultifying bureaucracy” (p. 154). A number of authors have

proposed that the organizational structure should be as flat as possible (Ashkenas, 2010;

Drucker, 1993; Welch & Welch, 2006).

All of these suggestions are sensible and may prove useful in some situations. However, a

key limitation is that they mainly deal with effects, rather than underlying causes. If a

management process requires too many approvals, it may indeed be an easy fix in some cases.

But in other cases, this is merely a symptom of a more fundamental issue. When many managers

are required to approve a given action, it may suggest that there are overlapping roles and

5
accountabilities, which in turn may be due to the way the organizational structure has been

designed. If a firm suffers from “overcollaboration”, it may be necessary for an individual to

heed the advice of Cross & Gray (2013) and remove oneself from interactions in order to reduce

one’s workload. However, the question is whether a re-design, such as a more logical grouping

of roles into teams and sub-units, could have reduced the time and cost of collaboration.

Similarly, reducing the number of management layers may be the right solution for a firm with a

tall hierarchy, but if one flattens the structure too much, it may lead to work overload for

managers, which in turn has a negative effect on performance (Wallin, Pousette, & Dellve, 2014;

Wong et al., 2015).

Hence the key question addressed in this paper is how we can build a theoretically sound

framework for understanding organizational complexity, and secondly, how we – based on this

framework – can derive design principles that can be basis for interventions aimed at simplifying

organizations.

The examples above suggest that complexity has multiple facets. It also seems clear that

one needs to relate concrete and observable instances of complexity to underlying causes in order

to achieve simplification. For this reason, I have chosen to use systems theory as the starting

point. A key assumption in systems theory (Ackoff & Emery, 1972; Jackson, 2000) is that one

has to view the phenomenon that one is trying to understand as part of a larger whole. The

explanation for the behaviour of an individual in an organization can often be found by

considering the larger system in which the individual is embedded. In order to improve

performance, the question is thus how we can modify or improve the design of the overall

system, rather than changing individual level behavior.

6
 However, there is not one, but multiple “systems theories” (Jackson, 2000). Here I have

selected theories that I group into three “perspectives”. The first is the functional perspective,

which focuses on the relationship between the purpose (or function) of the organization, and its

structural design. The second is the information processing perspective, which focuses on the

work processes and the flow of information in relation to the formal structure. The third is the

stratification perspective, which focuses on the formal structure and vertical reporting

relationships in the organization. The three perspectives are largely independent and

complementary, in the sense that they address different aspects of complexity (Figure 1).

Figure 1. The three perspectives on simplification covered in this article.

The perspectives that I cover do not represent the entire breadth of theories in the field of

management and organization. Organizational complexity (or more precisely, bureaucracy) is

acknowledged as a key phenomenon in transaction cost theory (Williamson, 1983), where it is

viewed as the main cause of diseconomies of scale. More recently, neo-institutional theorists

have discussed the emergence of complex institutional forms as a response to incompatible

stakeholder expectations (Greenwood, Diaz, & Li, 2010; Pache & Santos, 2013). These theories

are already well known and extensively covered in the literature. My purpose here was to select

7
theories that are not necessarily new themselves, but underappreciated, and that may contribute

to an alternative way of framing the issue of organizational complexity. While the predominant

focus in the literature is on descriptive theory, the purpose here is to describe theories that can be

used prescriptively (van Aken, 2004) and provide solutions that can help reduce complexity.

More specifically, this is done by deriving design principles that can be the basis for

assessment/diagnosis, interventions, and systematic evaluation of outcomes. I will limit my

discussion to issues related to organizational structure, but similar principles can be used for

simplification in other domains, such as product or process design.

THE FUNCTIONAL PERSPECTIVE

In systems theory, one assumes that each organization (as well as each sub-unit within the

organization) has a purpose, which may be operationalized by identifying more specific

functions (Ackoff, 1971; Ackoff & Emery, 1972). A function is fulfilled by a structure (e.g., an

organization or a sub-unit), but the terms function and structure are conceptually distinct (Gresov

& Drazin, 1997). When designing a system, one starts by identifying purposes and functions

(i.e., ends), and then proceeds by considering structures (i.e., means) that may fulfil the

functions. In engineering, ends are usually formalized as functional requirements, whereas

means are formalized as design parameters (DPs) (typically physical components; but they may

also be software components). It is also possible to identify functional requirements for social

systems, including organizations. The functions may be deduced from already existing

documents that describe missions, unit mandates, project charters, and so on, and may be further

clarified in interviews with members of the organizations. Design parameters for an organization

8
are the organizational units, temporary projects or individual roles that are made accountable for

achieving the functional requirements.

In axiomatic design theory (Suh, 1990, 2001), one considers the relationship between

functional requirements and design parameters in more detail. One assumes that every

organization can be described by decomposing a high level function (e.g., “Provide software

products for the health sector”; “Offer attractive banking services”) into more detailed functions,

which are linked to specific design parameters (Worren, 2018b). For an organization, this means

that one defines a hierarchy of functionality that corresponds to the hierarchy of authority (i.e.,

the formal structure of the organization) (see Figure 2). This constitutes a new manner of

representing organizations as systems. Unlike an organization chart that only shows the reporting

structure, one can link the structural components of an organization (e.g., roles, teams, sub-units)

with their purpose. Similarly, unlike corporate “mission statements”, which are rarely

operationalized and decomposed, one can link higher and lower-level missions or unit mandates

(i.e., functions). The dual focus on both function and structure is a unique feature of the

functional perspective, and makes it possible to re-frame some common organizational design

issues, including the challenge of organizational complexity.

Figure 2. Mapping between functional requirements (FRs) and design parameters (DPs) of a
hypothetical software firm. The arrows indicate that when designing an organization, one starts by

9
 defining a high level FR and then iterates between DPs and FRs until one has a design that can be
implemented.

Suh (1990) introduced a tool, called the design matrix, to map the relationship between

FRs and DPs (Table 1). The FRs (usually formulated as verbs) are listed vertically and the DPs

(usually formulated as nouns) horizontally. Inside the matrix, one indicates which DP that fulfils

which FR. In the case shown in Table 1, this is done by using a capital “X” for the intended

relationship (i.e., the designation of the unit or role that is accountable for achieving a given FR).

One may also quantify the relationship, that is, identify the extent to which a given DP affects a

given FR (see Worren, 2018a).

Design parameters

Product Customer
R&D Sales
Functional requirements development support

Develop new product concepts X

Build software products X

Provide customer support X

Sell software products and services X

Table 1. Design matrix for hypothetical software firm (the same as in Figure 2).

According to Suh (1990) it is axiomatic that one should maintain the independence of the

functional requirements (FRs). This principle implies that one must first define the functional

requirements, and then design the organization (specified as design parameters (DPs)) such that

each of the FRs can be satisfied without negatively affecting the other FRs (i.e. the FRs are

independent). When this is not the case, one has a design with functional conflict (i.e., a conflict

10
or contradiction between functional requirements) (Worren, 2018a), which Suh (1990) called

coupling.

There are multiple causes of functional conflict. One common source is competition for

resources, as when two product divisions share the same manufacturing facility, which is unable

to meet the demand from both of the divisions (if it prioritizes one division, it will negatively

affect the revenues of the other). A second cause is different time orientations, as when a sub-

unit is responsible for two sets of activities, one that requires quick feedback to internal or

external customers (e.g., customer support), and another that requires more time consuming

analysis (e.g., error identification and mitigation); the general tendency is to spend most of the

time and resources on the more urgent tasks. A third possible cause is role conflicts, for example,

a staff unit that develops company policy that also performs internal services and which creates

policies that favour (or is perceived to favour) its own service providing activities.

Functional conflict has a number of negative consequences. It leads to unclear

accountability for teams and sub-units, and creates goal conflicts as the achievement of one sub-

unit’s goals may compromise the ability of another sub-unit to achieve its goals. It increases

uncertainty and causes a status quo bias, as it becomes less clear for decision makers which

levers they should pull to achieve a given outcome (Ethiraj & Levinthal, 2009). Finally, it may

also lead to role conflict and ambiguity at the individual level, for example, when individuals in

matrix roles report to two or more managers who pursue conflicting goals (Rizzo, House, & and

Lirtzman, 1970). According to Suh (1990), functional conflict (or what he termed coupling)

represents complexity and reduces the probability that the organization will be able to achieve all

of its goals. We should note that this definition differs from the more common conception of

complexity as (high) variety or differentiation. A large or differentiated system is not necessarily

11
complex if the FRs can be satisfied independently (i.e., if there is no functional conflict, or

coupling) (Suh, 2001). This means that it may not be an effective strategy to minimize

complexity in a firm by, for example, reducing the number of product variants or closing down

offices: This reduces the “functionality” (the outputs delivered by the organization), whereas the

axiomatic principles are intended to allow the organization to deliver the same outputs, but with

less internal complexity.

From a functional perspective, simplification of an organization needs to proceed in four

steps. First, one needs to identify the firm-specific functions (functional requirements) of the

organization. We know from research in organizational behaviour that there is a tendency in

many organizations to have many implicit and inconsistent goals (Argyris & Schön, 1978).

Hence one usually needs to help stakeholders clarify and agree on what the actual goals are for

their organization. The second step is to map the functions or goals against the design

parameters, that is, determine how they are satisfied by specifying the sub-units, projects, or

roles etc. that contribute to the fulfilment of the functions. The result of this step may be called

the “intended design matrix”, as it will identify the formally accountable units for the different

FRs. The third step is to assess the degree of functional conflict or coupling. As suggested in

Worren (2018a), this may be done by making pairwise comparisons of the FRs against each

other (“When DP1 implements measures to maximize FR1, what effect does this typically have

on the ability of DP2 to maximize FR2?”). Based on this exercise, one will be able to produce a

design matrix that shows the actual correspondence between FRs and DPs, including unintended,

negative relationships.

The fourth step is to consider how one can remove the conflicts and contradictions. One

can distinguish between two main approaches. One may first try to work within the constraints of

12
the existing organizational structure. The most common solution is structural separation. This

involves splitting an existing sub-unit into two parts or the establishment of a new sub-unit,

which is allocated one of the functions. The key assumption is that firm can continue to perform

the same functions, but that they need to be allocated to different internal units so that one avoids

functional conflict at the sub-unit level (for some empirical support, see Ethiraj & Levinthal,

2009 and Huckman & Zinner, 2008). Consider a situation where there are two software

development teams, each working on a new software product. The key goals for the two teams

are to develop the new products according to the specifications - and on time and on budget. In

addition, they have been asked to ensure that the finished products conform with quality

standards. This is done by performing testing, both of single components developed by

individual programmers, and on the total system (Table 2). However, the team leaders gradually

realize that there is a contradiction between these two goals. It requires resources to perform

testing, and one of the programmers in each team has to set aside his or her core tasks to do the

testing, which slows down the coding work. It is difficult for that person to give critical feedback

to peers who are members of the same team, and asking an internal person to perform this work

also reduces its legitimacy: People elsewhere in the firm suspect that quality is not taken

seriously. In addition, the team leaders realize that different skills and tools may be needed to

perform effective testing, compared to the software development tasks. Hence they decide to

create an independent team, which performs testing for both of the development teams (Table 3).

The test team will work in parallel with the development teams, meaning that they will, at the

end of each day, make their working build available to the test team. This solution resolves the

functional conflict that they struggled with.

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 Design parameters

Development Development
Functional requirements team 1 team 2

Develop software product 1

according to requirements, cost and X
schedule

Develop software product 2

according to requirements, cost and X
schedule

Ensure quality X X

Table 2. Design matrix for software firm with two development teams.

Design parameters

Development Development
Test team
Functional requirements team 1 team 2

Develop software product 1

according to requirements, cost and X
schedule

Develop software product 2

according to requirements, cost and X
schedule
X
Ensure quality

Table 3. Design matrix for software firm after establishment of separate test team.

14
 Although structural separation is the most common solution, another possible solution is

temporal separation, where the same firm or sub-unit is engaged in different and potentially

conflicting activities, but at different points in time. A medical center may provide medical care

to patients Monday to Thursday, but spend Fridays performing clinical trials or engaging in

research (cf. Huckman & Zinner, 2008). A firm may focus its effort on achieving sales growth

for the five first years, and then prioritize cost reduction the next five years (cf. Ethiraj &

Levinthal, 2009). In some cases, neither structural nor temporal separation is an option, and one

has to introduce a new organization logic in order to remove the functional conflict. One

example may be a product based firm that introduces a “solutions” strategy where it seeks to

combine individual products into a combined offering. This will usually be difficult if the main

units are still measured on product profitability, as the profitability of individual products may be

reduced by creating joint offerings (even if the firm benefits as a whole). This conflict is

removed by restructuring the firm according to market units instead of product units (Day, 2006;

Galbraith, 2002).

THE INFORMATION PROCESSING PERSPECTIVE

Organizations consist of sub-units that not only need to process information to perform

their own tasks, but that also rely on information from other sub-units (or external sources) in

order to plan and execute these tasks. This is the key assumption behind the information

processing perspective, which was established by early writers in the field such as Galbraith

(1974), Daft & Lengel (1984) and Tushman & Nadler (1978). A key variable is the existence of

a dependency (or interdependency) between two or more roles or sub-units. Information must be

transferred or exchanged between units that are interdependent in order to ensure that a work

15
process is completed and that one achieve the desired outcomes (regarding time, cost, quality,

etc). Yet information exchange and coordination may be time consuming and costly activities.

For this reason, one should consider how can minimize coordination costs by finding logical

groupings of related roles and by selecting appropriate coordination mechanisms (Kilmann,

1983; Thompson, 1967).

These basic ideas have been developed further by scholars within engineering

management (Eppinger & Browning, 2012) and modular systems theory (Clark & Baldwin,

2000). An important contribution has been the development of the Design Structure Matrix

(DSM), at tool that can be used to analyze interdependencies between tasks or (alternatively)

between roles and sub-units in an organization. The DSM is a square matrix where

interdependencies between elements (tasks, roles, sub-units etc.) are shown (Figure 3). Reading

across a row, one sees from which other element in the system (task, roles, sub-units etc.) a given

element needs input (e.g., information, resources, approval, etc.) (Unlike the design matrix

described above, which maps functional requirements against design parameters, the DSM thus

maps design parameters against design parameters). The DSM can first be used to document and

represent the current interdependencies in an organization. It can then be used to optimize the

grouping or clustering of elements. The basic assumption is that information exchange and

coordination are more time consuming and costly if they occur across rather than within sub-

units. If there are interdependencies between sub-units, it will require coordination with people

who report to a different manager, who probably pursue other goals and priorities, and who may

also be located in a different office (Kilmann, 1983). Hence a key goal is to align the

interdependencies between tasks or roles related to a work process with the formal structure of

the organization (i.e., the sub-unit boundaries). There now exist algorithms that can take DSM

16
data as input and cluster interdependencies in a manner that minimizes the number of

interdependencies between clusters (e.g., sub-units) and maximizes the number of

interdependencies within clusters (e.g., Yu, Goldberg, Yassine, & Chen, 2003).

Figure 3. Example of clustering of DSM elements. The X’s represent interdependencies between
the elements (e.g., element B is dependent upon input from C, but C is not dependent upon input from B).
Comparison to a graph representation of the same data (Worren, 2018a).

Definition of complexity. According to the information processing perspective, a complex

organization is one with an excessive number of cross-unit interdependencies, i.e., an

organization where the overall coordination load is high (Nuñez, Giachetti, & Boria, 2009) and

where the formal structure is misaligned with the work process interdependencies (Browning,

2001; Kilmann, 1983). This situation not only increases coordination costs but also reduces

flexibility, because changes cannot be made independently in one sub-unit without affecting the

performance of other sub-units. It may also lead to a less delegation of authority and to a need

17
for intervention by managers at higher levels, in order to resolve conflicts and disagreements

between interdependent sub-units (Kilmann, 1983; Stea, Foss, & Foss, 2015).

Design principles. When confronting a situation where an excessive amount of time is

used for coordination, one may first consider whether one is able to remove one or more

interdependencies. Baldwin & Clark (2000) describe how some decisions by engineers

responsible for different modules of a product, such as a PC, may be reciprocally interdependent,

which may lead to unwanted iterations in the work process (as one engineer requests information

from a second engineer, who cannot provide the information before the first engineer has

completed his or her task). The question is whether it is possible to formulate a “design rule” up

front that can substitute for mutual adjustment and coordination during the work process. One

example is standards for manufacturability, which may substitute for coordination between

design and manufacturing engineers regarding the manufacturability of products that are being

developed.

If one has identified the interdependencies, and ascertained that they cannot or should not

be removed, the next step is to group the tasks or roles to minimize coordination costs (i.e., to

align the formal structure with the work process interdependencies). This is a criterion that has

been described by a number of authors (e.g., Kilmann, 1983; Thompson, 1967; Tushman &

Nadler, 1978). Rechtin (1991) formulated it as follows (p. 41):

 "In partitioning, choose the elements so that they are as independent as possible; i.e.,
elements with low external complexity and high internal complexity" (Alexander,
1964).
 "In partitioning a system into subsystems, choose a configuration with minimal
communications between the subsystems."
 "Don't partition by slicing through regions where high rates of information exchange
are required."

18
The challenge is that work process interdependencies are rarely documented in the same manner

as the formal organization, and consequently may be ignored or misperceived (Sherman &

Keller, 2011). One therefore needs to interview participants in a work process or distribute an

electronic survey to collect this information, before one can use the DSM to map and optimize

the grouping of roles (for an example, see Worren, Soldal, & Christiansen, 2017).

Even if the intention is to group related roles in the same sub-unit and reduce

coordination across boundaries, one rarely ends up with completely isolated sub-units when

using the DSM procedure. On the contrary, there are usually some “residual interdependencies”

(Mintzberg, 1979) that remain between the sub-units. Once units are formed, one needs to

consider how to manage these interdependencies. Whether a particular coordination mechanism

will be effective will depend on the circumstances. The key variable is uncertainty (cf. Ven,

Delbecq, & Koenig, 1976). With relatively predictable tasks, one may rely on planning and

procedures to coordinate the actions of multiple sub-units. With less predictable tasks, one will

need to move to less formalized and more intensive forms of coordination, such as video

conferencing and meetings. More coordination is generally associated with faster and better

integration (e.g., two engineering teams, each responsible for a component, will be able to

integrate their outputs into one product more easily when the team leaders of the two teams

coordinate effectively with each other). However, more intensive forms of coordination are more

costly, and just as managers may sometimes fail to coordinate effectively, they may also

sometimes select coordination mechanisms and processes that are costlier than they need to be,

based on the nature of the interdependencies.

19
THE STRATIFICATION PERSPECTIVE

Hierarchical organizations are divided into layers of roles, corresponding to different

scopes of competence, responsibility, authority. Consequently, what I here refer to as the

“stratification perspective” are theories concerned with the structuring of the vertical layers of

roles (i.e., the reporting structure in the firm) and the allocation of decision rights and

accountabilities at different levels of the organization.

It is a common assumption that the vertical structure of a firm, and in particular, the

number of management levels, is related to both costs and complexity. New information

technologies have increased the capacity of senior executives and made many middle manager

roles redundant (Wulf, 2012). Consequently, during the 1980’s large firms started to “delayer”,

that is, systematically eliminate layers in the hierarchical structure, particularly at the top of the

organization. In the U.S., the average span of control for CEOs almost doubled from 1985 to

2005 (from 4.7 to 9.8 direct reports on average) (Wulf, 2012). The trend continues. For example,

KLM, the Dutch airline, announced in 2016 that it would introduce a flatter organizational

model. The airline’s CEO, Pieter Elbers, stated: “We are currently going through a process to

make the organization simpler" ([Link]., 2015). The changes are expected to lead to a

reduction of 25% of its managers. DXC, the IT technology firm, announced in August 2017 that

it intended to save US$1 billion by trimming four layers of management (from 11 to 7 layers of

management) (Novinson, 2017). FMC Subsea, an engineering firm, reduced the number of

management levels in its regional units from 8 to 3 as part of a reorganization in 2015 (Worren,

2017). As a result of budget cuts, even public sector organizations in many countries have been

forced to cut management layers to become more cost-effective (Morris & Farrell, 2007).

20
 How, exactly, does the number of levels in a firm influence its effectiveness, and more

specifically, the complexity of its organization? A higher number of layers generally leads to

higher costs, not only because of the additional number of roles, but because resources at higher

levels of the organization are more expensive. In a study of 663 Swiss firms, Kuhn (2011) found

that delayering significantly increased profitability, and one would presume that this is partly

because of a reduction of costs. Other studies have shown that delayering is often accompanied

by downsizing, and typically motivated by a desire to reduce costs (e.g., Rajan & Wulf, 2003).

However, there are also many indirect effects of having a steep hierarchy, as stated by

Peter Drucker (1993, p. 202):

“Every additional level makes the attainment of common direction and mutual
understanding more difficult. Every additional level distorts objectives and misdirects
attention. Every link in the chain sets up additional stress, and creates one more source of
inertia, friction and slack (…)”

One effect is a delay in decision making processes. Eberhardt Rechtin, former president

of the Aerospace Corporation in the US, claimed that the time that it takes to reach a final

decision doubles with each added approval that is required. So, as an example, if the time that it

takes to get the first approval is 30 days, it will take 240 days to reach the final decision if there

are four levels of management that need to get involved (Rechtin, 1991). The number of layers

that a request from the lowest level of the organization would need to pass through before it can

be approved has been called “organizational distance”. Banet, Piehl, & McCann (1976)

determined organizational distance in thirteen electric motor manufacturing companies by

interviewing managers and correlated the results with organizational effectiveness. They

concluded that a distance between two and three was optimal for these firms.

21
 Another effect is filtering and aggregation of information as it passes through the levels

of a hierarchy (Mintzberg, 1979). In a recent study of lending decision in a large Indian bank,

Skrastins & Vig (2015) showed that lending decisions that are made at higher levels of the

organization are made based on different criteria compared to decisions made a lower levels: At

higher levels (and in larger banks), one relies less on “soft information” about potential

customers and uses more standardized and formalized indicators (e.g., credit history) when

approving loan applications. They also found that lower usage of “soft information” led to worse

performance, and that the return on loans decreased by 14 percent by adding one managerial

layer.

A third effect is micromanagement of employees. The tendency to micro manage

employees is sometimes viewed as a personal predisposition, but it may also be a structural

issue, as pointed out by Jaques (1989). If there are more management levels than needed, it

means that the span of control is low. A manager with only a few subordinates will have a

surplus of time that will probably be filled by performing operational rather than managerial

tasks. The roles and responsibilities of the manager versus his or her subordinates are thus likely

to overlap. Conversely, with fewer management levels, the span of control are larger and the

manager will by necessity be forced to give employees more autonomy and focus his or her

efforts on key managerial tasks (e.g., planning and coordinating the work, following up the

results, representing the sub-unit externally, etc.).

However, it is also well documented that delayering can go too far. When the span of

control increases, there is a higher risk of “work overload” for managers, i.e., having too many

responsibilities given the time available. One study that surveyed managers in 14 hospitals found

that a higher span of control was associated with self-reported adverse outcomes (i.e., medical

22
errors, infections and injuries) (Wong et al., 2015). The relationship between the number of levels

and organizational effectiveness may therefore be represented as an inverted U-shaped curve

(Meier & Bohte, 2003). Initially, a reduction of levels in a steep hierarchy leads to cost reductions

because management positions are removed. It may also increase motivation among employees as

a result of higher autonomy. However, these gains are subject to diminishing marginal returns.

Excessive delayering may reduce performance. It may lead to work overload for the manager, who

will have insufficient capacity for supervision of employees or for coordination of the work that is

performed. It also reduces the opportunities for promotion, which in turn may reduce motivation

and effort among employees.

In addition to the effect of the overall number of layers, one may also consider how tasks

are allocated to roles at different levels of the organization. Jaques (1990; 1989) argued that the

challenge is not one of centralization versus decentralization, but of ensuring that tasks are

allocated to the appropriate level of the organization. His key assumption was that people at

different levels hold roles with varying degrees of authority, and as individuals, also have

different degrees of “working capacity” (i.e., competence). The roles at different levels also

require a different time horizons: A CEO may have a time horizon of 10 to 20 years, while a

front line worker may only have a time horizon of hours or days in terms of the work tasks that

are being performed. Based on this rationale, he concluded that people at a low level of the

organization will not have sufficient political weight, long term view, or coordinating skills to

handle complex and strategic tasks.

On the other hand, employees at the bottom of the hierarchy are usually closer to the

field (e.g., customer, suppliers) and thus have “local knowledge” that may be valuable in solving

a problem or performing a task. Authors who use agency theory as a starting point have often

23
framed this as a delegation problem (i.e., whether a principal (manager) should delegate a

decision to an agent (employee) at a lower level in the organization (Robinson & Stocken, 2013).

The conclusion is that there is a basic trade-off between better utilization of local knowledge

versus the risk of potential loss of control, assuming that the agent may not share the principal’s

interests. This issue is in turn associated with the steepness of the organization. The reason why

an employee at low level of the organization might be better able to make a decision is not only

related to the fact that he or she has local knowledge, but also that it is difficult (and takes time)

to transmit this information from the bottom to the top of the organization. Colombo &

Delmastro (2004) found that managers in organizations with many layers are less likely to

delegate decisions, because they have better access to the relevant information themselves (a

finding that is also confirmed in Wulf, 2012).

Definition of complexity. Unfortunately, there is no clear definition of “vertical

organizational complexity” in the literature. But it seems clear that managers believe that a high

number of layers represents organizational complexity. Some scholars (e.g., Colombo &

Delmastro, 2004) have also operationalized (vertical) organizational complexity as having a high

number of levels. It is clearly a rather rudimentary definition, because it does not take into

account the size of the organization, the tasks and work processes, and communication systems.

An improved definition would conceptualize vertical, organizational complexity as having an

excessive number of layers, considering such contextual factors. If not, the concept is more akin

to complicatedness rather than complexity as defined by Suh (2001) (In the two preceding

perspectives, complexity is defined as a relative and not an absolute measure). Conceptually,

“vertical” complexity is not too different from “horizontal” complexity (related to the functions

and interdependencies between sub-units): Overlapping roles as a result of excessive layering is

24
analogous to functional conflict or coupling, and the difficulty of transmitting information

vertically is analogous to coordination costs arising in work processes where sub-units at the

same level participate.

Design principles. As we have seen, the key goal should not be too minimize the

number of layers but to identify the appropriate number of layers, and avoid overlaps with

regards to roles and responsibilities between subordinates and superiors. The principles for a

“requisite organization” advocated by Jaques (1989) are intended to fulfil this purpose. He

proposed that roles should be arranged vertically according to task difficulty. Moreover, he

proposed that that each employee should be supervised by a manager working at one “stratum”

higher than themselves (in terms of working capacity and time horizon), to allow the manager to

provide appropriate context and direction for his/her employees. In practice, this means that one

needs to identify the tasks and the roles at each level in the current organization, and consider

whether each level adds value, and whether there is sufficient capacity for supervision of

employees at the level below.

One also needs to take into consideration the competence of the employees, the

particular tasks that are performed in the unit in question and how they are related to the tasks

performed elsewhere. A supervisor will have more capacity (and can handle a larger span of

control) if the employees are highly competent, perform similar tasks, and have few

interdependencies toward each other and toward people in other sub-units. He or she will have

less capacity (and will need to have a lower span of control) if employees are less skilled,

perform dissimilar tasks, and have many interdependencies that require the manager’s

intervention (Mintzberg, 1979).

25
DISCUSSION

Organizational complexity usually has multiple underlying causes. For this reason, one

needs to use a combination of approaches to achieve simplification. In this paper, I have

highlighted three perspectives, all with their roots in systems theory, but nonetheless based on

different assumptions about the causes and consequences of organizational complexity (Table 4

and 5).

Specific design principles can be derived from each perspective that may be the basis for

interventions in organizations (Table 4). The principles are independent of the unit of analysis:

One may use the principles to simplify a department, a business unit, or an entire firm. As with

other types of organizational interventions, the first step would be to document the current

organization, assess the current degree of complexity, and identify the underlying sources. Data

would typically come from interviews with managers and employees, but electronic surveys may

also be used to identify interdependencies (e.g., Worren, Soldal & Christiansen, 2017). The

subsequent step would be to create new designs that lead to simplification in accordance with the

criteria listed in Table 4. This is partly a creative process where one generates alternative

solutions (in this case, organizational models) that may satisfy the requirements (i.e., the firm-

specific functions (design goals) and more generic design principles such as those listed in Table

4 and 5). However, analytical and algorithmic methods are gradually being introduced even in

this field. With regards to functions, one may use systematic methods to identify functions and

assess their relationship (see Worren, 2018b, for a suggested methodology). With regards to

work process interdependencies, algorithms have been proposed that can be used to cluster the

interdependencies and identify a more optimal grouping of roles or sub-units (e.g., Yu, Yassine,

& Goldberg, 2007).

26
 Table 4. Key assumptions and design principles related to each perspective

Perspective Assumed cause of Assumed consequences Design principles

complexity

Functional Conflicting functions (i.e.,  Increased uncertainty 1. Maintain the independence

conflicting or contradictory  Unclear accountability of functions (i.e., functional
goals, unit mandates, requirements) of roles and
 Role conflicts
missions) units
 Inability to fulfil
requirements and attain
objectives

Information An excessive number of  High coordination costs 2. Define “design rules” to

processing work process (i.e, low productivity) remove reciprocal
interdependencies  Reduced flexibility interdependencies
A lack of alignment between  Need for intervention by 3. Group interdependent
the formal structure and the higher level manager tasks/roles in the same unit
work processes 4. Select coordination
mechanism according to
degree of uncertainty

Stratification Excessive management  High costs 5. Define a requisite number

layers and/or inappropriate  Overlapping roles and of management layers
task allocation responsibilities 6. Assign tasks in a manner
 Slow decision making that matches complexity of
processes the tasks with the
competence and
accountability of the person

27
 Table 5. The main characteristics of complex versus simple organizational designs according to the three approaches discussed in the article.

Perspective Complex structure Simple structure

Functional

Efforts at fulfilling one functional requirement negatively affects A role or sub-unit can work to fulfil its corresponding FR without
the ability to fulfil another functional requirement (i.e., negatively affecting the ability to fulfil other FRs.
functional conflict or coupling)
Information
processing

The formal boundaries are not aligned with the work process The formal boundaries are aligned with the work process
interdependencies – there are frequent or critical interdependencies – the most frequent or most critical
interdependencies across units. interdependencies are contained within units.
Stratification

The formal reporting relationships are not aligned with the The formal reporting relationships are aligned with the required
required roles at different strata. Some employees report to roles at different strata. Employees report to managers who are
managers who are at the same stratum as themselves in terms of one stratum higher than themselves in terms of working capacity
working capacity or authority. and authority.
 When combined, the three perspectives constitute a broad and holistic view of

organizational complexity. However, the three perspectives have only limited value when used

separately. The main contribution of the functional perspective is to highlight the linkage

between unit mandates (functions) and specific organizational arrangements and to sensitize

decisions makers to potential functional conflicts that should be removed to increase

effectiveness. But the functional perspective is mainly applicable to the horizontal relationships

(between roles or sub-units at the same level) and does not contain design principles for

introducing hierarchical sub-divisions among elements or re-allocating a task to a different level

of a hierarchy. The information processing perspective focuses on lateral work processes and

coordination costs related to information exchange and mutual adjustment. It is relevant for

understanding how interdependent roles may be integrated into sub-units, but ignores the

potential of functional conflicts (which might suggest a need for separation rather than

integration of roles and activities). Finally, the stratification perspective is useful when

considering the vertical structure and determining the number of management layers. But it does

not explicitly link the organizational model to the unit mandates (functions) or incorporate

interdependency as a design consideration. One clearly needs to go beyond a count of the

number of hierarchical levels to understand complexity. Even organizations with a flat

organizational structure may have a highly complex governance model (e.g., Worren &

Scholderer, 2018) One can imagine that a reduction in the number of management layers might

increase rather than decrease complexity (defined according to the functional and informational

processing perspectives). This may happen, for example, if managers are forced to combine

(potentially incompatible) roles and take on “two hats” at the same time, such as a line manager

and staff management role, as a result of delayering and downsizing.

 By adhering to the principles derived from all three perspectives, one will design an

organization with self-contained units, that is, units that are focused on a key function or task,

that are relatively independent, and that possess the required authority and resources to produce a

whole product (or component, deliverable). This idea is far from new; it was introduced in the

scholarly literature 60 years ago, by March & Simon (1958). However, increasing complexity

has made it even more relevant today. It is, essentially, a prescription for enhancing the degree of

organizational modularity1 (Sanchez, 1995). The three perspectives may be used in conjunction

to operationalize this term: We may define a modular organization as one that minimizes

functional conflict between sub-units or roles, maximizes the number of interdependencies

within and minimizes the number of interdependencies between sub-units, while nesting roles

and sub-units into a hierarchical system where larger units (business units, divisions etc.)

constitute more inclusive clusterings of units. Scholars have identified a number of benefits from

having an organization with modular or self contained units. It should lead to higher

productivity, given that it implies a reduction in coordination costs (Kilmann, 1983). It should

lead to higher effort, because key performance indicators and incentives can be tied to

measurable outcomes (Zenger & Hesterly, 1997). It should also lead to increasing innovation, as

the units are allowed to introduce local improvements to their work processes and /or product

components without requiring system-wide changes (Sanchez & Mahoney, 1996).

1
I here focus on one aspect of modularity, the creation of semi-independent units, and ignore others (such as
substitutability and recombination of modules).

30
 Linkages between the three perspectives

Although the three perspectives represent different facets of complexity, there are also

interrelationships between them. If there is functional conflict (or coupling) between roles or

sub-units, it leads to a need for coordination (marked with an a) in Figure 4). For example, a

situation where two sub-units have overlapping or conflicting mandates will trigger a need for

frequent information exchange in order ensure coordination between the sub-units and negotiate

how to best divide their efforts (The reverse is not the case, however: Work process

interdependencies between sub-units do not necessarily create a functional conflict. Units may be

interdependent from an operational point of view, while being independent in terms of unit

mandates or functions. The fact that one unit is dependent on another unit for certain inputs does

not in itself create a functional conflict (Worren, 2018b).) There are also some relationships

between the stratification and the information processing perspectives. The more (and stronger)

interdependencies there are between sub-units at one level, the more managerial capacity that is

needed at the next level in order to coordinate between the sub-units (the relationship marked

with a b) in Figure 4). Moreover, an excessive number of management layers tends to create

overlaps and conflicts between roles at different levels, which is analogous to functional conflict

(coupling) (the relationship marked with a c) in Figure 4). There is also a relationship the other

way: Functional conflict (or coupling) between sub-units at a lower level usually requires that

decisions related to the sub-units’ activities are placed at a higher level of the organization than

what would otherwise be the case (the relationship marked with a d) in Figure 3). For example,

in an international firm, if pricing decisions made locally by a subsidiary may be detrimental to

other subsidiaries (e.g., because they have overlapping sales territories), the responsibility for

31
making pricing decisions needs to centralized rather than delegated (e.g., the decisions need to be

made by the headquarters rather than the subsidiaries themselves). Finally, there is a relationship

between stratification and information processing: A steeper hierarchy, or a more centralized

organization, means that information from the bottom of the organization must be transferred up

and down across more layers, leading to potential distortion of information and overload of

managers (the relationship marked with an e) in Figure 4). In sum, the relationship between span

of control and organizational complexity is not straightforward: Additional layers may on the

one hand contribute to increased complexity. But on the other hand, managerial capacity is also

needed to sort out interdependencies between and within sub-units. This suggests that delayering

needs to occur simultaneously with regrouping of sub-units. It is difficult to remove layers and

create a flat organization if one does not first create more modular or self-contained sub-units.

Figure 4. Linkages between the three perspectives discussed in the article.

32
CONCLUSION

Organizational complexity is a key challenge for organizational leaders. Consequently,

we need to develop frameworks that can help leaders in managing complexity and in simplifying

their organizations. In this article, I have shown that specific design principles can be derived

from three approaches – the functional, information processing, and stratification perspective.

The three perspectives are complementary, and should be combined when assessing the existing

level of complexity in an organization and developing solutions. By following these principles,

one enhances modularity – one reduces conflicts and interdependencies and creates more

independent and self-contained units. In the realm of engineering, modularity is seen as the only

viable response to reduce the complexity of physical products and software programs. It might

also be the only viable strategy to achieve organizational simplification.

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