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The Matrix

Saturday, July 1, 2006 - 15:36

Hierarchies may be evil necessities, but new styles and concepts of management are making them more horizontal and responsive to the needs of a fast-changing market, reports Darren Baguley

As Australian financial institutions live by the customer relationship management (CRM) mantra that it is easier to sell existing customers additional products or services than it is to get new customers, traditional vertical management structures are proving inadequate. Calling the customer service centre of your bank often means that you get someone trying to sell you a financial product that's unrelated to your call. Acquiring new customers costs organisations money, and because there is no historical data for a new customer, it will be some time before a company can work out whether they are worth keeping. As a result, many Australian financial services companies ranging in size from boutique wealth management firms through to the big four banks are implementing matrix-style organisational structures.

Matrix management structures aren't new, they first came into vogue in the late 1980s, and are common in manufacturing as well as investment banks. The idea is simple enough: an organisation has two different lines of authority that, in theory at least, work together to make a balanced decision. No one person has sole decision making power over a particular situation or particular type of decision, and, in effect, this breaks down the traditional, vertical, hierarchical command-and-control style of organisational structure that emerged from the Industrial Revolution. Another driving force behind the development of matrix structures is that many organisations have centralised functions that are supported globally, while the organisation itself is structured around geographical business units.

While the idea behind the matrix structure is simple, it is complicated in execution and most organisations struggle to get it right. Nevertheless, organisations, especially large ones, are perennially restructuring themselves and the reason for this is that no one structure is right for an organisation in all situations and all the time. An organisation in start-up mode will find a certain structure works well for it; this same structure may not be good for an established business aggressively trying to grow market share, and it would be different too for a market leader trying to maintain its position.

"It's never one perfect solution for each organisation, companies really have to customise to suit their maturity and skills capability," says David Farley, Executive Director Strategic Projects at ING Australia.

Many professionals and industry experts agree that a matrix structure can be a powerful way to drive organisational change, but customer demands are also pushing organisations towards matrix-style structures. "If you want to change a corporate culture, instituting a matrix management structure is one way of at least starting that process because you are instilling new ideas across the system," says Professor Rae Weston of the Macquarie Graduate School of Management. "The other thing that is pushing [adoption of matrix structures] is that customers want a matrix solution; they don't want a single solution, but a solution from different parts of the organisation. In a sense, that is what has pushed the adoption of matrix structures in recent times. If organisations are going to have cross-functional offerings for customers, then they should have cross-functional people [in management]."

Customer demand was certainly behind the institution of a matrix-style structure in the case of ANZ bank. "It's being driven by the market," says Head of Leadership Capability and Performance Mark Jankelson. "Customers want to feel like they're getting solutions that are tailored to their needs, not what we want to sell them. A pure product approach only goes so far; whether you're talking retail customers, or the big end of town, people want to feel like they're being treated as individuals. Somehow the bank should have a holistic view of the customer, their needs and what they already have, and be able to bring things to them that are relevant to their particular circumstances. This applies to a wide range of organisations.

"ANZ's model is a specialised business model that acknowledges there are key customer segments that need to be served, and in the long run specialists will win over generalists. Thematically that's how we've organised, but underpinning that is a very strong push to make sure we collaborate across our various lines of business to bring the best solutions to customers. One of the things we did a couple of years ago is cluster our businesses under major segments; so we have a personal division, which is the retail end of the market, a corporate business banking unit, which goes from SMEs up to corporate customers, but not the very biggest, and then we have the institutional side of the bank, which deals with the large institutions. Each of them has product and customer-facing sides of the business and they work together."

Pros and cons

While matrix-style structures have their advantages in meeting customer needs, some observers believe that the disadvantages far outweigh the advantages. As well as using matrix structures to align themselves more closely with the needs of their customers, organisations can also gain efficiencies by centralising parts of the company. The classic case is certainly nothing new - centralising functions such as marketing, information technology, finance and human resources, and using the centralised functions to support a range of business units. Rachael Heald, Global Human Resources Director for public relations consultancy Text 100, believes that any efficiency gains are offset by the conflict and confusion that matrix structures engender.

"The disadvantages are that matrix structures by their nature create conflict and confusion in organisations," says Heald. "They often actually result in a lot more inefficiency because you end up with people inside the organisation having to talk to each other a lot more. They have a lot more meetings, we often hear people complaining about the number of meetings they go to, and it's often unclear who is actually making the decision, so they get tied up in constant discussion trying to achieve consensus because there isn't a clear decision maker."

For organisations with a history of hierarchical management styles, Heald argues that introducing a matrix structure can usher in change because it necessitates collaboration and can be used as a lever to achieve some cultural change. "But achieving that aim can come at a high cost; matrix structures are a highly inefficient way of managing an organisation and tend to not be sustainable," she says. "Organisations go down the track of matrix management and, generally, in a few years they're changing the structure again to a more traditional structure because it costs too much to run them. But it can work depending on what outcome you want, it can change the leadership dynamic in an organisation."

Another potential problem with matrix structures is that despite good intentions, the structure can be a complete fallacy because power in an organisation ultimately lies with whoever holds the purse strings. If a company has one person controlling the budget, then that person is the de facto decision maker. If real power is only vested in one person, then the other line of reporting is merely a line of influence. With no budget, it has no structural power.

When Suncorp Metway's management team got down to restructuring the banking and insurance conglomerate a few years ago they were fully aware of the inefficiencies of the matrix-style structure. According to Derek Duffy, Human Resources Strategy Adviser, when Suncorp restructured in 2003, a traditional matrix structure was considered but ultimately it chose to design a hybrid structure that tries to incorporate its strengths and minimise the weaknesses.

"We're definitely receiving some of the benefits that usually come from traditional matrix structures," says Duffy, "but what was running through our minds most was the potential downside in terms of mixed messages, flawed accountability and the quandaries people find themselves in when caught between two bosses. We recognised that for Suncorp's model to work, it really needed to still behave like a matrix organisation at a certain level, so we came up with a structure with clear lines of accountability and reporting lines for all concerned while making sure that it was still very much a collaborative cross business approach."

The ramifications for organisations that get their structure wrong, however, can be dire. Many organisations have fallen by the wayside because their structure did not allow them to adjust to market conditions, and it will probably continue to happen for as long as companies exist. According to Jarrod Martin, Senior Banking Analyst at ABN AMRO, the obvious impact is that the bottom line suffers, but from a market share perspective, companies with the wrong structure in place tend to fall behind.

"The more endemic problem is that companies which fail to structure themselves correctly tend to be a follower in the market," explains Martin. "Their ability and agility to innovate is seriously hampered, and it takes a very long time to bring products to market so these companies end up following instead of being a market leader."

A new philosophy

For many years now, the structural organisation of corporations has been much the same since the advent of the Industrial Revolution. Companies were structured vertically into silos along a particular axis, like geographical, product, function or customer-based ones.

However, as the 20th segued into the 21st century, globalisation and new communications technologies have relentlessly exposed the limitations of such structures. One solution to this problem was to develop corporate structures that resemble a matrix with a horizontal form of authority superimposed over the vertical silos - as well as reporting up the hierarchy, individuals are also responsible for reporting across. For example, a product manager in the Australian branch of a global company might be responsible to the global chief of a particular product line for matters related to that product such as roadmaps etc, but the same manager may also report to the local sales manager for sales targets. As a result, decisions regarding that particular product should take into account the needs of both managers, although the weighting will usually not be 50:50 as this tends to lead to conflict.