He would have never asked me for advice because I’m just knowledgeable about project management. At a lunch among good acquaintances he told me about his business, that all plants were achieving black figures due to good controlling and Sales was acquiring good contracts, but the EBIT was not really going to start flying. During our conversation he developed an understanding that his company wasn’t earning its profit with its products but with their commission and delivery to its customers – in projects.
The organization no longer fits to its market
This was exactly the point. The company had been established product oriented with a functional line organization. As the market was growing internationally it had implemented a matrix a few years ago with a sales organization clustered by regions. Now it was time to adapt customer oriented to the project driven business because they often lost a lot of the profit generated in the functional matrix. In essence the customer projects needed to become more profitable to increase the entire company’s bottom line.
Business Administration thinks too egocentric
To approach the issue we need to look back a little into the past of Business Administration. Line and matrix come from a product oriented, egocentric view to the market. Until the 1990s the market thankfully absorbed the economy’s products and services. By technical leadership sometimes monopolistic or oligopolistic structures arose at the offering side in which the customers were quite dependent from their suppliers due to missing alternatives. Business Administration therefore focused, following the economic principle, on describing, analyzing and optimizing production and the organization of the running business, and developed management models accordingly.
Since globalization increased traditional market leaderships are questioned from the millennium on latest. International competition, cheaper and/or simple, but sufficient product alternatives from emerging countries with lower production cost as well as transparency of prices and services available through modern communication etc. have challenged the dominance of our companies in many industries. In addition there is an increasing customer emancipation fostered by the new competition situation on the offering side. The change from vendor to customer market demands for more flexibility at the producers, and also for keeping selling proposals in order to not suffering from claims, deductions, re-work and margin losses.
Established management approaches and systems are insufficient
This kind of change has not been re-enacted by many companies (like my acquaintance’s one) but also modern Business Administration sufficiently. Established management approaches and systems made for repeating processes and widely known influence factors are not tailored to the management of (customer) projects or unfit for with every contract changing or even unknown frame conditions. Often there isn’t even awareness for this difference in characteristics and imperatives of running and project business. Leading projects from out of the functional line reasonably therefore mostly fails because of the line managers’ time and goal conflicts as well as of the resource conflicts between line and projects resulting.
Established structures are overwhelmed
A project-driven business model (see definition in my article “Does Your organizational Structure still fit Your Business?“) demands for an organization structure and culture that concedes the same priority to the project earning the company‘s revenue as to the product built and delivered by the project. Global optimization must be the management’s focus instead of local KPI optimization at plants or departments with successes spoiled in unprofessional projects. It seems reasonable to also assign P&L responsibility and far reaching competences to the projects being the bracket from bid to acceptance.
The existing line or matrix does not achieve the cross-departmental function in most cases due to conflicts of responsibilities and competences. But projects need leadership across departmental borders on contract and project level as well as in the company management. Actually there also is currently a more functional and “classic” business competence at the department leadership level rather than extensive project management skills.
Adapt the company to the business model
There is only help in a transformation of the organization and corporate culture concerning established hierarchies, responsibilities, compensations, thinking and priorities etc. towards an organization focused on the project business. In a pure line organization this means the change to a matrix “function vs. project”. At an already matrix-organized company it will be the implementation of a third dimension on peer-level to the existing ones. What it takes and what to pay attention to I have described in my article “Turn-around for Enterprises with project-driven Business“.
This needs to be accompanied by building internal project management competence and an own career path in the new dimension. As project management is “management under heavy-duty conditions” it is also a perfect opportunity for leadership development in the company. Universal management skills like stress resistance and risk sensibility, methodologic know how, structured approach, social competence and leadership qualities are nurtured. Therefore the Third Dimension should be attractive for motivated employees to leave the functional line’s bosom with their company-specific expertise, join project management, and there win acceptance for the department soon.
We shouldn’t fail to recognize that this transformation will afford some mid to long-term effort, and will come across many fears and resistance in the established organization. Siemens Chairman Peter Löscher illustratively described this 2010 with his „bed of clay“ comparison. The colleagues in the projects urgently need it for the quality and success of their work, the top management wants to enforce it as acknowledged being critical to survive, and the middle management needs to comply – or leave. That’s what I finally suggested to my acquaintance for his company.