Bureaucracy TransformedJohn Pourdehnad
The management of a Fortune 100 company recently decided they could no longer support the Experimental Lab in their R&D department. The lab had become a huge bureaucracy that was not creating value for the company, and its innovations, when weighed against its operating costs (almost $1 billion), failed to justify its existence. The company management decided that before downsizing the lab, they’d give it a chance to reinvent itself. The lab’s management then embarked on a participative planning process with its stakeholders to redesign it into a self-sufficient profit center.
The new design incorporated the principles of the market economy as well as a multidimensional organizational structure. The changes were based on the belief that if the lab were treated as a business and given the opportunity to determine its own fate, an entrepreneurial spirit would energize employees, and the benefits of internal markets would emerge. Unlike downsizing, which reduces labor costs, internal markets improve profitability by combining revenue expansion with cost reduction (by altering work methods and improving quality).
The lab became a totally program/project based organization. Employees who traditionally had served as function heads/managers became program/project managers – setting direction and running the team of knowledge workers who had been assigned to the project. The workforce for the projects was composed mainly of knowledge workers in a collection of varied work arrangements – some part-time, some cyclical, and some contract-based workers. Recruiting, developing, and helping to connect the right knowledge workers with the project became the responsibility of the knowledge/talent pool staff.
All the organizational units within the lab started operating as profit centers, subject to minimum constraints. They purchased resources and sold their output both internally and externally. Everybody in the organization had to have a customer, and their survival depended on customer satisfaction.
The implementation had three major thrusts:
1- Training the function heads as general managers with the help of professors from the local business school.
2- Developing a business game that simulated the new business approach. Players wore different colored hats; blue represented the input functions, red represented programs/projects (output units), and green represented market/user functions.
3- Developing a new accounting system that would run parallel to the old accounting system for six months before transitioning to the new accounting system.
The lab became a viable entity within a year.