#43 Organisational Design and Value Creation

Why everyone in Fintech needs to think deeply about organisational design and its impact on business model innovation.

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Introduction

This week I will share my thoughts around something that I have been thinking a lot about, organisational design and its impact on value creation. Every now and then I think about elements of the Fintech ecosystem that are not being covered in the media or on Twitter conversations. Some time back I wrote about the Institute for Development and Research in Banking Technology (IDRBT) and it’s silent role in powering the Indian Fintech revolution. The point of that article was that apex research bodies enable regulators and industry players to better understand emerging technologies and proactively regulate them. It enables regulators to stay on the front foot thus growing the ecosystem.

To unlock value in Fintech, a lot needs to be done apart from unlocking new technologies or coming up with cool use cases. Boring stuff needs to be done. One thing that has been replaying in my mind is the role of organisational design. As defined by McKinsey, organisational design “involves the integration of structure, processes, and people to support the implementation of strategy and therefore goes beyond the traditional tinkering with “lines and boxes.” Today, it comprises the processes that people follow, the management of individual performance, the recruitment of talent, and the development of employees’ skills.”

The reason organisational design is becoming ever more important, particularly in the financial services industry, is because the industry is undergoing a foundational shift in how value is created and how customers are served. Organisations thus have to fully repurpose themselves to take advantage of these changes. In fact, this will be even more critical in Africa where we are “technology takers”, very few African businesses are purely tech companies who develop their own proprietary technology. Often, companies repurpose existing technologies. Value creation in African technology is largely business model innovation as opposed to real tech innovation. Organisational design thus becomes critical.

The Power of Organisational Design

History is replete with examples of innovations in organisational design and structure that have driven real value creation. An early example is Neil McElroy of Procter & Gamble who created the concept of a brand man. In an 800 word memo that’s become a cornerstone of product management, McElroy detailed why P&G an American Consumer Goods conglomerate, needed to create roles that were fully responsible for their brands. In the memo he details some of the responsibilities of a brand man including;

1. Study carefully shipments of his brands by units.

2. Where brand development is heavy and where it is progressive, examine carefully the combination of effort that seems to be clicking and try to apply this same treatment to other territories that are comparable.

3. Where brand development is light: (a) Keep whatever records are necessary, and make whatever field studies are necessary to determine whether the plan has produced the expected results. (b) Study past advertising and promotional history of the brand: study the territory personality at first hand–both dealers and consumers–in order to find out the trouble. (c)After uncovering our weakness, develop a plan that can be applied to this local sore spot. It is necessary, of course not simply to work out the plan but also to be sure that the amount of money proposed can be expected to produce results at a reasonable cost per case. (d) Outline this plan in detail to the Division Manager under whose jurisdiction the weak territory is, Obtain his authority and support for the corrective action. (e) Prepare sales help and all other necessary material for carrying out the plan. Pass it on to the districts. Work with salesmen while they are getting started. Follow through to the very finish to be sure that there is no letdown in sales operation of the plan.

He adds to the memo that;

“In Short, when the brand men have approached their fullest responsibilities, they should be able to take from the shoulders of division managers and of the District managers a very heavy share of individual brand responsibility. This would leave the sales head in a much freer position to administer the sales policies of the company and apply general volume pressure without having to give such a large proportion of their time to thought on how to bring up volume on a certain brand in a certain part of the territory”

In short, a change in organisational design was needed to unlock increased economic value. The concept of brand men in FMCG was birthed and has become a standard in the design of a consumer goods sales organisation. 

Interestingly, McElroy was an advisor at Stanford and heavily influenced Bill Hewlett and David Packard, founders of Hewlett & Packard. HP was a pioneer in the product management role in technology companies. Their insight was that the product needed to respond to the needs of customers with a product head who was responsible for manufacturing, development and sales. If the product team exceeded 500, it was broken up to drive more focus. 

In Africa, Equity Bank innovated around the introduction of agency banking and at a point were even offering other banks in Africa consulting services on the design of their agency banking model. Their insight was to create a hub and spoke model where each branch was responsible for the recruitment, oversight and float management for the agents around them. There were centralised support at HQ for elements such as administration and KYC. A head of agents was placed in each branch and was charged with sales, volumes and operations, reporting to a centralised head of agency banking at HQ. 

A factory worker at a traditional kanban board

Everyone who has been involved in an agile software development project has come across Kanban Boards. Kanban boards were invented by Taiichi Ohno to drive process improvements in manufacturing efficiency at Toyota. The key insight from the lean manufacturing process from an organisational design perspective was that decision making was driven lower into the org structure with mechanics and factory workers having more leeway to make decisions. 

Context

Current Operational Environment

A lot of change is occuring within the financial services space, whether that’s banks, insurers, wealth managers and brokerage houses. Dynamics are at play that are changing manufacturing and distribution and it’s evident that the existing organisational structures just won’t work, both in terms of the skill sets for specific roles and the design of specific workflows.

Some examples may suffice. In my leadership role at a financial institution, I have had first hand insights into how technology is changing the banking sector. One instance has been the role and design considerations around bank operations. Bank operations for a long time were standard, taking branch operations as a subset. Branch operations largely revolved around the following factors;

1. Cash operations;

   1. Ensuring there’s sufficient cash to serve customers;

   2. Ensuring that the above cash is within the insurance limits;

   3. Ensuring cash accounting is done well i.e. managing teller limits, treasurer limits etc;

2. Process operations;

   1. Ensuring good process management for certified cheques, bankers drafts and other wet-signature based payment orders follow due process;

   2. Ensuring KYC is followed for customer onboarding;

   3. Ensuring all documentation is handled properly including document receipt, handling, storing and archiving;

3. People operations;

   1. Ensuring adequate staffing to manage the branch;

   2. Same as above, ensuring that there’s adequate staffing to fulfil maker checker obligations;

   3. Managing leave, off-days and other considerations to minimise overtime;

The above naturally called for a specific type of person. One who liked routine and was a traditionalist that didn’t like change. Ultimately, what you were optimising for was security, standardisation and risk. 

However, over the last few years, things have started to change. As payment methods as well as onboarding have moved online, a lot of process redesign has been necessitated. You get to a situation where you need your ops head to be a flexible thinker who can think from first principles to redesign workflows and processes. Where once your ops head was perfectly suited for what he/she needed to do. Now, their skill sets are a constraint.

Similarly, APIs have entered into the banking domain and every bank is trying to figure out what to do about their APIs and how to monetise them. This again requires fresh thinking. What I’ve come to learn is that business fundamentals don’t change and what changes is how those business fundamentals are orchestrated. For instance, the 4Ps of marketing/business will never change. The 4Ps are Product, Pricing, Place and Promotion. 

For instance, P&G focuses on product and pricing, Walmart receives goods from P&G and offers place and sometimes even promotion. Facebook as an internet company has come and changed a number of dynamics. As a seller, Facebook gives you Place for free but charges for promotion whilst you continue to focus on product and price. The 4Ps remain the same, but how a specific company orchestrates them is different.

There’s an interesting story of how Ebay launched in China and charged merchants on its platform a listing fee, the way supermarkets such as Walmart charge brands a listing fee for the best real estate on the supermarket. Taobao offered its merchants free listing but charged for ads and placements. Similar companies, similar industries but a different perspective on what they’re offering. Taobao had the insight that they needed to offer merchants free listing but charge for promotion. Ebay charged for Place. 

Interestingly, both for Facebook and Taobao, when the product is free, the marketing role takes on a new function. Given that the free pricing has its own marketing implications, these companies have realised that they need to focus more on PR than marketing with marketing reporting to the Head PR. In traditional industries where price is a factor, PR reports to marketing. Here is a breakdown of the above concept in extreme detail from the founder of Meituan.

Back to the case of bank APIs, banks need to think about what their APIs are, potentially using the 4P framework. My general view is that an API strategy doesn’t necessarily need to charge for API calls. API’s should be seen as the top of the funnel from a sales perspective where a bank becomes an enabler and monetises downstream either from deposits, FX, payments or other services. This then begs the question of where this sits in the organogram, my view is that the API department should be treated almost similarly to Treasury where for a long time in banking, Treasury has operated like an internal broker. Deposits raised by retail are placed with Treasury who then charge the corporate department for their utilisation. In essence, a centralised service that doesn’t report to any commercial department but rather lubricates their proper functioning. Placing intense commercial pressure on the API team at such an early phase may drive the wrong decisions that hamper the long-term value of the API play.

Barriers to Corporate Innovation in Africa

I have thought long and hard about why corporate innovation in Africa is often so difficult and why outsiders are best placed to drive innovation. Outsiders in this case not just from a citizenship perspective but from a cultural perspective. Michael Joseph of Safaricom was the quintessential outsider, he had had quite a nomadic career and then found himself in Nairobi in charge of what was then a very small Telco company. 

People who have worked with him have spoken of “expletive filled” meetings and a super-human sense of urgency in everything that he did. This is often contrasted to the more gentlemanly nature of his successor Bob Collymore. Similarly, Dr. James Mwangi was an outsider in the banking industry, as a banker at the then defunct Trade Bank, James Mwangi has been responsible for wealth creation at an unprecedented scale in Kenya through both the bank and the Wings to Fly program. Why outsiders?

Corporate Africa has an embedded “survivorship bias” i.e. we tend to incorrectly concentrate on the people who made it rather than the people who didn’t. The people who made it naturally create narratives that justify their success and this perpetuates into future generations. Take Kenya as an example. Kenya was a settler colony which the British designed to accommodate their settlers. The education system was like all other 20th century education systems and was designed to create a managerial cadre for both business and government. Initially, the people to be educated were the settlers and impressive schools were built for this purpose. Nairobi School which was built in 1902 was called the Prince of Wales School and Lenana School was called the Duke of York School.

The local governments that took over post-independence rather than building more schools moulded around these top schools decided to remain with the same schools but control enrolment through “merit”, by stating that the top candidates from primary school across the country would be the ones accepted into these schools. I find it incredulous to define merit based on an exam done by a 13 or 14 year old.

These schools then manufactured all the top leaders who went into business and government. A similar experience was experienced across the continent in both Francophone and Anglophone Africa with the degree of similarity being governed by whether countries were protectorates or colonies. If you look at most British colonies e.g. Zimbabwe and Kenya, they tend to look the same. Similar schools, a tradition of administration and management, a strong tourism sector and robust export oriented agricultural sector.

What this created was two things;

1. To succeed in this education system was more down to personality type rather than anything else. Not to say that the people who did well were not hard workers, they were some of the hardest working people you’ve seen. Nonetheless, the mix of rote memory and standardisation selected more for personality than anything else. The core traits being governed by a propensity to extroversion, respect for order and tradition and reliability. This personality type gives a good breakdown. One pitfall of this personality type is that the reliance on order and tradition makes them extremely uncomfortable with change or a lack of order, elements that are the cornerstone of what a Start-up is all about;

2. Given that they succeeded, this created survivorship bias. In essence, we must be special given that we made it and we thus need to create more people like us in order to create better companies and societies. In essence believing in their own hype. If we made it, we can’t be wrong!

This is not an attack on anyone, just an introspective look at some of the dynamics at play. Given that industries didn’t change, companies optimised around reliability, order and consistent execution. As the creative and out of the box thinkers are being recruited into organisations to drive change, they come up against the roadblock of traditionalists who have severe survivorship bias and friction happens. Often the latter come out winners and order is retained. 

The picture is complicated by the emergence of Gen-Z into the workplace. Gen-Z are a whole different animal in terms of their respect for tradition, sense of order and approach to work. A lot of people complain about Gen-Z’s in the workplace, particularly how they lack motivation and order. From my experience, Gen-Zs can be extremely hard working and valuable so long as they see the value in what they’re doing. They are not the type to throw themselves into any task that’s given to them. For this generation, alignment matters more than anything and a simple hierarchical relationship just won’t cut it. 

Next Steps;

Clearly, a lot of non-technological things need to happen. Largely at the organisational level and even at societal level. Some recommendations could include;

1. Reviewing recruitment principles away from aptitude tests that optimise for the same type of person;

2. Pairing teams based on natural aptitudes, crazy out of the box thinkers need to be paired with traditionalists who prefer order, once the creation is done, it needs to be organised;

3. Introducing new and fresh ideas into the board of directors by adding people from non-traditional industries. Start-up founders and operators need to be recruited to bank boards and vice versa;

4. Approach organisation re-design from first principles and focus more on function and suitability rather than the traditional approach of reporting lines which reflect status and hierarchy rather than strategic alignment;

5. Think less in terms of processes and best-practice and approach everything from scratch using first principles thinking. A lot that worked in the past may not help.

Note, all these are my thoughts and I may be extremely wrong or misguided. If you think so, please reach out to me and tell me where my blind spots are and what your experience has been. As said from the beginning of this newsletter, I’m trying to Learn out Loud.

As always thanks for reading and drop the comments below and let’s drive this conversation.

If you want a more detailed conversation on the above, kindly get in touch on samora.kariuki@frontierfintech.io or samora.kariuki@gmail.com