Effective Organizational Design: Think Outside the Boxes (and Lines)
Explore our framework for an effective operating model and lessons learned in designing one that fully captures the organization’s value creation potential.

As service companies grow organically and through acquisition, be it of sole proprietor mom-and-pops, scaled local companies, or national-level providers, many find themselves struggling to settle on an optimal operating model. Indeed, many tend to approach operating model design in a way that is ad hoc at best.

This is a missed opportunity. Service companies with effective operating models generally have greater agility and higher levels of employee satisfaction. They also financially outperform service companies with less effective operating models.

That is what emerged from a series of in-depth discussions L.E.K. Consulting had with several branch-based service companies, both residential- and commercial-focused. Designed to identify common patterns that lead to successful operating models following a transition, these discussions made clear how important it is to align capabilities with bandwidth, ensure the accountability of leadership, and deploy effective sales strategies.

While there is no silver bullet, there are systematic tradeoffs, inflection points, and purposeful — as opposed to ad hoc — choices that branch-based services organizations should take into consideration along the way.

Many service organizations struggle to make operating model choices  

There are a number of key questions that service companies are faced with as they grow, the answers to which will ultimately determine what their ideal operating model should comprise. From strategic objectives (e.g., What are the primary goals we hope to achieve through expansion?) to the desired execution timeline (e.g., How quickly do we want to fully integrate new branches/acquisitions?) to labor retention (e.g., How do we ensure that we retain key personnel?), a successful operating model will provide satisfactory answers to all of these questions (see Figure 1).

The most common pain points are around managing talent/labor management, aligning goals, ensuring effectiveness of the sales force, and establishing ways to share best practices across the organization (see Figure 2). 

Goal alignment, for example, can be particularly challenging for growing companies, especially those pursuing M&A, as one executive told us:

 “… Proper goal alignment is one of our biggest pain points and risks. Especially when we acquire someone and the owner just got paid, how do we a) keep them around and b) make sure they are still working hard. In addition to financial incentives, we try to message to them that we are taking the annoying administrative stuff off their hands while letting them do “fun” stuff like working with their customers and employees …” 

But the real work begins when branch-based service organizations start to grow. As they reach critical inflection points in their lifecycle, such as operating across multiple regions and/or offering multiple service lines, they are faced with a new set of operating model considerations around what to scale and centralize, on one hand, and where to enable local autonomy — for example by evaluating the importance of national accounts and/or deciding whether or not to deploy regional leaders — on the other. To inform their operating model decisions, there are several areas of consideration that growing organizations can assess, among them strategic objectives, customer relationships, execution time, labor/ownership retention, and their preferred methods of expansion.

When it comes to operating model considerations, there are a limited number of fixed rules. One is assigning clear decision-making responsibilities, irrespective of who they are assigned to. Another is investing in talent acquisition. Indeed, labor comprises some 70% of service companies’ expenses, and the tight labor pool makes acquiring labor difficult. So regardless of where that function sits, it is essential to ensuring that companies can draw from local talent pools and flex labor to meet fluctuating demand.

The degree of centralization that service organizations want to engage in, as well as how to house different functions, are considerations that are handled on a case-by-case basis. Indeed, no set approach works for all companies. But depending on the service focus, and the degree to which interfacing with local customers is essential to operations, certain functions may be better suited for centralization than others. Commercial service organizations that don’t use a franchise model and maintain a focus on large customers may not need a robust localized sales force, for example.

Unique considerations are often the result of the organization’s primary growth strategy, such as whether its model is inorganic or organic/franchise. Highly acquisitive aggregators, for example, must consider how to adapt their operating models to deal with newly acquired companies — from maintaining the legacy brand (if it is to be retained) and dealing with legacy ownership/relationships to developing a robust integration playbook that can be applied across all of the acquisitions they make. Common considerations include those that come with scale; as a company grows, whether or not it needs to develop distinct regional leaders and/or business units is just one decision that must be made. Notably, the outcome of such considerations will be highly dependent on both the organization’s ownership model and the types of service(s) it provides (see Figure 3). 

There are a number of ways to mitigate the most common operating model pain points that service organizations experience as they grow, such as: 

  • Prioritizing employee retention through improved benefit offerings, incentive structures, investment in apprenticeship programs, and developing training academies 

  • Integrating key functions (e.g., IT, HR) quickly while allowing for greater flexibility with other functional decisions to be executed at the branch/regional level (e.g., commission structure, marketing budget) 

  • Providing centrally- or regionally-led structure and training to ensure sales force effectiveness while maintaining a sense of entrepreneurship at the local level 

  • Establishing recurring best practice sharing sessions across operating companies 

Operating model decisions are usually made on a case-by-case basis 

When it comes to making operating model decisions, different approaches — for example, centralized vs. decentralized operations, or organic vs. inorganic growth — involve different tradeoffs that branch-based service organizations must weigh (see Figure 4).  

Assigning responsibility for different company functions at varying geographic levels — local, regional, and central — requires making various tradeoffs as well (see Figure 5).

One common consideration service organizations that are seeking to optimize their unique operating model cite is that while deploying a highly centralized sales function may increase the efficiencies of dealing with large accounts, it can limit the ability of salespeople to utilize potentially important local knowledge and/or relationships. In service areas where large accounts are more common/important — think certain commercial service areas, such as facilities, that serve customers with many national locations — service organizations may choose to deploy a centralized sales function, whereas those targeting homeowners may typically retain a greater “on-the-ground” presence, albeit often one backed by national or regional marketing campaigns.

Strategic operating model decisions also have pros and cons. For example, aside from whether or not to centralize operations, whether or not to deploy business units is one of the most pertinent decision service organizations are faced with. Based on the conversations with service organizations that L.E.K. has had, while some companies with complex and highly distinct service offerings may benefit from creating distinct business units beyond regional organizations, doing so introduces another level of complexity that can result in inefficiencies. That said, service organizations with national scale and the resources to hire and retain leadership with the requisite expertise in both service execution and business unit/P&L management tend to be more likely to create business units. 

To help safeguard against commonly experienced downsides of operating functions with a high degree of local consistency/autonomy, branch-based service organizations can take a variety of steps. One is ensuring that their local employees have formalized pathways for communicating relevant local knowledge that is essential for HR processes, such as effective people management, recruiting, etc.

Despite the case-by-case approach, there are common themes 

Service organizations with high-performing operating models tend to have the same key success factors, among them customer-centric, consistent execution; robust training models; formalized playbooks/best practices; KPI tracking; influential and empowering leadership; and effective recruiting/labor management. And those factors often involve incremental considerations as the organizations scale.

Many of the most commonly cited key success factors are underpinned by data and KPI tracking, people/talent management, and strong service performance, and can be measured by tailored criteria sets to assess organizations’ adherence to them. For example, whether or not a service organization is achieving consistent execution — defined as consistently delivering high-quality/efficient service to which marketing/sales initiatives are aligned — can be assessed based on the time it takes to complete jobs, the average amount of driving required to complete each job, and the customer satisfaction scores those jobs subsequently receive (see Figure 6).

How operating model changes are timed 

As service companies transition from operating on a local to a regional to a national level, they face a number of critical decisions. Some key factors are more pertinent during particular growth stages than others; for example, it’s important to develop strong relationships with labor early in the growth cycle. Service organizations that strive to include these factors at the right stage and adjust their consideration priorities as they grow are often well-positioned for success (see Figure 7).

A unique operating model for every service organization

When it comes to deciding on an operating model, there are myriad factors that branch-based service organizations must take into consideration. And there is no one-size-fits-all solution. But there are common themes and pain points, as well as common decisions and tradeoffs that need to be made. Indeed, studying the steps taken by service organizations that have walked this path before yields invaluable lessons, including the various pitfalls to avoid along the way. 

For more information, please contact industrials@lek.com.

L.E.K. Consulting is a registered trademark of L.E.K. Consulting LLC. All other products and brands mentioned in this document are properties of their respective owners. © 2023 L.E.K. Consulting LLC

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