Making a Matrix Organization Work

Matrix organizations are usually prescribed and implemented in organizations where double responsibilities are expected on the same subject. For example, although product managers are responsible for product profitability, they must rely on functions within the organization that they cannot control, such as salespeople and production workers who do not report to them.

The matrix organization is common in global companies. Such organizations need to think globally, but act locally. Who, then, is responsible for the profits: the local market, where the action is; or the global product manager, who probably directs pricing and product definition, as well as strategy?

One way to avoid this complexity is to make the global organization responsible for profits, while the local branch becomes just a sales organization––not responsible for profitability. Or the opposite: Give the local market responsibility for profitability, while the global organization provides the functions of pricing, product definition, and strategy, etc.

But both solutions, while they have the virtue of simplicity, fail to satisfy management’s need to monitor people in the company and hold as many as possible responsible for profitability. This probably explains why organizations frequently switch back and forth from centralized operations to decentralized operations.

But eventually, when they conclude that neither structure provides the desired controllability and accountability, they either reorganize into a matrix organization, where the global and the local share responsibility; or they give up and organize themselves functionally, making the president alone responsible for profits.

In the latter case, both local and global organizations become cost centers with different goals to achieve. Local is responsible for sales but is not measured for profitability. And the global organization is measured by the function it is supposed to perform, but also is not accountable for profit.

Both solutions are problematic. Matrix organizations create a lot of conflicts––particularly internal conflicts––because who is in charge is not clear.

Another reason that organizing the global organization functionally is a bad idea, is that profits are not measured in many places like by market or and by product. As a result, profit accountability is measured through cost accounting, which does not identify which people should take responsibility for profitability; it gives information, but the question of who is in charge, who can make changes in order to improve results, is not answered.

What is the solution, then?

To make a matrix organization that works.

Here is how: You have to decide which is the solid line and which is the dotted line.

What does this mean?

Let us take the example of global product management, with local sales and service management. Assume that both are profit centers. To which organization should the local market accounting report? Think of a solid line subordination to the center (global) manager and the dotted line subordination to the local market manager. The solid line represents that the local accountant “belongs” to the larger accounting department, and is only assigned to the local market to serve that local market.

Why? Because accounting needs to be centrally managed, to prevent the danger of “creative accounting” in different locations. Money––accounting information––is essential for managing a company with adequate controls. Thus, this function needs to be centralized. But at the same time, each local market needs to have its own separate accounting so they know what is happening within their territory. Thus the local accountant reports dotted line to the local manager.

Now, how does this work? Who hires the accountant? The solid line (the global organization). This does not mean that the central accountant will actually travel to, say, India just to hire an accountant for its Indian market organization. But it does mean that the global organization, the supervisor with the solid line relationship, has to approve whoever is hired. It is the solid line supervision that sets the standards and must validate that the newly hired person meets those standards.

Who trains the new accountant? Again, the solid line. Who fires the local accountant? Only the solid line: This ensures the local accountant’s loyalty to the center, which in turn prevents messing around the accounting system by the local manager with the information provided.

What happens if for some reason the local manager cannot work with the local accountant? The accountant has to be sent back to the central pool and either reassigned or fired. Who decides the salary of the local accountant? The center and the local manager together make that decision. Why? Because the local market manager must take into account local standards in order to attract the right talent, while the center needs to maintain similar salaries for its accountants all over the globe. Who decides the bonus? Both, for the same reason.

Now let us reverse the situation and take the example of a maintenance crew. Every plant needs maintenance. The center needs to monitor the maintenance of its production facilities all over the world, and ensure they are using the best-known practices and meeting the highest standards.

What now? In the center we should establish a center of excellence for maintenance, which creates manuals for best practice and sets standards. It will also organize an annual get-together, at which the latest procedures can be shared. It should have a budget to carry out these responsibilities as well as to train its people.

But to whom do the maintenance people in each plant report to? Where is the solid-line relationship now? With the factory manager. And dotted line to the center of excellence.

As you can see, the authority has switched: The plant manager hires maintenance people and trains them, according to the manual provided by the center of excellence. The plant manager is the one with the authority to fire, too. The role of the center of excellence is to provide information and set standards and to audit how well its standards are being followed. That is all. Thus the maintenance people at the plant are in a dotted line relationship to the center.

Confusion about who is “solid” and who is “dotted line” can create major problems in a company. Quality-control people: are they in a dotted line relationship to the plant, or solid line relationship to the plant? Is central quality control a center of excellence, period, or is it actually responsible for quality control throughout the company?

Lack of clarity, obviously, can create major quality problems in a company. I suggest to you that this was the cause of Toyota's big crisis with quality as reported this year.

This methodology––differentiating solid from dotted line relationship––was developed more than one hundred years ago, by Lyndall Urwick, but is no longer being taught in business schools and has virtually been forgotten. But we need to relearn it. I have seen some true managerial disasters and lots of emotional pain caused solely by lack of clarity about who is in charge and how.

Sincerely,

Dr. Ichak Kalderon Adizes

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