Episode #0071 - What is the major issue with siloed business structures?

Pricing College Podcast

We have seen it - and I am sure you have seen it. Businesses run on bizarre structures - based on States, regions or anything else.

What could possibly go wrong - well to be honest, lots!

When sales work regionally - and marketing and pricing work nationally - we predict lots of problems.

In today's episode, we want to dig a bit deeper into what we discussed in the last episode about companies driven by operations. I suppose one of the real signals we often see when we look at a company and look at a pricing optimisation or pricing strategy change. The first thing to look at is, how is the business structured? Is it structured by functional lines or operations delivery, sales marketing in that mechanism? Or is it done in a different way? Probably one of the most common mechanisms we see is by cost centres or revenue centres, by geography even by city. Divided up that way of where you might have and this is very common in Australia, certainly B2B. We'll have a state general manager or a city General Manager. That person will be in charge of seemingly everything in that area. So, say you’re the State General Manager of South Australia. You run Adelaide your account to your head honcho wherever they're based. And in your monthly meetings and you take responsibility for your P&L. We've heard said very many times, “I own my P&L it’s all my responsibility”. But we want to point out when we see that it's a real warning signal.

Often people don't realise how much organisational design can interrupt derail pricing strategy or price improvement programs. They have a huge influence. And largely because they can speed up implementation and thinking and strategising if designed correctly. Or they can seriously slow it down. Slow it down and make it completely ineffective. Because you ended up sort of bottlenecking at certain points in the organisational structure. Simply because the strategy or the key players the senior players are distributed across different states. Because we've got a different type of structure. And what we found overall is when you have like a number of key decision-makers who really have pricing control. Some of whom may agree to change others who may just comply and don't agree to change. What can happen are things slow down tremendously. Things don't get done basically. When you find that strategy is almost distributed across a number of different leaders in a region. Things get very, very messy. Innovation and problem-solving slow down. Ultimately you do need to think about centralising the process. Centralising that strategising initially straightaway. Then maybe decentralising the execution. That's kind of the way more flexible organisational structures are being built to enable pricing projects to succeed.

We see it so often whereby you have a marketing department or sales department, or Sales Department Local and National. You'll have a marketing department generally said nationally focused and then there's a real disconnect. There's almost like a disconnect between the head office and the people in that area when there's a geographic distance. But also when people do what they're incentivised to do what they're paid to do. If your boss is the person in that in your city, you do what they tell you fundamentally. Because they determine your career and your prospects. So you're probably not really utilising the marketing that's happening. The marketing became probably or distance from you and there's not really any overlap. Probably the pricing I'd be honest, is probably done very much on your localised basis. So, what's happening in central head office probably doesn't make much sense to you. With that disconnect, there can be become internal politics. They’ve become one against the next. It leads to value destruction I would argue in many regards. Because all decisions have been taken at a local level. There's nothing joined up. There's often a lot of duplication happening. It's very much based on this year's operational aspect. Especially when CAPEX is a big indicator of that. It's very much this year's financial. Not the future of the business. Not the value creation. Not improving the value offered to customers. It's just one of those red herrings. I don’t know if red herrings are the right word. But more alarm bells that we see and when you see it look a bit deeper. Because I'm sure there's going to be duplication. There’s going to be a misalignment of objectives. And almost certainly there's got to be value destruction.

Because you got to think about if you do pricing well and to get the sort of EBIT gross that you're expecting. The 10% to 15% EBIT growth from a pricing project. What you need to do is work smart and work I suppose, be agile. A pricing team need needs to do their job properly to get the money that you want. They need to work across the business to get key sources of information and support. They also need to work up and down the business. By this I mean, they need to work with executives to get sponsorship. To push the business planning process forward. To inform segmentation. And to inform business strategy because that too may have to change. Also down they've got to work with customer services. The sales team find out key business intelligence sources and information about that price-setting process. And also then further out they’ve got to work with understand customers get involved with that. Because ultimately their pricing is disconnected from the customer base it's just not going to work. So what I'm trying to say is if you're working, you can't expect to get the outcomes from the pricing. If you don't appreciate the agility involved in doing so. And if you're in a very traditional business structure, you've got to think of other ways to mobilise your pricing project. Because working within a broken or very traditional structure does not yield the results. And the speed of results that you're expecting, things are going to be difficult. There are a lot of ways you can get around this sort of thing. And one more we've got a lot of resources on our page just to go through some of those ideas. So feel free to download those resources on our resources page at taylorwells.com.au or free to get in touch. I'm not saying that it's impossible to do a pricing project in a traditional but slow-moving organisation. It just becomes harder and you've got to be more creative about how you do it. Because pricing fundamentally does require that you work across the business. If you have silos in your business largely created by your reporting structure or organisational design, you can't ignore it. You can't just say oh, that's just a people issue we can work across that because we're optimising prices. It's a pure numbers game that will not work. It just won't, you'll only get so far with that sort of stuff and then it'll just be left.

The last point I like to make is when we say, we have to be all moving in alignment. This does not mean at all that everything is centralised. You told your people, wherever you're located, you follow the script. At the end of the day customer focus really is if you're a salesperson, it really is your market intelligence. Your knowledge of that local market. Because obviously value can be very local aspects. It can be proximity, local competitors, what's driving the market at that point in time. That aspect of stuff really has to be taken into account. I'm a big believer that this should be on a functional level. If it's a sales thing that should be flowing through to the sales department. That should be flowing through to people who really understand sales. Have the ability to lobby for sales and to help out in the business. Then obviously, that should be working with the marketing, getting you the marketing collateral you need. So that it's working correctly. If it's done on a more siloed P&L basis in geography. And there's no direct contact between salespeople out there meeting customers to sales directors and sales leadership. That's where it falls down. So we're not saying it's the Empire that dictates what people do. It has to make sense. Does it fundamentally make sense to you if you kick the tires does it make sense and doesn't help? So when you're working when you're entering stuff into systems. Does it come back with benefits to you? Or is it just purely almost more work on your back that you don't get any benefit from? Yeah, that's it for me.

Me too. And as I say, you know, feel free to jump on our website, download some resources and guides they'll really help you in this regard. And also, if you're thinking about pricing, transformation or price change improvement programs. Lots of good stuff is there just to guide you through it.