The Challenges of Horizontal Integration

David Trafford discusses the challenges facing organisations that aim to be more horizontally integrated. He argues that whilst many leadership teams see the benefits of horizontal integration, they don’t fully understand the implications of the resultant changes and what needs to be done to put the necessary conditions for success in place, including having a Chief Enterprise Architect who reports to the CEO.

We’ve all been ‘horizontally integrated’ to some degree. It could have been when your company was acquired and new practices, policies and technologies were introduced. It could have been when Shared Services were introduced for functions like HR, IT, Finance, Legal or Procurement. Or it could have been when a decision was taken to become ‘one company’ from the disparate businesses that have operated independently for many years.

Some enterprises have gone further and are pursuing global horizontal integration where one ‘business platform’ – often based upon an integrated IT package – is rolled out across all its divisions and operating countries. This type of horizontal integration was discussed by Peter Boggis in his Insight article Achieving the Dual Goals of Innovation and Horizontal Integration through Business Platforms.

Equally, those organisations that have outsourced certain functions are experiencing horizontal integration as their outsourcer seeks synergies by sharing resources, services and processes across their different clients.

In its simplest term, horizontal integration is when policies, processes, practices and technologies – essentially all facets of the enterprise operating model – are common across all or major parts of the enterprise, and resources are shared as opposed to being dedicated to specific businesses.  

The business case for horizontal integration is principally cost, predicated on the belief that doing things in a common and shared way across the enterprise will significantly reduce cost. It’s also argued that sharing services can deliver better service quality through a ‘central’ function than if individual business units provided the services themselves. Horizontal integration can also reduce risk by ensuring that common standards, whether they are financial, safety or ethical, are applied across the enterprise. It can also ensure fairness because all employees are treated the same way, for example in respect to performance management. Finally, it’s argued that horizontal integration makes it much easier for talent to move across the enterprise.

The challenges of horizontal integration

The potential benefits of having a common and shared operating model – supported by one integrated IT platform – with services provided by global shared service centres located in low-cost economies is very alluring. Not only would this deliver a significantly lower cost-base, it would enable changes to products, services and processes to be implemented more easily, thereby making the enterprise more agile.

Irrespective of whether you agree with this utopian vision of the future enterprise, it’s fair to say that most organisations are, to varying degrees, seriously pursuing the horizontal integration agenda. But pursuing this goal has its challenges, and some of the major ones include:

  1. The need to incorporate ‘authentic differences’. Whilst the world may appear to be getting smaller and more Western in its ways, the reality is that customers in different countries and cultures have different needs. And companies ignore this at their peril. More importantly, countries have their own laws and regulations that must be respected. Authentic differences therefore need to be understood and accommodated in the enterprise operating model. This does not mean that horizontal integration cannot be achieved, only that authentic differences need to be accommodated.
  2. Configuring the technology platform. Over the past 20 years, considerable progress has been made in the development of integrated packages that support an increasingly large set of business processes. But configuring these packages to the requirements of a ‘common and shared’ specification is a non-trivial task. This is made even more complex when authentic differences for discrete businesses, countries or markets need to be incorporated. After spending many millions of Euros, a global finance and leasing company concluded that the task was just too difficult and resorted to having different instances of the package configured to the requirements of each region. They had achieved a significant degree of horizontal integration across each region, but found it too difficult to integrate globally. 
  3. Changing accountabilities. During the 1980s and 1990s the prevailing management philosophy was to ‘let a thousand flowers bloom’. Enterprises created multiple business units, where the head, or Managing Director as they preferred to be called, was given considerable autonomy. So much so that it was not unusual for different business units in the same enterprise to compete against one another for the same business. Whilst this trend has passed, the reality is that most ambitious executives want to run their own business, and to do so with minimum interference from the centre. One of the implications of horizontal integration is that it takes away some degree of freedom with business leaders having different authority and decision rights to those in non-horizontally integrated enterprises. The challenge this presents is that those executives who have enjoyed considerable freedom in the past may find horizontal integration constraining.
  4. Future divestment. Horizontally integrated enterprises are, as the title suggests, integrated. As such it’s much more difficult to ‘unpick’ and divest parts of the business than in enterprises that are not integrated. A recent example is a global manufacturing and service company that some five years ago – following the appointment of a new CEO – decided to become ‘one company’. This involved restructuring the divisions, reducing the number of enterprise applications and generally pursuing the horizontal integration agenda. Earlier this year – under investor pressure – it decided to spin off one of its divisions as a totally separate enterprise. While this would have been a relatively simple exercise five years ago, it now is a much more difficult task due to the degree of horizontal integration. Shared Service units, including IT, HR and Finance, needed to be split and new technology platforms needed to be built to host applications for the spun-off company. Separating the IT alone cost over $100m. 
  5. Mindset. Mindsets of people within the organisation are important enablers of and inhibitors to change. No matter how much work is done to make the enterprise more horizontally integrated through structural changes and the introduction of common and shared policies, systems, technology and processes, it simply will not work as intended if people don’t have the right mindset. We also know that changing mindsets requires more than issuing everyone with promotional pens and mouse-mats. This important topic is discussed by Peter Turgoose in his Insight article Sustained Change Requires Mindset Change.

These challenges are not show-stoppers and do not negate the case for pursuing the horizontal integration agenda; they just illustrate the complexity of the journey and the need for senior leadership to fully understand what they are undertaking and the implications. For all enterprises the question should not be “how do we become more horizontally integrated?”, but “what is the best way to set ourselves up for success?”.

Understanding the target operating model is key

True horizontal integration brings about a fundamental change to the way an enterprise operates. It changes where work gets done and who has what accountabilities. Having clarity of a destination is therefore very important so that people can understand the journey they are on and the implications for them personally. As a result, some people may decide that working in a horizontally integrated organisation is not for them. What’s more, if we don’t have a defined target state we can’t judge whether we’re making progress or have put the conditions for success in place.

Surprisingly, some enterprises embark on horizontal integration without having a target destination, and some actively discourage one being talked about, preferring to “just get on with the change”. This approach may be perfectly acceptable when undertaking incremental change, but when it involves change across established functional and geographic lines, a target operating model is imperative.

Role of the Chief Enterprise Architect

Horizontal integration projects are the most challenging of change projects. Not only for the reasons given above, but because they inevitably cut across organisational boundaries. In fact their very purpose is to significantly redefine organisational boundaries, processes, accountabilities and policies. Not only do they require sponsorship at the top, but someone with business and change experience to lead them. Many titles are possible for this person, but the one preferred by the author is Chief Enterprise Architect. The role should not be confused with the Chief Technology Architect, who reports to the CIO, as the Chief Enterprise Architect should report to the CEO and be a member of the executive committee.
 
In one UK bank, the CEO appointed a person to his executive team to fulfil the Chief Enterprise Architect’s role (though he did not have this title). From the outset, it was acknowledged this was a fixed-term appointment with a clearly defined set of target outcomes. By being a part of the executive committee this person was able to fully understand what was going on across the bank, including the blind spots and concerns of his executive colleagues. As a result he was able to keep them fully informed and help them fulfil their role in the complex and challenging journey.
 
Surprisingly, few enterprises have such a person in place when they embark on a major horizontal integration initiative. Unfortunately, most believe it can be done with existing roles and structures, and with the executive committee acting as the steering group. What this misses is a recognition that no one on the executive committee will have the ‘head space’ to think through the target enterprise operating model nor the time to understand the journey at a level where they are able to anticipate and head-off the inevitable challenges. Delegation of this accountability to a programme manager, or someone in IT or OD, or to an outside consultancy significantly increases the risk of failure.
 

Putting the conditions for success in place

Once the decision has been taken to become more horizontally integrated, the most important role of the executive team is to ensure that the conditions for success are in place. Indeed some – the author included – argue that the decision to proceed should not be taken until the conditions for success are in place. Whilst the conditions vary between organisations, they invariably include clarity of target state, agreed operating principles and experienced people who have successfully led this type of change before.

I welcome your thoughts.

David Trafford
david.trafford@formicio.com

Formicio Insight Article: The Challenges of Horizontal Integration

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