Specialization Costs in Functional Organization
In a functional organizational structure, each team is responsible for a set of something called functions. An essential property of a functional team is homogeneity of knowledge within the team: people in it usually share similar educational background, similar expertise, similar career development paths. A clear benefit of functional organization is that it allows a team to expand while leaving team members specialize in knowledge required for functions that the team is responsible for.
A common difficulty with functional organization shows up when goals ignore functional boundaries: teams delivering different functions need to collaborate to achieve goals.
The typical solution to the need for cross-functional collaboration is to shift from a purely functional to a matrix organization, sometimes permanent, often temporary, where an individual in a functional team will have one manager focused on supporting that individual in developing their function-specific knowledge, and another manager focused on how to best combine that knowledge with those in other functions, to achieve an outcome.
However, as long as functional teams are maintained, the manager of such a team will continuously face a tradeoff: the manager needs to split time between learning new knowledge within the team’s specialty, and learning new knowledge that supports cross-functional collaboration. The latter may be one driver for continued demand for MBA-type education: basic and practice-oriented education in economics, finance, decision analysis, operations management, and so on – i.e., basic knowledge of business administration – targeted at people who do not need to specialize in any of these areas, but are specialists, or will specialize in other functional areas (e.g., engineering, chemistry, biology, medicine, etc.).
This functional vs administrative specialization tradeoff that any functional manager experiences, generates costs, and these costs increase as administrative knowledge develops. For example, much of business administration knowledge in academia developed since the 1940s, which led to continued academic research and institutionalization – the creation of management faculties across universities, even if that is far from the only way to get education in business administration. The point I want to make in referring to the development of academic knowledge in business administration, is that there was less for a functional manager to learn about business administration in the 1950s relative to today (and today is simply a point on a timeline that will likely extend far into the future).
How do these costs manifest themselves in a functionally organized firm? The more functional managers lean towards developing business administration knowledge, the less resources they have to deepen functional knowledge, which will eventually erode innovation and quality of functions their teams provide. The more they invest in specialization in their functional area, the higher the opportunity cost to better perform cross-functional coordination and the management of their functional team.
In a firm, a signal of preference for functional specialization is the development of functional teams specializing in knowledge that falls under the umbrella of business administration. A common example is the development of a financial planning and analysis functional team that provides expertise on demand for planning, analysis, development of metrics, among others. The functional organization, initially set up to support the development of functional knowledge directly related to products and services, i.e., to revenue-generation, expands to provide supporting functional teams, focused on facilitating cross-functional collaboration across specialties represented by non-administrative functional teams.
The reason, as mentioned above, is simple: The functional team manager has a set of administrative responsibilities, such as financial planning, hiring, process improvement, business data analysis, among others. If the functional manager cannot – for good reason – develop specialized knowledge in business administration, they have to rely on an internal team, equally a functional team, but now one that provides some functions that fall under the broad notion of business administration.
The interesting implication of expanding the classical functional organization by having these supporting administrative teams that service functional managers, is that it is exactly these teams that will have best insight into resource plans, goals, and targets at the level of all functional teams, and are therefore able to support planning and forecasting in ways which no functional manager themself could achieve – simply because the latter have to keep their focus on specialized non-administrative knowledge and services.
This dynamic between functional and business administration teams creates an interesting distribution of information, that functional managers need to be particularly aware of: the cheapest way for a functional manager to find out the dependencies of their team on others, and of others on their team (both of which are crucial in planning what the functional team needs to do, and resources it needs to do so), is not to go to all functional teams, but to those teams responsible for business administration. Notice the paradox, or at least a tension: non-experts in functional areas might end up holding key information about dependencies between functions, a paradox because they are non-experts in what that information is about.