Engineering the engineering org

How can companies design their engineering functions to strike the right balance between market responsiveness and operational efficiency?

Harnessing and optimizing engineering talent is paramount to success in the technology sector, but our experience has shown that there is no single way to accomplish this when it comes to designing an engineering organizational structure. Some structures optimize solution time-to-market, while others optimize operational efficiency. If an organization leans too far in either direction, it risks falling behind competitors in cost structure, innovation or speed-to-market. How can companies design their engineering functions to strike the right balance between market responsiveness and operational efficiency? It is worth noting that what is right for one company in its current form (stage in the product life cycle, competitive landscape, etc.) may not be right for another or for that same company five years from now. In short, there is no right structure — only the right structure at the right time for a given company.

Know your options

There are a wide variety of options when it comes to engineering organizational structures. For this analysis we have grouped them into three categories: vertically oriented, horizontally oriented and hybrid.

Figure 1: Engineering organizational structure spectrum

EY - Engineering organizational structure spectrum
  1. Vertically oriented structure where engineering is part of each business unit (BU)
  2. Horizontally oriented structure where engineering is a stand-alone organization
  3. Hybrid structures that use hard and dotted lines to matrix engineers between an engineering organization and BUs

To assess where their company lies on this spectrum, executives can ask themselves questions such as:

  • Who is responsible for meeting customer demands and anticipating market trends?
  • Who owns the product line P&L? Who is responsible for prioritizing engineering investments?
  • Who is responsible for attracting, developing and retaining engineering talent?

Consider an example

Let’s take the semiconductor industry as an example. We analyzed six major US semiconductor companies’ engineering organizations and found two to be vertically oriented, one horizontally oriented, and three using a hybrid model.

Figure 2: Semiconductor industry example – 2016 snapshot

EY - Figure 2: Semiconductor industry example – 2016 snapshot

These companies have used different evolutions to arrive at their current structures (see Figure 3). While some have maintained their structure orientations over the past decade, nearly all have seen some level of reorganization, and half have migrated across our organizational spectrum. All three of the companies that employed hybrid models in 2016 were using a vertically oriented structure ten years earlier.

Figure 3: Semiconductor industry organizations – evolution

EY - Figure 3: Semiconductor industry organizations – evolution

What is the right structure for your company?

To understand the journey from where a company is to where it should be, management should weigh the pros and cons of each of the three organization structure types and understand which situations make a company better suited for one structure versus another.

Vertically oriented organizations enable the BUs to determine and develop products independently. This allows companies to shorten time-to-market for customer solutions and respond nimbly to customers with a rapid pace for changing requirements. Placing engineers in product silos, however, reduces collaboration between engineering teams and can lead to duplication of effort or missed opportunities for innovation. Vertically oriented structures tend to work well when market demands evolve quickly or are unpredictable and when there are a smaller number of larger customers with more customized or unique requirements.

Horizontally oriented structures pool the engineers together and deploy talent to meet the needs of the various businesses. This optimizes operational efficiency and helps with managing margins. It can create a headwind, however, when companies look to vertically integrate technologies for specific customers or to perform other real-time changes that can be delayed by lack of control in a horizontal structure. Horizontally oriented structures tend to work well when cost optimization is a top priority, technologies are shared across product lines, market demands are predictable, and there is a need or desire to re-allocate engineering resources between businesses quickly.

Hybrid structures look to attain the best of both worlds though various arrangements. In many cases, hybrid companies assign engineers to the BUs, but maintain a dotted line relationship back to engineering (or vice versa). Structures can grow in complexity from there. The pros and cons of these structures vary as much as the structures themselves, but generally the benefit is a balance between operational efficiency and speed-to-market. This structure also offers a flexible career path, training and mentorship for engineers while still tying them directly to the performance of the BU. So why doesn’t everyone do this? The downside is that the models become complicated, and it can be difficult to assign clear goals and delineate responsibilities to executives, leading to slower decision-making and confusion over who is ultimately responsible for meeting deadlines, achieving financial targets and addressing customer needs. Hybrid structures tend to work well for companies building in scale that want to provide both growth and flexibility to their engineers, as well as for companies where there is established mutual respect between executives in the BUs and engineering organizations.

Figure 4: Picking the right structure

EY - Figure 4: Picking the right structure

In short, executives must analyze their company’s place on the product maturity curve, degree of competitiveness, pace of product innovation, length of life cycle and mix of other concerns to determine what org structure will best enable them to meet their goals. They should do this periodically to make sure that as their competitive and operating environment changes, so too does their organization.

Balancing act

Whichever structure a company chooses, it is important to be aware of the inherent limitations and take action to counterbalance them. The figure below demonstrates some leading practices that we’ve observed for accomplishing these feats.

Figure 5: Programs/incentives to counterbalance limitations of vertical and horizontal organizational structures

EY - Figure 5: Programs/incentives to counterbalance limitations of vertical and horizontal organizational structures

In closing

Companies should be aware of the challenges and opportunities presented with different structural options and build engineering organizations to achieve their goals. It is important to recognize that the organizational design is important, but it is not the only factor in determining the success of product engineering. It is just as important to appropriately design the engineering career track, business metrics, executive goals, P&L structure and corporate culture when optimizing the engineering organization.

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Barak Ravid
Managing Director, Co-head of Technology
Ernst & Young LLP

Spencer Lee
Vice President
Ernst & Young LLP

Nina Lapachet
Senior Manager
Transaction Advisory Services
Ernst & Young LLP