How Much Should You Pay for Org Design & Development?
According to Deloitte, 92% of senior leaders believe that organizational design is important or very important, making it their hottest topic of 2016. But few of those leaders know where the funds for this work should come from, how much to spend, or what to expect in return.
As our own clients are deciding on how to use their budgets in 2017, the big question we’ve been trying to help answer is: What’s an appropriate budget for team and organizational design?
To that end, what follows is an examination of the work of organizational design, the market rates for those services, guidance on how to budget for this work, and when.
OUR FACTS AND FIGURES
In addition to our own history of engagements at NOBL, a leading organizational design firm, the figures referenced here were gathered from Training magazine, the Association for Talent Development, Bersin by Deloitte, Business.com, Inc.com, Gallup, Quora, Fast Company, The Conference Board, and Forbes. Please take the numbers shared as directional, not exact. Your people and your context will undoubtedly demand further complexities. All monetary amounts are in USD, and most sources included figures exclusive to for-profit institutions.
DEFINING ORG DESIGN & DEVELOPMENT
First, here’s how we define both organizational and team design:
Organizational Design is the art and science of aligning a company’s strategies, structures, and systems to most effectively fulfill the organization's purpose
Team Design is an iterative process of steering individual teams ever toward higher levels of performance and engagement
What does this actually look like in practice? For most, it’s a mix of tools. At NOBL specifically, our outcome is always the same: high performing teams and enriching cultures, but the format and output of our work varies during the duration of our work:
RESEARCH: Sprints into competitive and comparative organizations (structures, budgets, processes, etc.) and assessing the existing conditions of a team or organization
FACILITATION: Team offsites and workshops, critical for developing cross-team collaboration
COACHING: Leadership and team coaching, change management coaching, often in-person embedded with the team
TRAINING: Targeted courses to address critical teaming skill gaps (e.g. giving and receiving feedback, adaptive planning, meeting discipline, etc.)
Because of the variety of tools, talent, and timelines required for this work, we’ve taken each of the areas of work above and done a deep dive into their corresponding market pricing. What follows is our best effort at exploring each area and the publicly available price ranges for these services.
RESEARCH PRICING BENCHMARKS
OD Researchers are obsessed with the practices and paradigms of the world’s most effective organizations. How do they attract top talent? How do they onboard that talent quickly and effectively? How do they structure their teams, how do they disseminate information, how do they distribute decision-making, how do they measure themselves, how do they respond to new opportunities or obstacles? Their questions and their investigations never end. These researchers are constantly building a body of knowledge for their clients, knowing however that you can’t simply copy-and-paste one organization’s ways of working to another. Their findings illuminate a new way of working or thinking, or provide the necessary argumentation for fundamental organizational changes. Their gaze is also pointed inward; they are capable of making quick work of assessing your existing organization and team.
For the research portion of our work, there’s a vast amount of information online about the typical fees of OD and management consulting firms. There’s less information, though, on how firms typically budget ahead of time for these services (in part, because these are considered reactive services rather than proactive).
As a baseline, an entry level management or organizational design consultant at a small firm typically bills at $175/hour and a partner closer to $350/hour. Consulting firms in major cities can also charge up to 50% more, and a brand name (McKinsey, Booze, Deloitte, etc.) can add another 50% to the cost, if not more. Research teams at consulting companies can include 4–5 people (one senior, varying juniors) and are billed by the week or month. Larger projects may require larger teams too, of course. Therefore, for a typical month of research, clients can pay anywhere from $70k-280k for a research team (price varies due to the team’s allocation, the firm’s location, and the firm’s credentials).
Why so expensive? One, by paying these fees clients have made them normal. Two, as large as these fees may seem, consulting companies are extremely expensive businesses to run because of the salaries required to attract and retain top management talent. For reference, the typical profit margin for a consulting company is between 15–25%.
TRAINING PRICING BENCHMARKS
Traditional corporate learning and development is focused on addressing an individual’s skill gaps or enforcing compliance and mitigating risk. OD Training is targeted for the skills required for group collaboration and coordination (harsh processes and silos are not collaboration). OD training can include courses on the basics of team design, modern leadership, cultures of continuous learning, change management, adaptive planning, and effective time management.
A large organization, on average, will spend a total of $12.9MM yearly on overall learning and development. Midsize firms spend $1.4MM and small companies spend $350k. These figures include: tuition reimbursement, conferences and professional development, compliance training, online learning systems, and both internal and external content production.
The average spend per learner in the average for-profit organization is $971 per year. Large firms spend less per learner ($447) because of economies of scale. Small firms pay more per learner ($1,105). Firms, on average, spend about 10% of their L&D budget on outsourced help like ours–again, small firms typically pay a higher percentage because they have fewer resources in-house. On average, 13% of L&D budgets are spent on software tools. Tuition reimbursement, as a means of retaining top talent, accounts for 10%.
Of course, there are outliers. For example, Starbucks built a “leadership lab” for their store managers at the cost of $35MM, roughly $3,600 per manager, yet because of savvy PR they were also able to generate millions of media impressions in the process. In stark contrast, Jiffy Lube boasts 120 online, self-paced courses which cost less than 15 cents per course. The challenge with using existing L&D courses as a benchmark for OD training is that OD is a newer area of focus, unlike basic skill training (e.g. How to Powerpoint), and OD courses are therefore more expensive to source and distribute. There are no 100+ courses, for 15 cents a piece, at the ready for organizations as of yet.
FACILITATION PRICING BENCHMARKS
OD Facilitators are indispensable for team or leadership offsites. Standard facilitators are good at ensuring momentum in the room, and OD Facilitators take this further by being able to gauge the dynamics among the team while introducing exercises and activities to increase the creativity and capability of the whole team, together.
Facilitation rates, too, vary widely. Facilitators charge either an hourly fee or day-rate. Hourly fees can be anywhere from $180–500, and day rates from $1,800–8,000. How much you pay is typically dependent on whether the facilitator is a sole proprietor or part of a consulting group and that person’s level of experience and/or reputation. But like consulting fees, companies in major cities and facilitators from major firms can often bill at twice these rates, if not more. One last note, while facilitators initially quote a day rate there is likely pre- and post-work to be done and budgeted for. A single day of facilitation can quickly cost north of $25k due to that work.
COACHING PRICING BENCHMARKS
OD Coaches are invaluable to team leaders. They provide insight, reflection, and guidance as leaders face continual change and must marshal their teams in response. Moreover, OD Coaches are the voice of reason to individual team members who are struggling with accepting and adopting new behaviors.
In vetting coaching services, we focused exclusively on executive coaching and not general life coaching. The average experienced executive coach bills at $600 per hour, and the average executive who purchases these services attends 5–9 of these sessions per year, with each session lasting on average 2 hours. Therefore, companies on average, spend $9,000 per executive on these services.
THE RETURN ON YOUR OD INVESTMENT
Business, any business, is just the commercialization of human interactions.There is no organization that exists that isn’t ultimately the product of the coordination and collaboration of people. For decades, organizations have focused on optimizing every other element of work: input goods, supply chains, distribution chains, customer service, and individual task efficiencies. Internal coordination and collaboration is now the frontier of optimization, one that can serve as a sustainable competitive advantage because cultures, from one organization to another, are not easily reproducible. You can clone a business model or an app, you can’t (yet) clone people and relationships.
In Gallup’s 2016 meta-analysis of 82,000 business units in 73 countries and across 49 industries, they found that organizations in the top quartile of engagement had 10% higher customer loyalty, were 20% more productive, and 21% more profitable than organizations in the bottom quartile. Moreover, organizations at the very top of the spectrum were found to be four times more successful than those at the bottom of the rankings.
From our own work at NOBL, we’ve seen teams report a 65% increase in candor, a 30% increase in their ability to plan and focus, and a 34% increase in trust between teams and individuals. All of which have directly contributed to the bottom line thanks to faster, more engaged, and more cohesive teams and departments.
Organizational design and development is a practice area critical to any business that wants to improve year over year. And for mature organizations, where growth is measured typically in single digits, OD can be the most impactful lever and most explosive return for your business.
SAVING TIME, MONEY, AND COLLECTIVE HEADACHES
A surprise visit to the ER will always be more expensive and more severe than maintaining your annual check-up. Organizational Design, like most management consulting, is too often a reactive impulse and service: leaders finally recognize a toxic culture, or missed deadlines become an organizational norm, or there’s a costly talent exodus. In these situations, OD work becomes rushed and therefore more costly. Moreover, the longer you operate your business without an OD practice (insourced or outsourced), the more organizational debt and dysfunction you’re likely to accrue. Removing that debt will take time and focus away from unlocking new opportunities achieved by helping teams work better together.
You can circumvent these challenges by 1) preserving an explicit OD budget for your organization or department and 2) making OD-related activities a continual norm among your teams.
We suggest a yearly organizational design and development budget pegged as a percentage of your firm’s overall payroll expenses. Because OD is focused on improving the collaboration of your people, headcount is the most direct contributor of cost, and payroll is the closest financial metric to base OD costs on. After analyzing the market rates given the services listed above, we feel confident in suggesting the following percentages, based on total payroll costs, for organizational design and development:
4% for large companies (>10k employees)
6% for midsize companies (1–10k employees)
8% for small companies (<1k employees)
Under this guidance, a 100-person company that spends $10MM on payroll for its people should also set aside $800k to ensure those people continue to work well together, in the face of all kinds of conditions.
If your organization is unable or unwilling to create an overall OD budget at this time, but you lead a team or department, we suggest a team or department budget of 10% of your payroll expenses (higher because you won’t reap the benefits of economies of scale). In this situation, we also advise that the P&L or department foot the OD bill and not HR. HR is likely already stretched thin given an ever widening list of responsibilities and an ever dwindling amount of resources. We do strongly suggest, however, that an HR business partner be present in the design and implementation of OD work so as to be an ambassador between teams/departments and to spot potential challenges along the way.
Of course, once you have money set aside for this work, you’ll need to know how to spend it. The areas we discussed above (research, facilitation, coaching, and training) represent the total universe of OD-related activities. To be more granular and prescriptive, you can think of your OD practice in two segments: Maintenance and Intervention.
Maintenance related OD work involves distributing and training basic OD practices and approaches. These are tools and habits akin to your annual physical, which keep teams healthy and fit. These include a survey instrument of some kind (there are many to choose from, including our own), monthly team retrospectives, quarterly team offsites, feedback formats, and leadership lessons.
Intervention related OD work involves a targeted response to a specific dysfunction, likely identified through Maintenance OD practices. This, unfortunately, is your surprise ER visit. These are punctuated sprints that bring leaders and teams together to triage and address critical barriers to collaboration and coordination. Often, this begins as a team offsite and then involves follow-up work to ensure new behaviors and attitudes stick.
The percentage of your budget you spend on Maintenance versus Intervention will be specific to your organization. Moreover, the amount you spend internally versus outside help will also be determined by the level of OD maturity in your organization. Even for the most mature OD functions, we suggest that 10% of your budget go toward outside help, if only to be exposed to the practices of other organizations obsessed with organizational design.
Org Design services may seem costly now, but without a focus on how your teams work best together, the results may ultimately be far more expensive. Moreover, now is an opportunity to hone OD as a competitive advantage in your market while your competitors are unaware of the opportunities and still question the returns. As work increasingly relies on collaboration and coordination and as conditions remain increasingly uncertain, the ability of your teams to sense and respond to the world, to marshal the engagement of their colleagues, and to align quickly to new information will undoubtedly be the most significant competitive advantage of the 21st century.