Organisational Development

What is organisational development?

Organisational development (in German: Organisationsentwicklung) denotes the planned, longer-term change of structures, processes, leadership and collaboration in a company. It is characterised by the involvement of employees in the analysis and implementation, and by the organisation learning in the process to manage future changes itself.

Typical triggers are rapid growth, a new strategy, the build-up of staff after a financing round, the integration of an acquired company or the preparation of a sale. Responsibility lies with the management, supported by the people function (human resources) and, where needed, by external support. Tangible results are an organisation chart, role descriptions and rules on who may sign contracts and approve expenditure. Added to these are rules of procedure for the management (Geschäftsordnung), which set out the responsibilities and decision-making paths of the managing directors, and a headcount plan aligned with them.

Triggers in growth

Organisations do not change evenly but in stages. In the founding phase, the founders decide almost everything themselves, and coordination happens on the fly. As headcount grows, the first management roles emerge, then areas with interfaces, finally a second management level with defined processes. At each stage, something stops working that previously ran on personal coordination.

Typical signs are decision-making paths that grow longer, recurring conflicts between the same areas, tasks for which nobody feels responsible, and resignations of high-performing employees on the grounds that nothing is moving forward. Organisational development ideally begins before the next stage, not only once these signs accumulate.

Fields of action

• Decision rights: who decides what alone and from what point someone must consent, for example through an approval matrix with amount limits. Often the most effective single lever.
• Structure and roles: functional, product-based or mixed organisation, the number of management levels and the span of control, that is, the number of employees per manager.
• Interfaces and processes: the few handover points between areas where things regularly stall, rather than complete process manuals.
• Bodies and rhythm: which body decides what and at what interval it meets.
• Objectives: aligned objectives for each area, for example through OKRs (Objectives and Key Results, objectives with measurable key results), so that conflicts of objectives are not fought out case by case.
• Leadership: preparation of new managers, who often come from a specialist career path and learn leadership only on the job.

Employment law framework

Within the limits of the employment contract, the employer can specify the content, place and time of work in more detail at its reasonable discretion (right to give instructions under Section 106 of the German Trade Regulation Code, Gewerbeordnung, GewO). Changes that go beyond this require an agreement with those affected or a termination with an offer of changed terms (Änderungskündigung), that is, a termination combined with the offer of altered conditions. If there is a works council, many measures trigger participation rights (Sections 87, 99 and 111 of the German Works Constitution Act, BetrVG). These include transfers, the introduction of technical systems that can monitor behaviour or performance, and fundamental changes to the organisation of the establishment.

If an establishment or part of an establishment is transferred to another company in the course of the reorganisation, a transfer of undertaking exists. The employment relationships of the employees assigned to it then pass to the new company under Section 613a of the German Civil Code (BGB), unless those affected object.

Organisation as a field of review

Investors and buyers examine in due diligence whether the organisation can carry the business plan. They look at the organisation chart, the second management level, documented decision rights and dependence on individual persons, and they reconcile the headcount plan with the planned management structures. In larger transactions, assessments of the management are added, for example through a talent assessment, a structured appraisal of the managers.

In a company sale, a high dependence on founders or owners reduces value. Buyers react with discounts, an earn-out, under which part of the purchase price depends on later business performance, or long transition periods for the previous decision-makers. An organisation that works without these persons is therefore also a valuation topic, especially in business succession.

After an acquisition, organisational development becomes part of integration planning. It must then be clarified which management levels and decision rights of the acquired company remain and how they fit with those of the acquirer.

Practical example

After a Series A financing, the first larger growth round with institutional investors, a software company grows from 40 to 90 employees within 18 months. All approvals still run through the two founders, decisions pile up, and the new team leads do not know what they may decide themselves.

Management appoints five heads of area and introduces an approval matrix. Heads of area approve expenditure of up to EUR 20,000; above that, management decides. Measures above EUR 250,000 require the consent of the advisory board under the rules of procedure. Added to this are a weekly leadership meeting, a monthly report per area in management reporting and quarterly objectives. After half a year, instead of almost all approvals, only the matters above EUR 20,000 land with the founders. Before the Series B round, the company can show investors a management team with clear responsibilities, and the founders gain time for product and fundraising.

Distinctions from related terms

• Change management: steers a single change project with a beginning and an end. Organisational development is broader in scope and aims at the organisation's lasting capacity for change.
• Personnel development: promotes the skills of individual employees. Organisational development addresses structures, rules and collaboration; the two interlock in developing new managers.
• Restructuring: is usually driven by costs or crisis and follows a tight timetable. Organisational development is generally driven by growth and strategy.

Common mistakes

• Organisation chart without decision rights. New boxes change nothing as long as all approvals stay in the same place.
• Structures of large companies adopted. Several management levels and extensive committees slow down a company with a few dozen employees.
• Too many changes at once. A new structure, new tools and new objectives all at once overwhelm the organisation and obscure what works.
• Co-determination overlooked. Measures implemented without the required involvement of the works council can be challenged and delay implementation.
• Promotion without preparation. The best specialist becomes a manager without being prepared for it. The team then often loses both, specialist performance and leadership.

Frequently asked questions

When is the right time for organisational development?

Before the next growth stage. After a financing round that provides for a substantial build-up of staff, management structure and decision rights should be in place before the new employees join.

Does it need external support?

Not necessarily. It helps when the management is itself part of the problem or when conflicts between areas need to be resolved. Pure process questions are often better clarified by the company itself.

Does the works council have to be involved?

If there is a works council, yes for many measures. Which rights exist in detail depends on the measure and ranges from information to co-determination that can be enforced.

How long does it take for changes to take effect?

Individual rules such as an approval matrix take effect within a few weeks. Changed collaboration often needs six to twelve months, because it runs through habits.

The Roemer Capital view

In the financial model of a growth round, the planned hires are shown with cost and timing. Who will lead the new areas and who will decide what in future is almost never shown there. Roemer Capital asks this question explicitly in preparation, because investors also ask it in the management presentation and in due diligence.

Companies that clarify management structure and decision rights before the round put the capital raised to work faster. In a sale process the same applies to dependence on the owner: the earlier the organisation works without the owner, the fewer discounts and safeguard mechanisms buyers demand.