What these terms describe
Organization design is about how people are grouped, who reports to whom and who decides what. An operating model goes a step further by describing how the whole organization works to deliver what it offers. Both subjects come with a stock of terms that are often used loosely in meetings. The definitions here are general and describe common usage; real organizations frequently combine several of these ideas, and usage differs between companies.
Operating model basics
Operating model. A description of how an organization arranges its people, processes, technology, locations and governance to deliver its strategy. It is a design choice, and the usual options are compared in discussions of operating model choices.
Organization structure. The formal arrangement of teams and reporting lines, usually shown as an organization chart. It shows who reports to whom but not how work actually flows between people.
Function. A group organized around a type of expertise, such as finance, human resources, IT or procurement.
Business unit. A part of the organization with its own focus, such as a product line, market or region, often with its own targets. The challenge of coordinating many business units grows as the number of units rises.
Value stream. The end-to-end sequence of activities that produces something of value for a customer. Organizing around value streams cuts across functions.
Capability. What an organization is able to do, such as handling customer enquiries or forecasting demand, regardless of which team does it.
Centralization terms
Centralization. Concentrating decisions or activities in one place or one team. Centralized management is usually chosen for consistency and shared effort, with the costs being slower local response and dependence on the center.
Decentralization. Pushing decisions and activities to local units or teams. It tends to favor speed and fit with local conditions, at the price of duplication and inconsistency. Neither direction is right in every circumstance, and local decision speed is one of the factors normally weighed.
Hybrid model. A mixture in which some activities are central and others are local. Most real organizations are hybrid in practice, and the useful question is usually which things to share and which to keep local.
Federated model. A form of hybrid in which a central group sets common standards and individual units carry out much of the work within them.
Hub and spoke. A structure with a central hub that provides shared services, tools or expertise, and spokes, such as sites or units, that use them.
Shared services. A model in which an internal team provides an activity to several units, such as payroll or IT support, much like an internal supplier. The shared services model can come with service agreements and charging arrangements.
Outsourcing. Having an external organization carry out an activity, in contrast to an internal team. It is a distinct decision from centralizing inside the organization.
Structure and reporting terms
Span of control. The number of people who report directly to one manager. A wide span means many direct reports and usually fewer management layers; a narrow span means fewer direct reports and often more layers. There is no universally correct number, because the right span depends on how complex the work is, how experienced the team is and how much support managers have.
Layers (or delayering). The number of levels between the top of the organization and the front line. Delayering means removing levels.
Line and staff. Line roles directly produce or deliver what the organization sells. Staff or support roles, such as legal or HR, advise or serve the line.
Functional structure. Teams grouped by specialty. It builds deep expertise but can make coordination between functions harder.
Divisional structure. Teams grouped by product, market or geography, each carrying a range of functions. It improves focus but can duplicate effort across divisions.
Matrix structure. An arrangement in which people report to two dimensions at once, for example a function and a project or product. A person might have a functional manager and a project lead. It can make better use of expertise, but it can also create unclear authority and conflicting priorities unless roles are written down.
Dotted-line reporting. A secondary, usually less formal, reporting relationship in addition to a main one, often for guidance or coordination.
Cross-functional team. A group drawing people from different functions to work on a shared goal.
Roles, forums and accountability
Center of excellence. A small group that holds specialist knowledge or sets good practice in one area and supports others in applying it. It can be a way of sharing skills without moving all the work into one team.
Community of practice. An informal network of people who share an interest or discipline across teams and exchange knowledge.
Decision rights. Who has the authority to decide, advise or approve in different situations. Written decision rights help prevent disputes over who has the final word.
Accountability and responsibility. Responsibility is doing the work, and accountability is answering for the result. One person may be accountable while several share the responsibility. A RACI matrix is a common tool for setting this out.
Process owner and system owner. A process owner is accountable for how a process performs from end to end, and a system owner is accountable for a specific application or platform. System ownership roles often overlap with, but are not the same as, process roles.
Steering committee. A senior group that gives direction, resolves conflicts and approves major decisions for a program or a shared area. A steering committee works best with a clear remit and a stable membership.
Project management office. A team that sets common methods and supports or oversees projects. Project management offices vary from light advisory units to strongly controlling ones.
Using the terms carefully
The words above are tools for describing a design, not recommendations. Labeling a structure as hybrid or federated does not make it work, and renaming a team as a center of excellence does not give it expertise or authority. When a term matters for a real decision, it is usually worth agreeing, in writing, what it means in the organization concerned.