Cross-Functional Processes: A Challenge of Incentives and Organization Structure

In any organization, various functions coexist: accounting, operations, supply chain, and many others. All these functions, though distinct, must work in harmony to achieve business objectives. Yet, in practice, cross-functional processes often present significant challenges, potentially becoming a stumbling block for business success. One such process that provides a perfect illustration is the three-way match - an intersection of accounting, operations, and supply chain.

The three-way match is a crucial business process for controlling the company's purchases. It involves verifying the invoice, purchase order, and the receiving report before paying. A different department owns each component of the three-way match: accounting is responsible for the invoices, operations for the receiving receipts to the warehouse, and supply chain for the purchase orders. This distributed responsibility can become an obstacle to achieving a successful three-way match.

So why are cross-functional business processes so challenging? At the heart of this issue lies the structure of organizational incentives, which are traditionally tied to the organizational chart.

The Challenge of Misaligned Incentives

Each department in a vertical organizational structure has its goals defined by its specific roles and functions. Accounting could be incentivized to process invoices quickly, while the supply chain department could be driven to reduce purchasing costs. These different incentives can often be at odds with each other, thus making the collaboration necessary for a successful three-way match difficult.

When incentives are not aligned, there can be a lack of communication and collaboration between departments. This miscommunication can lead to inefficiencies and create conflicts that hamper the smooth functioning of business processes. For instance, if a supply chain team orders a batch of materials that don't match the invoice, the accounting department might be left in the dark, thus leading to delays and complications in the payment process.

Towards an Incentive Structure that Encourages Collaboration

Designing an incentive structure that encourages cross-functional collaboration is the key to solving this dilemma. This might involve shifting from a vertically-focused incentive structure, which emphasizes individual department goals, to a more horizontally-focused one, emphasizing cross-departmental processes and collaboration.

In the context of the three-way match, this could mean that instead of incentivizing the accounting department to process invoices quickly, incentives could be based on completing the entire three-way match process. This would encourage better collaboration between accounting, operations, and supply chain departments, as all work towards a shared goal.

However, shifting incentive structures is a challenging task. It requires careful planning and a thorough understanding of each department's role and objectives. It also necessitates a cultural shift within the organization, promoting a mindset that values collaboration and shared success over individual department achievements.

The Three-Way Match: A Closer Look

Let's delve deeper into the three-way match process to understand the impact of misaligned incentives. In an ideal scenario, the supply chain team creates a purchase order for materials needed by the organization. Once the materials are received, the operations team generates a receiving report. The invoice then arrives at the accounting department for payment processing.

However, complexities can arise in an organization where each department's incentives are primarily tied to its unique objectives. The supply chain team, for instance, may be incentivized by cost-cutting. Therefore, they might order a cheaper batch of materials, assuming it will still meet quality standards. The operations team receives these materials and is likely incentivized by efficiency and speed. They might not thoroughly inspect the materials, assuming the supply chain team has ordered the usual, reliable items. Then, the accounting department, driven by the speed of processing invoices, pays the bill promptly without realizing there has been a change in the materials.

Reimagining Incentives

Consider a situation where the incentive structure is reoriented to focus on the success of the three-way match process rather than individual departmental goals.

The supply chain team, while still conscious of costs, now understands the importance of maintaining quality to ensure smooth operations and accounting processes. They communicate any changes to the supply chain and accounting teams well in advance. The operations team, aware that their performance is tied to the successful completion of the three-way match, takes extra care in inspecting received materials and communicates any discrepancies to the supply chain and accounting departments. The accounting department, now incentivized by the accuracy and completeness of the three-way match, takes the time to verify the invoice, purchase order, and receipt.

In this reimagined scenario, all departments work harmoniously, not just because their incentives are aligned but because they share a common understanding of the process. The successful completion of the three-way match becomes a shared goal, promoting better communication and collaboration across departments. Thus, by shifting the incentive structure from a vertical to a horizontal orientation, organizations can enhance the efficiency and success of cross-functional business processes.

Cross-functional business processes like the three-way match are crucial to the success of any organization. Yet, they can often be the most difficult to execute successfully because of misaligned incentives tied to the structure of the org chart.

Organizations need to rethink their incentive structures to overcome these challenges to promote better collaboration across departments. While it's a challenging task, the resulting increase in efficiency and reduction in internal conflict can substantially improve overall business performance.

In the end, remember that the most crucial process in any business is not accounting, operations, or supply chain alone but the harmonious and seamless integration of all these functions.

At Turbine, we're building an all-in-one platform for managing your business supply chain, accounting, and operations workflows. From cutting a purchase order through customer fulfillment, we integrate with all the tools you use to centralize information across your systems. 

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