Organizational design plays a crucial role in determining an organization's success or failure. As an organization grows, it faces numerous challenges that determine effectiveness, productivity, and profitability. Understanding the relationship between organizational design and organization size is crucial for businesses looking how to achieve their goals. In this article, we will explore the key factors that organizations face as they grow, and how their organizational design impacts their ability to overcome these challenges.

The Rule of Three

The Rule of Three is simple, but once you know it, it's hard to unsee:

When your organization's size gets to the boundary of a "Power of 3," then former structures deteriorate.

That means, when you reach:

Potence	Threshold	Structure	Potential observations
0	1	An individual	No collaboration structure needed.
1	2	A pair	Usually very informal. "Do what it takes."
2	9	Team	A team needs to form. The team will communicate their own affairs mostly ad hoc and informally.
3	27	Team of Teams	Up until this point, most likely, everyone knows everyone else: who they are, and what they do. Most communication remains informal.
4	81	Teams with Coordinators	People detach: no longer everyone will frequently interact with everyone else. Teams will separate communication channels for "inside" and "outside." Coordinative roles emerge.
5	243	Coordination Layer	It's technically impossible for everyone to be in contact with everyone: "everyone can work on everything" begins creating communication overload - specialist areas form. A coordination layer will be essential to stop irrelevant, premature or even wrong information from stifling team performance.
6	729	Hub-Spokes Organization	Executive management begins to lose track of everything going on. The coordination layer begins to become too big to act as a single team. Possible solutions could include a combination of: decentralization, delegation/reporting hierarchy and functional departments. Centralization and standardization are utilized to increase functional efficiency.
7	2187	Team of Hubs	Distinct entities with few touchpoints evolve. The coordination layer will require more formalization and will behave like a "team of teams." Business functions deteriorate into silos. At operative level, people no longer know what's happening elsewhere.
8	6561	Team of Entities	Operating as a single entity becomes unfeasible - entities will separate. Entity basis could be location, product or business function. Each of these has its own mangement. Underlying smaller structures are preserved while the overall organization remains strategically aligned.
9	19683	Coordinated Entities	Entities will begin to detach. Keeping the different entities aligned, effective and minimally redundant is a continuous challenge.
10	59049	Independent economic entities	Most likely, there will be some major entities that are independent economically entities (e.g. individual brands, regional OpCos, subsidies) which each have a smaller structure. Arguments around "duplication versus economies at scale by centralization" have no clear winner.
11	177147	Conglomerate	It's very likely that there are a number of entities that act economically independent, i.e. there's a parent entity is operating more like a conglomerate with smaller, underlying entities. Redundancy is a desired systemic capability.
12+	531441	A Nation?	Hey - we're talking about organizations bigger than the countries of Malta or Belize here! Let's leave it at the point that these are special and have their own, unique challenges.

Approximate or exact?

The question begs for an answer. These numbers cannot be treated as a "law," but rather a "rule of thumb." There is no clear-cut point where a hard switch is required, and it stands to reason whether the given numbers are applicable to a specific organization. Instead, they represent a trend: as we approach the threshold without modifying the structure, more problems will surface. For instance, a shift from a pairing to a team structure may work well for 3-6 people, but with 7 people, misunderstandings may increase overproportionally - or a team of 12 may still be feasible, but have more challenges to navigate.

Up and Down!

The "Rule of Three" not only applies as an upper limit of organizational size, but also as a lower limit. A structure designed for 150 people would be inefficient if applied to a team of only 20 individuals. Similarly, investing in role clarity and formal working agreements may not be necessary for a pair as they can collaborate and achieve their goals with fewer formalities.

What the Rule of Three means for you

Adapting to change is crucial for any organization, but how do you ensure your structure is still relevant as your company grows or shrinks? The "Rule of Three" suggests that as you approach certain size thresholds, the challenges and inefficiencies of retaining the current structure increase significantly. However, relying on traditional, heavy reorganizations is not an effective fix. In fact, by the time a reorganization is complete, your target structure may already be obsolete. Instead, building organizational adaptivity as a core capability can help you stay ahead of the curve and ensure your structure is always optimized for your size and needs.

Growing

It's important to recognize the signs that indicate your current structure is no longer effective for the size and be open to adopting new patterns that work for larger organizations. By familiarizing yourself with these patterns, you can anticipate the challenges that come with growth and take proactive steps to adapt your organizational structure to meet the needs of a larger organization.

Shrinking

Reducing the size of an organization can be a positive thing, as it simplifies operations and allows for more streamlined processes. However, it's important to also eliminate any organizational patterns that were designed for a larger size in order to fully take advantage of the benefits of downsizing. Failing to do so can lead to inefficiencies and ultimately result in the downfall of the organization. Therefore, it's crucial to identify appropriate smaller-sized patterns and implement them effectively.

Decoupling

One of the most effective techniques in organizational design is decoupling, which involves breaking down a large organization into smaller ones with limited touchpoints. This approach allows decoupled areas to function with a lower "Rule of Three" complexity, enabling optimization with minimal overarching patterns. Decoupling scales well and reduces coordination overhead. When organizations become proficient at decoupling, they begin to ask, "How can we decouple further and simplify the structure of each area and the entire organization with less overhead?" There is no universal rule for when to decouple, but when it is appropriate, the benefits are significant.

Consequences of Ignoring the Rule of Three in Organizational Design

The "Rule of Three" is a soft but essential principle to consider in organizational design and management. Ignoring it can lead to consequences such as miscommunication, misunderstandings, overhead, poor outcomes, poor return on investment, and poor customer satisfaction. Growth and shrinking patterns in organizations should be organic, and it's better to constantly look for the next possible move rather than tie a change to a specific event or period of time. By applying the "Rule of Three" continuously and effectively, you can ensure that you're always working with the most efficient structure and prepared for any future changes.

Applying Occam's Razor to Organizational Design

Don't multiply entities without necessity

Occam's Razor

Applying Occam's Razor to organizational design means sticking to the simplest approach that works. This means not splitting teams if they can effectively communicate and collaborate as a single unit. It means avoiding adding a coordination layer if lateral alignment can work. And it means not using a team framework for a small group that could work like a pair, among other things. However, it's important to note that the caveat to Occam's Razor is to not increase complexity unnecessarily without a valid reason. For instance, if a small group of six people could function as an economic entity with their own funded subsidy, it may be better to let them operate independently rather than adding 20 extra people to deal with the bureaucracy of the parent company.

However, it's important to remember that when a simpler approach is indicated by the Rule of Three, but you don't know how to do it, adding complexity is usually the wrong solution. For example, if a single team is already not functioning effectively, creating a coordinated team-of-teams will only add further problems to an already unsolved issue: It's better to focus on mastering the basics before considering adding more complexity.

Closing Remarks
Always keep in mind that the "Rule of Three" is primarily meant to broaden your vision of what is happening, why it's happening, and to spark a conversation. The numerical thresholds are merely a signal of what to be mindful of. It's essential to prioritize doing what's straightforward and effective, and determining the simplest approach will vary depending on the situation.