Understanding an organization through formal and informal interactions

How can individual performance be affected by the consistency between formal and informal aspects of the organizational structure of a company? A well-established stream in organizational studies promotes the idea that internal consistency is always associated with better individual performance, because it is easier to coordinate work, share goals, exchange information and access resources that can impact individual performance. Yet other observers claim that there are some advantages to inconsistency too, for instance, an array of diverse information can be generated, and adjustments can be made to compensate accordingly. But offsetting these advantages are higher maintenance costs and a risk of raising diverging or conflicting expectations. 

To explore this topic, we conducted a study in 2012 which was published in the Strategic Management Journal. Our initial premise was that to understand how an organization works, we need to take a holistic approach that can encompass the co-presence of both formal and informal interactions.  

We based our research on three hypotheses.  As for the first, when the task in question requires the use of typically vertical hierarchical mechanisms, the consistency between formal and informal reinforces individual behavior, improving performance. The second hypothesis suggests that when there are horizontal, reciprocally independent relationships at play, the inconsistency between formal and informal interactions initially lowers and then boosts individual performance, following an inverted-U shape, with a ‘sweet spot’ at a point where they overlap. Lastly, our third hypothesis addresses sequentially interdependent activities (which would involve horizontal interactions, like in an assembly line); here inconsistency between formal and informal flows leads to a decline in individual performance.  

To test our hypotheses, we utilized data from an Italian branch (Alpha) of a leading financial services firms specialized in private banking, asset management and investment banking. Both in Italy and elsewhere, these types of services must comply with a vast number of rules and regulations that serve primarily to protect the rights and interests of investors. Inevitably this regulatory framework directly impacts organizations’ internal structures and work flows in a substantial way. In this regard, Alpha has an extensive system of structures and formal procedures, which provided us with the ideal setting to study the effects of formal and informal interactions. 

We began our investigation by interviewing six of Alpha’s senior managers with the aim of understanding the company and finding out what documentation was available. Next, we sent a questionnaire to each of the 111 employees who worked in the company’s core business asking about respondents’ formal workflows as well as their internal interactions. Finally, we mapped out the formal connections between all the members of the organization by studying 147 standardized, documented company procedures, after turning them into flow charts and task sequences, and links between tasks and task performers.  

By cross-tabulating the organizational structure and the 147 procedures, we drew up a map of the formal connections among organization members, broken down into three types: hierarchical relationships, sequential workflows (one-way sequential relationships), and reciprocal workflows (two-way horizontal relationships). We validated this map during ten meetings with the teams from the various functions in our study. In addition to these three matrices, we developed a fourth on informal workflows showing whether or not an informal relationship existed between all the Alpha employees. 

The findings from our study offer significant support for our hypotheses, and suggest that the value of consistency between formal and informal workflows is limited to situations in which the characteristics of the task at hand don’t require differentiated methods for accessing resources. In light of the positive effect on individual performance that emerged when there was consistency between hierarchical structures and informal networks, we can see that the overlap creates value. This implies that when the coordination required for a given task is fairly straightforward, it’s better to send employees consistent, reinforcing signals. What’s more, it’s not only routine tasks that benefit from consistency between formal and informal network.  

Instead when there is inconsistency between the two, and when workflows are reciprocal and bidirectional, we found two contrasting effects on individual performance. Due to the lack of coordination, performance will initially decline, but thanks to more open access to ideas and information disseminated throughout the organization, sooner or later performance improves. So organizations should factor in this effect when complex coordination is needed. When instead the situation calls for sequential, one-way work flows, the lack of consistency between formal and informal elements will unavoidably impair performance, because ‘out-of-the-box’ interaction represents a distraction. 

Last of all, our study shows that the social dynamics don’t always act as positive propagators of formal mechanisms that are planned to promote efficiency and effectiveness, as per conventional wisdom. Instead the consistency between the two levels is valuable only when the characteristics of the task at hand do not require multiple methods for accessing resources.