Tuesday, May 15, 2012

Does a Flat Organization Have Negative Consequences?

Julie Wolf of Harvard Business School has conducted an extensive study of companies that have tried to flatten their organizational structure.  She studied historical data on 300 large U.S. firms over a 15-year period, and she conducted interviews and analysis of CEO calendars.   She examines the consequences of attempts by large firms to "flatten their hierarchies" - something often recommended to improve performance.   The conventional wisdom is that we should flatten hierarchies so as to push decision-making down to the lowest level possible.  However, Wolf found an unintended consequence of such flattening efforts: "Results suggest that flattening transferred some decision rights from lower-level division managers to functional managers at the top. Flattening is also associated with increased CEO involvement with direct reports—the second level of top management—suggesting a more hands-on CEO at the pinnacle of the hierarchy."  In short, by removing layers, we may be pushing decision-making up the organization, rather than down to the people at the local level with specific knowledge about the customer, markets, technologies, and the like.  Flattening could lead to a more centralized management structure.

I've always believed that organizational structure is a blunt weapon.  Structure is an easy lever to pull if an executive wants to reduce costs and influence behavior.  However, simply moving boxes and arrows on the organizational chart often does not lead to higher performance.   Structural change must be accompanied by process and cultural change.  Specifically, Wolf's research suggests that firms need to be very clear about the allocation of decision rights when layers are removed.  I also think that firms need to pay close attention to status/informal hierarchies, rather than only focusing on the formal organizational structure.   Often, the informal hierarchy drives decision-making processes.   The values of the organization drive decision-making processes.  Flattening of the formal structure has to be accompanied by an effort to reduce the salience of status differences, and it has to be buttressed by leadership which emphasizes the value of putting decision-making in the hands of those closest to the work. 


Scott Beaty said...

Michael,In addition to the "pushing decisions up the hierarchy" phenomenon there are two other consequences of a flattened hierarchy I've seen. One is the reduced opportunity for leader development. As a result of flattening structure it's common in some industries for a person to spend 10-12 years as an individual contributor with no opportunity to practice leadership at lower levels in the organization. Second, a flattened hierarchy often results in a dramatic increase in the number of direct reports. Where 5-8 direct reports was once the "rule of thumb" it's now often double that. As a practical matter the leader seldom has time to properly do the coaching,mentoring and development of others that was once possible.

Michael Roberto said...

Great point, Scott. Thanks for offering these thoughts. You are right about the span of control. It's an issue. I also do think that people end up spending more time as individual performers/contributors.

mike said...

Hi Michael, speaking as someone in the middle, it is all about decision making rights. We create layers of managers without clarifying roles and rights. This effectively "neuters" those middle layers, leaving them unable to react to market changes without seeking two upper layers of approval. If you can't hire, fire or even be involved in setting your budgets, then why do you exist?

I understand Scott's view, but I would propose that leadership development and individual contribution are tied together. You do not need direct reports to require the facilitation and communication skills to be an effective leader.

Also, I agree with Scott on the number of reports. However, my take is that in the past, the manager was a full time manager. With current organizations, someone gets promoted to manager, but their prior role is not filled. They take this role with them, and now we have a "working" manager. As Scott says, this person now has direct reports to lead, plus their new manager "special projects", plus their own prior work to do. This diluting of their role as manager inhibits their ability to coach and to mentor.

james said...

The worse thing for an organzation is to pretend that it is a non hierarchical organization when in fact it is not. And what are some of the signs that an organization is not a flat organization titles' management has lots of titles there's lots of them vice presidents assistant vice presidents junior vice presidents' Their all on salary everybody else is hourly. Suggestion boxes oh yes suggestion boxes. Try working outside of the box in a truly hierarchical organization this is never allowed. It is very rare for a large organization to have a flat organization very rare. This is the main reason why smaller companies are so very often much more successful than much larger ones.

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Manoharan Rathinam said...

Transforming a hierarchical organization in to a flat organization is a big dream. A CEO groomed from a hierarchical organization may find it extremely challenging to manage this change. An effort to make it look like a flat organization may succeed. To actually transform to a flat organization calls for structural, cultural, strategic, competency and paradigm shift within an organization. Imposing all these changes at once on any organization is a criminal mistake.
I would recommend defining the traits, & competencies required for leaders in a flat organization. Define the culture you want these leaders to stand for. Share your vision to the leaders. Support them to align with your thoughts. Explore the possibilities of implementing the cultural changes as much as possible. See which of your leaders can flex. It’s a moment of truth for them. Identify those leaders who can’t flex and plan for their replacement. Focus on HR practices to get the right leaders in and groom.
Once you have the right set of leaders…. the organization is ready for the battle.

Maciej Rajk said...

Thanks for this article! As a management consultant I take high interest flat organizations. What you wrote - specially the quoted HBS study - inspired me to write this:


Adrian Coman said...

Hello! Very interesting the thoughts and the comments.
I'm writing my dissertation on "The role of the business analyst in developing the small business" and I am considering to suggest that a flat hierarchy will create the context for employee to grow, be engaged and more productive.

I would appreciate your input if you would like to offer some suggestion for my dissertation.

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Shalin Siriwaradhana said...

Found a good organizational chart for explaining a flat organizational structure in the creately diagram community. there are 1000s of org chart examples and templates to be used freely.