Organization Design - is it good to be flat?

Business Excellence Series Title - 2

Organization design is one of the first HR priorities for SMEs, and most of them tend to have a flat structure. But is that structure sustainable in the long run?

The first HR priority for a start-up trying to scale up or an SME, to enhance effectiveness of internal functioning, will be to ensure an optimal Organization Design. This is an initiative which tends to get missed out by most organizations, and alternatively gets addressed in an unstructured manner, which leads to major avoidable inefficiencies and fall-outs. As such “Organization design” largely involves creation of Role descriptions, reporting relationships, chain of command, and management processes which directly impact effective functioning of employees, in turn leading to the ability of the organization to achieve its strategic objectives. Various studies have shown that a structured approach to Organization Design helps to reduce costs, drive growth, and strengthen both short-term performance and long-term organizational health.

One of the key aspects of Organization Design is Organization Structure. As one can visualize, there is no single structure which would be right fit for all organizations. Every organization has to adopt a different structure, which is a function of various factors namely, life cycle stage of the organization, business model, industry, talent landscape, size, leadership styles, and culture. Primarily structures were traditionally made around functions or business divisions. With increasing complexities and inter-dependencies, these have further evolved into Matrix structure (a combination of functional and divisional) and further into network structure, which involves multiple relationships among managers.

“Various studies have shown that a structured approach to Organization Design helps to reduce costs, drive growth, and strengthen both short-term performance and long-term organizational health.”

Start(up) with a Flat structure

Initially all start-ups start with a very flat structure, where a promoter entrepreneur hires people to carry out multiple jobs, who directly report to him. This is the most effective structure at this stage of the organization life cycle, as it ensures speed as well as optimization of cost, which is very important at this stage. It is therefore, advisable that SMEs should operate with a flat structure in its initial growth phase and add people strictly based on increasing activities/volumes without creating any hierarchies.

As an organization grows and keeps adding more people, it becomes difficult beyond a point that promoters can handle everything themselves. In fact, the initial strength of Flat structure, helping in quick decision making, now makes things slow-down, as every decision needs to be directed to the same few people, who end up becoming a bottleneck due to limited bandwidth.

Boston-based Wistia found that as they grew, a flat structure started turning from a boon to a bane. Their CEO, Chris Savage, reflected in a blog post:

“As our company grew from 2 to 30 people, I was surprised to see how the strengths of a flat organization turned into our team’s biggest weaknesses”.

In such growing organizations eventually any leader will be overwhelmed without introducing much dreaded hierarchy. While the general best practice is to have 8 to 12 reports, in some cases, leaders have tried to have as many as 40-50 people all reporting up to a single person. With no structure, the quantity of problems as well as quality of decision making become major issues. How do you address all the problems that come up when there are too many people coming to you? They either get ignored, or you never get enough of the right things done.

Structuring for Growth

This is the time when growing start-ups or small SMEs should put a formal hierarchical structure in place. At this stage, organizations need to deliberately introduce hierarchy by meaningfully clubbing activities and identifying Team Leaders to handle a set of people. Simultaneously, it will require clearly articulating Roles, Responsibilities and defining Accountabilities, along with Delegation of authority.

This transition is normally difficult as it requires letting go of a “flat” management style, and allowing people to make their own decisions, which normally is quite scary. In fact, for the founder of a start-up, it’s often very unsettling, because he always has a fear of people making mistakes. But the fact is that people will make some mistakes, which an entrepreneur might also have made in his initial phase. But for developing leaders, those risks have to be taken and costs involved if any, have to be borne. As promoters start this transition, sometimes they get perturbed by some challenges which they face in terms of certain wrong decisions made, some delays, and increased costs. But these are natural challenges likely to come in this transition process and need to be managed prudently, rather than turning back.

Interestingly, Google faced a similar situation, when their founders Larry Page and Sergey Brin wondered whether they need any Managers at all. As reported in HBR, Google founders learned this lesson the hard way –

“In 2002 they experimented with a completely flat organization, eliminating engineering managers in an effort to break down barriers to rapid idea development and to replicate the collegial environment they’d enjoyed in graduate school. That experiment lasted only a few months: They relented when too many people went directly to Page with questions about expense reports, interpersonal conflicts, and other nitty-gritty issues. And as the company grew, the founders soon realized that managers contributed in many other, important ways—for instance, by communicating strategy, helping employees prioritize projects, facilitating collaboration, supporting career development, and ensuring that processes and systems aligned with company goals.”

Moving from a flat structure to a hierarchical structure is the natural progression of any growing organization. As organizations grow more, a normal hierarchy starts posing problems in effective coordination and functioning, where Business Unit and Functional structure is needed to be introduced. With increasing size and complexity, Matrix structure and Network structure become the need of the hour. A periodic review in view of internal and external changes, with help of an expert, is necessary to avoid any major fall-outs.

Structures will only help organizing people involved in delivering a business objective in a particular manner. In addition to the Organization Design itself, success or failure of the structure is also dependent on the people sitting in different boxes. It is therefore, critical to involve them in designing/ changing any structure, so that there is a better understanding and alignment. Otherwise it may be viewed as an attempt to put them in a confined space and may lead to introduction of bureaucracy, which will make the structure dysfunctional.

Structure has to be designed keeping business needs, roles and responsibility in mind and not around specific employees/ leaders. Any structure which is created to accommodate a leader, becomes dysfunctional sooner than later. Other aspects like span of control, number of layers, delegation of authority and accountability are also very critical, for making effective implementation of Organization Design.

It is important to remember that organization structures cannot be kept static. While structures are not to be changed every now and then, they need to be reviewed periodically in view of business growth, diversification, introduction of new specializations, market changes, and customer expectations. In case organizations fail to notice the need for change in the structure at right time – say, from geographical focus to product focus, or elimination of a dysfunctional layer, or introduction of matrix reporting where needed – it may lead to significant negative impact on business results, major opportunity loss and huge costs. At the same time, appropriate adjustments in Organization Design in line with internal and external environment changes, leads to visibly positive business outcomes.

For Share and Like – use below links

For any Services or further Insights/ Support - Contact using form below

This article originally appeared in SME Futures in 2018.