Due to the fast changing market landscape, companies are finding that they need to adjust their structures, cultures and practises to remain competitive. Agile and efficient startup firms have significantly disrupted many markets and now are some of the largest business around. This has inspired incumbents and newcomers to reduce the costs and barriers embedded in traditional hierarchical structures and streamline operations by reforming their business structure.
> You may also be interested to read our research report on The Barriers to Digital Transformation which includes our latest thinking on organisational structures and agile attributes.
A ‘flat’ organisational structure configures the organisation as a network rather than a traditional hierarchy. As with many alternative org structures, the flat (or flatter) organisation is a response to the weaknesses of the organisational pyramid – where the problem is that top management is too dislocated from base operations.
In adopting this approach, companies may organise into self-managing teams and adopt the technique of self-management. This allows individuals to take on responsibility for their own tasks and priorities, by allowing employees to set their own goals and self-manage how they meet tasks and objectives (as opposed to micro-management). The flattening of the hierarchical pyramid structure is intended to eliminate levels of hierarchy and increase the control of lower-level managers. The rationale behind this is clear: to create a streamlined, more efficient and more responsive organisation. By doing this, the firm not only enhances performance, but also improves employee accountability and morale.
However, the outcomes of firms implementing flat structures and self-management are not clear. Some firms are great case studies of the benefits of a flat structure, while others show difficulties with the structure.
A popular example of a large firm that has successfully adopted this approach is Semco, a large Brazilian manufacturing firm. In a radical change (in response to financial pressures), Semco significantly cut management layers to only retain three: corporate (counsellors) and two operating levels in manufacturing (partners and associates). The system is held together by coordinators (former supervisors/managers), but uniquely no coordinator reports to another. One of the distinctive features of the Semco structure is the emphasis on employee autonomy – in Ricardo Semler’s words, “we hire adults, and then we treat them like adults”. Under the idea of self-management, employees are trusted to use their common sense in matters ranging from working schedules to travelling expenses. This not only increases autonomy, but also reduces overhead costs and time. Operating with this flat(ter) structure, the company has a higher profit margin, higher sales and has become one of Brazil’s fastest-growing companies. This case study can easily inspire others to follow their actions as it is a great representation of the predictions of the structure.
Semco managed the cultural shift to autonomous management by segmenting the firm into smaller production units of around 150 people. They previously attempted worker participation programs such as kanban systems and motivation schemes which did not hold in the long run because they were too complex to implement across large teams and needed too much management. By breaking up larger units into smaller ones, employees were more in touch with each other and this allowed easier coordination of work under self-management. Segmenting units increased costs slightly at first, but in the long run the benefits gained included lower costs and higher productivity and profits in each unit. Initially, there was some reluctance from workers to take on management responsibilities, but there was no problem with increased autonomy. Importantly, Semco’s shift came at a time of financial stress, so managers were willing to adapt to save the company.
The firm does not stand alone as a success story. Other successes include WL Gore, which has also adopted a flat structure from the start with no traditional bosses or managers and now operates at a scale of 10,000 employees. Every employee has a sponsor (with a role to mentor, share knowledge and introduce connections) and is seen as a knowledge worker making their own commitments, as opposed to having assignments. Automattic, the company behind WordPress, employs a distributed workforce with a flat structure. Activity across its 328 employees is coordinated via internal blogs and messaging tools. High employee autonomy grants empowerment and flexibility, and encourages complete ownership over tasks. Valve, a successful game development company, has no managers at all and allows employees to move between teams as they wish. In addition, a study published in the Journal of Applied Psychology looked at factory workers organised into self-managing teams and describes how ‘peer-based rational control’ increases performance at both the individual and team level, and those workers that self-organised outperformed those organised in a traditional hierarchy.
So, can we conclude that the way forward is to flatten all organisations? Buffer recently released a post about their attempt to move to a completely flat structure. After realising that the amount of freedom without guidance or accountability felt ‘odd’, they realised that a flat structure would not suit them, but a blend of hierarchy and self-management did. There is additional empirical research that shows evidence at odds with the expected view of flattening the firm – it shows that flattened firms showed more control at the upper levels of the firm through CEOs centralising more functions and increasing direct reports. Firm managers became more, not less, involved in internal operations. This suggests that flattening the firm structure may push more decisions upward instead of increasing delegation downwards.
The problem may lie in barriers within firms that deter the success of the flat organisation. A factor may be fear from employees of both the unusual and change, and fear of not hitting their targets and making bonuses (as Tom Reiger points out). Out of this fear, employees will work to serve their personal interests over those of the entire firm. There is also resistance from cemented mindsets of how an organisation should run and this creates reluctance to change the status quo. Also, it is hard to change organisational structures due to high levels of existing bureaucracy and the need to instil the belief throughout the entire company that the change will succeed.
Flat organisational structures are increasing in popularity, but flattening is not yet a definite solution to increase efficiency in operations. Creating a more agile organisation requires more attributes than just a flatter structure, such as open and collaborative culture, communications and practises. However, the move to flattening a firm is certainly enabled and helped by growing digital technologies. Digital transformation efforts throughout organisations can reduce the need for middle management, more easily connect employees to each other across departments and provide better, faster access to necessary information and content. This enables a connected network, rather than a hierarchy, that does not depend on management.
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> You may also be interested to read our research report on The Barriers to Digital Transformation which includes our latest thinking on organisational structures and agile attributes.