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Author's profile photo Daniel Wellers

Why Organizations Without Hierarchy Really Work

Imagine a huge, complex organization where no one is in charge.

Can’t see it? Well, look in the mirror. One example is that thing sitting on top of your shoulders called your head.

The human brain has 85 billion nerve cells, with many thousands of interconnected processes happening simultaneously. Or think about our massively Networked Economy. Highly complex systems like these have structures and coordinating mechanisms, but are also highly adaptive and self-managing. Nobody is in charge.

Of course most organizations today are exactly the opposite. They run on century-old hierarchical management models designed for the transition from an agrarian to an industrial economy, where centralization, conformity and obedience were critically important. It should be no surprise that these models are poorly suited in a world where complexity is epidemic, and innovation accelerates exponentially

But things are changing rapidly. For example, more and more organizations are making the move to Holacracy; a new distributed governance process with no management hierarchy. Instead power is held by defined roles such as facilitation, not by people. Pioneers like Zappos are learning that, while not a panacea, Holacracy can be an effective alternative to rigid, hierarchical management structures. This is just one example coming from bold management innovators at the leading edge of the Future of Work.

Archetypes of self-managing structures are emerging

While researching his new book “Reinventing Organizations” author Frederic Laloux discovered that management innovators in different industries and locations, with workforces ranging in size from hundred to tens of thousands, and who did not even know of each other’s existence, were nevertheless following strikingly similar paths. For example, here are three distinct organizational structures that emerged consistently:

  1. Parallel teams – when work can be organized into autonomous streams with little need to coordinate with each other.
  2. Web of individual contracting – where roles and commitments are set through one-to-one conversations between colleagues who work together.
  3. Nested teams – for work requiring specialist teams that work together toward larger whole.

Which structures emerge depends upon the type of activity, as well as the length and depth of an organization’s value chain.

From Bureaucracy to Values and Share Purpose

Self-managed organizations still need clear paths for getting things done. The big idea is that this work will become self-managed according to values and shared purpose instead of preset rules and hierarchy. Here are some examples:

Institutionalize advice in decision making – We’re accustomed to two methods of deciding things; tops-down authoritarian and egalitarian consensus-style. But that’s because we don’t trust individual employees to make decisions on their own. But what if we could guarantee that that individual had the full benefit of the organization’s knowledge and experience before making the decision? The advice process is a recent development that requires only that the decision maker (who is usually the person who identified the issue in the first place) first consult experts on the issue at hand and then all those who will be significantly affected by the outcome. After that, the decision is theirs to make and cannot be over-ruled. You may think this could never work in large companies, but the advice process is in practice at AES, a global company with 40,000 employees.

Get rid of budgets – Instead of asking “Do I have enough budget?”, the Norwegian energy company Statoil asks:

  • “Is this really necessary?”
  • “What’s good enough?
  • “How is this creating value?”
  • “Is this within my execution framework?”

There are no annual budgets at Statoil. Instead the “bank” is open year-round and managed through a process of dynamic forecasting. Spending decisions are made as late as possible, and at the lowest sensible level in the organization. Cost management KPI’s are either absolute, relative to competitors, or directional depending on what works best in each situation. The results? Less gamesmanship and hidden political agendas, timely discussions about important issues, and a pervasive value-oriented, cost conscious mindset.

Set your own salaryMorning Star is a self-managed company with no centrally defined roles, titles, or career paths. Therefore their compensation system is designed to reflect the actual value employees deliver to the company. Every year employees, in an open and transparent process, review themselves and their colleagues. Then they write a one-page letter explaining how much they deserve next year, and why. A compensation committee reads them all and makes recommendations back to each individual, which everyone is then free to disregard. But like the review process, every employee’s decision about their own compensation is completely transparent within the company. This is powerful motivation to act responsibly, and it seems to be working. Today, Morning Star is a $700 million business with double-digit growth over twenty years, while their industry’s annual growth rate is about 1%.

If all this sounds blasphemous, even perilous, it’s because it is. Exercising leadership muscles of influence, persuasion, trust, respect and community-building is far more difficult than command and control. And for many organizations, this will require a major shift in culture and mindset.

Get Going Today

Fortunately there is no shortage of ideas on how to get started. Management innovators are all around us. Gatherings like the MIX Mashup and competitions such as the Unlimited Human Potential MPrize, unearth new management practices and technologies every day.

What’s clear is that change needs to happen – and quickly. Employees are deeply unsatisfied with the status quo, which makes for unhappy – and unproductive – workplaces. Radically simplifying our current management structures can bring the Future of Work one step closer.

This article originally appeared on SAP Business Innovation.

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      Author's profile photo Mehmet Koc
      Mehmet Koc

      Thanks for this nice article.