Ideas for Leaders #083

Flattened Organizations: When Cons Outweigh Pros

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Key Concept

When an organization is ‘flat’ employees report directly to senior managers; but as management layers increase, so too does the hierarchical gap between employees the CEO and the C-suite, leading to decision-making being focused at the top of the organization. So should firms eliminate these layers in order to shift more decision-making powers downwards? Well, this Idea shows that this may in fact achieve the opposite. Flattening can lead to more control at the top. 

Idea Summary

Flattening (or delayering) of hierarchies within an organization has been called for by much recent literature. In theory, flattening is supposed to help push decisions downwards to enhance customer and market responsiveness and improve accountability and morale. In this Idea, however, Harvard Business School’s Professor Julie Wulf suggests that many companies that flatten their hierarchies to achieve these benefits do not end up with them at all. In fact, flattening can lead to exactly the opposite effects from what it promises to do.

Using a number of methods to put this to the test — including CEO interviews and a large sample panel dataset — Wulf found that flattening has transferred some decision rights from lower-level division managers to functional managers at the top. In other words, though CEOs did indeed take steps to delegate some decision-making to lower levels, ultimately flattened firms  exhibit more control and decision-making at the top — precisely the opposite of what it sets out to do.

Other main findings include the following:

  • Flattening at the top is a complex phenomenon that in the end looks more like centralization; however, standard classifications of “centralization” or “decentralization” are not 100% applicable here, as firms are in fact doing both.
  • Division manager pay seems to decline as functional managers join the executive team. Moreover, these findings suggest that functional managers at the top make decisions or perform activities that were previously performed by the division manager. This is evidence of centralization rather than flattening.
  • From the point of view of CEOs, flattening is not about delegation of decision-making to subordinates and a hands-off role for the CEO; rather, it is a way of changing the structure of their executive team and broadening their span of control to “get closer to the businesses.”
  • The evidence suggests that a flatter hierarchy is not associated with a hands-off CEO who delegates decisions to subordinates; rather, CEOs are much more involved, facilitating more team-based interactions. This has implications for how information flows within an organization, executive development and the skill sets needed in the top team.

Business Application

Most firms flatten to push decision-making downwards, but as this Idea shows, often this has the opposite effect. This structural change is important to understand, as it has implications for not only those that make decisions, but also for how decisions are made. This makes clear that flattened firms will require a different system to govern the hiring, development, motivation and decision-making of managers.

The danger is that division managers may be hired to “be the boss” but will in fact be out of sync with the way decisions are made in the organization. As human capital is one of the most important resources for today’s firms, they should consider these consequences carefully before setting out to delayer their hierarchies.

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Authors

Institutions

Source

Idea conceived

  • January 2012

Idea posted

  • February 2013

DOI number

10.13007/083

Subject

Real Time Analytics