17 April 2024

Who’s in charge around here?

Banking & Finance
| The European |

Technology has made flat organisational structures the flavour of the month – but do they really work? Alex Katsomitros finds out 

When Blinkist, a Berlin-based startup that provides a book-summarising subscription service, embraced “Holacracy”, a management theory that extols the virtues of decentralised hierarchy, everything looked rosy. Its founders were keen on building a well-oiled, self-organised organisation, recalls Holger Seim, the firm’s co-founder and current Chief Operating Officer. “As young entrepreneurs, we wanted to be progressive and try out new, modern forms of work,” he says. Holacracy, first implemented by the US shoe retailer Zappos, seemed to be the right organisational recipe for an ambitious startup like theirs.

Then problems started rolling in. Holacracy’s self-organisation principles were supposed to render decision-making faster and better, empowering workers and removing bottlenecks that hinder growth. In practice, the opposite happened. “Holacracy added a lot of complexity to our organisation and shifted focus from solving problems for the customer and the business to discussing internal processes,” says Seim. Many workers felt overwhelmed with their internal tasks, being unable to guide junior colleagues. “Holacracy sounds nice on paper, but it hasn’t worked in practice for us and I haven’t met a firm with over a hundred employees and a certain scale that made it work either,” warns Seim. Eventually, the firm abandoned it, embracing what Seim calls “situational leadership”: a more flexible mix of worker empowerment and traditional top-down management that shifts depending on the circumstances.

The world is flatter  

Blinkist is not the only firm that has been experimenting with flat structures. From Frederic Laloux’s “Teal organisations” to “lateral leadership”, Holacracy is only one amongst many new management theories that highlight the advantages of horizontal hierarchies over top-down management. Many companies have been brandishing their flat credentials, promising less formality and more “worker empowerment” to their employees. One reason is that the youngest of them seek more autonomy and meaning in work, a trend accelerated by the pandemic. The shift from manufacturing to knowledge-based services, along with increased access to higher education, has also offered employees more influence in the workplace. 

It is in this new landscape that terms like “bureaucracy” and “authority” have almost become dirty words. “People have an image of office culture like a black-and-white photograph of workers in grey suits and hats and orderly rows of desks. It suggests conformity, a lack of creativity, and a patriarchal, conservative environment,” argues Peter Klein, who teaches entrepreneurship at Baylor University. “In reaction, they imagine instead a fluid, loose, fun workplace environment they associate with more decentralisation and flatter hierarchies,” adds Klein. Some of these theories tap into broader critiques of capitalism and its power structures. Controversially enough, the ‘New History of Capitalism’, a leftwing school of thought, traces the origin of business practices such as quantitative performance measurement to the institution of slavery in the Southern US.

Fewer middle managers, more authority 

The backlash against such provocative views is severe. In their book Why Managers Matter, Klein and Nicolai Foss from the Copenhagen Business School defend traditional management, unpicking one by one the arguments of flatness aficionados. The latter, Klein and Foss argue, cherry-pick their data and overemphasise the success of flat firms, such as computer game developer Valve. Many of these firms are less flat than widely believed, with hidden layers of informal management lurking in their bowels. Some, including Zappos, have even quietly abandoned their principles, bringing back traditional managers. Even worse, “bossless” organisations can only flourish under specific circumstances, Klein and Foss argue. One is that groups and tasks can be broken down into smaller independent units, meaning that little coordination is required. They also use simple technology and operate in a stable environment without much disruption. 

As Blinkist quickly found out, these conditions are rarely met. With flat hierarchies, chaos is always a looming threat. “We realised that different employees read different things about Holacracy and created their own truth of how things should work at Blinkist,” says Seim. The lack of explicit rules and procedures makes everything politicised, while conflicts and endless meetings become the norm. Opportunities to coach talent are missed, and firms are unable to adapt to outside changes, as the effort required to make the model’s intricate principles work leads to less focus on customers. 

Despite their aversion to egalitarianism, Klein and Foss acknowledge that modern firms are becoming flatter. Delegation at US firms has increased, while the number of management levels between division heads and CEOs has decreased, a process they call “delayering”. Paradoxically, that doesn’t lead to more decentralisation. Flatness should not be confused with bosslessness, argues Foss from his office in Copenhagen: “Many companies are delayering, so the hierarchy does become flatter, but often this happens because top managers want to gain more power and get closer to the action.” 

The loss of middle management is not a reason for workers to celebrate, given its role as a buffer between them and top management. “Middle managers are still essential to create clear touchpoints for employees to access feedback on projects, resources for personal support and entryways into learning and development,” says Richard Davies, UK managing director at Netcompany, a Danish IT consultancy that despite boasting a flat organisational structure, still maintains two types of middle managers: line managers and mentors. “If this is lacking, employees can become disengaged.” 

The same is true for much bigger companies, such as Elon Musk’s Tesla. In theory, anybody can talk to anybody else at the company without having to go through an intermediary. But there is a flip-side to that, Klein argues. “That also means that Elon Musk is only one phone call away from you, looking over your shoulder and maybe popping into your meeting, yelling. That doesn’t sound like more autonomy to me!”

Digital hierarchies 

One reason why flat structures are becoming more popular is the impact of technological change. By openly embracing the loose structure and democratising promise of the internet, flat companies become more modern in our eyes. However, technology may have reduced transaction costs between firms and their customers, but it also has a similar impact inside organisations. “Digitalisation makes it easier to organise and manage hierarchical teams, because managers can track people and tasks using digital dashboards featuring detailed project-level data,” Klein says.

Knowledge-based economies are characterised by rapid technological disruption, uncertainty and complexity. For proponents of flat hierarchies, such changes favours small, nimble firms where workers close to the action take part in decision-making. But this is also the environment where centralised decision-making is often necessary, Klein and Foss argue, pointing to companies that have survived major technology shocks, regulatory upsets or fierce competition due to strong, charismatic leaders, such as Steve Jobs. These managers can detect signals about changes in the market and take action before it’s too late. A case in point is the Covid-19 pandemic. Although it forced experimentation, with changes such as remote working and more flexible hours becoming permanent features of the workplace even post-pandemic, it also reaffirmed the need for top-down management. “The pandemic is a good example of why managers are needed,” Foss says. “During lockdowns, managers stepped in to redesign organisations. Offline work was moved online, teams were redesigned, and delegation, monitoring and reward systems had to be rethought.”

To survive in such a rapidly changing environment, firms need to constantly innovate and reinvent themselves. In theory, smaller, agile firms with flatter structures should be better at this game. “Companies that face little competition and a stable environment can get away with being hierarchical – in fact they can thrive. In the long run, adaptability and agility are crucial factors in an organisation’s survival and in this regard, flat organisations are at an advantage,” says Martin Gutmann, an expert on leadership who teaches at the Lucerne School of Business. However, empowerment and diversity can only be good for innovation if channelled by a managerial hierarchy, argue Klein and Foss. One of the most famous flat firms, the Danish hearing aid manufacturer Oticon, generated more ideas than it could implement and eventually embraced a more traditional management model. Even at startups, flatter hierarchies can improve ideation and creative success, but also lead to “haphazard execution and commercial failure  by overwhelming managers with the burden of direction and causing subordinates to drift into power struggles and aimless idea explorations,” argues a Wharton School academic in a recent paper. “Innovation requires connecting the dots between different things. The higher someone is up in the hierarchy and the more areas they oversee, the easier it becomes to connect the dots,” says Blinkist’s Seim, adding: “In many cases, innovation requires bold decisions and bigger risks that tend to be easier for a senior manager compared to a junior worker.”

The need for “macro-management”

What separates the two camps is essentially a different view of human nature. For “flatocrats”, bossless, self-organised firms fulfil our inner need for freedom and creativity. The most optimistic ones feel that leaderless firms have even solved the old problem of worker alienation by offering their employees a meaning to attach to their labour. Proponents of top-down management like Klein and Foss respond that hierarchy is also hardwired into our brains and history. Early humans lived in small, egalitarian communities, but they developed hierarchical societies as soon as they settled down and set up agricultural communities. Today, top-down management solves the perennial problems of coordination and cooperation by establishing standard procedures and networks to bring workers together, help them exchange information, and resolve conflicts. Managerial authority, they argue, is not obsolete in our knowledge-based economy, it just takes a different form, with managers deciding how things should be done, rather than telling highly-educated workers exactly what to do. As Foss and Klein note in their book, management in the 21st century is about designing the game’s rules, setting goals, selecting people and evaluating results: not micro-management, but macro-management. 

Nicolai Foss, Professor of Strategy,
Copenhagen Business School
Peter Klein, Professor of Entrepreneurship,
Baylor University

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