It is common to hear Start-ups talk about the desire to keep hierarchies “flat”.
This means they do not want multiple layers of management, bureaucracy and red tape getting in the way of people actually doing their most innovative work. Instead, in a flat organisation everyone is more or less on the same level and can therefore organise themselves and prioritise their own work.
However, new research from Saerom (Ronnie) Lee, Assistant Professor of Management at Wharton, has found that in the long term a flat hierarchy is actually detrimental to these Start-ups being able to deliver on their innovative ideas.
When a Start-up first forms, there are so few employees that people can keep track of what everyone else is working on. Founders may even be able to all sit at a single table across from one another and collaborate this way.
However, eventually as more employees join the company, the research shows that without management layers being added, employees become unable to organise themselves to actually deliver projects.
The study looked at 6,234 Start-ups that produced video games between 1971 and 2015 (an industry where both creativity and commercial success are vital), and found that that while a flat hierarchy in the start-up is likely to improve ideation and the creativity of the output, it can cause commercial failure of these projects as managers need to spent more time and effort on directing effort, and employees waste time with aimless idea exploration and becoming protective of their ideas and projects.
While a flat hierarchy led to more creative ideas in Start-ups, it often resulted in worse commercial performance
Prof Lee discussed the reasons he found in a Podcast interview on SiriusXM:
“Although many entrepreneurs dislike the notion of hierarchical structure and managers, they ultimately do need managers, and do need to plan ahead and design the appropriate hierarchical structure way earlier than they think,”
“What many of them (founders) realize over time is that no matter how good the business idea is or how brilliant the team is, mismanagement can ultimately kill their business. Unfortunately, there are many cases where startups fail simply due to the lack of management structure.”
Lee then also points out that while a very small Start-up can get away with a flat structure, it makes sense to start implementing management layers once the team grows beyond 20-30 people. Without a certain level of oversight and supervision, employees may lose direction, drift into endless exploration where they come up with new ideas instead of finishing projects, create projects they aren’t capable of accomplishing, and fight with each other.
“With no managers to keep them in line, they can start competing for projects, and these competitions start to get out of control and result in conflicts. While a flat hierarchy can foster experimentation and creativity at the early stage, it can lead to dysfunctional conflicts and coordination failure among employees, result in employee turnover, and ultimately lead to commercial failure,”
It can be a fine balancing act, especially if the moment when the company needs to transition to adding managerial layers comes as a surprise. Many early employees may disagree with and resist having to change the way they work, and especially having people oversee their work if they previously had more freedom.
Lee notes that setting expecations in advance is the only way to prepare for this:
“Because it’s very difficult to make the transition from a flat to a hierarchical structure while busily working on ideas, entrepreneurs need to plan ahead and have a structure in mind,”
With the right planning, it is completely possible to build a start-up which has the benefits of creative output and ability to react, as well as the process effectiveness and ability to commercialise their innovations.
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