Fire the bosses: How flat firms work

A few companies are dispensing with hierarchies, but don’t expect the end of management

MANAGEMENT theorists have long pondered the structure of the corporation. In an open economy, with resources distributed by the invisible hand, how can it be that the market’s bidding is carried out by these autocratic, centralised entities? Economist Ronald Coase supplied the classic answer in the 1930s – corporate central planning evolved to streamline transaction costs across great distances. But to some, this paradigm is shifting.

Valve, a video game company with a staff of 300 and an estimated value of up to $4bn (£2.4bn), is one of a small number of firms to adopt a “flat”, managerless structure. Business teams are formed and reformed based on projects that need completing, and decisions are made democratically – “the best idea wins, no matter who it comes from,” Valve’s DJ Powers recently told the BBC. But does the model hold any lessons for businesses outside of the video games sector?

UNLOCKING INNOVATION
“Organisations are generally becoming less hierarchical, and managerless firms represent the extreme end of this trend,” says professor Cliff Oswick of Cass Business School. The main attraction of moving away from a “top-down” model, he says, is that it fosters a more agile way of operating. Decision making is distributed across the firm, rather than being concentrated in a small team at the top, helping to enhance innovation through a larger pool of potential ideas.

Morning Star, an American tomato processing firm, is identified by management expert Gary Hamel as a concrete example of how this can work. Rather than reporting to an individual, employees draw up their own personal mission statements describing how they will use their skills to meet the firm’s targets. The parameters and budgets of an individual’s plan are negotiated with peers, as is compensation. And according to Hamel, employees end up taking on a far higher level of responsibility for their work, with the firm boasting double-digit growth rates compared to 1 per cent for the wider market.

The theory is that by freeing individuals to manage themselves (and each other), the temptation to blindly follow the sometimes ill-conceived decisions of managers is removed. As Hamel asks – we trust people to spend their own money responsibly, so why not give them this responsibility within the firm?

TAMING THE CHAOS
The answer may be that few firms are suited to this way of functioning, says Oswick. Companies operating on a “high volume, low cost” basis (McDonalds, light manufacturing firms), he says, typically employ people to undertake fairly repetitive tasks that still require a level of supervision and coordination. It is hard to imagine a car being made any quicker if all assembly line workers had their own idea of what it should look like.

But even in knowledge-intensive industries like law, finance, or tech, management is not about to die out. Luis Garicano of the LSE has argued that some form of leadership structure will always be necessary to prevent the prospect of endless meetings and inter-departmental politicking. And modern management heroes like Steve Jobs demonstrate how much can be achieved through visionary leadership.

Rather, the future for the majority of professions may be what Oswick calls the “mild version” of the flat structure – removing some layers of middle management, and introducing self-organising work teams.

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