If only we could manage without managers

A hierarchy of managers exacts a hefty tax on any organization. This levy comes in several forms. First, managers add overhead, and as an organization grows, the costs of management rise in both absolute and relative terms. A small organization may have one manager and 10 employees; one with 100,000 employees and the same 1:10 span of control will have 11,111 managers. That’s because an additional 1,111 managers will be needed to manage the managers. In addition, there will be hundreds of employees in management-related functions, such as finance, human resources, and planning. Their job is to keep the organization from collapsing under the weight of its own complexity. Assuming that each manager earns three times the average salary of a first-level employee, direct management costs would account for 33% of the payroll. Any way you cut it, management is expensive.

…the typical management hierarchy increases the risk of large, calamitous decisions. As decisions get bigger, the ranks of those able to challenge the decision maker get smaller…A related problem is that the most powerful managers are the ones furthest from frontline realities. All too often, decisions made on an Olympian peak prove to be unworkable on the ground.

…a multitiered management structure means more approval layers and slower responses. In their eagerness to exercise authority, managers often impede, rather than expedite, decision making. Bias is another sort of tax. In a hierarchy the power to kill or modify a new idea is often vested in a single person, whose parochial interests may skew decisions.

No wonder economists have long celebrated the ability of markets to coordinate human activity with little or no top-down control. Markets have limits, though. As economists like Ronald Coase and Oliver Williamson have noted, markets work well when the needs of each party are simple, stable, and easy to specify, but they’re less effective when interactions are complex. It’s hard to imagine, for instance, how a market could precisely coordinate the kaleidoscopic array of activities at the heart of a large, process-intensive manufacturing operation.

That’s why we need corporations and managers. Managers do what markets cannot; they amalgamate thousands of disparate contributions into a single product or service.

Wouldn’t it be great if we could achieve high levels of coordination without a supervisory superstructure? Wouldn’t it be terrific if we could get the freedom and flexibility of an open market with the control and coordination of a tightly knit hierarchy? If only we could manage without managers.

Peer inside an open-source software project, and you might think you’ve glimpsed that organizational nirvana. You’ll find hundreds of programmers and few, if any, managers. In an open-source project, however, tasks are modular, volunteers work independently, interfaces are clearly defined, and scientific breakthroughs aren’t expected. Coordination is plug-and-play. Contrast this with the challenge Boeing faces in building an all-new airliner. Here, a vast army of specialists must work shoulder-to-shoulder in tackling thousands of leading-edge design and manufacturing issues. As Boeing has learned, outsourcing chunks of development doesn’t make coordination any less perplexing. A market can’t build a Dreamliner.

It’s tough to imagine a company where…

• No one has a boss.

• Employees negotiate responsibilities with their peers.

• Everyone can spend the company’s money.

• Each individual is responsible for acquiring the tools needed to do his or her work.

• There are no titles and no promotions.

• Compensation decisions are peer-based.

Sound impossible? It’s not. These are the signature characteristics of a large, capital-intensive corporation whose sprawling plants devour hundreds of tons of raw materials every hour, where dozens of processes have to be kept within tight tolerances, and where 400 full-time employees produce over $700 million a year in revenues. And by the way, this unique company is a global market leader.

This probably stretches your credulity; it sure stretched mine. That’s why, when I heard about the Morning Star Company, I jumped at the chance to visit one of its plants in California’s San Joaquin Valley.

Morning Star’s goal, according to its organizational vision, is to create a company in which all team members “will be self-managing professionals, initiating communications and the coordination of their activities with fellow colleagues, customers, suppliers, and fellow industry participants, absent directives from others.”

Did you stumble on those last four words? How the heck do you run a company where nobody gives orders and nobody takes them? Here’s how Morning Star does it:

Every employee at Morning Star is responsible for drawing up a personal mission statement that outlines how he or she will contribute to the company’s goal of “producing tomato products and services which consistently achieve the quality and service expectations of our customers.”

Every year, each Morning Star employee negotiates a Colleague Letter of Understanding (CLOU) with the associates who are most affected by his or her work. A CLOU (pronounced “clue”) is, in essence, an operating plan for fulfilling one’s mission

In explaining the logic behind the CLOUs, Rufer emphasizes the idea that voluntary agreements among independent agents can produce highly effective coordination. “The CLOUs create structure,” he says. “As a colleague, I agree to provide this report to you, or load these containers into a truck, or operate a piece of equipment in a certain fashion. This is spontaneous order, and it gives you more fluidity. Relationships can change form more easily than if we tried to fix them from above.”

Strikingly, Rufer doesn’t see freedom as the enemy of coordination; he sees it as its ally. Every person at Morning Star is a contractor in a web of multilateral commitments. As one team member told me, “Around here, nobody’s your boss and everybody’s your boss.”

…there’s no central purchasing department or senior executive who has to sign off on expenditures; anyone can issue a purchase order. If a maintenance engineer needs an $8,000 welder, he orders one. Although purchasing is decentralized, it’s not uncoordinated. Morning Star colleagues who buy similar items in large quantities or from the same vendors meet periodically to ensure that they are maximizing their buying power.

Colleagues are responsible for initiating the hiring process when they find themselves overloaded or spot a new role that needs filling. It’s a rare company that shares the corporate checkbook with frontline employees and expects them to take the lead in recruiting.

Morning Star has no centrally defined roles, so employees get the opportunity to take on bigger responsibilities as they develop their skills and gain experience. “We believe you should do what you’re good at, so we don’t try to fit people into a job,” says Paul Green Jr.

“Since we believe you have a right to get involved anywhere you think your skills can add value, people will often drive change outside their narrow area,” Green says. “We have a lot of spontaneous innovation, and ideas for change come from unusual places.”

A blind skier, on the other hand, must be coached down by a guide who shouts out directions. People can’t be self-managing without information. At Morning Star the goal is to provide staffers with all the information they need to monitor their work and make wise decisions.

Colleagues are encouraged to hold one another accountable for results, so an unexpected uptick in expenses is bound to get noticed. With this sort of transparency, folly and sloth are quickly exposed.

New employees attend a seminar on the basics of self-management, where they learn that responsibility is freedom’s twin. Consult as widely as you like, they’re told, but in the end you have to take responsibility for your decisions. No one gets the option of handing off a tough call.

At the end of the year, every employee in the company receives feedback from his or her CLOU colleagues, and in January every business unit is required to defend its performance over the previous 12 months.

At the end of each year, every colleague develops a self-assessment document outlining how he or she performed against CLOU goals, ROI targets, and other metrics. Colleagues then elect a local compensation committee; about eight such bodies are created across the company each year. The committees work to validate self-assessments and uncover contributions that went unreported. After weighing inputs, the committees set individual compensation levels, ensuring that pay aligns with value added.

For decades the assumption has been that the work of managing is best performed by a superior caste of formally designated managers, but Morning Star’s long-running experiment suggests it is both possible and profitable to syndicate the task to just about everyone. When individuals have the right information, incentives, tools, and accountabilities, they can mostly manage themselves

On the one hand, you can think of Morning Star as a socially dense marketplace. Colleagues are free to negotiate marketlike contracts with their peers. While this might seem a contentious and complicated process, several factors mitigate those risks. First, everyone involved in the negotiations shares the same scorecard. In a pure market, a consumer doesn’t really care whether a deal is good for the seller. By contrast, people at Morning Star know they won’t have a great place to work if the company doesn’t do well.

…team members at Morning Star know that if they take advantage of a colleague or fail to deliver on a promise, the repercussions will catch up with them. This encourages associates to think in terms of relationships rather than transactions.

Morning Star is a collection of naturally dynamic hierarchies. There isn’t one formal hierarchy; there are many informal ones. On any issue some colleagues will have a bigger say than others will, depending on their expertise and willingness to help. These are hierarchies of influence, not position, and they’re built from the bottom up. At Morning Star one accumulates authority by demonstrating expertise, helping peers, and adding value. Stop doing those things, and your influence wanes—as will your pay.

In most companies the hierarchy is neither natural nor dynamic. Leaders don’t emerge from below; they are appointed from above. Maddeningly, key jobs often go to the most politically astute rather than the most competent. Further, because power is vested in positions, it doesn’t automatically flow from those who are less capable to those who are more so.

- Gary Hamel

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