Wednesday, May 23, 2018

Is Tesla's Problem Too Many Middle Managers?

As the Wall Street Journal and other news media reported recently, Tesla’s 46-year-old founder Elon Musk is waging a war on middle managers. In a memo to employees, he has vowed to flatten the management hierarchy in an effort to improve communication. As he put it in his memo, “… people are forced to talk to their manager, who talks to their manager, who talks to the manager in the other dept, who talks to someone on his team. Then the info has to flow back the other way again. This is incredibly dumb. Any manager who allows this to happen, let alone encourages it, will soon find themselves working at another company. No kidding.”

Removing layers of management became fashionable in the 80s (famously at GE) and lately, with many companies looking at start-ups as their management models, this has become a popular topic once again. In fact, as Neilson and Wulf (2012) have pointed out, executives’ span of control has been increasing – from an average of 4.7 in the eighties to 9.8 in the past ten years. This is borne out by my own experience; one division head I work with has over 15 direct reports (not uncommon in her industry). And it is certainly not surprising that Musk, a very hands-on entrepreneur, would embrace this practice since it gets him even more involved with all aspects of the business. It’s his company and he alone can solve its problems!

But is this structural solution a key answer to what is ailing Tesla, a company that has been confronted with production delays and quality issues although its brand image continues to be solid? Removing middle managers, while it may save some costs and improve communication in the short run, has some unintended negative consequences. Google found this out a few years ago when it questioned the value of middle managers and removed some layers. But after a careful study of what made for effective managers, the company decided that middle managers added value after all, provided that they had the right skill sets. Google’s own research has identified the eight things that good managers do, and the company is using this framework to select and develop its managers. What are these eight behaviors? No surprises here; good managers: are good coaches, empower their team and do not micromanage; express interest in and concern for team members’ success and personal well-being; are productive and results-oriented; are good communicators; help with career development; have a clear vision and strategy for their team; and have key technical skills that help them advise their team.

Neilson and Wulf’s research also found that flattening layers ironically enough has centralized decision-making even further. Imagine this happening at Tesla, where Musk (who is already reported to be sleeping on the factory floor many nights) now becomes the central point for all decision-making. And Tesla is only his day job, since he is also CEO of SpaceX!

I don’t have first-hand knowledge of what is going on at Tesla to recommend what its organizational solutions should be but, in my experience, changing the structure alone is seldom sufficient in adequately addressing a company’s issues. If there is a pattern of bureaucracy and lack of sharing information at Tesla, then good management practice suggests creating cross-functional teams and empowering them so they can decide and act quickly. In addition, I would make sure Tesla has the right managers with the right skill sets in place. Having a strong bench of such leaders will also help the company build for the future. In the long run (or even in the medium term), these will be more effective solutions than getting rid of all those manager positions.

Neilson, G. and Wulf, J. (April 2012). How Many Direct Reports? Harvard Business Review.

Wednesday, April 18, 2018

Management Tools or Just Fads?

Some of you may remember when these management practices were in vogue: quality circles, Six Sigma, Business Process Reengineering, forced rankings. Indeed, over the years, business managers have embraced certain “best practices” that have turned into fads, but then they moved on to the next best thing. A few of these practices – like 360-degree feedback – have had staying power. But many have come and gone.

I was reminded of these fads when I read a book that David Burkus (2016) recently published, in which he describes 13 of the latest management tools. He does a good job summarizing what he calls this new set of management tools: “… the redesigned management tools … may seem odd, but they are effective. And decades of research in human psychology reveal why: they work because they are different and better. Indeed, their differentness strengthens the case that we need reinvention.” (p. 7)

What are these new tools and trends? He devotes a chapter to each one: Outlawing e-mail, putting customers second, losing the standard vacation policy, paying people to quit, making salaries transparent, banning noncompetes, ditching performance appraisals, hiring as a team, writing the org chart in pencil, closing open offices, taking sabbaticals, firing the managers, and celebrating departures. He also gives examples of companies that have apparently implemented these tools successfully, and he cites relevant research to demonstrate the effectiveness of these tools, while encouraging companies to continue experimenting with new tools and methods.

I agree with Burkus on the importance of experimentation with new tools. However, applying these tools uncritically may in fact tend to make them more like “flavors of the month” and fads rather than lasting practices. Professor Jeffrey Pfeffer has written extensively about the dangers of management fads (Pfeffer and Sutton, 2006), and he urges companies to answer some fundamental questions first. Building on his work, the following are questions that I would urge managers to answer before they decide to implement these other current management practices or tools:
1.     What is the objective or outcome that the company wants to achieve by implementing this practice or tool? Why are you even considering it? Be careful not to have a solution in search of a problem.
2.     Will the solution in fact address the problem that your company has or help achieve this outcome?
3.     What is the logic or evidence (other than anecdotal or some consultant’s recommendation) that this practice or tool is effective? Simply benchmarking is not sufficient since companies and industries differ significantly in terms of their context.
4.     Does the practice seem to fit with the current or desired culture? Of course, some practices are introduced precisely to signal a culture change. On the other hand, if the practice is so counter to the current culture, some groundwork needs to be laid first.
5.     What is the readiness level of the company to take on such a practice? Since research shows that the majority of change efforts fail, managers need to be careful that the conditions are in place for this practice to succeed, such as the capabilities of the workforce and managers, as well as the number of changes that the organization has absorbed (that may lead to change fatigue).
6.     What are the downsides of implementing the practice even if it is a good idea overall? What are some major unintended consequences?

Let’s take two of these practices and examine each more carefully. The first is his recommendation to make salary transparent. Some companies have tried this while many are reluctant. There is no question that in this day and age, companies need to be more forthcoming about their pay practices. At the very least, that means communicating clearly to employees what the company’s compensation philosophy is, and how pay is set throughout the organization, e.g., salary ranges for different levels. There are organizations (such as branches of government) where employees know everyone’s salaries because the criteria for pay and promotions are based on tenure and rank – not performance. In some types of sales, the commissions that salespersons make are also well known. However, in the vast majority of organizations that are trying to establish a meritocracy, the challenges for total salary transparency are enormous. So far, the evidence for the effectiveness of full pay transparency is anecdotal. Companies also need to consider the downsides or unintended consequences of implementing such a practice. In discussions with managers in various companies (as well as a group of executive MBA students in Singapore), I get almost unanimous agreement that their companies are not ready for such total transparency.  In situations where companies have not achieved a true meritocracy (which is probably the case in a majority of organizations), revealing every employee’s salary will only breed resentment and perceptions of unfairness.

The second practice is around “firing all managers.” According to Burkus:
“Some of the most successful companies have opted to fire all their managers. Others have found ways to push some of the management function down to the level of those who are being managed. Research suggests that employees are most productive and engaged when they, and not their manager, control their destiny.” (p. 176)

Many years ago, the common management wisdom was that a manager’s span of control should be no greater than five. Larger than that and a manager would not be able to devote the time to “manage” his or her direct reports effectively. These days, some CEOs have direct reports of over 20. At Google, Schmidt and Rosenberg (2014) report on their rule of seven—managers should have a minimum of seven direct reports. One reason for pushing the span of control outward is to prevent managers from doing too much micromanaging, thus providing more autonomy for employees (which is Burkus’ point). Organizations like Zappos, Dupont and Whole Foods have experimented with so-called “self-managing teams” but to suggest that this will work universally can be a dangerous prescription. In some cases, less experienced workers may need strong coaching from their supervisor. In fact, Pfeffer (2007) has pointed to organizations like Southwest Airlines that has one of the highest ratios in the industry of supervisors to those being supervised. In other cases, employees’ needs and preferences might clash with this approach. When Zappos implemented its workplace hierarchy, for example, turnover rates jumped approximately 15-20%.

In addition, there are unintended consequences to this trend towards flattening or delayering. In an interesting analysis, Wulf (2012) investigated whether this practice has in fact occurred in corporations. She sampled 300 large US firms over a 15-year period and found that indeed flattening has occurred, at least at the higher levels of organizations. She found, for example, that the number of firms with COO positions decreased by around 20 % over this period, and the number of positions between division head and CEO decreased by about 25 %. She also found that the number of positions reporting directly to the CEO almost doubled (from 4.5 to almost 7), and more recent data suggest that this trend is continuing (with average span of control up to 9.8).

However, she also found that decision-making actually became more centralized, and CEOs of these flattened companies became even more hands-on. Perhaps part of the reason for this is her finding that the composition of the types of positions reporting to the CEO has also changed. That is, the C-suite started to expand to include executives with global functional responsibility in such areas as human resources, information technology, and marketing. If this is in fact a result of flattening, lower-level managers may feel more disempowered, and the tensions between headquarters and subsidiaries increasing. Her finding is not surprising given the trend in global organizations to “globalize” and integrate certain core functions such as human resources and supply chain. This has led to multiple tensions between the corporate center and the subsidiaries and operating units, and occasional confusion as to whether this is part of a pendulum swinging back to centralization from decentralization.

Another unintended consequence of flattening might be an increased workload for employees. As Pfeffer (2007) has pointed out: “Since people have been taken out of the organization, those that remain have more to do unless something has been done to decrease the total workload. And there are fewer people in the organization to ensure coordination, reflection, and learning.” (pp. 34-35)
I am not suggesting that companies should shun these emerging management practices. Some of them might actually stand the test of time and effectiveness. Companies might even want to introduce some of these tools as a vehicle to provide a jolt to the organization or to signal its willingness to think outside the box.

Let’s take a current hot trend towards creating more agile and fast teams. Erik Ries (2017), who was one of the first to codify this approach and apply it to start-ups, has been in much demand with many companies lately, including such large Fortune 500 companies like GE and General Motors (as reported in Fortune, March 2018 issue).  He has tapped into an important need that many companies large and small are facing today. In a 2017 Deloitte survey of more than 10,000 business and HR leaders across 140 countries, 94% report that agility and collaboration are critical to their organizations’ success, but only 6% say they are highly agile today. Implementing this “agile team” approach might very well help an organization that is faced with slow decision-making, silo mindsets and a lack of collaboration.

Nonetheless, I would recommend starting out by answering the six questions above carefully before deciding to introduce a new tool to your team or organization. It is also important to experiment and pilot. And if you are part of a global company and are considering some of these practices, it is also important to make sure that these practices will work globally.

Burkus, D. (2016). Under New Management: How Leading Organizations Are Upending Business as Usual. Boston: Houghton Mifflin Harcourt.

Pfeffer, J. (2007). What Were They Thinking? Unconventional Wisdom About Management. Boston: Harvard Business School Press.

Pfeffer, J. and Sutton, R. (2006). Evidence-Based Management. Harvard Business Review, 84 (1), January.

Reis, E. (2017). The Startup Way: How Modern Companies Use Entrepreneurial Management to Transform Culture and Drive Long-Term Growth. New York: Currency.

Wulf, Julie. (2012) The Flattened Firm: Not as Advertised. California Management Review, 55(1): 5–23.