Are Organisational Structures Upside Down? – When the Management Tail Wags the Dog of Organisational Purpose

Corporate history is littered with examples of Laozi quotecompanies that suffered, or even failed, because they drifted away from their original principles and purpose, whether that’s Apple of the 1980s and ’90s struggling to decide who it’s market was (back when Michael Dell was suggesting the best thing to do with Apple was to close it), Progressive Insurance surrendering it’s guideline that any new area of business represented 5% or less of total revenues (which led to a loss of $84m in the mid-1980s) or the thousands of start-ups that struggle with growing up into a medium-sized company and balancing their earlier freedom with the new requirements for governance and organisation.

I can comprehend how these things happen, but what I really don’t get is how or why companies sometimes seem to forget that they do anything beyond simply existing; “management” or “HQ” becomes more important than the companies’ “do-ers” – the designers, manufacturers, salespeople, customer services etc. The “central functions” begin to determine the organisation’s approach, while those who understand the business’ function best of all are gradually cut out of the loop.

I’ve written about how metrics can drive inappropriate behaviour, but that’s only part of the story. The Tesco and, more recently, Toshiba misreporting scandals show how inappropriate metrics can combine with “centralisation” (by which I mean the movement of power and influence to the administrative centre of an organisation) to lead to terrible results.

It doesn’t have to be like that. But we have to think about organisations differently to most to avoid it. Firstly, we’ll look at what goes wrong, before exploring how we can put core purpose back in its rightful place – at the forefront of any organisation.

Losing Focus

Napoleon Hill QuoteAs an organisation’s focus shifts towards its headquarters, it loses it’s strength in serving the customer (including its shareholders – who are served by achieving the maximum possible genuine/legitimate return – alongside those who it sells its products too).

One simple reason this happens is due to a knowledge imbalance. In a medium or large organisation those doing the work can’t know everything else that the business is involved in, yet those in “corporate” functions can see the overall position. This can leave operational areas feeling disempowered and therefore they feel a reliance on those functions, while central areas have the ability to translate the information they receive from operational areas into whatever story they’d like to tell.

It also happens because the organisation starts to measure success differently (which I covered in some detail in the post I mentioned earlier, so will keep it brief here). When for-profit businesses start they tend to have a simple overall objective; make more money than you spend. There are all sorts of interim goals, which can sometimes appear to conflict with that (e.g. gaining market share through investment in products, marketing, selling at low price points), but ultimately they lead towards that objective.

That tends to change, however, as organisations expand, particularly as they become focused on those who might buy a slice, or the whole, of the company – the objective becomes more like “make the business appear as valuable as possible”. Clearly making a genuine, increasing level of profit, while maintaining a healthy balance sheet is one way to do this, but that can be much harder to do than finding tricks with numbers, like bringing income into earlier accounting periods (as Tesco did) or putting hugely unrealistic figures onto the balance sheet for new ventures (as Toshiba did).

There is also a problem with self-justification. In general, people at the centre of an organisation feel important (they see across the organisation, they work with high ranking people etc), so they feel like they should be doing “important” things. Simply playing back office to operations doesn’t seem important enough, so other tasks start to be created. You gradually notice more and more “strategists”, who talk in very conceptual terms (often including lengthy management-speak), and often don’t talk to the do-ers very often. Layers and layers of “planners” creep into existence, but it’s impossible to differentiate one from another.

Unfortunately, these organisational units also tend to spend a lot of time with those at the top of an organisation. Therefore those at management board can easily level hear far more from them than those really doing the organisation’s work. And suddenly you have a vicious circle, as senior people listen to the ever-expanding central functions and the organisation’s focus shifts further and further from where it started; delivering a service/product that customers wanted to purchase.

Creating Friction

Peter Drucker QuoteThis loss of focus leads to a number of negatives beyond inappropriate objectives leading to strange organisational behaviour.

One of these is the creation of additional friction within the organisational system. Now that an organisation is focused on the centre, those involved in serving customers are required to provide an ever increasing amount of information. This can shift a significant amount of resource away from core business.

Inserting layers and an extra breadth of new roles also removes clarity from communications. The information going to the management board gets distorted en route, while their objectives are warped on the way to operational staff.

Further, roles in these central functions tend to be less well defined than elsewhere, often leading to significant overlap (in areas considered valuable or interesting) with gaps elsewhere (in the less glamorous topics). As multiple people perform separate analyses of the same topics, they come to conflicting conclusions, but nobody notices until you reach the point in the organisation where they collide.

Decision-making power can also drift away from operational areas to the centre as excessive governance is created. This does not only put decision making power in the wrong hands, but means those decisions are made more slowly and creates a cultural divide between the doers and the central decision makers (I’m sure you’ve heard descriptions of people from HQ being in their “ivory towers”…).

Losing Practical Ambition

It also becomes inevitable that you lose ambition within your core business. If you can make something appear good more easily than you can actually make it good, then why waste the effort? If you are one of the doers and you’ve lost your decision making ability, then what power do you have to innovate? If extra layers make it harder to pass on an idea or a message, then you can only change fewer and fewer things.

There may still be great drive for new products and attention grabbing offerings, but the ambition is not relating to providing the best possible thing for the customer – it’s to provide the best possible story for the market. Releasing a product that isn’t ready is an even surer way to reduce people’s morale than not releasing one at all (imagine you knew you had a great idea and it would take a couple of years to get ready for market, but it’s seized from you aftepremierr one year, released to market, is a disaster – as you knew it would be – and you see you’re idea killed before it had been given a chance…) – have a look into RJR Nabisco’s release of Premier for an example.

Introducing extra layers also intrinsically reduces an organisation’s likelihood of trying new things that might really make a difference – if an idea has to get approval from more people and each person has non-identical criteria for acceptance then there is, by definition, more chance of it being rejected. If people have exactly the same criteria then going through multiple people for approval is pointless.

Reducing Transparency

Some might say this isn’t that big a deal, but I think a reduction in transparency due to distortion of organisational purpose is damaging to both a specific business and wider corporate culture.

Where a business’ aims differ from its apparent purpose it becomes really difficult for someone outside the organisation to understand what is actually happening within it. Therefore people can’t really make informed decisions about investing in an organisation, while this opacity also drives the need for masses of regulation.

This is emphasized by a wider corporate culture of trying to inflate share price as much as possible. Compounded, it means that investors have to factor the risk of the numbers not telling the true story into their investment decisions, which means all businesses have to try to max out their figures or they’ll be undervalued and their low share/purchase price will lead to investors believing something’s wrong, driving value down again (because investors will still be making the adjustment for over-the-top valuations).

Sticking to core purpose breeds simplicity, which improves organisational focus, drives efficiency and innovation, and creates clarity. So how do we put the “front-line” of the organisation at the forefront of its thinking?

Clarity of Responsibilities (and Feedback)

Central, management-type functions are often a great example of “mission creep”; as described above they start to take on a role beyond their intended station. An organisation should be run for the doers, rather than central administrators.

Therefore it’s absolutely essential that each areas’ responsibilities are carefully and clearly defined. More importantly it’s about drawing limits to those responsibilities; without limits people will always start to drift into new areas (which is something you want in some situations – e.g. product development – but not when you’re looking for a function that exists to enable other functions). Peter Drucker’s five tasks for managers is a good place to start:

  1. Set objectives (the metrics being measured need to be agreed with the front-line, but no area can consistently set its own targets)
  2. Organise (work and people)
  3. Motivate and communicate (or “integrate”)
  4. Measure
  5. Develop people

Once you’ve decided what it is your central functions need to do, then the more challenging step is ensuring that you enforce those limits.

When one of your keen, bright people comes to you saying they’ve found a “paper” adjustment that will boost share price, the company’s ability to raise capital and/or increase your own pay packet, then you have a decision to make – go with it and set that standard or resist and continue to focus on your core business.

peter lewisPeter Lewis, the long term CEO of Progressive Insurance, encountered this problem in the 1990s (as outlined in Great By Choice, again!). The share price was fluctuating wildly, jumping by 18% on one day in October 1998, before falling by 19% in a single day in January 1999. This was partly due to Lewis’ refusal to “advise” analysts about forthcoming earnings figures (unlike most businesses), meaning the market struggled to predict how Progressive was performing before figures were officially announced. The other reason was Lewis’ refusal to flatten out earnings between quarters. Lewis stood by his beliefs (that Wall Street shouldn’t have insider information and that information should reflect the reality of a business), despite the implications. He found a way around this problem – publishing monthly financial statements – despite the difficulties this posed to his business.

Reducing To Bare Necessities

As Franz Kafka said, ‘idleness is the beginning of all vice’. If the centre of an organisation has only enough resource to deliver its essential functions, then it can’t take on activities beyond those core elements.

Organisations can strip out the central excess, as well as stop building it up in the first place. Whitbread – the owner of Costa Coffee, Premier Inn, Beefeater among others – employs over 45,000 people across multiple businesses. Yet it only has a strategic management team of 60. They’ve recently stripped out much of middle management and reduced that team down because of changes in the business; specifically the introduction of technology that enables data to be transmitted instantaneously. By keeping it as lean as possible, Whitbread are a great example of maintaining focus on delivery.

Forced to Connect

Sometimes the connection between the front-line and central functions can be lost – the centre becomes too occupied in its own responsibilities to remember the business’ true purpose.

To remedy this, organisations should encourage people to spend time with the front-line, seeing the business in action. This helps generate direct visibility of what the business does, while also ensuring the central management team has some view of what people on the front-line are thinking. Bill Marriott, CEO of Marriott International between 1972 and 2012, is famous for his visits to hotels and his efforts to talk with as many people as possible – even past 80 he is still making visits and keeping a blog up to date, so there’s no reason we can’t do that too.

Nominative Determinism

Joel Spolsky QuoteJoel Spolsky, CEO of Stack Exchange, is one of the strongest proponents of putting the front-line experts at the heart of the business, with the “management” function simply acting as lubrication to help the business work. Spolsky’s view is that ‘The “management team” isn’t the “decision making” team. It’s a support function. You may want to call them administration instead of management, which will keep them from getting too big for their britches’.

While I’m only taking a brief aside from his article, I think the nomenclature is something worth considering; as you’ve seen through this post, we typically refer to these functions as “central”, “headquarters” or “management”, which suggests they are in charge. Here we’re talking about turning that around in practice – so front-line experts are the decision makers, with everyone else enabling good decision making – so we should try to turn around how we conceptualize and describe the organisation too.

Why do you think that we place those administrative functions on a pedestal? Is it straightforward supply and demand? Or do we, for some reason, actually have more talented decision makers in those roles at the moment? And what do you think works to get those with the right knowledge involved in making the big decisions?

Watch Out for the HiPPO – Avoid Automatically Doing Whatever the Boss Thinks

Will Rogers QuoteIt can be hugely frustrating at work to have your opinion cast aside so lightly when the boss thinks something different. They’ve fallen foul of the law of the HiPPO – the Highest Paid Person’s Opinion tends to win out.

The term HiPPO was coined by Avinash Kaushik in Web Analytics: An Hour a Day, to explain what happens if there is an absence of data (as an aside, I feel like it’s worth mentioning that Kaushik donates all proceeds from that book to charity). If you’ve ever been in a meeting where people have looked to the chair or the most senior person for a decision because there’s not enough information to make an informed choice, then you’ve witnessed the HiPPO effect in action.

Why Does the HiPPO exist? – The Followers’ Role

A hippo from San Diego zoo
The other type of hippo – from San Diego Zoo

There are some sensible reasons why people might choose to agree with the most senior person – they may well be more knowledgeable or skilled at that particular task; after all, they have been promoted to that senior position (though we’ve already seen that doesn’t necessarily mean that they’re great at what they’re doing now). It might also be the safest place to be for your career, depending on how open-minded your boss is…

This can, and does, result in bad decisions being made, as well as employees becoming disengaged. It happens because of a few different biases (such as the desire to conform and loss aversion – we value not looking stupid over being right), but the big one is authority bias.

Authority Bias – We have an in-built tendency to believe those who we perceive as “experts”. It’s completely understandable for the basic functions we need to keep society going – listening to your seniors about what to eat, how to look after children etc – but it does leave everyone thinking in exactly the same way. That’s not great for making big steps forward in business.

One of the most famous psychology experiments of all time provides a terrifying example of how obedient we can be to authority, known as the Milgram experiment. The set-up for the study was that the participants were helping with an experiment about learning – they were to administer electric shocks, of increasing strength, to the learner when they got an answer wrong.

However, both the researcher, who oversaw the participants’ performance, and the “learner” were actors looking to test how far people would go with the shocks. So the participant and the learner were put in different rooms and the experiment began. As the shock increased the “distress” of the learner rose too – eventually the learner stopped responding at all.

The shock generator used in the Milgram experiment
The shock generator used in the Milgram experiment

Amazingly, 26 of the 40 participants, with encouragement from the researcher (both beforehand, with an explanation of why the experiment was so important, and during the experiment, with reminders that they need to carry on, if the participant started to hesitate) proceeded to the maximum shock level – long after the learner appeared to be either unconscious or dead. Those involved in the study did whatever the scientist told them, even though it meant they “killed” somebody – which is pretty scary. The experiment was then repeated in a number of different studies and the results showed the same thing again and again; people do what they’re told by authority figures.

To emphasise this obedience effect the study was conducted in a lab and the researcher wore a lab coat, but it highlights how biased we can be to authority. At a more facile level you probable see advertisers trying to use the authority bias every time you watch tv – there’s always some doctor or dentist recommending this or that skincare/toothbrush/whatever somebody’s trying to sell.

In a meeting room we see the same thing; when there’s uncertainty we tend to look to the most senior person to decide.

Why Does the HiPPO exist? – The Leaders’ Role

Self-Serving Bias – This is where our cognitive or perceptual processes are distorted in order to maintain or increase our self-esteem. Most likely we’ve all felt this at some time, whether it’s initial resistance to negative feedback, remembering more about our contribution than others or seeking out information to support our own theory (which I try to bear in mind when writing, but I’m most likely still guilty of).

There have been some challenges to the universality of the self-serving bias, so Mezulis, Abramson, Hyde and Hankin conducted a meta-analysis of 266 studies, all of which had results on how people attributed positive and negative results (to fit with self-serving bias we’re expecting positive results to be deemed as more due to oneself and more likely to happen again than negative outcomes).

(For context, the most common methodology for testing attribution is to make someone do a test, then give them a random set of results, but the participant is told that they are genuine. They are then asked to assess what influenced their performance and the researcher judges whether the factors chosen are internal or external).

There are global differences in self-serving bias
There are global differences in self-serving bias

They found that the self-serving bias was universal, but that the scale of it was influenced by a number of factors – children and older adults showed a big bias, while those from the US showed a bigger bias than those from Western Europe, with Asians showing an effect that was smaller still.

They also found supporting evidence for one of the main theories for why the self-serving bias exists – that it enables better mental health by distorting reality to make us feel better – because those with psychopathology had a smaller bias, with depression the lowest bias of all the conditions reviewed.

Further research, by Campbell and Sedikides showed that the self-serving bias is magnified when our self-perception is under threat – i.e. if you’re challenged then your bias gets even greater. For example, if someone sees themself as in charge, but feels like their authority is under threat…

This bias is closely related to confirmation bias (searching for, interpreting or recalling information that supports your beliefs or theories), choice-supportive bias (the tendency to assign positive attributes to a choice, after the choice has been made) and egocentric bias (the tendency to believe that we are more responsible for outcomes than we are and that other people think like us).

In summary, this means that leaders have a tendency to believe their own hype – they get a distorted view of their own abilities, using their promotions, previous achievements and the common support of their juniors as evidence. They start to really believe that they’re more capable than the other people in the room – particularly when those surrounding them agree with their opinions.

So the juniors tend to agree with their seniors, and this adds to senior people believing in their superiority. It’s easy to see that this quickly becomes a viscous cycle, so what can we do?

What Can We Do About It?

Find Data – The term HiPPO was created to describe what happens when there’s a lack of data, so this is an obvious one. Preparing objective evidence is a great way to take the emotion and opinion out of a wide range of situations. You need to stay aware of confirmation bias in order to make sure it’s a fair discussion, but evidence will almost always win out over a strong opinion.

Try to think creatively about what data is out there – if there’s not exactly what you’re after then try to come up with a proxy. Has something similar happened before? Is there something in a different sector that is useful? Any academic research (use a specific academic search engine, even if it’s only Google Scholar)? And if there’s nothing that can give a hint, then it’s always worth proposing a trial. This doesn’t only relate to your own ideas/thoughts – if you’re at a meeting and you can feel the HiPPO moving in, then suggest that the group try to find some data to enable an informed decision. 

Alfred P SloanSeek Disagreement – Alfred Sloan, the long-term president, chairman and CEO of General Motors, had a strong belief about making decisions; they shouldn’t be made until someone had expressed why the “preferred” option might not be the right one. As you can see on the right, he actively used to delay decisions if he didn’t feel there had been enough disagreement – a pretty amazing commitment.

When we’re in a position where we are the highest paid person then we should follow his advice. We should be encouraging people to disagree and be as open as possible. If needed, ask people to play devil’s advocate. You can do this when you’re not the HiPPO too – seek a wide range of views. There’s a natural tendency to be positive about your own ideas, so you need others to supply the balance; however uncomfortable, it’ll pay off longer term.

Seek Consensus – I accept this seems like the opposite of the above, but I’ll explain why they are complimentary. Here I’m referring to trying to build support for, or disagreement with, a concept before the formal meeting happens.

At Valve, they tried to remove the HiPPO by getting rid of bosses entirely. The idea was that if there were no more bosses, then the best ideas would win out rather than the organisation just doing what a few senior people at the top say. People simply have to convince others to work with them on their ideas – theoretically a true idea meritocracy. To facilitate it, people even have desks that wheel around, so they can join up with new “teammates”.

While that’s clearly only suited to a limited number of fields (and if you push people who work at Valve, you can still detect a hierachy even there), it is an extreme example of something that’s relevant to us all. If our idea is good then we should start talking to people about it before getting to a decision point – find out whether people will support it, while also discover some of the flaws in your plan. By the time you get to the crunch time meeting, you already know that others in the room think it’s a good idea and you can bring them in to offer support. The risk of the HiPPO is reduced when there is broad group support.

So we should welcome disagreement, so that we can see flaws and improve our ideas, but we should seek concensus in order to reduce the risk of a flash decision from the highest paid person leading to a viable idea getting flushed away.

Everyone slips up from time to time
Everyone slips up from time to time

Remind Ourselves of What’s Gone Wrong Before – The self-serving bias means that we’re much better at remembering our successes than our failures. Most of the time that’s useful for our mental health – as seen in the relationship between depression and reduced self-serving bias – but it  isn’t helpful in the workplace.

To perform as well as possible, we need to remember what went wrong in the past. Firstly, it helps us avoid making the same mistakes again and again (e.g. organisations continually expect projects to deliver without delays – for reasons we explored here). Secondly, and more relevant to this post, it reminds us that we’re not perfect. We can only increase our chances of success by making the most of the people around us, but sometimes we need a reminder.

Remind Ourselves of the Role others have Played – We find it easier to remember our own contributions to successes than those of others. That same research found showed that it was truly a memory effect; when participants were given reminders about the role others played, they attributed less of the success to themselves and more to others. We should note down how others have helped us, as well as what we’ve done ourselves. We should aso ask other what they think they contributed, so we can both celebrate their successes and give ourselves a prompt about how others help us. Combined with the action above, you reduce the chance that you’ll be the person playing the HiPPO.  

Finally, if you want a specific example of a HiPPO then have a look at this Forbes article.