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Should you run a top-down or a bottom-up organizational design?
Choosing “top-down” means giving the roles at the top of your organization significantly more control over key decisions than those lower in the hierarchy. Choosing “bottom-up” means having little to no centralized control so that those doing the work are free to organize, make decisions, and perform as they best see fit. Both camps have their own justifications.
The extremists in the top-down camp believe that an autocratic, hierarchical style of command-and-control decision-making is necessary for an organization to be successful and fulfill its purpose. In this case, strategies or plans are first conceived at the top of the organization and then cascaded down into the organization for implementation. When decisions from the bottom need to get made, they must first go to a qualified manager for approval. Deep down, the proponents of a top-down structure believe that if there isn’t an appropriate level of centralized control, the inmates will soon be running the jail and chaos will reign.
The extremists in the bottom-up camp believe just the opposite — that most forms of hierarchy are unnecessary and inefficient (if not outright evil). Their view is that a top-down hierarchy separates authority from those actually doing the work. Therefore, at its best, a top-down approach leads to cultures of disempowerment, resentment, and bureaucracy. At worst, it gives birth to autocratic tyrants who wield unchecked power, enriching themselves and their families at others’ expense.
So who’s right?
Well, if you were to gauge the current zeitgeist in business and popular culture, you’d get a strong sense that the bottom-up camp is right camp to be in. Best-selling books and viral articles get published regularly that bemoan the old paradigm of top-down command and control as “so-last-century” while promoting an emerging new paradigm of self-managed, egalitarian organizations without bosses, titles, or anyone telling you what to do. Ahhhh. So refreshing.
But is it true? Let’s see…
Reinventing Organizations from the Bottom Up? Not Quite.
The bottom-up camp loves to use the term “self-managed organization” to describe their ideal. A good example of the excitement surrounding the movement is the book Reinventing Organizations by Frederic Laloux. Laloux captures some of the elements of self-managed organizations and references companies like AES, Buurtzorg, FAVI, Holacracy, MorningStar, Patagonia, Semco, Steam, W.L. Gore & Associates, Whole Foods, Zappos and a few others. He makes the case that as the leading edge of global consciousness evolves, so too will new forms of organizational design that emerge to support it.
While I appreciate the ethos and intent of the bottom-up camp, there’s something that strikes me as counter-productive in it – namely, an almost cult-like aversion by its operators and proponents to anything that could be perceived as top-down hierarchy, structure, and authority.
I’m sure you’ve seen this trend already. The headlines scream “no-bosses, no-titles!” The org chart shows a series of concentric circles, a constellation of stars, or even a tree of life. The stories and anecdotes that circulate around the movement are usually about how small groups of peers self-organize — without the tyranny of managers — to create breakthrough results.
This aversion to hierarchy, structure, and authority is ironic because, if you were to peek behind the curtain of a high-performing, bottom-up, self-managed, seemingly egalitarian, set-your-own-salary-and-work-schedule, next-generation-consciousness company — what you’d find in actuality is a well-run top-down hierarchal organization!
Wait… what? Yep, that’s right. The best of the self-managed organizations are fundamentally top-down hierarchies in disguise. In order to explain why, I first need to clear up a common misconception about the top-down approach.
The Misconception About Top-Down Structures
The popular concept of a top-down hierarchical structure typically shows a dictator (on a spectrum somewhere from malevolent to benevolent) who sits at the top of the organization and literally dictates down decisions to be implemented by their minions.But the real purpose of any structure – top-down or bottom-up – is not to consolidate or centralize control but to delegate or decentralize authority!
Think about it. If there wasn’t a need to delegate, then there wouldn’t be a need for structure at all. Why? As a business grows from a start-up into a scale-up and has more resources, opportunities, needs, and complexities, its structure must naturally evolve too. It’s no longer sufficient to be a one-man band. There’s a greater and greater need to delegate authority and decision making to other roles in the organization.
The corollary to structure and delegation is this: If the organization were never to grow beyond the need for one person to manage it, there wouldn’t be a true structure at all because all authority and control would still be centralized with the founder. So at its core, the purpose of structure is not to control. It’s to delegate.
It is this real need for true delegation of authority that explains why the bottom-up camp tends to go overboard in trying to hide the fact that there’s actually a hierarchical structure in place within their organizations. From a leader’s perspective, being able to truly delegate and get a culture to embrace accountability for their roles is not an easy task. It takes tremendous energy, effort and reinforcement, and the slightest misstep or overreach by management can set things back significantly (e.g., why would the staff take ownership if there’s a history of management overriding them in the end?)
If staff sense that — despite the rhetoric — there really is a boss they need to get approval from, rather than taking fully accountability and ownership of their roles, they will seek out explicit approval from the boss before making decisions. Since the bottom-up camp is seeking to delegate and unlock the self-organizing, creative potential of their teams, the leader fights extra hard to appear as if not in charge. But as I’ll explain, they really are in charge and there is a hierarchy in place — just not the kind that Reinventing Organizations refers to as a dominator hierarchy that is found in a command-and-control setting.
Aside: There are other reasons that leadership attempts to pretend the hierarchy in a self-managed organization doesn’t exist. These include the fact that many of the employees attracted to the concept of self-managed organizations tend to value egalitarianism. I.e., in order to appeal to that crowd, they need to speak to the desires of that crowd. Also, the “Teal” stage leaders in the companies that Laloux references in Reinventing Organizations tend to view themselves as servant leaders, so they prefer to remain behind the scenes if they can. And of course some leaders just don’t want to deal with all the minutiae and issues of running a business so they make themselves unavailable. In any case, the most practical reason to pretend that there isn’t a hierarchy when there really is one is the need to have real delegation of authority.
Leaders Make the Self-Managed Organization
So the purpose of structure is not to control but to delegate. Many bad or ineffective leaders and managers today still misunderstand this simple fact about structure. They look at a structure and rather than think “How much can I delegate or empower?” they think “How much can I personally control?” As a result, they end up micro-managing what they should delegate.
It is our collective bad experience with control-centric leadership and management that has caused the renaissance of the bottom-up movement and made top-down structures appear to go out of style. But sexy-sounding concepts like the empowerment of workers, no bosses, no titles, and the ability to set one’s own work schedule are not the cause of a self-managed organization. They are a symptom. The cause is effective leadership.
Even Reinventing Organizations recognizes that it is leadership that makes the self-managed organization. And when the leadership changes, even the most celebrated self-managed organization starts to act like a more traditional, command-and-control one. Something that the author witnessed again and again in his study:
“An organization cannot evolve beyond its leadership stage of development. When a Teal company [what Reinventing Organizations refers to as a next-generation, bottom-up, self-managed company] changes leadership, they revert to more conventional management practices and not much remains of their pioneering style.”
Put another way, the right leaders will make the organization thrive and appear to be self-managed. The wrong leaders in any structure will quickly cause it to fail.
Let me give you an example of the critical role of leadership in designing a self-managed organization at scale. I think this is an interesting example because it comes from the military — the classic top-down hierarchy.
In his book Team of Teams: New Rules of Engagement in a Complex World, four-star General Stanley McChrystal describes the journey toward more self-management on which he led the Joint Special Operations Command during his tenure in Iraq to fight against the Al Qaeda insurgency of that period.
At the start of his command in 2003, the Joint Special Operations Command Forces — despite having superior training, weapons, support, and satellite intelligence — were getting their butt kicked by Al Qaeda in Iraq. Like a multi-headed hydra, Al Qaeda was just too damn agile, nebulous, and rapidly evolving for the traditional top-down military command-and-control paradigm to assess intelligence, make decisions, issue orders, and generally keep up with them.
In this new and rapidly changing environment, General McChrystal realized he had to evolve how the military had traditionally operated. He began an intensive, multi-year effort to break down the existing silos among soldiers, analysts, and support personnel to create mostly autonomous, cross-functional teams. Relying almost exclusively on communication and influence (rather than command-and-control dictatorship), he fought to end a reliance on secrecy and need-to-know intelligence and instead built a new culture based on transparency and decentralized decision-making across departments.
To speed up decision making, he delegated life-or-death kill decisions to the forces closest to the action. He then reinforced positive behaviors by demonstrating to the teams that if they were transparent in their decisions and actions, and also followed a set of core operating principles or values, he would give them tremendous autonomy to make on-the-spot decisions and complete their respective missions. But if a team was found to have held back information, operated rogue, or violated the core principles, then he would drop the hammer of military justice on their heads.
It worked. The changes implemented under General McChrystal’s leadership began to transform the Joint Special Operations Command into a more nimble, cross-functional, and effective fighting force. Ultimately, their work turned the tide against Al Qaeda in Iraq before General McChrystal was fired for political reasons back in Washington.
Team of Teams makes the strong case that for a top-down hierarchy to survive and thrive in a fast-paced, unpredictable environment, it must transform its organizational structure and design from Command-and-Control to a “Team of Teams.” To support this narrative, the authors use the picture below to illustrate their case:
From the image above, it appears that the structure of the Joint Special Operations Command changed drastically, doesn’t it? There’s apparently no more hierarchy and things magically happen from a new emergent self order. Right? Wrong! This is the common misconception in the self-managed movement. What General McChrystal changed is not the hierarchy. The top-down hierarchy still exists in the Team of Teams. There are still the same ranks and insignias, and General McChrystal is still ultimately in charge.
What changed is the information exchange, transparency, and delegation of authority within the structure, more than the structure itself. If I was to craft an alternate narrative for Team of Teams, I would say that General McChrystal did not abolish the organizational structure or hierarchy of the Joint Special Operations Command. Rather, he personally made the journey from a classic command-and-control style to a super delegator style that I call design-centric leadership:
This scenario isn’t unique to the military. You’ll find a similar hierarchical structure (no matter how flat or well disguised) as well as the core elements of a leader’s design-centric approach in every high-profile self-managed organization. This means that without Roger Sant and Dennis Bakke architecting from on high, there would be no self-managed AES; no Jos de Blok no Buurztzorg; no Jean-Francois Zobrist no FAVI; no Chris Rufer no MorningStar; no Yvon Chouindard no Patagonia; no Gabe Newell no Steam; no Tony Hsieh no Zappos; no John Mackey no Whole Foods; no Ricardo Semler no Sempco, etc.
So while we all want to participate in high-performing organizations that have an emergent order and progression, where good decisions get made and implemented easily, and where we can express our true nature and gifts — the secret to creating such an organization is not in pretending that a top-down hierarchy doesn’t exist or that an organization can somehow transcended its leadership. The secret lies in recognizing that a certain kind of leader sits at the top of a hierarchical structure and designs the organization to exhibit self-managed behaviors!
Design-Centric Leadership: Architecting the Game for Others to Play
Design-centric leadership is an approach whereby the leader’s job is to design the organizational environment and step back from its day-to-day management, in order for positive self-managed behaviors to emerge at all levels.
Have you ever played a really fun board game? Well, to use that experience as a metaphor… are you great at playing the game or designing a game for others to play? A traditional leader might design the game, but more importantly they will control and play it. A traditional leader thrives on taking action, seeking to be smarter, faster, and more astute than the other players. A design-centric leader, on the other hand, has made a commitment to focus on designing the game for other players to play.
The design-centric leader attempts to delegate as much as possible. This doesn’t mean they delegate everything. It doesn’t mean they just hire great people and blindly trust them to do what’s right. It means they take ownership to steward the most important things — the ongoing alignment between the organization and its environment, including its vision, strategy, culture, functional structure, and collaborative processes — while delegating just about everything else:
How does a design-centric leader do this, you ask? Well, every situation and every leader are unique. In general, the leader of a self-managed organization is constantly observing and listening to feedback signals from within and outside the organization. They are monitoring how the current vision, strategy, culture, functional structure, and team-based collaborative processes are performing. If adjustments need to be made, they rely mostly on communication and influence (vs. command and control) to accomplish a shift. With the right architecture, transparency, and reinforcement systems in place, the staff are given tremendous authority to make most of the daily/weekly/monthly work decisions and to design their own processes to get the job done.
What a design-centric leader gets in their DNA is what Demming meant when he said “A bad system will defeat a good person every time.” Put another way, the environment trumps all! So the design-centric leader attempts to architect the system not by dictating how everything should be, but by influencing (and sometimes controlling) the elements that make up the environment in which the teams operate. They’re designing the environment into an integrated system of self-reinforcing, positive behaviors and outcomes.
As General McChrystal put it in Team of Teams, “The move-by-move control that seemed natural to military operations proved less effective than nurturing the organization — its structure, processes, and culture — to enable the subordinate components to function with ‘smart autonomy.'”
I want to reiterate that the design-centric leader rarely pulls out their authority card to create a self-managed environment. Remember: if they appear to be in charge, then the organization will stop acting like a self-managed organization. Usually, they’ll only use their authority when it is absolutely necessary — like firing an influential person who is not a cultural fit or intervening if the company is in real duress.
Rather then relying on authority, the design-centric leader almost exclusively depends on feedback, communication, relationships, and influence to sense and respond to environmental signals occurring from within and outside the organization. This means they are constantly reflecting on the bigger questions facing the organization and its teams:
- Are our vision and strategy still aligned with the changing world? If not, what changes need to be made?
- Does our current functional structure have good checks and balances? Is it collapsing too much under one strong personality? Are we missing any core functions for our long range development and short-range execution? If so, where do we need to make a change?
- Is our culture strong and vibrant and are we being effective, even at the cost of some inefficiency? If not, what changes do we need to architect into the system?
- Are we still hiring aligned people and are they taking initiative to drive the business forward and design their own work processes? If not, where do we need communicate and influence a correction?
If you’re looking for a step-by-step guidebook to architecting your own self-managed organization, I’m sorry to say there’s no such thing. Every organization and situation is unique. A truly self-managed organization doesn’t copy another model. Sure, they may get inspiration from other companies but they break the mold in finding the right approach that works for their organization, in their market, and at their lifecycle stage at that time in history. Asking the right questions will help you find the way.
Additionally, you’ll want to keep in mind the common challenges that every organization is faced with when embarking on a transition to greater self-management. If you keep these challenges in mind, then you’ll know where to prioritize your own efforts as you come up with a model that works best for your organization.
The 3 Biggest Challenges in Building a Self-Managed Organization
Before you read further, I have to say that the most important thing about leadership is being yourself. You shouldn’t embark on a change initiative because it’s being written about in books and magazines. It’s better to be a full-fledged autocratic leader who delegates sparingly if that’s your true style than it is to try to act like a design-centric leader when it isn’t your style. Be yourself. Anything else will backfire.
It should also be clear that making the transition to a full-fledged self-managed organization is not required in order to scale and be a market leader. In fact, the most successful companies in history are led by visionary-dictators/entrepreneurs who have designed their organizations and management teams so they can delegate the non-essentials while still keeping personal control of what they do best… things like strategy, product, brand, and customer experience. But that’s a story for another article.
If you’re still inspired to build a company with more self-managed behaviors, you should keep in mind the three biggest challenges that I’ve found entrepreneurs must face and overcome in their own way…
Challenge #1: The Leader’s Mindset
The biggest and most under-reported and biggest challenge in architecting a self-managed organization starts and ends with your mindset. Period.
Most leaders (and especially those who have been successful starting and growing businesses) love to take action and secretly thrive on being the smartest person in the room, stepping in to save the day when there’s a crisis, and even being the conduit through which most decisions and initiatives flow. We celebrate this kind of leadership in movies, biographies, and even bumper stickers: “Lead. Follow. Or get out of the way.”
The bumper sticker for the design-centric leader would be quite different. Maybe something like General McChrystal’s line: “A leader’s first responsibility is to the whole.” It’s easy to feel the tension between those two polarities, isn’t it? So which type of leader are you now and which type of leader do you aspire to be, given your own style and talents?
The hardest part of the journey to becoming a more design-centric leader is that the further you go into the process, you influence and communicate more but actually do less and less. This transition can feel really uncomfortable for a talented, action-oriented leader. In Team of Teams General McChrystal captures his own struggles well:
“And so I stopped playing chess, and I became a gardener. But what did gardening actually entail?” First, I needed to shift my focus from moving pieces on the board to shaping the ecosystem. Paradoxically, at exactly the time when I had the capability to make more decisions, my intuition told me I had to make fewer. At first it felt awkward to delegate decisions to subordinates that were technically possible for me to make. If I could make a decision, shouldn’t I? Wasn’t that my job? It could look and feel like I was shirking my responsibilities, a damning indictment for any leader.”
In many ways, this is a process of letting go. So what do you do with that vacuum? Where would you put all your personal energy and drive to take action that made you so successful in the past? If you’re no longer the center of attention, and people no longer come to you to get answers, how does that affect your sense of self-worth and accomplishment?
Don’t underestimate how hard it is to make this individual journey from a traditional lead-by-doing style into a lead-by-designing style. Despite your best intentions, it’s very easy to step back into the drama, to take action and solve problems for people, and even to feel personally powerful by saving the day. Heck, isn’t that what you get paid for?
It takes time and resources to build a self-managed organization and crises will strike along the away. But every time the leader steps back in and starts acting like an individual hero or control-centric savior under crisis (e.g., sales are down—I’ve got to do something; we lost a key staff member—I’ll just step in and fulfill this role temporarily; holy crap the market has shifted—I need to innovate us out of this again, etc.) then the rock rolls back downhill and its even harder to push it up again.
The best practice to shift your mindset and behaviors is to find a mentor or a coach who has successfully made that transition and understands it. This relationship gives you a private and independent ear to process through the many conflicting feelings and hard choices, and hopefully to find the inner clarity and continued conviction needed to make the transition.
You also need to find other outlets for your immense energy and drive (new fitness routine or mountain climbing, anyone?) that used to go to personally driving the business forward. Finally, you have to find the joy in leading through questions, influence, design, and the success and development of your people (as opposed to your own heroic actions). It’s a hard journey and it’s not for everyone.
Challenge #2: Committing to Full Transparency
You may have noticed that successful self-managed organizations have a practice of complete transparency? For example, they publish salary information, financial information, key metrics, team performance to goals and performance reviews. They have open meetings where anyone can listen in. Basically they make key information available, along with the education to go with it, to everyone in the company.
The reason for extreme levels of transparency is that, when done correctly, transparency creates trust and reinforces desired behaviors and outcomes. This should be intuitive. After all, what kind of game would you be designing if the players didn’t know their standings and the score?
At some point or the other, you’ve probably read the headlines that surround Semco — the Brazilian conglomerate architected by Ricardo Semler — that captivates the global imagination with statements like, “At Semco, we trust people to do what’s right. That’s why our employees set their own salaries.”
On the surface, that sounds a bit crazy, right? Other leaders must read that and think, “That’s insane. What would happen in my own company if we allowed staff willy nilly to set their own salaries? How would Frank react to know that he makes 25% less than Jeanie? I trust people, sure… but I’m not stupid. That would lead to chaos and I don’t think my culture could handle it.”
But look deeper into Semco and other high-performing self-managed organizations and you’ll see that Mr. Semler is crazy like a fox. While the external message from Semco is that “We trust our people and when we expect the best from people, we get the best.” The internal reality is quite different. Semco doesn’t just trust people to do what’s right. Mr. Semler is not an idiot. Instead, he architected a system of real transparency that reinforces trusted behaviors. This is a subtle but profound distinction between trust and transparency.
In the case of Semco, all salary and company financial information is made public and updated consistently. There’s also a dedicated HR manager on staff who shares with the teams what the market rate salary is for people in similar positions outside the company on a regular basis. The company invests considerable resources in educating its people on how to read and understand the company’s financial statements. The teams are allowed to set their own targets and benchmarks for their departments but must also hit profitability targets set by the company. All teams can also see how other teams are performing. In this context, delegating the authority for people and teams to set their own salaries makes a lot more sense, doesn’t it?
It is this major commitment to transparency (combined with high levels of communication and education) that reinforces trusted behaviors. If you just “trust” (despite the platitudes) without a major investment in transparency and all it entails then you’ll soon find negative behaviors taking place in the organization. Wake up one morning and all of your efforts to build a culture of mutual trust will have come crashing down. Transparency and verification lead to trust. Not the other way around.
Obviously, it takes a tremendous investment in time and resources and a cultural shift to create full transparency in your organization. Most leaders I know get excited about the concept from time to time but then pull back from actually implementing it. It can be scary and it takes a considerable investment in systems, metrics, training, communication, education, and staffing—in addition to managing the rest of the business.
For example, a good part of the book Team of Teams deals with the insane level of resources it took to create a shared operations center (backed by global, secure, fast communication lines), to break down old military silos top-secret clearances, and to cut through the old bureaucracy to create “shared consciousness” across the entire organization. Architecting this system and ensuring its full adoption was basically General McChrystal’s full time job.
It’s one thing to have the full resources of the US Military, not to mention a hierarchical chain of command, at your personal disposal to implement whatever you decided. It’s quite a different challenge to try to build a transparency system and all that entails while making payroll in your own business.
Just like the required shift in mindset, don’t take this challenge of building a transparency system lightly. And don’t do it in a half-baked way because if you do, it will cause more harm than good. It’s a multi-year endeavor that must be sustained and reinforced over time with dedicated resources while simultaneously growing the business.
One thing you can do to ease this transition to more transparency in the later stages of business development is to start your business with full transparency from the outset. If you can do it this way when you have just a handful of staff, that can prevent the culture shock later.
So if you’re starting out now, why not publish all salary information, business metrics, cash on hand, and other information in your start-up from the very beginning? If you can set up this way, it will make the transition to a full transparency system much easier later by reducing the time it takes to introduce and integrate the culture into something that may seem foreign and scary. But however you get there, remember that transparency is a prerequisite for trust.
Challenge #3: Slaying Efficiency Dragons
This last challenge is a really big bucket of issues that all revolve around protecting the organization from excessive efficiency and centralized control. What do I mean?
There’s a battle between efficiency and effectiveness occurring in every organization. Effectiveness is about doing what’s right and requires decentralized autonomy. An environment designed for effectiveness gives a tremendous amount of flexibility, freedom, trust, decision making, and risk taking to the teams accountable for doing the work. It relies on small, collaborative groups that take responsibility for their actions, share a common bond and goals, and figure things out together within a nebulous environment.
Efficiency on the other hand is about doing things the right way every time and requires centralized control and decision making. An environment designed for efficiency relies on centralized systems, processes, procedures, documentation, rules, and enforcement.
As an organization grows and gets more complicated, there will be a tremendous amount of pressure to centralize control, implement policies and procedures, and drive for more efficiencies at scale. After all, without short-range efficiency the organization will never be profitable. And without centralized liability protection, the organization can quickly find itself sued into oblivion.
A design-centric leader recognizes that, although every organization needs to be both effective and efficient, effectiveness and efficiency are in direct competition. If you’re going to have more of one, then you’ll have less of the other. And if left unchecked, efficiency will soon grow to destroy organizational effectiveness.
I call unchecked or unnecessary efficiency an “efficiency dragon” because it literally eats effectiveness and destroys the company from the inside out. Like wise rulers, strong design-centric leaders keep their eyes and ears peeled for efficiency dragons breeding in their kingdoms and do their best to slay them before they get too big.
Let’s go back to Reinventing Organizations, which does a fantastic job of highlighting the fact that every self-managed organization they studied invests heavily in counteracting and defending against the encroachment of efficiency dragons:
“Trying to avoid or limit staff functions (an efficiency function) is something I encountered not only in Buurtzorg, but in all self-managing organizations in this research. The absence of rules and procedures imposed by headquarters functions creates a huge sense of freedom and responsibility throughout the organization. Why is it then we might wonder that most organizations today rely so heavily on staff functions? I believe there are two main reasons for this [they provide economies of scale] and [give the CEO a sense of control].”
If you didn’t know already, the company Buurtzorg mentioned above provides local nursing services to communities in the Netherlands. According to their Wikipedia entry, “Buurtzorg Nederland is a Dutch home-care organization which has attracted international attention for its innovative use of independent nurse teams in delivering high-quality, relatively low-cost care.”
So I have a thought exercise for you. Using Burrtzorg as an example, do you think they can keep up this level of small-team effectiveness and continue to resist the temptation of creating more efficiencies and centralized control over time? In my opinion, it will be a real challenge with a high likelihood of failure.
For instance, let’s imagine that in the near future health care costs skyrocket in the Netherlands. Naturally Buurtzorg will fall under increasing pressure from the government to lower its delivery costs and increase its margins. There will then be a corresponding change in leadership to someone who is better at wringing out cost savings (but very much worse at architecting a self-managed organization). What do you think happens next? It’s not hard to predict.
The company will begin to centralize — just a bit more at first — in order to create more cost-savings and control. At first they’ll start with something non-confrontational like centralized procurement. But soon, in a changing environment there will be a need to change strategic direction as well. Corporate will find it very difficult to get many small independent community teams to move in the same direction and guess what? They’ll begin to centralize the team decisions too. In this future setting, Buurtzorg would start to look and operate more like a franchise than a group of small, independent, highly effective community care organizations. It’s sad but true.
The reason I share this kind of bleak prediction is that I want you to recognize how very hard it is to resist the pressure to centralize control, have greater cost savings and repeatability, and protect your business from liability. I don’t even need to mention the army of high-priced investment bankers, lawyers, and HR consultants whispering in your ear that you’re crazy for going against the grain and risking so much for so little.
If you think that won’t happen to you, let me give you two other examples from once-celebrated self-managed organizations, Nordstrom’s and Whole Foods, which are both falling prey to efficiency dragons as I write this.
Nordstrom’s has an almost mythical corporate history. Everett Nordstrom, son of the founder, was a classic design-centric leader. Under his influence and that of his brothers Elmer and Lloyd, Nordstrom did an amazing job of building a celebrated self-managed culture lasting multiple generations. Their guiding principle was based on unlocking effectiveness, not increasing efficiency. Famously, for a time they relied on a single note card for their employee handbook that read “Use good judgment in all situations.”
By the way, if you’ve never read it, it’s worth taking a peek at Nordstrom’s history to see how the brothers architected a self-managed organization that was built and reinforced around effectiveness (autonomy, core values, entrepreneurship, etc.) versus efficiency (over-centralized decision making, documentation, rules, and policies).
Beginning in the 1990s and under pressure to resist the threat of online shopping, however, a drive for more centralized control, policies, and liability prevention began to take over Nordstrom’s culture. More employee rules, documentation, and bureaucracy began to creep in. They began to look and act a lot more like their competition. In fact, if you scan the Nordstrom Code of Conduct today, it clocks in at 7,435 words. Heck, if you need a nap, read their Social Media Policy!
Now I’m sure that Nordstrom’s CEO has done his best to keep the old ethos in place and explain to the culture that the 7,435 word behemoth is just there for “liability protection” or “because the lawyers make us do it.” But you can’t have it both ways. You can’t speak two languages to one audience and be authentic. You’ve got to stand on principle, not on legalese. Scary? Yes! Crazy? Probably. But great self-managed organizations have found a way to keep organizational effectiveness high by embracing/tolerating inefficiencies, getting by with little centralized control, and even accepting some exposed liabilities. It’s hard to design it and it’s even harder to defend it!
Another recent example of how challenging it is to defend effectiveness against encroaching efficiency is Whole Foods. Founded in 1980 by design-centric leader John Mackey, Whole Foods basically created the high-end, organic groceries category and delegated a tremendous amount of autonomy to local store managers to select their own products, set their own prices, design their own stores, and control their own destiny. This conscious choice to design for more effectiveness at the local level certainly left a lot of money and centralized cost savings on the table. But the trade off for more entrepreneurial and effective local stores was worth it.
Fast forward 30 years and the rest of the grocery industry has caught up to Whole Foods. Everywhere from Costco to Safeway we find organic products at cheaper prices. Whole Foods’ stock price has been hammered by the competition and they are now centralizing much of that former local store autonomy in an effort to save costs and streamline operations.
This is just another example of the classic battle between effectiveness (giving great latitude to local stores to meet local tastes) and efficiency (centralizing purchasing and other services to create greater economies of scale). It takes great courage and patience – not to mention a defensible business model and margins – to consciously allow for inefficiencies in exchange for greater adaptability, autonomy, and resiliency in the organization. If a strong, design-centric leader like John McKay can fall prey to the drive for greater efficiency, you can too.
One final word, allowing for greater inefficiencies in exchange for local effectiveness certainly doesn’t make sense to Wall Street. For instance, I’m sure that this decision to centralize purchasing and other functions excites some short-range investment managers who focus on gross margins. I’m also certain that Whole Foods corporate management has convinced themselves that they can still get the best of both worlds – entrepreneurial local store managers that operate with autonomy but now backed by centralized purchasing for greater cost savings. Yeahhh!!! But it’s short-sighted and it will work against Whole Foods over time. That is, it may help the stock price in the short run but will erode organizational effectiveness in the long run.
Lead by Design!
At the start of this article I asked if you should you run a top-down or bottom-up organizational design…
By now, you should realize that this is a false question and that neither extreme of the top-down or bottom-up camp is a workable approach to building a thriving organization. Instead, the ideal approach would be a fusion of the best of both…
The next time you read a crazy sounding business article alleging that there’s a hot new company with no bosses where employees set their own salary and work schedule, what you’ll find backstage (if the organization is going to survive and thrive) is actually a high-performing top-down organization in disguise. One that has been architected by a design-centric leader to exhibit self-managed behaviors.
The design-centric leader focuses on architecting the game for others to play and communicates/teaches what is good play and what’s bad. The players (the staff) are then given a tremendous amount of autonomy in a transparent environment to execute within that framework, make their own decisions, and design their own work processes. The result is what appears to be a self-managed organization but is, in reality, the work of an architect designing the organization to be more autonomous, self-reliant, and adaptable to change.
It’s hard to be a design-centric leader. First and foremost, you must be comfortable in your own skin and have a sincere desire to adapt your management style. Even though you have a wealth of experience, talent, and drive, you will need to lead almost exclusively through influence and communication. Despite the pressure and inertia to step in and solve crises through personal action or to create greater efficiencies through centralized control, you resist and instead reinforce a system of self-management that is transparent, decentralized, and effective, now and over time.
I hope you find these concepts to be helpful as you prioritize and make choices on your own journey toward building a more resilient and effective organization. Here is some additional reading that you may find helpful in your quest.
- An Inside Look at Holacracy (a “buzzy” approach to self-management that I think embraces efficiency too much at the cost of effectiveness)
- The Culture System (things to think about when architecting culture)
- Lifecycle Strategy (I wouldn’t even try to build a true self-managed organization until the early Scale It stage)
- The Physics of Fast Execution (I didn’t discuss this but “gathering the mass” is the same as “seeking advice,” a concept embraced by all self-managed companies)
In a recent New York Times interview, Tobi Lutke, CEO of Shopify, used the term “trust battery” to refer to something that we’re all familiar with but we may not always articulate well: monitoring the current level of trust between people.
As you undoubtedly know, there are few things that can hinder success in an organization as much as a lack of trust. Using the metaphor of trust battery is a clever way to think about and communicate the importance of trust in your organizational culture and using it can make some hard conversations easier too.
Here’s how the trust battery works…
Every time your work with someone, the trust battery between you is either charged or discharged. When the trust battery between you is high, then the work gets done smoothly and quickly. When the trust battery is low, everything deteriorates.
When you start working with someone new, like a new hire, then the trust battery between you is charged at about 50 percent. You’re not really sure what to expect but you also give the benefit of the doubt and try to keep an open mind. Over time, if your interactions are positive, the trust battery fills up. If not, it drains.
Depending on its level of reserves, the trust battery can drain slowly or quickly. If you’ve worked with someone for a long time, have many positive shared experiences and a high degree of trust, then even if this person starts acting differently, the trust battery will drain more slowly. “Hmmmmm, Sam doesn’t seem like himself lately. He’s always been on time and now he’s late. I wonder what’s going on with him? I better check in and see if he needs anything.”
On the other hand, if it’s a relationship with low trust reserves already — like a new hire who clearly doesn’t cut it or a long-term relationship with a history of negative behaviors — then that battery drains very quickly. “Damn that Sam. He’s never delivered and he never will. He says one thing and does another. Why hasn’t he been fired yet?”
The trust battery works between groups too. For example, in your own organization, have you examined the trust level between sales and marketing? How about between customer service and engineering? Or between the CEO and the rest of the company? If you sense that the trust battery is running low between groups, I can almost guarantee that your company it not executing to potential – and it would be wise to take corrective action.
To be sure, we all have an intuitive sense for this already – it’s just how humans work. But calling it out makes it easier for everyone in your culture to understand and model. It also makes having difficult conversations easier and more constructive.
For instance, let’s say that Sam didn’t deliver on an important project. Confronting him with a statement like “Sam, you’re not trustworthy,” would only make him defensive. You would have an ever harder time restoring trust this way. With a shared company metaphor like the trust battery, you can make a more effective statement like: “Sam, my trust battery with you is really low right now. You said you’d get me this deliverable and it didn’t come through. Help me understand why because I want my trust with you to be high.” Sam’s not likely to be as reactive and it’s a much easier conversation to navigate, right?
As you teach your own organizational culture about the trust battery concept, it’s natural for a discussion around behaviors that build or destroy to trust to emerge. For me, these behaviors are self-evident. They’re really life lessons I heard from my grandmother.
Treat others with respect. Say what you mean, mean what you say. Listen twice as much as you talk. Follow through and follow up. Promise made, promise delivered. Be a master at your craft. And so on. These are all cliches for a reason — they’re behaviors that build trust and that we commonly believe to be desirable.
One thing that may need to be made clear – especially to younger staff – is that trustability is not the same as likability. I don’t have to like you in order to trust you, and vice versa. Some cultures confuse this by acting nice and friendly on the surface while avoiding harder conversations underneath. It’s these very conversations that are necessary to rebuild and reenergize mutual trust.
If you’d like some more ideas on starting the conversation on trust building with your own team, check out the Speed of Trust mini-lesson 13 Behaviors of a High Trust Leader or this list of 12 Leadership Behaviors That Build Team Trust by Ekaterina Walter at Forbes.
There’s a final reason I like the trust battery metaphor. It ties directly into the Organizational Physics Universal Success Formula that I find so effective. The formula states that when entropy (a measure of things falling apart) is high in the system, success is going to be low. Put another way, there are few things that cause entropy in your company to rise faster than mistrust among individuals and groups.
So as ever, in order to maximize the gains, keep the drains low!
One of the key concepts of Organizational Physics is that growing your business from the Nail It to the Scale It stage usually requires a change in organizational structure.
Changing structures, roles, accountabilities, and reporting relationships is a big undertaking. It’s a pre-requisite to scaling up but it can be hard to get it right. It also takes time and energy to integrate the new design.
When a growth company doesn’t yet have the resources to hire out its full team for the new structure, it’s a common practice to assign multiple roles or “hats” to existing leaders.
The idea is this. Until the company can afford to find and hire a dedicated replacement, a few leadership team members are assigned accountability to execute across multiple functions at the same time. Once a replacement can be made, the hat is taken off and given to the new dedicated replacement.
Some common examples of hat wearing that I see in companies in the Nail It stage include:
- The head of Sales wears the hat of head of Marketing. Once a head of Marketing is hired, the head of Sales can return to focusing 100% on sales.
- The CEO wears the hat of head of Strategic Alliances. When the business warrants a dedicated Strategic Alliance role, the company makes that hire.
- The head of Admin wears the hat of head of Recruiting and People Development. When the company has the resources, it creates two distinct roles: one for liability prevention and one for recruiting and cultural development.
- The head of Software Engineering wears the hat of head of IT/Tech Ops. Once the company has the resources to hire a dedicated head of IT/Tech Ops, the head of Software Engineering can go back to focusing fully on driving external software development.
There are other examples. Obviously, hat wearing isn’t ideal. In all of these instances the organization is violating a principle of structure. This is because they’re combining effectiveness roles with efficiency ones, long-range roles with short-range ones, or roles that need more decentralized autonomy with those that need more centralized control.
In other words, while hat wearing can be useful and necessary, you should always view it as a temporary measure. It sacrifices some focus and energy in the people wearing the hats (and the company as a whole) in exchange for short-term cash flow savings and buying time to find the right new hire or promotion. Basically, only deploy hats when cash or time is too tight.
That said, if you are deploying multiple hats, you should keep in mind a simple concept that will increase organizational effectiveness during a time of transition. It will also help your hat wearers to be successful in their multiple accountabilities. This concept applies only to those in jobs that have performance-based incentives.
The concept is this: Convert any performance-based incentives for those wearing multiple hats to base compensation, including any incentive compensation they would have likely earned if they had performed just their major role.
Here’s an example. Let’s say that you are the CEO of a fast-growing company with $15M in revenue and Joe is your head of Sales who runs the entire sales team. You have enough cash flow to make some smart business investments but not enough to hire or invest willy-nilly.
The rapid business growth is putting a strain on the culture and hiring. To compensate, you decide to create a new role called head of Culture and People Development with accountabilities for cultural events, recruiting and on-boarding, and cross-functional staff development.
You can’t justify hiring a full-time person for this position right now so instead, you ask Joe to continue to lead the Sales function and take on the newly formed Culture and People Development function. You justify this decision because it’s intended to be for one year only and Joe is your best cultural leader. Joe’s base salary as head of Sales is $150K. He earned $100K in sales commissions last year and is projected to earn the same this year.
Since Joe is now temporarily wearing two hats, what I’m proposing is that you should temporarily convert his existing sales commission plan and pay him base compensation of $250K (what he would earn if he hit his full sales targets this year), for as long as he’s wearing both hats.
Does the idea of taking away your head of Sales incentive plan make you feel queazy? It should. But if you are committed to driving your business to its scalable potential – and if Joe really is your best choice to wear the hat for Culture and People Development – then that’s exactly what you should do.
Why? Because if you give Joe both roles but keep the old incentive plan in place, despite his best early intentions to do well at both, he will likely do worse. The role with the explicit incentives (in this case, Sales) will always dominate his energy and attention, even if it causes harm to the development of the business. At the same time, even though he’ll give Sales most of his efforts due to the incentives, he’ll likely do worse at both roles because of the increased demands placed on him.
However, if you were to pay him a healthy flat wage and trust his intrinsic motivation to lead and oversee both roles – Sales and Culture and People Development, then he has a chance to do well at both roles in the interim. You’ll notice that without incentives, he’ll start to act less like a hammer and more like a lever. He’ll do better at developing the bench in both departments. He’ll see the big picture and make decisions that are best for the business in the short and long run.
Why is this the case? Wearing multiple hats — leading multiple, competing priorities — is hard to do. Short-range priorities like Sales will naturally overpower longer-range needs like Culture. Sales requires a hunter style; Culture a harvester one. Navigating these inherent conflicts puts a tremendous burden on the leader and on the company.
If the organization is going to achieve escape velocity, then Joe needs to be able to reconcile these conflicts, adapt his own style, develop the next generation of leaders, and execute well on both roles at the same time. Performance incentives don’t help in a scenario like this. They hinder.
For instance, if you were a professional soccer coach and your best athlete was a striker, you’d be hard-pressed to ask him to play defense too. You might justify it, however, if you were getting a lot of goals scored against you and you didn’t have other capable players. Now imagine that you ask the striker to make that change but also keep his existing goal bonus in place. How much defense are you going to get? Not much, and it will probably be erratic. But if you were to take away his goal-scoring bonus and just pay him as if he hit his quota anyway, then you’d get a more balanced player and true team leader.
Assigning hats in business is the same. Over time, it’s hard on the player and it’s hard on the team. You need to rely on the intrinsic motivations of the people wearing the hats and create an environment where they can do what’s right for the business’ sustained performance. Performance incentives hinder this by causing the leader to sacrifice one function for the other because the one with the explicit incentives will always win out.
Frequently Asked Questions (FAQ):
This concept of rolling performance incentives into healthy base compensation for hat wearers is simple but it usually raises some questions. Below are answers to some of the most common questions to help you think this through:
1. Why have any performance incentives at all?
Good question. There’s lots of evidence that — especially for creative, team-based collaborations — performance incentives cause more harm than good. Your business and culture may not need or have any performance incentives. If that’s the case, there are no incentives to take away or convert. Without incentives in one area, it’s much easier to move people in and out of hats.
2. Don’t I actually have to pay the hat wearer more to run multiple accountabilities?
No. I would argue that if you ask someone to wear a temporary hat and they reply with “pay me more money,” you’re not asking the right person. You’re dealing with box #3 Mercenaries/Specialists and they should be left alone to focus on their singular task.
3. Shouldn’t I create new performance incentives for all of the multiple hats instead?
No. You’re creating more complexity that’s harder to manage and harder to change when it’s time to take the hat off. Keep it simple. If you are committed to performance incentives, then keep them at the macro-level, like profit sharing or stock options, but don’t try to micro-manage incentive-based performance.
4. It seems really stupid to ask the head of Sales to also take on Culture and People Development. Do you recommend this?
No, I don’t recommend this. I was just sharing an example (one I have seen before). Again, hat wearing is not ideal but you have to play the cards in your hand.
5. Why have role accountabilities and hats at all? Why not just create a self-managed organization where people can shift in and out of roles across departments at their own volition/discretion?
Good luck with that. Every high-performing organization has defined roles on a team. Those roles may be self-defined but they are defined. The principle is the same. If you want fluidity of roles and accountabilities, individual performance incentives will only harm.
6. It seems really hard to get someone who’s wearing a hat to actually take it off. How is this done?
It can indeed be hard to get someone to take off a hat, especially if it feels like a loss of status. It isn’t. You can mitigate any resistance by helping the person being asked to take off a hat to see the bigger picture and what is best for the next stage of business growth. At the same time, try to get them to acknowledge what they are exceptional at and enjoy doing. By taking off the hat, you are freeing them up to have more time and energy to do what they are most exceptional at and creates the most value for the business – i.e., their main role.
7. It is too risky to take away all performance-based incentives. What are other options?
If the thought of taking away performance incentives from a particular role or individual feels too risky to you, I would trust that and not make the change. Either don’t invest in the new role at this stage or find someone else to wear the hat – someone who gives you confidence that the can execute without extra incentives.
“We believe that the future standard for all executive teams will include a head of Customer Success who’s on the same level as the head of Sales, Marketing, and Demand Generation.” – Aaron Ross
If you run a software-as-a-service (SAAS) business, you might already know about the core concepts behind Aaron Ross and Margaret Tyler’s book Predictable Revenue. Aaron Ross learned his craft as the head of customer acquisition for Salesforce.com and this book seems to have become the hot new bible for scaling up the revenue side of a SAAS business.
The main theme of Predictable Revenue is that the single most important thing a SAAS business can do to scale revenues is to segment its Sales roles into distinct focus areas and also to create a new role in the organizational structure called “Customer Success” that is dedicated to making existing customers successful and driving renewals.
Lately, I’ve been getting asked frequently in my consulting practice about how to structure the Customer Success role. My sense is that there is some confusion out there about the distinction between Account Management and Customer Success. In this article, I’m going to show you how to use the principles of Organizational Physics to actually structure the Customer Success role so that your own SAAS business has the greatest probability of realizing its potential.
Role Segmentation: Always a Good Idea
Predictable Revenue argues that the major role of Sales is actually four roles that need to be segmented in the organizational structure:
- “Inbound Lead Qualification” to qualify new leads coming into the business;
- “Outbound Prospecting” to create and qualify new sales opportunities and then pass them to Sales or Account Executives to close;
- “Account Executives or Sales” that close deals and carry a quota;
- “Account Management/Customer Success” which is a role dedicated to making existing customers successful and driving renewals.
Does it make sense to segment these different sales roles? Absolutely. In fact, you should define and segment all of the major roles and most of the minor roles in your entire business — not just sales.
Segmenting by roles greatly supports scaling your business. It helps to create role clarity and accountability. It allows the right style of people to focus on the most important things for their roles. It significantly improves the hiring process. And with the right management process, it can significantly increase execution speed.
Predictable Revenue encourages the segmentation of sales roles earlier than one might think and I totally concur — but again, for all roles. Technically I would start to think through your organizational design and role segmentations in the mid- to late Nail It stage of business development. Heck, it doesn’t even cost anything to segment by roles if you don’t have the budget to hire for it. Some of your staff can wear multiple hats until you do.
So how should you actually structure the four specialized roles defined by Predictable Revenue? The first three are easy. Outbound Reps, Inbound Lead Qualifiers, and Account Executives/Sales should go under the head of Sales. This makes sense intuitively. All three of these roles are about being effective in the short term and building and managing revenue-driving relationships. They also benefit from being under a single head of Sales.
But what about the fourth role of Account Management/Customer Success? This is the role that’s creating all the buzz (and I think some confusion) — how do you actually structure that? Here is where I differ from Ross and Tyler. From my experience, Account Management and Customer Success should not be thought of as one but as two distinct roles. If you structure with this in mind, you’ll have a much easier time filling both roles and getting to scale.
Account Management & Customer Success are not the Same Role
Below are two pictures of a simple business-to-business SAAS structure. They are meant to illustrate how a scalable organizational design will keep Account Management under Sales and treat Customer Success as its own major function.
This organizational design is based on the 5 Laws of Structure in Organizational Physics and places the major functions of the business in their correct relative locations based on the competing needs of short-/long- range view, efficiency/effectiveness, and autonomy/control.
The first picture shows the ten major functions of this business in grey: Strategic Execution, Strategic Finance, Sales and Account Management, Product Management, Customer Success, Technical Operations, Software Engineering, Marketing, Strategy, and Admin. (Every structure is unique, but these are some basic major functions you would typically find in a B2B SAAS company.)
The second picture just zooms in on the Sales & Account Management, Product Management, and Customer Success roles:
Before I proceed, I want to remind you that an organizational structure is not the same as an org chart. What this picture above is showing you is that this SAAS business has ten major functions. Each function has a PSIU code and a set of key performance indicators (KPIs) in blue. If you are unfamiliar with the PSIU code, it’s really helpful in designing your own organization to scale and making smarter hires. You can learn more about the PSIU framework here. It should also be clear that I am not designing for silos, but for unarguable accountability and cross-functional transparency.
Keep Account Management Under Sales & Make Customer Success its Own Major Function
OK, so why have I placed Account Management under Sales and not created a joint Account Management/Customer Success role as originally proposed by Predictable Revenue? The answer is that Account Management is a revenue-driving relationship role and Customer Success is a revenue-driving systems role. You will create more clarity, focus, and role fit and scale more easily by keeping these roles separate.
It seems to me that the authors of Predictable Revenue understand these differences intuitively. Even though they define Account Management/Customer Success as one function, note the subtle but important differences in their own definitions taken from their blog:
“Account Management/Customer Success: Account Management usually implies a quota-carrying salesperson working with current customers. Customer Success implies someone without a quota (that is, unbiased) whose job is solely to help customers get more value from your product, whether through hands-on help, education and training, etc.”
If you can conceptualize Account Management and Customer Success as two distinct roles rather than one, it suddenly gets pretty easy to figure out how to structure them both.
You’ll want a single head of Sales and Account Management overseeing Inbound Lead Qualification, Outbound Prospecting and Account Executives/Sales, as well as Account Management. Specifically what I mean by Account Management is Key or Strategic Account Management focused on building relationships, being the voice of key customer needs, and driving recurring and upsell revenues from your largest and most important accounts.
If your business does not have customer tiers, then you won’t even need the Account Management role – and note that neither Key Account Management nor Customer Success are the same thing as Customer Service. Customer Service is the role that provides low-level user support at an affordable cost. Account Management and Customer Success, on the other hand, are revenue-driving roles.
In addition to the head of Sales and Account Management, you’ll also want a head of Customer Success that oversees Client Onboarding, Client Training, Client Analysis, and Client Experience Optimization. Notice that all of these sub-roles require a systems approach. They need analysis. They need to be the voice of all customers, not just the largest ones. They also need to drive revenue by ensuring that all clients are activating the product, understanding and using it, and finding insights in usage analytics that help drive overall product improvements that increase usage and renewals.
3 Breakdowns that Happen When You Combine Account Management & Customer Success
There are 3 major types of breakdown that occur when you combine Account Management and Customer Success into a single role. They are breakdowns in focus, style, and time horizon.
Breakdown in Focus
Think about it. The entire ‘Customer Success’ movement was born from Ross’ and others’ recognition of a simple fact: Companies without a function focused on engagement and renewals from existing clients fail to scale because they focus too heavily on making new sales. It’s a classic symptom of trying to Scale It before Nailing It.
On the other hand, companies that combine Customer Success and Account Management, end up with similar problems, sacrificing the product experience of the many accounts (Customer Success) for the needs of the few key accounts (Account Management). Account Management ends up overpowering Customer Success or vice versa.
Again, the Account Management role is a relationship role that needs to focus on the needs, aspirations, and renewals of key accounts. Customer Success is a systems role that needs to focus on the needs, aspirations, and renewals of all accounts. Keep them separate and put the right focus, leadership style, and KPIs in each area.
Breakdown in Styles
The PSIU style and approach of a world-class Key Account Manager requires a high drive to Unify or create rapport and connect with key accounts. While we’re looking for a high drive to Produce and win new accounts from the other sales roles, we want a more Unifying approach from Account Managers who build relationships and create empathy with important clients.
You can contrast the style of a great Account Manager with the style and approach of a world-class Customer Success leader, who should demonstrate a high drive to Stabilize and Innovate, but not to Unify. The Customer Success leader excels at designing systems, analyzing data, finding efficiencies and, generally, making the entire system work better at scale.
If you were to place an Account Manager type with a high Unifier style into the Customer Success role, then you would get a lot of great customer interactions but not a lot of scalability, design insights, or process improvements. Customer Success must design and optimize systems and processes to onboard new clients, train all clients elegantly so they understand and engage with the product, and optimize the overall client experience for all clients.
In short, always try to put the right style of people into roles where they and the business can thrive.
Breakdown in Time Horizon
In addition to a breakdown in focus and styles, there is also a different time horizon for Account Management versus Customer Success. Account Management will always be under tremendous short-range pressure to meet key account needs and drive new revenues from their portfolio of accounts. It’s about relationships – and the needs of the most pressing and important relationship should always take precedence.
Customer Success is going to be under a lot of short-range time pressure too but you want to design the organization so that Customer Success doesn’t collapse under this short-range pressure. Customer Success must keep a medium-range time orientation (e.g., the next 3 to 6 months, not the next 3 to 6 weeks). If not, then it will start acting more like an Account Manager being whip-sawed by the needs of key accounts and less like the head of Customer Success for all accounts.
If you take another look at the structure diagram above, you will see that Product Management is situated between Sales/Account Management and Customer Success. This is not arbitrarily so. Product Management mediates between the two functions. The purpose of Product Management is to translate, prioritize, and coordinate the competing needs, focus, and time frames that are occurring between Sales/Account Management and Customer Success (as well as the competing priorities coming from Strategy, Marketing, and elsewhere).
We want Account Management to put pressure on the company to fulfill on the needs of key accounts. We also want Customer Success to put a different pressure on the company for the needs of the overall product experience and for renewals. The role of Product Management is to to make the hard decisions that balance out those competing needs and move the business forward now and over time. If you’re interested, you can read more about the Product Management role here.
Predictable Revenue has started a broad and productive conversation that is still evolving.
Despite how it’s been defined by Predictable Revenue, I believe that Customer Success should not be placed in the same category as Account Management. While every structure is unique, it generally makes more sense to keep Account Management under Sales and make Customer Success into its own major function.
Additionally, I think that one of the important ideas in this book – role segmentation – should apply not only to Sales but to all the major and minor roles in your business.
Finally, the idea of having happy, recurring customers is obviously not new and it involves more than formalizing a Customer Success role. It’s always a total company effort that requires constant engagement, effort, and reinforcement from all roles in the company.
I earn my living as a scaling coach to expansion-stage companies. One of the advantages of my position is that I get a deep, inside look into different industries and businesses. While no two situations are exactly alike, I have seen a consistent yet under-reported issue out there that keeps 9 out of 10 companies from getting out of start-up mode to the next level.
What is it? It’s a breakdown in Product Management.
Assuming that you already have a sound strategy and execution framework in place, if you can get your Product Management function right, you’ll solve a lot of problems inherent in scaling your business. You will also have a much easier time increasing revenue growth, execution speed, agility, and profits. If you don’t get Product Management right, scaling to your potential will be much harder or even impossible.
Before proceeding, I need to call out that the problems and solutions described in this article are only applicable to a company in the late Nail It to early Scale It lifecycle stage of business development:
In the early start-up stages of a business, Product Management doesn’t need to be a well-defined function. It’s just something that is organically “managed” by a product-savvy entrepreneur. At this stage, there’s a drive to find product-market fit and not much else matters.
But once product-market fit is established and the company is ready to scale up by adding new product lines, customer types, or markets between the late Nail It and early Scale It stages, that’s when Product Management should be rethought and redesigned. This article will help you do just that.
Is There a Breakdown in Your Product Management Function?
It’s pretty easy to spot a breakdown in the Product Management function in your business. Assuming that your business has already aligned around a clear growth strategy and execution framework, some symptoms of a Product Management breakdown will show up when there is one or more of these conditions:
- Poor coordination between sales, engineering, manufacturing, and marketing
- Haphazard quality in new product releases
- A struggle to translate customer needs into a delightful customer experience
- Growing revenues but little or no profits
- Finger-pointing and blame between departments
- Perpetually late product development
- A strong technical product but poor product marketing or vice vera
- A lack of organizational clarity on the short- to mid-range product roadmap
- A visionary entrepreneur who is stuck managing product details
Now, you’re probably thinking that I’m attributing a lot of internal corporate issues to a breakdown in just one function. And I am. That’s because at its core, Product Management is a translation, prioritization, and coordination function. And when it breaks down, this has a big impact across the entire organization. Let’s see why…
Product Management: It’s Not What You Think
The term “Product Management” can mean many different things to different people. For example, does your own definition include product marketing? Product development? Product pricing and positioning? Feature prioritization? Product strategy? Brand management? Resource allocation? More?
If you’re trying to improve something, you must first start with a clear definition of what it is you’re working on. There are actually five primary product management-related functions that every business performs but are distinct functions that should be treated as such. These five functions are Product Strategy/Vision, Product Design, Product Development, Product Marketing, and Product Management. While the titles may be different in your own business, the core functions will be familiar to you.
Terms and Definitions: Throughout this article, I use a shorthand code called “PSIU” to refer to the four forces and styles present in any organization: Producing, Stabilizing, Innovating and Unifying. You can learn more about PSIU here and take the World’s Fastest Personality Test to get a basic sense of it before proceeding.
Product Strategy/Vision (psIu)
Product Strategy/Vision is the function that finds the breakthrough product opportunities in the marketplace: “Hmmm, what potentials exist out there that we can bring together in new and innovative ways and that allows us to fulfill on our purpose?” The Product Strategy leader asks this question all the time and has the answers (sometimes the right answers, sometimes the wrong ones, but opinionated answers nonetheless).
A head of Product Strategy is usually either really enthusiastic or really frustrated. Why? Because they live in the future with a vision for how the world should be. When their vision is tracking well and showing visible, measurable results, they are really excited, fun to be around, and charismatic. But when things aren’t tracking to their expectations, others’ don’t “get it” like they do, or they’re not in a position to effect the change they want to see, then they can come across as extremely frustrated or irritable.
The style of a head of Product Strategy is very Innovative or future-oriented and focused on possibility (psIu). “What if we tried this?” Or, “Why not do it this way instead?” A classic example of a Product Strategy/Visionary style is Elon Musk. Notice how Musk continually underestimates the true delivery time frame for all of his ventures – SpaceX, Tesla, SolarCity, etc.? That’s because the high Innovator style tends to live in the future and sees things for how they could/should be and naturally underestimates the nitty-gritty details.
In your own business, Product Strategy probably isn’t its own distinct title. Instead it’s a “hat” worn by the visionary entrepreneur, CEO, or CTO. There’s no wrong answer. It should go to the person most suited to holding, articulating and selling the vision and strategy. As you go through this next section, I’d like you to keep in mind the different skills and style needed to be a great Product Strategist/Visionary compared to the skills and style required for the other aspects of managing products.
Product Design (pSIu)
Product Design is the function that can translate the Product Strategy/Vision into an amazing customer experience. Product Design will often speak in the language of “user experience.” They’re usually asking themselves and others, “What is the purpose of this product? What is the feeling we want to create? What is the optimal design for the best user experience?” Technically, they are well-versed in key elements of the user interface and how the product can or should interact with back-end technical systems and processes.
The style of a head of Product Design is usually a mix of Innovator and Stabilizer or pSIU. This means that they excel at seeing and articulating the product vision or strategy and how it should actually show up in end-user hands. They’ll use language like “elegant, beautifully, functional, appropriate,” and also have an intense level of attention to detail when it comes to the product experience.
An example of a Product Design style is Jack Dorsey, who is co-founder and now CEO of both Twitter and Square. The media tends to define Jack as the “next Steve Jobs.” But what I want you to notice is that Dorsey’s style is more in the detail and design of the user experience rather than the classic Product Visionary style of an Elon Musk or Steve Jobs. You can see this very clearly in Apple’s history. Apple would not have been Apple without a Jonny Ives — who is a Product Designer style — to complement the Product Vision of Steve Jobs.
Depending on your business type, Product Design likely has a title of Designer (Software) or Prototype Design (Manufacturing). The titles will be different but the function the same — to translate Product Strategy into an elegantly functional user experience. The better the Product Designer holds the Product Vision, understands the back-end technology or manufacturing process, and tunes her empathy to what the end-user desires, the better she will perform in that role.
Product Development — PsIu
Product Development is the function that transforms product designs into actual working products or, in the case of a manufacturing company, actual working prototypes for manufacturing to produce at scale. The Product Developer is constantly thinking about how to translate the concept and requirements of a product design into something that actually works and getting it produced or launched — fast!
The PSIU code for a Product Development function is a high drive to Produce or get stuff out the door and a high drive to Innovate or to be creative and disrupt the status quo. Mark Zuckerberg, CEO of Facebook, is one example of a Product Development entrepreneur. Notice that he holds the product vision (Innovator) and also gets his hands dirty writing code and getting products shipped (Producer) or a PsIu style that is common to many product savvy entrepreneurs. Even after Facebook became a $1B+ business, Zuckerberg still preferred to spend most of his time head down coding on the product while others took care of the business and coordination stuff.
Depending on the type of business you’re in, Product Development may be called Software Engineering (Software), Prototype Engineering (Manufacturing). Whatever it’s called, it is valued for its ability and capacity to produce high-quality and innovative products quickly.
Product Marketing — PSIu
Product Marketing is the function that defines how the product “shows up” in the marketplace. A great Product Marketer is adept at using their intuition and data to artfully answer questions like, “What makes this product unique? Who is the core customer? What are those customers’ conscious and unconscious unmet needs? What is the pricing model? Through whom should we distribute? What campaigns will be effective?” And then driving forward the execution of the campaigns that bring that brand to life.
In PSIU code, the Product Marketing function needs a high drive to Produce results or get the volume of day-to-day work accomplished; a high drive to Stabilize or ensure that the brand is accurately presented to the world; and a high drive to Innovate or be creative (PSIu). One popular example of a classic Product Marketer is Peggy Olson from AMC’s hit TV show Mad Men. When watching the show, pay attention to the fact that Peggy works long and hard (Producing) into the night responding to client projects. She is also able to analyze and intuit the larger product strategy for breakthrough positioning (Innovating) and manage the details of the pitch with attention to detail, stability, and support (Stabilizing) to her boss Don Draper, who is a classic Creative Director type or a big Innovator.
In your own business, the Product Marketing function might be called just Marketing or Brand Management – even as it helps to manage a wide range of functions such as product positioning, pricing, promotion, competitive analysis, PR and creative, and drives marketing execution and more.
Product Management — pSiU
And this brings us to Product Management, the focus of this article. At its core, Product Management (“PM”) is a translation, prioritization, and coordination function. Meaning, its role is to translate “upstream” product requirements from a variety of sources including clients, sales, strategy, marketing, and R&D. It prioritizes those requirements to best meet short-range client and business needs. And it coordinates “downstream” releases so that current customers, prospects, and staff are aware of (and ideally excited by), trained on, and engaged with the evolving features and products.
This includes prioritizing Product Development and Design resources by product, coordinating with Product Marketing activities, and ensuring that the short- to mid-range product development roadmap ties into the overall Product Strategy and is clearly communicated. An outstanding PM keeps the customer needs forefront in their decisions while coordinating and allocating resources to delight those customers and achieving business objectives.
In PSIU code, the PM function needs a high drive to Stabilize and a high drive to Unify, or pSiU for short. For instance, a classic PM style who is now in the public limelight is Sundar Pichai who was recently promoted to be the CEO of all of Google when it made the recent shift to its new Alphabet structure. By most accounts, Sundar is highly respected for his ability to translate the emerging products vision, manage the gap between technical product details and user experience, and coordinate across other Google functions (Stabilizer) and also to empathize and communicate with a wide range of different and often competing interests within Google to keep things moving forward (Unifier).
Aside: Note that Sundar has a very different style compared to the more famous Google co-founders, Larry Page and Sergey Brin, who both have a high Producing and Innovating style or PsIu common to entrepreneurial founders. Sundar’s pSiU style complemented Sergey and Larry’s PsIu style very well as he was able to help translate the strategy and competing product priorities into compelling Google products while navigating the political minefields and different personalities within Google. It will be interesting to see how he fares in the Google CEO role. I think he’ll do well at managing and improving on the core products Google already has while the big “moon-shot” innovations are hoped to emerge and be commercialized from elsewhere in the Alphabet portfolio. But that’s a subject for a different article.
In your own business, the PM function may not yet exist at all, or it may be called something different. If yours is a service or contract business, then perhaps it’s called Project Management or Program Management. Regardless of the title, the purpose of this role is to translate requirements, set short-run priorities, and coordinate releases.
In the rest of this article I’ll show why the PM function may be missing or has been set up incorrectly in a business that is attempting to scale and how to do it right. It is a very critical, high-leverage function that, when executed correctly, greatly facilitates the leap past start-up into scale-up and beyond.
Now, you may quibble with how I’ve defined and described the many facets of Product Strategy, Product Design, Product Development, Product Marketing, and Product Management, and the examples of styles found in each. It’s not an exact science and you’ll find variations in different companies and situations, along with changes in style as people evolve. But no matter how you slice it, we should all be able to agree that there’s a lot happening under the label “Product Management” that should be conceptualized as distinct and separate functions.
Put another way, if you’re waiting for some mythical combination of Elon Musk, Jack Dorsey, Mark Zuckerberg, Peggy Olson, and Sundar Pichai to materialize in your company as a single product visionary/designer/developer/marketer/manager, put the crack pipe down and come back to reality. These are different functions that must be thought of and managed differently.
So yes, you want to improve your company’s ability to define, prioritize, build, release, and promote its products – but how do you know where the breakdowns are really happening and how do you catalyze a breakthrough? Now that we have our definitions, we can start to understand what to do…
The 5 Things Every Business Can Do for Product Management Breakthroughs
There are five basic product management tactics that every business can implement to help it scale up more easily and profitably. These five tactics are applicable to most industries and scale up situations. I’ve helped to deploy them and seen them create significant breakthroughs in revenue growth, profits, and execution speed in multiple different industries, including high tech, clean energy, healthcare, finance, services, and manufacturing.
- Make the PM Role a separate function in the organizational structure
- Delegate profit & loss accountability to it
- Decentralize it so that it’s close to the customer
- Place the right style of leaders to manage it
- Equip it with sound processes, metrics, and tools
You’ll notice that all five of these tactics relate just to the PM function and not to Product Strategy, Design, Development, or Marketing. Why?
In most businesses struggling to scale, there’s not usually a big gap in Product Strategy, Design, Development, or Marketing. Put another way, it’s pretty easy and aligned for the current head of Marketing to manage or hire for Product Marketing; for the head of Engineering to manage or hire more Product Development or Design resources; and for the founding entrepreneur or head of the company to manage overall Product Strategy.
It’s true that sometimes early-stage start-up employees aren’t capable of scaling to the next level but, more often, it’s because they’re overwhelmed, taking on too much of the PM role in addition to their other roles (like when the head of Product Development or Product Marketing is also the head of Product Management). When these leaders can focus on what they’re best at, they have the time, energy, focus, and skills to thrive at the next level.
However, there usually is a breakdown in how the PM role is managed in a company between the Nail It and Scale It stages. Typically, the PM role is not treated as its own major function; it does not have P&L accountability; it is too centralized; it doesn’t have the right style or dedicated leadership; or it lacks sound processes, metrics, and tools.
And if it should turn out that your current head of Product Strategy, Design, Development, or Marketing still can’t cut it after relinquishing PM duties, well, congratulations. These roles are much easier to fill once you have set up these other five elements and have clarity on the real accountabilities of their respective roles. So the early focus should be on improving the PM function as it has been defined. Now let’s dive deeper and see how to do that.
Breakthrough #1: Make the PM Role a Separate Function in the Organizational Structure
Breakthrough #1 is to treat the PM role as its own major and separate function in the organizational structure. For instance, here’s a picture of a structure for a manufacturing company. I’ve designed it using the 5 Laws of Structure but intentionally left out the PM role to make a point. Note that the major business functions are in grey and each has a blue section with basic Key Performance Indicators (KPIs) to help explain its accountabilities.
While Product Design and Development (under Prototype Engineering), Product Marketing (under Marketing), and Product Strategy (under Strategy) are in their correct relative locations in this structure, the PM role is missing. What do you anticipate the problems would be in a company structured like this? As the company attempts to scale, there will likely be…
- A real struggle to translate new prototypes into manufacturing efficiently
- Increasing conflict between Manufacturing and Prototype Engineering departments, with each side claiming that the other “just doesn’t get it”
- Poor communication and coordination with Product Marketing, which feels increasingly left out of the picture and unsure of what’s coming out of Manufacturing and when
- Lack of confidence across the culture that the product will do what it’s supposed to do
- A frustrated Product Strategy function because it feels that the long-range product needs aren’t being taken into consideration in product development, which is perpetually under the gun to meet short-range needs
Have you seen some of these problems before? I bet you have. When most companies run into them, they attempt to solve them by calling out for “more product management.” However, they make the mistake of assigning product management within an existing function, usually Product Development, Product Marketing, or Product Strategy. But none of these locations in the structure are ideal and, in fact, can cause a lot of harm when attempting to scale up.
The Mistake of Co-joining PM with Product Development or Design
For example, what do you think happens in a business when the PM role and Product Development or Design roles are co-joined as the same function? That’s right, there’s a breakdown on one side or the other. If you have a technically strong head of Product Development or Design who also oversees the PM function, then you’ll likely have a fairly strong technical product that ends up being miscommunicated and that few are trained on. You will also have poor communication and coordination with marketing, sales, and operations on releases. Product Development seems confident in its own product and projections but everyone else isn’t.
On the other hand, if you have a strong PM who is also head of Product Development or Design, then you’ll likely have a really thorough product plan that is well-communicated but perpetually late on shipments. I.e, there is a lot of product planning being done but a lack of actual live, high-quality, working products shipped to customers on time. It should be clear that Product Development and Design roles and the PM role are different functions that require different accountabilities, skills, and leadership styles.
The Mistake of Co-joining the PM with Product Marketing or Strategy
If you co-join Product Marketing or Product Strategy with the PM role then the long-range functions of Product Marketing and Strategy won’t be as effective because they’ll be under constant short-range pressure to manage the current product pipeline efficiently. Product Marketing and Strategy must maintain that long-range focus to be effective while the PM role must have a short-range focus and deliver results efficiently. Don’t mix them.
Critically, if the PM role is buried under an existing function, it also won’t be able to coordinate cross-functionally very well because it’s not truly its own independent role in the structure. Let’s say that the PM role was buried under Marketing. If so, how do you think Sales Operations, Customer Service, and Manufacturing would view the PM role? That’s right, as a biased (if not useless) marketing function not pertinent to the operational demands of today. It would be given lip-service or ignored. Everyone would be frustrated with this arrangement, especially the PM who wouldn’t seem to be executing on their charter.
Example of the PM as a Separate Function in the Organizational Structure
Again, you can get away with burying the PM role in another function when the business is in start-up mode with fewer problems. But as you make the leap to scale-up mode and add more product lines, customer types, or markets, the PM role must become its own major function in the organizational structure like this:
With this approach, the PM role (called the ‘PM Office’ in the image above) now has its own dedicated home in the organizational structure so that it can perform its function and fulfill its accountabilities. It translates upstream requirements from clients, sales, marketing, and strategy into clear, short-range priorities. It helps to communicate and guide the transition from prototype to manufacturing. It coordinates between sales, prototype engineering, manufacturing, and marketing so that downstream product releases are well-prepared and communicated, adopted, and impactful. And critically, Product Development, Design, Marketing, and Strategy are freed up to focus on what they do best.
Breakthrough #2: Delegate Profit & Loss Accountability to It
It’s not enough to just make the PM role a dedicated major function in the business. It should also have accountability for quarterly and annual Profit and Loss (P&L) targets for all the products and/or business units it manages. Notice in the structure above that the PM role is black in color? The term “in the black” means to be profitable and it is the PM role that should manage short-range profitability.
Why? One of the biggest challenges of leading a company into scale-up and beyond is freeing the founder/CEO from trying to do or manage too many things herself. What worked in a start up can become a bottleneck to growth and no longer work at scale. As a company gets into scale mode, the founder and CEO (as well as other members of the leadership team) need to start taking off the multiple hats they’ve been wearing so they can focus on fulfilling the individual roles they are best suited for.
It’s a common scenario. Imagine a fast-growing start up where the visionary founder plays the role of head of company and also wears that hats of head of Marketing, head of Product Strategy, head of Product Management, and head of Team and Culture. Obviously, this isn’t going to scale up and this founder will quickly find themselves overwhelmed, unable to delegate effectively, and a bottleneck to growth.
When there’s budget and availability, this founder must find talented replacements for each of these hats so they can focus on being the head of Company and wear just one or two additional hats (such as the head of Product Strategy or the head of Team and Culture). That’s plenty to take on at scale.
But if quarterly P&L accountability is not delegated to the PM role, then the founder will never fully take off the old hats. Instead, they’ll be continually sucked into making product prioritization decisions that are really in the realm and accountability of the PM role who needs the authority to do his job.
Accountability Should Be Matched with Authority
Few things are more ineffective and dispiriting than having accountability for something without the authority to see it through. And the PM role has a lot to see through. For instance, can you get a sense for how much conflict the PM role must continually manage? It’s a lot. Sales has its needs. Operations has its needs. So do Strategy, Marketing, Customer Service, Finance, and others. How is all of this conflict supposed to be managed without the authority to set short-range priorities?
By delegating P&L to the PM role, you are putting real teeth into its authority and allowing it to fulfill its purpose. It’s much more realistic for this role to make prioritization decisions based on the constraints of quarterly profit targets (whatever they may be), rather than just the strong opinion of Sales, Marketing, or Operations.
Again, the PM role is essential but it isn’t easy. If the team can sniff out that this position really doesn’t have the authority to make prioritization decisions, the PM role will be bypassed and the ensuing conflicts will end up right back at the feet of the founder/CEO. This is NOT how you get to scale.
And if you’re thinking of delegating P&L decisions to the head of Finance instead, you’re preventing the PM from being responsive to customer needs and fulfilling on their charter. The head of Finance needs to support the PM role with clear budgets, analysis, and advice but the actual authority to make decisions within those budgets needs to reside with the PM.
How Does the PM Manage P&L In Practice?
So how does the PM actually manage P&L in practice? Basically, in the budget process, the head of Company and head of Finance collaborate with the head of Sales to set annual and quarterly revenue targets and with the other functional heads to set expense budgets.
The head of Company and head of Finance then also collaborate with the head of the PM function to set profit margin targets, the pricing matrix, and discount percentages allowed for each product. The target profit margin could be anything, even 0% as in “We’re not interested in profits right now; just step on the gas and drive revenue.”
By listening to and collaborating with all the other major business functions, the PM decides on the resource allocations to be put toward the various products and features. For instance, in a software company, the PM would decide what percentage of development resources to put on different products or features in a given quarter. Note that the PM is NOT dictating which individual developers to put on different tasks. That’s the role of Product Development. Rather, the PM is deciding what percentage of total product development resources to invest this period – as in 30% to Product A, 20% to Product B, and 50% to Refactoring, etc.
As mentioned, having accountability for P&L also allows the PM to be effective in their role. When conflicts arise (and they will), then the quarterly P&L target is the ultimate arbitrator. For example, let’s say that Sales really wants a feature in the next release but it would mean bumping out some other critical features in the roadmap in order to deliver it. The PM can look at all the trade-offs and say, “Listen, this isn’t personal. Here is our profit target for this quarter and next. Based on what I’m hearing from Sales, Operations, Marketing, Strategy, and Customer Service, these are the features I’m going with and why…”
Will fierce conflicts in prioritization still arise? You bet they will. And will the PM be able to resolve all of them without help and influence from the head of Company or head of Division? Probably not. But the spirit here is really critical. If the PM can’t resolve prioritization conflicts with their peers, then that key decision will need to roll up to the next level in the organization. But at the same time, the goal of the head of Company/Division is to push accountability for short-range prioritization decisions down to the PM.
In a scenario where the PM can’t resolve prioritization conflicts by himself or herself and the decision does end up rolling to the CEO, then a good CEO won’t just step in and decide. Instead, they’ll respond with, “Hey Sales and PM, if you can’t work this out together, then I will make the call – but I warn you up front, neither one of you is going to like my decision. Penelope, as head of Product Management, you have your profit targets. Sam, as head of Sales, you have your revenue targets. I’m sure you guys can find the common ground and figure out what’s best for the overall business without me having to decide. The choice is yours…”
Breakthrough #3: Decentralize It So That It’s Close to the Customer
In a company that already has a well-defined PM role, a complaint you may be hearing around the water cooler is that the PM Office just doesn’t get it; that they’re too far removed to understand everyone’s needs and too heavy-handed with their decisions. If that’s the case, this is likely occurring because the PM role is too centralized — there’s too much riding on one person or centralized team and they can’t process through the volume of work or they are too far removed from the unique needs of a customer segment to make sound decisions.
For instance, let’s say that you are a US-based manufacturing business and have manufacturing sites in Chicago, Tokyo, and Frankfurt. Well, if you were to centralize the PM function in Chicago, then you can imagine the discord, complaints, and manufacturing breakdowns happening in Tokyo and Frankfurt, can’t you? Each site has its own sales team, manufacturing team, expertise, language, and culture. The solution is to decentralize the PM role out to each site.
Put another way, to decentralize means that if you have multiple products, factories, or semi-autonomous sites, then a PM function should be assigned to each of them. That is, you’re not trying to create a bottleneck where every decision must flow to one central person or team to make PM decisions. Instead, you’re pushing accountability down into the organization so that those closest to the customer can conduct their own product management.
Using the above example of a manufacturing company with three sites, you’d work to develop a separate PM Office at each site. And each site may have multiple product managers, depending on the company size and complexity of its products and services.
Decentralizing product management has several benefits:
- You’re forming semi-autonomous teams that have revenue and profit accountability.
- The product decisions are closest to the customers they serve.
- There are no centralized bottlenecks.
When you hear this suggestion, you may be thinking that having separate PM offices and/or product managers seems to require a lot of new hires or a lot of overhead. Actually, no. An approach like this is a “costless structure,” meaning that you don’t have to make any new hires to make a decentralized product management structure work. If there’s not enough scale or budget to warrant a dedicated PM at each site, then you would simply have someone wear a part-time PM hat until you can afford to hire or until you need it as a dedicated position (i.e., the difference between a start-up and a scale-up).
Breakthrough #4: Place the Right Style of Leaders to Manage It
The style, vision and values, and capabilities of the people who play a PM role in your organization also have a lot to do with its overall success. Many struggling growth organizations make the mistake of attempting to fill their PM roles with a high Producer or a high Innovator style. And if you didn’t fully appreciate the true purpose of the PM role, then it’s easy to understand why these decisions get made.
When a High Producer is a PM
The mistake of choosing a high Producer style to be the PM usually happens because founder/CEO is frustrated by the lack of production happening in the product development domain and erroneously believes they can solve it by putting a high Producing force in the PM role. “We need a kick-ass go-getter who will drive the teams to get things done and won’t take no for an answer. Find me a Marine!”
Clearly, every organization needs a really strong Producing force. It needs it in Sales. It needs it in Product Development. It needs it in Manufacturing and other key areas of the business. But asking the PM role to provide that high Producing force is like asking the guy who quickly changes tires in a NASCAR pit crew to take that same approach and manage the entire racing operation. One needs to produce lighting fast on incremental tasks and the other needs to think, orchestrate, prioritize, and coordinate across an entire team, race, and season.
It’s not only the rest of the organization that will feel frustrated by a high Producer style in the PM role; the PM himself will also feel great frustration. Why? Because their daily work will feel like pushing a string. A high Producer style has a lot of energy and drive to step in and get things done but, in this new role, they can’t step in and actually get things done themselves. They need to listen, ask smart questions, empathize, coordinate, think things through, understand the details, communicate, influence, etc. All of these activities are a huge energy drain to a big Producer style but can be an energy gain to a Stabilizer/Unifier style.
When a High Innovator is a PM
Another common misstep occurs when the company believes that its products aren’t creative or innovative enough and so it looks for a high Innovator style to play the PM role thinking that that will lead to more creative ideas. While it might create some new energy and excitement in the short run, it will come at a huge cost of poor coordination, communication, and prioritization and will slow down overall execution speed soon after.
Yes, you do need innovative products. But there are already probably a ton of new breakthrough product ideas residing across your organization, including from within Sales, Marketing, Customer Service, Strategy, and R&D. Ideas that keep getting suggested but don’t get implemented. It’s not a lack of creative ideas that is holding back your product. It’s a lack of assessing those innovative ideas, prioritizing them, resourcing them, and launching them.
There is another big drawback to having a highly innovative PM in a founder-led company. A talented and visionary founder is worth his or her weight in gold. They simply have an intuitive knack for understanding where the market is going, where the opportunities lie, what customers truly desire, and how to delight them. Frankly, there is no product development process that can come close to duplicating this innate sense.
But when two strong Innovating styles are forced together, this usually turns into a pissing contest over who really owns the vision. Meaning that, if there’s a high Innovating force in the PM role and a high Innovating force in the founder/CEO role, then the conflict over who owns the vision and sets the priorities will get severe. Soon, the PM will be forced out or the fonder/CEO will quit in frustration.
You want your PM to have enough Innovating force to get and appreciate breakthrough ideas coming from elsewhere in the organization. He or she especially needs to be able to translate the innovative ideas coming from the founder/CEO but also needs the strength and credibility to remain neutral and push back on their dumb ideas. They should be able to steward the product vision but not have a need to control the product vision.
The Desired Attributes of a Great PM
There are other capabilities and attributes to look for in a strong PM besides the natural ability to Stabilize and Unify. Some of the qualities I’ve seen that work best include:
- They are in the #1 Team Leader quadrant, meaning they not only have the skills and pSiU style; they also share the desired vision and values and aren’t mercenary.
- They have a deep technical understanding of the product. This allows them to be credible with Engineering, Marketing, Sales, Strategy, and R&D. They understand the details but without getting lost in the details.
- They command and grant mutual trust and mutual respect. A successful Product Manager doesn’t have to say a lot to get a lot done. They emanate a sense of respect for themselves and they give and receive respect with others.
- They don’t make things personal. There’s no politics, innuendo, or personal toxicity following them around like the cloud from Linus’ blanket.
- They keep the mission forefront in their decisions. They make decisions based on what’s right for the company, not what’s seen as best for an individual or department.
- They add energy to the group. They make the work fun, stay positive, and are generally additive to a group or situation. They reduce entropy; they don’t create more entropy.
In short, I want you to recognize that the PM role isn’t a junior role. It’s a key senior role on your leadership team. So put resources and investment into finding and filling it with the right leader, with the right structure and accountabilities, and then support it with the right processes, metrics, and tools.
Breakthrough #5: Equip It With Sound Processes, Metrics, and Tools
There’s a booming industry of software-as-a-service (SAAS) companies that would like you to believe that if you just subscribe to their leading communication/groupware/collaboration/execution platform then your business will somehow be magically transformed. Good luck with that.
Purchasing or deploying a new tool or platform without first making the PM role a core and distinct organizational function, assigning quarterly and annual P&L accountability to it, and staffing it with the right people, would be the equivalent of applying a fresh coat of paint to a badly designed house. Sure, it might look fresh for a month or two but the house is still falling apart and it’s still hard to live in it.
Instead, put most of your energy and attention into rethinking and redesigning the PM function (as well as your overall strategy and execution framework) and then you can help to equip the PM with the right processes and tools to be effective. More specifically, strive to keep the processes and tools simple. You don’t scale through complexity; you scale through simplicity.
Regarding process, the PM function’s major process to manage is to define and communicate the short-range product roadmap/prioritization. The best practice I’ve seen here is for the PM to host an open product roadmap meeting once or twice a month. This means that whoever wants to influence the product roadmap can show up to that meeting and make their case. If someone doesn’t want to influence the product roadmap, then they don’t need to show up to that meeting. And if they miss that meeting, then they shouldn’t be allowed to jump in and sway those short-range prioritization decisions on the next release cycle.
The benefit of this approach is that it allows for frequent enough influence into product prioritization decisions but also enough autonomy for the Product Development team to produce actual products/features. Product prioritization decisions shouldn’t be left to the daily or weekly whim. They need some stability and focus. It also allows the PM to have some sanity because they’re not being whipped this way and that way every day trying to accommodate an ever-changing array of feature requests.
This suggested timing is just a guideline. If you are in a setting that requires more frequent adjustments to priorities, then you may have to have that prioritization meeting every week. If not, have it every quarter. Use your best judgement.
The PM must also make communicating the short-range product roadmap cycle a regular priority. This can be done however makes the most sense for your company, including via meeting, email, groupware, or even a dedicated product roadmap tool like ProductPlan provides (shout out to my fellow local Santa Barbarian Jim Semick!)
For metrics, also keep it simple. You don’t have to invest in a million-dollar ERP system just to figure out the exact profit margin to-the-penny of your various products. Start where you are. Guesstimates are good enough to begin. The spirit is for accountability on prioritization decisions to reside with the PM role and for it to have enough teeth behind its decisions to follow through and execute quickly.
As the business develops, the PM can gain additional leverage and insight by tracking key performance indicators (KPIs) like:
- Profit margin by product
- Development time and cost by product (i.e. resource allocation)
- Customer satisfaction by product
- Sales by product
The bottom line when it comes to processes, metrics, and tools is that a strong PM will likely already know what processes and tools they want to deploy and what metrics they need to track. If they try to go overboard, encourage him or her to keep it simple. Focus on having a regular and open product prioritization meeting as well as the regular communication of the short-range product roadmap and to pay attention to the metrics that really matter. That’s it.
One more thing: I would encourage Product Marketing to maintain its own product release calendar so that it can coordinate and execute on training, PR, education, campaigns, and all other aspects of product marketing. And that Product Development maintains its own development or sprint calendar too. Like an air traffic controller, the PM role needs to make sure the planes are doing what they’re supposed to be doing and that traffic is well coordinated, but they don’t actually fly the planes.
Also make sure to keep the product prioritization meetings SEPARATE from your regular cross-functional leadership team meetings. The product prioritization meetings are about working in the business. The cross-functional leadership team meetings are about working on the business. If you co-join these into one meeting, then you’ll spend almost all of your time deciding product prioritization and you won’t have the time energy, and focus to work on developing the rest of the business. Keep them separate.
Now that we’ve defined the terms of product management, talked through the basic scaling tactics, and answered the most pressing questions, let me share a case study with you that should help to bring it all together. This case study is based on one of my coaching client companies and I’ve changed the names to protect any proprietary information.
Three years ago, Acme Co. was struggling to break through from Nail It to Scale It. This eight-year-old company had about $6M in annual sales but its growth had been stagnant for the past several years and it was losing money. Its main product offering was providing benefits administration services to large employers. If you can picture 10,000 employees at Honda logging into a web portal to track and update their benefits, then you have an idea of their basic business model. Acme had invested heavily in its technology platform so that it could provide personalized information and benefits education to thousands of employees at scale.
The CEO of Acme, Max Payne, is a very smart, driven visionary. He didn’t set out to be in the large employer benefits administration business but found himself there because, after several early pivots, that’s where the market demand was, albeit with increasing competition and deteriorating margins.
For the past several years, Max was anticipating that the adoption of the Health Care Affordability Act by the US Government would unleash huge market demand from large employers and insurers to track quality of care (He was right). His vision was to transform Acme into a Quality of Care and Benefits provider – one with higher margins and faster growth potential, and a lot more exciting to manage than a low-growth, low-margin, pure benefits administrator. The challenge was that the company seemed to keep tripping over its own two feet during execution.
From his own assessment at the time, Acme seemed to be struggling most with:
- A compelling and exciting vision but poor execution
- Difficulty in managing the competing needs between the existing benefits business and the new quality of care initiative
- Too many dropped balls between signing on and onboarding new clients
- Inefficient manual processes that never seemed to get fixed
- Everyone not on the same page in understanding priorities and resource allocation
- Product development taking too long on the next-generation portal
- Max spent too much time managing internally vs. being external, meeting with new clients and partners to sell the vision, win early accounts, and build momentum for the new model, which he was very well suited to do
- A lack of capital, time, and energy to do everything at once.
At the time, Acme had an organizational structure that functioned something like this:
- Product Management didn’t really exist. It was “sort of managed” by the head of Software Engineering, head of Marketing, scrum master, and Max. A common problem was that new features for the next-generation portal would get built but were usually a surprise to everyone outside of product development and weren’t communicated well to clients or to support staff.
- Product Marketing was weak. It was managed by the head of sales who also oversaw marketing. The company knew this wasn’t ideal but didn’t have the budget yet to have a full-time head of marketing.
- Product Strategy was very strong. Max had and maintained a very clear vision of what the product could do and was very skilled at communicating that vision to the entire ecosystem.
- Product Design and Development was heroic. What do I mean by heroic? They were perpetually understaffed but had a small, committed, and talented software engineering team who kept building really great technical products.
- Other major functions like Sales, Customer Support, Channel Management, Tech Ops, Finance, Accounting, and Admin did exist and were being managed well, but with the usual challenges of a growing business.
Our solution (after putting in place a sound strategy and execution framework using the Strategic Execution Coaching Program) was to break out Product Management as its own major function as a PM Office that would manage both external products and internal projects like this:
After adopting this new structure at first, the company didn’t have a dedicated leader to head up its newly formed PM Office. Instead, a temporary hat was worn by the head of Tech Ops who did his best to manage the PM Office in the short run while the head of Software Engineering owned Product Development and Design, the head of Sales continued to wear the hat of head of Marketing and oversaw Product Marketing, and Max continued to wear the hat of Product Strategy, which he continues to wear to this day.
Over the next three to four months the company hired a dedicated person to be the full-time PM as well as a dedicated head of Marketing. Note how much easier it is to hire into a clear structure with well-defined roles. Even if your business doesn’t have a budget to make new hires, you should still create the right structure and assign temporary hats to current staff and then hire into those roles as you can afford to do so.
In this new structure, the accountabilities of the PM Office were to translate requirements from sales, strategy, marketing, and operations; prioritize the short to mid-range Product Development roadmap and resource allocation; and coordinate with Product Marketing on new product and new feature releases so that both internal staff and external customers and prospects are aware, educated, and trained to get the most of those features and benefits.
So what were the results of this new structure? Breaking the PM Office out as its own major function in the business has some profound benefits. In this case:
- The company has grown from $6M to $30M in sales in just two years (i.e. their timing was right thanks to Max’s high Innovating style and it is actually executing on its strategy thanks to the new PM role).
- Its net operating margin has improved from approximately 12% to over 50%.
- Max spends significantly less time managing the business and almost no time managing the product pipeline (other than contributing his desired priorities from Product Strategy).
- The business is an emerging leader in the new exciting growth field.
- The company just completed a new financing round at a significantly higher valuation.
- Intra-departmental communication and coordination has improved tremendously.
- The distinct accountabilities between Product Management, Strategy, Design, Development and Marketing are clear and managed by different leaders who are each a strong fit for their roles.
Now, just as I was attributing a lot of internal corporate breakdowns to one role — Product Management — I’m also now attributing a lot of internal breakthroughs, including increasing sales, improving product margins, better communication and coordination to that same role. Is this all really due to breaking out the PM Office as its own major function? Yes and no.
Yes, because Product Management was conspicuous by its absence. That is, if the organization is in scale-up mode and it is a complicated task to manage multiple product lines, customers, markets, or conflicting priorities, then the absence of Product Management will cause the business to bog down in its execution.
No, because Product Management does not operate in isolation. Every successful business must also have the basic foundation in place to scale. This includes a strong cultural system, a clear strategy, good cross-functional decision-making processes, great communication, a sound organizational structure, talented people who fit the culture, and effective targets and KPIs. In this case, Max did a great job of making sure that all the foundational pieces were alive within Acme and then by adding Product Management as its own major function into the mix, it could really scale up quickly.
Having coached over 50 multimillion-dollar companies from the Nail It to the Scale It stage, I’ve seen firsthand how Product Management can make or break your efforts to scale. In this critical stage transition, redesigning Product Management is essential.
Product Management is a distinct function from Product Strategy, Product Design, Product Development, and Product Marketing. If your business is making the leap from start-up to scale-up, then in order to be successful, you should make the PM role its own major function, delegate P&L accountability to it, staff it with the right leaders and team, and equip it with sound processes, metrics, and tools. Avoid Product Management bottlenecks by decentralizing the PM function to the teams closest to the customer. Finally, having a strong PM function does not mean you can skip the other elements of running a sound business – culture, strategy, structure, process, people, etc. The PM role is a catalyst that helps to bring all of those other aspects together for quick execution but it can’t itself overcome a misaligned structure or environment.
I hope you find this article helpful and that it gives you some things to think about as you work to create breakthroughs in your own organization.
It’s a classic tale. Your company’s driven, visionary founder manages to lead your start up to takeoff and hit rapid growth mode. But then something happens, and everything starts to bog down. Those former start up struggles and early wins turn into a whole new set of challenges: running the business at scale.
At about this time in an organization’s lifecycle, conversations in the board room and around the water cooler start to focus on the founder. See if you’ve said or heard any of these before:
- Our founder has great energy and ideas (along with some really dumb ideas) but we still can’t seem to get our act together.
- It’s no secret our founder isn’t an Operations person.
- We need to either replace our founder or support her with someone experienced who can run day-to-day operations and keep the trains on time.
- What we need is a President/COO. Then the founder/CEO can be Mr. Outside and the President/COO can be Mr. Inside.
Does any of that sound familiar? I bet it does. On the surface, having a President/COO can make a lot of sense. Every organization needs stability, structure, and experience if it is going to scale up. The approach is certainly popular. “President and COO” titles are so common—throw a stapler in the air at your local office park and you’re bound to hit one on the head.
But hiring a President/COO to solve the “founder” problem typically brings just a new set of problems, setbacks, and even disasters. In many cases I’ve seen, the new President/COO was a sure bet on paper but failed replicate past successes in a new environment.
In another common scenario, you’ll find that soon after joining, the new President/COO will get into conflict with the founder/CEO about who really runs the business. When this happens, the culture quickly erodes into “old guard” vs. “new guard” and execution speed bogs down across the board from all the in-fighting and politics.
There’s also a little appreciated but equally severe problem that happens when the founder leaves the business too soon, now that “the professionals are in charge” or because “it’s just not that much fun around here anymore,” and the company fails to capitalize on its true potential over time.
While hiring and integrating capable senior leaders into the organization is needed and necessary to scale your business (I’ll show you how to do this here), the popular approach of having a President/COO to oversee business execution usually turns out to be a fix that is much worse than the original problem.
I’ve coached over 50 founder-led, high-growth companies to increasing revenues and profits without a traditional President/COO and without consolidating business functions under a few key leaders like a President, COO, and/or CFO. I can say with confidence that there is a better way to build great leadership to help an organization scale, without the drawbacks of the popular approaches.
The answer lies in understanding the Leadership Team model. With a strong functional Leadership Team, you avoid the typical problems of the President and COO approach in favor of a distributed, transparent Leadership Team process. Done well, it’s the difference between a monarchy embroiled in power and succession battles and a functional representative democracy. I’ve seen it work over and over again. And it all starts with how you think about what’s really needed to scale your business.
Start With Your Strategy and Structure
Aristotle once said, “If you’re going to debate me, first define your terms.” Many of the issues surrounding the President/COO role start with a lack of clarity about what that title really means.
Think about it. When an individual has the title of “President” or “COO” or “President and COO” what does that really mean anyway? Are they in charge of operations? Sales? Engineering? Product Management? Tech Ops? Administration? Marketing? All internal functions? Some internal functions? The titles and role responsibilities might mean one thing in one company and something totally different in another.
To help answer that question, you need to know your business strategy and have an organizational design that supports that strategy. Below is a simple organizational design that supports an expansion-stage strategy for a Software as a Service (SAAS) company with one business unit. (Note that every structure is unique. Consider this structure an example for discussion, not a direct representation of your business.)
I’ve designed this sample structure using the 5 Laws of Organizational Structure. (If you’re unfamiliar with these laws, you may want to understand them before proceeding.)
Remember that the goal of a well-designed organizational structure is to call out the major business functions; place them in their correct relative location in the structure by balancing the need for autonomy and control, effectiveness and efficiency, short-range and long-range needs; and ultimately clarify who is accountable for each function.
Note that there may be 1 or 1,000+ employees in a given function. That’s fine. But who’s ultimately accountable for the performance of that domain? That’s what we need to get to in the structure. Clarifying accountabilities in the structure does not mean you need to rush out and hire someone to fill each role immediately. Depending on the lifecycle stage and budget of your company, one person could play a role and wear multiple hats across different functions in the structure.
Notice too that I’m not using titles in the structure but functional descriptions for each role? For instance, rather than the title of CEO at the top of the structure, I’m calling out the function this role performs as “Strategic Execution,” or the role accountable for defining the strategy and tying it to execution. Similarly, I’m not using a title like “VP of Sales,” but just a simple functional description of “Sales” meaning the role accountable for driving revenues from new and existing clients.
The reason why you shouldn’t use titles in your structure is that titles create confusion where you need clarity. They protect or project egos, create role confusion, and obfuscate the real and necessary discussion about what functions are needed to scale the business and the style you need in each role.
If you ever find yourself discussing what titles you need versus what functions your business must perform, read Organizational Design: The Difference Between an Organizational Structure and an Org Chart to get out of that trap.
Now that we have a basic structural map to work with, we can reframe the discussion with great clarity around what it would really mean to have a President/COO, the implications of different moves, and ultimately how to be smart about the decision.
So back to the issue at hand… when someone in your company says, “We need a President/COO,” you should immediately ask, “OK, and what functions will that individual be accountable for? Head of Sales? Head of Operations? Head of Sales and Operations? Overseeing all other business functions? To replace the founder/CEO as head of Strategic Execution? What functions do you think we need to fill and why?”
If you can answer that question for your own business, then you’ve won 50% of the battle and it puts you significantly further ahead of most companies that are just blindly looking for a title. The other 50% is avoiding the two most common mistakes made when attempting to hire/promote the equivalent of a President/COO in your business:
- Mistake #1: Turning the founder/CEO into the Queen of England
- Mistake #2: Consolidating Core Functions Under a President, COO, and/or CFO
Here’s what both mistakes mean and why it can be so costly to organizational performance…
Mistake #1: Turning the founder/CEO into the Queen of England
The mistake of turning the founder/CEO into “The Queen of England” occurs when the founder/CEO attempts to have one individual manage all internal activities so that he or she can be “freed” to focus on external activities like fundraising, market evangelizing, or playing golf. The founder/CEO maintains the CEO title in name only, but gives up trying to manage the business.
I call this particular move the Queen of England because the founder/CEO, even if they’re not originally intending this, ends up with all title and no power. What you’ll usually see happen in this case (there’s one exception — the Chief of Staff — that I’ll explain below) is that the founder/CEO and the new President/COO soon get into a toxic conflict over who actually controls what.
Once this internal battle ignites, the culture quickly segments into the “old guard” and the “new guard.” Execution speed slows down from all the infighting and internal politics. Navigating this situation sucks everyone’s time and energy. When this classic battle unfolds, either the founder/CEO stays (if they still have control) or the President/COO gets fired and the company is right back where it started — but now even further behind in its development.
Even if this battle for control isn’t overt, with the Queen of England structure in play, you’ll often find that the founder/CEO has disengaged from the business and made a quiet surrender.
This early exit happens because the founder/CEO is burned out from all the heavy lifting they’ve had to do to get the business this far and they crave a break. They typically feel dissatisfied because the business no longer seems capable of executing on their endless thought-stream of breakthrough ideas (the company is overwhelmed just trying to manage existing operations). Alternatively, the founder/CEO just doesn’t know what to do in this new “professional” setting and feels like a fish out of water. Things have gotten tiresome, overwhelming, or plain boring, so they crave a new setting, ideally with some money in the bank.
It is rarely a good thing when the innovative founder, who seems to have a sixth sense for what the industry really desires, disengages from the business too soon. And don’t fall for the popular myth that a talented founder is unnecessary to scale a great business.
Just look at every transcendent brand — those multi-generational businesses that disrupt and dominate entire industries. Each one had one or more founders who did not run a Queen of England structure (many tried it before reverting to the Leadership Team model that I’ll explain below). Nor did they get kicked out by VCs or put out to pasture by the Board into a Chairman or VP of Strategy role. Instead, these legendary founders got carried out on a stretcher after a lifetime of business building doing only what they could do.
You may be thinking, “Well shit, how many Steve Jobs, Jeff Bezos, or John Mackeys are there in the world? Those guys are born geniuses. Our founder is very far from their capabilities so who really cares if he disengages? In fact, we’d all like a break from his mood swings and barrage of crazy ideas. Truth be told, our founder is a pain in the arse.”
The fact is that genius founders aren’t born; they are made. We’re all shaped by the environments we inhabit. A large factor in what makes Jeff Bezos Jeff Bezos is that he sits at the head of Amazon every day. You’ll find the same thing is true with most great founders: They were born with raw capabilities, and that latent potential quickly became actualized in the crucible of leading a world-changing company.
In all but rare exceptions — such as when the founder is truly an immature idiot or a crook — don’t try to put them out to pasture. You can’t buy or duplicate what a talented founder as the head of Strategic Execution can bring to the table in terms of vision, heart, commitment, and innovation.
Instead, design the business around their individual genius — what they are uniquely capable of doing and energized by — while also designing the business to scale and coaching him or her to be an effective head of Strategic Execution.
By the way, the Queen of England structure isn’t just a stupid move for your mid-sized growth business. Of the world’s top 10 companies by market cap — Apple, Exxon, Microsoft, Google, Berkshire Hathaway, Johnson & Johnson, Wells Fargo, Walmart, GE, and Proctor & Gamble — can you guess how many have adopted a centralized structure where all reports roll to a President/COO who in turn reports to a CEO? Zero. (Note: you will see some of these organizations using the title “President and CEO” to indicate that one person is head of Strategic Execution for the business or for an entire business unit but they don’t have one direct report; they have a team of direct reports).
Finally, if the founder/CEO is really committed to stepping out of the day-to-day business, then he or she should call it like it is, give up the CEO title, and just sit on the board of directors. Problem solved.
Mistake #2: Consolidating Core Functions Under a President, COO, and/or CFO
Some companies intuitively grasp that the Queen of England structure is flawed but they still make the mistake of attempting to consolidate different core business functions under a President, COO, and/or CFO. The basic idea is to limit the number of direct reports that founder/CEO has to manage and to bring needed expertise to what may seem like — on the surface — similar business functions.
For instance, in the example structure above, this business has consolidated the external functions of Sales and Marketing under a President; the internal functions of Product Management, Operations, and Software (SW) Engineering under a COO; and Strategy and Admin under a CFO. You’ll see this or some variation of this consolidated structure in many different businesses (most of them not breaking through).
On the surface, consolidating like this might seem to make sense. But once you know what to look for, you’ll spot a lot of problems in this approach. Problems that will cause the business to miss new innovation opportunities, have more hierarchy than what’s needed, consolidate too much power in one person, and/or fail to scale to its potential. Here are some of the most glaring problems with consolidating:
- Marketing Should Not Be Consolidated with or under a Sales Function (President or Chief Revenue Officer)
Marketing is a long-range function. Sales is a short-range function. Unless you design against it, the short-range will always overpower the long-range. In this case, if you were to consolidate Sales and Marketing together under a President or Chief Revenue Officer, then Marketing would soon turn into a sales support function and lose its long-range effectiveness, which is needed to build and defend the brand architecture and positioning, craft a compelling brand narrative, and adapt the brand early to changing market conditions. In short, to do real marketing.
This is true even if you have what appears to be one rock-star President in charge of Sales and Marketing now. Either that leader truly excels at Sales or they excel at Marketing, but usually not both and definitely not both at the same time. Put another way, if you have one leader wearing both the head of Sales hat and the head of Marketing hat, then one or both of those functions are going to perform at a less than optimal level.
You may be asking, “Wait, doesn’t Marketing need to support Sales?” Absolutely. Every function has a client. But Marketing has many clients in addition to Sales, including Strategy, Product Management, Operations, and Strategic Execution. It must maintain its long-range orientation while simultaneously supporting short-range needs. Don’t consolidate Marketing with Sales or it will fail your brand over time.
This is different than having a President or even a President and CEO in charge of total performance of a distinct business unit. Even in this case, however, you’d still want to centralize the overall brand architecture under corporate Marketing and then delegate Marketing Execution to that business unit, but still within a sound structure where Marketing Execution is distinct from Sales.
You may also be thinking, “Geez, we can’t afford to go out and hire a new head of Sales or a new head of Marketing. Does this guy Lex think we’re made of money?”
My answer to that is you have to play the cards in your hand. But calling out Sales and Marketing as distinct functions and placing them in their correct relative locations in the structure is incredibly valuable — even if you’re going to have one leader wear both hats for now. Doing so allows you to spot where potential improvement areas lie, find quick wins, and to judge the current leader by their primary role and expertise. Ultimately, it also allows you to find the right new candidate when you can afford to do so.
- Product Management Should Not Be Consolidated with or under an Operations Function (COO)
Product Management is a translation function. That is, it is designed to translate between the need to support the effectiveness of outbound activities and the need for efficiency in internal ones. If you consolidate Product Management under Operations, it will become very efficient but less effective. It will cease being as responsive to the needs of Sales, Marketing, and Strategy.
For a different reason, it’s also a mistake to consolidate Product Management under the President in charge of Sales. Sales should be held accountable for revenue but Product Management should be held accountable for the profit of the products that Sales sells. One function, Sales, needs to be very effective at driving revenue. The other, Product Management, needs to be very efficient at coordinating upstream and downstream requirements and product releases and allocating production resources to be profitable.
In addition, if you did roll Product Management under the President in charge of revenue, then your profit margin will quickly deteriorate under pressure to hit revenue targets. The founder/CEO as head of Strategic Execution will end up needlessly caught in the mix of negotiating sales contracts or pricing models. Product Management needs to balance short-range profit targets with long-range product development needs, not fall prey to the singular pressure of Sales or Operations.
- Software Engineering Should Not Be Consolidated with or under Operations (COO)
Software Engineering needs to maintain its effectiveness and adaptability and will lose it if it’s consolidated under Operations. Software Engineering (otherwise called Product Development or Manufacturing in a non-software company) must be innovative and responsive to changing product requirements, right? Well, if you put it under the COO, who by design needs to make operations controllable, repeatable, and efficient, it will lose its flexibility and adaptability to change.
For a similar reason, you would not consolidate Technical Operations (IT, Tools and Systems Integration, Data Analytics and Reporting Platform, etc.) under Software Engineering or vice versa. If you do, what you’ll find is that your internal technical operations will always play second fiddle to external customer requirements. You’ll lose out on your ability to operate efficiently at scale.
- Admin and Strategy Should Not Be Consolidated Together, Nor Should They Be with or under Strategic Finance (CFO)
The CFO or head of Strategic Finance is a long-range effectiveness function. It must deploy surplus cash for a sound return, provide strategic-level insight to all other business functions and the board, and ensure that the organization is compliant with regulations and there is a sound global governance process in place.
Many companies consolidate their Administrative functions like controller, HR administration, and corporate legal coordination under the CFO. However, these administrative functions are all about short-range efficiency. A great CFO is not a great Administrator and vice versa. If you ask one leader to oversee both functions, the organization will have either poor strategic finance or poor administration (not to mention the structural risk of having one function both collect the cash and pay the bills).
Finally, it’s a mistake to have the CFO as head of Strategic Finance also oversee corporate Strategy. While both functions are about long-range effectiveness, you want your Strategic Finance function to act as a check and balance against spending too much money or doing really dumb things. If you were to consolidate Strategic Finance and Strategy, then you’d lose that check and balance or you’d miss out on really bold strategic moves. You want constructive tension between these roles, not consolidation.
There is another reason not to consolidate Strategy under the CFO. Strategy (priorities, incubating new initiatives, recruiting, culture, etc.) needs to be directly involved with the Strategic Execution function at the top. Strategic Execution is the head of the company and the biggest mistake this role can make is to misread the changing market environment. Strategy needs to directly support Strategic Execution and incubate the next generation of innovations. For this reason, the head of Strategic Execution can and should delegate accountability for all business functions except Strategy.
There are a lot of other poor consolidation choices that a business can make. The main thing I want you to take away is that how something is designed is how it behaves. Your business has many different functions. The design must make sense for the strategy and it must balance autonomy and control, short range and long range, effectiveness and efficiency. Rather than attempting to consolidate conflicting functions for “ease of management,” treat them as distinct functions that warrant their own space, focus, and accountabilities in the organizational hierarchy.
If placing a Queen of England or consolidating the wrong functions together causes problems for sustained business performance, as we have seen, then what is the right way to get the benefits of having the equivalent of a President and COO?
There are two smart and straightforward moves to make:
Smart Move #1: Hire/Promote Strong Functional Heads to Be On the Leadership Team
The structure above is both simple and smart. Rather than trying to turn the head of Strategic Execution into the Queen or England or to consolidate different major functions under a few individuals, hire or promote a team of leaders who each “own” one of the major functions. Together with the head of Strategic Execution (the founder/CEO), these leaders make up the Leadership Team.
This approach should make sense intuitively. In order to scale a business, you don’t just need one or two leaders; you need a team. Even if you can’t yet afford to have a senior team of 5 to 10 people, this is still a superior approach to scaling your business. Why? If you were to seek out a potential President or COO, they would still need a strong team of leaders under them.
Second, even if you have a small team that must wear multiple hats until the business is big enough to afford dedicated roles, as I mentioned earlier, it is still better to call out that your head of Sales is temporarily wearing the hat as head of Marketing (or your head of Software Engineering must help out in the short run as head of Operations), rather than giving your head of Sales the title of “President” in charge of Sales and Marketing – and dealing with all the trouble of undoing that consolidation later.
In a nutshell, this approach of having a Leadership Team requires that you first define your growth strategy and culture, then design the organizational structure based on the major business functions (not people or titles), and then find leaders who are a strong match for those functions, independently of job title.
Now, I can almost hear some of you thinking, “Wait a minute, there’s no way that our founder/CEO can manage a team of 5 to 10 direct reports. If we don’t consolidate some of these functions, it will be just too much for our founder to handle.” If so, I call bullshit.
The truth is that, with a basic cultural system in place, an effective team-based decision-making process, information transparency with clear metrics, and a sound talent management process, it’s not hard to manage that many direct reports. In fact, almost any founder can quickly learn to manage a team of 5 to 10 direct reports very effectively in about 1/2 day per week.
Here’s another way to think about managing direct reports in this or any structure. The Strategic Execution role (whatever the title may be: CEO, President and CEO, GM, Owner, etc.) needs to be strong at deciding what to do and why. His or her direct reports — the leadership team running the other major functions — needs to be capable of determining the how and when to execute on the plan.
So don’t add unnecessary layers at the top of your business. In order to execute swiftly, the Strategic Execution role needs a direct representative from every major function at the table. With the right strategic execution framework, it’s straightforward for the head of your business to manage a handful of talented direct reports who are also a strong match for their roles.
Smart Move #2: Optionally Have a Chief of Staff
If you still feel that the founder/CEO can’t manage that many direct reports, or if the business is just big and complicated, then a modified version is to add a Chief of Staff on the Leadership Team of functional heads. The sole purpose of the Chief of Staff is to support the head of Strategic Execution (founder/CEO).
Adding a Chief of Staff allows you to maintain the strong Leadership Team structure while also providing Strategic Execution with more administrative/obstacle-removing/project management expertise. You might think of how the Chief of Staff supports the Strategic Execution position of the President of the United States.
Unlike the Queen of England, it’s clear in this structure that the Chief of Staff is there to support, not interfere or compete with, the head of Strategic Execution. There’s just one ultimate boss and no role confusion about who is really in charge. “The buck stops here,” as Harry Truman was fond of saying.
There are other benefits of this approach too. The head of Strategic Execution still maintains direct connection with the Leadership Team of functional heads who execute on the strategy. The approach doesn’t consolidate too much power and control under one individual and it supports sound organizational design principles by balancing the conflicting needs of autonomy and control, effectiveness and efficiency, long range and short range. It also allows the head of Strategic Execution to train up the next new head of a strategic business unit as Jeff Bezos has done successfully at Amazon…
Take a Peek Inside Amazon
The Leadership Team with a Chief of Staff is the basic approach that Jeff Bezos has put in place, after some significant missteps, for the organizational structure at Amazon. According to the fantastic inside history of Amazon by Brad Stone, The Everything Store: Jeff Bezos and the Age of Amazon, in the early 2000s when Amazon was struggling to get its operational house in order, Bezos and the Amazon Board aggressively pursued and hired an experienced President/COO named Joe Galli, a former Black & Decker executive. Their vision was that Galli would “bring some adult supervision” and complement the erratic and visionary Bezos by giving focus and stability to Amazon’s execution.
In short, Bezos put in place a classic Queen of England structure whereby all Amazon executives reported to Galli. You can guess what happened. At first Bezos took some time off to be with his newborn son. But via email and irregular meetings, Bezos and Galli soon engaged in a classic battle over who really ran Amazon. The executive team culture turned toxic, business execution speed bogged down, and there was an exodus of key leaders and staff.
13 months later, Galli was forced out by Bezos, who still owned a majority stake. From there Bezos shifted towards a leadership team model with key executives owning different business functions as well as new innovation opportunities in Strategy. A few years after that, Bezos also put in place a Chief of Staff role that would be occupied by key up-and-coming leaders with great potential who would shadow him nearly every day for 18 months.
During the shadow period, the Chief of Staff (now formerly called the Technical Advisor) helps Bezos coordinate and execute on Amazon’s multi-pronged strategy. This close collaboration allows the pair to build chemistry and trust. It also allows the Chief of Staff to be inoculated in the Bezos mindset and philosophy and build up leadership skills and cross-functional visibility. The internal parlance for the Chief of Staff and other key leaders who’ve worked closed with Bezos is “Jeff Bots,” meaning they’ve bought into the culture, vision, and methodology at Amazon to such an extent that they are like little Bezos multiplied across the culture.
Once the Chief of Staff’s 18 month tour is over, the goal is to have him or her head up a new key strategic initiative at Amazon. One example of this is Andy Jassy, who went from Chief of Staff (and other roles at Amazon) to ultimately heading up the early version of Amazon Web Services (AWS), Amazon’s hugely transformative and market-dominant cloud services architecture.
Looking to hire or promote a President/COO – or multi-person equivalents – is rife with problems. Whatever you choose to do, you must avoid both the Queen of England strategy and short-sighted consolidation of different business functions. A better bet is to hire or promote highly competent, dedicated leaders for each business function and to align the strategy, culture, structure, and team-based decision making processes so that the head of Strategic Execution can drive the business forward (possibly backed by a Chief of Staff). If you take this basic approach, you’ll save yourself a lot of time and energy, avoid missed market opportunities, and give yourself the greatest probability of success.
“What’s the difference between an organizational structure and an organizational chart? Do you need one or the other—or both—to manage your business?” I get asked different versions of this question a lot. The distinctions are subtle but important. Knowing the answers—and approaching your organizational design the right way—is mission-critical to scaling your business.
The short answer is this. In most cases, if you’re entering a new stage for your business—scaling beyond start-up mode or embarking on a new growth strategy—you’ll need a new organizational design. And when it comes to organizational design, you really only need two things:
- A well-designed organizational structure
- A “role-centric” human resource management system (HRMS) that mirrors the structure
That’s it. You do not need a classic org chart—that constantly-changing and almost instantly-out-of-date diagram that shows names, job titles, and lines of reporting responsibilities. The org chart tends to quickly become obsolete and leads to a counterproductive focus on who’s where in the organizational pecking order…
Trying to maintain a classic org chart—or, heaven-forbid, to redesign your business based on one—causes much more harm than good. So drop the classic org chart and instead embrace the principles of effective organizational structure combined with a role-centric HRMS. Here’s what you need to know…
Are You Attempting to Redesign Your Business from an Org Chart?
It should be intuitive that, in order to manage and scale your business, you need a sound organizational design. As I’ve written in “The 5 Classic Mistakes in Organizational Structure: Or, How to Design Your Organization the Right Way,” everything has a design to it. If your business design sucks, then your execution will too.
Changing an organizational structure can be very challenging because there’s a lot of inertia tied up in the status quo. Individual perceptions of job status, internal politics, titles, compensation, and desired career paths can make changing your structure seem complicated, if not daunting. Many companies set themselves up for failure by attempting to redesign the organization from an existing org chart. When this happens, it sounds something like this…
“OK, so what if we have Sally and Mike report to Jeff, Jeff report to Ron and Ron and Helen will split reporting responsibilities? That could work. Wait.. what… Helen is leaving now? Damn. OK, how about if instead Peter takes over for Ron and Ron can head up the new product line? No, that won’t work because Ron’s ego is as big as the Grand Canyon and he’ll feel like he’s taking a step backward. Shit. This is complicated. I guess we’ll just stick with the status quo, even though we all know it’s not working well at all.”
If you ever find yourself in a conversation like this one, it’s a sure sign that you’re not thinking deeply enough about your business. You’re stuck in the past when you should actually be leaning into the future. You’ll end up making cosmetic, surface-level changes—or no changes at all—when what’s really required is deep thinking—that is, thinking deep into the structure of your organization to execute on an evolving strategy for an evolving market.
Having personally restructured over 50 companies and seen them transform into lean, mean, growing machines, I want you to know that while it is challenging, restructuring is absolutely necessary if the organization is transitioning into a new lifecycle stage and/or changing its strategy. But redesigning a business doesn’t start with the org chart. It starts with creating the new organizational structure.
The Key Differences Between an Organizational Structure and an Org Chart
An organizational structure and an org chart can often appear similar on the surface, but there are some profound distinctions:
- Organizational structure is designed around the functions a business performs (e.g., sales, marketing, finance, engineering, etc.).
- An org chart is built around people and titles.
- Organizational structure defines the purpose, accountabilities, and key performance indicators (KPIs) for each business function and role.
- An org chart shows each person’s job title and may include HR stuff like job requirements.
- Once correctly defined, a structure changes infrequently—for example, when there’s a change in strategy like a new product initiative or a move up to a new stage in the execution lifecycle.
- An org chart needs to be updated frequently as people come and go. It’s out of date almost the minute it’s created.
|Organizational Structure||Function-centric||Purpose, accountabilities, KPIs||Infrequent, changes with strategy|
|Org Chart||People-centric||Titles, job descriptions, HR stuff||Frequent, changes with people|
To repeat, you don’t need an org chart to scale your business, but you do need a well-designed organizational structure. And sure, there are key elements of a classic org chart that you’ll want to maintain in a role-centric HRMS to make the job of managing staff, budgets, and HR stuff easier. But I’ll share more on the HRMS in a bit.
How to Redesign Your Business With a New Organizational Structure
Good organizational design has some minimum requirements. Before you even start the design, you first take any consideration for people and titles off the table. You start with a blank slate and think through the functions the business must perform to succeed in its chosen growth strategy now and over time. What are those functions for your business?
In addition to supporting the chosen strategy, a good structure should (1) clarify the purpose and accountabilities of each organizational function; (2) place each major and minor function in its correct location relative to other functions by balancing effectiveness and efficiency, short range and long range, autonomy and control; (3) clarify the key performance indicators (KPIs) of each role; and (4) identify which people are accountable for performing different functional roles.
In a picture, a sound organizational design will look something like this below. And careful: it might look like an org chart at first but there are some major differences:
Note that every structure is unique. This structure above is a simple representation of a $15M Inc. 5000 Fastest Growing Company that I helped to redesign as part of my strategic execution coaching program.
Prior to this organizational redesign, the company had stalled out in its growth trajectory and the culture was deteriorating. The team was suffering from role confusion, unclear accountabilities, a lack of real strategic priorities, and stalled execution. Revenues and profits were flat for several years prior. Two years after the redesign, revenues were up 40% and net profits up 30%, the culture was restored, and the organization is now much easier (not to mention more a lot more fun) to manage. Much of this has to do with getting the structure right.
In the structure above, each large grey box represents the major functions of the business. The smaller beige boxes represent the primary sub-functions within those domains. The blue boxes under each major function capture some of the high-level KPIs for that functional area. Calling out the KPIs in the structure helps to bring clarity and focus to the structural discussion and ultimate adoption of new roles by the individuals involved.
Notice that I’m not using titles like “CEO” or “VP of Sales” in the structure. Instead I’m using functional descriptions like “Strategic Execution” or “Sales.” This is because job titles shift the focus to individual egos rather than the role requirements of each function. If the conversation shifts towards appeasing egos, that’s a sure sign that you’re designing the organization around people—rather than functions—and you’re setting yourself up for trouble.
Only after the design is set up correctly for the chosen strategy—again, independently of the individuals involved—should you assign accountability for each function. Note that, depending on the lifecycle stage of the business, one person might be accountable for their primary role in addition to wearing other temporary “hats.”
It doesn’t matter how many staff a given organizational function has, whether 1 or 1000+. What matters at this conceptual stage of the design is that a single person, whether as a dedicated role or wearing a temporary hat, is held accountable for the success of that area of the business. In short, you’re answering, “Who is ultimately responsible for the success or failure of this particular function?”
Also, notice that each function in the structure has a PSIU code. This shorthand code allows the company to have a shared definition of some key management requirements for each role, as well as the type of leader who is best suited to own it. It helps tremendously with hiring and creating role alignment and satisfaction among the staff. (If you’re not familiar with PSIU, I recommend that you read “The Four Styles of Management.”)
While there is an art form in facilitating a process to help the team opt into their new roles in the structure, the first step is always to create teamwide recognition and commitment to the right strategy and structural design before addressing who is will be taking on which roles and hats. If you don’t take this necessary step, the restructuring discussions will quickly devolve into a turf battle among individual egos at the expense of what’s best for the business.
Finally, one might look at the sample structure above and think “silos”. Actually, any pre-existing silos in the business disappear with the adoption of an effective team-based decision making process that creates transparency and cohesion, therefore bringing the new organizational structure to life.
In other words, creating unarguable accountability for the key organizational functions must also be matched with an information-sharing and decision-making process that creates radical transparency and rapid execution across the organization. You can read more about tying strategy, structure, and execution together in Parts III and IV of my book Organizational Physics: The Science of Growing a Business.
A Word About Hierarchy in Organizational Structure
One more thing before we move on. You may be thinking, “Wait, do we really need a hierarchy in our organizational design? That seems sort of old-fashioned. Doesn’t the new school of thinking propose a flat or hierarchy-less organizational design?” Let me address this short and sweet. Yes, your organizational design will have a hierarchy. No matter how flat, circular, or egalitarian you may want it to appear.
For instance, a poster child for “hierarchy-less” management is a methodology called Holacracy, which I’ve written about before in “An Inside Look at Holacracy”.
When you peel back the headlines of the “no boss, no title, no hierarchy” movement, what you’ll find is that these approaches absolutely have a hierarchy. There’s nothing inherently unnatural or wrong with hierarchies. They exist everywhere in both natural and man-made systems. To wit, if I was to gather together the fiercest proponents of hierarchy-less management structures, they would soon form into a new hierarchy of total believers over semi-believers.
Every effective organizational design, no matter its shape, is an attempt to clarify accountability and move the organization forward in its chosen direction with little lost time and energy in its momentum. Hierarchy is not about control; it’s about distributing accountability throughout the organization. The broader the spread of accountability, the higher “up” that role is in the hierarchy. So you can try to design an organization without hierarchy. You can also try to time travel. Let me know how it goes.
The Role-Centric HRMS
Now that you have a basic appreciation for organizational structure, it should be clear that there’s also a need for managing the people within that structure. Rather than trying to translate the structure into a classic org chart with names, titles and lines of reporting, keep the HR stuff in your human resources management system (HRMS). Keeping the HR stuff in the HRMS, while also having the HRMS mirror the design of the structure itself, allows you to have the best of both worlds.
Unlike a traditional HRMS that is title-centric, you’ll want to modify your HRMS so that it is role-centric. For instance, below is a picture of a role centric HRMS:
This HRMS creates an organizational tree that calls out the major and minor roles of the company as reflected in the structure. It shows who is playing each role and their number of direct and total reports. If one person was temporarily playing multiple roles (i.e., hats) due to budget or other reasons, their profile would show up in each of those roles. As the structure changes, people are reassigned and roles are added and deleted, as appropriate.
When you click on the name of the role, this links to the Role Entry as shown below. Any number of staff who are currently playing that role would show up in the Role Entry. Notice that the Role Entry includes the purpose, accountabilities, and top KPIs for that role.
Finally, the HRMS also maintains and updates all of the employee-/HR-specific information you need to keep, such as name, hire date, payroll information, contact info, etc.:
Having a role-centric HRMS based on the design of the structure gives you the best of both worlds. It not only allows you to manage the HR aspects of your firm, but also encourages employees to shift out of the “jobs and titles” mindset into thinking about roles, accountabilities, and KPIs. As your organization grows and develops, having this role-centric mindset creates flexibility to move people into roles where they are needed in that moment, without being so caught up in job titles and the status quo. Think “play the role to support the organization’s purpose” vs. “have a job title that describes my worth and status in the organization.”
It’s not only a structure win. It’s also a clear win for your culture.
To learn more about organizational design, see “The 5 Classic Mistakes in Organizational Structure: Or, How to Design Your Organization the Right Way”
You may not be surprised to hear that this tension between sales and marketing is common. The truth is that, by nature, their functions will always be in tension or conflict. One is short-range-focused, with a drive to close qualified leads NOW. The other should be long-range oriented, developing the brand and product offering to meet evolving customer needs in the future – not just this quarter’s targets. That conflict is never going to go away. And the point I’m going to make in this article is that it can be harnessed.
There is an easy way to address the conflict between sales and marketing and make it constructive for both growing sales and building the brand. It does, however, take awareness and discipline to do it well. The solution is to refocus and get alignment between sales and marketing on the most important question every business must answer: Who is your primary customer? You might think this is obvious, yet a surprising number of B2B marketing companies overlook this step. Or don’t do it adequately.
Who is Your Buyer Persona?
A “buyer persona” is a semi-fictional representation of your ideal customer — the real buyers who influence or make decisions about the products, services or solutions you market. The buyer persona sits at the nexus between sales and marketing. Defining or redefining the buyer persona is a high-leverage activity that takes the strengths and insights of both marketing and sales. It allows them to come together, focus on what’s most important, drop what isn’t, and then get busy driving sales and building the brand.
Why is this? Well, if you can get alignment between sales and marketing on who the primary customer is, then everything else is tactics. The tactics refer to the best approach to reaching this primary customer, and this is open for trial, error, and team learning. The tactics may change, the shared goal remains the same.
If you don’t have clarity and alignment on who the primary customer is, however, there will be rampant disagreement across the board. The sales and marketing teams will fight about the little things because there’s no alignment on the big thing. And even if your current marketing tactics are working relatively well, they won’t be seen as successful because there’s still no true alignment on the real goal: continuing to reach the primary customer while evolving the product to meet their changing needs.
The primary purpose of defining your buyer persona is to “tune” group empathy towards the needs, wants, and aspirations of the customer. If the persona doesn’t help to tune group empathy, then it’s not fulfilling its purpose. It’s just a useless exercise. This isn’t just true for marketing and sales. It’s true for every function in the business. Who do we serve? What is their primary unmet need? How can we delight our customers? A good persona will take an abstract concept and make it easy for everyone to relate to and create a deeper sense of meaning and purpose throughout the entire organization.
If Marketing Has Questions, Sales Has Answers
Top-performing salespeople understand their customers’ conscious and unconscious unmet needs as well as their spending priorities, decision-making processes, and aspirations. Too often average-performing marketing departments will discount sales leaders’ firsthand knowledge of their customers. They erroneously think, “Awww, that’s just sales. What do they know anyway?” Big mistake. A top-performing marketer, on the other hand, takes a different approach. They recognize that top sales people are already spending a lot of time interacting with the same customers that marketing is trying to reach. Duh!
When developing a buyer persona or type, marketing can help sales to clarify who is the primary customer (the one with ultimate authority) as well as the key influencers and gatekeepers in the buying process and how to reach them. Each of these can be a different buyer persona and requires a different approach and collateral than the others. The balancing act in this collaboration is that marketing must meet both the short-term needs of sales and the long-range development needs of the rest of the business.
The specific perspectives that sales can bring to the discussion on the buyer persona are the stated and unstated or unconscious reasons customers buy. The conscious reasons are good to know but the unconscious reasons are priceless. That’s what a good sales team is intimately familiar with.
For instance, let’s say that your business is selling a b2b marketing platform. If you were to ask a customer, “Why did you buy from us?” you might hear the conscious reasons such as “We have a goal to increase leads by 25% and conversion by 10% this year and your customer testimonials were the deciding factor. We liked this widget feature. Your customer support is outstanding…” And so on.
OK, that’s easy enough. But what about the unconscious needs of this buyer – what were those? Was it job security? Confidence? To be part of the in-club? To be able to justify their decision to their peers? To be seen as an innovator? These unconscious or unstated needs are the real reason sales happen.
A great sales person will intuit what a buyer’s unmet needs are and sell to those. A great marketer will incorporate solutions to the unconscious unmet needs in their marketing message and collateral.
Additionally, sales can bring to the table a deep understanding of the buying cycle, customer spending priorities, the competitor’s offerings, your unique differentiator, the customers’ requests and frustrations, and firsthand anecdotes from the trenches.
The 10 Questions Marketing Should Ask Sales
There are 10 basic questions that every great marketer should ask the sales team:
1) Who is the primary customer type?
2) What can you tell me about this primary customer? (e.g., position, age range, educational background, management style, industry experience, information sources, trade shows attended, etc.)
3) What are the customer’s unmet conscious needs? (i.e., what do they say they want?)
4) What are the customer’s unmet unconscious needs? (i.e. what do they really want?)
5) Who are the key influencers within and outside the customer’s organization that impact the buying decision?
6) What is the customer’s typical buying process and how long does it take?
7) What do we do differently or better than anyone else from our customer’s perspective? What do our customers say makes us unique?
8) What do our top competitors do differently or better than us? What makes them unique?
9) What are some of your best stories about when different customers were thrilled with our product or service?
10) What are the top 3 deliverables I can provide you to make your job easier, more fun, or more successful?
Why are these 10 questions important? Because they help a marketer tune his or her own empathy to the needs of the customer and the needs of the sales team. Great marketers understand that it’s not just about “marketing.” It’s really about meeting the needs of those you serve – in this case the end customer and the sales team.
The 3 Things Sales Can Do To Get More Out of Marketing
Harmony between sales and marketing is not just a one-way street. There are three simple things a sales leader can do to help ensure that marketing is supporting your team:
1) Share your customer knowledge. Make sure that marketing has the answers to the top ten questions and do it proactively. You don’t have to wait for marketing to interview you. Take initiative and start the dialogue with marketing. To be effective in sales, you need information transparency with marketing and vice-versa.
2) Bring Data. Great marketers love data, so the more and better data you have to support your reasoning, the more persuasive you will be. Where do you get the data? Industry publications, customer surveys, web site analytics. The data is there. The challenge is turning it into actionable insights. You can help this process by keeping the primary customer’s needs in the forefront of the discussions.
3) Advocate for your customer. Jeff Bezos leaves an empty seat in the Amazon conference room. This empty seat represents the Amazon customer. “Remember,” Jeff is known to say to the management team, “this is why we exist. To meet the needs of this customer.” How can you create a similar awareness and reverence for delighting customers in your own company?
Now, chances are that when sales and marketing attempt to answer questions about who the primary buyer really is, one or more people will say, “I wish we had the data to answer that question. We just don’t (have it, have access to it, know how to make sense of it, etc.)” Don’t fall into this trap! There will never be enough good, clean, accurate data. That’s not an excuse to not make your best effort at defining and creating alignment around the primary buyer persona.
In a well run sales force automation (SFA) system, for example, there’s a ton of available valuable data: Job title of the primary buyer, job title of the initial inquirer, job titles of key influencers, length of time from inquiry to purchase, how they heard about you, customer satisfaction scores, top feature requests, and recorded anecdotes from sales. Similarly, there’s a wealth of data in a well-run website and social media analytics platform.
So by all means, use the data if you’ve got it. Use it to improve your understanding of the primary buyer persona. But don’t use the lack of good data as an excuse to put off the exercise of defining the buyer persona in the first place. Start with what you’ve got. Build on it from there.
The Art is the Discipline
It’s pretty straightforward for sales and marketing to schedule a meeting or two to define the buyer persona. The real breakthroughs occur when you build in the organizational discipline to consistently define and redefine personas, and therefore find ways to improve the effectiveness of both sales and marketing. It’s the classic dynamic between working on the business versus in the business. Crafting the structures, processes, and discipline to step out of the daily work pressures to think strategically about the work itself is what separates the great companies from the average.
A simple best practice is to set a quarterly or bi-annual meeting with marketing and sales and other stakeholders to review the current primary buyer persona, take a fresh look at the top 10 questions, and make adjustments based on new data and new anecdotes from the field.
If everyone in your organization is clear on who you serve and the group empathy is tuned into the needs and aspirations of your customers, sales and marketing can cease viewing each other with suspicion and collaborate to solve your customer’s core business problem. The process always starts with and circles back to the buyer persona.
- You don’t build a great culture through intention alone. You build it through a culture system.
- You can’t dictate culture. But you can design for it. A strong culture system is designed around four key elements: Values, Rituals, Stories, and Consequences.
- To build a better organizational culture, use the culture system framework to focus your energies on improving the weakest element, then improve the next and so on.
When Intention Isn’t Enough
It’s 9am on Monday morning at ACME Widget Corp. The management team is gathered in the 1st floor conference room waiting for CEO Jack Ryan to arrive. A rumor is buzzing around that Jack has spent the past weekend at Culture Summit 2.0, some sort of “interactive experience” where business leaders learn from culture gurus how to build a thriving organization.
A few minutes after 9, Jack, calm and present as always, enters the conference room and gives his hellos. As he is taking his seat, Sally in Marketing says, “Jack, there’s a rumor going around that you attended a corporate culture workshop this weekend? How was it? We’re all curious to know…”
Jack doesn’t answer right away and instead takes time to visually connect and smile at everyone around the table. Finally he speaks. “This was one of the most transformative weekends of my life. It really reinforced for me the importance of values-based leadership and I’ve got a lot of new ideas to try. But the main thing is this: going forward my #1 commitment is to ensure that we truly become a values-based organization. That’s what I’m most committed to and excited about as a result of this weekend.”
Now imagine you’re in that circle and you hear Jack say this. How do you respond? I imagine that outwardly you might nod your head and even give a verbal “right on!” But inwardly? Might you have some skepticism that any CEO might succeed at this — despite a personal commitment to personal growth and values-based leadership?
“C’mon,” you might think to yourself, “What about Marie in accounting? Wasn’t she just a nightmare who ate away at the company culture for 6 years? What’s going to be different this time? We’re swamped and who has time to really focus on and enforce values? There’s no question I’d like to be part of a great culture; the hard part is actually making it happen.”
At the same time, try to imagine being Jack. Can you empathize with his desire to truly lead by values? To build a transcendent organization that makes a positive impact on the world, kicks ass in the marketplace, and has the culture you’ve always wanted to build — one you’re truly proud of?
Intuitively we all understand that building a truly values-based organization can be a life-changing experience for everyone involved. It creates tremendous organizational resilience, inspires the best in its people and customers, and builds a sustained advantage that’s hard for competitors to duplicate. So there’s no question that Jack is sincere in his desire to build such a culture. But how is that done?
If you read most popular books on building a values-based culture, the focus is usually on what personal characteristics are required in a values-based leader and how to develop them. For instance, in his best-selling book From Values to Action, Kellogg School of Management professor Harry M. Jansen Kraemer Jr. codifies the 4 principles of values-based leadership: self reflection (know yourself to lead yourself and others), balance (ability to see situations from multiple perspectives and differing viewpoints), self-confidence (accepting yourself as you are and playing to your strengths), humility (valuing each person you encounter and treating everyone respectfully).
That’s all well and good. You can’t have a values-based organization without a values-driven leader. After all, if the head is rotten, it affects the whole body. But clearly that’s not enough. Let’s give Jack the credit he deserves and say that he is highly self-aware, compassionate, and has great integrity. If you were to compare his personality to all of the stated requirements, it would be positive check marks all across the board.
So if Jack is an aspiring conscious leader with awareness, compassion, and integrity, then what is the cause of subtle doubt on the team? Well, as you have certainly experienced firsthand in your own career, building a values-based culture is really fricking hard. It takes tremendous effort and energy to get it right and one small or unconscious misstep by an organizational leader can quickly undo years of positive work. It’s a lot like playing Tetris – mistakes pile up and accomplishments disappear.
If the leader’s intention and values alone aren’t enough to build a better culture, what is? When it comes to building a reinforcing a values-based culture, you need a simple system that defines, reinforces, and defends the desired organizational values. Put another way, while your own intention and personal values are important, what’s just as important is the cultural system you develop.
The Four Elements of an Effective Culture
Culture can be systematized. In fact, every successful and durable culture is built on four basic elements: Values, Rituals, Stories, and Consequences. Once you’re familiar with this basic cultural framework, you can train your focus on each element to build a thriving culture in your organization:
- Values are the qualities of expression that the culture considers most important.
- Rituals are the formal and informal procedures and celebrations that the culture adheres to.
- Stories are the formal and informal lore that describe the culture’s values in action.
- Consequences are what happen to members of the culture when they violate the values.
You can see these four elements at work in every strong culture, whether it’s a family, a tribe, a community, a Fortune 100 firm, or a national identity. Take the U.S. Armed Forces, for example. Now, whether you’re a pacifist or a war-hawk, you will probably agree that the U.S. Armed Forces have a very strong culture, right? That’s because they rely on the four elements of a successful culture:
- They have a clearly defined set of values: duty, honor, respect for authority, sacrifice, courage under fire, etc.
- Those values get expressed in rituals. The salutes, ranks, badges, and ribbons are all forms of ritual. So are the elaborate ceremonies for career advancement; the historical celebrations for Memorial Day, D-Day, and the 4th of July; and the solemn bereavement and 21-gun salute for those lost in battle.
- Stories of values in action are spread and reinforced during those rituals (like when the General shares a story about a famous battle or a particular soldier’s heroics); through the armed forces media; in history books and historical re-enactments; and the informal mess-hall chatter of great exploits and total clusterfucks that happen out in the field.
- The consequences of not adhering to values are clear and reinforced. If you’re in the armed forces and you don’t adhere to the values, then you’ll get a dishonorable discharge, a sentence to Leavenworth prison, or even get a Code Red (you’ll know what this is if you’ve ever seen the movie A Few Good Men.
The U.S. Armed Forces have an intense culture, don’t they? They have to! If the Armed Forces didn’t invest considerable time, energy, and resources in building and reinforcing their culture, they could not be effective. As they say in the most gung-ho units — “HOOAH!” And of course if the U.S. Armed Forces lost their culture, or if their culture was no longer in synch with the values of the broader environment in which it operates, it would cease to be effective.
Even if your organization isn’t dealing with life and death, or war and peace, the elements of building a strong and resilient culture are the same. As a leader, you need to be clear and committed to a set of core values that are reflective of the best your organization can be; you need a series of rituals, small and large, the reinforce the expression of those values; the values must “travel well” through effective formal and informal storytelling; and you must enforce the consequences on yourself and others for failing to live by those values. By breaking the elements of a strong culture down, you’ll better know where to focus your energy and attention so you can help to build a thriving culture.
Values are running the show in your organization; you just don’t know it. You can tap into the organization’s existing values by observing a meeting like a fly on the wall. What is considered of higher importance than anything else? Does this company value profits over people? Efficiency over service? Self-glorification over the needs of the group?
Because values guide decision making and behavior, it goes without saying that, in order to build a thriving culture, the culture needs to be clear on what its core values are and those values must be supportive of the organization’s purpose. If your organization isn’t clear on its values, or its current values no longer support the organization’s purpose, then you’ll need to guide the organization through a values definition process.
Just as with any good decision-making and implementation process, you’ll want to gather in a critical mass of leaders from all levels of the organization to help clarify and build commitment to the right set of core values. You’ll know you have the right set of core values when you and the team can answer an emphatic “Yes!” to each question below:
- Do these core values support our larger organizational purpose?1
- Do these core values reflect our culture when it’s operating at its very best?
- Will these core values attract the “right” people and repel the “wrong” people?
- Can we clearly identify when someone is not living up to these core values?
- Would we fire someone for not expressing these core values?
When you can answer “Yes!” to each question above, write down each core value using complete sentences, each one starting with a verb. For example: “Build open and honest relationships through communication.” “Empathize with customers by walking in their shoes.” “Pursue excellence by getting it right the first time.” “Work smart by being disciplined in your thoughts and actions.” “Play hard by having fun together.”
When the values are defined it’s time to bring them alive…
Key Question: Do we have the right set of organizational core values to support our purpose now?
It’s not enough for core values to be known and understood in your culture. They must be experienced. What do I mean? Well, try to recall all of the knowledge you gained back in college. You can’t do it, right? Now think back to all the memorable experiences you had in college. The parties, the crushes, the dates, the trips, the project teams… Those are easier to recall. That’s the difference between knowledge and experience.
Rituals create experiences and it’s memorable experiences that really impact your culture. Rituals run the gamut from small to big and you’ll want to choose those that best activate your desired organizational culture. Here are some examples of small, effective rituals I’ve seen over the years. I’m not sharing them to create an exhaustive list, only to highlight that there’s a lot of room for creativity in the rituals you do embrace…
Quarterly Celebrations. It’s easy to celebrate when times are good. But what about when times are bad? Great cultures schedule their celebrations in advance and follow through no matter what happened that quarter. What did we learn as a culture? What heroic efforts were made? Celebrate the journey, not just the destination.
Steam Whistle. I once ran a sales team where after every sale, the rep would stroll over to the wall and blow a super-loud steam whistle. It would rattle windows and shake doors. The bankers on the floor above us absolutely hated us but that made it all the more fun. That whistle became known as the sound of success.
Pistachio Nuts. Back when Hewlett-Packard was a great company, it was known for… pistachio nuts. Yep. If someone did something special, like solve a complex bug in software or win a big contract, they’d soon find a silver bag of pistachios on their desk with an anonymous note telling them what a great job they did. I’ve read that if you worked at HP, you soon coveted receiving a bag. When you did, it meant more than gold. That’s a ritual.
Coffee Walk. Last week I spoke at an all-company meeting for GumGum, a fast growing advertising network in Santa Monica. During my interactions with the team, I learned that GumGum has a daily ritual “coffee walk” where the entire company goes for coffee at 3:30pm. They stroll the block, take time out to gaze at the Pacific ocean, have some laughs, and even enjoy some trivia. A fun little ritual.
Build Your Own Desk. Amazon is famous (infamous?) for having its office workers build their own desk using a door and saw horses. It’s a ritual that reminds new hires of Amazon’s roots and creates a shared sense of experience. I can just imagine the savvy old veterans watching the newbie put his or her desk together and having a good-natured laugh about it.
Parking Lot Sessions. Where I live in Santa Barbara, there’s a cool shoe company called Seavees that celebrates its California roots by having a monthly get-together in its parking lot. Called “Parking Lot Sessions,” Seavees invites a cool band, provides a BBQ and drinks, and revels in the vibes. That’s a ritual.
Appreciation Fridays. Every Friday at my kid’s school, the children gather together and share appreciations for one another and the teachers. “I appreciate Reid for helping me solve a math problem.” “I’m thankful to Alexa for telling me that she liked my new shoes.” It’s precious sweet but you can see the same positive cultural impact in a gathering of adults at work: “I want to thank Linda for helping me to get my article published this week. It was awesome and she went above and beyond.” A powerful ritual.
The bottom line is this: A ritual can be just about anything that creates a shared memorable experience and that supports the essence of the core values. Rituals don’t have to take a lot of time or cost a lot of money. If your core values feel more like words and less like a shared experience, it’s a sure sign that you should put your focus on creating more or better rituals, small and large, in your organization.
Key Question: What are the rituals we have in place now in our organization and what new rituals should we develop?
The more the culture is shared, the stronger it becomes. The best way to share a culture is through stories of core values in action. Stories, positive or negative, are incredibly powerful. Human beings are storytelling creatures. We’re attracted to stories, we remember them, and they define the world in which we live.
Max De Pree, the founder of Hermann Miller Chairs wrote in his book Leadership is An Art that “The #1 job of a leader is to define reality.” That’s true. What was left unsaid is that reality is subjective. For instance, do you feel that the U.S. Armed Forces, to continue with the example, are a belligerent bully corrupted by corporate greed and nefarious politics, or an honorable institution driven by self-sacrifice, honor, and courage? The answer depends on the stories being told within and without the organization, and which ones you believe.
Here’s the thing to keep in mind. If negative stories run unchecked – gossip, rumors, tirades – they eat away at the culture from the inside out. Pretty soon all anyone can think and speak about is how bad things are, how the leaders are hypocrites, who’s sleeping with who, and how the business is soon going under.
As a leader, in order to define and craft a new reality, you need to create an environment where it’s safe and encouraged to share positive stories of core values in action. If you can create this positive storytelling environment, then pretty soon all anyone can think and speak about is how good things are, how the leaders strive to walk the talk, who’s helping who, and how the business is going to survive and thrive, no matter what.
Rituals and stories go hand in hand together. One of my favorite practices is to create a ritual where company meetings end with each person sharing a story of when they saw a core value being expressed in the past week. For example: “To close this meeting I’d like each of you to share a story of when you saw a colleague express a core value in the past week. I’ll start: Last week I saw Susan go above and beyond to help our client Frank. She truly expressed the value of ‘above-and-beyond customer service’ and it was awesome to witness. Molly, what did you see last week?”
The first time you ask this question, you might get some blank stares: “Ah, what are our values again?” Remind them. The second time you ask the question, people will be more prepared. By the third time you ask that question, people will be paying attention for when they see a core value being expressed throughout the week. The stories reinforce what it means to express a core value. Pretty soon, those stories of values in action begin to travel around the organization. We get more of whatever we focus our attention on.
You can contrast this with a company that has core values that remain dead on the wall, meaning, they are aspirational statements that have no life to them. They’re viewed by the culture as vague, abstract statements that stand for hypocrisy rather than reality. It is stories of values in action that bring those values alive in the organization. The more you share them, the more believable and powerful they get.
One aspect of storytelling to keep in mind is the use of photos and video to capture, share, and archive the culture in action. For instance, at the recent GumGum all-hands meeting, they paid to have a professional photographer shoot the 3-day event. Then the photos were placed on Dropbox and sent to all participants. Simple? Yes. Smart. Very. It’s cultural storytelling in action. Remember, the more you share it, the more powerful it becomes.
Key Question: How and when can we share more stories of core values in action in our culture?
Values without consequences aren’t values at all. They’re idle wishes. Consequences are both really simple and really hard. The bottom line is this: If someone in your culture isn’t living by the core values, they must go. Values are non-negotiable. The minute you accept behavior that isn’t in alignment with the core values is the minute that your culture starts to get flushed down the toilet.
A common theme I see in average cultures is that they tolerate behavior that’s not in alignment with their stated core values. “Sure, George can be a real asshole, but he’s the only one who knows our marketing engine/technology platform/key client/etc. We simply can’t afford to fire him right now. After we make it through this quarter/product release/fund raising period/etc., we’ll try to find a replacement.”
I call bullshit.
A core principle of Organizational Physics is to eliminate entropy from the system. Nothing is more entropic to a thriving culture than when someone in a leadership position isn’t living by the core values. And one of the highest-leverage decisions you can make as a leader is to fire someone who doesn’t match values.
For instance, I have a CEO friend who is an awesome guy. He’s kind, smart, and thoughtful. He truly wants the best for his people and strives to build a great corporate culture. However, precisely because he’s so caring and generous, he often bends over backward to try to help someone who is a poor cultural match fit in. Several months ago he was dealing with one senior team member who was causing a lot of turmoil for him personally and for the company. This employee was very me-focused, caused constant fights between departments, and generally cost everyone much more energy than the employee actually contributed back.
Finally, my friend reached a breaking point, owned up to the cultural mismatch, and fired this senior leader. At the time, it felt like a very hard thing to do. It wasn’t clear how the company would cover the gap created by the absence, how and when they would find a replacement, and what kind of impact it would place on the CEO’s personal workload, which was already severe. I spoke with my friend a month or so after the termination. What do you think he said? “I should have fired that person months ago. I can’t believe the positive impact it’s had on our culture. Everyone is in a good mood, there’s low BS, and we’re kicking ass on all the projects we were struggling with before. Hire slowly. Fire quickly. Lesson learned.”
A key attribute of great organizational leaders is that they tolerate no bullshit when it comes to defending values. There’s a reason that, when the President of the United States is sworn in, he must state that he will “protect and defend” the Constitution of the United States. The Constitution is a values document. It’s easy to aspire to values. It’s hard, but necessary, to protect and defend them. That’s the real work of leadership. Otherwise all is lost. When it comes to building your own organization, hire by values and fire by values. You already know this to be true. So what’s holding you back?
Key Question: Are you tolerating behavior that isn’t in alignment with the core values? If so, what are you going to do about it?
Building a winning culture requires more than just intention. It requires a systematic approach to transformation. The Culture System allows you to identify where you need to focus your energy and attention to build a thriving values-based culture. Right now do you need to focus on values definition? Rituals? Stories? Consequences? Break it down so you can build it up.
Got some good rituals or stories of values in action? I’d love to hear them. Please share in the comments.
1.Note that there will come a time in your organization’s life when it’s necessary to evolve the organization’s values to better reflect its evolving purpose. That is, while core values remain relatively constant over the years, they don’t remain absolutely constant over decades. Winning organizations and cultures evolve their values over time in interplay with the surrounding and changing environment.
The best evolutionary values model I’ve studied in depth is Spiral Dynamics, taught by Don Beck. Spiral Dynamics is not widely known in the mainstream but it is the underlying framework for very popular values-based theories including Integral Theory, Tribal Leadership, Conscious Business, and many other next-generation values frameworks. If you get the chance, take a workshop with Don Beck. It will forever change how you think about values in individuals and groups.
Sometimes the best way to understand what NOT to do in an interview is to go through a bad one yourself. I’ve definitely had this experience. It occurred when I was interviewing for an entry-level sales position with a fast-growing telecom company in Minneapolis, Minnesota. At the time, I was 26 years old, had just shut down my first startup, had burned through all my savings, and was in desperate need of a job.
A friend of mine told me about the firm one night over beers: “Hey Lex, I know you just shut down your startup. Sorry it didn’t work out, man. If you need a job to pay the bills, they’re always hiring where I work. It’s not the best job in the world but the money can be good if you work hard at it.”
The notion of hard work and good money sounded like a pretty good opportunity. I needed something I could throw myself into until I found my footing again. So I called the company the next day, told them I was referred by one of their existing reps, and set an appointment for an interview. To prepare, I practiced my spiel about why I’d be a good fit for their organization, polished up my resume, put on a suit, and went in with a mix of hope, anxiety, and chutzpah.
I arrived at their offices and approached the front desk. The receptionist, middle-aged and blurry-eyed, looked me up and down skeptically and, with a hint of exasperation at having to deal with me, said, “May I help you?”
“Ah yes, I’m here for an interview for a sales position. My name is Lex Sisney.”
She glanced down at her calendar and shook her head: “There’s no interview today. You first need to take the written test.” She reached into her file drawer and handed me a 50-question fill-in-the-oval-and-make-damn-sure-you-stay-in-the-circle scantron test. “If you pass the written test, then you’ll be invited back in for an actual interview.”
I thought to myself, “Really? Why didn’t they tell me this on the phone? I’ve got to take some psychobabble test before even speaking with someone? And is this the kind of place I want to work for? WTF. Well, I guess I need the money so I better play along.” Out loud I said, “OK, let’s take the test.”
“See the clock over there on the wall?” she said. “You have 30 minutes to complete the test. Have a seat under the clock and the time will begin. Do you have a #2 pencil?”
“Uh, no, I’ll need a pencil please. Do you have one?” She rolled her eyes and reluctantly handed one over like it was her last meal. I took the pencil, turned on my heel, and walked back to my assigned seat under the clock.
The test asked me questions about what I’d do in hypothetical situations like the following:
You see a co-worker take a company coffee mug from the storage closet and put it in his briefcase. You should:
a) report the theft to HR
b) ask him what he’s doing
c) take a mug for yourself
d) tell him to put the mug back
I snickered under my breath but played along anyway. I finished quickly and turned it in with 15 minutes to spare.
The receptionist scanned it over with a raised eyebrow to make sure I stayed within the circles and didn’t miss any questions. “OK,” she said, “someone will call you if there’s a possible fit,” and I left. (Note: Psychometric tests like this one have transitioned from #2 pencil to the web, but they can still be just as asinine.)
About a week later, the company called me in for the interview. I was told that this time, I’d actually get the chance to speak with the hiring manager.
I arrived early and re-greeted the receptionist. She seemed in a somewhat better mood this time: “Have a seat Mr. Sisney and Mr. Johnson will see you when he’s ready.”
After waiting for 20 minutes past the scheduled time (is this a doctor’s office?), a new voice spoke from the receptionist area. “Mr. Sisney? I’m Lidia, Mr. Johnson’s assistant. He’s ready to see you now.”
Lidia led me back through the cubicles and telemarketers to a large windowed office. There, at a small, round conference table sat “the Man.” As I was ushered into the office, he didn’t actually look up or greet me but sat leafing through some papers, extended a limp-fish handshake, pointed to a chair across the table, and sternly said, “Have a seat.”
After what seemed like five minutes of just sitting there, he finally looked up from his reading, made eye contact for the first time, and with pursed lips told me, “I’m concerned about your ability to conform.”
“Excuse me?” I asked trying to mentally process what he had just said. He placed one of the pages he was reading on the table and with two fingers slowly twisted it towards me so I could read it.
“You see this chart? This fourth column is conformance. Your scores in these other three areas are very high but you have the lowest conformance score of anyone I’ve ever seen.”
I said, “Hey, that’s pretty cool. Can I have a copy of that?”
“No,” he frowned. “But tell me, why should I believe that you can conform to our way of doing things here?”
I tried to dance and weave and sell him on the idea that non-conformity really meant “creativity” but I didn’t think he really bought it. The interview lasted about 10 minutes total and I left thinking it had all been a big waste of time.
Surprisingly, they called me a few weeks later and offered me the job.
“No, thanks,” I said. “It seems like you’re looking for drones for your empire. That’s not really me.”
So what did this company do wrong in the hiring process? Alas, let me count the ways…
First, they were focused on the wrong things. It’s clear that this company was suffering from high turnover in the sales team so they tried to fix the problem by weeding out risky candidates (like me) using a psychometric profile test early in the hiring process.
In effect they were saying, “Turnover is costing us a lot of money. We must control for it by only hiring reps who can conform to our process.” Did it work for them? No! They still had high turnover in their sales team; those they did attract were of the lowest common denominator; and their entire recruiting process became a bureaucratic numbers game.
You don’t want to strive for conformity in your employees or in the candidates you select in the hiring process. Conformity is like monocultures. Easy to plant and hard to maintain—in addition to making the system brittle, stagnant, and tired over time.
What you do want in your organization is diversity—a diversity of styles and perspectives built around a common vision and values. Diversity is harder to design for than conformity but it ultimately makes things alive, vibrant, and adaptive over time. The right hiring process won’t reinforce conformity. It will support the selection of a diversity of styles and approaches that complement the surrounding team and environment.
Second, they treated people like discardable cogs. Every interview is a significant sunk cost. If you’re going to have one, you better make the most of it. Treat everyone you interview with dignity and respect, and use the interview as an opportunity to win hearts and minds. You never know—that lowly job candidate may one day be very important to your organization’s success.
In the personal story I just told you, soon after I turned down the company’s job offer, I started another company that went on to be hugely successful. Early in our growth stage, I needed a telecom partner to build and manage a complex phone system. In fact, I ended up spending several million dollars on our phone system over the coming years.
Which vendor do you think I didn’t call? Why would I call them? I got a chance to peek behind the curtain of their organization and I didn’t like what I saw. The process was haphazard and the people were rude. I wanted nothing to do with them—not even as a vendor.
It would have been a different story if this company had actually taken the time to treat me and other candidates like real people, not cogs in a machine to be used or discarded. People forget what you tell them but they always remember how you made them feel. In this era of social media transparency, that’s especially critical to remember. Treat everyone, especially potential job candidates, as a potential future customer.
Third, they lacked a strong foundation. Didn’t you get a sense of how crappy this entire organizational culture really was? Even the most amazing hiring process in the world won’t cover up a pile of shit. Your organization must have a strong foundation in place. It must have the right growth strategy as well as the structure, vision and values, processes, and team to support that strategy and adapt to changing conditions.
There’s a saying that how you do anything is how you do everything. It’s no surprise that this company went public a few years after my interview and then went bankrupt a few years after that. Why? They initially grew on market demand for their existing products but when the market demand shifted, they couldn’t adapt. They had conformed to the past and lacked a strong foundation to adapt to the future. Building a strong organizational foundation is outside of the scope of this work but if you’re interested in the principles, I encourage you to check out my book Organizational Physics: The Science of Growing a Business.
Fourth, they treated the interview like a competition, not a collaboration. A job interview shouldn’t be viewed as a competition where the winner tries to guess what the company really requires and the loser gets sent home. Instead, it should be viewed as a collaboration between a qualified candidate and the company to see if there’s a mutual fit.
Think about it. As the candidate, I want to know if this job is a natural fit for my skills, vision, values, style, ambitions, and desired compensation. If not, I don’t want to work here any more than you want me to. The company wants to know the same information about me.
The purpose of interviewing, therefore, is to allow both sides to determine if there’s a mutual fit. The “collaboration, not competition” mindset is a heck of a lot more fun for both the hiring manager and the candidates. Of course it requires having a really solid framework and hiring process in place that allows that to happen. Otherwise, you put yourself at risk of being “gamed” by candidates who just want a paycheck, rather than a mission.
If you’re interested in learning the steps to a breakthrough interview process, then you may want to check out my newest book, How to Think About Hiring: Play Smarter To Win the Talent Game, from which this article is an excerpt. But in any case, do these four things as you approach the interviewing process and you’ll set the stage for better results:
1. Seek diversity, not conformity.
2. Treat everyone with respect.
3. Hire from a strong foundation.
4. Make it a collaboration, not a competition.
Being business partners is a lot like being married. When the relationship is thriving, it’s awesome. But when it isn’t, it really sucks. In fact, few things can destroy organizational momentum like two co-founders in a bad relationship. I have a friend in a successful business partnership who puts it like this, “I have two wives. One at home and one at work. I’ve got to invest time and energy to make sure that both stay happy, otherwise, it all goes to s#*&t!”
Not all partner conflict is bad. You actually want constructive conflict in your partnership. Constructive conflict means that you and your partner share the same vision and values; there’s give-and-take; you fiercely debate potential decisions but without attacking each other’s character; there’s a sense of mutual trust and respect; and your individual strengths and styles complement each other. You are both better because of the other.
Destructive conflict, on the other hand, is like a toxic marriage. It eats away at the system from the inside and doesn’t work for anybody. Just as divorcing adults impacts their kids, two co-founders in a toxic relationship impact everyone else in the organization.
If you’re navigating a bad business partnership, or you just want to make sure that your current great partnership remains so, then it can be eye-opening to understand that any destructive partnership conflict falls into just three types. Once you know what type of conflict you’re dealing with, then you can know how to address it.
As you read about each category of destructive conflict below, see if you can recognize where your partnership is experiencing the most strain today. That will tell you where to focus your energy and attention to help the partnership be great again, if that’s possible, or to walk away if it isn’t.
Category 1: Conflict of Vision and Values
I’m just going to come right out and say it. If you are having a true conflict of vision and values between you and your business partner, you only have one option: get a divorce. In this case a “divorce” means that one partner needs to effectively buy the other out or, if not, to shut the business down and go your separate ways.
Why? Because nothing is more destructive to organizational momentum and potential than a conflict of vision and values. Vision is the destination or ultimate outcome you want the business to reach. Values are expressed in the behavior you deem desirable and acceptable during the journey. If the co-founders no longer want to end up in the same location or don’t abide by the same core values, how can they possibly work effectively together? They simply can’t.
As an example, imagine a married couple in counseling. One partner desires to live in Manhattan and spend their days shopping on 5th Avenue while sleeping around with other people. The other wants to live off the grid in an organic commune and work the land in meditation and celibacy. Is there anything that a marriage counselor can do to help the couple? No! They have different life visions and values. No amount of counseling or therapy is going to change that fact. It’s time to split the marriage and allow each person the freedom and autonomy to follow their own path.
The same is true in your business. What’s your vision? Does it align with your partners? Do you want to grow big but he or she wants to stay small? Do you both have the same set of core values? Do you authentically trust and respect one another? If you can’t agree on where you want to end up, or how you’re going to behave on the journey, then it doesn’t make any sense to try to travel together. But if you do, then all other conflicts are negotiable.
Thankfully, the remaining two types of conflict aren’t nearly as destructive and severe as a conflict of vision and values. In fact, they can be harnessed to form more constructive partnerships and to create a better, stronger, and more dynamic relationships.
Category #2: Conflict of Interests
A conflict of interests means that what’s good for one partner is not seen as necessarily good for the other. For instance, perhaps you feel your position is worth more in salary and equity than your partner’s but you know that broaching the subject will create hard feelings. It’s good for you, not so good for your partner. Or maybe you feel like your partner can no longer carry his or her own weight — in other words, the needs of the business have outgrown their capabilities. Continuing to work together seems good for them but not so good for you. How do you navigate a conflict like this?
In Michael Eisner’s thoughtful book about partnerships, Working Together: Why Great Partnerships Succeed, he tells a story about how to navigate a conflict of interest. It requires shared vision and values and a willingness for both partners to give and take.
Eisner begins the book with a story of how he met Frank Wells, a former Warner Brothers executive and free-spirited thrill-seeker, who once checked out of Hollywood for a few years to climb the tallest peaks in six different continents.
At the time, both Eisner and Wells were being courted by Disney to be Co-CEOs – a classic conflict of interest if ever there was one. But rather than duking it out in a battle of wills and egos, Wells realized that Eisner was the better Chairman and CEO for Disney and he, in turn, could thrive in the President and COO role, supporting Eisner, filling in the blanks, and helping the team reach its potential.
Their partnership thrived for a decade before Wells died in a tragic helicopter crash and, by that time, they had transformed Disney into a multimedia empire. This only happened because Frank Wells was able to put his own ego aside, trusting that if he supported Eisner to flourish in the CEO role, it would come back to him in spades. Eisner describes other instances of give and take from both partners in the book and wrote, “We learned that one plus one adds up to a lot more than two.”
Of course in order to put your own interests temporarily aside in the interests of your partner, you need to have absolute trust in your partner. If there isn’t mutual trust, then there’s no way to navigate a conflict of interests. So a key question is this, “do you trust your partner and does he or she trust you?” If so, and if you share the same vision and values, then you can find creative ways to navigate a conflict of interests. If not, and if trust can’t be restored, it’s a clear indicator that it’s time to get a business divorce.
Category #3: Conflict of Styles
The last major category of partner conflict is a conflict of styles. This conflict occurs when the style of one partner rubs the other the wrong way. Think of it like this — in order to have a good relationship, it’s not enough to trust your partner, you also have to like and respect your partner and they also have to like and respect you.
For instance, if one partner is highly creative and all over the map with their ideas but the other is very focused and methodical, can each one appreciate and respect the gifts of the other? If so, then that’s the sign of a strong partnership. If not, if there’s condemnation and scorn between the partners on their respective styles, then that’s a sign of a bad partnership.
There’s no one right style. A highly effective partnership requires complementary styles, where one partner is naturally stronger where the other is weaker. For example, I once had a partnership with a person who was a lot like me. At first I really enjoyed it. We moved at the same pace, saw things the same way, could do the same things very well, etc. But after a time, the similarities between us became more of a curse than a blessing. We’d fight for control of the vision; we both lacked attention to detail and process; we’d each struggle to do the things we weren’t very good at but that the business needed to get done. It became a real grind and the partnership failed.
After that experience, I began to really appreciate talented people who had a different style than mine – styles that complemented my strengths and interest versus replicating them. In my book Organizational Physics I make the recognition and appreciation of different styles really easy through a simple pattern language called PSIU. If you’d like to better understand your partner’s style, its strengths and stressors, gifts and blind spots, and how to manage your relationship better, you may want to start with the World’s Fastest Personality test here.
The Three A’s: Or, How to Energize Any Partnership
What I find most interesting about the three sources of destructive conflict is that a conflict of interest and styles (assuming there’s alignment of vision and values) ultimately leads to better, more creative decisions. Basically, you don’t want a partner who agrees with you on everything and lets your ego run rampant while you fall prey to your own blind spots. You want a partner who challenges you, who is strong where you are weak, and who helps you to see the complete picture. Then, when you join minds together to solve problems, you come up with better solutions.
In my coaching practice, I’ve found that there are three things every partnership can do to re-energize itself. These three things are simple to do but take concerted energy and effort to practice. However, if you put them into play, you’ll find that your partnership will improve, often dramatically.
People are who they are. The #1 thing you can do to improve your partnership (really, your relationship with anyone) is to accept the person for who they are. That is, quit wishing for them to be different. Nothing is going to change who they are unless and until they want to change themselves.
Is your partner a selfish, myopic, primadonna? Well, congratulations! If you are committed to be in that partnership then you get to practice patience, sacrifice, and compassion. Accept it. You’ll save yourself a lot of time and energy when compared to wishing things were different.
One thing I’ve noticed time and again in my own life and relationships is that if I stop wanting someone to be different than they are and I give them the respect and autonomy to be themselves, they magically seem to change into a new person. If I’m subtly or overtly holding an energy pattern of “You suck. You should be different than you are,” then they seem to exacerbate those negative behaviors that are driving me crazy in the first place.
Acceptance is a subtle, challenging thing. It’s also the surest route to happiness in your life and work and to thriving relationships. Accept others for who and how they are, not how you feel they should be.
Appreciation is the twin of acceptance. What you accept “as is” is what you can appreciate. What do you sincerely appreciate about your partner? Don’t underestimate the power of sincere expressions of gratitude and appreciation for yourself and others. We all want to feel accepted and acknowledged, and that we’re adding value to the lives of others. Take some time right now to think of the things you really appreciate about your partner and go and tell him or her.
I have a friend who is really in despair right now. For the past several months he’s been volunteering for a non-profit with a dwindling following. At first he was really excited to help them because their cause really resonated with his passion for social justice and his creativity. He was so enthralled with their potential that he volunteered all his free time for weeks rebuilding their brand architecture, web site, and social media presence, all at no cost. I saw his work and results and they are awesome.
I just got off the phone with him and I’m sad to say that, rather than being elated about a job well done, he feels devastated about what seems like a huge let-down. Why? Not one member of their board reached out to say, “Thank you. I appreciate how awesome this looks, the effort that must have gone into it, and what a great job you did.” No wonder that non-profit is struggling!
This little anecdote made me realize how many working relationships and partnerships must be on the rocks because no one took the time to sincerely appreciate someone. Man, what wasted potential and opportunity – and all for want of a little acknowledgement and appreciation! Appreciation is a currency that you must spend for it to do any good. Go and spend some now.
The last “A” that can turn a struggling partnership around is accountability. Often there’s partnership conflict because both partners are “in each other’s business,” and not in a good way. When it’s unclear who’s accountable for what business functions and decisions, this leads to confusion and wasted time and effort.
A thriving partnership is a combination of radical transparency and unarguable accountability. Radical transparency means that there are no secrets. There’s a free flow of information across business functions. Unarguable accountability means that one role is authorized to say “yes” and “no” to a decision in each business function.
For instance, if your strength is in marketing and sales and your partner’s strength is in technology and product, then you both need to understand what’s happening in all areas. But when it comes time to make a decision in sales or marketing, you take it. And when it comes to a decision in technology or product, your partner takes it. Do you and your partner (and others) influence those decisions? Absolutely. But the success or failure of the implementation falls to the person with accountability in that function.
In a growing organization, roles change all the time. In my coaching practice with expansion-stage companies around the world, what transforms a once-thriving partnership that has been struggling is the creation of a new structure with unarguable role accountability.
Prior to the new structure, both partners are struggling with questions like, “What is my accountability and what is my partner’s? When do I involve others in a decision and when do I just take action and get it done? How should the performance of different functions be measured? And generally, how do we get out of this cycle of second-guessing one another?”
Once the new structure is created and the partners have mutually accepted their own roles and accountabilities in that structure, all those nagging questions go away. There’s radical transparency fused with unarguable accountability where both partners, and the surrounding team, play to their respective strengths and passions. As my daughter’s preschool class used to say, “good boundaries make good buddies.”
In summary, constructive conflict is highly desirable. After all, “if both of us agree, one of us is useless.” Highly effective partnerships invest in developing and maintaining the partnership. If not, that formerly constructive conflict will turn destructive. You can avoid a turn for the worse in your partnerships by remembering these three things:
- The most destructive type of conflict occurs when there is no longer shared vision and values. If that’s the case, you can only divorce.
- The next, more manageable type of conflict is a conflict of interest. You can successfully navigate a conflict of interest by tapping into the bigger shared vision and values, and with give-and-take and mutual trust between parties.
- The last, and generally the easiest type of conflict to navigate, is a conflict of styles. You can shift this conflict by practicing acceptance and appreciation and by creating unarguable role clarity, where each partner plays to his or her respective strengths and passions in their area of expertise.
Thanks for reading. I hope you find this to be a helpful way to think about your partnerships and how to improve them.
Russell’s topic was “Entrepreneurs Need Coaches” and I thought he had some great insights that every entrepreneur can benefit from. If you click the link you can read his full commentary on the right hand side of the slides. I’ve also captured some of my favorite highlights from his talk below.
Created with Haiku Deck, the free presentation app
“We are all capable of being champions, in making the impact we want to make. Why not us? Practice! Practice! Practice! But how do you “practice” being an entrepreneur. The plane is in the air. For me, I need ground control, someone that can see the big picture when I’m just focused on the next waypoint. For me, it’s been about surrounding myself with the best coaches I can find.
The only lens that we see of the performers is the result of their practice. The problem is that there is not much of an opportunity to see that lens into ourselves and have it reflected back so that we can learn, grow, and make smarter decisions.
The road of entrepreneurship is just lonely. I did not fully appreciate that I was going to lose so many friends, that I would test my marriage and that I would question my sanity. What saved me? The acknowledgement that I am not alone, that what I am dealing with is a well worn path, that the path is the greatest gift, both the ups and downs. How I stayed on the road? By building a team of coaches that are there for me at the aid stations.
One of my greatest gifts has been actually having a 1:1 coach, someone who is committed to helping me navigate the tumultuous waters of entrepreneurship. My coach is guy named Lex Sisney. He has taught me a lot about myself, my skills, my blind spots, and my gifts. I am cheap and I have always dismissed the expense of a coach. It was a big mistake. I know that I have to keep investing in myself and I can’t do it alone, especially when everyone around me expects me to “have it together.” Lex has passed on a number of great learnings, but here are my top 6…
#1: Control the Belief Bubbles Lots of forces try to undermine your confidence as an entrepreneur. It takes great fortitude to withstand the naysayers, the “no’s”. It’s easy as a start-up to be the scapegoat if something doesn’t go well. We can either choose to take on those projected beliefs or resist them and grab hold of perceptions that advance our cause. This is not about rose colored glasses but it is about conviction.
#2: Success = Energy / Entropy Everything for me comes down to a core principal that an organizations is a system, one that has and needs to acquire energy to survive and one that needs to eliminate or mitigate entropy, that which is destroying a structure over time. In a finite system, maximize energy. To grow the system, get more. Entropy comes from many place — your family life, personnel issues, conflicting strategies. For me, it was such a simple model. I know when I have entropy — I feel it in my gut. Own it. Understand it. Take action.
#3: Find Your Genius Zone My genius zone is at the vector of happiness and productivity — how I am, how I want to be, and how others want me to be — If perfectly aligned, I’m in my zone. It is that place where I have a unique ability to perform at a high level and I get energy — I need to spend 80% of my time in my zone. For me, that’s doing deals — I love the art of the deal, the thrill of the hunt, the close and the satisfaction.
#4: Nail It B4 U Scale It A mantra I hear all the time from my coach and a huge challenge for entrepreneurs. Nail it is getting referencable validation that you’ve built a product that a customer is willing to pay for because you have solved a problem. Only then should you scale. Too many companies scale prematurely, haven’t validated the product and then lose control.
#5: Be Aware of the Force: PSIU Be aware of the leadership forces required in your organization at different times. 4 Forces at work are Producer (What), Stabilizer (How), Unifier (Who), and Innovator (Why Not?). Early stage is High innovator. Scaling/growth requires a stabilizer. Weighting your organization too heavily in one area will lead to sub-optimal results.
#6: The Early Customer Be very careful about the early customers you work with. These early customers become your launchpad or your demise. They need to be ready to take a leap with you. If they are not, but you sold them well, they are going to create too much entropy. You need a customer that wants to collaborate with you, not dictate your product for their unique circumstance. Being very aware of where interests align and diverge is critical.”
Great job, Russell. I love working with super-solid, passionate, and smart leaders like you. The best way to learn anything is to teach it. Not only are you helping others by reflecting and sharing your insights, you’re deepening your own awareness and capabilities too. Onward. Upward.
What’s more important… following the “Four Steps” or experiencing the genuine epiphany?
It’s the epiphany, right? Right!
I bring this up because I continue to run across product development teams that are so enamored with following a sound lean startup process that they have lost sight of the ultimate objective: building something magical.
Where’s the magic? The magic happens at the nexus between what’s possible, what you’re capable of, and what the client is willing to pay for:
Your real objective is always to find the epiphany that reveals the magic in the middle…
DO build something magical. You know, like puppies. Puppies bring delight. Plus they’re capable of growing through their own lifecycle stages and one day… giving birth to something new and magical themselves.
So the next time you’re in the heat of a product development process, don’t be a bad dog. Keep your eyes on the prize and find the magic in the middle.
The headlines rolled across my feed like the credits on a blockbuster movie. Something big seemed to be happening but I wasn’t quite sure what to make of it. It seemed that Zappos—the popular business management poster child for happy employees and customers—just announced it was adopting some new-fangled “boss-less,” “hierarchy-less,” “structure-less” management system called Holacracy.
“Hola-what?” I said to myself as I started clicking links. Aimee Groth at Quartz wrote: “Zappos is going holacratic: no job titles, no managers, no hierarchy,” while the Washington Post headlined with, “Zappos Says Goodbye To Bosses,” and the Canadian Broadcast Company led with “Holacracy management style eliminates all bosses, titles.”
I’ve been around long enough to know that what the media was reporting would be far removed from the truth. I also had the inkling that the level of publicity that Zappos generates made it likely that Holacracy would become the next buzzword in management in 2014. Paul Herbert captured it well: “A new word crept into HR’s vernacular last week: holacracy. Better get used to seeing it.”
Each year I attend two personal/professional development workshops for my own education and growth. After trying to make sense of Holacracy through their website materials and recorded webinars, in the spirit of exploration I decided to dive deeper and make Holacracy one of my annual workshops. I signed up for their 1/2-day Taster Workshop followed by a 5-day Practitioner Certification Training in Las Vegas hosted by Holacracy founder Brian Robertson.
A few weeks later I hopped in my car to make the trek from my home in Santa Barbara across the desert to Vegas. The seminar turned out to be located just down the block from the Gold and Silver Pawn Shop of History Channel fame. As I drove by their shop at 1pm on a Friday, there was a line of people down the entire block. “Note to self,” I murmured while rubber necking the crowd, “this is what a reality TV can do for your small business.”
I parked and found my way to the seminar, located on the third floor of a secured building. I buzzed the intercom, walked up three flights of stairs, and entered the room where I’d spend the next week. I noted there were about 25+/- people gathered around circular conference tables and a standard lecture area at the front. I found a spot, put down my stuff and, with a mixture of curiosity and anticipation, made small talk with my fellow attendees, a surprising number of whom were French nationals, while waiting for the seminar to start.
Little did I know then what a struggle that entire week — and even several weeks after digesting my experience — would be for me. What did I struggle with? First, I found it really hard to try to unlearn what I’ve spent decades mastering and greet Holacracy with a Zen-like beginner’s mind. What could they teach me, really? Is the founder just using different terminology or is there a real difference in philosophy? And how do I maintain an anchor point in the real world and not get swept down a rabbit’s hole of theory?
The other struggle was that Holacracy is not an easy practice to learn. In fact, the nuances are such a challenge to master that a handful of the participants in my course were on their third or fourth attempt at the same training. At one-week long and $4K a pop, that’s quite an investment. As one of my fellow participants poignantly put it, “Holacracy is like a religion for dedicated monks to practice,” adding, “I wonder what the layman’s version will turn out to be?” I think this is an excellent question that time will reveal.
I’ve been home for several weeks now and I’ve had sufficient time to reflect on my total experience. In retrospect, there are several things I really admire about Holacracy. There are also key elements that, if I was an entrepreneur or CEO considering deploying Holacracy in my organization, I would supplement around the standard Holacracy script. While you don’t need Holacracy to create sustainable business transformation, I believe that these adaptations are necessary to get the most out of your investment and increase your probability of success should you choose to deploy it as a management framework.
What Is Holacracy, Exactly?
Before I explain what Holacracy is, let me first clear up some of the more blatant misconceptions in the media. Holacracy does indeed have de facto bosses or managers, albeit ones with circumscribed power. These roles are called “lead links” and they set the priorities and control resources in an organization. Holacracy also does have an explicitly defined hierarchical structure. It’s not one big kumbaya free-for-all. And when it comes to titles, well, Holacracy can either support or not support the use of titles. The key point here (with which I agree wholeheartedly) is that individual roles in an organization can and should shift over time and, as a result, job titles more often cause harm than good.
In my book Organizational Physics, I explain that all business and management theory — past, present, and future — can be reduced to some key driving principles. That is, while supposedly “new” theories and strategies come and go depending on the cultural zeitgeist, they’re all trying to provide solutions to the same core underlying problems. In some sense, these countless methods can be boiled down to a handful of approaches
If you’re already familiar with the principles of Organizational Physics, you can easily understand this explanation: Holacracy is an attempt to increase system integration and decrease system entropy by aligning Structure and Process (the bottom left and right sides of the Execution Diamond shown at the bottom of the map below) by applying a very high Stabilizing force (the S in PSIU):
If you’re not yet familiar with Organizational Physics, this definition probably won’t help you much, but the rest of this article will. And though of course I’m partial, I firmly believe that if you read my book Organizational Physics: The Science of Growing a Business, you’ll find it much easier to put the barrage of “new” trends in perspective.
In any case, in order to understand Holacracy it’s helpful to realize that you’re already living and working in a system that uses many of the core Holacratic principles. It’s the United States of America. Wait… what??? Yep, this cutting-edge management theory is actually built on some of the core principles of our government:
- The U.S. government has a constitution, and so does Holacracy. (In fact, one of the first tasks of a CEO when adopting Holacracy is to cede his or her authority to a Holacratic-based constitution).
- The U.S. government has a set of explicit laws or rules that attempt to govern individual and collective behavior, as well as a detailed process to change an existing “law” or create a new one, and so does Holacracy – very detailed.
- The U.S. government relies on a nested hierarchical structure of governing bodies (i.e., The Office of the President, Congress, the Supreme Court, the Military, States, Counties, Cities, City services, etc.) that act mostly autonomously within their own spheres. And so does Holacracy.
- We, the people, elect representatives to perform defined roles in our local, state, and federal governments. The members of a Holacracy-based organization also elect individuals to perform defined roles at different hierarchical levels or “circles” of the organization.
Holacracy’s approach to managing an organization is also very similar in ambition to the founding vision of the U.S government. The founding fathers tried to create a structure, processes, and checks and balances so that the government wouldn’t meddle in the affairs of law-abiding citizens but would instead allow people the autonomy to pursue their individual and collective interests.
For example, when you got up this morning, did you call President Obama and ask him for permission to buy groceries? Or did you call the mayor of your town and ask for the right to binge-watch House of Cards? Nope. You just did what was in your own interest, while staying within the system of rules and processes that have been adopted by your local, state, and federal government.
So Holacracy asks this question: If you don’t need a ruler to govern your financial and social life, then wouldn’t it be superior to design a business around a set of rules so there’s no need for rulers? What if an organization acted more like a modern city and less like a top-down feudal monarchy? As Holacracy founder Brian Robertson puts it, “Order doesn’t require rulers. And if you give one individual monarch-like authority, then it’s only a matter of time before they make a royal screw up.”
It may seem counterintuitive to compare the core operating principles of a supposed next-generation management theory to the operating principles of the U.S government. After all, doesn’t the U.S. government of recent decades seem to be more incompetent, and sometimes even nefarious, than innovative?
Look at it this way. We can all agree that the design of the U.S. government has the potential to create a competent and wise system of governance as well as a happy, well-educated, prosperous, and productive population of citizens. But a lot depends on its lifecycle stage (the U.S. is aging), its sense of shared vision and values (it’s fragmented), its resources (it’s broke), and most importantly the quality and caliber of the leaders who perform roles in the system over time (The U.S. now has an entire party of leaders like this guy). So we know that things can and do go wrong despite our best design intentions.
The same is true for Holacracy. It has the potential to be transformative but a lot depends on the organizational lifecycle stage of the business, the embodiment of shared vision and values, the organization’s resources and capabilities, and the quality and caliber of the people who inhabit the roles in the organization. In theory, Holacracy is a compelling and very thorough framework for managing structure and process in an organization. In practice, a lot can go wrong, just as with any framework.
To sum this all up, Holacracy is an attempt to bring a rigid but evolving set of rules, structure, and processes to how an organization is managed so that individuals have more clarity and autonomy to do their work (what Holacracy calls “energizing their roles”) in pursuit of the organizational purpose, without undue meddling from those above or below them in the organizational hierarchy.
How Does Holacracy Work?
To accomplish its purpose, Holacracy focuses on five key elements, what it calls the Holacracy Operating System:
- The Holacracy Constitution
- Organizational Structure
- Governance Meeting Process
- Operations Meeting Process
- Glass Frog Software
Holacracy works by first having the CEO cede all legal authority to a new organizational Constitution. Holacracy provides a blueprint for the Constitution that the organization can modify for its particular needs and situation. This is where I warn you that you should not try to understand Holacracy by reading the Constitution. That would be like trying to learn a very complicated board game by reading the rule book. Instead, Holacracy encourages you to attend their trainings to learn how to “play the game” and then refer to the rule book when you have questions.
The organizational structure in Holacracy is constantly evolving. It’s created and reinforced through a series of special meetings called the Governance Process. The key organizing element of a Holacracy structure is a circle that is made up of one or more organizational roles. The highest-level circle is the General Company Circle (GCC), which consists of all of the main roles or functions being performed in the company. For instance, an initial GCC might consist of roles from Sales, Operations, Finance, Accounting, Engineering, Marketing, and Product Management, as well as the former CEO role. From the GCC, sub-circles are created for each role. For example, Sales is part of the GCC but also has its own Sales Circle.
Governance is where the organizational structure is created and evolved. Here the intent is to distribute authority and create organizational clarity about which roles are accountable for what. Holacracy doesn’t dictate what the structure should look like. It only stipulates how a role should be defined in the structure and how the members of a circle can adapt or change the roles within that circle to better serve the organization’s purpose. Most of the practitioner training is spent learning to navigate the nuances of the Governance meeting process. It starts out easy enough but the more you scratch the surface, the deeper it goes. If Holacracy was a board game, this is the stage when the players would get out the rule book (in this case the Constitution) and start interpreting and debating the rules. (This reminds me of Bismarck’s comment, “If you like laws and sausages, you should never watch either one being made”).
Operations is how the day-to-day work of an organization is managed. In Holacracy, the focus of Operations meetings is to synchronize information flow and quickly triage what it calls “tensions.” A tension is a perceived gap between what is and what could be. Any member of the circle can bring a tension to the table and have it addressed. What’s peculiar to the Holacracy approach is that the circle doesn’t try to find the best way solve an issue, nor does it attempt to do so holistically by gathering data on all the issues related to that tension. It simply tries to resolve that one particular tension, in isolation, for that one role in the circle. This is done through a series of rigid steps that the circle must follow before it can reach a decision. In other words, it follows a process focusing on micro-level issue after micro-level issue, until, theoretically, all issues are resolved…ad infinitum.
Glass Frog is like a corporate wiki designed specifically for Holacracy. Glass Frog contains the organization’s constitution, a description of all roles, and the output of all governance and operations meetings. A Holacracy purist would argue that Glass Frog is not part of its core operating system and that a company could deploy Holacracy without it. I disagree. There is an overwhelming level of detail within Holacracy. There’s no way to track and manage it without a good system in place to do so, especially in a distributed environment.
Now that you’ve gotten the basics, the main question you should be asking is, “So what?” Or, “What is the real problem that Holacracy is trying to solve?” It’s the question I’m most commonly asked about Holacracy, and probably the best one of all. So let’s address it.
What is the Real Problem Holacracy is Trying to Solve?
In Holacracy webinars and trainings, the first thing participants learn is what’s wrong with the traditional, top-down org chart. Brian Robertson will put up this image below and ask the class, “What are some of the challenges created by the traditional, top-down organizational hierarchy?”
The class or group will offer up answers like, “painful meetings,” “difficulty to change,” “overwhelm,” “unclear objectives,” “misalignment,” “lack of engagement,” “rigidity,” “politics,” “analysis paralysis,” “bureaucracy,” “fear,” “communication issues,” and so on. All common issues that people are faced with in poorly-run organizations.
Once the top-down hierarchy is defined as the core problem of most organizations today, the Holacracy trainer will propose that rather than “bugs,” these failings are actually “features” of top-down organizational design. That is, no matter how much restructuring, leadership training, agile development methodologies, or other tactics we deploy, they are ultimately doomed to fail because of the inherent problems of the surrounding structure.
Holacracy claims to design out these “features” by changing the concept of organizational structure from one that is autocratic and top-down to one that is decentralized, organic, and bottom-up. Ultimately, the vision of Holacracy is to allow the emergent, creative properties of the individuals playing roles within an organization to self-organize and flourish, much like human cells are organized into organs, which in turn are organized into bodies and minds, which in turn go forth into the world to express their purpose as humans.
If all this sounds very theoretical and far-fetched to you, especially in the midst of the chaos and battle of growing your own business, I understand. Still, several aspects of the Holacratic approach are impressive…
What I Admire About Holacracy
There are several things that I admire about Holacracy. There is a clear sense of “we’re changing the world” that emanates from Holacracy insiders. Brian Robertson is a very smart, charismatic, and articulate founder, even though he discounts his own role in the formation, evolution, and operation of Holacracy and attributes these to Holacracy itself. (On this last point, I strongly disagree. All founders are mission-critical to the success and growth of their organizations into and through Scale It mode).
When I boil it all down, here are three of my favorite things about Holacracy:
A Relentless Focus on Roles vs. People
Holacracy does an outstanding job of distinguishing and reinforcing the difference between roles and people, which is a core principle of any good structure. In fact, Holacracy does NOT manage people. It governs roles. Every role has a clearly defined purpose and accountabilities that are maintained and defined in its GlassFrog software.
Naturally, one person could play any number of different roles in the organization. Companies that deploy Holacracy are constantly checking and updating GlassFrog to see what a role’s purpose is and what it is accountable for. If there seems to be a breakdown in how a circle is being run, that circle can call a Governance meeting and change or add a new role, thus changing the structure of the organization on the fly.
Separation of Working In vs. On the Business
Holacracy does a phenomenal job of distinguishing between tactical/triage issues that are handled in Operations meetings and structural/role issues that are handled in separate Governance meetings. This is also a core principle of any good management process. It’s crucial to strike a balance between the demands of today and the needs of tomorrow, and a sound process will enforce a regular rhythm of long-range development and short-range execution. Holacracy accomplishes this by not allowing a circle to discuss Operational issues in Governance meetings and vice versa. The result is that there’s a clear and regular focus between working in the business and working on the business. Awesome.
An Operating System vs. Apps
Holacracy envisions itself like the Apple iOS platform. Apple builds and maintains the iOS platform while millions of independent developers build individual apps that run on that platform. Holacracy clearly distinguishes itself as the core operating system for Structure and Process ONLY. It does not try to tackle “app development” in the areas of strategy, people or cultural development, hiring, finance management, marketing, budgeting, sales tactics, etc. Instead, it encourages others to develop apps that are designed to run on the Holacratic platform.
Note that this separation of “OS” and “Apps” has caused some confusion in the marketplace. For instance, a guru like Steve Denning will look for a relentless focus on delighting customers within the OS and he won’t like it unless it has that, or until he understands the purpose of Holacracy is to be applicable to any organizational purpose.
On the other hand, I’ll look for a relentless focus on lifecycle management in the OS, believing that the operating system must manage differently at different lifecycle stages. To me, that’s not an App; it’s part of the OS. A culture guru like Robbe Richman, who was also at my training, will look for alignment of vision and values and organizational buy-in in the OS itself and not consider that an App either, etc. So there will be differences of opinion on where the OS should start and end. However, I appreciate the discipline Holacracy has embraced by clearly sticking to what it defines as the OS: structure and process.
Should You Deploy Holacracy?
When it comes to making a decision whether to deploy Holacracy in your organization, the real question you should be asking is this: “Where is my business in its lifecycle development and what is the management operating system I need for its next stage of evolution?” The solution you choose will depend a lot on your personal philosophies as well as the cost to integrate, maintain, and evolve the new system.
I indicated earlier that Holacracy is not an easy solution to deploy. There were parts of the training I really enjoyed but much of it I found exhausting, unnatural, and frustrating to practice. I am not alone. I’m told by Holacracy insiders that the norm is for a new circle to experience serious levels frustration, condemnation, and aggravation when deploying Holacracy. Then, almost by magic, around the three-month mark something shifts: Holacracy begins to feels natural to circle members and starts to work as designed.
Personally, I like systems that feel natural and intuitive, so I spent much of the training trying to think through how to adopt the “good” parts of Holacracy and design out the “bad” parts. My conclusion? A half deployment will backfire. Each element of Holacracy feeds into and supports the rest. It needs to be a full commitment from the Constitution on down. It’s all entwined and you can’t make up a “light” version and expect the organization to respond differently than it already is. So if you’re going to deploy it, prepare for months of push-back, resistance, and aggravation before you find the breakthroughs you’re seeking.
Upon reflection, I think this difficulty in deploying Holacracy may be one of its strengths. Its full commitment “forces” the organization, from the CEO on down, to adopt and practice decentralized management and self-organization. That is, while you could likely get equivalent organizational benefits by running a Management By Objectives (MBO) system or Objectives and Key Results (OKRs) or the latest flavor of MBO, what you wouldn’t get from these systems is the constant reinforcement of the new social structures that Holacracy is designed to create.
Naturally, you’ll want to test out Holacracy in the senior level GCC circle before going company-wide. If you get this far, stick with it. I’m confident that, with a full commitment, Holacracy can help your organization rise to the next level, just as any good approach would when backed by a full commitment. The adaptions that I’m suggesting below still work within a full Holacracy deployment – meaning, that you are still deploying the complete Holacracy implementation for process and structure, without sacrificing some important principles in leadership, long-range planning, and organizational design. I believe that these adaptations will allow you to get the most out of a Holacracy implementation.
Adaptation #1: Don’t Abdicate the Master Structural Design
My experience growing businesses and coaching dozens of other successful growth businesses is that structure is about 85% of the game. That is, get your structural design right and you can create massive organizational transformation. Get it wrong and you don’t have a chance.
Holacracy allows for an organizational structure to be designed from the bottom up. Not only does this “organic” approach take a long time and is prone to egregious errors; it also allows for chaos where you need order and order where you need chaos.
For example, every city planner and architect knows that there are principles to good structural design. If you were to allow individuals to design whatever style of home or building they wanted, wherever they wanted it, it wouldn’t take long until you had fracking wells next to schools and a shanty towns next to city hall. There’s a great example of a leader, the Mayor of Oklahoma City Mick Cornett, who understands this and took charge of a poor city experience with haphazard future direction and redesigned it for prosperity, health, and success. Well-designed organizational structures, just like well-designed cities, are a boon to everyone who inhabits them.
I think that Holacracy adopted its bottom-up approach to structure because it confuses what are really problems with poor strategy, misaligned vision and values, ass-backwards decision-making processes, and poor leadership with problems with structure.
If you go back to the Holacracy critique of the top-down hierarchical “structure” (in which they really mean to say “org chart”), you’ll see that very few items actually relate to structure and none of them to structure alone: painful meetings (accountabilities and process), difficulty to change (accountabilities and process), overwhelm (process and strategy), unclear objectives (process and strategy), misalignment (strategy, vision and values, structure and process), lack of engagement (process and people), rigidity (strategy, structure, and process), politics (process and people), analysis paralysis (process), bureaucracy (process), fear (strategy, process, people), and communication issues (process).
A sound management system will address all of the issues raised by Holacracy and leverage, rather than discard, the principles of sound organizational design. Think about it. The purpose behind a top-down organizational design is not to command and control or to dictate, as its harshest critics would claim. It’s to clarify accountabilities, thus decentralizing authority, and allocate resources. It’s about getting the right style of people in the right roles with the right metrics and providing them the autonomy to flourish. It’s also about allowing new business units to innovate because of — not in spite of — a sound overall design.
So even if you do choose to implement Holacracy, I’d make damn sure that you have the right initial structure in place and that, as the leader, you keep an eye on it to make sure it’s not going katty-whampus and headed off a cliff. You need a structure that supports the strategy and current lifecycle stage, and clearly identifies the metrics, key performance indicators, and style of leader most suitable for each role. This is in addition to the purpose and accountabilities of each role that Holacracy will definitely help you to define.
One way to conceptualize this is for you, the entrepreneur or CEO (GCC Lead Link in Holacracy terms) to maintain control of the overall strategy as well as the master structure to support the execution of that strategy. You could accomplish this as an accountability within the GCC or even create a separate Strategy and Structure circle with those specific accountabilities. This approach would allow for self-organizing circles but within the master design. It’s kind of like being a master planner for a community garden. You lay out the plots (the functions) in the optimal way to take advantage of the terrain and climate and invite the community members to plant whatever they want, while still being accountable to produce results. JUST DON’T LET GO OF THE MASTER DESIGN OR YOU’LL SOON HAVE A PLOT OF CRAP INSTEAD OF A VIBRANT ECOSYSTEM.
If you’d like to understand the basics of designing a structure from the Organizational Physics perspective, read The 5 Classic Mistakes in Organizational Structure: Or, How to Design Your Organization the Right Way.
Adaptation #2: Don’t Confuse the Tensions for the Cause
Holacracy Governance and Operations meetings have a relentless focus on solving tensions held by any role in the circle. So if you were the VP of Sales and had a tension with how Marketing was allocating its resource dollars to lead generation, you could bring that tension to the circle and have it processed.
In order to process the tension, the Holacracy trained facilitator would guide the circle through a series of prescribed steps to resolve the issue in such a way that your tension is satisfied (hopefully) but without harming the autonomy of any other role in the circle. How rigid are these steps? Very. There’s no discussion allowed of issues that might be related. There is only a focus on processing one tension at a time for the role that brought it to the circle. There is a set of rules about who speaks when and what is allowed or not allowed as a valid objection to any proposal. It’s a lot like practicing law in a courtroom.
Processing tensions is important. There’s always a gap between what is and what could be. However, the way the decision-making process is structured in Holacracy actually reverses what’s required for rapid execution. As I describe in Organizational Physics, organizational mass (resistance to change) is a real thing. In order to execute fast, you need a process that slows down enough up front (in the decision-making phase) to gather a diversity of opinions and sufficient data so that you make a good decision with full commitment. Then you can go fast on implementation. Holacracy reverses this model. It focuses on rapid decision making at the cost of rapid implementation. Exactly the opposite of what, in my opinion, a well-run decision making process should do.
To clarify, I’m not condoning pushing off making decisions. I’m also not condoning a poor decision-making process that allows for a free-for-all. The structure and process of meetings is critical to good management. But the right structure and process will support making sound, well-thought decisions that afterward get implemented quickly rather than rushed, half-baked decisions that fail on implementation. (If you’d like to learn more about the basics of a good-decision making process, read The Most Important Process in Your Business: Or, How to Make Good Decisions and Implement Them Fast.
In many later-stage, bureaucratic-heavy institutions like large businesses, governments, schools, and non-profits, I think that Holacracy could be a productive change. In these settings, there’s already a bias towards not making a decision, following the political winds, and covering your ass in the face of a stolid bureaucracy.
In short, these settings already have a high-Stabilizing force at work within them. Holacracy will match the Stabilizing force within these institutions well and, if executed correctly, it will shift the culture towards decision making, accountability, and action — any action. Because the risk of making a bad decision is low in these settings, versus the risk of not making a decision at all, it could be a helpful management practice to adopt.
However, in most expansion-stage companies (the area where I specialize), there’s actually a bias in the other direction. Here, companies usually confuse making rapid decisions with making rapid progress. Rather than speeding through to a one-off decision, they need to cultivate the muscle to find the underlying cause of every challenge. In short, they need to slow down in order to go fast. So be mindful of this if you adopt Holacracy. You’ll need to supplement it with long-range strategic development practices so that once or twice a year you pattern up all the tensions, identify their underlying causation, and put in place efforts to solve them at the root level.
Adaptation #3: You Can Renounce Your Authority But Don’t Cede Your Leadership
If you’re going to truly adopt Holacracy then you, as the CEO, will be asked to sign over your authority to a Holacratic-based Constitution, much as the President of the United States takes an oath to defend the U.S. Constitution.
Is this ceremony? Yes. Is it necessary? If you’re going to make a full commitment, then yes. But even if you do choose to sign over authority, make sure that you’re not also forgoing your own authentic leadership.
Let me put it this way. According to Holacracy, if the CEO just cedes authority to the Constitution up front, then the Holacractic system will take over and the organization will transform. It’s not a requirement for an organization to have great leadership, it’s only a requirement that they adopt Holacracy. Then, by virtue of its “exquisite design,” the organization will begin to transform.
This principle reminds me of Communism, which reads well in theory but utterly fails in implementation. The fact is that bad leaders make bad systems. A poor leader will attempt to execute on the wrong strategy, will allow misaligned vision and values, will disregard the principles of structure and process, or will place the wrong style of people in the right roles. If this is the case, then that business is going to fail anyway and Holacracy, or any other management system, is not going to prevent disaster.
On the other hand, a great leader builds sustainable systems. He or she will take what they’ve got and make any system work well, Holacratic or not. If you look at the most successful businesses in history, the ones that assume almost transcendent, iconic status — IBM, Apple, Ford, Disney, Walmart, Standard Oil, HP, Intel, Coca-Cola, Microsoft, Google, Amazon, Virgin, etc. — you’ll see that while each founder had his own unique approach and management methodology, each also designed their business to be symbiotic with his or her own innate genius.
These visionary founding leaders did what only they could do in the early stages of their business growth and beyond. They consciously designed their businesses around their own innate ability to innovate and made conscious design choices to offset their weaknesses. They influenced the most important things without getting bogged down in the details. They delegated, but with visibility and control. They surrounded themselves with complementary teams and structures. They ensured that good decisions got made and implemented quickly time and again, not by micro-managing details but through systems thinking. These same principles hold true for you.
Can you use Holacracy to create this kind of sustainable business growth over time? Absolutely. Do you need Holacracy to do so? Absolutely not. If you look again to the Organizational Physics map, you’ll see that there are many methods to manage your business, and they all come back to the basics. Set the right innovation strategy. Define the vision and defend the right values. Craft and realign the structure to support the evolving strategy. Use this structure to clearly distribute authority and accountability. Follow a sound decision-making process. Design for self-organizing teams with the freedom and autonomy to execute and backed with clear metrics. Get the right people in the right roles. Work on the long range and execute on the short range. Know the forces at play. You know — do the basics right.
Time will tell the fate of Holacracy in the changing winds of the marketplace. However that goes, I want to give kudos to the entire Holacracy team for their commitment to a big vision and for pushing the envelope. They’ve clearly chosen to do what they feel is right versus what is easy or expedient. As anthropologist Margaret Mead said, “Never doubt that a small group of thoughtful, committed people can change the world; indeed, it’s the only thing that ever has.” I look forward to learning more as Holacracy continues to develop.
The NFL is the most popular professional sports league in the United States. In fact, it’s bigger than the next three largest professional sports leagues combined. But when it comes to the field of talent management, what makes the NFL such an interesting case study for businesses of all types and sizes is not its popularity but its parity.
Each season, all 32 NFL teams begin with the same basic chance to be competitive. All teams have a roughly equal amount of money to spend and the same numbers of players to a roster, and the worst teams from last season get higher draft picks and an easier schedule this season. If a team gets “harmed” during free agency, the league will assign it compensatory draft picks to help it stay even.
Parity in the NFL has worked. On any given Sunday, one team can beat another. However, a few teams — despite parity — have been able to win consistently over time. In fact, over the past 13 NFL seasons from 1999 to 2012, just 6 teams out of 32 have achieved a 60% or better winning percentage: the Patriots, Colts, Steelers, Packers, Ravens, and Eagles, with only one team achieving a 70% winning percentage: the Patriots.
Clearly, if everything else is held nearly equal, then these winning teams have cultivated an edge in how they go about managing their business and developing their front office and on-field staff. Is there something you can learn from these consistent winners? And if there is something you can take away, can you actually apply it in growing your own business — a business that probably has just a fraction of the money and assessment resources that an NFL team can throw at the hiring problem? And can you teach it to your own team?
These are smart questions to ask. Even if you don’t follow the NFL or understand the rules of the game, anyone can appreciate the dedication it takes to thrive over time in a highly competitive setting. True, the NFL has its problems and its detractors. It’s violent beyond belief. It’s hypocritical when it comes to player safety. Its locker rooms and rosters are filled with some great men and some giant a@*!#$. That said, the NFL absolutely provides some critical insights for how to think about and approach the hiring process for every business, not just a professional sports team.
While you may not have considered the similarities between your business and an NFL team before, there are many. First, you too are faced with intense competition for great talent. Second, you can’t just throw money at the problem. You have finite time, energy, and resources to make great hires and avoid bad ones. Third, when an athlete is drafted and signed to a professional contract, they’re effectively being hired to do a job just as you hire an employee or independent contractor to do a job. So while your “draft picks” don’t get interviewed on ESPN, the fundamentals of getting the right talent at the right price are the same. Fourth, and most important, you’re not just looking to hire individual talent; you’re looking to build a winning team.
How Should You Solve the Hiring Puzzle?
Just as the NFL pours millions of dollars into how it assesses and hires potential draft picks, businesses of all types and sizes do the same when it comes to hiring. In fact, according to a recent IDC report, businesses actually spend over $85B each year trying to make the hiring process more efficient and effective. They invest in recruiting services, comparative profiling, psychometric tests, research, training, and other ways to try to get an edge in hiring and make it a little less painful.
Despite these massive investments, hiring is still a messy, expensive, convoluted process. For instance, in a recent Career Builder Survey of over 6,000 hiring managers from the world’s ten largest economies, more than half report making a bad hire that caused significant harm to revenues, productivity, client relations, or morale costing more than $50,000 per bad hire.
If you’ve been in the business world for more than a year, then you don’t need these stats to tell you how painful it is to make a bad hire and how challenging it is to get the hiring process right. If you can solve the hiring puzzle, then you can transform your business. If you can’t, and you make a string of bad hires, then you’re soon going to be out of business.
So what can you learn from the NFL winningest teams that hasn’t yet been captured by one of these tools, services, or recruiting firms? Why do businesses pour so many resources into it and still come up short? And can the hiring process ever be truly improved or will it always be an expensive crapshoot?
If you were to ask today’s HR experts on how to improve the hiring process, they’ll tell you that answer lies in having more technology and more data. For instance, there’s a fast-growing startup where I live in Santa Barbara, California, that helps companies scan a candidate’s Facebook page so they can know what that person is really like at home and avoid hiring some whacko. It’s all perfectly legal and EEOC compliant.
There’s yet another company nearby that will do a personality profile on your top performers and then compare them to new job applicants. Supposedly, this approach will weed out the riff raff to help find candidates who mirror the thought patterns and behavior of your existing “A Players.” It’s too bad that this company’s clients haven’t yet understood that high performers actually work best in teams when they are surrounded by complementary, not similar styles of colleagues.
Or perhaps you’ll hear that poor hiring is actually a supply side problem that occurs from a lack of adequately trained candidates coming out of colleges, universities, and trade schools. The solution therefore lies in how we prepare young people to enter the workforce and older people to transition their skills. If you believe this, then I know a few politicians who’d love to speak with you. Bring your checkbook.
The fact is that technology and training can play a part in improving the hiring process. But most NFL teams have near-equal technical capabilities and near-equal training regimes. Sure, every few seasons one team might develop an innovative technical or training edge, but that edge is quickly wiped out when other teams copy it. (The NFL is notorious as a copy-cat league. If something seems to be working, teams will quickly adopt it for their own use).
And if you were to ask the common fan why some teams perform consistently better than the rest, they’d tell you it’s because those teams have a great coach and a great quarterback. “Why have the Patriots won 70%? Easy. They have Belichick and Brady. ‘Nough said.”
Is that true? There’s some truth to it. Would the 2013 Broncos be who they are without Peyton Manning? Nope. Special players like Manning are hard to find and if you get one, you can build a dynasty around them while they last.
But it’s just as true that stars are developed, not born. We’re all shaped by the systems we inhabit and the NFL is rife with stars who were once rejects on their former teams but were fortunate enough to sign on with another team where their style, values, and talents were a better match – and that’s how they became stars (see Wes Welker or James Harrison).
It’s also true that great players get hurt (just like when a top performer at your company quits unexpectedly or no longer performs like they used to) and when this happens, the teams that don’t consistently win at a high level tend to implode. Those that do win consistently, however, tend to keep on winning, even without those former stars. New players enter the scene but the victories keep piling up.
Finally, two objections I often hear from executives when I tell them that the NFL can teach them about hiring is this: “That’s not applicable to us,” one struggling startup founder told me recently. “The NFL can try out players before hiring them. I wish we could do that. If we could try out staff members before hiring them, we’d do a better job too.” I’ve also heard, “The NFL has tons of standardized data to work with and a common hiring pool to compare players through the draft. If we had that level of standardized data, we’d be world-class at hiring too.”
It’s irksome to me that I hear these objections because executives like these just aren’t getting it. Yes, the NFL can try players out and then decide to keep them or cut them. So what? Your business can do the same. In fact, you should always try to structure your new hire arrangements so that you can date before getting married. It’s called a trial period and it’s easy to do and perfectly appropriate.
And yes, the NFL has lots of standardized data to work with. Team management knows the height, weight, 40-yard dash time, Wonderlic score (an “intelligence” test), and playing history of every prospective and future player.
While most of corporate America and Silicon Valley startups are driving hard to get more and more standardized and relevant information through big data, social gaming, and assessments on potential recruits, again, so what? The consistently winning teams use the same data set and have the same opportunities in the draft (or to recruit outside the draft using free agency) as every other team. Yet they consistently outperform their peers. How?
What the Best NFL Teams Do Differently
Clearly, there’s something beyond technology, data, training, individual talent, and luck that the winningest NFL teams do differently than the rest over time. So what is it?
The answer is both simple and profound: Consistently great teams don’t scout and hire for talent. They scout and hire for talent that is a supreme fit for their system. They always think about building a team with a strong collective identity at a fair price instead of just collecting individual talent at any price.
In addition, great teams tend to develop through the draft rather than relying heavily on expensive free agents. They also have a system for recognizing when to unload an existing player to another team and they manage their payroll (their biggest expense) in such a way so that the organization is healthy in the short and long run.
You too need to hire and develop top-notch managers and players. You too are under intense pressure and competition. And unlike the Yankees or Manchester United, you can’t just throw money at the problem. You’ve got to play “moneyball” instead and find the right mix of skills for your system and at a good value to market rates. You need to build a team, not a collection of mercenaries.
Put another way, the hiring process can be improved in your business by modeling what the NFL’s best teams do – but this doesn’t come from new technology, more training, or getting lucky. It starts with rethinking how you think about the hiring process itself. Unless you and your team have the right paradigm to think about hiring in the first place, then no matter what tools, resources, and processes you deploy, your hiring process is still going to be flawed. Until you think differently, you can’t act differently.
Today, you may know Bill Belichick as the head coach and de facto GM of the New England Patriots and one of the most successful coaches of all time. But 25 years ago, he got his first head coaching start with the lowly Cleveland Browns.
According to the book War Room: The Legacy of Bill Belichick and the Art of Building the Perfect Team, when Belichick took the helm at Cleveland, he was already crystal clear on the type of team he wanted to build — a big, strong, fast team that was capable of playing in any weather, in loud and hostile Rust Belt stadiums, and was smart enough to adjust their schemes each week to take away the biggest strengths of their opponents.
But during his first days on the job he quickly noticed that the Browns’ pro and college scouts, coaches, and administrative staff were not thinking about the hiring process in a smart and unified way. Because they weren’t thinking about it in the right way, they weren’t going about it in the right way, and they certainly wouldn’t be able to create a sustained competitive edge until they changed their thinking:
“[The Browns staff] were not speaking the same language when it came to personnel. There was one grading scale for evaluating the pros and an entirely different one for analyzing collegians. Even worse, in his opinion, there was no organizational identity. After all the scouting, who were the Browns trying to be?
It seemed to him that there wasn’t a good systematic answer to the question, so that became one of his missions: Build one player-evaluation system, for pro and college players alike, that always provided an instant snapshot of who a player was and whether he was capable of helping the Cleveland Browns. When the system was perfected, the coach imagined, everyone in the organization would be able to glance at a couple of numbers and letters on a scouting report and know exactly what type of player was being discussed.”
Belichick was never able to complete such a system for the Browns. A few years after taking the job in Cleveland, the team was moved to Baltimore and Belichick was fired. But the vision was set and years later, when Belichick became the head coach of the New England Patriots, he was able to put such a talent evaluation system in place and, with a few notable exceptions (no Aaron Hernandez jokes here, please), the results have been outstanding.
What Belichick recognized when he started with the Cleveland Browns is that hiring and development of both front office and on-field staff was critical to the organization’s success, but the organization lacked the framework to transform it into a competitive edge to wield against the competition.
It took Belichick years to refine his talent evaluation system. Once he got it going and cascaded it throughout the Patriot scouting teams and front office, however, it transformed a haphazard process into one that is much more accurate, scalable, and powerful.
I’m not saying the Patriots and other top performing teams have been perfect in their drafting and team development (they haven’t) but that the way they think about hiring and the approach they use gives them a slight edge over the other teams. And in a highly competitive setting, a slight edge makes a significant difference.
To drive this point home, I’d like you to reflect for a moment about how exactly you think about the hiring process in your business today. Are you searching for a particular personality? A salary range? Past experience? Education or credentials? A personal referral? Commitment to a vision? Job skills? Upside potential? Cultural fit? Avoiding a future liability? All of the above? And if you are clear on the above, how do you go about determining it? What tradeoffs are you willing to accept and why? Finally, how do you — and your team — actually know it when you see it in a way that everyone can agree on?
Chances are that you don’t have a unified answer to these questions nor a systematic way to find answers. And if you should happen to have an answer personally, does the rest of your company’s hiring team know the answer too? Probably not. In order to create a unified and systematic approach to hiring, one that guides you and your team to find the right candidates and avoid the wrong ones, you need a framework to follow.
The New Hire Draft Board: The Ultimate Talent Management Framework
Every season the NFL has a draft for new players. There’s a lot of organizational focus and media attention on the draft. It gets NFL fans in a tizzy of excitement too. “Who will our team draft this year?” “Will they botch it up again?” “Is there hope for the Browns finally?”
Before and during the draft, each team creates its own version of a draft board. The draft board helps team management to think about where they believe the relative value of a prospective player is compared to the “market demand” and the team’s needs.
If you’ve ever heard an NFL GM tell the media, “we worked our draft board perfectly this year,” what he’s really saying is that he believes the team got the players it wanted for the price they wanted to pay.
Even though your organization doesn’t hire employees all at once during a certain time of year like the draft or recruit employees in a hierarchy of rounds, but rather by pressing organizational need, you still need your own version of a “draft board” that allows you to think clearly and accurately about who to hire and why (and who not to hire and why) and where the value of a particular candidate lies.
If you had such a system, then you could place any prospective new hire on the draft board and see if they’re a fit or not, what the trade offs are for each candidate, and how candidates compare to existing staff and even glean insights into how to best recruit, manage, and develop them. In a word, the draft board brings clarity.
The right draft board will not only apply to prospective new hires but also to existing staff. That is, if you were to place an existing staff member on the draft board, it would tell you if they need a raise, if they’re suitable for a new position or are ready to be promoted into a leadership position, or if it’s time to let them go and find someone new.
Below is just such a draft board. It’s based on the team leadership framework created by legendary San Francisco 49ers football coach and GM Bill Walsh who was the architect of the 49ers football dynasty in the 1980s. There’s a richness of detail here, but for now just scan it quickly to get a sense for what a blank new hire draft board looks like:
Like most great things in life, this draft board is both simple and powerful. It groups all of an organization’s current staff and/or potential job candidates into one of four quadrants:
- The Team Leaders in quadrant 1 demonstrate high skills and fit for this position or role, they have shared vision and values, and they demand fair compensation (defined as at or below market rates for your industry and corporate lifecycle stage) for this position. That is, they could get more money elsewhere but they choose to take less because they intrinsically value being part of the team and opportunity in a role that is well suited to their strengths and interests.
- Team Leaders define “the way” of your organization much like Peyton Manning or Tom Brady are team leaders who define the way of their respective teams. “Hey rookie, see how Peyton Manning studies film every morning at 6am? That’s the kind of player we want around here. Prepare like he does and you’ll do just fine.”
Think of your Team Leaders as stars, starters, or captains. You want to reward and retain them for as long as possible. Give them ownership opportunities, career paths, autonomy, and support them as role models for the rest of the company.
- The Team Players in quadrant 2 don’t have the same technical skills, fit, or experience as a Team Leader but they share the same desired vision and values and don’t cost an arm and a leg relative to market price.
- Team Players are valuable to your success and you definitely want them around. It’s very hard to find people who share the same vision and values and embody “the way” of your organization. If they have the raw talent, it’s much easier to develop their technical capabilities over time to become Team Leaders or if not, to remain as valuable role players. It may also be that, as they develop their capabilities and acumen, a role in the organization opens up that is a very strong fit for their style.
Think of your Team Players as your role players or bench. You need to coach them to develop their technical proficiency and groom them into the right role while still celebrating them as key contributors to the team’s success.
- The Specialists in quadrant 3 have high technical skills and are a strong style fit for the job, but they don’t share the same vision and values and/or may be very expensive compared to market rates.
- Specialists are viewed as highly capable experts that don’t fit into the desired organizational culture. While specialists can get the job done, great organizations rely on them sparingly and never place them in core leadership positions because the specialist doesn’t share the desired vision and values. Much like having a primadonna wide receiver like “Ocho Cinco” in an NFL locker room can shift the focus from the collective “we” of the team to the “me” of the individual ego, a specialist in a leadership position who doesn’t embody the desired vision and values can quickly turn a once winning organizational culture into one that is toxic and self-defeating.
Think of Specialists like mercenaries or free agents who get paid well to perform a specific function well. If you do choose to use them to fill in some talent gaps, keep them on the periphery of the organizational core and pay them cash on the barrelhead for a job well done.
The biggest mistake you can make when hiring a specialist is to delude yourself into thinking that you can mold them into a Team Leader with the proper incentives and motivation. Don’t do it! They are who they are, and no amount of incentives is going to change that fact unless they themselves want to change.
Even with a strong individual commitment to change, personal character development can take a long time and can easily be tripped up. Therefore, if you do hire a Specialist, avoid putting them in a leadership position but allow them to express their high level of skills and acumen outside of the organizational leadership core.
- The Waivers in quadrant 4 do not have the skills and fit and do not buy into the desired vision and values. Or, they simply demand way too much compensation beyond market rates for a company of your size and industry.
- Waivers are who you’re trying to avoid hiring in the first place. The easiest time to make a waiver is before they even get hired! So if in the interviewing process you notice the signals of a quadrant 4, it’s straightforward: DO NOT HIRE.
The next hardest waiver to make is an employee who sneaked through the hiring process and turned out to be a poor fit that now sucks everyone’s time and energy. They don’t perform at a high level and they don’t embody the desired cultural traits. So why do you have them around? Now that you’ve recognized the mistake, fix it. Fire ‘em or trade ‘em to the competition. Fast.
By far, the hardest waivers to make are those former Team Leaders and Team Players who just no longer have the high level of technical skills or fit within the evolving organization, or who are just demanding too much compensation relative to market rates for a company of your size and industry.
While it’s hard to say goodbye to these once valued team members, it’s even harder to be burdened with excessive overhead and a diminishing skill set. (Just ask the Raiders who have been mired in trying to work themselves out of expensive and underperforming contracts for the past five years).
That’s the four main quadrants of the draft board: #1 Team Leaders, #2 Team Players, #3 Specialists, and #4 Waivers. You should notice immediately that this framework provides a strong foundation for how to think about who’s on your team now and who you want on your team in the future. It tells you that:
- You need a strong core of #1 Team Leaders who are extremely talented at what they do, are a great fit for your system, share the desired vision and values, and will work at a fair price relative to market rates.
- You need a deep bench of #2 Team Players who aren’t yet as talented as the starters (or there’s not the same level of job fit) but buy into the desired organizational culture at also do so at fair market price.
- For the most part, you want to avoid using #3 Specialists who, if placed in a leadership position, can quickly turn the organizational culture toxic or tip the payroll balance by demanding exorbitant fees to be part of the core team.
- You must avoid hiring and retaining #4 Waivers who don’t have the skills, aren’t a fit, don’t buy into the vision and values, or make it too expensive in time, energy, and/or money to keep them around.
As you can see, the draft board framework provides a very strong foundation for how to think about the type of players you want on your team. It’s pretty straightforward to master the basic concept and it’s simple for everyone involved in the hiring process to understand.
The PSIU Code: A Common Language for Hiring Success
The draft board framework also sets the stage to create a powerful common language within your company. A common language, or code, promotes rapid communication and instant understanding. Having such a code is incredibly important to not only the hiring process but also to overall communication and organizational performance.
The winningest teams in the NFL understand this. Each one uses their own proprietary written code or shorthand to define players’ skills and fit within their system. The Patriots, for instance, use an intricate upper- and lower-case letter and numbered grading system that compares a potential draft pick or free agent against existing players on the Patriot’s roster.
Patriot scouts are required to rank a player using this internal code to describe not only physical characteristics, but also how those players play the game and fit within the Patriots’ system. (Is this player aggressive? Smart? Instinctual? Observant? Tough? Passionate? Studious? etc.).
Using a code to identify and communicate the kind of player the team needs for any particular position is brilliant. Because once you know the language, this allows a near-instantaneous understanding of an existing player or potential draft picks. It also forces the entire organization to get on the same page when it comes to knowing what an ideal player represents – e.g., What does a starting Patriot linebacker look like and how should they go about their job? The code tells it.
Your business needs a similar code – and the draft board framework provides it. The code needs to be able to answer this question: “What are the desired characteristics for this role and is there a match with this employee or job candidate?” The code must be simple, fast to use, and easily understandable by everyone involved in the hiring process.
Here is an example of the start of an active draft board with a simple code. This draft board is for a new Head of Operations role for an expansion-stage healthcare technology company. It includes the new shorthand code that you will soon master.
Learning a new language takes a bit of practice but already you should have an initial grasp of the type of candidate this company wants just by glancing at the draft board target. What can we tell?
The company is seeking a #1 Team Leader who demonstrates high job skills and high style fit for the role, who shares the desired vision and values, and who demands fair compensation compared to market. In addition, we can tell that the right candidate is a Producer/Stabilizer style (PSiu) in their approach — meaning that he or she will thrive when working to accomplish the daily/weekly work and to bring order or efficiency out of chaos.
PSIU stands for the Producing, Stabilizing, Innovating, and Unifying forces (think “PS. I love U” to remember them) and is a form of management shorthand that tells you what kind of style, strengths, and approach you require from any given position. As I explain in my book Organizational Physics: The Science of Growing a Business, these four forces show up in individual management styles as a result of how we learn to drive and respond to change and to focus on the parts or the whole of the system we’re in.
“OK,” I can almost hear you saying. Seems simple enough. But how do I determine where each candidate is on the draft board?” Well, that’s the purpose of your recruitment and interviewing process! That is, a good recruitment and interview process will quickly and cost-effectively identify where a candidate is on the draft board. A poor recruitment and interview process won’t provide that level of insight or it will take too long and cost too much to find the answers.
Before you start diving into how you’ll build a new recruiting and interviewing process to support the draft board framework, I’d like you to pause and reflect for a moment. Remember earlier when I asked you how exactly you think about the hiring process in your business today?
”Are you searching for a particular personality? A salary range? Past experience? Education or credentials? A personal referral? Commitment to a vision? Job skills? Upside potential? Cultural fit? Avoiding a future liability? All of the above? And if you are clear on the above, how do you go about determining it? What tradeoffs are you willing to accept and why? Finally, how do you — and your team — actually know it when you see it in a way that everyone can agree on?”
Well, guess what? Now that you are starting to get an initial feel for the draft board framework, can you see that you’re already well on your way to answering those questions now and forever? No matter how you slice it, from now on when you think about the hiring process, you’ll know what to think about:
Are you in search of a “#1 Team Leader” and will you only accept a “#1 Team Leader” because this is a critical leadership position and you must have captain who walks the talk and demonstrates a high level of skill and fit?
Or will you accept a “#3 Specialist” for this position because it is outside the company core and you just need a high level of technical skill and role fit to get the job done?
Perhaps you are in the market for a “#2 Team Player” but you’ll expand the scope to a “#1 Team Leader” if you stumble across the right candidate? Or is this purely a “#2 Team Player” hire because that’s all that’s really required for this role?
And what is the style of candidate who will naturally thrive in this role based on the job requirements and the complementary skills and gaps in the team? Do you need a high Producer/Innovator who thrives at winning and coming up with creative solutions to complex problems? Or would it be a Stabilizer/Unifier style who brings order out of chaos while keeping the team and clients on the same page? Or a different style altogether?
There are still a lot of details to answer and those answers will come soon enough. But what’s really important (and valuable) is having a framework to ask the right questions in the first place! And that’s exactly what the draft board framework gives you: A new way to think about hiring, along with the right questions to ask.
Now that you have a snapshot of the draft board framework, the next step is to understand how to put it into action. Once you know the how, then you can tackle the when to hire and who to hire. But right now, don’t rush past small victories. Take a moment to savor them. You now have a seriously powerful framework for how to think about the hiring process.
Please note: this post is an excerpt from How to Think About Hiring: Play Smarter to Win the Talent Game.