Most managers and business leaders aim to make their organizations flatter. They try to reduce middle management, to skim the amount of hierarchical layers, or they scrap internal bureaucracy in order to achieve more efficiency, more effectiveness, and more enterprise agility. The problem with this is simple, but important: Organizations should actually not be flat, but decentralized. Why? Because flat means continuing to bark up the wrong tree: In flat, the steering from the top remains.
Hierarchical steering in organizations once was a pretty good idea. That was during the industrial age. Since this era ended in the 1970s or so, the ability of markets to surprise us has increased significantly: Value creation in the knowledge age is more dynamic and more prone to surprise than it was in the industrial age. The importance of services, customization, individualized production, uncertainty and highly competitive markets has risen dramatically. That means: in every organization, the outside has to be in charge, top-down has turned into a trap.
“Organizations outsourced the steering to markets around forty years ago.”
As complexity and dynamics reign the markets, confronting organizations with market-pull and ever-more surprise, any kind of centralized counter-push from “above” in the form of command and control ceases to function properly. Steering collapses. If one continues to allow steering from above (or from the inside-out, as we will see), then this inevitable leads to mis-leading, and thus to hinder or cripple value creation.
Flat hierarchies are thus not a solution at all, but actually the continuation, or perpetuation of a management tradition that has since long turned into a mistake. If an organization today does not turn to the market consistently, but remains in the mode of hierarchical steering, then middle management will always grow back. The same goes for bureaucratic steering rituals – such as target negotiation, micro-management, budgeting, planning processes, allocations, cost management, and excessive rules and policies.
It is only in the mode of “decentralized“ that the reason for having a middle management and centralized steering disappears entirely. Here, self-organization and leadership from the outside in become possible. Hierarchy becomes recognized as a trivial phenomenon. Value creation towards the market, from center to periphery to customer can become the dominant principle. Value creation can flow – unhindered by steering.
It is only in the mode of “decentralized“ that the reason for having a middle management disappears entirely.
So you better quit trying to make your company “flatter”. In complexity, an organization must be federative – not flat. When outside markets rule, then it is the part of the organization that we call the periphery that earns the money. It is the periphery that learns from the market easiest. That can best adapt to and respond to markets – quickly and intelligently. In complexity, the center loses its information monopoly, its competence advantage: it can hardly issue any meaningful commands any more. The coupling between periphery and center must consequently be designed in a way that enables the organization to absorb and process market dynamics. For that, the periphery must steer the center through market-like mechanisms and own the monetary resources. Not the other way around. (But hey, the periphery earns the money anyways, right?)
Decentralization works according to laws different than those of hierarchy. Where the principle of decentralization is applied, the devolution of autonomy and of decision-making power to teams in the periphery goes on, and on, and on. Decentralization never ends.