Executive summary

Successful startups change how a market works. In many cases, they also change how companies themselves work by rejecting traditional management structures and job descriptions. The way these companies describe themselves is as being “flat”—no hierarchy of managers, but a democracy where the best idea wins. At first glance, this may sound like the ultimate non-hierarchical, “boss free” way to run an organization. However, when there is no formal org chart, the resulting organizational structure is actually more hierarchical than traditional organizations, with one or a few people informally holding all power. Importantly, this hampers the organization in its mission to build the next-generation product or service for its market.

An explicit management structure is necessary to distribute power

Concentration of power

In “flat” companies that have not yet explicitly defined who is responsible for what and handed out manager titles and budget responsibility, there is still one manager at minimum: the CEO. This means that the CEO is essentially managing everyone and responsible for making sure every employee has the information needed to be productive. All decisions – including personal issues, expense reports, marketing, technology vendors, phone plans, product launches and hiring, along with the typical CEO functions such as driving the organization’s vision, mission and strategy – rest with the CEO. No one else has any decision-making authority. In effect, even though it was not intended, it becomes a two-tier organization with the CEO at the top and everyone else at bottom.

Hidden structures

Although flat organizations claim to improve communication and decision making by empowering employees to speak up and take charge, the reality is quite different. Without an explicit structure, implicit structures take hold. An ex-employee of Valve, a gaming company that used to promote it’s “no boss” culture, said, the experience could feel, “a lot like high school.” Without doubt, an overworked CEO who struggles to handle all the requests that come to them will choose to implicitly delegate certain types of work, and with it some amount of organizational power. Flat organizations can put psychological pressure on employees to try and figure out the “secret” org structure that really rules a place. Politics aside, as firms grow, there will be more possible lines of communication and higher potential for inconsistent information sharing. Not only are these implicit environments a barrier to effective decision-making but they are also the farthest thing from democratic.

No progress unless CEO is involved

In organizations that purport to be flat, it can seem like anything goes. Against this backdrop, employees may become bolder in offering opinions and suggestions. Ideas are great, but in order for them to become productive contributions to key business goals, there needs to be support, buy-in and resource allocation. Likewise, in order to avoid wasting time and resources on unnecessary projects, someone with authority needs to weigh in. In a flat organization both the ‘yea’ and ‘nay’ decisions will come from the CEO. Rather than being empowered to work on peer-led project teams or consult with mid-level managers who understand the company’s goals, employees in a flat organization will need to somehow gain favor with the CEO in order to get their projects approved.

Chaos or autocracy

Although a flat organization structure empowers all employees to speak up, who are they speaking up to? Consider what could happen if an issue arises with your product or service. Without an explicit structure, who is responsible for monitoring and resolving these risks? If employees can take matters in to their own hands, what guarantee do you have that they’ll resolve the issue in a way that is consistent with company standards? How can you ensure that an issue gets resolved at all and that measures are put in place to avoid similar problems in the future? Without an explicit structure in place, it seems like your options are employee-centered chaos or CEO-focused autocracy.

Management structures should align words and actions

It can be tempting to adopt new trends in management, especially when they come from the fun and energetic startup world. However, it’s important that a business’ words and actions align. You can’t use the term “flat organization” to denote a democratic, “no bosses” or egalitarian environment. As described above, the inherent flaws in flat organizations – including lack of delegation, hidden structures, no accountability, and chaos – will result in an organization that is more hierarchical than if it were led by an old-school org chart. Not only that, but a company without structure will lack the tools to execute on strategy. If you want to be truly democratic in how you manage your business, then you’ll need to implement an explicit structure and processes that support this goal. It turns out that management thinking is valuable, even in startups.