Flat and Fluid: How Companies Without Hierarchy Manage Themselves
Break down management into its component tasks. Distribute power and multiply accountability.
Key Takeaways
This post explores three flat and fluid organizations in completely different industries and of vastly different sizes. All of them lack hierarchical management, so how do they thrive? They follow these principles:
→Management is tasks: They think of management as a set of tasks rather than a group of people. Those tasks are broken down and formally distributed among regular workers. Everyone manages but no one is management.
→Transparency and accountability are sacred: Everyone’s performance metrics are made public and anyone can demand an accountability to anyone for their performance.
→Everyone makes decisions, but not everyone is involved in every decision: Workers are free to make decisions about their work without consulting “higher ups” (as there are none). Decision making power is distributed, but decisions are not made by majority vote.
→Make what’s implicit explicit: Topics that are taboo or give room for internal politics in hierarchical organizations (e.g. compensation, natural leadership, allocation of undesirable or highly desirable tasks) are confronted head on and the resulting decisions are made public and binding.
The Beginning
When the idea of running a country through a democracy started gaining traction during the renaissance period, most respectable individuals considered it lunacy. Large, powerful countries needed powerful rulers to steer the ship of state for the welfare of everyone. This sounds quite outrageous 237 years after the American Revolution. Nevertheless, the assumption that a rather autocratic hierarchy is indispensable goes almost unquestioned in the corporate world today and in the business schools that feed them managers.
Puzzled by this double standard and inspired by a visit to Medium’s offices, I decided to research successful businesses that lack hierarchy. I decided to call these organizations flat and fluid. Flat because they lack a formal hierarchy. Fluid because the work any individual does changes quickly and seamlessly according to what circumstances demand. This post will highlight the most interesting aspects from my research report.
Effective Organizations without Hierarchical Management
My first surprise was that the pioneer flat and fluid organizations are not in tech. W.L. Gore (chemicals) and The Morning Star Company (tomato processing) have been running without hierarchy for literally decades. Nevertheless, that doesn’t mean that tech companies don’t have much to teach.
A recent blog post about Medium made ripples through the internet. The post describes how Medium is implementing an organizational operating system called Holacracy, which doesn’t allow for job titles or fixed job descriptions, while enabling fast-paced innovation. Companies like 37 Signals, Menlo Innovations, Valve, WordPress, and HCL Technologies have also created their own ways to grow and innovate while balking at traditional hierarchy.
To keep things simple, I’ll focus on the three examples I found most helpful: Gore, Morning Star, and Medium. Here’s a quick background on each.
W.L. Gore and Associates
Gore is an international industrial products company with a history of over 50 years. The company has over $3 billion in revenue, 10,000 employees, and 2,000 patents. Gore was named in Fortune’s “100 Best Companies to Work For” in 2013, its 16th consecutive year. The company has no formal hierarchical structure or titles, except for a CEO and very few division heads (the most recent CEO was elected democratically by the employees).
Interestingly, power dynamics are alive and well within the organization, but not within a formal hierarchy. The purpose of this organizational structure, called “lattice”, is to actually bring out the real power structures to the forefront to hold them more accountable and make them more useful for everyone. Founder Bill Gore explains:
“A lattice organization is one that involves direct transactions, self-commitment, natural leadership, and lacks assigned or assumed authority. . . Every successful organization has a lattice organization that underlies the façade of authoritarian hierarchy. It is through these lattice organizations that things get done, and most of us delight in going around the formal procedures and doing things the straightforward and easy way.”
In other words, we all know a real power structure functions behind the formal authority hierarchy, so why not get rid of formal authority and focus on the real power?
The Morning Star Company
Founded in 1970 by Chris Rufer, a UCLA MBA student, Morning Star was a one-man tomato trucking company. Today, the company is the largest tomato processor in the US with over 400 employees and $700 million in sales from several tomato-based products.
Morning Star’s guiding principle is self-management. Morning Star has Rufer as CEO, but no other formal titles exist—everyone is known as a “colleague”. Rufer is known to say that it doesn’t matter where the buck stops, but where it starts. Gary Humel describes how this works :
Rather than pushing decisions up, Morning Star pushes expertise down. For example, roughly half the company's employees have completed courses on how to negotiate with suppliers. Many have also been trained in financial analysis. Since the doers and the thinkers are the same, decisions are wiser and more timely (sic).
Curiously, the underlying business opportunity of Morning Star is strikingly similar to that of W.L. Gore. Gore’s business started and continues to grow based on one simple question, “How can we make money off one raw material, PTFE?” While Morning Star asks itself, “How can we make money off one raw material, tomatoes?” Medium’s business is also built around one question, “How can we democratize long-form writing?”
Medium
Medium is a San Francisco based technology startup founded in 2012 by Twitter co-founders Evan Williams and Biz Stone. The company has adopted an organizational philosophy called Holacracy. Holacracy is described as an “operating system for people”, a formal system, with clear rules, to run a non hierarchical organization. This system is developed and promoted by a Philadelphia-based company called HolacracyOne, LLC, which itself is run using the Holacracy system. Holacracy is described as a “distributed authority system – a set of “rules of the game” that bake empowerment into the core of the organization” .
Managing without Management: Flat and Fluid
So how do these companies get anything done? Flat and fluid organizations think of management differently. Management becomes as a set of actions rather than a group of people. Management is broken down into its component tasks, and those tasks are distributed—almost crowd sourced—among regular workers. While there are no official managers, there’s still plenty of managing being done. Rufer explains:
"Everyone's a manager here […]. We are manager rich. The job of managing includes planning, organizing, directing, staffing, and controlling, and everyone at Morning Star is expected to do all these things. Everyone is a manager of their own mission. They are managers of the agreements they make with colleagues, they are managers of the resources they need to get the job done, and they are managers who hold their colleagues accountable."
While Gore, Morning Star, and Holacracy have this approach in common, they also have important differences. Those differences are mostly seen in (a) the system by which management tasks are “crowd sourced” within the organization and (b) the degree of consensus versus independence that is expected from the different employees when making decisions about those tasks.
To understand flat and fluid organizations even better, we need to think like these organizations think—disaggregating management into a set of tasks, rather than seeing it as a cohesive business function, like marketing or finance. Outlining what the different levels of managers do in traditional hierarchical organization was actually really helpful to me, so I copied the list below. The next step will be describing how some of those tasks are assigned and carried out in flat and fluid organizations.
• People Operations
o Hire
o Fire
o Evaluate performance
o Set compensation
o Promote
o Give Titles
o Create job descriptions
• Team Dynamics
o Divide and assign work
o Set goals for employees
o Mentor and teach
o Supervise employees’ level of effort
o Motivate
o Inspire creativity and innovation
o Provide feedback
o Settle disputes
o Set culture
• Process
o Set budgets
o Approve purchases
o Find opportunities for increased efficiency
o Safeguard and share information appropriately
• Strategy
o Define the mission of the organization
o Keep tabs on market threats and opportunities
o Define roadmap of new products and services
o Define roadmap of new market entries
o Analyze and approve investments
• Corporate Finance
o Define capital structure
o Resource allocation between different units/divisions
o Report financial performance to shareholders
Looking at this list it is clear how managers add value and why they are so busy. So, how are flat and fluid organizations able to get all this done consistently without a formal management team?
Getting It All Done the Flat and Fluid Way
Different flat and fluid organizations have different approaches for each of the tasks above—some have retained a traditional management approach in some domains, while others have reinvented every single domain of management. Exploring all of the tasks of management would make this post way to long, so let’s look at a selection of those tasks: giving titles, dividing and assigning work, evaluating performance and ensuring accountability, setting compensation, approving investments, and inspiring creativity and innovation.
Give Titles
In traditional hierarchical organizations, titles are very important; they are a sign of past performance, power and prestige. They are also a way to increase one’s value in the labor market if one were to leave the organization. Interestingly, Morning Star, Gore, and Holacracy all take the same approach to titles. They practically don’t exist.
At Morning Star, everyone is called a “Colleague”, at Gore an “Associate”, and in Holacracy a “Partner”. There is, however, one additional title at Gore that employees can earn, “Leader”.
What is interesting about the Leader title is that it is only used to identify people who have developed followers naturally . No one can be appointed to be a leader, no one can “kiss up and kick down” to be promoted to management. Rather, if it becomes evident that your peers of their own free will decided to follow you, then you will be awarded the title of leader. The title does not provide any formal authority, as others are not obligated to follow orders from the leader. The title is not a bestowal of power, but rather a recognition of natural power and leadership.
So, if the title of leader does not come with any authority, then why even have it in an organization? The title actually comes with duties (not privileges); duties like helping align other associates behind business goals, acknowledging the accomplishments of others, being a role model, and helping others with their problems.
This is a smart organizational strategy. Rather than fretting over natural leaders arising among front-line employees, Gore proactively and systematically makes implicit leadership explicit, co-opts that leadership, and utilizes it to promote the mission of the organization.
Divide and Assign Work
One of the most common tasks of managers is deciding who will do what portion of the work that needs to be done. Morning Star and Gore have similar approaches, while Medium uses a different solution.
At Morning Star, the division and assignment of work is negotiated among peers in regular intervals. This type of negotiations occurs often in hierarchical organizations, but more often than not, in implicit and political ways. Morning Star makes these negotiations explicit by assigning a time when they must occur and then documenting them and making them public. Each employee negotiates a written Colleague Letter of Understanding (CLOU, pronounced “clue”) with every single employee they interact with. A similar method is used at Gore, where employees negotiate “commitments” with each other.
Medium takes a different approach, while still respecting a flat and fluid structure. They divide work into domains. Each domain is assigned to a role titled Lead Link, which is responsible for dividing the work in the domain into sub-domains. So far this sounds hierarchical, but this is where the similitude breaks down: the Lead Link does not have the authority to assign the subdomains to anyone. It is similar to how two children split a piece of cake, one cuts it into two halves, and then other chooses what half to take. After an employee takes a subdomain, he or she is free to resign from it at any time. Note that resigning from a sub-domain is not the same as resigning from a job, as an employee will usually be over several subdomains at any given time.
Evaluate Performance and Ensure Accountability
Management usually makes sure subordinates do the work they are supposed to, and do it well, by evaluating that work and then holding employees accountable. Flat and fluid organizations have found alternative ways to incorporate accountability into the workplace.
Morning Star evaluates performance and ensures accountability in a variety of ways. First, the organization goes through great effort to have full transparency in two ways:
a) Financial performance of each unit is published twice a month for everyone to see; any decrease in output or increase in costs becomes apparent quickly and publicly.
b) Individual goals are written down in CLOUs which are made public; these CLOUs also include “stepping stone” goals to make sure people are staying on track.
Second, each employee must provide formal feedback to everyone they have a CLOU with. And finally, there’s a culture of holding each other accountable in day-to-day conversations.
A culture of peer-to-peer accountability seems to be quite important in flat and fluid organizations. Delancey Street is another example of this. Delancey is a nonprofit residential facility that houses 350 ex-convicts at any given time, with the average resident having been incarcerated four times. The facility has no formal staff other than its own residents and the organization’s president, Mimi Silbert. The organization is incredibly successful, with over a 90 percent of residents not returning to incarceration. Silbert has created an intricate social system that helps ex-convicts rehabilitate each other. At the core of the system, Silbert demands two vital behaviors from its residents. First she demands everyone confronts everyone else about every single violation. The other requirement is each resident has to take responsibility for another resident’s success (a mentee) .
Medium also leverages peer-to-peer accountability. During regular “tactical” meetings, each employee must proactively report their performance metrics and progress on projects to the members of their circle (team). Everyone is aware of what good metrics should look like, so underperformance becomes public—and embarrassing—on at least a weekly basis.
If the number one behavior necessary to rehabilitate criminals is peer-to-peer accountability, it must surely be a powerful tool to make individuals keep their own commitments at work. And it makes a lot of sense. In hierarchical organizations, usually only one or two people have authority to demand accountability from you, while in flat and fluid organizations everyone does. While power is divided, accountability is multiplied.
Set Compensation
Most organizations have compensation change based on the tasks a person is in charge of and their performance in those tasks. Compensation is another way to provide accountability, so it is extremely important that it be done fairly and effectively. The same is true in flat and fluid organizations.
Morning Star has a two-part process to set compensation. First, each employee is responsible for crafting a self-evaluation of their performance compared to their CLOUs. Then, one of several compensation committees, each conformed of peers and elected by peers, “works to validate self-assessments and uncover contributions that went unreported” . Based on the findings, the committee sets individual compensation based on added value to the company.
At Gore, peers rank 20 to 30 peers based on added value to the organization. Using this information and external benchmarking data, a committee decides on compensation. Additionally, each employee has a sponsor (similar to a Delancey Street mentor) who is allowed to advocate their mentee’s case in front of the committee, before it makes a decision.
Approve Investments
Morning Star has created a uniquely flat way to approve investments: every single employee has the authority to approve a purchase in behalf of the company. However, they must first build a business case showing the net present value and ROI of the investment for the company. They must also consult their peers to make sure their assumptions are reasonable and the financial model is properly put together. Now, requiring a financial model does not work like a poll literacy test meant to separate those who are “equal from those who are more equal”. As quoted earlier, Morning Star offers training on financial modeling to all its employees. The goal is to push expertise down to the front lines, rather than have complex decisions be pushed up a chain of command.
Inspire Creativity and Innovation
At Morning Star and Gore innovation is the realm of everyone, rather than of the select few within the corporate version of an ivory tower. This means that everyone can come up with and pursue innovative ideas. At Gore, they have a “dabble time” policy—later copied by Google—where everyone can use 10% of their work week to work on initiatives of their own choosing. Ideas must be “unique and valuable” and not copy-cat products. After this phase, a self-formed team working on an idea goes through a periodic review process, based on the “Real, Win, Worth” framework of innovation.
At Medium, opportunities for innovation are called “tensions”, or gaps between what is and what can be. Tensions are regularly brought up and assigned next steps in regular tactical meetings. Anyone can bring up and pursue a tension.
I hope this quick survey of how flat and fluid organizations have reimagined management tasks without hierarchy makes the point that with some creativity, flexibility, and trial and error, all other tasks can also be reimagined as well (or more likely have been already, but I have no time to write it here).
Flat and Fluid Decision Making
Decision making in most flat and fluid organizations is surprisingly undemocratic at a first glance. Medium describes one of its key tenants like this: “Distribute decision-making power and discourage consensus seeking”. Gore explains it like this to its new employees: “Complete consensus can never be reached. Different decision-making styles are required in different situations”.
Flat and fluid organizations tend to democratize decision making power, rather than decision making itself. In other words, every employee has the power to make any decisions they see fit to fulfill their job responsibilities (in the case of Morning Star that even includes spending the company’s money). Employees don’t need to consult a boss in order to deviate from their regular work routine if they believe that’s good for the business; neither do they need to get the decision pre-approved by their peers, as in a majority-rule paradigm.
There is often a safeguard to this democratization of decision-making power, however. At Gore, there’s the “waterline principle”, a reference to how ships can be sunk if struck below the waterline. Gore requires that employees involve other employees in decision making if the issue at hand could be considered a waterline issue for the company, such as reputation, trade secrets, or large expenditures. Morning Star also encourages—thought it doesn’t require—consensus seeking before an employee decides on a large investment.
Challenges
Flat and fluid organizations have their own unique challenges. Jeri Ellsworth is a former employee of Valve, a US-based videogame company with a flat structure. In an interview with Grey Area podcast, she warns: “the one thing I found out the hard way is that there is actually a hidden layer of powerful management structure in the company and it felt a lot like high school. There are popular kids that have acquired power in the company, then there’s the trouble makers, and everyone in between” . This example shows how allowing natural leadership to arise can be a double-edged sword. It also shows how Gore’s approach of calling out natural leaders and holding them to a higher standard is not only a win for the company, but could also prove essential to make sure organizations remain fair.
Final Thoughts
One of the major barriers for the adoption of flat and fluid structures is the lack of a dominant design. An employee going from Medium to Morning Star might not have an easier time adapting than another employee coming from a hierarchical organization. On the other hand, most people can go from one hierarchical company to another without having to relearn much about how power dynamics work.
Finally, one question business schools should ask themselves is, what is the relevance of an MBA degree if flat and fluid organizing takes hold? If management tasks are distributed among all employees, do “general management” MBA programs still make sense? This is especially relevant for graduates interested in the growing technology sector, where companies seem to be the most open minded about adopting a flat and fluid approach. Functions like marketing, finance, and supply chain management will continue to be relevant. But, without a corporate ladder to climb into general management roles, are those jobs still appealing? Are they worth the $200,000 in tuition and living expenses usually incurred for a top MBA education? If management tasks are unbundled, wouldn’t it also make sense to unbundle management education?
