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STARTUP

This Fundamental Problem Can Kill Your Startup–Here’s How to Avoid It

Startup founders often overlook organization design choices even those these are a key to success in scaling.

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BY Sharon Poczter - 08 Jan 2019

startup killer problem

PHOTO CREDIT: Getty Images

Presented with the everyday existential challenges of a startup--from funding to competition--founders often overlook one extremely important set of choices for their long-term strategy: organizational design ("org design").

When startups are small, thinking through roles and work processes is less important. In early days, there's typically not even enough employees to do all the work, so founders and their early employees typically take on whatever work needs to be done without thinking through org design.

One of the byproducts of scaling, however, is that a founder can no longer avoid thinking about how to allocate, coordinate, and supervise work. For instance, with 30 employees, it will no longer be efficient for everyone to report to the founders. Or with new markets added weekly, there needs to be a structure to the workflow to keep track of new business efficiently.

For startups that rely heavily on the productivity of their employees, org design is your production process. Founders of startups that heavily rely on their people therefore need to be just as obsessed with org design as manufacturing companies are about production processes.

The best place to start with organization design is by answering three simple questions:

  1. Who does what?
  2. How will we coordinate the work?
  3. Who will report to who?

Without purposeful org design, companies will naturally grow into less productive bureaucracies. As Tony Hsieh likes to point out--as companies grow in size, innovation and productivity naturally fall.

Furthermore, org structure is much more difficult to change retroactively. Organizational restructuring is a time-consuming process with little probability of success. The nature of the work a company faces will unavoidably change as a company grows. Not only will a company face new demands as external factors such as technology and competition change, but the nature of the work will change simply as a function of scaling.

Without adjusting the work to the changing outside environment, companies will spend millions going backwards, trying to restructure later on. Just ask Microsoft as they continually spend millions of dollars chasing markets they could have addressed years earlier.

Smart org design, on the other hand, can foster growth and be a central factor for a company's competitive advantage. The key to harnessing org structure in your favor is to incorporate efficient market principles to org design. This means designing a nimble organization structure in which the supply of work can constantly adjust to meet changes in demand from the external environment, and also allowing employees to have choices in the supply of their work in order to meet these demands.

Giving employees choice in the work they do, the amount they do, and who they work with, will not only support productivity and help capture additional productivity gains, but will help serve as a powerful indicator of information about performance. Given the chance, high performers will do more, and appreciate the opportunities to do so.

Here are two simple ways in which you can incorporate efficient market elements into your org design:

1. Make org structure flexible.

The demands of the outside environment change rapidly and since you can't hire or reorganize as fast as the work will change, flexibility in roles and titles is necessary. In addition, employees should have some latitude in choosing what work they do, and how much of it they can do.

2. Make org structure team-based and mobile.

Employees should be organized into customer, product, or market-focused projects rather than strictly functional groups (such as marketing, finance, and operations), and given the freedom to move between projects.

Allowing for mobility gives unhappy employees the ability to change their circumstances without leaving the organization. Furthermore, by voting with their feet, employees' choices can tell you a lot about their (and each other's) ability, as there will automatically be more demand for well-managed teams. It also allows for employees that work better together to sort into groups on their own, which will also boost productivity.

Google and Astra Zeneca are examples of companies that continually incorporate efficient market principles into org design. Work at Google is organized into teams, and employees are explicitly encouraged to change teams. Not only does this help reveal information about managers and teams, but it also ensures that high performing individuals don't leave. At Astra Zeneca, employees form and crowdfund their own projects, essentially using a kickstarter-like internal process to incubate good ideas.

Just like an efficient market continually adapts to change, so too should org design. It is essential for founders of scaling companies to continually assess the fit between the work, people, and formal and informal org structure. Org design has the power to inhibit the growth of your employees, and therefore you company, and also the power to boost productivity and catalyze scaling. Which will you choose?

 

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