Flat Organizations – Risks & Remedies

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November 25, 2022 Steve Berman

Many closely held businesses are helmed by a single leader who oversees all operations, owns all key relationships, and makes the final calls. It’s easy to see this person as a hero, inextricable from the company itself. 

But what happens when the hero leaves? Their absence (and the lack of designated management to fill the void) can limit the business’s sustainability and value.

While robust management structures take time and resources to implement, the return on investment may be significant. Organization-building efforts can lay the foundation for improved sustainability, higher employee engagement, and increased value when it’s time to sell.


What Is Flat Management?

Flat organizations have few (if any) distinct levels between high-level management and employees. These structures often arise organically, as founders grow their businesses from one-person startups to larger companies with expanding employee rosters.

A limited number of executives oversee many direct reports and often manage multiple areas of the business. This can eliminate the information silos seen in complex corporations, improving communication and efficiency.


Potential Pitfalls of Flat Management

While flat management lends itself well to startups and small organizations, structure becomes more important as a company matures, seeks growth capital, and explores M&A opportunities.

Lack of Organizational Cohesion

For startups, a flat management structure can initially be beneficial when open collaboration is key to moving things forward.

However, as a business expands, vague responsibilities and workflows may lead to employee confusion and limited avenues for advancement. Client and vendor interactions may also suffer from delays and misunderstandings resulting from unclear or overburdened points of contact.

Most notably, an authority figure’s departure (either planned or unanticipated) can leave a leadership vacuum. The lack of a prepared, capable replacement can cripple a company.

Limited Scalability

Over time, a flat structure can inhibit growth. Faced with growing responsibilities and an expanding roster of reports, leaders can easily become overwhelmed. Internal competition for resources and recognition often ensues. That can create inefficiencies and stifle innovation.

Companies may find themselves turning down opportunities because they lack capacity. Complex initiatives like market and business line expansions can appear unattainable.

Enterprise Value Tied to Leaders

Having grown their businesses from the ground up, many founders take pride in maintaining singular roles. As key relationship owners, decision-makers, and repositories of institutional knowledge, their organizational value can be immense. That can make exit planning (and even growth financing) extremely challenging.

Companies with flat hierarchies depend on dynamic, stable leadership. When entrenched owners signal their intent to sell, prospective buyers may respond with lower-than-anticipated purchase offers. Acquirers are often hesitant to pay a premium when their target’s most valuable asset can walk out the door.

And if an owner passes away unexpectedly, a flat organization’s value can evaporate overnight. That can create serious problems for their employees, estate, and their next of kin.


How to Build a More Robust Organization

A flat organization can evolve, but structure isn’t created overnight. Patience, introspection, and careful corporate planning are essential. While the process can be challenging, closely held businesses can build meaningful hierarchies without compromising the values that drove their initial success.

There’s more than one way to build out a flat management structure, but the following steps should always be considered.

1. Be transparent.

The transition to a different corporate structure is a major adjustment for everyone in the company. It’s best for leaders to be open and honest about forthcoming changes to minimize confusion and give employees the opportunity to buy into the new system.

2. Define goals.

Why is it necessary to unflatten the business? What should it look like when it’s done? How will implementing hierarchy help the organization move forward?

3. Map the current structure.

Identify leaders, core business processes, and who “owns” what. Critical tasks, no matter how large or small, should be included. What are the strengths and inefficiencies of the current workflow? Are there potential bottlenecks and organizational risks?

4. Rethink responsibilities and roles.

When transitioning from a flat organization with overlapping responsibilities and vague job descriptions, it’s important to reassess who does what. How can tasks be equitably assigned? Establishing clear roles for owners, management, and staff makes for more efficient coordination and decision-making across the organization.

5. Identify leaders.

Whether promoting from within or finding external hires, find the right people to fill the new positions. Look for candidates who can grow into their roles and inspire confidence in their reports.

6. Build and empower teams.

Establishing teams helps foster the relationships that lead to innovation. To reduce the risk of information silos, teams should operate with a high degree of autonomy, with management acting as their advocates across the larger organization.

7. Create redundancies.

The company shouldn’t fall apart if any one person leaves. While it’s important to have distinct roles, there should be enough overlap that business can continue in someone’s absence.

8. Decentralize knowledge.

Adequate training and one-on-one time with new leaders ensure that institutional knowledge is distributed across the organization.

This process is an opportunity for personal and corporate growth, rather than limiting anyone’s role or influence. It allows employees the opportunity to focus on their talents and hone their skillset in a defined way.

Additionally, introducing this kind of structure, and delegating responsibility, can give leaders the clarity and space they need to focus on even bigger things, like a company's long-term plan.


Hierarchies Help Companies Build for the Future

Well-defined management frameworks foster sustainable, succession-ready businesses. An efficient hierarchy can help preserve and build a company's market value, while creating opportunities for growth, independent of a single person's leadership.

Whether a closely-held company is destined for a generational transition, M&A, or employee ownership, robust management structures can ensure success long after a hero’s departure.

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