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Oct 30, 2018 | 8 min read

Transformation

Why the pyramid is obsolete

Tom Morisse

Research Manager


FABERNOVEL
As demonstrated by Yuval Noah Harari in his now famous essay Sapiens, we, human beings, are the only species capable of large-scale and flexible cooperation alike. The emergence of the big firms of the Industrial Revolution, with their pyramidal organizational structure, was a crucial development. But despite its many successes, this model has become obsolete. From glory to downfall, let’s explore the reasons.

« From the top of this pyramid, 3,000 years of management look down on us. » (Napoleon Bezos)

Let’s set something straight, we’re not here to kick anyone when they’re down. To declare that the pyramidal organizational structure, in its various successive forms (divisional, matrix, functional, etc.), is scandalous.

As we should acknowledge that over the past 100-150 years, the model has worked rather well: for instance, from 1850 to 2000, GDP per capita multiplied by over 15 in France, while at the same time the population went from 36 to 59 million inhabitants.

Why then is it high time to build the future of organizations as we are asserting? It’s not a matter of a model’s raw performance compared to others. It’s a matter of organizations adapting to their environment, its stakes and its constraints.

 

Standardization & optimization

The pyramidal organizational structure allowed ambitions and made it possible to achieve scales which, until the late nineteenth century, were inconceivable: shipping products across thousands of miles, managing activities in several time zones, coordinating the actions of thousands of employees. A company like Walmart, with its over 2 million employees, is thus equivalent to a country.

Which solution was adopted? One goal, standardization; one approach, optimization. Activities are divided, sub-divided, sub-sub-divided into tasks and processes, in order to have resources transformed into products or services as fast as possible, by employees with few or even no skills. The model is extremely resilient in periods of slow transformation. Employees quitting? It’s easy to replace them. Consumers’ expectations are also standardized – it’s the famous quip by Henry Ford, who offered his Model T in any color as long as it was black. Even shareholders are standardized! That, indeed, was the basis of the legal innovation behind the limited company: regardless of a change in shareholders, the day-to-day business of the company is not affected.

The pyramidal model is extremely resilient in periods of slow transformation

The corollary of standardization is optimization: when the basis of a business is standardized, you can establish the usual standards and improvement goals, and focus efforts on respecting them. Stock rotation, margins, default rate, etc. The paragon of this mindset is the Six Sigma methodology invented in the 1980s, with the holy grail residing in lowering waste rate to below 3.4 defects per million units produced.

Standardization and optimization logically lead us to the pyramidal form and the verticality of hierarchical relationships: from the top downwards, each person tells her auxiliaries what to do and how to do it, measures deviations, identifies potential for optimization. The command-and-control approach has proven to be the most efficient.

Within the pyramid, 1 set of tasks = 1 role, 1 role = 1 position and 1 position = 1 person (who may occupy it for a long time, potentially their entire life). If optimization is relentlessly pursued, logically each person should remain at their (type of) position. A person becomes an expert, makes less mistakes, is more productive, trains future interchangeable employees, etc. In fact, let us look at the etymology briefly: the term position embodies the fixity inherent to a pyramid organizational structure. Although this became less true in the late twentieth century: when cost optimization takes precedence over all else, rotation of the people at the bottom of the pyramid is then resorted to in order to limit wage inflation. Many employees of the tertiary sector paid the price for this.

Within the pyramid, 1 set of tasks = 1 role = 1 position = 1 person

Naturally, highlighting standardization and optimization does not imply the absence of innovation. It is present in pyramidal organizational structures, addressing optimization issues. It’s one of the activities operating in silo mode, the R&D or innovation division… and in the industrial age, the patent is exploited, diverted from the ambition that led to its establishment – protecting small inventors against large manufacturers. As a patent makes it possible to measure the R&D activity volume and the financial flows it yields, and it can be sold or combined with other elements of the IP portfolio.

In summary, picking up on Harari’s analysis, in the scale/flexibility combo, organizations in the 19th and 20th centuries restricted the latter in order to better achieve the former.

 

Three shifts, a new era

A triple shift is underway, and has even made major headway. From human resources to talents. From atoms to bits. From product to experience. All this linked to or amplified by the advent of the digital age. Simply put, we now have organizations structured around the limitations and expectations dating back to several decades ago.

Firstly, a shift from human resources to talents. When almost half a generation today has graduate degrees, while in 1900 only 1% of a given age-group had high school diplomas, the thorough processes that offset a lack of qualifications are hardly necessary anymore. Furthermore, it becomes unbearable to be bound to a set of well-defined tasks, when you have lots of skills and a greater capacity to understand the organizational stakes. And it’s the entire aforementioned equation that crumbles. A position could be designed to involve several roles, particularly through cross-functional projects, or one could serve at radically different positions throughout one’s career.

The founder of LinkedIn, Reid Hoffman, upon observing this new employer/employee power struggle recommends setting up “tours of duty”, i.e., clear, exciting missions over 2 to 4 years, after which the employer and employee renew their vows or split up.

Then comes the shift from atoms to bits. There has always been information transmission in traditional organizations, but it came with and guided atom flows, as a company served as a machine for processing atoms. The railroad, a key organizational invention of the 19th century, was thus designed to transport atoms, living or non-living, from point A to point B, and accounting advances (which were plenty!) only served to enhance the former.

This relationship is reversed today: with the digital age, a company serves as a machine for processing information, for instance, identifying a user’s unmet need in order to deliver a solution. Atoms have become by-products of information. And this changes everything, because bits circulate at the speed of light while most atoms, in merchandise form, travel at 30 mph on their container carriers.

First consequence: uses, trends, aspirations, technologies, etc., are also evolving at the speed of bits. The world becomes hard to predict when the pyramidal model is indeed hinged on the stability of products and methods, aimed at obtaining higher optimization margins year by year. It is therefore necessary to set up a more harmonious agile organization in order to rise to the challenge of numerous potential changes. In cybernetics, this is referred to as Ashby’s Law: a system can only regulate another one if it has superior variety. In a nutshell, you can’t produce 20 different objects with one single tool…

Second consequence: bit manipulation, whose growing manpower comprised of intellectual and creative professions are specialists, can hardly withstand the command-and-control coordination inherited from atoms. Shoshana Zuboff, a professor at the Harvard Business School, describes it perfectly: “When tasks require intellective effort, obedience can be dysfunctional and can impede the exploitation of information. Under such conditions, internal commitment and motivation replace authority as the primary bond between the individual and the task. »

Lastly, a shift from product to experience: from a client’s perspective, getting a product or service, with a binary rating scale (yes/no), is replaced by a broader continuum comprised of emotions, with high expectations for customization. Moving forward, it’s the user experience that makes or breaks companies’ reputations. The first ones to (re)value the very notion of a user, of a link that isn’t immediately transaction-based, a service that isn’t necessarily commercial, were the GAFAs.

This last shift ended up fracturing the silo approach. Designing an experience is more complex than manufacturing a product, and is naturally cross-functional (mixing code, design, marketing, customer service, etc.). This involves connecting the first two shifts: orchestrating talents in order to better magnify increasingly volatile information. Thus, there is a glaring need for lateral relationships, which were sometimes in place before, albeit without ever being formally enacted. That was to be expected: a pyramid, by definition, demands to be read from top to bottom, but never on the sides. In the emerging era, the nature of human relationships is mutating from asymmetrical command to symmetrical exchange. And the pyramid becomes a network.

One of the main characteristics of a network is that it naturally gravitates towards a blurring of organizational boundaries. A pyramid is self-contained, based on an inside/outside binary relationship, as who other than your employees is the better bet in terms of standardizing and optimizing atom flow processing? As for the network, it relies on a continuum: connections are made in every direction, and it is the high intensity of exchanges between certain nodes that draw the center of an organization. It is akin to the “core developers” of an open source project defining the broad outlines through regular interactions, while relying on user feedback and contributions from ad hoc participants.

Furthermore, a wide range of connections is now necessary as the vast majority of relevant information as well as processing capacities for designing complex experiences are based outside. Today, this aspect is best embodied by services based on machine learning: impossible to design such projects with a silo approach. As far as concerns algorithm models (whose basics are available through open source) and data (to be aggregated from users or external sources) and computing resources (the cloud giants’ servers), all these involve networked projects.

The outcome of the three shifts: as a former director of a liberated company once told me, the labor market is currently 50 years behind in terms of catching up to societal changes. Yet, although lagging behind society by 50 years in 1950 was synonymous with a slight deviation, in light of the digital revolution experienced over the past decades, the 50-year lag now constitutes a wide gap.

For instance, smartphones have changed everything in the space of 10 years, we spend 2 hours on them and check for updates 50 times every day, and yet, many established organizations have not evolved sufficiently enough to fully grasp their potential, from both employees’ and clients’ perspectives.

In the age of mass customization, why shouldn’t we have vastly varying organizational models from a collective standpoint, offering life trajectories entirely adapted to the individual?

 

Too little, too late?

How are traditional organizations reacting to these various shifts? There are two types of marginal adjustments.

On the one hand, spaces are being created where flexibility trumps scale. New methods that may concern a handful of individuals (e.g.,  graduate programs for high-potential individuals), with a legitimacy that is doomed to diminish given the rising level of general qualifications, or emergent activities (e.g. internal startups). The issue is not that these initiatives are bad; it’s that they mostly remain in the experimental stage, are not followed up, or followed extremely slowly, by the generalization of the good practices identified across the entire company.

On the other hand, the improvements made are ornamental and are designed to make the pyramid more acceptable. In other words, a band-aid on a bullet wound. Because in a brand-new open space, with “startup-like” perks, a boring job still is a boring job.

Meanwhile, opportunities are preempted by companies innately adapted to this new era – that’s the advantage of (re)starting from a blank slate.

That’s why the pyramid is obsolete, an unplanned obsolescence but increasingly manifest. To respond to the radical context transformation involving the three shifts, it’s time to (re)design organizational models that are more flexible, without compromising scalability. Models that duly make room for individuality, without compromising the capacity to operate efficiently at scale. Organizations changing from a faceless (anonymous) state to a faithful (loyal to all of their stakeholders) one.

The timing is right, for alternative models are already emerging; just as much inspiration to enable each company to thereby define its organization. That’s what we will present in the coming weeks.

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