Self-Inflicted Duress: The Case of a Technology Giant

The case of ABC Services, an immensely successful giant in the technology services sector exemplifies the systemic problems organizations self-create and then struggle with. To maintain anonymity, we will make do with the alias and the facts of the case will be sufficient to draw conclusions.

The earliest five years was the period of investment. Massive infrastructure investments were accompanied by a hiring spree. The monthly number of new hires exceeded 100 at times. Very high barriers to entry, adoption of the new technology by avid consumers at a very high rate, favorable regulatory environment allowing an oligopoly translated into stellar business results. All financial and operational parameters attested to an enviable growth pattern with smart profits. The number of customers, revenues saw double-digit growth consistently at enviable profitability.

A start-up hiring more than 100 persons a month is most likely to encounter organizational difficulties. ABC was no exception. Where would the new hires go? What would be their job descriptions? What would be their performance metrics? There was much dust in the air for a very long time. Organizational structure kept changing. A culture was created where managerial power was measured by the headcount managed. Revenues and profits raining in provided little reason to consider them as important issues. The focus was on gaining power.

The oligopolistic structure of the sector accompanied by a dizzying rate of customer uptake of the new technology allowed ABC to build a tremendous customer base in the first decade after its inception. Evolution of technology allowed executives of the company to fancy an ever-growing list of ideas for new services and products that appeared to be very promising on paper. The idea overarching their ambitions was monetization of the customer base by tapping into the ostensibly insatiable appetite of the consumers for innovative offers. New services meant more headcount, which, in turn, meant more executive power in ABC culture. Profits continued to grow regardless of what was going on in the organization.

Executive ambitions for new revenue sources brought hordes of new hires on board, which was followed by endless organizational changes. Turf wars were now underway at the executive level. Every organizational change was an opportunity to aggrandize power as well as a threat of losing it.

Contrary to expectations, just about every new business line either failed completely or remained significantly short of delivering the aspired results. The natural executive response was covering up. Product and service line profitability was never measured. As long as the main business lines produced healthy profits and future growth expectations for the new business lines could be used as an argument to keep them, there was no need to measure individual product profitability. Executive vice presidents, of which there was about a dozen depending on the times, conveniently agreed that new product profitability could not be measured reliably. None of them had a good reason to dissent and put paid to the plans to hire even more people.

Soon all teams had much fat. To make matters worse, many bright minds brought on board during continuously replenished waves of recruitment were struggling to maintain their positions because of the stream of business underperformance in new product lines that were eroding the viability of keeping all these recently created posts. The difficulty ABC faced by employing such bright minds is that they were never short of arguments justifying their jobs and even having more power when possible. Turf wars were had now spread to middle layers of the company. Even individual contributors to whom nobody reported were fighting to enrich their job descriptions without any limits to their imagination on just how critical their position was for the company because their grades and compensation, not to mention their longevity within ABC, depended on that. Executives continued fighting their own turf wars in a culture where headcount meant power and safety in waves of organizational change that kept coming every few months.

It was not long before the human resources function was tasked with regulating the headcount in the strictest terms possible. That made matters much worse. The mechanistic view of HR teams encouraged them to move people from box to box like moving furniture in a living room. Much dreaded HR quotes heard in the corridors or around the water cooler emerged: “Well, that manager no longer has enough people to justify his position” or “These tasks are duplicated in departments x and y, why don’t we combine them and get rid of one manager? This will help with the span of control issue that the board of directors is keen on”. This spurred managers to dig their heels even deeper and defend their positions ever more vehemently. The stakes justified all means that included deprecating the work of others while glorifying their own. Perceived threats meant that HR business partners were never going to be let in on the realities of the business lines.

When ABC headcount stopped growing, another structural problem emerged. There were no longer enough positions in the organization pyramid that was no longer expanding. Granting higher grades to the best talent to prevent them from leaving the company was a palliative solution. HR soon ran out of grades to confer. A whole new battle started for grades.

A way out of the trouble early on could have been giving each executive vice president their own HR budget to manage. EVP in charge of HR was a vehement opponent. Letting go of the budget would result in losing power. Although the EVP had company profit in his grade report card as a target, the contradiction was evident. The larger the budget under his control was, the more powerful he felt. On the other hand, he knew that the two main business lines would continue to rake in profits, and he had hardly to bother with that. Besides, more organizational conflict meant he could justify a larger HR team. A larger HR team meddling even more in business lines with an inevitable mechanistic view built on their privation in business facts created even more conflict. This was a vicious cycle feeding on organizational tension between the now clearly separated silos of power.

HR business partners were constantly told by managers that a disaster was impending if they did not immediately recruit new people. Reams of information and facts were provided to justify the arguments unilaterally. Business partners had no way of checking facts provided to them because the details of the business were held back artfully by the managers. A key performance parameter for HR business partners was internal client satisfaction, which rendered their dilemma unsolvable. They poured more fuel on fire by saying that frequent changes in organization structure is a necessity because of the dynamism of the sector ABC was competing in. In many cases, a new organization structure was nothing more than a return to older version. ABC was oscillating between a limited number of organization designs. It goes without saying that this line of thinking justified even more headcount for HR. Safety in numbers.

ABC services case exemplifies how systems self-create the troubles they are mired in. Solutions can only be found within the very same system that led to the problem in the first place. A systemic approach is necessary to uncover the sources feeding the vicious cycles burdening ABC. A good starting point could be candid questioning of the organizational paradigm that equates power to headcount while considering profit a foregone conclusion. True, the business is still profitable, even today, and is the envy of many. Nonetheless, the fact remains that without tension in the organization things could be a lot brighter.

In addressing the self-inflicted woes like in ABC Services, we see off-the-shelf prescriptions, benchmarks, best practices, etc. as potentially hazardous. Every organization is a living being and should be treated as such. The same organizational intervention may lead to very different results in two different companies no matter how similar they appear on the surface. Having said that, we would argue that a systemic solution to ABC’s problems would comprise the following components:

1. A value tree that depicts succinctly where every department fits into the process of value creation at ABC. McKinsey’s renowned “Mutually Exclusive Collectively Exhaustive” principle is simple enough to adopt in developing this diagram.

2. A candid series of well-structured discussions at the executive level to define mutual expectations, e.g. who expects from whom to deliver the aspired financial performance. The value tree is an invaluable component in structuring the discussions.

3. An open mind, acceptance that ready-made solutions are not available: Take the case of HR EVP: The expectation of other executives could be having him as a neutral third party in headcount regulation with final authority or it could be having him focus on people development and let every department manage their own HR budget.

4. A set of agreed-upon executive targets consistent with expectations. For example, if the HR EVP is expected to regulate headcount, internal client satisfaction cannot be a performance parameter; if his focus is expected to be on people development the same factor should have a sizeable weight in his grade card.

5. The democratization of job descriptions and performance bonuses where HR defines the general outlines of what is expected from different functions, but the teams finalize the job description of each post collectively. Likewise, teams decide, within the general HR guidelines, what should be the performance metrics for each team member. At the end of the period, a collective decision is made as to who gets how much bonus payment. The weight of the manager’s view in the final decision may vary depending on organizational readiness to such democratization.

Most readers at this point will at least be confounded by the apparently radical elements in the suggestions above. Democratization of bonus distribution? Collective team decisions? There is enough evidence in the business world to convince even the most conservative reader. After a great start, Starbucks had begun faltering. It was not until a decision was made to engage teams that they got out of the trough. Morning Star, one of the largest food companies in the United States, applies many of the principles listed above. In his seminal work titled “Reinventing Organizations”, Frédéric Laloux provides a much larger number of examples and principles.

Even the most radical suggestion has enough merit to make a strong case. Take collective decision making at team level for deciding who gets how much bonus at the end of the year. In the case of ABC, and many other companies alike, most employees get their bonus based on the perceptions of the immediate managers unless hard targets such as sales quotas are applied vigorously. Not everyone in a company is a salesperson and even sales staff get a sizeable portion of their final grade from qualitative factors. Perception based evaluation is inevitable. In the case of ABC, in most instances the whole process ran backward: The manager would decide who gets the top grade than works his A collective opinion that the whole team agrees on has two merits: It is more credible because it collects data from a larger audience. It also reduces friction and resentment within the team because the outcome is of their own making.

While we search for scapegoats, factors external to our organizations, to blame all our troubles in business, we often overlook the fact that such troubles are self-inflicted. At Heraklion Partners we use a systemic approach that treats every organization as a living being and, differently from many advisors, combine our thinking with a clear link to financial results. Getting the most out of an organization is possible if one looks into the system that feeds the problem one is trying to solve. A parting thought: radical suggestions are much less radical than unquestioned practices we regurgitate daily in organizational design.