Sunday, June 2, 2013

Team Scaling

As startups grow (after achieving initial customer traction, finding the right Go-To-Market strategy, and raising more money at higher prices), many people ask:  “Can the founder CEO scale?”

As startups grow, the company builds its executive team, adds structure and processes, and refines its corporate strategy.  This is not trivial, but much easier than the people challenge.  Organizational theory says that the people challenge grows exponentially with the number of employees.  Span of Control Theory

As startups grow, the people challenge becomes the primary challenge, and the CEOs generally change their styles for managing and communicating with the employees.

Phase I:  1 to 30 employees.  At this phase, everyone is within the CEO’s “span of control.”  So, the CEO can have direct communications with everyone.  “A manager's span of control is the number of employees that he or she can effectively be in control of at any one time...Views on the ideal span of control have changed over time as thinking about corporate structure itself has changed. For the first 60 years of the 20th century, when managers favoured a structure based largely on military models, a consensus formed around the number six. After 1960, however, management styles began to change. Flatter, less hierarchical and more loosely structured organisations implied larger spans of control. The consensus on the size of the ideal span rose to between 15 and 25."  The Economist

Phase II:  30 to 100 employees. The company has grown beyond the CEO’s direct span of control, but everyone is at most only one connection removed from the CEO’s span of control.  So, the CEO can have near direct communications with everyone.  Everyone is within the CEO’s “effective” span of control.

Phase III:  100+ employees.  At this point, the startup organizational structure starts to break down.  The company has too many employees for the CEO to manage directly.

Empowerment.  To reduce organizational complexity and personal workload, the CEO starts empowering key executives – who may be functional leaders or business unit leaders.

Usually, the CEO initially takes a bipolar approach to empowerment:  still micromanaging (which can result in the team’s paralysis and lack of ownership, as they wait for the CEO’s direction) or complete delegation (which can result in the team pursuing non-critical missions).  It takes time for the CEO and the execs to develop the right balance and trust.  The CEO also needs to develop (i) a “passive sonar” system (which allows the CEO to observe the critical events without being noticed) and (ii) a way to influence the team in the background (so the empowered exec does not lose authority and motivation).

Micromanage (paralysis) ßà Passive SONAR + Background influence ßà Abandonment 

Coordination of these silos will soon become a major challenge, because empowerment will result in organizational silos.  In fact, successful empowerment creates stronger silos.  I had a great conversation with Amitabh Sinha about the difficulties of coordinating silos.  Usually, CEOs try to coordinate silos (or business units) through financial metrics and other KPIs.  They help, but don’t address the root cause.  The CEO needs one simple vision to unify the silos.  In technology companies, that vision could be one unifying product architecture.  For example, promoting every Apple product to have the same look and feel from the user perspective.  Amitabh believes the organizational structure must be consistent the underlying product architecture.  Another unifying vision could be targeting the same teaching customer. 

Vision and culture for all employees.  As the CEO manages the company by empowering executives within his effective span of control, the CEO still wants to communicate with all employees without undercutting  his executives' empowerment.  One method is to promote vision and culture.  This way everyone knows where the company wants to go and why.  This helps each employee do the right thing from the CEO’s perspective, even if the CEO cannot talk with each employee personally.

Vision usually comes naturally to every founder CEO.

Culture is more complex.  According to Wikipedia, “Organizational culture is the behavior of humans who are part of an organization and the meanings that the people attach to their actions. Culture includes the organization values, visions, norms, working language, systems, symbols, beliefs and habits. It is also the pattern of such collective behaviors and assumptions that are taught to new organizational members as a way of perceiving, and even thinking and feeling. Organizational culture affects the way people and groups interact with each other, with clients, and with stakeholders.” Wikipedia    I find culture best created through the company’s folk heroes and losers.  These role models translate the company’s abstract culture into something very simple for everyone.  So, CEOs can get tremendous leverage by creating the right heroes (like George Hu below).

Developing future leaders. The company needs to identify future leaders early and start developing them.  Those future leaders could a summer intern.  Marc Benioff writes in "Behind the Cloud":  "Roughly two years after we started our company, George Hu, an analytical and enterprising Stanford MBA student, joined salesforce as a summer intern.  George was tasked to investigate new vertical markets..., but on his own initiative he began to examine our sales process and analyze the effectiveness of our marketing dollars...We were shocked [with the results of his analysis], and none of us could believe how much money we were wasting...This led to a new marketing model." George is now COO of Salesforce.

This organizational transition is illustrated in the chart below:

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