Does a Flat Organization Have Negative Consequences?

Julie Wolf of Harvard Business School has conducted an extensive study of companies that have tried to flatten their organizational structure.  She studied historical data on 300 large U.S. firms over a 15-year period, and she conducted interviews and analysis of CEO calendars.   She examines the consequences of attempts by large firms to "flatten their hierarchies" - something often recommended to improve performance.   The conventional wisdom is that we should flatten hierarchies so as to push decision-making down to the lowest level possible.  However, Wolf found an unintended consequence of such flattening efforts: "Results suggest that flattening transferred some decision rights from lower-level division managers to functional managers at the top. Flattening is also associated with increased CEO involvement with direct reports—the second level of top management—suggesting a more hands-on CEO at the pinnacle of the hierarchy."  In short, by removing layers, we may be pushing decision-making up the organization, rather than down to the people at the local level with specific knowledge about the customer, markets, technologies, and the like.  Flattening could lead to a more centralized management structure.

I've always believed that organizational structure is a blunt weapon.  Structure is an easy lever to pull if an executive wants to reduce costs and influence behavior.  However, simply moving boxes and arrows on the organizational chart often does not lead to higher performance.   Structural change must be accompanied by process and cultural change.  Specifically, Wolf's research suggests that firms need to be very clear about the allocation of decision rights when layers are removed.  I also think that firms need to pay close attention to status/informal hierarchies, rather than only focusing on the formal organizational structure.   Often, the informal hierarchy drives decision-making processes.   The values of the organization drive decision-making processes.  Flattening of the formal structure has to be accompanied by an effort to reduce the salience of status differences, and it has to be buttressed by leadership which emphasizes the value of putting decision-making in the hands of those closest to the work.