Some Thoughts on Organizational Design

The way organizations grow and communicate moves in surprising ways. Organizations can be seen as living organisms and the way they scale isn’t as clean as it looks on a spreadsheet. This is because there are both external and internal factors that impact how organizations change.

The external factors for organizational growth and things like market size and growth rate. These factors are widely understood to change how a company will grow. For example it’s obvious to most people that your local barber shop and a SaaS business are different. Yet there are large chains of barber shops such as Sportsclips as well as small SaaS business so market dynamics alone don’t explain org size.

The internal factors that affect growth include things are:

• systems
• automation
• controls
• management structure

All of these can have very large effects on how organizations change. Also changes in these areas create very different organizational cultures. When you are looking at companies inside a similar market these factors will actually explain most of an organization’s size.

Throughout the rest of this piece we will look at:

• How Organizations change as they grow
• What impacts the systems and business model has on orgs growth and some interesting properties of that
• How culture is created in an organization and how that interacts with the systems and business that the organization is in.

Organizaitonal Scaling

One of the first things that I noticed about companies was that companies of around 100 people can have almost as many layers as companies of 5000. This surprised me at first until I started thinking about span of control. Span of control is the number of direct reports that a manager can work with.

For the purposes of this let’s say that number is eight. This means that a single founder can successfully manage a nine person company with no other managers. The next level is a 73 person company with each person reporting to the CEO also managing eight people. At this point the exponential math kicks in and you get a company size of 585 people. The next layer at that point allows you to expand to almost 5000 people.

This simplified model explains why the number of vertical layers doesn’t grow as fast as one would expect. It also provides a cap on organization size as executives' abilities to manage managers and create systems limit growth. This is also why for SaaS startups so much emphasis is on the VP of sales and engineering since those two groups need the most people.

The other important skill that companies need to develop is communicating between different reporting lines. This is because there can be a drift in the incentives that different teams have to work for different people with different goals. The process of working with other teams is what makes big companies seem slower. Making sure that communication is minimized and as efficient is a key scaling challenge.

Scaling Limitations

Companies will grow until either their business model or systems start failing. The interesting thing is in many ways both of those can be changed. Business model seems like a pretty fundamental decision for a business since it’s how they sell their product and go to market. However it can change in both small ways over the lifetime of a business and in big ways for example deciding to franchise a business model. Franchising brings you from a model of directly providing a service or goods to a model where you are selling the system. This is a way to allow a business which is constrained to a local market to scale to a very large size.

Businesses scale until either systems or business models start to fail. So it’ll feel like things are always going to shit even in a successful business. This is because most of the time is spent at either the end phase when the systems have broken or when new systems are being built.

Building new systems is a painful and slow process. It involves getting people to agree to new ways of working. Often this with people who succeeded with how things were. There are many reactions to this but it can often feel to people like the magic is leaving where they worked. At the same time new people join the organization and feel that every process is broken. The issue is that both of these feelings are true and things are changing in ways that are often irrevocable.

As the systems and business change it also creates cultural change. If this isn’t done carefully there is a tendency for companies to drift into becoming bureaucracies run by committees. This is because of a lack of trust between teams which makes process more important. The other reason that this happens is that more people have to go along for any change. One of the easier ways to get people invested in a change is to involve them in it. This tactic creates committees. Teams being more independent allows for companies to avoid creating these committees. A good example of this is what Amazon does with two pizza teams.

Culture Cause it Had to be Here

Growth changes the culture of a company over time. This is especially true when growth is rapid. This is because culture is passed on by people. It’s not something that is written down as a set of values but instead is a way of operating and seeing the world that is shared by a group.

This also means that once a culture is set it’s actually very difficult to change in big ways. This is because there is a ton of path dependence in what a company’s culture is like. Once it’s set up to work a certain way it’s hard to make it be something else. For example if there is a culture of doing things via consensus bucking the mold and trying to force stuff through will get that agent rejected.

This means that if a major culture shift is necessary it often ends up looking very brutal. It’s not enough to bring in a new CEO but at some point there needs to be a large amount of turnover of staff to get people to buy into the new way of doing things. This makes creating the culture of the organization one of the most important things to get right early on.

Conclusion

Companies are best viewed as living organisms. They grow and change in various ways overtime and those changes are based on both their internal dynamics and outside pressures. In many ways those changes are hard to predict and the causes of them are tough to see from the outside.

Companies will scale until their process breaks. This makes them feel very dysfunctional. Growth stage companies can also feel broken because they are building process on the fly. Well run companies deal with change and focus on sense making in drastically changing circumstances.