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Jan Bosch is a research center director, professor, consultant and angel investor in startups. You can contact him at jan@janbosch.com.

13 June 2022

There are few topics in companies as sensitive as the notion of organization and organizational setup. Many still view their career as climbing the corporate ladder and, having reached a few rungs up the ladder, worry about sliding down again. So, every discussion that might rock the boat is received with great skepticism and people easily get defensive.

The fact of the matter is, though, that in times of rapid change, the traditional, hierarchical setup is probably the worst possible way of organizing large groups of people. Hierarchical structures are good at scaling, controlling many people from a central position, they’re very efficient for repeatable tasks, allow for harmonization of processes and effectively support globalization. If the context in which the company operates is stable and has a low level of complexity, hierarchical setups are perhaps the best answer to the organizational challenge. They’re extremely good at exploiting the learnings of the past and driving continuous efficiency improvements.

Of course, hierarchical organizations also have weaknesses. They tend to suffer from slow decision-making. Power tends to be driven by position and not capability. Because of the career ladder notion, the company tends to be internally focused and things easily gravitate toward politics. Inherent in the structure is the extremely high resistance to changes. Hierarchical organizations are, in many ways, even intended to naturally resist any change to the status quo. If the context in which the company operates is volatile, the future is unpredictable and the industry is undergoing a fundamental transformation, we need a much higher degree of exploration. In a hierarchical organizational culture, however, exploration is very inefficient as it has a very different reward function in that only a small percentage of the things we try out will actually work.

Guess what: the digital transformation is volatile and unpredictable. We don’t necessarily know how things will unfold and, especially, when they will unfold. So, we need to operate with a clear strategy of how we want the industry to evolve and at the same time act with agility in response to the context in which we’re operating.

This calls for a new way of thinking about organization. There are numerous views on this, including many by people who have spent much more time thinking about this question and are much smarter than me. However, in my view, there are at least three main aspects that need to be considered: cross-functional teams, new skills and different leadership.

Cross-functional teams are incentivized to reach certain quantitative outcomes and contain all the skills needed to achieve these outcomes. The notion is that intra-team coordination is at least one order of magnitude (if not more) efficient than inter-team coordination. So, by bringing individuals with various skills into the team, we’re increasing the efficiency of communication dramatically.

Second, we need to train and hire for new skills. There are two types of skills to consider. First, to maximize the use of data and AI as well as continuous business models, we need people in the company who have the relevant knowledge and who can continuously develop and grow their understanding of the domain. The second type of skill is being comfortable in the unknown. This requires a relentless curiosity, a willingness to learn and to be surprised by what happens. To explore and embrace the perception of inefficiency that comes with it and to trust that the process will lead to the desired outcomes, even if it’s not clear right now how we’re going to get there.

A great example of this is A/B testing. When defining an A/B experiment, you need to start from the mindset that you don’t know the answer to the question the experiment is hoping to elucidate. Also, the vast majority of A/B experiments in most SaaS companies fail in that the experiment doesn’t result in a better outcome for the company. This requires the curiosity to use even the unsuccessful experiments as a basis for learning. Finally, you have to trust the process and accept that 95 of 100 experiments (or more) won’t result in a positive outcome but that the few successful ones will justify the overall investment of time and resources.

Third, leadership. Traditional leadership tends to be intertwined with management and, especially high up in the organization, tends to be driven by short-term financial metrics. Leadership in digital transformation means letting go of preconceived notions based on earlier ‘old-world’ experiences and leading people even if you’re uncertain and, most likely, the least knowledgeable in the team. Bringing people together around curiosity, learning and experimentation, leading them through the many unsuccessful outcomes and helping everyone view this as a learning opportunity is a different type of leadership. Especially as leadership will be much less based on positional power. In addition, digitalization often requires decisions that hurt from a short-term perspective but are instrumental for creating a desirable future. We need leaders who are willing to place these kinds of bets.

Hierarchical organizations are the least suitable form of organizing large groups of people during industry upheavals such as a digital transformation of your industry and company. Instead, we need to explore alternative ways of organization. Even if there are many aspects and views on this topic, in my view at least the notion of cross-functional teams, developing new skill sets, both technical and personal, as well as new forms of leadership need to be realized to be successful in this transformation. Remember: most people are well-intended so if change is slow, it’s likely due to the way you’ve organized your people.