The keys to self-management. A coherent set of structures and practices to get rid of bosses, hierarchy and the pyramid.
This entry is not one story, not one “hack”. It's perhaps the first attempt to formulate a coherent and consistent set of hacks that propel a whole new organizational model based on self-management.
Increasingly, we are coming to the realization that hierarchy is poisonous and that the pyramid shape of today’s organization deeply limits people’s ability to contribute their passion, creativity, skills and energy towards a collective purpose.
Much of today’s thinking about organization insists that culture is key, and that enlightened leaders should empower their followers. This entry claims that the future belongs to organization that go a whole step further. Instead of just empowering followers, why not get rid of the pyramid entirely, and make everyone powerful by design?
It is the result of three years of research into extraordinary organizations from different industries and geographies, that have relentlessly experimented and put every aspect of management we take for granted on its head, until everything clicked. They show that it is possible to operate even very large and complex organizations on self-managing principles, and that in these environments, human potential is unleashed in ways that traditional organizations could hardly contemplate.
A great number of self-managing organizations were scanned in the first step of this research. In a second step, nine self-managing organizations were singled out for in-depth research. These organizations are both large in size (the smallest has 500 employees, the largest 40,000) and have operated based on self-managing principles for at least 5 years (most have done so for 10 years, 20 years or more).
Some of the organizations are for-profit, others are nonprofit, some are in blue collar, some are white collar industries. They come from a great variety of sector: home care, automotive supply, education, food processing, media, retail, electricity generation, etc.
Some of these organizations have been researched before (one of them, Morning Star, won a Mix prize), but the majority haven't been researched or featured in any depth.
Here is is an overview of the nine organizations that were researched in particular depth:
Energy sector―Global―40,000 employees―For profit
AES was founded by Roger Sant and Dennis Bakke in the United States in 1982 and quickly grew into one of the world’s largest electricity production and distribution companies, with plants in dozens of countries spread around the globe and 40,000 employees.
IT consulting―Global―10,000 employees (1996)―For profit
BSO/Origin was founded in 1973 by Eckart Wintzen in the Nether-lands. By 1996, when Wintzen left, after selling it to Philips, it had 10,000 employees in 20 countries.
Health care―Netherlands―7,000 employees―Nonprofit
Buurtzorg was founded as a nonprofit in 2006 by Jos de Blok and a team of nurses. It has become the largest neighborhood nursing organization in the Netherlands, providing home care to the elderly and the sick.
School (Grades 7-12)―Germany―1,500 students, staff, and parents―Nonprofit
ESBZ, a publicly financed school in Berlin, was founded in 2007 under the guidance of Margret Rasfeld, the school’s director. It has attracted international recognition for its innovative curriculum and organizational model.
Metal manufacturing―France―500 employees―For profit
FAVI, a brass foundry, is a family business created in 1957 in the north of France. In 1983, Jean-François Zobrist was appointed CEO and undertook a radical transformation of the organization. It produces, among other things, gearbox forks for the automotive industry.
Organizational operating model
Holacracy is an organizational operating model, originally developed by Brian Robertson and his team at Ternary Software, a Philadelphia-based start-up. After transferring Ternary to new leadership, Robertson co-founded HolacracyOne, a training, consulting, and research company dedicated to spreading this new organizational model, which has been adopted by large and small for-profit and nonprofit organizations on several continents.
Food processing―United States―400-2,400 employees―For profit
Morning Star was founded in 1970 by Chris Rufer as a single-truck business transporting tomatoes. Today, it holds an overwhelming market share of tomato processing and transport in the United States. If you have enjoyed a pizza or spaghetti sauce in the United States, you are likely to have tasted a Morning Star product.
Human Services―United States―4,000 employees―Nonprofit
Resources for Human Development (RHD) is a Philadelphia-based nonprofit operating in 14 states, serving people in need through a variety of homes, shelters, and programs in areas such as mental disabilities, addiction recovery, and homelessness. It was founded in 1970 by Robert Fishman.
Hydraulics components―Global―900 employees―For profit
Sun Hydraulics, a company that was founded in 1970 by two engineers, designs and manufactures hydraulics cartridge valves and manifolds. Today it is a public company with factories in Florida (where it is headquartered), Kansas, England, Germany, and Korea
Other organizations that have pioneered self-mangement practices that were researched include Gore-Tex, Valve, Menlo, the VISA network, Orpheus Chamber Orchestra, Alcoholics Anonymous, and others.
Each of the researched organizations is of course unique, and so were their journeys to self-management. But they have one thing in common. Their founders or 'CEOs’ (an inappropriate term in case of self-managing structures) are people who have gone through quite a bit of a personal journey, who have their ego under control and have explored deep questions of meaning.
For them, the current way of managing organizations (they pyramid, the need to control, the power games and so forth) simply didn't make sense. They didn’t want to be the heroic leader that calls all the shots, they didn’t want to be the bottleneck at the top of the organization. It was really an inner imperative, a desire to find management practices that would be in congruence with their deeper values that pushed them to engage in bold experimentation.
After the fact, once everything clicked and the results proved spectacular, they were able to rationalize the journey, to show
- why and how it unleashes people's passion, energy and creativity
- why and how it produces much better bottom line results.
To some degree, these elements were present in their mind when they set out on the journey. But the trigger, really, wasn’t so much a goal they wanted to achieve as an inner urge to find organizational practices that would meet deep-held values.
More and more people sense that very notion of hierarchy and the resulting pyramid shape of today’s organizations are out of date. By definition, a pyramid restricts initiative taking and decision making to just a few people at the top. It fails to ignite the creativity, energy and passion of the vast majority of employees. And often the few people at the top who have real power to shape a better future dissipate most of their energy in power games and infighting. The world is becoming increasingly complex and change is increasingly fast-paced. Pyramid-shaped organizations prove to be increasingly unable to operate in such a world.
Many leading thinkers argue that the answer must be empowerment: a culture where leaders are trained to share their power with their subordinates, where decisions are pushed down the pyramid. This solution still rests on the notion that power is a currency in limited supply, and that power power given to people below is taken away at the top. Who likes to give something away? No wonder these types of organizations must constantly invest in training and culture to push leaders and managers to share some of their power. Why not go a step further, and create organizations on entirely different foundations, where everyone is powerful by design, because there is no more pyramid?
All around us, we can see that truly complex systems thrive without hierarchy. Market economies, traffic systems, the human brain, and natural eco-systems are all highly complex, non-linear, adaptive systems that operate without hierarchy. An increasing number of truly exceptional organizations take inspiration from these systems to build large organizations that transcend the need for hierarchy.
Some people mistakingly think that self-management simply consists in taking out hierarchy and creating a “flat” organization. This quickly leads to a power vacuum that creates major uncertainty. People look at each other and wonder who can take what decision. In the absence of agreed upon processes, covert or overt power games emerge to try and get things done. Regularly articles appear in the press reporting on organizations that have gone down this path, suggesting that self-management cannot work in practice.
In reality, organizations can’t take out one form of managerial coherence without putting another (more powerful) one in its place. The pioneering self-managing organizations in this research have reinvented almost all organizational structures, practices, and processes to adapt them to the organic, adaptative world of self-management. They show that self-management is not only possible, but is vastly more productive and more fun.
So what do self-managing structures look like, if not a pyramid? The research reveals three different types of self-managing structures. Which one is most appropriate for an organization depends on the length and depths of its value chain. In some cases, the organization can be structured in a series of parallel teams, for instance, while in other cases, a structure of nested teams is required.
But it is not only the structure that changes. Almost all of the basic organizational processes need to be adapted to a world without a boss. In today's model, a boss calls the shots when it comes to decisions such as setting targets, evaluating, compensating, making purchases or investments, etc. Pioneering organizations have upgraded all these processes to adapt them to a world of peer-based relationships. Politics is almost completely drained out of organization. Much better and faster decisions are made, fueled by a group's collective intelligence and passion.
Here is a list of the key structures and processes that have to be upgraded for an organization to operate in self-managing fashion:
- The basic structure of the organization
- How staff-type functions are structured and provided
- How projects are managed
- How decisions get made and who can make them
- How investments and purchases are made
- How information flows
- How knowledge gets managed
- How teams coordinate actions
- How colleagues are recruited
- How targets are set and followed up
- How colleagues are evaluated
- How colleagues are compensated
- How roles gets defined and assigned
- How colleagues are dismissed
- How conflicts are resolved
- How crises are dealt with
- How strategies are defined
- How innovation is managed
- How targets are set
- How budgets are created and followed up
Each of these “hacks” is described in detail in a document attached with this entry (“A detailed description of structures and practices of self-managing organizations”).
Decision making―an illustration
Here is one illustration: how are decisions made in self-managing organizations, and who can make what decision? Can anybody just make any decision? That sounds like a recipe for chaos. Are decisions then made by consensus? That sounds exhausting and impractical, certainly for organizations with hundreds or thousands of employees.
These organizations found the key to operate effectively, even at very large scales, entirely without hierachy, without pyramid and without boss subordinate relationships. The key is not consensus. It is to take inspiration from the corodination mechanisms that underlie all truly complex and nonlinear systems found, for instance, in nature.
Almost all organizations in the research use, in one form or another, a practice that one of them called the “advice process.” In principle, any person in the organization can make any decision, including spending company funds. But before doing so, that person must seek advice from all affected parties and people with expertise on the matter. The person is under no obligation to integrate every piece of advice; the point is not to achieve a watered-down compromise that accommodates everybody’s wishes (and satisfies no one). But advice must be sought and taken into serious consideration. The bigger the decision, the wider the net must be cast―including, when necessary, the “CEO” (for lack of a better word) or the board of directors. Usually, the decision maker is the person who noticed the issue or the opportunity or the person most affected by it.
Dennis Bakke, the founder of AES, an electricity generation company of 40,000 people, recounts a story that exemplifies the advice process in action. One day Shazad Qasim, a recently hired financial analyst at AES, consulted with Bakke. He was intending to leave his role to go back to his native Pakistan and research the opportunity for electricity-generating capacity there on behalf of AES. Bakke remembers his reaction:
I told him I was skeptical. Several years earlier, Agency for International Development (AID) representatives from the U.S. Department of State had encouraged us to expand into Pakistan. We had told them that we hardly knew what we were doing in the United States, let alone a place like Pakistan. Besides, it ranked as one of the most corrupt countries in the world for doing business. The ethical standards at AES probably ensured that we would never get any business there.
Despite the CEO’s recommendation, the advice process meant the decision was Shazad’s. He decided to go to Pakistan, effectively creating a new position for himself as business developer, retaining his previous salary. Six months later, the former financial analyst invited Bakke to Pakistan to meet the prime minister. Two and a half years later, a $700 million power plant was running. In line with AES’s principles, the decision that AES would invest $200 million of its equity wasn’t made by Bakke or the board, but by Shazad and people with less seniority (who of course, given the amounts at stake, asked Bakke and the board for advice).
We often think that decisions can be made in only two general ways: either through hierarchical authority (someone calls the shots; many people might be frustrated, but at least things get done) or through consensus (everyone gets a say, but it’s often frustratingly slow and sometimes things get bogged down because no consensus can be reached).
The advice process transcends this opposition beautifully: the agony of putting all decisions to consensus is avoided, and yet everybody with a stake has been given a voice; people have the freedom to seize opportunities and make decisions and yet must take into account other people’s voices. The process is key to making self-management work on a large scale. It is actually so critical that, at AES and other self-managing organizations, colleagues know that forgetting to uphold the advice process is one of the few things that can get them fired (how someone can be dismissed in the absence of hierarchy is another process these organizations had to reinvent).
It’s interesting to hear Bakke elaborate on the many benefits of the advice practice: in his experience, it creates community, humility, learning, better decisions, and fun:
- First, it draws people whose advice is sought into the question at hand. They learn about the issues and become knowledgeable critics or cheerleaders. The sharing of information reinforces the feeling of community. Each person whose advice is sought feels honored and needed.
- Second, asking for advice is an act of humility, which is one of the most important characteristics of a fun workplace. The act alone says, “I need you.” The decision maker and the adviser are pushed into a closer relationship. In my experience, this makes it nearly impossible for the decision maker to simply ignore advice.
- Third, making decisions is on-the-job education. Advice comes from people who have an understanding of the situation and care about the outcome. No other form of education or training can match this real-time experience.
- Fourth, chances of reaching the best decision are greater than under conventional top-down approaches. The decision maker has the advantage of being closer to the issue and … usually has to live with the consequences of the decision.
- Fifth, the process is just plain fun for the decision maker because it mirrors the joy found in playing team sports. … The advice process stimulates initiative and creativity, which are enhanced by wisdom from knowledgeable people elsewhere in the organization.
Avoid jumping to any hasty conclusions. The CEOs and other leaders of self-managing companies are anything but weak, hands-off leaders. Arguably, these CEOs and senior leaders are better informed and more influential than leaders invested with the powers of hierarchy. With the advice process, they are continually consulted regarding decisions by people from all corners of the organization. Information and decisions that reach them are not vetted and filtered many times over as they climb up the chain of command. In traditional organizations, senior leaders must do the hard work of integrating conflicting perspectives into a decision; because this process takes time, senior leaders become bottlenecks for decision-making. With the advice process, they can ask tough questions and give their opinions forcefully, but then move on to the next question; meanwhile, someone else will do the work of integrating different perspectives and advice.
There is no prescribed format for seeking advice. People might reach out to colleagues in one-on-one discussion, or convene the relevant group for a meeting. When large groups are affected by a decision, email or the intranet is often the best way to collect input.
For some reason, many people naturally assume that in the absence of bosses, decisions in self-management organizations will be made by consensus. And because they have been scarred by the paralysis and endless discussions that often come when people seek consensus, they are quick to dismiss self-management as a viable way to run organizations. So let’s be clear: self-management works because organizations have found ways to make decisions that transcend both hierarchy and decision-making.
In principle, consensus sounds appealing: give everyone an equal voice. In practice, it often degenerates into a collective tyranny of the ego. Anybody has the power to block the group if his whims and wishes are not incorporated; now it’s not only the boss, but everybody, who has power over others (albeit only the power to paralyze). Attempting to accommodate everyone’s wishes, however trivial, often turns into an agonizing pursuit; in the end, it’s not rare that most people stop caring, pleading for someone to please make a decision, whatever it turns out to be. With the advice process, no one has power over anybody else. The process transcends the need for consensus by giving everyone affected a voice (the appropriate voice, not an equal voice), but not the power to block progress.
Consensus comes with another flaw. It dilutes responsibility. In many cases, nobody feels responsible for the final decision. The original proposer is often frustrated that the group watered down her idea beyond recognition; she might well be the last one to champion the decision made by the group. For that reason, many decisions never get implemented, or are done so only half-heartedly. If things don’t work out as planned, it’s unclear who is responsible for stepping in.
With the advice process, the ownership for the decision stays clearly with one person: the decision maker. Convinced that she made the best possible decision, she sees things through with great enthusiasm, trying to prove to advice givers that their trust was well placed or their objections immaterial. While consensus drains energy out of organizations, the advice process boosts motivation and initiative to unprecedented levels.
(See the attached document “A detailed description of structures and practices of self-managing organizations” for the full set of descriptions of the structures and practices necessary for organizations to operate in self-managing fashion)
Hierarchy can’t handle complex systems
Before I engaged in this research, I was assuming, like most people, that you can operate in truly self-managing fashion in a group of at most 4 or 5 people. But that any group larger than that needs structure and someone to call the shots—a boss—to get work done. Through the research, I’ve upgraded my mental model and realized that indeed we do need structure, but we don’t need a boss.
Here is the truth about hierarchy. Hierarchy is better than no structure at all, for sure. But is is a very blunt and weak weapon. It can only accommodate systems with very limited complexity. Reality shows that all truly complex systems are run with coordinating mechanism other than hierarchy. If we want to navigate truly complex systems, we need to upgrade to organizational systems more powerful than hierarchy.
Think about this: the idea that a country’s economy would best be run by the heavy hand of a central planning committee like the Soviet Union used to do has been thoroughly discredited. We all know that a free-market system with a myriad of players picking up on signals, making decisions, and coordinating amongst themselves delivers far superior results.
Yet for some strange reason, inside organizations (some of which have revenues larger than the GDP of the Soviet Union), we still insist we need the equivalent of a planning committee: a pyramidal hierarchy where the Central Committee (usually referred to as the Executive Committee, or C-Suite) makes all key decisions on products, volumes, prices and innovation, and controls far flung operations through an asphyxiating chain of budgets and targets that are to be followed up rigidly every month.
We have given up the illusion that we can plan market economies. The global economy has grown into a truly complex, self-managing system. There are structures and coordinating mechanisms, but not boss to try and steer it all.
Consider other truly complex systems. Our brain has 85 billion nerve cells. Thousands of processes happen in parallel at all times. There are structures and coordinating mechanisms, but not boss. No cell is the CEO of the whole, sitting down with a bunch of other cells in executive meetings. The brain is a highly adaptative, self-managing system.
Or take just a single human cell. Its complexity is breath taking. Look at it through an electronic microscope, and it looks like an entire universe. Thousands of chemical processes happen at all times in coordinated fashion. And yet there is no boss within the cell.
Take other complex systems. Rush-hour traffic in large cities. Or an eco-system like a forest. They have structures and coordinating mechanisms, but no boss. All truly complex systems operate without hierarchy, for one simple reason: hierarchy is unable to deal with high levels of complexity. With appropriate structures and coordinating mechanisms, self-management beats hierarchy every time.
As the complexity and speed of change in the world increases, there is no way around the fact that we need to adapt our ways of collaborating. We need to brings the self-managing principles that account for successful free-market economies, for the functioning of the human brain, of a human cell, and of large eco-system inside organizations. There is no way around this simple truth: the future calls for self-managing systems.
The challenge in switching mental models
Leaders who champion self-management have found that the biggest challenge they faced is in helping people upgrade their mental model. People need to come to terms with the idea that self-management, far from being a pipe dream, is the best way to run large and complex organizations.
Leaders in these organizations spend a significant amount of time reaffirming the principles and practices of self-management. Outsiders call them crazy or naive. Colleagues inside self-managing organizations generally relish the system, once they have tasted it, but even they find it hard to shake off the idea that self-management is risky. When a problem occurs, voices call to reintroduce controls and oversight. If leaders are not careful, rules and hierarchies quickly creep in through the backdoor. They need to reaffirm their conviction that self-management provides more control than rules and hierarchy, that self-management is less prone to abuse and mistakes, because control is baked into the system, not into a few people’s roles.
This change of perspective, many leaders of self-managing organizations argue, is the biggest challenges these systems face at this moment, because self-management is still such a deeply countercultural concept. In comparison, the challenge to reimagine all key organizational processes (decision-making, performance management, compensation etc.) to adapt them to a bossless context is relatively straightforward.
Explicitly addressing assumptions
Our belief that organizations cannot operate without hierarchy is based, for most of us, on a number of untested, unconscious assumptions we hold about people and their motivations. Several leaders of self-managing organizations have found it useful, therefore, to talk often and explicitly about the assumptions underpinning self-management and to contrast them with the assumptions hidden behind by traditional hierarchical models.
In 1983, Jean-François Zobrist was appointed CEO of FAVI, a family owned brass foundry in the north of France. Within 3 years, he transformed it into a highly successful, self-managing organization. In a market that has been steamrolled by Chinese competition, FAVI is the only European producer standing. It generates double digits margins and commands a 50% market share in automotive gearbox forks in Europe.
When FAVI switched to self-management, and in the years that followed, Zobrist continuously engaged workers and engineers in the factory about the hidden assumptions behind traditional (i.e. hierarchical) management. He kept asking them: in the way FAVI used to be run, what did you think leaders thought about operators? One day, he captured the most common answer:
The analysis of our organization chart in the early 1980s [when FAVI was still run like any other factory] reveals without a doubt that men and women are considered to be:
- Thieves because everything is locked up in storage rooms.
- Lazy, as their working time is controlled and every late showing punished by somebody … who doesn’t even care to inquire about the reasons for being late.
- Not dependable because all their production is controlled by somebody else who is not very dependable either because random controls … have been put in place.
- Not intelligent, as a “manufacturing engineering” department does the thinking for them.
Zobrist and his colleagues defined three new assumptions that over time have become mantras inside the factory:
- People are systematically considered to be good. (Reliable, self-motivated, trustworthy, intelligent)
- There is no performance without happiness. (To be happy, we need to be motivated. To be motivated, we need to be responsible. To be responsible we must understand why and for whom we work, and be free to decide how)
- Value is created on the shop floor. (Shop floor operators craft the products; the CEO and staff at best serve to support them, at worst are costly distractions)
- If you are familiar with management theory, you will have recognized the similarity between the statements from FAVI and the Theory X and Theory Y that Douglas McGregor developed in the 1960s when he was a professor at MIT. He stated that managers hold one of two sets of beliefs concerning employees: some think employees are inherently lazy and will avoid work whenever possible (Theory X); others think workers can be ambitious, self-motivated, and exercise self-control (Theory Y).
Which set of assumptions is true? People can debate this topic endlessly. McGregor had a key insight that has since been validated time and again: both are true. If you view people with mistrust (Theory X) and subject them to all sorts of controls, rules, and punishments, they will try to game the system, and you will feel your thinking is validated. Meet people with practices based on trust, and they will return your trust with responsible behavior. Again, you will feel your assumptions were validated.
At the core, this comes down to the fundamental spiritual truth that we reap what we sow: fear breeds fear and trust breeds trust. Traditional hierarchies and their plethora of built-in control systems are, at their core, formidable machines that breed fear and distrust. Self-managing structures and the advice process build up over time a vast, collective reservoir of trust among colleagues.
Organizations routinely talk about their values and mission; Self-managing organizations often talk about something even more fundamental―their basic assumptions about human nature. Many of us hold deeply ingrained assumptions about people and work that are based on fear, assumptions that call for hierarchy and control. Only by shining light on these fear-based beliefs can we decide to choose a different set of assumptions. FAVI and others have found that when colleagues know and talk about the two sets of assumptions frequently, people shift their belief system. The risk that fear-based control mechanisms will creep in through the back door is minimized. Someone will speak up and say, “Wait a minute! Does this new process fit our assumptions? I think not.”
The self-managing organizations in this research have all achieved outstanding levels of performance. These companies seem to fire on all cylinders at the same time. They provide a space in which employees thrive; they pay salaries above market rates; they grow year in and year out, and achieve remarkable profit margins; in downturns, they prove resilient even though they choose not to fire workers; and, perhaps most importantly, they are often vehicles that help a noble purpose manifest itself in the world.
Take the example of Buurtzorg, a Dutch neighborhood nursing organization providing care to old and sick people in their homes. It was founded in late 2006 with a local team of 10 nurses. It now employs 7,500 people. These nurses all operate in bossless, self-managing teams of 10-12 nurses. There is no “management” above the nurses, but a powerful coordination and knowledge exchange system to help the teams interact and learn from each other. This environment is so appealing to nurses, that 75% of all neighborhood nurses in the Netherlands work for Buurtzorg today. In what used to be a stable competitive market, nurses are deserting traditionally run organizations in droves to join Buurtzorg.
Financially, the company does fantastically well too. In 2012, it generated surplus funds (what we could call “profit” if Buurtzorg wasn’t a nonprofit) of around seven percent of its revenue. This is remarkable, because its explosive growth is costly: every new team costs the organization €50,000 before it breaks even. If we took only mature teams into consideration, Buurtzorg would have a double-digit surplus margin―due mostly to its low overhead costs and its high productivity. When growth slows down, this nonprofit will be highly “profitable,” giving it the means to start disrupting other fields of health care.
From Buurtzorg’s perspective, what truly matters is the quality of the care. Growth and a solid bottom line are meaningful inasmuch as they help the organization reach more people. And the medical out-comes of the care it provides to the people it serves are spectacular. Ernst & Young made a study about Buurtzorg’s medical and financial outcomes:
- Because Buurtzorg focuses on making its clients autonomous as much as possible, Buurtzorg requires on average close to 40 percent fewer hours of care per client than other nursing organizations.
- Patients stay in care only half as long.
- Hospital admissions are reduced by one third, and when a patient does need to be admitted to the hospital, the average stay is shorter.
- The savings for social security are considerable. Ernst & Young estimates they would be just below €2 billion in the Netherlands if all home care was provided in Buurtzorg fashion. Scaled to the US population, this would represent $49 billion―not too shabby if you consider that home care is only a fraction of total health care costs. What if hospitals were run that way?
In surveys, clients and doctors rate the service given by Buurtzorg significantly above that of other nursing organizations. And nurses rave about their organization, too. Buurtzorg was named “Employer of the Year” in the Netherlands for the second time in a row in 2012. Every time a patient and a nurse come together in a relationship that honors the timeless human connection of care, a small miracle happens. Buurtzorg found the recipe to make that miracle happen, day in and day out, on a massive scale.
Example Sun Hydraulics
To see another example of the stellar results organizations can achieve with self-management, take Sun Hydraulics, a 900-person-strong Florida-based global producer of hydraulic cartridge valves and manifolds. Bob Koski, one of the two engineers who founded the company in 1970, wanted to create a “healthy, self-managed, and informal” organization, instead of what he considered “mostly a poisonous and disrespectful atmosphere of bureaucracy and intimidation” in the companies he had worked for previously.
Sun has no quality control, scheduling, or purchasing departments. There are no standard production times, no time clocks, no piece rates. People work in natural clusters and self-organize to get their work done. The results have been spectacular here too. Sun Hydraulics, now a public company quoted on the NASDAQ stock exchange, has a stellar reputation for quality and service in the industry. The atmosphere on the shop floor and in the offices is unlike anything I have experienced in other manufacturing environments (save for FAVI, another industrial firm flourishing with self-management principles). In Florida, and throughout engineering schools in the country, people know that if you can land a job at Sun, you’d better take it!
Financially, Sun’s results are impressive too. It has been growing at double-digit rates since the 1970s. More impressively still, in a highly cyclical industry, the company never took a loss in over 30 years! In 2009, at the height of the financial crisis, its revenues were cut in half, and yet it posted a profit for the 38th consecutive year, even though it didn’t lay off workers (it never has in any previous downturn either). In a normal year, its profit margins are off the charts: its gross margins range between 32 and 39 percent and net income margins between 13 and 18 percent―margins we are more likely to associate with a software firm than a manufacturing firm.
Or take FAVI, a French brass foundry. It had 80 employees when it started its transition to self-managing ways of operating in the 1980s. It has since delivered rather well on its purpose to create meaningful industrial employment in the underprivileged northeastern part of France where it is located. All its competitors in Europe have shut their doors and moved production to China; FAVI not only bucked the trend, but has expanded to more than 500 employees today.
Its financial results are outstanding too. FAVI’s primary business is in the cutthroat automotive industry, where it competes with Chinese suppliers. And yet it pulls off the feat of paying its workers salaries significantly above market rate (in a typical year, workers receive a profit share that gives them 17 or 18 months’ worth of salary) and still make, year in and year out, an after-tax profit margin of five to seven percent. It has also proved extraordinarily resilient in times of recession. When the 2008 financial crash turned into an economic downturn, FAVI’s revenue declined by a whopping 30 percent in 2009. True to its style, it avoided layoffs and still managed to achieve a 3.3 percent net profit margin in the midst of the crisis. In 2012, demand for its automotive products crashed again, this time by 22 percent, and yet FAVI finished the year with a 12 percent cash flow margin.
Another measure of success: FAVI is famous with its clients for its impeccable product quality and trustworthiness. Since the mid-1980s, it hasn’t been late on a single order it shipped. A story from a few years back illustrates the pride workers have in their track record. One day, because of a technical glitch, one of FAVI’s mini-factories produced items that, once the long truck drive was factored in, would reach the customer a few hours later than the promised delivery time. The team hired a helicopter to deliver the pieces on time. A few hours later, a puzzled client who saw a helicopter land on its premises called Jean-François Zobrist, FAVI’s “CEO”, to tell him that there were still items in stock, and the helicopter really wasn’t needed. Zobrist answered that the helicopter might look like an extravagant expense, but it was a statement members of the team made for themselves, about the commitment and the pride they place in their work. That was worth every penny of it.
There is one striking paradox worth highlighting: These companies are highly profitable, despite the fact that they seem to be, compared to traditional corporations, quite careless about profits. They don’t make detailed budgets, they don’t compare budgets to actuals at the end of the month, they don’t set sales targets, and colleagues are free to spend any money they deem necessary without approval from above (as there is no one above to approve the spending). They focus on what needs to be done, not on profitability, and perhaps precisely for that reason, their efforts are rewarded with stellar profits.
(See attached document “Self-management and organizational results” for more details)
We mistakenly think that self-management is a new, and revolutionary concept. And yet self-management is how the universe has operated for billions of years. It is new only in the realm of large scale human collaboration.
A number of pioneering, self-managing organizations have borrowed from nature’s rulebook. They are complex, participatory, interconnected, interdependent, and continually evolving systems. Like ecosystems in nature, form follows need. Power is distributed. Decisions are made at the point of origin. Roles are picked up, discarded, and exchanged fluidly. Innovations can spring up from all quarters. Meetings are held when they are needed. Temporary task forces are created spontaneously and quickly disbanded again. The results they achieve are truly spectacular.
There are now enough organizations that operate with self-management at large scales, and have been doing so for 10, 20, or 30 years, in times of booms and bust, to declare this form of management to be reality tested. Based on these companies’ experience, we can formulate a coherent and consistent set of structures, practices and processes that allow organizations to unleash unprecedented levels of productivity, passion and creativity.
For organizational leaders who feel that today’s management paradigm has exhausted itself, the question is no longer: “What else could we do?” or “Can self-management work?”. It is: “Am I ready to take the leap”?
All insight gained during this research deserve to be attributed to one or several of the organizations that pioneered new practices. All along the attached documents, the organizations whose innovations proved most insightful for the research are mentioned and given credit.
Two documents in attachment elaborate on the ways of working of self-managing organizations.
- The first document gives a detailed description of a coherent set of structures and practices needed for organizations to get rid of hierarchy and operate in self-managing fashion.
- The second documents elaborates on the spectacular results achieved by self-managing organizations, and discusses possible reasons how such extraordinary levels of performance are achieved.