Thursday, July 17, 2008

Building Organizations without Managers

Today I'm posting a guest post from Jon Poland. I met Jon at the first BarCampSeattle where I was one of the organizers. Jon has spent quite some time thinking about organizations and how the people inside of them interact. This post raises some questions that would be rather uncomfortable for most organizations.

When Jon talks about organizations without managers he is not talking about organizations without leaders. Leaders are the people you follow, managers are the people who tell you what to do. Sometimes they are the same person... if you're lucky.

Over to Jon...

Turning the Organization Inside Out
A Model for Hyper-Innovation

Jon Poland – 3rd i

What is the chief reason that people fail to perform to their fullest potential?

I believe that it stems from a lack of motivation/inspiration. I believe the root causes are limited choice about the work they do and an inability to provide input into how their work is done. Employees also are forced to roll the dice on whether their manager is good to work for and can/will serve as a beneficial mentor/coach. On the flip side, some managers are not comfortable dealing with problem-employees directly and the whole team/organization suffers as a result.

This makes me ask the question: why do we need managers? In fact, why is a multi-tier hierarchical organization necessary at all? The answer that typically comes back is that the organization needs direction/leadership and that employees require overseeing or they won’t do their jobs properly, if at all. But what if these functions could be accomplished more effectively without a top-down structure?

All organizations need rules to operate by. Rules create order out of chaos. But rules – if overbearing, improperly applied, or treated like dogma without an understanding of the reason for their existence – can crush the soul of an organization’s employees. So we will pay careful attention to the rules that are developed for this new type of organization. Also, people need a purpose in order for their work to be meaningful, which can be expressed as an organizing principle. This principle should inspire people to come to work and act as a touchstone. The organization must live this principle in order for it to be beneficial.

Here are the proposed 12 Rules for Organizations without Managers:

Rule #1: No one can be made to work on anything they don’t want to and they get to choose how they want to do the work. This restricts one person from imposing their will upon another. People in this company will be self-managed.

Rule #2: People can work on projects or in professional groups with no more than 80% time allocated to any one project/group, no more than three projects/groups per person, and a minimum of 40% total allocation. People who can’t achieve minimum allocation are automatically dismissed after two quarters. Professional groups include accounting, HR and legal. People have the flexibility to work on different things so that their minds get enough stimulation, but without getting spread out too thin. Maximum 80% allocation to any one project/group encourages cross-fertilization between projects/groups. Minimum 40% total allocation gives employees flextime opportunities (school/family/health) while still making their contribution significant enough for the company to have them.

Rule #3: Anyone with an idea for a project can champion that idea within the company and recruit others to participate in the project. The project must have at least 6 members to be considered a project (no compensation for allocated time until then). The person(s) with the forming idea own 10% of the project (split according to their agreed upon percentage contribution to the idea) which translates into 10% of the profits generated by the project or 10% of the cost savings generated by the project (convertible to stock in the company per an agreement between the idea owners and the executive team). This encourages entrepreneurship within the company and rewards people for their IP contributions.

Rule #4: Anyone in the company can become a member of a project/group if they have three sponsors from that project/group. The amount of time they can allocate to the project/group is determined by the sponsors. An exception is that the idea person alone can recruit a new member if there are less than 5 people on that project. Another exception is that the executive team can appoint people to professional groups if a group is smaller than three members.

Rule #5: A person’s contribution is determined quarterly by 5 people they work closely within each project/group. People are rated anonymously on a likert scale based on their level of effort, mastery, mentorship, collaboration and attitude. The standard salary for all project members is the same (set by the executive team), but people with above average contributions make up to 100% above standard and people with below average contributions make up to 50% below standard. The standard pay for each professional group is set according to the industry average. People who are new to a project start at the standard salary until rated. Professional groups smaller than 6 people will need to fill the gap by getting rated from people they work with who are outside that group. Ranges are to reward higher contributions and to encourage underperformers to perform better or leave.

Rule #6: Anyone can be dismissed from a project/group, including idea owners, by a majority of the people who rate them (done anonymously). Idea owners retain their ownership rights described in rule #3. In addition, a professional group can dismiss an employee outright by agreement from three people in that group. If someone has violated HR policy or accounting rules, that profession is in the best position to make the judgment call.

Rule #7: Employees who have been with the company for a year split quarterly profit sharing evenly. Profit sharing is 20%. Yes, that’s very high compared to other companies, but it provides a strong incentive for every person to make the company profitable (and remember there is no managerial overhead to pay).

Rule #8: Executives are appointed by the board, but must be ratified by the employees and can be dismissed by a majority vote of the board or employees (done anonymously). Executive pay is 5X the company average with the CEO making 10X. The executive team can propose major company initiatives, but initiatives must be approved by the employees by a majority vote (also anonymous).

Rule #9: People who average in the top quartile of contribution for the last 4 quarters are eligible to be recruited by the executive team into the Front Office Group (FOG). The FOG supports the executive team. The rules that apply to this group are the same as for project groups (except they can’t propose project ideas). Their standard rate is 3X the company average. By agreement from three members they can disband any project they (1) suspect of being a hideout for underperformers, (2) feel is not in alignment with the company’s organizing principle, or (3) feel has reached a dead-end and won’t self-disband. People who were on two such projects within a one year timeframe are automatically dismissed from the company.

Rule #10: The total company budget (determined by the executive team) is distributed across employees in proportion to their salaries and assigned to projects/groups according to percentage time allocated. If a project/group has more budget than they need, they can assign the overage to other projects/groups that need it. Because of 20% profit sharing, hoarding is unlikely.

Rule #11: Project/group members let HR know which skill sets are needed. HR must at a minimum conduct background checks and verify resumes for promising candidates before letting them in and will let a few more candidates in than are technically needed for that period. It’s up to new hires to get onto projects/groups at the percentage allocation they prefer. This rule along with all the other rules will be disclosed to candidates up front. This gives more people a chance to work at the company and weeds out under-performers quickly.

Rule #12: In addition to sick/vacation time, everyone gets one week PTO for expanding their horizons, whether reading, going to seminars/conferences/training, etc.

All this assumes that there is money to pay employees. A bootstrap startup company could do without an executive team or FOG early on (and forget about budget). It could offer a higher share of project ownership, and relax minimum percentage allocation to encourage people to work there part-time as a second job until the company is in a position to pay them.

A company set up in this way would release people’s potential to be highly innovative as well as productive. It would be an exciting place to work.

Jon Poland is the founder of 3rd i Designs which provides an online set of tools for organizations to conduct faster/cheaper/better strategic planning. He is also working on an online application for organizations, communities and societies to participate in collective decision modeling. The ideas for this paper were inspired from his master’s degree in entrepreneurship work and from a BarCampSeattle session hosted by Bruce P. Henry on gaming the organization.


Anonymous said...

Are there any companies actually set up like this?

Drewe said...

I have to say - there is one major hurdle with this approach - people. Like many of your readers, I am a leader in IT - in my team (which I inherited totally - ie, none are my personal hires) there are 2 people who would work well in this organization type. The others? No chance. They need motivation - the require motivation, they need people to get behind them and provide them with the impetus they need to get their work done. Whilst they may work on 'projects of choice' - life is not made up of that. If work was that enjoyable, I could pay less :D

Anyway, Whilst it is a good concept, I don't believe it could work in a practical setting with other than an exceptional group of employees.

Anonymous said...

sorry.... but I disagree. These rules are following in the same downward spiral as most failed management thinking. With such strict guidelines on numbers of people, percentages of ownership, etc, etc, there is no way that these rules can be easily applied across multiple organizations. These numbers may work well for one organization, while another may require a drastically different set of numbers to be successful. My point is that, the organization should be tailored to the goals of the organization and not to an organizational structure itself. When too much focus is on how to mold a team or company into a certain structure, a lot of what the employees actually need to be successful is lost.

Instead, I recommend evaluating the goals of the company. Finding a clear set of goals and finding specific talents of employees to start meeting those goals. Once this has been reached, the organizational structure begins to become clear on it's own and the use of layers of management or lack therof becomes obvious.

Anonymous said...

Hi there Bruce and Jon,

This post really helped me in researching and writing a piece on collaboration – thank you very much! I’ve tried to ping this post from my own blog, but I’m not sure how reliable pingback/trackback is, so I thought I’d say hello the old fashioned way!

btw, my piece is called 'The Tension in Collaboration’ and is online at;

Best wishes,


Rick Cogley said...

Wow, this is interesting. I'm tempted to try this with my company.

Rick Cogley

Anonymous said...

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