Organization Design 101 For Startups

As any product-oriented startup founder will attest, great organizations — like great products — can be designed to be effective and responsive. Most breakthrough products are arrived at by following a unique design path.

At high-growth technology startups, the organization is designed keeping in mind the market segment, product roadmap, sales process, and other company-specific factors.

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Organization Design 101 For Startups

When should founders start thinking about organizational design? The short answer is as soon as the core team expands beyond early engineers.

Since early missteps can leave a lasting imprint on organizational memory, founders must start laying the building blocks — culture, values, and vision — of the organization they aspire to build from day one. Galbraith's star, McKinsey 7-S, and lean organization are a few broad and accessible frameworks that can support this process.

Conceptually, an effective organization should optimize revenue per employee before growing headcount. However, when venture-backed startups enter a hyper-growth phase, they generally hire rapidly and unknowingly create clumsy reporting structures and organizational bottlenecks.

Some telltale signs include problems not appearing on the surface until it's too late — and once they do, there's no clarity on who's going to solve them — and new hires not knowing what's expected of them, who they can turn to for help and how they can grow within the organization.

In the beginning, when a startup has only one product, functional grouping makes the most sense. Yet as the startup grows and expands its product portfolio, it either stays as is (functional) or evolves into a product or hybrid organization.

The essence of the “functional organization vs. product organization” dilemma is this: grouping people from the same function under one manager versus grouping people working on the same product under one manager.

At startups, stage-specific challenges are generally met with a stage-appropriate response. For instance, as operations scale and the organization races toward the elusive product-market fit (PMF), core functions are activated and cross-functional teams are set up.

Post-PMF, as the product portfolio expands and ancillary functions (like finance) are formalized, corporate functions are centralized and cross-functional teams are grouped by product.

Deciding what to centralize and decentralize can be a hard call. The argument for centralization is that it reduces overheads and accelerates decision-making, and the argument against centralization is that it leads to organizational rigidity.

The argument for decentralization is that it leads to increased ownership and accountability, and the argument against decentralization is that it creates short-term chaos. Alfred Sloan of General Motors is credited with saying: “Good management rests on a reconciliation of centralization and decentralization.”

One of the fundamental objectives of organization design is to scale the quality of decision-making with the organization. A well-conceived organization structure — who does what, who reports to whom, how do decisions get made — does not automatically translate into better decisions.

In his book High Output Management, Intel CEO Andy Grove wrote about decisions being made at the “lowest competent level.” According to Grove, critical, non-strategic decisions turn out best when they are made by people closest to the situation — not someone high up the chain.

Grove also wrote about how leaders should step into the decision-making process at the right stage — too early, and not enough viewpoints get assimilated into the process; too late, and, likely, the group has already dismissed some crucial, non-consensus views.

Dependencies grow with the organization. Even if the headcount grows linearly, the number of possible lines of communication within an organization grows exponentially.

In their book Working Backwards, Amazon executives Colin Bryar and Bill Carr describe dependency as “something one team needs but can't supply for itself.” Managing dependencies (both technical and organizational dependencies) requires cross-team communication and coordination.

After multiple iterations at refinement, the hard-won insight at Amazon was that cross-team communication doesn't need refinement — it needs elimination.

This insight developed the principle of separable, single-threaded leadership — when a leader or dedicated team assumes clear, unambiguous ownership of a single outcome with minimum reliance or impact on others.

Early on, founders and early hires wear multiple hats and focus on solving existential challenges. As the product evolves, the market becomes clear, metrics start to move and resources make it possible to grow the organization, the organizational mindset shifts from the 0-to-1 to 1-to-n modality.

Even after bringing experienced executives on board and setting up cross-functional teams, most founders retain hold on at least five focus areas: strategy, hiring, brand, culture, fundraising, and investor relations.

Hiring takes a disproportionate amount of founders' time. Additionally, founders opt to remain deeply or sufficiently involved in a chosen area of personal expertise — product, engineering, customer development, operations, etc.

Computer scientist and investor Marc Andreessen describes entrepreneurial judgment as “the ability to tell the difference between a situation that's not working but persistence and iteration will ultimately prove it out, versus a situation that's not working and additional effort is a destructive waste of time and radical change is necessary.”

The question is: How does a well-designed organization adapt to a sudden change in course — or “pivot”? The answer lies in determining the key principle around which the organization is designed — milestones, speed, or agility.

If the organization is designed for agility, it can quickly restructure and reallocate resources to adjust to its new reality. Startups that assume high levels of opportunity risk should ideally be organized for agility.

In conclusion, the following questions can help startup leaders gauge whether the constituent elements of organization design — structure, strategy, systems, people, internal network design, culture — are falling in place:

• Does the structure bring out individual and group skills and focus attention on core objectives?
• Does the strategy account for variables and address near-term and long-term tradeoffs?
• Are there systems and processes to ensure optimum and timely allocation of resources? Are the systems underwritten by conflict resolution mechanisms over the allocation of those resources?
• Does the organization harness the intrinsic talents of all of its people? How does it measure and reward performance? Can a majority of the workforce see a clear career path for themselves?
• How cohesively do two or more teams operate when working on a common outcome?

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Article Source: Forbes.com