Chapter 1
The Bulge in the Corporate

Where did they come from?
Job evaluation-driven bloat
One-way career development
Culture of mistrust
A new philosophy


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Chapter 1

The Bulge in the Corporate Pyramid

Excerpt from Downsizing: Reshaping the Corporation for the Future

By Robert M. Tomasko


The Tale of The Tardy Product Innovation. It is a story most of us smile at, but too many of us have also lived through it. Robert Reich, former Secretary of Labor and a seasoned industry observer, tells one of the better versions:

"A salesman hears from a customer that the firm's latest bench drill cannot accommodate bits for drilling a recently developed hard plastic. The customer suggests a modified coupling adapter and an additional speed setting. The salesman thinks the suggestion makes sense but has no authority to pursue it directly. Following procedures, the salesman passes the idea on to the sales manager, who finds it promising and drafts a memo to the marketing vice-president. The marketing vice-president also likes the idea, so he raises it in an executive meeting of all the vice-presidents. The executive committee agrees to modify the drill. The senior product manager then asks the head of the research department to form a task force to evaluate the product opportunity and to design a new coupling and variable-speed mechanism.

The task force consists of representatives from sales, marketing, accounting, and engineering. The engineers are interested in the elegance of the design. The manufacturing department insists on modifications requiring only minor retooling. The salespeople want a drill that will do what customers need it to do. The finance people worry about the costs of producing it. The marketing people want a design that can be advertised and distributed efficiently and sold at a competitive price. The meetings are difficult since each task force member wants to claim credit for future success but avoid blame for any possible failure. After months of meetings the research manager presents the group's findings to the executive committee. It approves the new design. Each department then works out a detailed plan for its role in bringing out the new product, and the modified drill goes into production.

If there are no production problems, the customer receives word that he can order a drill for working hard plastics two years after he first discussed it with the salesman. In the meantime, a Japanese, West German, or South Korean firm has already designed, produced, and delivered a hard-plastics drill."

Ironically this unfortunate drill maker has even less bureaucracy than do most American corporations. Six, seven or even eight layers of management between salesmen and chief executive are much more common than the three described here. So are three and four year waits for product improvements.

Losing sales to overseas competitors because of slow product development is only one consequence of the bulge in the middle of many corporate pyramids. Another, which also diminishes competitiveness, is high prices due to excess middle management overhead.

Too much management, too many staff
General Motors Corporation has become a favorite target for critics of corporate bureaucracy. David Cole, head of the Office for the Study of Automotive Transportation at the University of Michigan, feels that GM's costs would be reduced by 30% if the company adopted Japanese-like leaner management practices. He feels GM's problems are caused by inadequate management, not technology. A GM chief executive agrees, blaming much of the problem on what he has called the company's "frozen middle management."

To make matters worse some smaller companies in high technology industries have started to show signs of premature bureaucratization. Many thought the way to become the "next Microsoft" was to organize and staff the same way Microsoft does today. This led to situations like one brand new advanced technology-based business, at its time the most capital intensive start-up since the Federal Express Company, creating an organization structure that included managers, directors, vice presidents and an executive vice president, along with a chief strategy planner and the founder-president. Total size of the company needing all this management: twenty-two employees.

Where did they all come from?
Very few companies, or government agencies, initially set out to create organization structures with an overabundance of staff or layers of management. But, as these examples have illustrated, bureaucratic bloat seems more common than not. Before considering ways to combat this situation, it is helpful to review its causes. These are some of the most common:

Age and Prosperity. Time in business is, unfortunately, the most likely correlate to excess staffing. And, ironically, the more successful a company has been in the past the more prone it may be to adding unneeded managerial jobs. It is almost a law of nature that, absent a calamitous past, as businesses grow in sales they also grow in employment. And companies whose past success has resulted from taking market share from competitors in growing industries - rather than surviving in low cost niches - are often the most prone to problems as their markets mature. This situation is further complicated by a social objective many companies have, at least implicitly, to provide an increasing number of jobs as they get older. This objective, whether held by a company or expected of it by society, can lead to a lack of attention to managing a firm's size when time are good. It can also slow a company's reaction to early warnings of economic troubles - all of which can leave few alternatives to massive cutbacks as troubles deepen.

Size. Big seems to breed bigger. As total employment increases so does the number of management layers required to keep things under control. And so do the number of staff support units. Functions that smaller companies must buy in the outside marketplace (payroll processing, printing, travel and meeting planning, food and security services, medical and counseling help) have a habit of migrating in house as the size of the workforce grows.

More analytically oriented departments also tend to grow as a motivation to provide excellent staff work in their individual functional specialties replaces a more general orientation to serve the highest priority business needs. This is often an honest narrowing down of mission. With all these new managers and staff professionals around it just seems harder to keep the "highest priority business needs" constantly in mind. As most companies grow, corporate goals become increasingly abstract to those in the trenches.

And staff professionals feel closer to their counterparts in other companies than to people in their company who work in a different department.

Growth by Diversification. From the 1960s thru the 80s, the favored form of corporate growth was through diversification. While synergy was the word commonly used in annual reports much of this growth came through the acquisition or start-up of enterprises related only marginally, if at all, to the base business well understood by corporate senior executives. Managing these business expansions required new layers of executives able to cope with the diversity and new headquarters staff to help the senior executives manage the new executives.

Management by Decentralization. This was the new management philosophy created to support the diversification era. It stressed trust, delegation and management by objectives - all important parts of the manager's toolkit. Unfortunately in some companies it resulted in the destruction of economies of scale and excessive duplication of staff efforts. This new philosophy was espoused by many executives, practiced by far fewer. Executives uncomfortable with its tenets found themselves looking for indirect ways to regain a comfortable level of control over their businesses. Some responded to this dilemma by bureaucraticizing their senior management structures with group executives and offices-of-the-president. Others embraced the technologies of strategic planning.

Strategic Planning. The rapid adoption of strategic planning in the late 1970s promised executives a way to get their arms around business diversity. It also created jobs for strategic planners and other staff analysts at several levels in the corporate hierarchy. Planners also bred planners. Some division-level general managers felt the need to hire their own planners to respond to the new requests for information from the headquarters planners. In a number of companies the overlay of these planning staffs on line management resulted in slowed and over-analyized decision making - as well as increased overhead.

New Management Concerns. Energy conservation, productivity improvement, product safety, product quality, work-life quality, innovation - these are all examples of important concerns that have occupied top management attention. In many companies the response to these challenges has been to set up high level staff departments. As one executive commented: "It seems that every time I ask my staff a new serious question, they go and add someone else to their payroll."

New Technologies and Markets. Finding opportunities from technologies such as artificial intelligence, computer-assisted manufacturing and genetic engineering has also led to the creation of new staff units. Overseas expansion has added to the complexity of many management structures as special divisions or global matrix structures have been used to stimulate international growth. All of these are important issues. All seem to require net additions to the corporate bureaucracy.

Scarcity of Expertise. Knowledge and experience in dealing with the issues mentioned above are often difficult to find and , at least in the early stages of an issues' prominence on the corporate agenda, usually expensive. This has often led to setting up additional elite, centralized staff departments. At times these acquire decision-making authority over line management in their special realms, adding the equivalent of an extra layer of management.

These are all forces driving the expansion of corporate bureaucracy. They originate in situations outside the company. All are pervasive and difficult to completely control because coping with them involves adopting new responses to external situations. In later chapters we will consider some of the alternatives to the almost "knee-jerk" tendency to cope with change by growing the organization.

Unfortunately these are not the only villains. As troublesome as these forces can be to a company trying to control its size, these are not the most significant driving forces. Much greater difficulty has come from internal management practices.

Probably the most persistent causes of management layering and excess headquarters staff are the human resource policies employed by many American corporations. Their consequences are unintended, but also unmistakable. The three most problematical areas are Compensation, Career Development and Corporate Culture.

Job evaluation-driven bloat
Most major American companies, and many government agencies, use some form of job evaluation to help them pay employees fairly. Because this process is such a critical cause and sustainer of management layering it is worth examining in detail.

The process usually works something like this. A written description of the responsibilities, performance standards and qualifications required for each job in the company is prepared. Inputs and approvals of its content are obtained from a number of sources. Then the technique of job evaluation is applied to rate the job description, either by a compensation professional in the human resources department or a committee of workers and managers. Its result is an assignment of a number of points for each job. After point scores are obtained for all positions in the company some statistical techniques are used to slot jobs with similar point values into common salary ranges. Data from salary surveys are then used to help set the dollar value of the ranges.

The entire process is comprehensive and usually internally consistent. It does provide a much needed way to pay people in an internally consistent manner. It does help companies keep their salary levels in line with the outside job market. And it solves some of the difficulties inherent in trying to compare the contributions of, say, a sales manager with a design engineer. But it is also a major builder of top heavy management structures because the criteria used almost invariably give more points to people with more subordinates and bigger budgets.

When the pro-management bias of job evaluation is brought up with many executives, their reaction is typically first one of acceptance. Frequently they do feel that senior management positions are the most strategically important in their firms and they are happy this is reflected in their compensation procedures. What they are less comfortable with is the ways these systems treat employees in the middle ranks of their companies. And they are often very concerned when they start to see the connection between what appears to be their overlayered organization structure and the methods used to set salaries.

Job evaluation points quickly translate into salary dollars. To the extent the point allocation is biased toward management jobs it sends a clear message: to get ahead here, become a manager. In some very traditional manufacturing operations this message makes sense. But it is much less relevant for companies employing many staff professionals, engineers and scientists. For these "knowledge workers" their greatest value lies in their individual contributions, not their supervisory skill.

This compensation-fueled desire on the part of employees for management positions sends another clear message to many companies: keep high performers loyal and motivated by designing the organization structure to provide them with abundant management jobs to move into.

For some of these performers this is fine. But for too many their capabilities and the requirements of management positions do not match. This reality has not escaped many companies. They take it into account when they design these jobs. More often than not these "management" jobs have a limited number of direct reports to allow plenty of time for their incumbents to continue to add value through individual contributions. Eventually, these companies find reasons to reorganize and add an additional layer of managers. This layer allows for the closer supervision that these half-managers, half-contributors sometimes need. And it provides another rung in the advancement ladder as they move upward to jobs worth still more evaluation points. Until companies change the ways they set salary levels so that having fewer people to supervise does not always have to equate with less responsibility and pay, job evaluation driven bloat will make it very difficult to stay streamlined.

One-way career development
Just as job evaluation can be troublesome by telling motivated employees the only way to increased earnings is by managing others, the career development practices of many companies breed tall management hierarchies by sending the message that getting ahead means moving in one direction on the organization chart. Upward.

The assumptions behind linear upward career development made more sense in the 1950s when seasoned managers were relatively scarce, markets were growing rapidly, and having "management-in-depth" was an enviable position. This era of the Organization Man also was the time many companies first installed fast track training and promotion programs for their most promising new recruits.

These fast tracks, staffed by well educated but minimally experienced new hires, indirectly led to increases in management layers in a number of companies. Being on a "fast track" implied making a series of closely spaced promotions, often in several areas of the company as a way to rapidly develop management talent and to give the up-and-comers high visibility. To survive the rapid coming and going of fast trackers - and still keep the business on an even keel - new management positions were created to supervise them. Their rapid rate of turnover necessitated narrower spans of control, and their limited experience in each of their assignments led to additional headquarters staff to monitor their work and detect their errors. This helped the balance of power in some companies to shift from line management to staff departments. Because each job change usually implied an upward movement, some companies also found it necessary to add additional layers, or half layers, to accommodate the fast trackers.

For some rising managers the fast track involved several employers. Unwilling to wait to be advanced as corporate hierarchies began to clog up, they chose job hopping as the fastest way to advance their career and salary. The high turnover this contributed to, often in key positions, eventually resulted in these jobs being more narrowly defined and more of them created.

Eventually these merry-go-rounds had to slow down. The combination of recessions, a glut of talented baby boom generation MBA's, and a maturing of many growth markets reduced the speed of many on fast tracks. But the changes they necessitated in corporate organization structures have been slower to go away.

Fast tracks and the upward career progression have contributed to the "bulge in the middle" pattern of organization structure common in many companies. Spans of control at the bottom and top of many corporate hierarchies are relatively broad. This is especially true in manufacturing firms where the first line supervisor may oversee from a dozen to thirty workers and the chief executive may have eight to twelve direct reports. But in the middle management ranks the pyramid commonly narrows to three, four or five people reporting to a manager, and the number of layers increases.

Why? Companies telling employees that the best careers are those that steadily advance up the hierarchy are building disappointment into their organization structures. Hierarchies inevitably narrow, and well performing but unpromoted employees are likely to leave or become demotivated if their expectation was to rise to the top. One way to attempt to postpone turnover or disappointment is to add extra steps in the ladder. While companies are seldom restructured for this purpose, explicitly, the implicit driving force of many reorganizations has been to build in room for good performers that "may" be needed for the company's next growth spurt.

While there is nothing wrong with preparing for the management needs of the future, there are ways to do it that have fewer adverse side effects. We will consider some of these alternatives in later chapters.

Linear careers also have less relevance for many knowledge workers, although companies frequently continue to manage these people in the traditional way. Often professionals, such as planners and engineers, can make a stronger long term contribution by having careers of well planned lateral moves through different divisions rather than ones involving retrofitting into management. Businesses as diverse as Citicorp, Club Med and Minnesota Mining and Manufacturing have found such rotation is a key to their ability to remain competitively innovative.

Corporate cultures based on mistrust
A final factor that contributes to excess headquarters staffing is much less tangible than the others mentioned. But it is just as strong and far more difficult to eliminate than fast tracks or malfunctioning compensation systems. It is the set of rules firmly embedded in many American corporate cultures that says:

- "It is better to win than lose."

- "It is better to control than to be controlled."

- "It is better to hide mistakes than admit them."

These do not appear in any company's policy manual, but most managers seem to learn them easily enough early in their careers. Harvard behavioral scientist Chris Argyris has confirmed after many years of research that these, and similar statements, make up the unspoken assumptions that influence how most managers relate to each other. Because the behaviors produced when assumptions like these are acted upon seem common regardless of company size or industry, it is fair to call them pivotal values for many American corporate cultures. These are cultures based on mistrust.

Argyris has examined the adverse consequences of these implicit assumptions. Among the most serious is the tendency many managers have to protect themselves by making it difficult for others to bring up information that contradicts a position they have taken. Many subordinates realize doing this would go against the company norm, so they self-censor themselves by not reporting - or trying to cast in the best possible light - information about, for example, declining market share that may diminish their bosses' public delight with continued sales increases.

These tendencies to hide unfavorable information often occur in corporate cultures that are quick to reward success, and equally fast to punish failures. The net result is companies with managers who are not very good at learning from their mistakes. They are better at burying failure than examining it for lessons for the future. These tendencies are often ignored in times of business growth and earnings increases; unfortunately by the time economic conditions become less favorable it is often too late to resurface the early warnings of trouble ahead. Situations as diverse as the space shuttle Challenger disaster and the decline of the American automobile industries' competitiveness illustrate these consequences.

Argyris calls these aspects of corporate cultures "undissussables," but many companies have realized the problems valid information has in getting through the self-protective behaviors of their managers. Rather than changing the corporate culture that leads to the behaviors, executives try to short circuit it. They create special watch-dog staff units to provide alternative communication channels to the management hierarchy. These missions are commonly assigned to planning departments, the controller's staff, the information systems group, and sometimes to the human resource function. They are the real reason many outside consultants and researchers are hired. All of these are used to combat the tendencies of managers to highlight good news and hide the bad, to underestimate expenses and overestimate customer demand.

These alternatives are expensive, both in money and in the slowed decision making that occurs in companies with groups of checkers and auditors who keep watch on other checkers. The most common way companies accommodate to these cultures of mistrust is to add additional layers of management, supported by groups of headquarters staff policemen. Since these additions, at best, temporarily circumvent the problem rather than change the culture that produces it, they can easily become counterproductive. Win-lose managers find ways around them to which frustrated executives respond by continuing to bloat the corporate bureaucracy. Gamesmanship prevails, and newly improved bench drills take even longer to reach their customers, who by then have become ex-customers.

Sometimes the consequences are more tragic. We may never know for sure why Korean Airlines Flight 007 left its planned course and flew over Soviet airspace in 1983, but some pilots of that airline have suggested one of the company's management practices could have contributed to the deviation. They dismiss the possibility of an intentional overflight or spy mission. They feel it was much more likely a navigational error, such as entering the wrong coordinates into the 747's guidance system, happened. The pilot of Flight 007, they say, appeared from radar records of his flight path to have discovered the mistake but rather than return and correct it he decided to fly on using the less reliable method of compass and star watching. Why did he not choose the safer course of returning and fixing the problem?

The other Korean Airlines pilots suggest this was because of the company's policy of severely punishing pilots who made such mistakes. They have cited examples of other pilots being disciplined harshly for being discovered making similar navigational mistakes. This led to pilots fearing punishment and embarrassment more than the risks of flying without properly set instruments. A corporate culture was created that encouraged hiding mistakes - even though this norm could lead to much more serious errors. And, unfortunately, no amount of additional staff or management layers would have changed the ways this culture may have encouraged people to act.

An intolerable situation
Up to this point we have considered a dozen forces working to build and maintain corporate bureaucracy. They work from both inside and outside the organization. They are strong and persistent; it has taken several strong shocks to the U.S. economy to start loosening their grip. But recently an increasing number of American companies have noticed the problems they create and have begun to attack them.

Until the early 1980s the bulge in the corporate pyramid resulting from these driving forces was generally tolerated. It was assumed to be a necessary cost of doing business in a time of increasing complexity. But a combination of factors early in this decade forced many companies to closely reexamine their approach to management staffing. The recession of 1981-82 was deeper and broader than many previous downturns. What made up the customary costs of business came under detailed review. Workforce reductions were common, as in the past, but in many companies for the first time these involved firing significant numbers of white collar workers. Included among these, again for the first time since the Depression for many businesses, were sizeable numbers of managers and well paid headquarters staff.

This recession signaled not just another shift of the business cycle, but a growing awareness of how mature the U.S. economy had become. The growth rate of many basic industries had declined and in some cases became negative. Competition became more oriented toward fighting for someone else's piece of the pie, rather than stimulating an expansion of the pie's size. And increasingly the challengers came from abroad with well honed marketing skills developed in highly competitive local markets.

These overseas competitors discovered many American companies were quick to analyse but slow to react. They found them more attuned to the needs of smooth factory production than to changing customer requirements. They also found an unexpected ally in the overelaborated management structures and systems of their U.S. adversaries. In the early 1980s Ford Motor Co. needed a dozen levels of management to produce cars competing against those Toyota built with seven.

In the dark days before Ford's turnaround and Chrysler's successful rebirth many business commentators speculated that the future American economy would be based on food growing and hamburger preparation. But other, more perceptive, observers refused to equate maturity with decline. They identified some alternatives to the staff driven, layered structure approach to organizing and managing.

Emergence of a new philosophy of management
By the mid-1980's academics and management gurus had rallied to the support of American management. "Managing Our Way to Economic Decline," a landmark Harvard Business Review article by Robert Hayes and William Abernathy, helped sound the alarm. Theory Z and The Art of Japanese Management dissected key features of the new competitors' organization design and management style. And In Search of Excellence achieved best seller status while reminding executives that all that was good in management did not necessarily come with a "Made In Japan" label.

While a weakened economic situation provided the initial impetus for management cutbacks, the emerging collection of new management philosophies provided its justification. These authors and others stressed back to basics and managing through people rather than by the numbers. The new center of attention was the factory floor, not the senior analyst's carpeted office. The new watchword was "lean and mean."

Thomas Peters suggested:

"There is, then, a lot that can be said for simply cutting staff. We find so many companies that do so much better with so many fewer people. Our journey through the terrible recession of 1981-83 was peppered with stories of company presidents who had cut their staff, often by up to 80%. The only noticeable difference in output, they'd tell us time and again, was better staff work."

Peters' examination of America's best-run companies found eight characteristics many shared. While he described each as an independent attribute, there is one characteristic that seems to have an especially pivotal role in making excellence possible. This is the one he terms Simple Form, Lean Staff. Four of his other attributes make it possible to be simple and lean:

- Stick to the knitting

- Have a hands-on, value driven management,

- Invest in people to improve productivity, and

- Closely control only the critically important activities,   decentralize the rest.

And Peters' three other lessons happen most easily in companies with restricted staff groups and management layers:

- Be action oriented,

- Stay close to customers, and

- Innovate by providing operational autonomy.

Now, supported by an intellectual justification, and some recent recession-driven practice in making management cutbacks, many executives approached downsizing with renewed vigor. Headquarters staffs were slashed and entire layers erased from organization charts. And many mid-level workers lost their jobs.



© Robert M. Tomasko 1987, 1990, 2002

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