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6 Types of Organizational Structures. Which Type Yields the Most Benefits for an IT Company?

What organizational structures do you think are most common among Ukrainian IT companies? To find the answer to this question we decided to check out Dou, the Ukrainian IT community and job portal. Our analysis revealed that three out of five profile descriptions of software development companies and jobs published to Dou contain a phrase along the lines of “We have a flat team structure”.

 

It looks like professional growth opportunities and the absence of bureaucracy are among the main benefits IT companies offer.

 

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Senior .NET Engineer opening at DataArt

 

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Romexsoft company profile at dou.ua

Why Flat is hot

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Within software development companies, the term “flat organization” implies that there are neither bosses nor subordinates. The team consists of like-minded people, and the opinion of every team member matters. Companies with a flat team structure consider large corporations evil, and hire people who share a similar perspective. They claim that compared to large corporations, their processes are much faster, their work schedules are more flexible, and every employee is valued.

 

Flat companies encourage their teams to make independent decisions and to show initiative. For example, a group of engineers working on the same project is often completely self-managed and might report to the CTO only.

 

A flat structure promotes collaboration and attracts millennials, a generation that respects collective voice. They want to be heard and don't want to be told what to do.

 

Flat structure is indeed a great way to organize teams, and here is why people love it:

  • The decision-making process runs quickly. This helps meet customers’ needs without taking too long.
  • Flat companies incur the lowest management costs compared to other management styles.  
  • Employees feel more independent which fosters innovation.   
  • In self-managed teams, managers spend less time controlling their subordinates and pay more attention to strategic tasks. In the long term this helps business flourish.

But there are also certain disadvantages to the flat style. They include:

  • The lack of strict rules may cause communication issues within the team.
  • A flat structure is extremely challenging to scale with the growth of the company. It only works when flat units continue their existence as project-based departments inside of a larger hierarchy.
  • Flat companies don’t offer forward-moving career paths which may lead to employee retention issues.
  • Because flat teams are often cross-functional this may create extra tasks for the employees. The lack of specialization makes professional growth challenging for individuals.  

Despite its limitations, a flat management style works great for small or mid-size companies. The larger the organization, the harder it is to organize the workflow. That’s why mid-size and large companies can't afford a flat organizational structure and need more enhanced management. Companies with a traditional pyramid of power are hierarchies.

Where does evil come from?

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The hierarchy is the oldest organizational structure. In fact, for a long time it was considered the only possible way to make business work.

 

One of the first organizations to adopt a hierarchical structure was the army. Today it remains the preferred way to organize work for many companies.

 

When people talk about hierarchy and how much they hate it they often associate hierarchy with bureaucracy. Though bureaucracies will always have hierarchies, not all hierarchies are bureaucratic.

 

A variety of rules and standardized processes don't always make a company efficient. The largest companies with a long chain of command try to reduce bureaucracy as much as they can. This is especially true for technology companies where flexibility is crucial.

 

Modern software development organizations aren't really hierarchical. So how do they organize their work and why?

Hierarchy which is not really a hierarchy

Jacob Morgan in his typology differentiates classic hierarchies from flatter companies. Classic hierarchies are the out-of-date structures hated by everybody because of their rigidness and terrible bureaucracy.

 

For the part 30 years companies have been working to change their management systems. They have been speeding up their decision-making processes with the help of IT products, simplifying communications between divisions, and using third-party consultants to cut management costs.

 

These are flatter companies.  

 

In hierarchical structures, jobs are highly specialized and formalized inside the company and departments are formed rigidly.

 

At the same time every company has a different organizational chart. The hierarchy in one company is different from the hierarchy in another one. There are two core types (functional and divisional) and several subtypes of hierarchical systems. Let’s compare their benefits and challenges. 

Functional hierarchy: specialized departments

Jobs in the functional companies are grouped into departments by specialties. For example, companies may have marketing, sales, and services departments. When managed appropriately, each department grows into a highly effective unit because it is formed by skilled experts. It’s always clear who responds to whom within the departments. The job descriptions are well defined and employees can plan their career path effectively.  

 

Weak cross-departmental ties are the major problem of this structure. For example, people who work in a customer service department hardly know what’s going on in the sales department.

 

Because of the narrow span of control, it may be challenging for employees to follow the company's strategic direction. This significantly slows down the response of the entire system to market changes.  

 

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Divisional hierarchy: product-, market-, or process-based departments

The core principle of this type of organizational structure is to form departments around a specific market or product. For example, the company provides two different services — B2B marketing services and education. The top management of this company decides to form separate branches for these services. Each department will fall into subunits: customer acquisition, sales, customer care, production, etc.

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There are different kinds of divisional structures.

1. Product-based divisions

If your company produces a variety of products like in the chart below (electronics, home goods and yummy snacks), it’s better to form separate divisions for each line. This type of organizational chart suits large manufacturing companies like Virgin.

 

The core benefit of the product-based structure is a fast product launch. This is a huge advantage in an environment with stiff competition like the technology market.

 

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2. Market-based divisions

A market-based structure is established when a company operates in different markets. This type of structure helps facilitate communication with a particular target audience. For instance, if your company develops a mobile product for varied target markets, you can form specialized departments to meet each customer group’s needs.

 

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3. Process-based divisions

This approach is helpful when you play in a changeable market and need to effectively adapt to the stages of the production process.

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In the chart above, all the departments – R&D, customer acquisition, and order fulfillment – refer to production stages. The basic blocks for a process-based company are specialized teams. They are different from functional departments because they include people with different specializations needed to fulfill a given production stage. At the same time, these teams are more formal compared to flat project teams.

 

All the types of divisional structures have similar advantages and challenges.

The benefits of the divisional structures:

  • Each division works as an almost independent part of the organization. This helps department managers to operate resources effectively.
  • There is a single KPI system for every division.  
  • The organization is more agile compared to the functional structure and can respond to market changes just by adding or cutting divisions.  

In divisional organizations departments perform as separate business units. They may develop as totally different, non-compatible systems. This significantly increases management costs.

 

The weaknesses of functional and divisional structures can be mitigated with a hybrid structure based on a matrix chart. Matrix companies are more flexible for fast changes. Let’s discover why.

Matrix. It's everywhere.

 

The matrix organizational design looks like a table with horizontal and vertical dimensions. It is no longer a typical hierarchical pyramid.

 

The “vertical” dimension is formed from traditional functional or divisional departments. On the chart below they are marketing, sales, and services. At the same time the employees from every department are involved in project teams (electronics, home goods, yummy snacks on the chart below).

 

Both departments and project units have their own managers and employees report to the managers of both dimensions. This double-dimension structure facilitates cross-divisional communication.

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Matrix is one of the most popular organizational structures among Ukrainian software development companies.

 

For example, RubyGarage, a web and mobile app development company, has a matrix organizational structure. Their departments are called offices.

 

"Every office has a lead (one or more). All leads are responsible for two things: how well their offices carry out their tasks, and how well their people are skilled and trained," said Vladimir Vorobyov, СЕО at RubyGarage.

 

Here is what RubyGarage's org chart looks like:

 

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RubyGarage sticks to a very clear product development workflow which involves people from every department.

 

"All the roles are involved in specific product development workflow stages (except for a project manager, who is engaged in every step)," said Vorobyov.

 

Below is a diagram displaying RubyGarage's workflow roles mapping:

 

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Artyom Serdyuk, a KMBS lecturer, says that over the past five years the number of independent cross-functional teams and loose matrixes in the Ukrainian IT companies has been growing.

 

"I think it’s connected to the growing maturity of the companies and their relations with the customers as well as selling and management processes," said Serdyuk.

Pros and cons of the Matrix structure

Pros:

  • Fast communication between functional departments helps to increase the speed of the production process. Managers handle issues quickly and minimize possible negative consequences.    
  • Product quality improves compared to classic hierarchies because every project team member brings their expertise into the development process.
  • Matrix organizations have less bureaucracy. Every team member takes part in the decision-making process and can improve the results of the project.

Cons:

  • Management costs are higher compared to other structures because you need more managers.
  • The sophisticated management system may cause confusing situations between managers and subordinates.
  • Divisional and project managers may start to compete for the employees’ loyalty and time.

Flatarchy: this is how Google works

If you want to start a new product line, offer a new service, or turn your software development company into a startup incubator, flatarchy can be a great choice.

 

Flatarchy is sort of a hybrid that combines some features of a flat organizational structure with some features of a hierarchy.  

 

To put it simply, flatarchy is how Google works. When Google comes up with a new and innovative idea, they don’t change their entire organization, nor do they create a separate company. Instead they form an independent project group inside the company, test their business hypothesis as fast as possible, and then decide what to do with this startup.

 

They may integrate it into the main company, close it, or create a separate business unit inside of the corporation.  

 

Here is what a flatarchy looks like:

 

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One way to establish a flatarchy is to create hierarchical teams for specific projects. This is the model used by Ciklum, one of the largest outsourcing companies in Ukraine.

 

"Our organizational chart looks like a huge umbrella under which different projects are developed," said Olga Vasylevska, HR Business Partner at Ciklum. "We have more than 200 teams working as independent business units in development centers in five countries. Every team is formed on demand of our customer starting from a single engineer up to several hundred employees. We have tech consultants who help our clients form the most effective team, depending on their needs."

Holacracy: the choice of mature professionals

In 2015 Tony Hsieh, the CEO of Zappos, announced his company was shifting to a new management system named holacracy.

 

Holacracy literally means “the power of an altogether” and its premise is that everyone takes part in the decision-making process. In holacratic companies employees choose their duties by themselves, there are no managers and everyone’s opinion is important. How does it differ from flat structure?  

 

The key features of this system are:

 

1. Roles instead of jobs.

 

Employees don’t have specified positions that strictly define their work responsibilities. Instead, they have several functional and management roles to fill. For example, Lewis Hoffman from HolacracyOne, Robertson’s consulting company, has 15 roles:

 

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Image source: GlassFrog

 

Every day, employees decide what kind of tasks they're going to do. They may switch from one role to another several times a day. They may also refuse some roles and try new ones.

 

2. Circles instead of departments.

 

Members of  holacratic teams get together in small groups called circles. These circles form a hierarchical structure, but it’s different from a traditional hierarchy. Each circle has a goal and members of the circle choose how they are going to reach it. These circles aren't completely autonomous. They are interconnected.

 

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3. Links instead of managers.

 

All management functions in a circle are distributed between four roles (lead link, rep link, facilitator, and secretary) instead of a single manager. One person can't fill two or more management roles simultaneously.

 

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Image source: Targetteal

 

Using this arrangement, holacratic organizations decentralize authority and decrease competition inside of the team. As a result, you get a more agile company which can properly respond to fast environment changes.

 

4. Transparent rules instead of “politics.”

 

Everyone inside the company knows what rules are established in the company and why. Team members may also change corporate rules when they become inefficient or out-of-date. This is possible because authority is distributed between team members. Employees don’t spend much time figuring out who is responsible for what.

 

Max Semenchuk, Partner at 4IRE Labs, a Ukrainian IT company that uses holacracy, says that one of the most important things that differentiates holacracy from traditional structures is transparency and open access to information.

 

"We've started to talk and show more info regarding customer satisfaction, project results and company budgets through the organization," he said. "Previously only the deputy managers had partial access to that. The team said this brought more trust to the organization and helped with making or understanding some decisions."

 

5. Integrative decision-making.

 

The decision-making approach in traditional hierarchies is top-down. Flatter companies use a consensus model, where team members are looking for a compromise. The final decision can be made by any team member.

 

Companies that practice holacracy use an integrative decision-making process. Here is how it works: a proposer describes a problem and proposes a solution to this problem. Then a Facilitator asks the team: "Do you see any reasons why adopting this proposal would cause harm or move us backwards?" Anyone can state their objections. The goal is to make a proposal that wouldn't cause any objections, but that would still address the proposer’s problem.

 

"Integrative decision-making process helped to lower the tension between the roles with conflicting agendas (e.g. sales and project managers)," said Semenchuk. "So it led to a more solid company position and mutual support."

 

Holacracy is a framework for building an extremely flexible company which may change fast on each level. At the same time this management type has its challenges.

Holacracy challenges

1. Implementation difficulty.

It took Zappos (1,600 employees) several years to shift to holacracy. While you're going through a transition you need to train your staff. This may cause service issues.

 

When 4IRE Labs started changing their organization to a holacracy, they started with the service level and organizational support departments first.

 

"I wanted to make a new organization out of top-tier and autonomous specialists," said Semenchuk. "I neither could nor wanted to manage them in a direct manner. Still, I needed to find a way to make it effective and controllable."

 

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4IRE Lab's changes to the service level

 

You may switch to the holacracy completely, like Zappos did, or use just some principles that fit your business best. The latter was the option chosen by companies like Medium and Valve.

 

2. There’s a lack of experimental results.

We still have to wait to see the strategic effect for Zappos and other companies that have been experimenting with holacracy.

 

3. The undefined job roles cause employee outflow.

There is no career growth in holacratic companies. Instead every employee may try different roles.

 

This lack of clear career paths may be risky for employees. If they ever decide to apply for a job at a traditional hierarchy, they may face challenges to getting hired. It’s not clear what expertise the candidate has and whether they are capable of doing the job. For example, Zappos lost 18% of employees while shifting to the holacratic model.

 

It's important to note that shifting to holacracy won’t help an organization solve core management issues, improve their business strategy, or build trustful relations inside the team.

 

If your team is not yet mature, holacracy can be a crash test for your entire business. Holacracy is better for small or mid-size flat companies that already have enough agility to transform their management. 

 

As we see, every structure type, even the most innovative one like holacracy, has its limitations. Is there any one best way to design your organizational chart?  

What does the choice of the org structure depend on?

According to Serdyuk, the two major factors that influence the choice of an organizational structure in IT companies are the maturity of sales management, project management and accounting, and the maturity of the team. He says the stronger the project team in a company, the more likely they are to use a dedicated team model.

 

"If you have a long and successful record with your technical specialists, you would consider changing a command-and-control approach to self-management, and vice versa," said Serdyuk.

 

The choice of the optimal structure for your business depends on your company’s size and complexity, strategic goals, business environment, and even personal traits of the leaders.

 

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Source

 

1. Business strategy is one of the main factors that define what organizational structure is best for a given company.  Three typical business strategies are: 1) product quality competition, 2) service competition, 3) price competition.  

 

IT companies prefer to choose product quality or service competition because price competition may be beneficial only for a short period of time.

 

Companies that decide to concentrate on product quality competition definitely need a strong R&D department, a product management team, and other specialists and processes that will allow them to improve the quality of services provided.  

 

Because these additional specialists have to be closely tied to each other to make things work, the best possible organizational structure for companies that focus on improving their service quality is a product-based divisional hierarchy or a matrix structure.

 

2. The speed of change in the technology market will never let you establish a functional hierarchy because the main competitive advantage in this market is agility. You need to evolve as fast as you can.

 

3. Size and complexity of the company. If you run a small company, you don’t need to build a three-tier management pyramid: you may use a flat structure. With the growth of your business the flat organizational structure may evolve into a number of independent flat teams, as was the case with Ciklum. This way you can stay close to your clients, retain employees, and save management costs.

 

The truth is that the perfect type of organizational structure doesn't exist.

 

Typically companies change their organizational structures over the course of time. There can be different reasons for this. But most often companies switch to a different structure after a management crisis, when they start getting too many projects and can no longer control the processes.  

 

Other reasons include customer relations issues, cutting down on management costs or changing the strategic direction (like focusing on service improvements rather than increasing the number of engineers).

 

The more factors you take into account when shifting from one management style to another, the more risks you can avoid.