May 11th, 2010

The managerial hierarchy: decaying, rotten, broken and in need of a good gutting

Lovely, useless antiques or decaying, rotten crap. Our house, dating back to the 1920s, is rather old, for a Canadian house. (If you are European, you are laughing and saying: “Oh, that new?” Please, bear with me.)

We have some lovely plaster molding on the walls in our living and dining rooms. We paid a lot of money to restore that molding to its original condition: it looks exactly like it must have when this house was first built. It is the first thing that many first-time visitors notice: its quaint architectural detail recalls an earlier style that, quite frankly, you just don’t find in modern houses anymore. It is a lovely antique. Utterly, completely useless, but breathtakingly lovely. As I sit here writing, I look up at it, sigh contentedly, and keep writing. Other than the fact that it makes my husband and I happy, it serves no other purpose.

Making Pasta

Making pasta is easy in our modern kitchen. Is anything easy in the managerial hierarchy?

The second thing that many visitors notice is our thoroughly modern kitchen. Like the molding, we spent a lot of money renovating that kitchen. Unlike our molding, however, we did it because we had to. It was falling apart, decaying, decrepit. One of the first bad surprises we had was the floor: when we walked across it, it felt like it was swinging in free space. For good reason: the support beam had completely rotted through and was no longer touching the basement floor. Not only did we fix this, but we eventually completely gutted that kitchen: stripped it bare to the exterior brick wall, even ripped out the floor (you could see clear to the basement) and started over. Our kitchen stands as a testament for modern times: equipped with every modern convenience, it’s the heart of our family and entertaining lives.

Some things need a good gutting. It never ceases to amaze me how practically all organizations today resemble our old kitchen: decaying, decrepit, dangerous and desperately in need of gutting. Of course I am speaking of that most ancient relic, more than 160 years old: the managerial hierarchy. When you think that my kitchen was “only” 40 years old and yet managed to be completely useless, what does this say about the managerial hierarchy? Exactly.

Before you correct me and start speaking to me of decentralization, participative management, empowerment, flat organizations, project-based organizations, matrix organizations, please understand this: if you are reporting to some sort of manager who is not an owner, (if you use the word “report to”) you are in some product of the managerial hierarchy. They are all one and the same: antique relics that, like my old kitchen, need to be completed gutted. Thrown out. Discarded.

The managerial hierarchy is beyond broken. It’s rotten to the core.

Once Upon Time in Capitalism. The managerial hierarchy wasn’t always broken. In fact, once upon a time, it was a bright, shiny object. Like Twitter or Facebook. Which explains why it is so prevalent in twentieth-century capitalism. To understand this startling fact, we need to go back near the beginning of the Second Industrial Revolution, which is said to have started somewhere in the 1840s.

Prior to that time, capitalism existed in the form of owner capitalism: owners managed, and managers owned.

RR Train Gr. Brit. (LOC)

This marvel of technology helped to bring in the Second Industrial Revolution

And then a perfect storm of events happened, in transportation, communication and technology. This perfect storm is responsible for the birth of the managerial hierarchy, and looked like this:

  1. Technology: Electricity replaced steam and water power, thus allowing factories to be designed according to the logic of the production processes rather than proximity to a power source. This resulted in a dramatic decrease in capital required for factories as well as in production costs.
  2. Technology: Substitution of steel for cast iron and advances in metallurgy resulted in the ability to manufacture interchangeable parts, which opened the door to mass production.
  3. Transportation: A railroad system, supported by steamships, was in place by this time. (It had just finished by the 1840s.) What used to take weeks and weeks to ship only took days.
  4. Communication: With the invention of the telegraph system, you could send and receive messages over a space of minutes and hours instead of months and days.

These four factors, coming together in precisely the same time period, starting in the 1840s, meant that you could get incredible cost reductions with increases in volume. The advances in technology made mass production feasible, but you still needed a lot of capital to build the factories. To offset this capital investment, significant cost savings were needed, which could only be achieved by volume production: economies of scale. You couldn’t achieve those economies of scale, though, without the communication and transportation networks that kept the constant flow of goods moving: raw materials into the factory and finished goods leaving.

Put simply: making more of the same thing cost so very much less as long as you kept making them, and you made lots and lots of them. And you didn’t stop.

A Six-Sigma Black Belt’s Wet Dream. Just how much less did things costs to make? Take a look at these numbers. Have we ever been able to make these kind of savings since the 1880s? (That question is purely rhetorical.)

  • Standard Oil Trust’s cost of kerosene dropped from 1.5 cents / gallon in 1882 to 0.45 in 1885
  • Andrew Carnegie reduced the cost of steel rails from $100 / ton in the early 1870s to $12 by the 1890s.
  • Henry Ford reduced labour time in putting together the Model T chassis from 12 hours and 28 minutes to one hour and 33 minutes.

Do the math: that’s reduction in costs by as much as 90%!

Rolling on down the river. The perfect storm of technology, communication and transportation boiled down to this: making lots of the same thing cost less, as long as you kept the flow moving. That river of raw materials flowing in, and finished goods coming out could not stop. The only way to achieve this was through the attention of a dedicated management team who constantly watched over every step of the process. It was just too complicated for just one or two owners to keep an operation producing these volumes running.

And so, the managerial hierarchy was born.

In other words, companies were now run by a dedicated team of salaried managers, with little or no equity ownership, whose sole purpose in life was to keep this river flowing: raw materials in, finished goods out.

Really, there was no other way to manage this complexity…back in the 1840s, that is.

Capitalism’s Golden Period. The Second Industrial Revolution, which spawned the period from 1840 to 1914, saw the birth of companies like Campbell Soup, Heinz, Carnation, Nestlé, Cadbury, Lever, Procter & Gamble, Colgate, Bayer, BASF, Ford. Sound familiar? They should, as many of these companies are still around today. It is no coincidence that they all came to be born in the same Golden Period of the Second Industrial Revolution.

Fast Forward to 2010. Times have changed a little since 1840s, haven’t they? It’s now 2010. Let’s take a peek at just some of the changes that have occurred since the onset of Second Industrial Revolution.

  • Volume production. Lean manufacturing, lean methods, Atoms are the new bits, the Dell business model. We have now rejected making lots and lots of the same thing. The business model to follow is make a batch size of one, and it’s exactly what the customer ordered. We make it when the customer ordered it. What’s a factory?
  • Communication. Gee, just a few minor changes have happened since the telegraph. Fax. Personal computers. The internet. Email. Text. Facebook. Twitter. Blogs. Social media. Collaborative software. Video calls. Computer chat. Telephone. Cell phones. Smart Phones. We can talk to anyone, anytime, anywhere. Instantaneously. We now talk about delays in seconds when we talk communication. We can work anywhere, anytime. What’s an office?

The next Revolution? Where? Where? I am a Project Manager who has always worked in an engineering environment. I have always worked on projects: unique endeavors whose volume size is…well…one. I have never worked directly in a factory. Ever. In other words, in my 20+ years of experience, I have never encountered the perfect storm conditions of the 1840s. My responsibilities have never involved making lots of the same thing or with keeping the flow of goods moving.

So, please answer me this: why have I always found myself in a management hierarchy? Why has everyone else around me? Why have you?

The answer is…I shouldn’t. No one in 2010 should. Even factory workers no longer should. So much has changed since the Second Industrial Revolution that the managerial hierarchy is not only useless, it is keeping most companies from realizing their full potential.

It has morphed into a soul-sucking, innovation-killing monster whose only purpose is to feed itself.

I keep waiting for the next Revolution, which supposedly is happening right now, has been happening for the last twenty years, and yet, nothing changes. We still use the words “report to”, “boss”, “hierarchy”, “organization” and “reorganization”. Do we not already have the perfect storm that is needed to make that next Revolution happen, the one where hierarchy goes away?

When do we finally get rid of decaying, useless, dangerous crap that no longer serves its purpose? That is actually dangerous? When do we finally rip organizations down to the studs and floor boards and start over?

I’m still waiting.

I’m also just getting started. I hope you’ll check back, and see where I’m headed.

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