Why A Flat Org Chart Might Not Work for the Eight-Figure Exit

One of the biggest challenges when it comes to exit planning is making sure your business won’t fall apart once you’re no longer leading it. Having a powerful, scalable organizational chart in place is one of the many ways that you can help prepare your team for an exit. Yet, one type of org chart that has gained popularity in recent years may not help you reach your goal. In today’s entry, I’m going to look at why the flat org chart might not work for the eight-figure exit.

Follow Along With The Financially Simple Podcast!

This week on The Financially Simple Podcast:

• (0:40) My soapbox

• (1:40) Why organizational charts matter

• (3:48) Different types of organizational structures

• (14:00) The reason we’re here

• (15:00) What got us here won’t get us where we want to go

• (16:14) The lack of a clear leader can be confusing

• (19:10) Why you can’t have a flat org chart in your RIA

• (25:46) Embrace hierarchy

• (26:27) How does an organization that truly conquers things structure its org chart?

What is an “Org” Chart & Common Variations

Over the years, there have been many different forms of organizational charts used across many different industries. Each has its merits and drawbacks. So, how do you know which one is best for your organization? Is any one type better suited for achieving your goal of having an eight-figure exit? Before we get into these specifics, let’s first look at the classic definition of an org chart.

Investopedia defines the org chart as “a diagram that visually conveys a company’s internal structure by detailing the roles, responsibilities, and relationships between individuals within an entity.” In other words, your organizational chart should provide a clear point of reference to determine who is responsible for each function within your firm, as well as outline a definitive chain of command. So what are some of the common variations being employed in businesses? Let’s take a closer look…

Hierarchical Structure

Friends, the hierarchical structure is the most widely used type of org chart. Basically, you have a centralized leader at the top and command flows from the top to the bottom. You can best envision this as a pyramid. This structure offers great benefits such as clearly defined responsibilities and chain of command. Likewise, the hierarchical structure can facilitate employee development through well-established pathways to advancement. Additionally, this type of org chart often fosters strong team relationships.

On the other hand, no system is perfect. Despite the many benefits, a hierarchical structure can limit opportunities for inter-departmental collaboration, causing team members to fall into patterns of prioritizing departmental goals over firm-wide objectives. Similarly, this structure can cause change and innovation to be a slow process due to the proverbial red tape.

Functional Structure

These org charts are divided into multiple departments with specific responsibilities and skills. Department heads report directly to the top of the org chart (CEO). On the positive side, they encourage specialization and skill development. Likewise, departments can be innovative and self sufficient. Functional structures also offer scalability, making them a great option for companies of all sizes.

Unfortunately, they often decrease collaboration and create barriers between functions. These are likely byproducts of limited inter-departmental communication.

Matrix Structure

The matrix structure resembles the hierarchical grid but has a unique difference. Team members with shared skills report to their department heads, but also to various project managers. This structure is commonly used in large or multi-project organizations that relocate employees when and where they’re most needed.

Although the matrix structure allows project managers to choose the best employees for each task, it is prone to frequent changes, making stability a challenge. The flexible work environment encourages team members to use their skills in a variety of ways, while promoting communication and shared responsibilities throughout the organization. However, there is an increased risk for inter-departmental conflicts and it can be challenging to track budgets and firm resources.

Flat Org Chart

Folks, this is why we’re here today. The flat org chart eliminates middle management positions and often gives employees more responsibility with equal say. Typically, the flat org chart is used in small startups but has gained recent popularity in companies trying to buck traditional power dynamics.

Many startups like this structure because it promotes open communication and interaction throughout the team. It also tends to make decision-making a faster and more straightforward process, while enabling your firm to be more nimble. As you strive to implement strategic changes, the entire organization can change direction relatively quickly. Sounds great, right? Despite these benefits, it may not be the best fit for your organization, as you work toward the eight-figure exit. Friends, I learned this lesson the hard way in my previous business.

When I founded my previous company, we were a small, tight-knit team. Therefore, a flat structure seemed like the perfect fit for our collaborative culture. However, as we grew and took on more clients, the lack of clear leadership and reporting lines started causing confusion. Decisions took longer, and we soon realized we needed a more defined org chart to ensure everyone was on the same page. Let’s camp out here for a bit.

Why You Can’t Have a Flat Org Chart in Your RIA

Friends, without structure and managers, it is much harder to get things done and to make sure the right people have all the information they need.  In a 2021 study, Saerom (Ronnie) Lee, Assitant Professor of Management at the Wharton School of the University of Pennsylvania, wrote that a flat org chart “can result in haphazard execution and commercial failure by overwhelming managers with the burden of direction and causing subordinates to drift into power struggles and aimless idea explorations.” This can definitely impede your progress toward the eight-figure exit.

Additionally, unspoken lines of communication and decision-making often begin to form in flat organizational structures. Navigating this “shadow hierarchy” creates conflict and confusion, slowing your firm down. In theory, a flat org chart allows more people to take on leadership roles and always ensures you have the best person for a given problem. However, as firms grow, they typically encounter significant challenges in coordinating employees, according to Lee’s 2021 study.

Chris Savage, CEO of the video marketing platform, Wistia, realized this firsthand. In a blog, he wrote: “We began to realize that by building a company with a flat org structure, we had done the exact opposite of what we had intended. We had centralized all the decision-making, and we were relying on a secret implicit structure to make progress.

An org chart is a map of the growing organism that is your company. If you have a clear map, it makes it easier for everyone to know how to navigate communication and decision-making, and feel more comfortable that you’re headed in the right direction.”

Flat Org Charts Lead to Flat Out Wasting Money

Because a flat structure requires regular decision-making and strategizing meetings, they can lead to greater levels of wasteful spending. But how? Well, I’m glad you asked. Recently, Canadian e-Commerce giant, Shopify, rolled out a meeting cost calculator to its more than 10,000 employees. The tool embeds an estimated meeting cost in team members’ calendars based on the average cost of compensation, meeting length, and number of attendees. By that token, the average Shopify meeting, consisting of three people and lasting 30 minutes, costs somewhere between $700-$1,600 USD.

Friends, that is a lot of coin over the course of a year. In fact, the company will be able to cut costs by 15% by simply eliminating three meetings from each team member’s weekly calendar. So, a flat org chart could be costing you significant money each time you have to hold a meeting. I’ve personally seen businesses with meeting costs of $32K just in C-level compensation. So, I challenge you to calculate the cost of your next team meeting and weigh it against how productive or beneficial that meeting time actually is.

What to Do? Embrace Hierarchy

if you’re turned off by the idea of a hierarchical system, consider this… hierarchies are a naturally occurring aspect of any society. Don’t believe me? Here’s what Robert Sutton, Professor of Management Science at Stanford University had to say about hierarchies: “It is impossible to find groups or organizations where all members have roughly equal status and power. Whether researchers study people, dogs, or baboons, hierarchies are evident after just minutes of observation.” Still not convinced? Let’s look at how an organization that truly conquers things structures its org chart.

The U.S. Department of Defense is the second largest employer in the world with 2.91 million employees. The U.S. Army accounts for more than one-third of that number. Within the U.S. Army, there is a hierarchical structure consisting of centralized, high-level leadership (Generals) overseeing large groups or regions. Troops answer to their immediate superior in the form of a ranking officer, and this structure continues all the way down to the Team level, which comprises a non-commissioned officer and three junior enlisted soldiers. To see a full breakdown of their structure, follow this link.

Embracing hierarchy allows for clear lines of communication and decision-making. Both of which are essential aspects of firms positioning themselves for an eight-figure exit.

Wrapping Up…

Friends, a flat org chart may have worked when you first launched your RIA. It might even still be working. However, as you make moves to drive your firm toward the eight-figure exit, you’re going to outgrow the effectiveness of the flat org structure. For that reason, it could be time to reevaluate your firm’s structure and begin embracing hierarchy. Doing so will provide clarity and direction to help you get where you want to be.

Look, I know life is hard, but life is good. Driving your firm toward the eight-figure exit you desire can be frustrating. But it doesn’t have to be. By embracing a hierarchical structure, you can make your firm’s structure at least financially simple. Hey, let’s go out and make it a great day!

Do you have more questions about determining which organizational structure is right for you? Could you benefit from assistance in designing a new org chart? Reach out to our team to learn how we could help!