Why Startups with Flat Organizational Structures Often Fail


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In this latest blog, you will learn about:

  • What flat organizational structures are, and how they are relevant to startups
  • The behaviors you can expect to observe in startups with a flat organizational structure
  • How do these behaviors contribute to these organizations failing
  • Decisions you can make in your startup company to avoid these situations

Have you ever tried to organize a group event with your friends? Whether it’s dinner, a night out, or a trip to the beach…it can be painful, right?!

It isn’t normally until somebody pulls rank, takes the lead, and makes a decision that everybody agrees to that anything gets organized.

Little did you probably realize at the time, but you just obtained a small insight into the world of a startup company.

Startup Organizational Structures

As an employee in a flat organizational structure, you may feel that you work for a forward-thinking, modern company where everybody calls the shots for themselves and there’s plenty of self-autonomy. This is a typical approach for startups. However, that doesn’t always work well and considering 90% of startups don’t make it past year five, it’s critical to start off on the right foot.

The main reasons why startups with flat structures fail are:

  • It’s not clear who makes the final decisions
  • It’s not clear who anybody is reporting to
  • There is often an overlap of your responsibilities, and your job description develops into something you didn’t sign up to
  • Motivation is lacking, as there’s no clear progression path

There’s No Clear Decision Maker

At the core of a flat organizational structure is self-autonomy. The well-intended consequences of implementing a team that has no specific authority within it are that it provides individuals with the ability to make their own decisions, and own them.

From the perspective of an employer, this is a huge statement of trust in your employee. It is to be admired to some degree, as you would think that such a level of ownership over one’s work would push them to thrive and become masters of their field.

There’s one issue though – who actually makes the final decisions? As an employer, it may look good to hand over the reins of a hugely important function in your company to an employee and let them get on with it, but say you have a client that has an issue with that work – isn’t it your responsibility as the face of the business to fix it?

A flat structure in such circumstances can ultimately result in a lack of oversight. Quality control can’t always be defined by the person creating the work, and it often needs a second opinion. If nothing else, it’s vital that the leader of a business is constantly setting the direction of the company and ensuring that employees are going in the same direction. 

An absence of clear leadership can quickly spiral into a lack of direction and absence of quality control, and this is often to the detriment of startup companies.

In your own startup, define very clearly who sets the tone and direction of the company. That could be one person or a small handful of people that you consider part of your leadership team that operates on a consensus basis. Even still, in situations like this, the buck has to stop with somebody in some kind of position of authority.

An absence of this in the workplace is certainly a contributing factor to startups that struggle.

Reporting Lines Aren’t Defined

Reporting lines are typically between an employee and a more senior figure in the company that is above them in the organizational hierarchy. The role of the senior figure often manifests in what’s called a ‘Line Manager’, someone who is “responsible for overseeing and managing employees to fulfill business goals”. 

Speaking from an employee’s perspective, having clear reporting lines through a line manager creates order within the chaos. There is often solace to be found in knowing you have one person of authority in the business that you can turn to for guidance, advice, and to create a bit of order. From the perspective of the line manager, having a direct connection to employees ensures oversight of work progress, and creates a clear chain of command between the line manager and those above them. 

In flat organizational structures, however, these reporting lines…disappear. Everybody reports to everyone, which essentially means that everybody reports to nobody. There are no line managers, and you essentially become your own line manager. Again, a subject of autonomy that may be appealing to some, but it creates an information clog. 

This clog in reporting lines can translate into critical business information – and sometimes, operational problems themselves – not being highlighted in good time for them to be solved effectively. 

The consequences of this for small businesses can be monumental, particularly in client-facing environments. The need for clear communication between client and customer has been highlighted in previous Set Hub blogs, and that is exactly for reasons such as this.

In your own startup company, it is critical to have at least one person beneath you whom your other employees are reporting to. Creating that information funnel can be the difference between your new venture being a success, and falling victim to the trend that 90% of startups do. 

Job Responsibilities Overstretch

Now, a good employee will always take on the odd task that’s outside of their remit to keep things moving along in the business. Nobody wants a ‘that’s not my job’ character in the team, although, of course, a balance has to be struck about how often tasks outside of people’s remit are being performed.

On the subject of balance, imagine you are hired to a position that has a very specific remit you happily signed on the dotted line to perform. 

Little by little, extra tasks are being thrown onto your plate – you’re hired for marketing, but you’re now performing a sales function. You take care of the finances, but all of a sudden you have some digital marketing tasks to fulfill.

Not only have you got too much of your own work to do, but you’re now out of your comfort zone. It’s not what you’re good at, and, critically, the psychological contract between you and your employer is being eroded. This has one of the most devastating impacts on employee retention that any single business can experience, and perceived breaches in the contract can affect an employee’s commitment to the company – and make them consider leaving.

Constant employee turnover is a costly business for startups, and in an environment where you’re almost definitely going to be ensuring every penny in the bank goes towards worthy investments, this is something that is imperative to avoid.

When building a team, ensure there is transparency in your job descriptions – and preferably, stick to what’s on there.

Employees Have No Incentives

There’s a reason why the phrase ‘climbing the ladder is so prominent in business. Figuratively speaking, it is indeed representative of the hierarchy that is required for companies to thrive.

The crux of the matter here is again from an employee’s perspective – what incentive do I have to work hard, go above and beyond, and make a truly positive impression in a company that has no room for me to progress from my current position?

What’s more, if I’m ‘stuck’ in my current position, with no room for progression, how will I be able to justify a pay rise? Of course, your work can contribute to this discussion, but we often correlate a new, more senior position with a pay increase. Flat organizational structures shut the door on this, and it can make people feel like they’re not particularly working towards something. 

The consequence of this is a lack of motivation from the employee, which in startup companies can have a devastating impact. Startup companies typically have small headcounts, and the importance of maximizing the output of every employee to keep things running smoothly is critical at this point.

Add into this the issue of retention, and its cost on a business, and you have a perfect storm that will contribute negatively to the performance of your startup company. 

Flat Organizational Structure Problems

While it is often approached with the best of intentions, and there is a desire to be modern and forward-thinking from startups that apply a flat organizational structure, it can cause a lot of issues that ultimately contribute to the failure of a business. 

Having a clear structure within your team is actually beneficial to you and your business – issues with hierarchical structures tend to center around the misuse of authoritative positions, not in the fact that they exist themselves.

At Set Hub, we work with a plethora of startup businesses that combined together have decades of experience in establishing structure in their company. If you’re starting out on your entrepreneurial journey, not only can we assist in the setup of your business, but we can lean on our own personal experiences with startups to help provide guidance to you about what may work best for you.

Give us a call today if you’re looking to launch your dream business venture in the UAE – or beyond in the wider GCC region – and we’ll put your own time and resources back into the thing you’re passionate about, while we take care of the rest. 

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