ORGANIZATIONAL STRUCTURE

The Big MisconceptionsHolding Holacracy Backby Georges Romme

SEPTEMBER 10, 2015

One important reason why there are so many very badly managed firms in the world today

is the widespread belief that management should be the responsibility of a few people at

the top. The future of corporations may therefore depend on the rise of distributed forms

of management, such as holacracy.

Don’t cringe. True, Zappos’s recent experience with holacracy, as widely reported in the

media, demonstrates that the transformation to distributed management is not easy.

Holacracy was supposed to revitalize the online shoe store’s culture and its reputation as a

fun place to work, but the ever-expanding circles of responsibility that have emerged

within the company and the resultant endless meetings are becoming a drain on

productivity.

Still, the essential concepts behind holacracy offer perhaps the best hope of easing top

managers’ stranglehold on companies and, by extension, on innovation. As Clayton

Christensen and many others have demonstrated, the management practices prevailing in

most companies tend to stifle any dialogue on ideas that arise from the shop floor or the

front line.

The real problem with holacracy isn’t the ideas behind it but the persistence of a few false

beliefs that have grown up around it. Three misconceptions, in particular, have been

particularly damaging: that holacracy is non-hierarchical, that implementation specifics

aren’t important, and that the board’s functioning shouldn’t be affected. These

misconceptions lead CEOs and other would-be change agents to underestimate the

challenges arising from holacracy. As a consequence, they end up merely inventing “clever

titles to replace those at traditional corporations.”

I’ll address those misunderstandings, but first it’s worthwhile to take a look at where

holacracy came from. Brian Robertson’s adoption of holacracy in Ternary, the software

company he founded, didn’t come out of the blue. His distributed-management approach

drew inspiration from an earlier model, sociocracy. The two approaches share a set of key

principles and practices, with the main differences arising from jargon: Sociocracy,

developed in the 1970s, was based on principles of cybernetics; holacracy represents a

repackaging of the principles in the vocabulary of software engineering.

The key idea of both is that management should be viewed as a mechanism — an

“operating system” in holacracy — for distributing power and leadership throughout the

organization. Information and authority flow in linked circles, with people taking on

shifting roles as needed. For engineers familiar with the concept of distributed intelligence

in systems, this is an easily understandable, even obvious, form of structure. But it

challenges most people’s deeply rooted notions about management and governance. The

idea that a few directors and managers should run the organization is so entrenched in

people’s consciousness that it’s hardly ever questioned.

Another stumbling block is that distributed management is still a rarity — few people have

had any experience with it. Although sociocracy is in place in about 100 small and

medium-size organizations, some of which have been using it for decades, there are no

applications in multinational companies (except for a small unit within Royal Dutch Shell

that applied the principles for more than a decade, with good results in such areas as

productivity and employee satisfaction). The consulting firm HolacracyOne says a few

hundred organizations have recently been “trying out” holacracy, but only Ternary has

used it for more than five years.

It’s no surprise, then, that misconceptions have grown up around holacracy. But if the

practice is to find its way into more than just a handful of companies, then business

founders, managers, and directors need to have a good understanding of what’s true about

holacracy and what isn’t.

Misconception 1: Holacracy means abandonment of corporate hierarchy. Although

holacratic and other distributed-management approaches are fundamentally different

from the command-and-control structures that prevail in many organizations, they aren’t

nonhierarchical, as many believe. A truly nonhierarchical structure is a scary prospect for

most businesspeople, and for good reason: a lack of a hierarchy leaves an organization

without a clear sense of who is accountable for what.

Instead, in holacracy and sociocracy, self-organization coexists with and complements a

robust hierarchy. Each staff member has a powerful voice, and employees are organized

into self-managed circles. Power and authority can flow in virtually any direction, but with

an eye to maximizing efficiency, the hierarchy helps the organization determine how many

circles should exist, identify which circle should decide on a particular idea or proposal,

and create links between circles. Moreover, instead of conferring authority, the hierarchy

establishes an unambiguous sequence of levels of accountability.

The interplay between self-organization and hierarchy has enhanced the resilience of

Endenburg Elektrotechniek, the Dutch engineering company that initially pioneered

sociocracy. A rough schematic drawing of the company’s structure would show a top circle,

consisting of the board of directors, above and slightly overlapping a general-management

circle, which is above and slightly overlapping the circles for units such as manufacturing

and technical installations.

When Endenburg Elektrotechniek lost more than one-third of its sales, its CEO saw no

solution other than to lay off 60 employees. The next day, an employee called a meeting of

his unit circle to discuss an alternative: delaying the layoff for a few weeks and shifting

people into a concentrated sales and marketing effort. The unit circle appointed him to

advocate for the proposal to the company’s general-management circle, which decided to

have the proposal discussed by the board of directors’ (or top) circle. The board authorized

the proposal, and all available employees got a one-day crash course in customer

acquisition. Within several weeks, the effort had won enough new projects to make the

layoffs unnecessary. Although the company’s largest business line was sized down

substantially, growth in several other products and services led to a much more diversified

customer base.

This example demonstrates that each staff member has a powerful voice, with the circular

hierarchy processing ideas and proposals. Anyone can signal problems and raise ideas in

the circle he or she belongs to, with functional leaders (appointed in the next-higher circle)

and delegates (appointed in the lower circle) acting as links between circles. The system

also maintains unambiguous accountability and decision authority: For example, major

investments need to be authorized by the directors in the top circle, but the directors will

not interfere with how people are assigned to key roles in any of the other circles.

Endenburg Elektrotechniek and many other applications of sociocracy suggest that “self-

organization” and “hierarchy,” rather than being contrasting ideas, are complementary

tools in turning distributed management into a system with a limited number of circles

conducting very creative but efficient meetings. Interestingly, in companies like

Endenburg Elektrotechniek, the general-management circle will typically meet twice per

month, and all other circles will meet (on average) four to six times a year, unless there is

an exceptional situation like the one previously discussed.

Misconception 2: The goal justifies any means. Another common belief is that once the

blueprint of holacracy has been adopted, any implementation strategy will do to get the

company there. At Zappos, Hsieh’s ultimatum to employees — embrace holacracy or accept

a buyout — illustrates this misconception. A “hit and run” strategy toward empowerment

creates a major misalignment between the CEO’s empowerment rhetoric and the reality of

the arbitrary use of absolute authority. Employees are left in utter confusion, which can

prevent the company from fully implementing the intended change.

Many such experiences demonstrate that the implementation process must itself be

holacratic, drawing on employees’ ideas and ensuring that everyone understands and

embraces the changes. The transition can’t come about as a directive from the top. In fact,

the best approach is for top executives to get out of the way while a dedicated project team

(possibly including external experts) orchestrates adoption and implementation.

The pace of change must also be deliberate and well-orchestrated. The brand-strategy

consulting firm Fabrique, for example, first defined shared objectives and had a project

team pilot-test whether sociocracy served to realize those objectives. Then, on the basis of

the evidence collected, it had the project team, together with the executive team, make a

shared “go/no-go” decision (the result was a “go”). An approach like this signals top

managers’ deep understanding of distributed management and leadership and establishes

them as role models.

Misconception 3: Distributed management does not affect the C-suite or boardroom.

Many attempts to introduce distributed management fail because executives and directors

take themselves out of the equation. They assume that the change affects only operational

and middle managers and that their own discretionary powers will remain intact. They

don’t grasp that holacracy represents a fundamental redistribution of power and authority

throughout the organization.

For example, corporate-governance systems and financial ownership often need to change

in a holacracy. Zappos now falls under Amazon’s ownership umbrella; will Amazon’s

ownership ultimately work against Zappos’s experiment with holacracy? And what if

Hsieh’s successor someday turns away from holacratic principles?

Companies such as Endenburg Elektrotechniek and MyWheels, also in the Netherlands,

and the Terra Viva Group in Brazil have taken steps to restructure financially in an effort to

ensure their sustainability. Terra Viva Group, a formerly family-owned agribusiness

company that adopted sociocracy to manage its rapid growth, created a shareholders’

association that owns 51% of the company so that no single large shareholder, such as a

family member, can interrupt capital investments by leaving the company. Terra Viva now

“largely owns itself,” says its current CEO, Frans Schoenmaker.

Too often, CEOs treat distributed management as their latest toy, and they don’t think

through its full implications. Awareness of the misconceptions that have grown up around

sociocracy and holacracy can help a company avoid the kind of turbulence and confusion

seen at Zappos and turn distributed management into a highly productive system that

ensures the firm’s long-term productivity, viability, and resilience.

Georges Romme is a professor of entrepreneurship and innovation at Eindhoven University of

Technology in the Netherlands and author of the forthcoming The Quest for Professionalism: The Case of

Management and Entrepreneurship (Oxford University Press).

Related Topics: ORGANIZATIONAL CULTURE

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8 COMMENTS

Graham Boyd 3 months ago

@Georges, your article compares well with my experience using Holacracy over the past 5 years in 3

different companies. In the latest one I brought in Holacracy slowly - in essence, prototyping the minimum

viable next step each time. But, the hierarchy was retained, informed by the Requisite Organisation design

of Jaques, and Otto Laske's CDF. So self-organising was balanced with hierarchy in a dynamic way. See

here for more details: http://www.enliveningedge.org/organizations/living-the-re-invented-organization/.

One big addition we made was bringing in coaching for all. Holacracy is often used just as a technical

solution to an adaptive challenge. In part because Holacracy often is seen as just technical; and because it

is ineffective at addressing inter- and intra-personal tensions. So I developed and deployed a peer to peer

coaching methodology to support each person's adaptive journey.

Finally, investors and board. I'm starting up a new company and using the Fair Shares model of Prof Rory

Ridley-Duff of Sheffield University to insure the board will reflect all voices / stakeholders, and all capitals.

Not just financial.

Excellent article - and bringing some much-needed input on using Holacracy and Sociocracy effectively.

Thanks for writing!

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