To grow you must build a beautiful, pragmatic, innovative and agile bureaucracy
It's become common to use the word "bureaucracy" as an insult, and therefore many entrepreneurs don't realize where it is necessary and good
Many young people have only ever heard the word “bureaucracy” used as an insult so when they create a business they have no idea why bureaucracy is good.
I’m talking about basic organizational realities like the need to impose controls over who is allowed to touch the money, how the money is tracked, who is authorized to make payments, how expenses are organized for accounting purposes, and how to protect yourself against embezzlement. All of which is bureaucracy, of the type you need to survive.
Again and again, I find myself teaching my clients some basic facts about organizational theory, such as, an organization must have hierarchy, and the way you design your hierarchy will determine whether you will be successful.
Some say we live in a partisan era, that different groups of Americans disagree about almost everything, and yet most Democrats and Republicans recite some of the same cultural mantras, including “bureaucracy is bad.” Or sometimes they recite the more general mantra, “Decentralization is good, centralization is bad.”
This idea now dominates USA culture. It would be difficult to identify who the counter-culture is. Where are the Americans who shout, “We love centralization!” As an aspiration, no one advocates for it. But in reality? Wealth is concentrating, and it is concentrating the most for those entrepreneurs who understand how to build functional bureaucracies.
You cannot grow without bureaucracy, therefore you must have the ambition to build a beautiful, pragmatic, and innovative bureaucracy. We have many new software tools that enable agile bureaucracies, and yet the cultural denotation of the word "bureaucracy" has not changed at all over the last few decades.
If you think “decentralization is good, centralization is bad” then you've been brainwashed by the people who don't want you to be successful. If you want to be build something big, then you need to deprogram yourself.
True story: at Futurestay.com the early days were fast and wild and loose and full of growth, but also some sloppiness. One of the cofounders paid for most company expenses using his personal American Express card, and then later he would transfer funds from the company to his personal bank account, to reimburse himself for the expense. The leadership team was small and everyone trusted one another. But three years later the company wanted to raise another round of funding, and they went back to their original investors and asked those investors to put in more money, at which point the original investors took a close look at the financials. And one of them saw this pattern of funds being repeatedly transferred to one of the founders. At which point the investor went completely ballistic. EMBEZZLEMENT! An investigation was done and the cofounder was cleared – the record keeping had been sloppy, but these were just reimbursements for legitimate expenses. All the same, this scandal delayed fundraising for six months.
The most dysfunctional startups that I've worked at are the ones with an ideological commitment to flatness. They move from 10 people to 50 people and they don't realize they need to start putting in place controls for money. They get to 75 people and they still have the CEO using their American Express card to pay for things. As the various teams develop the CEO has to hand their American Express info to whoever is running the marketing team, the devops team, the data analysis team, and so on, to pay for various 3rd party services.
Later on, (when the company has 100 people? 200 people?) when some actual controls are put in place, the new CFO is horrified by how many people know the American Express numbers, and so he/she has to spend time clawing back control of actual spending.
Software developers are aware of the concept of "tech debt." They are less aware of the concept of "organizational debt" but organizational debt grows quickly in the companies that try to remain flat for too long. At a certain point, the company needs a way to track money, and to get money to individual teams, to set budgets for each group, etc, but in a flat organization all of that is done on a personal level, by 2 or 3 key people, for far too long, and the lack of process eventually strangles the possibility of growth.
I’m not saying that “centralization is good, decentralization is bad.” What I am saying is that you have to make these decisions pragmatically, not ideologically. The design of a company is an art, not a science. There is no easy, simple formula that works for everyone. How much should you decentralize decision making to individual teams? How much should you decentralize budget decisions to individual teams? There is no one-size-fits-all approach. There are dozens of delicate tradeoffs to consider. Pushing decision making power to the team leaders might give your company an agile dose of decentralization, but this only works if you’ve hired excellent people. And even if you do decentralize some decision making, remember that you, as leader of the company, have ultimate responsibility for the company, and therefore a certain amount of power must always remain centralized with you.