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Managing without managers
June 13th, 2009 by Joca

Maybe you already heard about Ricardo Semler:


ricardosemler

CEO and majority owner of Semco SA, a Brazilian company best known for its radical form of industrial democracy and corporate re-engineering. Under his ownership, revenue has grown from $4 million US in 1982 to $212 million in 2003 and his innovative business management policies have attracted widespread interest around the world. TIME featured him among its Global 100 young leaders profile series published in 1994 while the World Economic Forum also nominated him. The Wall Street Journal America Economia, the Wall Street Journal’s Latin American magazine, named him Latin American businessman of the year in 1990 and he was named Brazilian businessman of the year in 1990 and 1992. Virando a Própria Mesa (“Turning Your Own Table”), his first book, became the bestselling non-fiction book in the history of Brazil. He has since written two books in English on the transformation of Semco and workplace re-engineering: Maverick, an English version of “Turning Your Own Table” published in 1993 and an international bestseller, and The Seven Day Weekend in 2003.

I’ve just read his 1989 Harvard Business Review article entitled “Managing Without Managers”.

It is worth reading. Even though it as about the experience if a manufacturing company, it talks about management issues that many companies have, independently of the type of the organization:

  • How to empower people?
  • How to build trust in the management team and the employees?
  • How to conduct a company transitioning into business unit organization?
  • How to implement a profit-sharing program?
  • How to give access to all relevant information?

And many of his ideas are in sync with the Open-Book Management ideas I mentioned earlier in this blog.

I’ll highlight some parts of the article in order to motivate you to read it! 🙂

Profit-sharing

Lots of things contribute to a successful profit-sharing program: low employee turnover, competitive pay, absence of paternalism, refusal to give consolation prizes when profits are down, frequent (quarterly or semiannual) profit distribution, and plenty of opportunity for employees to question the management decisions that affect future profits. But nothing matters more than those vital statistics—short, frank, frequent reports on how the company is doing. Complete transparency. No hocus-pocus, no hanky-panky, no simplifications.

On the contrary, all Semco employees attend classes to learn how to read and understand the numbers, and it’s one of their unions that teaches the course. Every month, each employee gets a balance sheet, a profit-and-loss analysis, and a cash-flow statement for his or her division. The reports contain about 70 line items (more, incidentally, than we use to run the company, but we don’t want anyone to think we’re withholding information).

Hierarchy

The organizational pyramid is the cause of much corporate evil because the tip is too far from the base. Pyramids emphasize power, promote insecurity, distort communications, hobble interaction, and make it very difficult for the people who plan and the people who execute to move in the same direction. So Semco designed an organizational circle. Its greatest advantage is to reduce management levels to three—one corporate level and two operating levels at the manufacturing units.

It consists of three concentric circles. One tiny, central circle contains the five people who integrate the company’s movements. These are the counselors I mentioned before. I’m one of them, and except for a couple of legal documents that call me president, counselor is the only title I use. A second, larger circle contains the heads of the eight divisions — we call them partners. Finally, a third, huge circle holds all the other employees. Most of them are the people we call associates; they do the research, design, sales, and manufacturing work and have no one reporting to them on a regular basis. But some of them are the permanent and temporary team and task leaders we call coordinators. We have counselors, partners, coordinators, and associates. That’s four titles and three management layers.

….

We have other ways of combating hierarchy too. Most of our programs are based on the notion of giving employees control over their own lives. In a word, we hire adults, and then we treat them like adults.

Business units

When we made the decision to keep our units small, we immediately focused on one facility that had more than 300 people. The unit manufactured commercial food-service equipment—slicers, scales, meat grinders, mixers—and used an MRP II system hooked up to an IBM mainframe with dozens of terminals all over the plant. Paperwork often took two days to make its way from one end of the factory to the other. Excess inventories, late delivery, and quality problems were common. We had tried various worker participation programs, quality circles, kanban systems, and motivation schemes, all of which got off to great starts but lost their momentum within months. The whole thing was just too damn big and complex; there were too many managers in too many layers holding too many meetings. So we decided to break up the facility into three separate plants.

To begin with, we kept all three in the same building but separated everything we could—entrances, receiving docks, inventories, telephones, as well as certain auxiliary functions like personnel, management information systems, and internal controls. We also scrapped the mainframe in favor of three independent, PC-based systems.

The first effect of the breakup was a rise in costs due to duplication of effort and a loss in economies of scale. Unfortunately, balance sheets chalk up items like these as liabilities, all with dollar figures attached, and there’s nothing at first to list on the asset side but airy stuff like “heightened involvement” and “a sense of belonging.” Yet the longer-term results exceeded our expectations.

Within a year, sales doubled; inventories fell from 136 days to 46; we unveiled eight new products that had been stalled in R&D for two years; and overall quality improved to the point that a one-third rejection rate on federally inspected scales dropped to less than 1%. Increased productivity let us reduce the work force by 32% through attrition and retirement incentives.

I don’t claim that size reduction alone accomplished all this, just that size reduction is essential for putting employees in touch with one another so they can coordinate their work. The kind of distance we want to eliminate comes from having too many people in one place, but it also comes from having a pyramidal hierarchy.

Information

A few years ago, the U.S. president of Allis-Chalmers paid Semco a visit. At the end of his factory tour, he leafed through our monthly reports and budgets. At that time, we had our numbers ready on the fifth working day of every month in super-organized folders, and were those numbers comprehensive! On page 67, chart 112.6, for example, you could see how much coffee the workers in Light Manufacturing III had consumed the month before. The man said he was surprised to find such efficiency in a Brazilian company. In fact, he was so impressed that he asked his Brazilian subsidiary, an organization many times our size, to install a similar system there.

For months, we strolled around like peacocks, telling anyone who cared to listen that our budget system was state-ofthe- art and that the president of a Big American Company had ordered his people to copy it. But soon we began to realize two things. First, our expenses were always too high, and they never came down because the accounting department was full of overpaid clerks who did nothing but compile them. Second, there were so damn many numbers inside the folder that almost none of our managers read them. In fact, we knew less about the company then, with all that information, than we do now without it.

Today we have a simple accounting system providing limited but relevant information that we can grasp and act on quickly. We pared 400 cost centers down to 50. We beheaded hundreds of classifications and dozens of accounting lines. Finally, we can see the company through the haze.

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