Ray Dalio compares managing a business to conducting an orchestra. Managers should direct their people, like conducting an orchestra, rather than micro-managing each part of the business, or telling people exactly what tasks they should do. I’ve worked for managers across all elements of the spectrum, from those who micro-managed, to those who created a truly decentralized, and autonomous organisation by devolving most elements of responsibility to management. Personally, I feel the latter option creates high impact organisations, although a couple of qualifications. There is a fine line between a well-functioning autonomous organisation and a laissez-faire style organisation where key functions are not performed well, and there is a lack of responsibility and accountability. In order to create this autonomous and decentralised organization, here are two non-negotiable tools which should be implemented by every organisation, including 1) a channel responsibility document, and 2) a limit of authority document.
Great managers orchestrate rather than do. Like the conductor of an orchestra, they do not play an instrument, but direct their people so that they play beautifully together. Micromanaging, in contrast, is telling the people who work for you exactly what tasks to do or doing their tasks for them. Not managing is having them do their jobs without your oversight and involvement. To be successful, you need to understand these differences and manage at the right level.
Ray Dalio
Channel Responsibility
This document sets out who precisely is responsible for what roles or tasks in an organisation, it must be regularly updated and publicly available for all to see.
There cannot be any confusion over who is responsible for what specific tasks on a project or within an organisation. There should never be more than one person responsible for a task, else either it will not get done, or those responsible will blame each other for why it was not done. Similarly, in an organisational structure, there should never be a situation where one person reports to two superiors. We call this a “two headed snake” structure and it is a management sin, because inevitably the subordinate will play the superiors off against one another.
Identify the jockey
A few years back I worked in a private equity group that was funding the production of a movie for Netflix. A Zimbabwean author had written a book about an event in Zimbabwe which had occurred several years earlier, and its success had prompted a producer to come forward with a proposal to make a documentary-movie about the event with the end goal to eventually sell the production to Netflix and earn a healthy profit.
There were a handful of partners in the company, each whom were to bring to the table certain value, and in return would get varying proportions of equity in the company. The deal was that our group would fund the production of the film by extending a loan to the company, and once this had been paid down, the partners would get their share of the residual value of the company, once it had been sold.
The project didn’t go well. Huge amounts of money got spent, of which much couldn’t be properly accounted for, there was infighting and blaming between the partners and various employees, and most importantly, the film was never released. Five years later, and it’s all but been forgotten. Maybe one day in the future, somebody picks up the pieces, buys the rights and finishes the movie, but for not, it’s long way off.
In diagnosing what went wrong, there were several factors that stood out to me:
Firstly, there was not one overall “jockey”, or person with ultimate responsibility for the project. Any project needs to have a person ultimately responsible for the outcome of the project. They need to own the outcome, live and breathe the project, and be accountable to the project sponsor.
Secondly, the only partner with “skin in the game” was our group. The other partners had equity, contingent on our loan being repaid satisfactorily. In essence they had a call option, with the right to exercise it if the movie was successful, but could let the option expire worthless if the project was unsuccessful with their only cost being their time sunk into the project. In the end, our group was left with the burden of the loan, whilst the other partners have moved onto other things.
Thirdly, there was no-one from our group who owned the project. The MD had ultimate accountability for the project, but he had many other projects to focus on and did not have the time to put enough focus on this project. Our group FD had some oversight of how the funds were spent, but the money was in the hands of the operations team, and much of the money was not accurately tracked.
A tool for effective channel responsibility – the RACI Matrix
Organisations can use a tool known as a RACI matrix, which shows who is Responsible, Accountable, who is to be Consulted and Informed of any task or deliverable. For example, if we look at creation of the annual budget, the CFO is ultimately Responsible for the creation of the budget, all the department heads are Consulted during the process, the CEO is ultimately, and always, Accountable, and all the various department heads are Informed.
In a well-run organisation, every employee should be able to stand up and say precisely what they are responsible for. This extends to outsourced service providers. Often companies will outsource certain parts of the business such as legal, accounting, payroll or IT. These service providers must sign a SLA (Service Level Agreement) in which their responsibilities and limits of authorities are clearly laid out. An organisation should never outsource a function which it does not understand or cannot measure. Rather, it should first seek to understand a function in-house, and then to outsource it if necessary.
Limits of Authority
Linked to the Channel Responsibility Document is the Limits of Authority document. This document is of critical importance, since it enables a company to enable autonomy, which we like, but within certain boundaries, or limits of authority. In addition, it protects both employees and the company.
Limits of Authority should be set for all stakeholders who can influence a company’s performance including shareholders, directors, executive, management, employees, and outsourced service providers.
I experienced a scenario last year in relation to leasing of properties. During our search for suitable tenants to lease to, we came across a business who expressed an interest to lease space from us. One of our employees spoke with the company representative to give general details about the property. Several weeks later, when we informed the company they wouldn’t be allocated space since we had another tenant already pre-booked, the Director started saying the employee had verbally agreed to him being allocated space and that we should reinstate his company, and in Zimbabwean law a verbal agreement is binding. Regardless of what the employee actually said, I stated that the employee didn’t have the authority to approve leases, since this is strictly the prerogative of MD of the company.
Employees need to be very careful not to exceed their LOA, else this can be grounds for the company to terminate their contract, or even to take legal action against them. For example a procurement department might exceed their Limit of Authority if they approve the purchase of goods over a set price or quantity.
Good management is like a jazz band
Dalio likens effective management to a well-functioning jazz band, where there is no script, but the band members listen well to each other, so they can understand where the jazz is going, and collaborate well with each other, to produce great jazz.
Similarly, effective organizations often have decentralized and autonomous structures, where each person in the company knows what precisely they are responsible for, and what they must not do. This leads to agile structures which leads to quick decision making and minimal bureaucracy, lower overheads, and accountability. It is beautiful to watch a company that operates this way, where there is no politics, infighting or bickering, everyone just gets on with that they are responsible for, like good jazz.
Mark Leonard, founder and president of ultra-successful Canadian software company, Constellation Software, talks of his company’s culture as follows:
Our Operating Group Managers have done a spectacular job of growing CSI’s market share of acquisitions within this portion of the VMS sector, without succumbing to the siren song of increased centralisation, bureaucracy, and control. Most of these businesses are blessed with big moats and long-tenured employees and customers. The Operating Groups provide a low overhead environment where autonomy, collegiality, and shared knowledge are the cultural norm, and good people thrive.
Mark Leonard, Constellation Software, Inc.