Organizational costs: old vs. new

Corporate organizations that predate the Internet were built based upon a military or “span of control” model. While it evolved over thousands of years from Roman times, there have been limited changes, even with the introduction of telecommunications and computers. The foundation was that a manager/leader could directly manage a specific number of direct reports. This was due to the need to gather information, understand the bigger picture, and provide leadership to the team. From the Army website, here is the traditional Army organization.

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The classic corporate organization has a manager handling between 5 and 10 direct reports. If it was less than 5, then there was too much redundancy between what the boss and the underling were doing. If there were more than 10, the supervisor could not spend enough time with each employee leading them and providing the personal guidance and coaching.

This hierarchical organization for corporations is alive and well today. Entrenched management levels handling the processes of budgeting, management reviews, etc. are very difficult to change even if the tools are available with the Internet. Management consultants have made reducing management levels to eliminate costs one of the main topics over recent decades. There have been heroic attempts. In 2003, ATT CEO David Dorman took steps to reduce ATT’s corporate layers by almost half, saying the change “helps us get even closer to our customers.”

However, it is extremely difficult to significantly revamp the traditional corporate organization. For most managers, it is a nightmare to think that a subordinate were to resign and they were not able to replace them. This would mean they had to do both their job and the job of the subordinate. They are right to be concerned.

The historical business models are not the same as the business models emerging built on the Internet. Let’s just briefly compare Holiday Inn Express to AirBnB, and consider management time required for each accommodation business model.

For quality control:

· Holiday Inn Express requires defined standards, routines, and monitoring. This needs management to oversee field inspectors, review reports, initiate remedial action where required, etc.

· AirBnB gathers customer feedback and posts it so substandard quality accommodations are exposed and either improve or lose bookings.

For branding:

· Holiday Inn Express must manage individual facilities that are branded in order to maintain the standard. This requires management attention.

· AirBnB does not brand their accommodation providers and has the flexibility to drop and add providers based upon customer feedback rather than expensive in-person inspections.

Of course Holiday Inn Express and AirBnB are offering “different” accommodation services, but the market speaks. Intercontinental Hotels Group, the parent of Holiday Inn Express is valued at $9 billion while AirBnb is valued at $25 billion. Oh, and AirBnB was started in 2008 and doesn’t own any of its accommodations.

This may, as Alan Greenspan once remarked, be “excessive exhuberance”, but then again, it may not. Time will tell which business model has the most competitive structure and can expand profitably.

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