Management Case A: Scaling Growth

Previous Chapter

Short Answer

“Growth for the sake of growth is the ideology of the cancer cell.”

Edward Abbey, The Journey Home: Some Words in Defense of the American West (1991)

If you’re going into management, or transitioning from an individual contributor (employee) to manager, here’s the shortened version:

You have to learn to let go of what you were good at; you’re doing a different job now by managing people, amplifying employee talents, and giving credit where it’s due.
The people working for you/beneath you are probably smarter than you.
You lead by example in everything. What you do and show is what your employees do and show.
Properly delegating time, tasks, and people is paramount to survival as a manager.
Notifications and distractions will kill your productivity if you let them.
Give people what they need, not what they want.

As the number of people you’re responsible for increases, the policies and procedures in place need to scale to accommodate. If you do not plan appropriately, you face stagnation or even organizational death.

Scaling up typically involves things like:

New layers of management
Specialization of roles
Generalization of procedures to follow
Formalization of communication and meetings
Difficulty in cross-team communications and organizational communication

A 5 minute email can have the same, if not better, results than a 1 hour meeting. Learn when to do emails over meetings.

If you don’t know why your manager (or superior in general) wants something, it’s usually ok to just ask them why it is important.

The typical ratio of manager to direct reports I can reasonably assume is around 1 to 7-10, given or take a few more or less direct reports, depending on role, scope, manager experience, and proficiency. It’s basically a judgment call.

If interested in my basis for that ratio, look further into this paper on relationships in organization (1938) and this explanation on the formulas from Graicunas (2019).

Long Answer

While you’re reading this, I will ask you to temporarily imagine yourself in the role of an educator or a teacher.

I’m going to draw parallels from two places you may not expect to see in a book on education systems: project/product management and military organization and communications in milsim (military simulation) environments. This is split into separate chapters to distinguish certain information and covers the former reference (project/product management).

This chapter covers organizational structures and how businesses may bring on new people and shuffle around internal employees to meet the needs of a company.

According to Tony Fadell in his book Build from 2022, there are multiple breakpoints for organizations at around 15 people, 40-50 people, 120-140 people, and 350-400 people. These breakpoints aren’t limited either; the next chapter showcases similar breakpoints in a different application. I’m going to use these values as my own breakpoints and attempt to illustrate why they are these values.

There’s also mathematical formulae to help determine these values. See the Graicunas reference and paper links in the “Short Answer” section above for formulaic examples.
The concept of scaling isn’t unique to Fadell either. Other authors, such as Robin Dunbar (2013) and Geoffery West (2017), also researched this topic.

Organizations in both public and private sectors don’t fare well past these limits without appropriate planning. This planning includes, but is not limited to, communication methods, role designation and duties, and layers of management.

You should avoid limiting personnel as people may leave the organization and shift roles or the organization may experience growth beyond those limits.

How does this relate to Teaching/Instruction?

Pretend you’re an educator, teacher, or instructor.

You’re technically a manager of ICs (individual contributors), but may deal with class sizes of up to 40 students, or lecture hall sessions with hundreds of students, which are past typical limits for managers and direct reports.

You may also deal with multiple groups of up to 40+ different students in a single day, which means you could quickly approach the 120-140 or 350-400 people breakpoints with only one manager. Sometimes this is accommodated with assistant teachers, co-teachers, and other support staff. Sometimes this is not accommodated.

I’ll discuss more on this below, but the general lesson is as the number of people you’re responsible for increases, the policies and procedures in place need to scale to accommodate.

A Quick Aside

I’m not going into depth on matrices, or a weak vs strong matrix in management. That’s too high level for this book.

At best, we’re going to assume 1 manager oversees X number of direct reports and make a nice and simple tree diagram across multiple levels.

I’m also not going into many edge cases, such as the manager with multiple managers and individual contributors under them as direct reports.

Business Breakpoint 0: The Start

Fun fact, I did project management before teaching. Additionally, me and my engineering class back in college also made a business as our senior project in undergraduate study.

I think I’m OK talking about this.

If you’re making a business, you have to go through multiple hoops just to legally set up the business. There’s registration with the State, market research, business plans, tax information, marketing plans, insurance, general management, contracts with labor and employment, licenses, banks, and many, many more.

If, for some reason, you actually want to start a business on the side, please refer to resources like SBA.gov as far too many details are outside scope here.

When starting out, you’ll also want to set up communications like emails and websites through official business URLs (such as “companyname.com”) rather than informal, personal emails for perception amongst clients. You’ll also want to document important processes first like hiring and onboarding, even if only rough drafts right now, as a clear workflow is far easier to manage and enforce than no workflow.

As an aside, remember that both hiring and fully onboarding takes several months for every new person, employee, etc. you bring on! Plan for that time!

Additionally, if having to choose between two options, like which employees to hire, with similar performances between them, then use cultural/company fit as a tie-breaker. You’ll want to be careful with bringing on new people, because the cost of one bad hire can quickly exceed the cost of recruiting and cause organizational issues. Even if someone will perform well, but cannot adjust to the environment, it’ll still create issues.

You can also teach ability/skill far more easily than culture or mindset.
A really good employee being worth many employees is a widely accepted view, but you may risk a single point of failure and overworking them.
Don’t expect top-tier talent unless you provide top-tier pay and benefits to keep them around.

These things above are to solve an early scaling problem and identify what you want from your employees, and yourself, as part of your business. Properly building a foundation is key to success and makes it easier to scale up.

For the rest of this chapter, pretend you are the CEO/owner of this newfound company as I go through those breakpoints from before and why I find them applicable and relevant from my own experiences looking at companies.

Business Breakpoint 1: 15 People

15 people is how many people a single manager typically can manage simultaneously as an upper limit. A smaller breakpoint starts at around 5 direct reports per manager where relations and group management quickly explode exponentially (Chute, Gulick, & Urwick, 1938). At this stage, it’s you, the manager, and the other employees as ICs.

As for typical limits, I’d expect around 5-8 direct reports if overseeing people with different roles and 9-12 direct reports when overseeing people with similar, if not the exact same, roles. You could extend beyond the 14 person breakpoint (15 people minus you, the manager) for direct reports, but it would have to be in a role requiring minimal direct intervention with individual contributors and the manager barely doing any IC level work.

You’ll have two layers at this point:

Manager(s) (You)
Individual Contributors

As there’s only one true manager (and perhaps assistant managers if you hire them), your main duties are management and task delegation but you may do non-management duties as well to cover deficiencies, employees taking time off, and other similar reasons. There’s few bottlenecks in communication and things are straightforward. Everyone can fit into a single space without great difficulty and it’s 1, maybe 2, managers directing employees/ICs.

Some small businesses may purposely stay small and still be successful. These businesses may hire contractors to perform tasks rather than hiring more new employees and these contractors are applicable at any scale of business. Business growth depends on organizational structures, revenue streams, and expense management.

Lastly, if you’re at this breakpoint, I’ll wager a guess you’ve probably started the group with a bunch of friends (or at least people you’re friendly with). To grow past this point, you’re going to need to set rules in place for how your “friends” interact with each other. If you do not, bringing in new people will swiftly backfire on your with various mixed opinions added and no codified means to appropriately communicate them.

Business Breakpoint 2: 40-50 People

One single manager cannot reasonably handle 40-50+ people by themselves. They cannot effectively oversee this many direct reports, so a solution is a new organizational layer.

You’ll have three layers at this point:

Director/CEO (You)
Managers (New)
Individual Contributors

If you’re at the top level here, or close to the top level, above, your goals start going from managing tasks to managing people. You can no longer deal with incidents or problems as they come; you have to think steps ahead and plan out the future. This is a paradigm shift from operating tactically to operating strategically. The director+ here now develops employees, company culture, and revenue streams.

Put another way: finding methods to earn money, improving the state of the company, and getting employees to perform better.
If it doesn’t cover one of these areas, consider delegation.

An assumed “upper limit” is about 4-5 managers with 8-10 employees each on average in a ~40-50 person organization. These people, called direct reports, are people one layer immediately below a manager, director, etc. said leader are responsible for. Contributors (ICs) report to managers, managers report to directors, and so on. You could adjust the ratio of manager:employee and director:manager, but avoid overloading any one manager (or higher) staff member. Your initial batch of new managers can also form your C-Suite/executive board when scaling up in the future.

You may also consider hiring on new individual contributors to assist you, the director, but remember they count towards the limit of direct reports. If their roles are not well-defined, they risk redundancy.

In smaller organizations, employee often wear multiple hats. When scaling up and expanding operations, you’ll need specialists and managers to oversee new projects or expand existing projects. Generalists are still helpful, but you’ll need to look into specialists to meet advanced project requirements. Some ICs may step up into management, but you may need to bring in outside managers and specialized individual contributors to fulfill new roles.

Growth near this breakpoint introduces new regulations too. For example, the Affordable Care Act, according to the IRS (2019), explicitly define “50 or more full-time employees” where you legally have to change procedures and benefits to meet requirements.

Communication as a risk factor exponentially increases with scale. Large meetings, if done with 40-50 people, almost certainly lead into side conversations and distractions, which waste time and reduce productivity. Conveying vital information occurs through mainly one layer at a time rather than straight from point A to point B. This is when you learn the art of sending an email instead of hosting a meeting.

As for you, the CEO, you become a director, or a manager of managers. There are many similarities, but also differences, between managers of ICs and managers of managers:

Rather than assist directly with tasks, you help the people helping people complete tasks
Managers require more autonomy compared to ICs
You have more responsibility and power, but less freedom
You move from domain expertise to management
Specialization occurs to avoid redundancy
Oversight of more projects instead of only a few projects

Remaining as CEO/director at this stage requires committing more to management to maintain organizational effectiveness. Expect some loss/reduction of certain technical skills to dedicate towards learning and executing in leadership roles. It’s possible only a small amount of your time as director is what you would’ve done as an IC. If you worked on development for 8 hours as an IC in a given day, it may now be only 30-45min at most as a manager+. It’s not your job anymore and other duties are far more important for the organization’s well-being.

This effect magnifies as your organization scales up.
You’ll also have to accept your direct reports, or team, may be or become smarter than you on certain aspects. Learn to respect them.

If there’s no employee(s) to fulfill organization responsibilities, it falls upon you and everyone else in the organization instead until you bring in more external expertise. If losing one employee risks the failure of most or all of the organization, that is failure in allocation. There should be succession plans and contingency systems across each management layer to address emergencies.

Business Breakpoint 3: 120-140 People

Another layer of management appears at this stage: directors, or “middle management.” Unlike the previous stage, directors are a layer between you and managers, rather than only director -> manager -> employee. Each director usually manages up to 6 direct reports and may oversee key projects/products directly if needed. At 120-140 people, you may only need 3, or even 4-5, directors.

The organization layers may look like this now:

President/CEO (You)
Directors (New)
Managers
Individual Contributors

Outside core products and projects, you’ll want specialized departments and teams, such as HR, legal, and more. Outsourcing these functions typically exceeds a breakeven point at this scale and it’s more cost-effective to bring in-house instead.

More management means reviewing meeting structures, organizational culture, and support networks for managerial staff. Management coaches and hired specialists familiar with director+ training may be contracted or hired for support. You’ll also want to review communication across management layers to reduce issues like information loss.

If priorities as CEO were not already shifting, they continue at this scale and beyond as you’re managing multiple systems of the organization. Scaling means reassessing and refining over time through continuous improvement.

There is no one-size-fits-all solution, as each company may experience unique problems, but there are several solutions which apply broadly across parts of an organization and solve more common problems. You’ll need to assess problems specific to your business and which problems have precedent with proven solutions already.

Business Breakpoint 4: 350-400 People

Notice: This section is less from personal experience and more extrapolation from researching the topic.

From 120-140 to 350-400 people, it’s another layer of management before scaling up further. The organizational flow may look like this:

President/CEO (You)
Executive Board (New)
Directors
Managers
Individual Contributors

Executives (top management) establish direction for the organization. Directors (middle management) translate that direction into strategy. Managers (low management) take strategy and develop tactics to meet goals within teams.

Depending on how many management layers are present, a manager may have to think about strategy/direction alongside tactics.
Strategy is why; tactics is how (see Simon Sinek’s Start With Why (2009))

Additionally, things like all-hands meetings, organization-wide events, and similar items face more problems as you scale upward:

They become significantly more expensive
They require more advance planning
Risk of misusing “all-hands meetings” goes up exponentially

Scaling beyond this breakpoint seems like repeating the same strategies at larger scales, like 1000+ and 10000+. Each new breakpoint focuses on some of the following:

Adding more middle management layers
Creating specialized departments as needed
Bringing services in-house which become too expensive out-of-house
Bringing outside expertise to fill specialized roles
Establish a steady ratio of managers:direct reports for each management layer
Formalizing communications across layers

The “Hidden Costs” Problem

Alternatively: Small Things Lead to Big Problems

Imagine you’re running a coffee shop and you want to sell a cup of coffee to customers.

There’s many things involved in the process. You have many direct costs, such as:

Ingredient/Material costs
Packaging costs
Labor costs

Don’t forget about multiple indirect costs, which aren’t put into the coffee but still used to help make the coffee:

Debt/interest payments on estate, like rent
Franchise costs
Maintenance/Remodeling costs
Machinery/Equipment costs

You may go with a rule of thumb, like 3x material costs to cover labor, taxes, etc. and still generate profit. Another rule of thumb may be to visit your closest competitor, see what they’re selling at, and price your coffee 25 cents lower or so.

Costs of goods sold (COGS) is sneaky on prices and why you may optimize adding as little of an ingredient needed for your coffee without sacrificing quality. This may sound like penny pinching and hurting the customer, but it’ll hurt the seller’s pockets far more than you may expect.

Let’s put it into hypotheticals. You sell 1000 cups of coffee at averaging 3 dollars each, with an average COGS of 1.25 dollars each. That’s 1.75 dollars in revenue per cup of coffee for 1750 dollars total.

On that same example, one ingredient suddenly increased in price but it’s necessary to maintain your standard of quality. The COGS is raised to 1.50 dollars per cup now, so there’s an additional running cost of 0.25 dollars for each coffee you make. Over 1000 cups, like before, that’s instead 1500 dollars total revenue.

In a single day that’s 250 USD less in revenue because one part changed. It may seem small now, but losses like these compound over time. Many people want to earn money, so it’s in their best interest to establish processes, like strict portion controls and packaging methods, to keep the bottom line low and profitability high.

The Technical Debt Problem

As a company grows, the more likely it is held together by duct tape and glue rather than a robust system.

This isn’t entirely the company’s fault; it’s the nature of complexity. You add in more employees, then the number of relationships skyrockets. You develop or implement more systems or processes, the interactions and complexity also increases (exponentially so!).

Because it takes time to sort out complexity, and people often resort to fast solutions which work now, you accumulate “technical debt.” Technical debt is the maintenance cost of a system for choosing quick, working solutions now instead of robust solutions later. You “pay off” the debt by rewriting the systems to go beyond just functional.

It’s another reason why I believe Tony Fadell, the author of Build, developed the breakpoints I examined earlier: to find concrete points you must ensure sustainability at before continuing growth.

Where this debt is most visible is for anyone working behind the scenes and/or on the systems an organization uses. In terms of jobs, this is mainly programmers and software engineers. You can see technical debt in multiple areas, like if you’re working in a retail store and utilize a POS system that barely functions, but was affordable for your budget and is quickly implemented.

It is an important skill to manage technical debt, much like managing financial debt. You “borrow” future capabilities to boost current capabilities. Sometimes it comes from something you thought was OK at first, but realize it doesn’t work later and now you pay back interest on it. Accuring debt is sometimes the best, if not only, choice to meet your needs and/or meet regulations/requirements. How you plan and pay back that debt before it compounds out of control and affects your processes is what separates great managers from poor managers.

This includes balancing shipping/selling products to generate revenue vs paying down the cost of debt.
Velocity (i.e. how fast you get money) is still important; you cannot get money to pay off debt if no money is coming in!

There’s also what I’ll call “bad engineering,” which affects technical debt, but is worse. Think of bad engineering as making terrible decisions with whatever assets, liabilities, and equity you have now and acquired via debt/loans. There’s no control, tradeoffs, or any benefits; it’s just costs. The decisions might be slow to appear, but once they appear it may already be too late or extremely costly to fix. You might never avoid technical debt, but good processes can certainly avoid bad engineering and not put the organization at undue risk. Combine debt with bad practices and you’re in trouble.

Taking Time Off

A manager has many freedoms.

Taking time off whenever they want, however, is not typically included. At least not in the way many may think.

At a high enough leadership position, or when you’re the owner/president of an organization, you’re always on-call. You could take time off like a typical employee, but you may only manage 2-3 weeks because chaos ensues from absent leadership (and not having someone around to pay people!).

This also applies to finding coverage for roles. A manager may have to cover deficiencies for roles they cannot sufficiently delegate out or hire to fill. They may also have to take the brunt of coverage during times multiple employees need to take time off as well.

Does leadership have the same 24 hours a day like people do? Yes.

Does leadership spend it the same way their employees do? Not really. Some leadership may do significantly less “physical” work and instead go through multiple meetings, presentations, emails, and solving people’s issues instead of their own issues. They may evaluate their work on quality of hours instead of quantity of hours.

As people “climb up the ladder;” they tend to spend less time on production/labor tasks and more time in managing. That’s a trait consistent across multiple roles and companies, where you “work” less, but your brain works harder. Some days could be 2 hours of smooth sailing and other days 12+ hours of putting out (almost) literal fires. This is further exacerbated by how a high level leadership mistake can have vastly greater consequences than a low level employee mistake.

Lastly, some leadership roles are in a position they can influence their wealth, whereas the vast majority of people cannot influence their wealth as easily. I’m not fully equipped to discuss or debate beyond this, however, but history is consistent on giving out more wealth to people higher on the ladder compared to people on the bottom.

The Bureaucratic Spiral

As you scale up organizations, or introduce new initiatives, you should be extremely careful about bureaucracy.

Let’s explore a bad implementation in the shoes of John Employee; the average white collar worker. You are hired and want to just work on your job, then enjoy the rest of your day. You also prefer explicit over implicit instructions, so you can verify work was done right and there won’t be many issues in the future.

Despite that goal, the organization may require meetings to go over work. That’s still “normal” because meetings communicate necessary information.

However, you notice future meetings don’t get agendas, or they take up too much time talking about non-meeting related things.

Then those meetings have meetings for scheduling meetings. This becomes a hassle for your current employees, so you hire on someone specifically to handle meetings for employees.

Then you get a new initiative to adhere to multiple different activity trackers because managers across all layers of an organization want to know their employees are working and not just collecting paychecks. To verify work outputs, new levels of performance are developed such as meeting expectations and exceeding expectations.

Except “exceeding expectations” may be what people consider “meeting expectations” and ruins the new system anyway.

It’s death by process. There’s so many new meetings, initiatives, etc. it takes away time to do what you’re supposed to do, which ironically places you and/or the employee at risk of firing/laying off.

In short, unchecked bureaucracy creates the very failures it tries to prevent.

Scaling Down & Layoffs

Scaling down can occur in different ways, including scope, number of projects, operations, investments, personnel counts, attrition, reduced hours, outsourcing, and more.

Generally speaking, employees react negatively to downsizing and there’s multiple reasons why:

Firing/laying off employees
Shuffling into undesired roles
Getting relocations
Facing stricter policies
Receiving reduced benefits

It is significantly harder to take away things than it is to provide things. You really need to ask yourself if some benefits for employees are really sustainable long-term. Some resentment appears when benefits get taken more than when they were never offered in the first place.

This isn’t to say all perks are bad or excessive. Some are genuinely beneficial to employees and increase productivity.

The CostCo hot dog combo, despite being a loss leader and staying at $1.50, is a great reason to get customers spending more and kept at that price for over 40 years (Matthews, 2018).

In short, scale down carefully and with purpose. You’re laser focusing on solving problems by keeping the good and cutting the bad. Handwaving away problems and pretending they don’t exist will not help you.

Final Notes for Managers

As the organization scales, the level of risk each layer takes on may increase as well. A director affecting the workflows of hundreds of employees means each decision carries more weight on average compared to a single employee at the bottom of an organizational layer.

This isn’t to say managers/directors are more important than individual contributors. Even an individual contributor may cause massive amounts of damage to an organization with a single incident. Instead, this is me saying that as you’re responsible for more people, the risk of something going wrong, and the price of that risk, also scales up.

Additionally, as the differences in layers emerge, there is a risk of “general incompetence” in every manager in an organization. This is when managers, directors, etc. are colloquially called “idea guys” and expect implementation of new products, trends, ideas, and more without proper knowledge or consideration for feasibility.

If you are in a managerial or leadership position, you are very much at risk of general incompetence.

This same general incompetence applies cross-functionally as well. You may have two separate teams, such as marketing and engineering, where one team barely understands what the other team is doing and pitches product(s) potentially misrepresented to clients, leading to a loss in business and trust.

Bibliography

Abbey, E. (1991). The Journey Home: Some Words in Defense of the American West. Plume.
- Original work published 1977.
Chute, C. F., Gulick, L., & Urwick, L. (1938). Papers on the Science of Administration. Southern Economic Journal, 4(4), 506. https://doi.org/10.2307/1052808
- The alternative link source used is a retyped version by Nickols, F. on August 7, 2019 @ https://www.nickols.us/relationship.pdf.
Dávid-Barrett, T.; Dunbar, R. I. M. (22 August 2013). Processing power limits social group size: computational evidence for the cognitive costs of sociality. Proc Biol Sci 1 August 2013; 280 (1765): 20131151. https://doi.org/10.1098/rspb.2013.1151
Fadell, T. (2022). Build. HarperCollins.
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West, G. (2017). Scale: the universal laws of growth, innovation, sustainability, and the pace of life in organisms, cities, economies, and companies. London, United Kingdom: Penguin Press. ISBN 978-178022559-3.