Rogier Maes’s beginning-of-the-year speech never once mentioned holacracy or self-managed teams. Derek Melis, his friend and CFO, was relieved. Rogier was the CEO of the global construction company Contect; he, his executive team, and the board had been talking for months about transitioning to just such a system. Derek still hated the idea; it was too risky to let 200 offices and subsidiaries around the world call the shots on major decisions without approval from headquarters in Eindhoven. But Rogier thought it was the key to boosting engagement and performance,1 and he had hinted that he might use Contect’s 2017 annual all-employee meeting—his chance to announce new goals and celebrate the previous year’s accomplishments—to roll out the change. CASE STUDY CLASSROOM NOTES 1 Does the centralization of power dampen entrepreneurship? This is one of the critical questions Erik Roelofsen asks when he teaches this case in executive education classes. Instead, to Derek’s relief, he’d stuck to the traditional rallying cry: “We’ve had double-digit growth again. Our revenue is up by 14%, EBITA by 12%, and order intake by 13%. Our performance has exceeded shareholder expectations. We could never have achieved it without all of you! Remember: No matter how large Contect gets, it will stay agile and motivated. Thank you. And here’s to an even better 2017!” Rogier handed the microphone over to Henning Haas, the CEO of Contect’s Germany group, and came backstage where Derek was waiting. “That seemed to go well,” he said. He and Derek could hear people still clapping and cheering in the auditorium. “Of course,” he added, “I think the applause would be even louder if I’d talked about the holacracy initiative.” His tone was teasing, but with a serious edge. “You were right to hold off,” Derek said. “Yes, and I take your cautions very seriously. But I still believe that self-governance is the way forward. People want to be their own bosses, responding to local circumstances but working for the common good. If we give talented people the best opportunities, they’ll stay with us forever, and we’ll keep growing at the rate we want to.” “Let’s just wait until we iron out more of the details,”2 Derek said. 2 Adopting self-management wholesale—using it to determine what should be done, who should do it, and how people will be rewarded across an entire enterprise—is a difficult endeavor. Many experts say that in certain environments it won’t pay off. “Or until you finally get on board, my friend,” Rogier replied. Getting Used to the Idea? The next morning, as Derek was driving to the office, he mulled over his relationship with Rogier. The two men went way back. They’d met at university, and although Derek had gone on to graduate school and a career in banking, while Rogier had joined his family construction business and then founded Contect, they’d never lost touch. Derek had helped Rogier stay anchored when Rogier was going through a brutal divorce. And when Derek had lost his job during the financial crisis, Rogier had invited him to join Contect.3 3 Does the fact that Rogier put Derek in this role compromise Derek’s ability to do his job? Can he do what’s best for the company if he’s worried about his friendship with Rogier? Although they didn’t always see eye to eye at work—Derek was far more conservative than Rogier—they had tremendous mutual respect and could usually compromise. But the decentralization debate was different. In Derek’s view, the subsidiaries already had far too much power. Although Contect had launched as a specialist in small but steady installation jobs with high margins and low risk, it was now a full-service company that did design, construction, lighting, ventilation, plumbing, waste processing, and IT infrastructure for much bigger, more complex projects. Rogier’s strategy since 2000 had been to grow through acquisitions and to give a long leash to all the businesses he bought. The smaller ones could keep their own names, leadership teams, practices, and policies for the first five years. And although senior managers’ remuneration was tied to Contect’s overall sales and operating profits, the head office had relatively little control over the 30,000 projects the company had under way at any given time. Rogier liked this system for three reasons: It freed him from having to manage all the disparate businesses, so he could focus on additional acquisitions. He felt it wouldn’t be cost-effective to add more controls at the group level. And he thought independence was a great motivator. “I’m an entrepreneur through and through,” he would say. “I want my company to be just as entrepreneurial.” Derek understood all those points, but he still thought Contect was too lax. Inconsistent policies put the company at greater risk of lawsuits. The lack of control meant that the leadership team had little say in how the Contect brand was being managed at a local level. And without centralized oversight of projects, any single subsidiary’s missteps risked taking down the entire company. Rogier knew Derek’s position—but he had gone to an executive training course on holacracy in Las Vegas4 and had come back so fired up that he was now pushing for self-managed teams at headquarters and complete decentralization at the country level. 4 For-profit companies and nonprofit organizations in Australia, France, Germany, New Zealand, Switzerland, the UK, and the United States—most notably Zappos, which is based in Las Vegas—have adopted holacracy practices. Derek had held him off by insisting that he get the board more involved in the decision, but Rogier had managed to align directors on his side. He now had only one major—and very vocal—opponent: Vera Hoch, the head of the audit committee. Vera’s Perspective Walking into the office, Derek checked his phone and saw that he had five e‑mails from Vera. He called her right away, and she explained that Rogier had suggested she reach out. “I tried to talk to him about this whole holacracy nonsense5 last night, and he told me to check in with you,” she said. 5 Critics of holacracy claim that it creates silos, does little to remove hierarchy, and is difficult to organize and maintain. Derek smiled. This was an old trick of Rogier’s: He would align two people who disagreed with him, knowing that the more moderate one (Derek in this case) might temper the other’s view. “I don’t need to remind you what happens when we give so much power to the subsidiaries,” Vera said. “I’ve seen firsthand how ugly it can get. Rogier has too, which is why, frankly, his position on this stuns me.” Just after Vera joined Contect’s board, the company had been hit by a huge scandal. The project— Park 007—was a James Bond–themed amusement park with artificial ski slopes, cliffs for bungee jumping, roller coasters, indoor water sports, casinos, cinemas, and two five-star hotels. The Russia office had contracted to build it but hadn’t done so. For two years the subsidiary had recorded revenue from the proposed €650 million megaresort. Contect’s head office had discovered the fraud only after someone anonymously sent Rogier a thumb drive containing a Russian news report that the park was still barren land, despite what the Russia office’s books said. Everyone involved had been fired, but cleaning up the company’s reputation in Russia and Europe had not been easy.6 6 Royal Imtech, the company on which the original teaching case is based, went bankrupt in 2015 following a series of scandals. Vera had led the subsequent charge to strengthen the internal audit system. After Derek joined, they’d worked together on further risk management. They established a central division to set policy, ensure compliance, and evaluate projects worth €100million or more, and created an executive council of market and industry experts to advise on budgets and other strategic issues. Now Vera was getting worked up. “He’s calling it ‘holacracy,’” she said, “but that’s still just decentralizing, which we can’t do any further. We have to take back control at the top—not give the subsidiaries more power. Rogier has set ambitious growth goals this year, and without oversight I’m worried they’ll incentivize the wrong behaviors. Does he really want us to roll back all the work we’ve done and give the groups free rein? Why haven’t you been tougher with him on this? Please don’t let your personal relationship cloud your judgment as CFO. You need to tell him that from a risk perspective, full decentralization is out of the question.” Henning Weighs In Derek couldn’t stop thinking about Vera’s admonition, but he tried his best to focus on the earnings report he needed to finish. Unfortunately, just before lunch, Henning Haas knocked on his door. “I thought you’d be on your way back to Frankfurt already,” Derek said. “I’m leaving tomorrow. I wanted to see a few people first—including you.” Derek knew that this would be yet another conversation about decentralization. Henning was a big proponent of greater freedom for the groups, and as leader of the company’s largest country group, he held a lot of sway with Rogier and the board. “You’ve always been very careful around risk, Derek, and we appreciate that, but this company won’t continue to grow if we hinder it. The success you’re seeing in Germany, France, the UK, even Central Europe—it’s because we have increasing autonomy and freedom.” “And Russia?” Derek asked. “You can’t punish us all because of one bad apple. Designing policy around the lowest common denominator is a poor strategy, and you know it.” “As the CFO, I can’t lose sight of what’s going on in each country.” “I’m not suggesting complete anarchy,” Henning said. “And I’m not suggesting we spy on everyone 24/7. But we’re a global company. Our projects aren’t isolated. You saw what happened with Park 007. If one office does the wrong thing, we all suffer. It hits our collective reputation and our finances.” “Just don’t forget we’re in construction, not banking, Derek. Decentralization is the norm in this industry. We’re all organized around projects. And we should be able to contain risk at the local level. You have to admit that it would be a far more efficient approach,7 whether you call it holacracy or not: Faster decisions, made by the people who are most affected by them and know the ins and outs of the specific project, will make us much more agile. My peers and I will be able to bid on projects more quickly, get them done faster, and book more revenue if we aren’t hindered by needless bureaucracy.” 7 In a 2014 CEB study, 60% of the corporate strategy officers surveyed said that their company’s decision-making process was too slow, in part because of an excessive focus on preventing risk. After Henning left, Derek found that he was too distracted to get back to work. He believed that if he was truly determined to, he could probably persuade Rogier to abandon his holacracy plans. But it would take a lot of social capital. Was this the issue over which to put his friendship—and his job—on the line? Question: Should Derek fight the holacracy initiative? The Experts Respond Peter van Mierlo is the senior partner of PWC in the Netherlands. Derek shouldn’t fight Rogier on this initiative. In fact, he should tell his friend that moving more responsibility to the subsidiaries is a great idea. But he should explain that if the initiative is to be successful, contect must first lower its risk profile, increase in-region monitoring and reporting, and build the right culture. With that groundwork laid, holacracy can flourish at the company. Why is decentralization right for this organization? In large part because of the global business it’s in. With more than 30,000 construction projects under way around the world, many of them unprecedentedly complex, Contect simply wouldn’t be able to insist on standardization or keep close tabs on everything from headquarters. No one at an office in Eindhoven can know exactly how complete a job in Turkey is, for example. The decision makers need on-the-ground familiarity with the project. Demographic developments and other megatrends such as urbanization, improved technology, and the strength of Asian markets also make decentralization a more desirable—and viable—option than ever before. Technology has boosted transparency and changed the way people do business across the globe. Urbanization is having a material effect on the complexity of construction projects. It’s not just construction companies that should be pushing decisions down as close to the customer as possible; it’s all companies. That said, decentralization is no excuse for lack of accountability or control. Rogier’s initiative will succeed only if he makes significant changes to how the company is run. First, he needs to ensure that all his subsidiary leaders are credible and trustworthy and are the kind of people who want to work independently but also feel accountable to the larger company. They must have the humility and self-awareness to share information with headquarters, admit when a project isn’t going as planned, and recognize how they can improve their business. Rogier also needs to make sure they have clarity regarding Contect’s global strategy, purpose, and values and a better understanding of how their subsidiaries contribute to them. If those things are crystal clear to the people on the ground, the company’s level of risk won’t be as great as Derek and Vera fear. Leaders at headquarters still need to know what’s happening in all the units and in their largest projects. That’s the only way to avoid another Russia situation. And Rogier’s view that the CEO should focus solely on new acquisitions is reckless. Derek must persuade him to create a culture of accountability by closely monitoring such things as working capital levels, cash flows, delay reports, claims management, gross margin analysis, cost control, project pipelines, and the people engagement index. No matter how you run a company—with a tightly centralized structure or as a complete holacracy—that transparent view into unit and overall performance is essential. Furthermore, it will emphasize to the German CEO and other country leaders that it’s in their self-interest to share as much information as possible and to discuss problems with headquarters. Contect simply can’t keep close tabs on everything from headquarters. Derek can support Rogier’s push toward holacracy in a way that simultaneously safeguards the company. Ensuring that Contect has clarity around values, purpose, and strategy, and building systems that allow for transparent monitoring at the country and project levels, are the only ways to safely give the subsidiaries the responsibility they need to do their jobs well. Without those conditions in place, however, Rogier and Derek will be playing roulette with the company’s future. Ben Noteboom is the former CEO of Randstad, a global staffing and recruiting firm. If Derek wants to save the company—and therefore his job—he should persuade Rogier to abandon the holacracy initiative. Contect should not be giving more control to its subsidiaries; it should be looking to further centralize. There are typically four reasons for this: to increase oversight, to share best practices and concepts, to realize potential economies of scale, and to help your subsidiaries join forces when approaching customers in the market. Let’s start with oversight. It’s worth noting that this case is based on the Dutch company Royal Imtech, which went bankrupt in 2015. A big factor in that company’s demise was its lack of control over the projects undertaken by each of its country units, including a fraudulent initiative in Poland (similar to the Russian one described in this case). In the construction industry—or in any business that, like Contect, is project based—one unit’s failure can taint a whole company. So leaders need to scrutinize assignments and contract terms to reduce risk. They must know whether projects are on schedule and prevent potential manipulation by governments or other local actors. It’s possible for Contect to monitor these things while continuing to respect the integrity of local managers. When I was the CEO at Randstad, this is exactly what we did. We gave each of our individual offices room to operate while maintaining standards and control at the center. It might have been easier to keep the units independent—especially the recently acquired ones—but you can’t be 100% sure that people will always act in the company’s best interests. Another benefit of centralization is to ensure that services are performed consistently across locations. During my tenure at Randstad we acquired, rebranded, and integrated 185 companies (including the next biggest competitor in our industry), and we made a point of spreading best practices—carefully measuring the most efficient approaches to our work and then sharing them across offices. Both employee engagement and customer relations improved, and I believe that centralization at Contect could yield the same results. Of course, regulations and requirements governing construction vary from country to country, which might limit standardization. And the fact that this company is in construction and Randstad is a services-based business is an important distinction. But that shouldn’t hold Contect back from ensuring that everyone executes to the same standards across the globe. It’s not clear whether the other two benefits—economies of scale and approaching customers together—are in play here, but efficiencies might well be gained by combining back-office, project administration, and monitoring systems, if not across the entire company, then at least for similar markets. And it would probably behoove Contect to encourage businesses in the same region to cross-sell or collaborate in serving customers. Whatever Rogier calls it, what he’s pushing is dangerous to Contect. It’s also possible (though I can’t imagine it) that each subsidiary is unique and that centralization would bring none of these benefits. If that’s the case, then Contect’s leadership should act as a financial investor. Whether Rogier calls it holacracy or decentralization, what he’s pushing is dangerous to Contect. If the company doesn’t share best practices and maintain control over its subsidiaries, then each one is essentially a stand-alone business—with the ability to bring down the whole company. HBR’s fictionalized case studies present problems faced by leaders in real companies and offer solutions from experts. This one is based on the Rotterdam School of Management case study “Autonomy and Control: The Collapse of Royal Imtech,” by Erik Roelofsen, Tao Yue, and Melanie Beuken.
