July 14, 2021

Startups and SMB Span of Control

While it is difficult to pin down what makes a great organizational structure, as anyone who has worked in a bloated bureaucracy (or watched Office Space) can attest, it's pretty easy to find faults in a poorly organized one.

No matter the size of your company, the design and structure of your chain of command can significantly affect company productivity, control, and morale. This article will discuss one potential metric for measuring reporting efficiency — span of control — and the benchmarks and impact relevant to your organization.

Definition: Span of control (SOC) refers to the number of direct reports an employee has. You can calculate the average SOC by dividing the total number of direct reports (DR) by the total number of managers. For more information on how to use excel to calculate SOC, see here.

Metrics: 

  • So, what should your company's span of control be? As mentioned before, there isn't a single correct answer, but the industry benchmark is around 8, with the following data from SHRM providing some context:

  • The data suggests a “diamond” reporting structure:
  • Ground-level managers maintain a small span of control in order to maximize product-focused development.
  • Executives also have a small span of control than middle-level staff to lower micromanagement of the day-to-day and focus on the company’s long-term vision. 
  • This article will recommend an average span of control of 7 for companies working in the tech sector, which has historically always been considered the "magic number.” However, it's important to know that some companies are beginning to divulge.

"Google has increased the span-of-control to ‘10', thus making the structure comparatively ‘flatter', but not physically flat (although it did experiment with later). A broader span-of-control helps in improving the overall efficiency by reducing the overhead costs of middle management. However, it also requires transferring more authority to employees and designing independent job descriptions. The concept of ‘Smart Creative’ is designed to motivate employees to be more independent and responsible, thus reducing the management role in routine activities." LinkedIn

  • Traditionally, tech companies used a narrower span of control, with teams prioritizing clear lines of communication, speed, and flexibility. 
  • However, Google’s promotion of OKRs and a hands-off approach to management demonstrates that a broader span of control can create innovation and independence.
  • This reflects the importance of the SOC metric -- it can be modified to have real effects on the flexibility and control of management across the board. 

Insights:

  • All startups begin with a completely flat management structure, where all employees report to the executive board. 
  • As the company expands past 10 employees, the first layer of middle management is created.
  • Around 60 employees, the second layer of middle management is formed.
  • At each expansion point, the need for further subdivisions and managers naturally expresses itself when communication begins to break down and coordination between team members and leaders becomes strained.

Impact:

  • If the span of control is too large, managers feel overwhelmed and spend most of their time in 1 on 1s and managing people rather than products.
  • If the span of control is too small, employees feel micromanaged, and communication top-to-down is slow.
  • While that suggests that there is a single "magic number" of direct reports that are most efficient, in reality, numerous factors, including sector, employee, company size, product, and manager traits, can affect what the ideal span of control should be.

Actions:

  • Our recommendation: Only create a manager when they have 5 DR or plan to have more than 5 DR soon. When someone has too many DR, to the point where most/all of their time is spent on managing subordinates, layer.
  • Startups cannot remain flat forever -- the collapse of communication is inevitable as the company grows in size without creating layers of management. Plan for this in advance.
  • Use software tools to track and manage headcount and organizational structure in your company and monitor the metrics that matter.

Understanding the hiring and organizational structure of your company is key to sustainable and efficient growth. TruePlan offers dynamic hiring and headcount management software that centralizes requests and communication for recruiters, budget planners, finance teams, and budget owners.

Appendix:

If we consider the Graicunas formula for direct group relationships:

n (2^{n-1} -1), where n is the number of direct reports

It can be seen that with 15 direct reports, the superior would have to manage 245745 relationships, taking into consideration how each combination (subgroup) of his subordinates and himself would work both together and by themselves. The complexity increases exponentially with each additional direct report, meaning that a high span of control can only be achieved with a hands-off approach and abandonment of individual management.

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