Every leader of a growing and successful entrepreneurial firm, with its informal and loose management controls, will inevitably be advised by consultants that as soon as possible the enterprise should become professionally managed.  This transformation, it is implied, is the formula for future growth and success, not to mention survival.  My experience is that this can become a dangerous illusion.

Some brief definitions: entrepreneurial firms are privately held, founded by an entrepreneur, and tend to be distinguished by their creativity, informality, adaptability, capacity for rapid decision-making, and usually staffed by some pretty fired up people.  They focus on gaining customers, making money, growing, and taking bold actions to do all of these.  Paperwork and record-keeping of all kinds are seen as drains on resources, especially time, and therefore to be kept to a minimum.

Professionally managed firms have sophisticated (and expensive to maintain), coordinated systems for planning, goal-setting, salary and bonus administration, budgeting, financial structure, benefits, paid time off, hiring, discipline, termination, promotion, management development, performance management, job descriptions, succession planning, employee handbooks, and so on. In short, they have widely a implemented rational bureaucracy.  Their people may or may not be fired up.

In fact, there is a good chance that most of the employees of the professionally managed firms are not fired up!  What is the basis for this statement?  Most people work for professionally managed firms, from Fortune 1000s to governmental entities, and according to repeated surveys by Gallup and Towers Perrin only about 21% of all employees are fully engaged, 71% are partially engaged, and 8% are fully disengaged.  Engagement (being “fired up”) is defined in terms of a sense of urgency, intensity, focus, and enthusiasm. Name any of your least favorite large organizations that have a reputation for customer dissatisfaction, whether that be the DMV, the Post Office, your bank,  phone or cable company, airline or TSA, etc., one thing they all have in common is that they are professionally managed!

Why then the emphasis from so many management experts on professional management systems?  The answer is that each of these systems can make rational good sense, even though each also carries a possible downside, and together they can be stifling.  Let’s examine a few.

Management by Objectives (MBO)—Much research shows that people accomplish more when they manage their jobs by goals, objectives, and plans for achievement.  However, the system can become counter-productive when it seems that values and mission mean little, and that numbers count for everything, and carefully set goals and objectives become swords dangling over one’s head.  The pressure to set “stretch goals” can come to mean that only unrealistic goals are acceptable.  An enormous amount of time can be spent on “horse-trading”—management wants to prevent “sandbagging”; others want not to be shut out of bonus potential.  Being honest about what is realistic is seen as a sucker’s game—you will only be outbid by the opposition.  The stress on “alignment,” can turn into “a-long-line-ment”, meaning decisions cannot be made without the input and approval of a long line of people.  The more decisions there are the longer the wait time.  And then what about the creative people who do not work best with goals?  Did Bill Gates have the objective of a net worth of $80 billion?  Did Michael Dell plan to drop out of UT-Austin and start a firm that custom-built PCs?  Did Steve Jobs plan to create the company with the largest market capitalization in the world?

Salary Planning—Wages and bonuses are the single biggest expense of almost any enterprise.  It only makes sense to manage this expense systematically and objectively. Paying too much is expensive, and so is paying too little, since it leads to turnover and jobs that go unfilled or filled by the unqualified. So job descriptions and salary groups or bands must be designed.  Creative projects, however, require employees to function outside their usual roles, perhaps moving in and out of many different projects over the course of a year.  Adjusting salaries in such situations is little problem with informal systems, but formal salary administration requires that management committees frequently meet to approve new job definitions, and much time is spent gaming the system to get raises for those who otherwise would be topped out in their current job description under the current salary budget.  Additionally, job descriptions can be seen to mean that if it is not on your job description, it is not your job.  For the entrepreneurial firm, it is sometimes said that everything is everyone’s job, and that anyone who doesn’t get this does not belong there.

Performance based bonuses—In the professionally managed firm, discretion no longer rules as it does with entrepreneurs; all that count are results compared to objectives.  If the objectives upon which bonuses are based are seen as unrealistic to begin with (see “stretch goals” above), however, the system seems rigged to eliminate bonuses, with a resulting decline in trust and openness.  The drive to “hit the numbers” for bonus purposes can also lead to cutting ethical and legal corners.

Objective hiring and promoting criteria—Gut feeling and “knowing the person” no longer count as much as they did in the early years of the company, when the founder’s intuitions led to great team additions, even when their resumes indicated lack of qualifications.  In more formal processes, there is only so much you can ask or find out about strangers without taking legal risks, a high level of uncertainty and anxiety is generated on the part of hiring managers, and an endless series of interviews and screening mechanisms become the norm.  Avoiding risk can crowd out finding top talent as the priority, and then mediocrity rules.  Sometimes, much time and money is expended on the charade of interviewing a wide range of candidates, when the preferred person has already been virtually selected from the outset.

Documented procedures for discipline and termination—Candor and openness give way to documented processes which are seen as exercises in hypocrisy or exercises in CYA.  Managers begin to doubt the leadership of executive management and HR when they see lengthy delays in dismissing those who should have been gone a long time ago.  Employees manipulate Workers Compensation and disabilities to avoid discharge, not to mention harassment claims.  Skillful management, upon which promotions depend, can become less a matter of forming and motivating teams for high performance and more a matter of navigating bureaucratic landmines and not speaking one’s mind, i.e., becoming “emotionally intelligent” in the most two-faced and favor-seeking senses.

In summary, the downside of “professional management” is that bureaucracy may rule and relationships suffer, along with spontaneity and quick, decisive action.  Bureaucracy in its best sense is a set of policies, procedures, and criteria meant to ensure fair and impartial decision-making freed from subjective bias and to create coordinated effective action. In its more dysfunctional sense, it is mostly self-protective, to avoid being open to charges of unfairness, even those that are baseless.  It can also become self-perpetuating, whereby the rationale for continuing a practice is that it has become established. Energy that could be spent building better products or services is spent finding ways to minimize spontaneity and risk, two elements at the heart of entrepreneurial success.

This is why we could provide tongue-in-cheek re-definitions: an entrepreneurial firm is what management experts say the professionally managed organizations should become, and the professionally managed firm is what these same management experts say entrepreneurial firms should become.

How then do we make the best use of professional management practices while retaining or growing the entrepreneurial spirit?  First we need to recognize that professional bureaucracy falls into the class of what Henry Herzberg refers to as “satisfiers” or “hygiene factors.”  Without a reasonable degree of them present in the workplace, employees will be highly dissatisfied, and there will be legal hazards too.  But the presence of satisfiers does not provide “motivators” in Herzberg’s sense, those features of the work environment which create engagement.  Their absence, moreover, does not eliminate the possibility of high motivation.  Many start-ups that are significantly lacking in “satisfiers” have highly engaged teams for whom the work is exciting, important, energizing, and on which they are intently focused upon doing at an exceptional level.

Next month we will focus on what it takes to generate engagement in the workplace, and how to preserve the best part of the entrepreneurial culture, alongside of or in spite of the necessary and positive aspects of bureaucracy.