Building Companies of Scale: The Importance of Employee Empowerment and 5 Key Considerations for Effective Organizational Leadership in the Lower Middle Market

1. Does the company have the talent to take on the responsibility of more complex decisions?

Many leadership teams are reluctant to delegate additional responsibility and authority because they don't have confidence in the skills of the lower levels of management. However, this lack of confidence can be overcome through a systematic talent assessment and development process. Successful companies take the time to invest in their employees and train them to take on additional responsibilities, or they change their hiring practices by better-defining roles and recruiting for newly defined positions. This reassures employees that the company is committed to its growth and development, instilling confidence and trust in the proposed changes.

2. Which decisions should be delegated, and what is the most effective organizational structure?

Like with most organizational transformations, there need to be clear goals. The delegation of responsibility can vary from business to business. At one extreme, the leadership team can function as portfolio managers overseeing management teams of business units, each managing all aspects of their own businesses. While this works at the highest level of large conglomerates, it generally does not in mid-sized businesses. However, even in mid-sized businesses, there can be significant variation in the delegated level of responsibility and authority. At one extreme, a retail chain may delegate only the responsibility of keeping the store staffed and clean to store managers. Conversely, they may delegate more complex responsibilities like the authority for the site selection, merchandise mix, pricing, and profitability. Most retail chains have found a blend between the two extremes to balance success at a local level while meeting the broader value-creation goals of the organization. Similarly, each company needs to find its own blend. A company can achieve optimal levels of delegation by enabling opportunities to challenge the status quo of central command, by giving more responsibility and authority to additional levels of management, and by providing clarity to employees through clear communication about the organizational structure.

3. Is there a common understanding of business objectives and an open communication culture?

For department managers to make decisions aligned with the company's value creation goals, they must understand and buy into these goals and see how their roles and decisions impact their achievement. This often necessitates a significant cultural shift within the company. While leadership teams frequently articulate their vision, it is less common for companies to break down this vision into specific, relevant goals for department managers and even rarer for small companies to provide managers with transparency into operating results.

To delegate responsibility effectively, companies need to clearly define roles, set detailed objectives, and regularly update the entire organization on performance. Implementing productive meetings and examining their cadence is crucial. Business units and departments should have daily and weekly meetings for tactical issues and monthly and quarterly strategic reviews to assess performance and progress towards goals. The CEO should lead monthly or quarterly discussions to update employees on the company's performance against its annual objectives.

Building a culture of mutual trust through open communication and transparency is essential for good decision-making, and an appropriate meeting cadence is necessary to enhance collective learning and improve buy-in.

4. Do managers have the information they need to carry out their responsibilities?

The transformation from a central "command and control" organization to one with more distributed responsibility requires a complete overhaul of how information is disseminated. Financial and operating information at most small companies is designed to cater to the needs of senior management. This needs to change. Information on operating performance now needs to be more detailed and timely to suit the needs of each decision-maker. CFOs must ensure that the information provided is organized to make it easy for each decision-maker to understand what is important, especially when significant economic decisions are delegated to employees with less financial literacy.

For many organizations, this transformation will necessitate implementing a Business Information (BI) system accompanied by training to enable managers at all levels to analyze data and make better decisions. For example, a warehouse manager responsible for minimizing truck load times needs regular, detailed reporting to understand the loading times for different trucks at various times of the day and with different merchandise types.

5. Are managers held accountable, are their incentives aligned, and are they encouraged to make decisions?

Accountability and incentives are crucial in ensuring managers are committed to their responsibilities. Leaders must establish clear performance metrics and regularly review these with managers to ensure alignment with the company's goals. Managers should be held accountable for both the outcomes and the decision-making processes they employ. This accountability can be reinforced through regular performance reviews, feedback sessions, and a transparent reporting structure. We do not need to look very far to find a road map that describes what smaller companies need to implement to overcome growing challenges – simply look at conventional practices at successful, larger companies.

Additionally, aligning incentives with company objectives is essential as it ensures that employees are motivated to work towards the same goals as the organization, leading to increased productivity and efficiency. This can include performance-based bonuses, promotions, and other rewards that motivate managers. When employees see a direct connection between their efforts and rewards, it fosters a sense of ownership and engagement, ultimately driving the company’s success.

Finally, leaders who delegate tasks and trust their direct reports set a positive example, shaping the organizational culture. Moreover, cultivating an environment that tolerates mistakes encourages employees to take the risks necessary for effective decision-making.

The path to sustainable growth

Implementing effective organizational leadership and empowering employees are critical for companies looking to scale. Businesses can create a structure that supports sustainable growth and performance by delegating responsibilities, investing in talent development, promoting open communication, and aligning incentives. The hard part, which requires the judgment and skill of an experienced leader, is to time it right, tailor the right approach for each situation, and manage the cultural change.

NewSpring Holdings offers strategic guidance and best practices across various functional areas to maximize performance. This includes key investments in operations, establishing a robust sales infrastructure, developing go-to-market strategies, managing the M&A process, and fostering leadership best practices. By leveraging this strategic approach, we’ve seen companies effectively navigate the complexities of growth and achieve long-term success.