Usually, we associate company formalization with a hierarchical structure facilitating a chain of command with clear departments, defined roles, job descriptions, and documented processes for making decisions and getting things done. But does this accurately capture the way companies function today in particularly dynamic and evolving sectors where constant adaptation is key to survival and to maintaining a competitive advantage? My experience with and research on companies, particularly relatively young technology-oriented companies, suggests such companies may not be formalizing as they mature according to a typical lifecycle scheme we might read about in textbooks. 

I recently spoke to a friend of mine who co-founded a startup in 2007 and has worked there continuously since then. The enterprise, which leverages technology to offer training programs to companies and professionals in Europe, grew quickly; in its early days, it had about 12 clients and generated €200K in turnover. Now they have thousands of clients and generate about €8 million in turnover; they have gone from 15 employees to a staff of almost 60 people plus another 50 freelancers. Growth like this is hard to manage. Scholars such as Daft (2010) contend that companies pass through similar organizational stages of development as they grow and evolve and that this evolution is painful. Leadership crises are inevitable because the mindset necessary for getting a startup off the ground is incompatible with the mindset required to manage a more mature company.

My friend’s company has experienced many of the things companies typically experience as they evolve from the startup phase into a more mature phase, including having a majority of their shares acquired by an investment group. Nevertheless, according to my friend, there was “no formalization” until 2014 when they introduced Agile management practices such as Scrum. Such practices, which originated mainly in software development, have now spread to other sectors because many companies recognize their potential to help efficiently manage the development of a wide range of products, services, and processes. In large more process-heavy bureaucratic companies, such as those typically found in the insurance sector, Agile management practices are sometimes used to streamline work so that bureaucratic structure does not get in the way of delivering key products and services. In this context, Agile practices appear as a contrast to traditional formalization. 

The main point of implementing Agile management practices in my friend’s company, however, was to shield the head engineer and his team from the rest of the organizational “chaos” so that they could effectively innovate, develop, and deliver products according to client specifications and deadlines. Meanwhile, the rest of the company has resisted any significant formalization; roles and chains of command remain fluid and informal. But rather than being an exception, I wonder if my friend’s organization doesn’t represent a new normal. My experience with other companies that are similarly young but too old and mature to be considered startups, companies that have experienced rapid growth and rely heavily on technology for their product offer, provides support for this hunch. Maybe these companies aren’t simply postponing the inevitable leadership crisis and restructuring but are actually adapting to market forces. This makes sense in sectors experiencing disruptive innovation, where too much structure and formalized processes might actually impede rapid innovation. 

Is it appropriate to consider Agile management practices as a kind of formalization, albeit very different than traditional formalization? The roles, processes, and protocols are very well defined, which is consistent with basic notions of what formalization is. Can this phenomenon, therefore, be seen as a kind of micro-formalization within the larger company? Perhaps lifecycle models that assume a more traditional path towards formalization to be inevitable and necessary should consider a phase of micro-formalization in certain sectors as being the new norm.   

This article originally appeared in ISM's 2019 Annual Newsletter.

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