12 Mar 2012  Research & Ideas

Crowded at the Top: The Rise of the Functional Manager

It's not lonely at the top anymore—today's CEO has an average of 10 direct reports, according to new research by Julie M. Wulf, Maria Guadalupe, and Hongyi Li. Thank a dramatic increase in the number of "functional" managers for crowding in the C-suite. Key concepts include:

  • The number of managers reporting directly to the CEO has doubled, from an average of 5 direct reports in 1986 to an average of 10 today.
  • In 2008, companies averaged 2.9 general managers, compared with 1.6 in 1986, according to data from several surveys. The average number of functional managers reporting directly to the CEO increased much more dramatically, from 3.1 in the late 1980s to 6.7 in 2008.
  • Two main factors have driven the C-suite sea change: an overall increase in IT investments and an overall decrease in firm diversification.
  • As hierarchical flattening occurs, companies are pushing some decisions toward the top, casting doubt on the common idea that firms flatten in order to push ideas down the organization.

 

It's getting a little less lonely at the top. So says recent research that reports a dramatic change in the top management structure of large US firms.

According to a survey of some 300 Fortune 500 companies, the number of managers reporting directly to the CEO has doubled, from an average of 5 direct reports in 1986 to an average of 10 today. The growth is driven almost entirely by an increase in the number of C-level "functional" managers, rather than by an increase in general managers. These days, along with the CEO and the general managers, top offices are teeming with specific titles such as chief financial officer, chief marketing officer, chief technology officer, and chief human resources officer.

"In companies that have more related businesses, it makes sense to have these positions toward the top with the objective of centralizing the marketing activities across businesses."

In 2008, companies averaged 2.9 general managers, compared to 1.6 in 1986, according to data from several surveys. The average number of functional managers reporting directly to the CEO increased much more dramatically, from 3.1 in the late 1980s to 6.7 in the mid-2000s. And as functional managers have risen in power, general managers may be losing some of theirs.

A new working paper, Who Lives in the C-Suite? Organizational Structure and the Division of Labor in Top Management, explores several factors that have led CEOs to depend more directly on functional experts than ever before—coordinating all the top minds in the top office.

"CEOs are spending more and more time with their direct reports, in larger and longer meetings," says Julie M. Wulf, an associate professor of strategy at Harvard Business School who cowrote the paper with Maria Guadalupe of Columbia Business School and Hongyi Li (HBS PhDBE '11) of the MIT Sloan School.

(An article in the forthcoming April issue of Harvard Business Review, cowritten by Wulf and Booz & Company Senior Vice President Gary L. Neilson, will discuss what these findings mean for how CEOs manage.)

The researchers collected information from some 300 large American firms, focusing primarily on the period between 1986 and 1999. By evaluating a combination of confidential compensation surveys, public accounting records, and technology investment data, they were able to piece together the main factors driving the C-suite sea change: an overall increase in IT investments and an overall decrease in firm diversification.

The IT investment factor

Looking at growth patterns over the 13-year period, the researchers found a direct correlation between an increase in the number of top-level functional managers and an increase in information technology purchases. Wulf notes that the 1986-1999 time frame was especially significant in terms of corporate technology. The 1990s marked an era when PC prices started falling, when dot-com companies started booming, and when most large companies began to deploy organizational game-changers such as e-mail accounts, intranets, and enterprise resource planning (ERP) software.

"You might expect that advances in information technology would increase the number of people you could manage because it makes it easier to communicate with many people at once," Wulf says. "But what we found instead is that it's not an increase in the total number of managers reporting directly, it's just the number of functional managers, which is a little more subtle."

The paper divides functional managers into two camps—those focused on products (marketing and R&D managers) and those focused on administrative functions (such as finance managers, HR directors, and legal department managers). Wulf explains that the administrative functional managers were those most directly affected by IT investments. As the number of significant IT purchases grew, so too grew the number of administrative functional managers in the C-suite. One possible explanation is that prior to the onset of electronic communication, it would have been too costly for employees to communicate crucial local information from the front lines to the corner office. For administrative operations, constant communication is important. And with e-mail and the like, such communication is instantaneous. "IT pushes those guys to the top," Wulf says.

Firm diversification

Meanwhile, an increase in the number of C-level functional product managers was directly related to a firm's decision to become less diversified. The paper notes that many US firms have narrowed the scope of their operations since the 1980s, in efforts to compete better in the global economy-winnowing their product portfolio and focusing on a particular customer base. If a company sells both discount consumer electronics and high-end data storage systems, for example, it makes sense for each business unit to have its own marketing chief, housed in that unit. But if the firm decides to focus solely on the high-end corporate customers, the CEO may choose to move the marketing heads to the C-suite, along with other functional managers, in hopes that they'll work as a team and discover effective ways to cooperate better.

"By narrowing their focus in terms of their business portfolio, companies increase the potential for synergies," Wulf says. "If you're in a corporation with diversified businesses, there's no reason to have a chief marketing officer because there's no single company brand to manage. But in companies that have more related businesses, it makes sense to have these positions toward the top with the objective of centralizing the marketing activities across businesses."

Wulf hastens to say that the research is by no means a death knell for general managers, but their jobs may change. At the least, they will likely find themselves in more meetings than ever before. "The general managers are put in a position to coordinate more with these functional positions, which historically they maybe haven't had to do," she says.

And if compensation is a chief indicator, then fortune seems to favor the functional managers as they move to the top. The paper reports that an increase in the number of product functional managers in the C-suite led to a decrease in salary for the company's division managers. Each additional product-focused functional manager reporting to the CEO was associated with a 2.4 percent lower salary and a 5.4 percent lower total compensation for general managers running divisions, according to the research. (The researchers found no correlation between administrative functional managers and divisional managers' pay.)

The myth of the "flattened firm"

Wulf is hopeful that "Who Lives in the C-Suite?" will shed new light on the idea of corporate flattening, which refers to the idea of removing layers from the corporate hierarchy in order to streamline operations. The prevailing idea behind this strategy is that firms can move decisions down the corporate ladder faster than ever, making it easier to respond directly to their customers. But the ever-growing number of officers in the C-suite indicates that as firms flatten, they are actually pushing some decisions toward the top of the firm.

"The conventional wisdom of delayering is that it's about pushing decisions down," Wulf says. "But our research finds it's not as simple as that. It appears that the opposite is true. CEOs are actually broadening their spans because they want to get closer to the business."

About the author

Carmen Nobel is senior editor of HBS Working Knowledge

Comments

    • Andrew Campbell
    • Director, Ashridge

    This is interesting research, but I am a little concerned by the explanations given for the greater number of direct reports.

    Yes, the reduction in diversification makes it logical to have more roles at the center. But it is unlikely that IT is a driving force. If it was, we would see increases in spans of control more generally.

    So the other reasons are probably things like cost and norms. Having more people report to the CEO reduces management layers within the staff functions. Instead of having a chief of staff looking after marketing and strategy and public affairs and ..., it is possible to have them all report to the CEO. This reduces a layer and hence cost.

    On the norms side, trend setters like Jack Welch typically had 12 to 18 people reporting to them. Other CEO's have copied this and found that it can work OK. The old norms of span of control proved to be inappropriate, at least in the C-suite.

    One other factor affecting the data could be the maturing of some functional areas as accepted sources of expertise. So Marketing and HR and Strategy are much more commonly reporting into the CEO than they used to, partly because CEOs are now clearer about how these functions can contribute to organisation success.

    This is a fascinating area - keep doing the work! In our work, we have found that CEO's do a pretty poor job of giving leadership to these functions - which is one reason why they often under perform. This work is part of our course on Organisation Design www.ashridge.org.uk/aod

     
     
     
    • Anonymous

    The researchers collected information from some 300 large American firms, focusing primarily on the period between 1986 and 1999. ---how relevant is this today as the research is over 10 years old? was quite excited about it till i saw this - i imagine much has schnaged again since this research

     
     
     
    • John Haddock
    • President, Abbott Furnace

    I suspect that increasing complexity, increasing compliance requirements and the associated risks are driving some of the growth in functional direct reports. IT can't be buried in Finance if much of a firm's success is driven by internet presence or global integration. The costs of getting it wrong are huge. Likewise environmental regulations and compliance. They are much more onerous than they were and have criminal liability associated with them. Pulling it out of Manufactunring and making it a direct report makes sense given the risks. At the same time, the need for multi-divisional global companies to coordinate marketing and technology initiatives worldwide quickly leads to the appointment of chief marketing and chief technology officers. Given the above, the growth in functional direct reports is not surprising.

     
     
     
    • Yashwani Mehra
    • Consultant, TCS Ltd

    This article highlights that the traditional wisdom of span of control of 7 is really outdated and CEOs manage 12 or more direct reports.

    A logical corollary of a flatter hierarchy is faster decision making, but this may not necessarily be true. As though the heirarchy is flatter the decision making has been pushed up. The plus point however, is that decisions may be quality decisions.

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited

    With more and more challenges on CEO's to satisfactorily face the turbulent business environment around him, he has to be responsible for each and every activity. Delegation of responsibility to others has no doubt to be done but he cannot rest thereafter. The buck stops at his level and hence he has to link himself, directly or indirectly, with many levels. Taking actions for non-performance by the senior management would not lead to regaining the lost ground. Hence, all functional managers have to be the CEO's direct reports. The CEO can also not ignore the key general managers and professionals who also would be answerable to the CEO. Obviously the CEO's span of control is now very wide.

     
     
     
    • Nick Robinson
    • http://www.nickrobinson.org

    I too got excited by this research, until I realised the data is well over a decade out of date!

    Not sure what the point of publishing this is, perhaps as a point of historical record?

    Causes are usually multi-factorial; in this case, and given the dates, I suspect it's due to IT, delayering and improved leadership abilities at the top. Oh, and having a smaller share of the bosses' time can make it still feel lonely in the c-suite, and having more direct reports canals it lonelier still for the CEO...

     
     
     
    • Cynder Niemela
    • Principal, Conscious Teaming

    Interesting research findings. I am surprised it takes so long to conduct the research and publish findings. If business operated so slowly ...

    With the added number of direct reports, how has the CEO's focus/role changed? Is the CEO spending more time internally managing vs. developing external relationships? Does the CEO conduct performance reviews and performance discussions with all 10 direct reports? Is there a division of R&R between CEO and President - or has this second role (e.g., President) been eliminated?

     
     
     
    • Carmen Nobel
    • Senior Editor, HBS Working Knowledge

    In response to the #2 and #6 comments: The research homed in on the period between 1986 and 1999 in large part because that was such an important time in the history of technology adoption -- e.g., the Internet. However, the data on the average number of direct reports is more current, indicating that the effects of the sea change still hold true today.

     
     
     
    • Anju Kotwani
    • Freelance Writer

    It is a significant research that will help the firms to understand paradigm shift. Yes, I totally agree that firms are adding more layers as against the flattening structure, especially between the middle management and top leadership level. Most of the companies have become top heavy and that is why CEOs are not alone.

     
     
     
    • Anonymous

    Dear Carmen,

    Very interesting article. This is reflective of the collective decision making that is taking place through various mechanisms like the management committee.

    Also, CEOs are under constant pressure both from Investors and from the Board and their need to be constantly updated on various developments across their entity which may span geographies and products in this networked era becomes crucial for their performance.

     
     
     
    • Pardha saradhi

    Dear Julie Wulf,

    It's true. I fully agree. It works better with all major functional heads reporting directly to.

     
     
     
    • Pratap Vankayala
    • Delivery & Pre-Sales, TCS

    This is an interesting observation and the trends owing to the adoption of technology in the said period of 1986-99. Also today, we see the emergence of several C-level roles like Chief Spiritual Officer, Chief Belief Officer etc, apart from the traditional C-level roles like the CFO, CTO etc. Through these C-level roles, the CEO is able to cover additional aspects, and that is increasing his involvment as well. Thanks to the intelligence we are able to gather through various sources using technology. Due to this, the CEO is certainly able to make an advised/informed decision, which is an advantage.. but the CEO position as such is lonely.. As Peter Drucker mentions, we cannot differentiate between the CEO and the company that he represents..

     
     
     
    • Anonymous

    I believe this information would have been clear businesses who work with "top heavy" management versus the adage of today's business world where we actually view CEO's as working more with entry level (bottom) workers to get their views of what is working for the company. The paradigm shifts today show that there are still "old fashioned" CEO's who believe that getting the whole team involved is better than directing a group of managers to take care of the business.