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Jun 26Doug Smith

It’s Less Lonely At the Top: The Rise of the Functional Manager

Jun 26Doug Smith

I read an interesting article in a recent HBS Working Knowledge blog that talks about crowding in the C-Suite. According to the article, 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 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.

Here’s the rest of the article:

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 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.”

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