Middle Managers Must Play Game Of Risk

May 30, 2012 (10:05 AM EDT)

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In the first part of this series, we looked at the evolution of the managerial role, starting in the 1910s, and its apparent failure at the dawn of the Internet era. In the second part, we looked at how the idea of charismatic leadership rose in response to the apparent failure of managerial models to cope with new realities, but how that construct failed to actually fix things. It created instead a sort of leadership theater designed to manage Wall Street perceptions, rather than the company.

Failures in leadership were blamed on managerial incompetence. Middle managers, fighting fires out of sight, became convenient scapegoats.

Why? Because they were exposed to the downside of risks without being given the ability to manage those risks or participate significantly in the upside.

We wrapped up last time by noting that the leadership theater is no longer sustainable because of the deluge of information that must be processed to steer a company. Much of that information is starting to flow upward to the C-suite, since managers aren't empowered to handle it. The Management By Exception pipes are about to burst.

We're now ready to get to the new vision for managerial thinking: Management For Opportunity.

Risk And The Manager

Consider why managers ended up in firefighting roles by the late 1980s, fueling the rise of the false-Messiah leader.

In our three-layer model, in a chaotic environment the Management By Process layer gets destabilized, the Management by Objective layer turns into garbage, and all of the action moves to the Management by Exception layer, which was supposed to be an exception-handling layer.

Does this movement happen because managers are incompetent, risk averse, and bureaucratic? Charismatic leaders like to claim this is the case, but the real reason is much simpler: You can only fight uncertainty with uncertainty. To manage in uncertain markets and turn a profit with increasingly volatile cash flows, managers need risk-management capabilities.

Managerial roles started failing because they were exposed to increasing downside risks without being given upside opportunity management capabilities of equal power.

Leaders have monopolized risk taking for nearly three decades, and they have used that monopoly primarily to manage perception risks rather than real market risks. During this period, all capacity (read: liquid assets) for risk was absorbed by Big Bold Moves scripted by leaders during times of crisis.

There's now a chance to change this picture.

Why A Fourth Layer?

There's only one way to deal with the impending deluge of chaotic information converging on the C-suite: Devolve the traditional leadership function of opportunity selection downward through the managerial ranks.

The idea--of smaller bets, placed earlier, that mature as business models exactly when they are needed--is the idea of innovation. That rarely works in isolation, because too much is expected of small seedlings, too soon, during moments of crisis.

The only way to actually get to effective innovation is for the C-suite to give up its monopoly on serious risk taking. Instead of a billion-dollar move every five years, during a crisis we need a thousand smaller moves worth a million dollars each. That's enough to turn every middle manager in a large corporation into an angel investor.

We need a middle management equivalent of Google's famed 20% time. A way for companies to make the best use of seasoned corporate warriors with deep domain knowledge, a couple of business cycles worth of realism, and wisdom to offer younger employees.

Line managers must now be required, enabled, and trained to take on market risks (not just internal risks) on negotiated terms, just as they took on negotiated objectives in the Management By Objective era.

The culture that needs to emerge is a Management For Opportunity culture.

The Risk-Taking Manager

What does the manager need to take on a meaningful role in risk management? How do Enterprise 2.0 tools play into this redefined role?

The missing piece is the ability to gamble. E2.0 tools provide the information advantage required for gambling at layers that traditionally didn't manage external risk. But this information advantage is meaningless if it's not accompanied by resources with which to gamble.

Line managers today are either P/L managers or cost center managers. Neither truly manages much market risk.

The first kind of manager is expected to hit targets within strategies thrust on them top-down. They're expected to hit those targets with one hand tied behind their backs on the marketing and innovation fronts.

The second kind of manager lacks even that minimum amount of control over revenue streams. He or she must service "internal" customers through murky "cost recovery" accounting for services billed at rates that have no relation to market rates. The accounting is a joke. It's more about balancing the books in nominal ways than representing financial realities in ways that help manage the business.

How do we change this ridiculous picture?

The Gambler-Manager, 2.0 Style

The basic mechanism for creating more autonomous, risk-managing managers is to devolve authority over the two basic Druckerian management functions ("the business enterprise has two--and only two--basic functions: marketing and innovation") down to the lowest possible level: people who manage small workgroups of individual contributors.

This means taking a sledgehammer to centralized corporate marketing and R&D models, except in the very rare cases that very large amounts of capital, in the form of technological and marketing muscle, must be assembled in one place and time.

This idea is generally anathema to large corporations, but once you understand the CEO "leadership" job that I wrote about last time, you realize why marketing and innovation are centralized today.

On the marketing front, the need for centralized management of a corporate brand is vastly overstated: It's primarily needed for Wall Street perception management, not for creation of demand (the textbook purpose of marketing).

On the innovation front, large, centralized R&D centers are more about creating poster-child advances to help CEOs manage expectations of future growth. In practice, most of these vanity projects fail to even reach the marketplace, let alone create new markets. Fortunately, they absorb a small fraction of the innovation budget. The rest of the budget is devoted to minor enhancements of existing products and reinforcing engineering firefighting.

In effect you have a centralized innovation and marketing circus designed to provide a background to the CEO's antics on the stage of the perception management theater. In the leadership theater, the CMO is the art director; the innovation CTO is the special effects maven.

No wonder line managers charged with actually growing revenue and profit are starved of autonomy and resources.

This needs to change.

The New Middle

When you put all of these ideas together, the new middle manager starts to look like an angel investor or micro-VC inside the corporation, with sufficient liquid resources, innovation potential, and marketing autonomy to maneuver in the marketplace.

The mantra of "innovation everywhere" by itself is meaningless. It needs to be upgraded to "business everywhere." The Druckerian yin-yang of marketing and innovation needs to be the recursive, fractal DNA of the entire organization, right down to the individual contributor.

To inform this organic, enterprise-wide maneuvering, you need information, which is where Enterprise 2.0 tools come in. We've talked enough about the tools (inbound social media analytics, blogging, word of mouth, crowdsourced innovation, early-beta processes) over the last three years that a word to the wise should be sufficient.

In this vision, middle managers, far from being dispensable, are critical. They're the ones who pull the entire organization together into a sort of negotiated, agile, systemically risk-managed and dynamically stable vortex that is Enterprise 2.0. Take them out of the equation and you get a lovefest between self-absorbed individuals and celebrity "tribal leaders"--something that looks more like a music festival than a business.

Middle managers everywhere, welcome to 2.0. You have a part to play. You're not obsolete.

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