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BUSINESS MODELS

Case Study: Is Holacracy for Us? by Erik Roelofsen and Tao Yue DECEMBER 08, 2016

Rogier Maes, the CEO of Contect, wrapped up his year-beginning speech to all the company’s employees. Listening, Derek Melis, his friend and CFO, was relieved. Rogier hadn’t once mentioned holacracy or self-managed teams, even though the executive team and the board had been talking for months about transitioning to just such a system at the global construction company.

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Derek still hated the idea; it was just too risky to let 200 offices and subsidiaries around the world call the shots without permission or approval on major decisions from headquarters in Eindhoven. But Rogier thought it was the key to boosting engagement and performance, and he had hinted that he might use Contect’s 2017 annual all-employee meeting—his chance to announce new goals and celebrate the previous year’s accomplishments—to roll out the change.

Instead, to Derek’s relief, he’d stuck to the traditional rallying cry: “We’ve had double-digit growth again. Our revenue is up by 14%, EBITA by 12%, and order intake by 13%. Our performance has exceeded all shareholder expectations. We could never have achieved it without all of you! Remember: No matter how large Contect gets, it will stay agile and motivated. Thank you. And here’s to an even better 2017!”

Rogier handed the microphone over to Henning Haas, the CEO of Contect’s Germany group, and came backstage where Derek was waiting. “That seemed to go well,” he said. He and Derek could hear people still clapping and cheering in the auditorium. “Of course,” he added, “I think the applause would be even louder if I’d talked about the holacracy initiative.” His tone was teasing, but with a serious edge.

“You were right to hold off,” Derek said.

“Yes, and I take your cautions very seriously. But I still believe that self-governance is the way forward. People want to be their own bosses, responding to local circumstances but working for the common good. If we give talented people the best opportunities, they’ll stay with us forever, and we’ll keep growing at the rate we want to.”

“Let’s just wait until we iron out more of the details,” Derek said.

“Or until you finally get on board, my friend,” Rogier replied.

Getting Used to the Idea? The next morning, as Derek was driving to the office, he mulled over his relationship with Rogier. The two men went way back. They’d met at university, and although Derek had gone on to graduate school and a career in banking, while Rogier had joined his family construction business and then founded Contect, they’d never lost touch. Derek had helped Rogier stay anchored when Rogier was going through a brutal divorce. And when Derek had lost his job during the financial crisis, Rogier had invited him to join Contect.

Although they didn’t always see eye-to-eye at work—Derek was far more conservative than Rogier— they had tremendous mutual respect and could usually compromise. But the decentralization debate was different. In Derek’s view, the subsidiaries already had far too much power.

Although Contect had launched as a specialist in small but steady installation jobs with high margins and low risk, it was now a full-service construction company that did design, construction, lighting, ventilation, water, waste processing, and IT infrastructure for much bigger, more complex projects. Rogier’s strategy since 2000 had been to grow through acquisitions and to give a long leash to all the businesses he’d bought. The smaller ones could keep their own names, leadership teams, practices, and policies for the first five years. And although senior managers’ remuneration was tied to Contect’s overall sales and operating profits, the head office had relatively little control over the 30,000 projects the company had underway at any given time.

Rogier liked this system for three reasons: It freed him from having to manage all the disparate businesses, so he could focus on additional acquisitions. He felt it wouldn’t be cost-effective to add more controls at the group level. And he thought independence was a great motivator. “I’m an entrepreneur through and through,” he would say. “I want my company to be just as entrepreneurial.”

Derek understood all those points, but he still thought Contect was too lax. Inconsistent policies put the company at greater risk of lawsuits. The lack of control meant that the leadership team had little say in how the Contect brand was being managed at a local level. And without centralized oversight of projects, any single subsidiary’s missteps risked taking down the entire company. Rogier knew Derek’s position—but he had gone to an executive training course on holacracy in Las Vegas and had come back so fired up that he was now pushing for self-managed teams at headquarters and complete decentralization at the country level.

Derek had held him off by insisting that he get the board more involved in the decision, but Rogier had managed to align directors on his side. He now had only one major—and very vocal—opponent: Vera Hoch, the head of the audit committee.

Vera’s Perspective Walking into the office, Derek checked his phone and saw that he had five e-mails from Vera. He called her right away, and she explained that Rogier had suggested she reach out. “I tried to talk to him about this whole holacracy nonsense last night, and he told me to check in with you,” she said.

Derek smiled. This was an old trick of Rogier’s: He would align two people who disagreed with him, knowing that the more moderate one (Derek in this case) might temper the other’s view.

“I don’t need to remind you what happens when we give so much power to the subsidiaries,” Vera said. “I’ve seen firsthand how ugly it can get. Rogier has too, which is why, frankly, his position on this stuns me.”

Just after Vera had joined Contect’s board, the company had been hit by a huge scandal. The project —Park 007—was a James Bond–themed amusement park with artificial ski slopes, cliffs for bungee jumping, roller-coaster rides, indoor water sports, casinos, cinemas, and two five-star hotels. The Russia office had contracted to build it but hadn’t done so. For two years the subsidiary had recorded revenue from the proposed €650 million mega-resort. Contect’s head office had discovered the fraud only after someone anonymously sent Rogier thumb drive containing a Russian news report that the park was still barren land, despite what the Russia office’s books said. Everyone involved had been fired, but cleaning up the firm’s reputation in Russia and in Europe had not been easy.

Vera had led the subsequent charge to strengthen the internal audit system. After Derek joined, they’d worked together on further risk management—establishing a central division to set policy, ensure compliance, and evaluate projects worth €100 million or more and creating an executive council of market and industry experts to advise on budgets and other strategic issues.

Now Vera was getting worked up. “He’s calling it ‘holacracy,’” she said, “but that’s still just decentralizing, which we can’t do any further. We have to take back control at the top—not give the subsidiaries more power. Rogier has set some ambitious growth goals this year, and without oversight I’m worried they’ll incentivize the wrong behaviors. Does he really want us to roll back all the work we’ve done and give the groups free rein? Why haven’t you been tougher with him on this? Is it your personal relationship? Please don’t let that cloud your judgment as CFO. You need to tell him that from a risk perspective, full decentralization is out of the question.”

Henning Weighs In Derek couldn’t stop thinking about Vera’s admonition, but he tried his best to focus on the earnings report he needed to finish. Unfortunately, just before lunch, Henning Haas knocked on his door.

“I thought you’d be on your way back to Frankfurt already,” Derek said.

“I’m leaving tomorrow. I wanted to see a few people first—including you.”

Derek knew that this would be yet another conversation about decentralization. Henning was a big proponent of greater freedom for the groups, and as leader of the company’s largest country group, he held a lot of sway with Rogier and the board.

“You’ve always been very careful around risk, and we appreciate that, but this company won’t continue to grow if we hinder it. The success you see in Germany, France, the UK, even Central Europe—it’s because we have increasing autonomy and freedom.”

“And Russia?” Derek asked.

“You can’t punish us all because of one bad apple. Designing policy around the lowest common denominator is a bad strategy, and you know it.”

“As the CFO, I can’t lose sight of what’s going on in each country.”

“I’m not suggesting complete anarchy,” Henning said.

“And I’m not suggesting we spy on everyone 24/7. But we’re a global company. Our projects aren’t isolated. You saw what happened with Park 007. If one office does the wrong thing, we all suffer. It hits our collective reputation and our finances.”

“Just don’t forget we’re in construction, not banking, Derek. Decentralization is the norm in this industry. We’re all organized around projects. And we should be able to contain risk at the local level. You have to admit that it would be a far more efficient approach, whether you call it holacracy or not: Faster decisions, made by the people who are most affected by them and know the ins and outs of the specific project, will make us much more agile. My peers and I will be able to bid on projects more quickly, get them done faster, and book more revenue if we aren’t hindered by needless bureaucracy.”

After Henning left, Derek found that he was too distracted to get back to work. He believed that if he was truly determined to, he could probably persuade Rogier to abandon his holacracy plans. But it would take a lot of social capital.

Was this the issue over which to put his friendship—and his job—on the line?

Should Derek fight the holacracy initiative?

If you’d like your comment to be considered for publication in a forthcoming issue of HBR, please remember to include your full name, company or university affiliation, and email address.

Erik Roelofsen is a professor of international financial reporting and capital market communications at the Rotterdam School of Management.

Tao Yue is the managing editor of the Rotterdam School of Management Case Development Centre.

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