A company I worked with burned through $20 million of cash in one year before anyone thought it was a result of a bad org structure. Every one of the signs that point to your org structure being broken was sitting in plain sight, and the leadership team interpreted all of them as people problems.
They had raised about $120 million in their first five years and their headcount was hovering around 100 employees. This was a B2B software company in a regulated industry, so getting information security right was often the difference between closing a deal or losing it. And for years, the money went out the door on bad decisions and inefficiencies that all traced back to the way the company was organized and who was sitting in which seat.
When things blew up, the founder and the leadership team blamed individuals. They went looking for the manager who happened to be closest to whatever had just gone wrong, and they held that person responsible.
They were wrong almost every time, and it cost them more than $20 million to find out.
Intro
Welcome back to the Organized Chaos podcast. I'm Nahed Khairallah, Founder of Organized Chaos, and today I want to talk about the signs that your org structure is broken, because very few startups catch these early.
The reason they don't is that a broken structure produces symptoms that give the impression that you’re dealing with an employee problem. You see a person who isn't performing, a team that keeps missing dates, or a product that costs more to build every quarter. So you deal with whichever one is in front of you, and the root cause behind all of it stays unresolved.
I've run or advised on more than 20 org redesigns over my career, both as a consultant and as an in-house Chief People Officer. About half of those kept headcount flat, and I want to be clear about that up front, because this topic gets dragged in the wrong direction on a regular basis. Org design should never just be about cutting headcount and cutting costs. When a company uses it that way, it's usually a knee-jerk reaction to org design mistakes that were made much earlier. If you want my full take on that, check out episode 15 on how to avoid layoffs as a fast growing company.
Today is about when a company is working fine on the surface, but its structure is quietly costing real money.
What They Blamed First
I'll stay with that $20 million company for a minute, because the same sequence shows up in most companies at that size.
They had one department that contained engineering, product, and information security. All three functions reported up to one leader, who was primarily an engineer by training and did not have the capability or the technical know-how to manage all three of those functions together. It was unrealistic to even expect that of him.
So he did what any of us would do. He focused his time, his attention, and his budget on the department he understood, which was engineering.
Over time, engineering became the de facto product team and was deciding what got built. The actual product people turned into Scrum masters, running ceremonies instead of defining what the product should look like. Similarly, information security got overruled on a regular basis, because the engineering team wanted to ship code faster and get features out the door, which helped the commercial team sell more. Every one of those overrules added tech debt, weakened the software's security posture, and made both the security audits and the client audits harder to pass.
Now think about what the founder would have seen from where he was sitting. He kept putting money and headcount into product, technology, and security, and he wasn't getting the progress he expected on product development, on features, on go-to-market, or on revenue. To put it simply, the ROI for each dollar invested kept shrinking and turned into a loss with time.
He read that as an execution problem, which is what most founders in that seat would have concluded.
Signs Your Org Structure Is Broken
I tell founders to look for these 6 signs that you can check within a week:
- Nobody can tell you who owns a decision.
- Quality, delivery cost, or rework is getting worse as you grow.
- More headcount is the proposed answer to every problem.
- Two teams are doing versions of the same work.
- Managers are carrying more direct reports than they can manage.
- Your first instinct after something goes wrong is to find the person responsible.
Now let’s look at each one individually.
The first sign is question marks around who owns what. If there isn't a clear line between authority and accountability, that's a telling sign that jobs aren't defined well enough, and it makes it very hard to operate efficiently. A lack of clarity in job duties, responsibilities, and authority is one of the most common ways companies end up in endless swirl on the most trivial decisions. At that $20 million company there were many decisions where it simply wasn't clear who the decision maker was, and several jobs where authority and responsibility overlapped on the same call.
The research on this is lopsided. Strategy& looked at the companies that execute well and found that information flow correlated with execution at 54% and decision rights at 50%, while structure came in at 25%. Their conclusion was that decision rights and information flow are roughly twice as powerful as structure is in driving organizational effectiveness.
So if you go straight to redrawing boxes and reporting lines without settling who decides what, you'll pay the full cost of the upheaval and keep the problem that caused this issue in the first place.
The second sign shows up in your delivery. Watch for quality slipping as you grow, delivery getting more expensive per customer, or the volume of rework climbing as you serve more customers. That usually points at process and workflow breakdowns first, so go and look there. But if you've genuinely thought through the process and addressed it, and you're still seeing one or more of these signs, then your org structure is getting in the way of those processes being executed properly.
This is one check you do not want to skip, because if you reorganize around a process problem, you'll disrupt the whole company and inherit the same symptoms in a new shape.
The third sign is that every problem in the company has a solution that involves adding headcount. At that $20 million company, more headcount was the answer almost every single hiring manager gave, and most of the company's problems were actually tied to workflows and processes that the structure itself was creating. When adding more people is always the answer, more times than not your company is starting to bloat. If you want to hear more about my take on how to do headcount planning without burning your runway, then check out episode 40.
The fourth sign is duplication of effort, where two teams are doing versions of the same work and neither of them knows it. This one points to clear siloing of your departments and teams.
The fifth sign is large spans of control, where managers are stretched too thin to actually manage. The sweet spot I use is 4 to 6 direct reports, and I don't recommend stretching a manager beyond 7. That's predominantly for knowledge workers, and it changes with different types of jobs, so it’s higher for standardized, repeatable work and lower for complex technical work. I went through my reasoning behind those numbers in episode 19 on the fundamentals of organizational design for startups.
The sixth sign is about you. When something goes wrong internally, like a missed launch or a failed audit, and your first reaction is to ask who was responsible, stop and ask a different question: did the org structure set that person up to fail?
Look at the company I opened with. One leader was running engineering, product, and security with only an engineering background. He was set up to fail at two of those functions, and his managers were set up to fail with him. Blaming him directly would have changed nothing. I wrote more on how to separate manager issues from structural ones in my newsletter on managing underperforming employees.
Why Do Most Org Redesigns Fail?
If three of those signs appear, you likely need a redesign. However, the track record for organizational redesigns is poor.
Only 23% of organizational redesigns meet their objectives and improve performance. Meanwhile, 44% stall during implementation, 23% complete but fail to reach their goals, and 10% actively harm performance.
These failures stem from how companies manage the process, driven by three common causes:
- Designing for leaders. Most redesigns accommodate individual leadership preferences rather than solving organizational problems.
- Poor timing. Companies often reorganize reactively while losing money, forcing major structural decisions from a position of weakness and equating org design with layoffs.
- Skipping change management. This explains why 77% miss their targets. Organizations shift departments and roles without providing adequate communication, training, or support. When employees do not understand the rationale or benefits of a change, resistance follows and performance drops.
Beyond the Org Chart
Effective leaders look past reporting lines and focus on operations. To make a redesign work, four elements must align with the new org chart:
- Processes: Update workflows to match the new structure.
- Capabilities: Structure around core business strengths to build a competitive edge.
- Rewards: Align compensation and incentives with the new behaviors you want to see.
- People: Place employees where their skills fit best, and recruit or transition roles when necessary.
Navigating Scope Changes
For example, when we split product and information security out from under the Chief Technology Officer, his scope was reduced significantly. We brought him into the conversation early, sharing the business context and explaining how the change benefited both him and his department.
Focusing solely on engineering allowed him to excel in his domain while gaining dedicated executive peers in product and security. Although he was initially hesitant about losing authority, the clear rationale convinced him to champion the transition to his team.
When Someone Says No
Be clear upfront about whether you are informing a leader of a structural decision or asking for their input. Pretending a closed decision is open destroys trust.
When a leader opposes a necessary change, you have two options: get them to agree and commit, or part ways. Never let an individual hold your org structure hostage out of fear of the gap they leave.
Someone Will Always Leave
Sometimes employees leave anyway, and you should plan for that.
I was consulting for a manufacturing client in the Middle East, a company 5 or 6 years old with under 300 employees. They had supply chain and logistics sitting together underneath an operations department. The original logic was that those functions had overlaps worth consolidating, and putting them together meant fewer direct reports for a CEO who wanted to spend his time on the commercial side of the business.
Then costs and inefficiencies started climbing, and in manufacturing the margins are tight enough that this can decide whether the business survives. So the company split supply chain and logistics into two separate teams, and moved the existing leader onto logistics, because he hadn't been doing a particularly good job on the supply chain side.
He wasn't happy about it, because he believed his role was being undermined, and he left the company. They hired someone to replace him and that person turned out to be much better.
Org restructures are never going to please everyone, and walking into one thinking otherwise is naive at best. It’s like the saying goes: If you try to please everyone, you please no one.
What the Split Achieved
Here is what changed at the $20 million company after we split product, security, and engineering into separate departments reporting directly to the CEO.
Implementation took 60 days, and the teams reached full efficiency within 6 months. That 4-month gap went toward recruiting two new product and security executives, which took roughly 120 days.
Within 6 months, product features shipped faster and required less rework while revenue increased as more customers signed up for features designed around their actual needs.
They also secured SOC 2 and ISO 27001 certifications within 12 months, after struggling for 3 years to earn any certification. In a regulated industry, those credentials directly unblock enterprise sales.
Total operating costs across the three departments actually decreased. By redesigning the workflows connecting them, the company gained efficiency, accomplished more with fewer people, and redirected the newfound capacity toward future projects.
No employees resigned as a result of the restructure. Teams welcomed the change because it relieved operational stress caused by the previous structure.
While turnover results will vary by organization, establishing the right structure protected the team and kept everyone engaged.
Stop Copying Other People's Org Charts
I want to add one more thing before I close. Most companies fall into the trap of copying their competitors' org charts or general industry benchmarks, because everyone from founders to the board and investors is looking at someone else's setup.
The problem is that your org structure is supposed to be the mechanism that executes your specific strategy. If your strategy and your capabilities are unique to you, your structure shouldn't look like everyone else's. Yet most leadership teams try to replicate what other companies are doing without questioning whether it actually works.
There's a subtle version of this that catches fast-growing companies off guard, where decisions quietly change hands during a restructure without anyone announcing it. I wrote about that in my latest newsletter commentary on the Airbnb people team restructure.
How Do You Test for the Signs Your Org Structure Is Broken?
Here is what you can do this week. Redesigning an org creates real disruption for every team involved, so you should never do it on a whim. Because every company is different, there isn't a single step-by-step formula that fits everyone. But here's a quick diagnostic you can run on your own.
- Rule out process first. Before you look at structure, make sure you've actually tried fixing the workflows under whatever is bothering you. Process breakdowns cause most of these symptoms, and in my experience, they sit right behind unclear decision rights. They're also much cheaper to fix. If you haven't looked at process yet, stop here and go do that. If you have, and the issues are still there, keep going.
- Test decision ownership. Pick the 3 most expensive decisions your company made last quarter. Ask 3 key people, separately, who owned each decision. If they give you different names, or start arguing about it, you have an overlapping authority problem.
- Write down the decision rights. For every decision where there was confusion, write the decision on one line, assign a single owner and one person to consult, and email that list to your team leads this week. It takes an hour, causes zero disruption, and research shows decision rights matter twice as much as structure for execution. If that clears up the issues over the next few weeks, leave the org chart alone.
- Count the swirl. Look back over the last 3 to 6 months, and list the decisions that took weeks when they should have taken days. For each one, figure out if the delay was about the decision itself or an argument over who got to make it.
- Check your rework. Look at your product or service delivery over the past 6 months and count how many times you needed unexpected rework. Then check the same thing from a year ago and compare the numbers. If rework is going up as you scale, then your org structure is getting in the way of delivery.
- Audit last quarter's hiring requests. Check how many role requests were thrown at a problem rather than driven by real work volume or missing skill sets. If most hires were meant to solve operational friction, your company is bloating, and those requests show where processes are breaking down.
- Count direct reports. List every manager along with their number of direct reports, and flag anyone managing more than 7 knowledge workers. While reviewing that list, spot any two teams doing overlapping work and assign clear ownership to one of them.
Closing
If you take one recommendation out of this episode, take this one. Before you change anything in your org chart, go and settle who decides what. It's the cheapest and least disruptive intervention available to you and it has about twice the effect on execution that structure does, and you can do it right away. If you do that and the symptoms are still there, then you have a real structural problem, and you should treat it like the multimillion dollar decision it is.
If you'd like me to help evaluate your organization's setup, book a free diagnostic call.
See you in the next episode!
