Managing Organizations

Case Study: Is Holacracy for Us?

by Erik Roelofsen and Tao Yue
From the Magazine (March–April 2017)

Robert Samuel Hanson

Rogier Maes’s beginning-of-the-year speech never once mentioned

holacracy or self-managed teams.
Derek Melis, his friend and CFO, was relieved. Rogier was the CEO of
the global construction company Contect; he, his executive team, and
the board had been talking for months about transitioning to just
such a system.

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Derek still hated the idea; it was too risky to let 200 offices and
subsidiaries around the world call the shots on major decisions
without approval from headquarters in Eindhoven. But Rogier
thought it was the key to boosting engagement and performance, 1
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.

CASE STUDY CLASSROOM NOTES

1 Does the centralization of power dampen entrepreneurship? This is one of
the critical questions Erik Roelofsen asks when he teaches this case in
executive education classes.

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 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,” 2 Derek said.
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 2 Adopting self-management wholesale—using it to determine what should be
done, who should do it, and how people will be rewarded across an entire
enterprise—is a difficult endeavor. Many experts say that in certain
environments it won’t pay off.

“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. 3

3 Does the fact that Rogier put Derek in this role compromise Derek’s ability to
do his job? Can he do what’s best for the company if he’s worried about his
friendship with Rogier?

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 company that did design, construction, lighting, ventilation,
plumbing, 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 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

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sales and operating profits, the head office had relatively little control
over the 30,000 projects the company had under way 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 4 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.

4 For-profit companies and nonprofit organizations in Australia, France,

Germany, New Zealand, Switzerland, the UK, and the United States—most
notably Zappos, which is based in Las Vegas—have adopted holacracy
practices.

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 5 last night, and he told me to check
in with you,” she said.
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 5 Critics of holacracy claim that it creates silos, does little to remove hierarchy,
and is difficult to organize and maintain.

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 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 coasters, 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 megaresort. Contect’s head office had
discovered the fraud only after someone anonymously sent Rogier a
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 company’s reputation in
Russia and Europe had not been easy. 6

6 Royal Imtech, the company on which the original teaching case is based,
went bankrupt in 2015 following a series of scandals.

Vera had led the subsequent charge to strengthen the internal audit
system. After Derek joined, they’d worked together on further risk
management. They established a central division to set policy, ensure
compliance, and evaluate projects worth €100 million or more, and
created 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 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? Please don’t let your personal relationship 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, Derek, and we
appreciate that, but this company won’t continue to grow if we hinder
it. The success you’re seeing 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 poor 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.

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“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, 7 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.”

7 In a 2014 CEB study, 60% of the corporate strategy officers surveyed said
that their company’s decision-making process was too slow, in part because
of an excessive focus on preventing risk.

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?

Question: Should Derek fight the holacracy initiative? The

Experts Respond

Peter van Mierlo is the senior partner of PWC in the

Netherlands.

DEREK SHOULDN’T FIGHT Rogier on this initiative. In fact, he should

tell his friend that moving more responsibility to the subsidiaries is a
great idea. But he should explain that if the initiative is to be
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successful, contect must first lower its risk profile, increase in-region
monitoring and reporting, and build the right culture. With that
groundwork laid, holacracy can flourish at the company.
Why is decentralization right for this organization? In large part
because of the global business it’s in. With more than 30,000
construction projects under way around the world, many of them
unprecedentedly complex, Contect simply wouldn’t be able to insist
on standardization or keep close tabs on everything from
headquarters. No one at an office in Eindhoven can know exactly how
complete a job in Turkey is, for example. The decision makers need
on-the-ground familiarity with the project.
Demographic developments and other megatrends such as
urbanization, improved technology, and the strength of Asian markets
also make decentralization a more desirable—and viable—option than
ever before. Technology has boosted transparency and changed the
way people do business across the globe. Urbanization is having a
material effect on the complexity of construction projects. It’s not just
construction companies that should be pushing decisions down as
close to the customer as possible; it’s all companies.
That said, decentralization is no excuse for lack of accountability or
control. Rogier’s initiative will succeed only if he makes significant
changes to how the company is run. First, he needs to ensure that all
his subsidiary leaders are credible and trustworthy and are the kind of
people who want to work independently but also feel accountable to
the larger company. They must have the humility and self-awareness
to share information with headquarters, admit when a project isn’t
going as planned, and recognize how they can improve their business.
Rogier also needs to make sure they have clarity regarding Contect’s
global strategy, purpose, and values and a better understanding of
how their subsidiaries contribute to them. If those things are crystal
clear to the people on the ground, the company’s level of risk won’t be
as great as Derek and Vera fear.
Leaders at headquarters still need to know what’s happening in all the
units and in their largest projects. That’s the only way to avoid
another Russia situation. And Rogier’s view that the CEO should
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focus solely on new acquisitions is reckless. Derek must persuade him
to create a culture of accountability by closely monitoring such things
as working capital levels, cash flows, delay reports, claims
management, gross margin analysis, cost control, project pipelines,
and the people engagement index. No matter how you run a company
—with a tightly centralized structure or as a complete holacracy—that
transparent view into unit and overall performance is essential.
Furthermore, it will emphasize to the German CEO and other country
leaders that it’s in their self-interest to share as much information as
possible and to discuss problems with headquarters.

Contect simply can’t keep close tabs on

everything from headquarters.

Derek can support Rogier’s push toward holacracy in a way that

simultaneously safeguards the company. Ensuring that Contect has
clarity around values, purpose, and strategy, and building systems
that allow for transparent monitoring at the country and project
levels, are the only ways to safely give the subsidiaries the
responsibility they need to do their jobs well. Without those
conditions in place, however, Rogier and Derek will be playing
roulette with the company’s future.

Ben
globalNoteboom is the
staffing and former CEO
recruiting firm. of Randstad, a

IF DEREK WANTS to save the company—and therefore his job—he

should persuade Rogier to abandon the holacracy initiative. Contect
should not be giving more control to its subsidiaries; it should be
looking to further centralize. There are typically four reasons for this:
to increase oversight, to share best practices and concepts, to realize
potential economies of scale, and to help your subsidiaries join forces
when approaching customers in the market.

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Let’s start with oversight. It’s worth noting that this case is based on
the Dutch company Royal Imtech, which went bankrupt in 2015. A
big factor in that company’s demise was its lack of control over the
projects undertaken by each of its country units, including a
fraudulent initiative in Poland (similar to the Russian one described in
this case). In the construction industry—or in any business that, like
Contect, is project based—one unit’s failure can taint a whole
company. So leaders need to scrutinize assignments and contract
terms to reduce risk. They must know whether projects are on
schedule and prevent potential manipulation by governments or other
local actors.
It’s possible for Contect to monitor these things while continuing to
respect the integrity of local managers. When I was the CEO at
Randstad, this is exactly what we did. We gave each of our individual
offices room to operate while maintaining standards and control at
the center. It might have been easier to keep the units independent—
especially the recently acquired ones—but you can’t be 100% sure
that people will always act in the company’s best interests.
Another benefit of centralization is to ensure that services are
performed consistently across locations. During my tenure at
Randstad we acquired, rebranded, and integrated 185 companies
(including the next biggest competitor in our industry), and we made
a point of spreading best practices—carefully measuring the most
efficient approaches to our work and then sharing them across
offices. Both employee engagement and customer relations improved,
and I believe that centralization at Contect could yield the same
results. Of course, regulations and requirements governing
construction vary from country to country, which might limit
standardization. And the fact that this company is in construction and
Randstad is a services-based business is an important distinction. But
that shouldn’t hold Contect back from ensuring that everyone
executes to the same standards across the globe.
It’s not clear whether the other two benefits—economies of scale and
approaching customers together—are in play here, but efficiencies
might well be gained by combining back-office, project
administration, and monitoring systems, if not across the entire
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company, then at least for similar markets. And it would probably
behoove Contect to encourage businesses in the same region to cross-
sell or collaborate in serving customers.

Whatever Rogier calls it, what he’s

pushing is dangerous to Contect.

It’s also possible (though I can’t imagine it) that each subsidiary is
unique and that centralization would bring none of these benefits. If
that’s the case, then Contect’s leadership should act as a financial
investor.
Whether Rogier calls it holacracy or decentralization, what he’s
pushing is dangerous to Contect. If the company doesn’t share best
practices and maintain control over its subsidiaries, then each one is
essentially a stand-alone business—with the ability to bring down the
whole company.
HBR’s fictionalized case studies present problems faced by leaders in real
companies and offer solutions from experts. This one is based on the Rotterdam
School of Management case study “Autonomy and Control: The Collapse of
Royal Imtech,” by Erik Roelofsen, Tao Yue, and Melanie Beuken.
AHarvard
versionBusiness
of this article appeared in the March–April 2017 issue (pp.151–155) of
Review.

ER
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.