Transaction tax and team structure

If we are not working on a whim, but are trying to build processes in the organisation in the most efficient way, we need to think about the management structure.

The specificity of NGOs, and especially small initiatives, is that the size of the team and the complexity of processes can change regularly and dramatically, depending on current projects, funding, and external conditions. Here it is important to take into account transaction tax - the loss of information when it is transferred from one person to another - and the corresponding loss of efficiency.

Roughly speaking, the efficiency of one person is 100%. The efficiency of two people seems to be 100%+100%=200%, but in reality it turns out to be 180%, because 20% is lost in communication. And the more people involved, the more complex the processes - the more information and productivity is lost.

In addition to direct losses, there are also time losses on management: the more subordinates you have, the more time you spend not on work that is about doing something, but on work that is about managing these people.

So as an organisation grows, productivity growth will lag behind staff growth - this is normal and important to understand.

What are two possible pitfalls of staff growth/downsizing to watch out for:

1️⃣ The more people there are, the more time will have to be spent on management. And the more complex the structure and the higher the position, the greater the share of management costs in that position. You have to be prepared for this, and not to continue when you have 100 people, just as you worked when you had five: you will have to give up some tasks, give and delegate more and more.

2️⃣ When reducing the number of employees, it is important to adapt the management structure. That is, go in the opposite direction: while there were a lot of people, it was logical to live with a branched management structure, and some positions allocated exclusively to management; if the number of people involved in the processes is significantly reduced, it is necessary to adapt, and start taking tasks other than management, and generally adapt the structure.

If you are stumped about the structure of your organisation/initiative - write to us, we'll sort it out.