July 30, 2013 · 2 min read
Amazon’s “two-pizza teams” are well-known; they’ve been written about in Fast Company and the WSJ. But almost everyone misses the point. They aren’t about team size—they’re about autonomy and accountability.
For context, here’s a succinct explanation from Ben Thompson of the difference between divisional and functional organizations:
In a divisional organization, different products are companies unto themselves. They have their own marketing, their own engineering, and their own finance. There may be some centralized functions, such as legal and HR, but everything that makes money for a product lives within that product’s organization.
Most crucially, each product has its own profit-and-loss statement (P&L). The performance of each division is thus clear to everyone from the CEO to the division presidents to Wall Street, and accountability is usually directly tied to the P&L.…
Functional organizations are the exact opposite: each function is siloed, and products cut across functions in a matrix-like fashion. This significantly expands the role of the CEO and his leadership team in all products, as that is the main point of coordination.
In this model, there is usually no ownership for a product’s P&L. Instead, everything accrues to the company’s all-up P&L, including compensation.
Ben points out that most multi-product companies, including Microsoft until recently, organize divisionally. But Amazon took divisional organization to the extreme with two-pizza teams (2PTs, for short).
Two-pizza teams are so named because they’re small: 6 to 10 people; you can feed them with two pizzas. The most important aspect of a 2PT isn’t its size, though, but its fitness function. A fitness function is a single key business metric that the senior executive team (the “S-team”) agrees on with the team lead. It’s the equivalent of the P&L for a division: a single metric to provide focus and accountability. In some cases, the fitness function is literally a P&L: for instance, when I was on the SEM team, we used the contribution profit from the sales driven through sponsored links, minus the cost of those clicks. In other cases, it’s something more clever: e.g., teams that built fulfillment center software would have metrics related to the efficiency of picking, packing, and sorting.
Once approved, the team is then free to execute relatively autonomously to maximize its fitness function—to pursue creative strategies and to set its own internal priorities. A handful of engineers, a technical product manager or two, and maybe a designer all report directly to the 2PT lead (or “2PTL”); there’s no need to coordinate even across teams, let alone across divisions, to get something done. This model has helped Amazon stay nimble and innovative even as it has grown.
It has also helped the company attract and retain entrepreneurial talent. The 2PTL job is similar in character to being general manager of a division—just as a GM is like a CEO of a product within a company, a 2PTL is like the CEO of narrower function—but the job is small enough in scope that a junior manager can take it on. This makes it an attractive opportunity and a strong growth experience for an ambitious young leader with ownership and drive—core Amazon cultural values.
Essentially, Amazon found a way to take the idea of divisional organization, and push it all the way down the management hierarchy to the level of small teams with first-level managers.
The divisional-vs.-functional question doesn’t necessarily have a single right answer for all companies. The post quoted above mentions Apple as a (rare) example of a company that thrives with a functional org. But I think that the most successful companies find an answer that fits their mission and culture, and then take it to the extreme. Amazon did.
Epilogue: This post describes Amazon as I knew it when I worked there 2004–2007. People who were there more recently tell me that since then, fitness functions themselves have been abandoned, although the ideas of accountability, autonomy and ownership are still core and very strong.
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Thanks to Andrew Miner, John Rauser, Eric Vadon, Ben Bernard, and Blake Scholl for commenting on a draft of this post.
These days I do most of my writing at The Roots of Progress. If you liked this essay, check out my other work there.
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