A number of people have published lists of things that Marissa Mayer should fix as the new CEO of Yahoo.  Several of these recommendations include firing a lot of people.  And we can now also read Marissa's first memo to Yahoo employees, which clearly tries to alleviate fears of layoffs.  My own theory of organizational change is a bit different and it is based on observations of several successful and failed turnarounds going back to my days as a management consultant.  You can’t have change without firing some people but it is far more important to fire the right people than to fire a lot of them.

In particular, resistance to organizational change tends to be concentrated in the middle management layer of large companies (and whatever else it may be, Yahoo is very much a large company).  That’s especially true for companies that have been in a rut for a while.  The reason is that adverse selection tends to operate most strongly at this layer.  People who want a career at a dynamic company leave and the ones who stay in middle management at a stagnating company are frequently the ones best at “distributional” politics.

Usually what happens following a CEO change is that other high level positions are also up for grabs and a lot of focus goes into recruiting senior talent.  But if that is not accompanied by a fairly significant turnover of the middle management layer it is unlikely to succeed.  All the ideas for new directions and energy coming from the top will get absorbed in the middle.  And when that happens employees quickly get cynical because they conclude that there will be no real change.

In the current environment Marissa has some interesting opportunities for shaking up the middle management ranks.  In addition to promoting from within, she can pick up a number of startups that have very talented people and also interesting products but could benefit from the scale of Yahoo.  That is more true today than it has been in a long time due to the amazing levels of startup formation over the past few years.  Yahoo still has a market cap of nearly $20 billion and so could be somewhat aggressive with stock without causing massive dilution.

I am looking forward to see what Marissa decides to do with Yahoo.  But more than anything I will be looking for signs that she is shaking up middle management.

A number of people have published lists of things that Marissa Mayer should fix as the new CEO of Yahoo.  Several of these recommendations include firing a lot of people.  And we can now also read Marissa's first memo to Yahoo employees, which clearly tries to alleviate fears of layoffs.  My own theory of organizational change is a bit different and it is based on observations of several successful and failed turnarounds going back to my days as a management consultant.  You can’t have change without firing some people but it is far more important to fire the right people than to fire a lot of them.

In particular, resistance to organizational change tends to be concentrated in the middle management layer of large companies (and whatever else it may be, Yahoo is very much a large company).  That’s especially true for companies that have been in a rut for a while.  The reason is that adverse selection tends to operate most strongly at this layer.  People who want a career at a dynamic company leave and the ones who stay in middle management at a stagnating company are frequently the ones best at “distributional” politics.

Usually what happens following a CEO change is that other high level positions are also up for grabs and a lot of focus goes into recruiting senior talent.  But if that is not accompanied by a fairly significant turnover of the middle management layer it is unlikely to succeed.  All the ideas for new directions and energy coming from the top will get absorbed in the middle.  And when that happens employees quickly get cynical because they conclude that there will be no real change.

In the current environment Marissa has some interesting opportunities for shaking up the middle management ranks.  In addition to promoting from within, she can pick up a number of startups that have very talented people and also interesting products but could benefit from the scale of Yahoo.  That is more true today than it has been in a long time due to the amazing levels of startup formation over the past few years.  Yahoo still has a market cap of nearly $20 billion and so could be somewhat aggressive with stock without causing massive dilution.

I am looking forward to see what Marissa decides to do with Yahoo.  But more than anything I will be looking for signs that she is shaking up middle management.