As small companies grow, they have two ways of building a management team. One way is to build the management job around the employee; the other is to define the management job and then find someone to fill it.

All too often, companies choose the first route, fitting the job to the employee. This is natural, but unfortunately it sets the stage for slow growth and a whole bunch of problems down the road.

Why Firms Fit Round Pegs into Square Holes

Most entrepreneurial firms start off with a strong CEO supported by a small core of trusted insiders. These trusted insiders might be strategists, tacticians, or worker bees; it doesn’t matter because the key is that they are loyal, trustworthy, competent, hard working, and capable of wearing several hats. Trusted insiders come in all shapes and sizes, and they are essential for taking a business from inception to the stage where a clearly defined, organized management team becomes necessary.

And here is where the trouble begins. When the CEO recognizes the need to create a layer of management to handle the firm’s newfound complexity and scale, he/she will naturally turn to trusted insiders to fill key management slots. It doesn’t matter if the insider doesn’t exactly fit the role: first, the CEO at this stage values trust more than competence; second, the CEO is still hands-on enough to fill in wherever the insider may not be up to the task.

Why Round Pegs Are Time Bombs

Initially, this approach to team building is reasonable, easy to implement, and lets the CEO sleep at night. Long term, however, the CEO will have many a sleepless night because of percolating issues such as these.

Issue one: Poor personnel management. People who are good at doing things aren’t always good at handling direct reports, and to compound the problem, a trusted insider probably lacks the experience and training to handle the human resources side of the job. Putting someone like that in charge of a team can cause simmering dissatisfaction, or worse. In no way will it improve team performance or morale.

Issue two: No scalability. A growing firm will run out of trusted insiders before it runs out of management slots. This means that the CEO will be forced to bring in outsiders, which goes against the corporate culture, or dig deeper into the ranks, which means promoting less trusted and perhaps less qualified people into positions of extreme importance. Either way, the CEO will be forced to spend more time dealing with management-level backstopping and peacemaking.

Issue three: Reluctance to cede power. One reason promoting trusted insiders is easy because the existing dynamics of the CEO-insider relationship can continue. Formally, an insider can be put in charge of a functional area, but in reality, both the CEO and the insider know that the CEO is still calling the shots. While this may be an extremely comfortable situation for both, it leads directly to the extremely destructive fourth issue.

Issue four: Confusion in the ranks. Small firms don’t need formal structures; everybody who works there knows who does what. However, when a firm reaches a critical mass of employees, the group mindset changes drastically. Eventually, for an organization to be efficient it must have a defined structure for processes and decision-making. If management roles are ill defined or haphazardly defined, staffers won’t know where to go for direction, when to act, when to seek consensus, and from whom to seek consensus. In short, chaos will reign.

Add all of this up and you have a firm that has locked itself in to a system of underachievement. Making matters worse, when the CEO finally sees the problem, those years of loyalty and comfort in the relationships make it extremely difficult to break out of the problem, because solving it means firings, demotions, and sometimes a complete restructuring of business processes and the organizational chart.

Many companies never muster the will to break free.

How to Win: Put Square Pegs in Square Holes

Business issues are seldom black and white, and solving the round peg problem is no different. Casting aside trusted insiders and bringing in a management team of unknowns is an extreme strategy that not only carries great risk, but also fails at a human level. Having traveled this road, I can offer a few suggestions for building a management team in a way that is both effective and equitable.

Tip one: Bring in an HR manager early. Many entrepreneurial firms view a formal human resources function as a frill, but strong HR support is invaluable for any firm adding its first layer of management. Without solid HR support, the CEO will be consumed by an ever-increasing load of issues that take precious time away from building the business.

Tip two: Groom insiders before promoting them. Relentlessly adhere to the notion that a candidate’s skill set must match the job description, regardless of who they are. If a trusted insider is favored for a management role, rather than throw that person into a position he or she is not ready to handle, slow down, do some training, develop a strong mentoring strategy – and then implement the promotion.

Tip three: Define performance expectations. Clear expectations solve a multitude of problems. A manager should never have doubts about his or her mission.

Tip four: Get out of the way. Assuming items 1-3 are in place, the CEO must give the manager room to execute the mission; otherwise, the firm doesn’t really have a management team at all.

Tip five: A board of directors works better than consultants. Getting outside input for management issues is a great idea, but consultants come in cold and have difficulty in adapting best practices, which they know, to the firm’s unique attributes, which they don’t know. A board of directors gives the firm the best of both worlds: insight about best practices from outside sources who become very familiar with the situations at hand.

Brad Shorr is Director of Content & Social Media for Straight North, an Internet marketing agency. He has executive level experience in the packaging industry, and has worked in startup, regional, and national business operations.