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InfoQ Homepage News Decentralizing Organizations to Deal with Complexity

Decentralizing Organizations to Deal with Complexity

Niels Pflaeging, founder of the BetaCodex Network, did the opening talk organize for complexity - how to get life back into work on the second day of the Dare Festival Antwerp 2014. He explained how decentralizing organizations is paramount to increase their performance and agility.

According to complexity theory, we have a thinking problem and a model problem in organizations, not a people problem said Niels. We have moved from complicated to complex problems in organizations, which means that the current ways of managing organizations are not suitable anymore.

In his book Organize for Complexity and in his white paper on organizing for complexity Niels outlines the notion that organizations don´t have tops and bottoms, but instead a center and periphery. The periphery has contact with the market, it is in touch with customers. The center is not, because it is isolated from the market by the periphery.

In traditionally managed organizations a client has contact with somebody in the periphery who supplies information to the center. People in the center are in charge, they will usually decide and command the person in the periphery what to do and how to react to the client. Once market stimuli and value creation become more dynamic, central steering collapses.

We consequently need to create more decentralized organizations said Niels. The periphery already learns and gets smarter, but the center does not. This leads to a decentralization imperative: To support organizational decentralization decision-taking needs to be decentralized, giving more power to people in the periphery.

Niels did an exercise with the attendants based upon theory X and Y motivation theory from Douglas McGregor. He asked people to write down if they consider themselves to be X or Y; everyone considered themselves to be Y. Then he asked which percentage of the people they consider to be X in their organization. Only few attendants said that it was 0%. This short exercise showed that we often perceive other people to be X, while we all perceive ourselves as Y, which is conflicting. Most management systems in organizations today are still, just as in McGregor´s time, designed on the assumption that some or most people in organizations would be of type X, while actually people working in them consider themselves to be of type Y. The fundamental mismatch between the way organizations are managed and the motivation of people working there remains until this very day

InfoQ interviewed Niels about dealing with dynamic problems, decentralization, and increasing agility.

InfoQ: You mentioned that there is a dynamic part of value creation and a formal part of value creation. Can you explain what you mean with this?

Niels: The traditional way of describing organizations through their line structure and processes, by looking at formal organization design as shown in the org chart, or by figuring out their “7S” has become ineffective Those tools may have been appropriate until the 1970s, but when markets and value creation became more dynamic and complex, these approaches stopped to be appropriate to understand organizational problems. In complexity, we need different, appropriate thinking tools. Some of the thinking tools that we need are distinctions, such as the distinction between center and periphery. Or the distinction between the formal and dynamic parts of value creation.

The formal part of value creation can be dealt with by machines, in principle. We can deal with it through standardization and even automatization. The dynamic part of value creation defies these approaches: The only “thing” capable of dealing with dynamic problems is humans. Because of this pressing need to solve dynamic problems, organizations have to devolve thinking and decision-making to the periphery. It is not an option. It is a question of survival in competitive, complex markets.

InfoQ: At #darefest you stated that we cannot afford centralized coordination anymore. Can you elaborate why?

Niels: Central steering and coordination are often depicted as a mere nuisance or as a necessary evil. That is a misconception: Centralized coordination is a luxury that organizations in dynamic markets cannot afford anymore. It is a misunderstanding turned management practice: Resource allocations, budgeting, resource committees, centralized investment planning, negotiated targets and MbO, through management decisions and highly controlled levels of authorization have had their role in the industrial age. Now they have become barriers to performance, because they hinder teams in the periphery of doing the work, and they obscure how value creation actually flows from the inside out.

In a certain way, the Soviet Union way of governance lives on in most companies today. Which is somewhat ironic. What organizations need, however, is decentralized, market-like coordination between teams, not centralized steering. Some pioneers have created this kind of org model, of course. But they still remain the exception. 

InfoQ: In your opinion which kinds of changes are needed in organizations to better serve their markets?

Niels: First and foremost, we must stop working in the traditional model of command-and-control, of management as we know it. Ultimately, we have to let go of that social technology called management  – a concept that served its purpose in the industrial age, but that is hopelessly out of tune with today´s knowledge-age markets and value creation. So we as knowledge workers and leaders have to start working on the organizational model, not just optimize the old one.

This requires “beyond command-and-control thinking”, of course. Just as we had to find a way out of the waterfall and project management mess of the past, we also have to find a way out of the management and command-and-control mess. The alternative is already there. And we also know how to create the necessary organizational transformation. We must turn our companies outside-in and also move towards different performance practices. This becomes possible only if we upgrade our thinking about other people at work, of course.

InfoQ: Do you have some suggestions how organizations can increase their agility?

Niels: There are literally hundreds of things that have to change in most companies, in order to move them from the traditional “Alpha” model of organization to the new “Beta” model. This affects practices, rituals, structure, and usually even performance systems such as the pay system. Transformation is complex, but it is neither utopian, nor does it take forever. The BetaCodex Network, an open source community focused on transforming organizations, can help organizations that want to go Beta by providing answers and solutions.

What we have clearly learned, though, since the Beyond Budgeting Round Table research collaborative was founded more than a fifteen years ago, is that transformation must be coherent: Just changing a few practices, or tweaking a few processes will never get you there, but leads to perpetuating the old model. So beware of cute little improvements, best practices and fun workarounds. We have been tweaking the old model for way too long already. Now is the time to step up to the challenge and work on the organizational model, consistently. We know from the agile movement what´s at stake, we know the alternative org model, we know the way change works – now we must put that knowledge to work.

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