“Management belongs onto the garbage heap of history!”
An interview with Niels Pflaeging - business thinker, advisor and founder of the BetaCodex Network
Today´s organizations, by and large, are in a mess. Our societies, economies and markets have changed, but companies and the way we organize work overall, haven’t: Organizations are still based on beliefs, design principles and methods inherited from the industrial age. Managers assume employees cannot be trusted. Collaboration happens, if at all, in spite of, not because of dominant mindsets and tools: functional division, control processes, HR practices, pay structures and incentive systems, power monopolies, lack of transparency, bosses rule, high levels of bureaucracy, overburdening planning and variance control – command-and-control is very much alive and kicking in companies and work places everywhere. The result: Demotivated workforces and low employee engagement. But also: Lack of team effectiveness, little innovation, and overall poor competitive performance.
On the other hand, a silent revolution is happening. A few pioneering organizations from distinct industries, countries and backgrounds have developed alternative organizational models, and these pioneers have achieved superior and sustainable competitive success. Not through better business models alone, mainly (!) but through better, non-bureaucratic, contemporary organizational systems.
Niels Pflaeging was for five years director of the prestigious Beyond Budgeting Round Table, and later co-founded the BetaCodex Network, an international, open source movement for organizational transformation. For ten years, Niels has helped companies around the world at achieving profound change: from industrial-age command-and-control to organizational models fit for the knowledge-age. Niels says: “Management is a zombie technology. It is a social technology that worked well during the industrial age, but that has become a bane for organizations everywhere. It passed away at some point during the 1970s, but few haven´t noticed!” Niels held a workshop called “Change Clinic: Organize for Complexity” in Vilnius on June 4th and ran a session for Agile Vilnius on the same evening. He also answered the following questions for us.
Q: Conventionally, a company’s management consists of 4 functions: planning, organizing, coordination and control. What happens to these functions, and who should do these tasks, if management becomes dispensable, as you say? Or do they become obsolete?
Niels: It´s that kind of definition you mention that we learn at universities, right? Definitions abound about what management could or should be. But we should ask ourselves if definitions like this are actually useful. What I learned from systems theory, over the last 10 years or so of studying and applying it in organizations, is that definitions like these are usually rather meaningless. They tend to mix up causes and effects. They usually don´t clarify what the underlying assumptions are. They don´t do a good job at defining a concepts elements – like, in this case, “planning” and “coordination”, “control”.
When you look at the history of organizations, you find that management was a solution for a need that was almost overwhelming in the industrial age. Industrial-age mass production required a new way of work organization, much different than the kind of model that was common in the age of crafts manufacturing. Then pioneers like Frederick Taylor came along and they suggested to run the industrial age corporation like machines, in which workers would not be employed and educated like apprentices in a crafts workshop anymore, but where worker´s work would be coordinated and controlled by standards, tight rules, incentives and the stopwatch. This idea of “managing” the work and of dividing organizations between thinkers and doers was indeed revolutionary. Taylor and his associates called this approach “scientific management” at the time. This concept became wildly successful and transformed not only organizations, but also the way we looked at work. The search for efficiency and the “one best way” to do anything that Taylor pioneered became defining for 20th century and it even changed the way kitchens were designed, or the way we spend our private time, and our holidays.
Q: So what is the alternative to this organization model for the industrial age?
Once you apply the notion of division between thinking and doing, and add to that the concept of functional division, or specialization – which is another idea that Frederick Taylor pioneered at the time – you quickly get to thinking of organizations as centrally steered command-and-control pyramids. With functions and departments, and maybe divisions. All held together by standards, rules, control and plenty of planning. And with intense budgeting, centralized resource allocation and variance control. This organizational model was so incredibly successful in the industrial age that it has indeed become the standard org model in the industrial age – and it still dominates, in spite of having become a dead horse. Compared with command-and-control, the alternative, contemporary model of turning organizations into decentralize networks, instead of pyramids, still seems pretty exotic to most of us. And many cannot yet believe that this emerging model can be applied to all organizations, independent of industry, size, country, culture or age.
Ten years ago, I became a director in a movement called Beyond Budgeting – a research group that had started in 1998 to identify and understand organizations that wouldn´t do any annual planning or budgeting, and thus or in spite of that were highly successful. We found quite a lot of these organizations! And we learned that these companies hadn´t just given up budgeting. They had also let go of command-and-control, overall, and of the many practices and the principles that come with it. These companies were often considered “weird” or exotic by their peers and by management gurus. We found out that they weren´t weird at all, but that they simply had figured out the code to post-industrial-age organization. They had become “agile, adaptive organizations”. The first such organization that we found that had this whole model in place, that did almost everything else than their competitors, and had thus become wildly more successful than anybody else, was Handelsbanken, the Swedish bank. Over time, we found more companies like that, large and small, and from many countries, and we succeeded in identifying the principle that companies like Semco, Toyota, Whole Foods and Google have in common.
We now call this kind of organization a “beta” organization, as opposed to Taylor-influenced, command-and-control “alpha” organizations that were fit for the industrial age. Today, firms must thrive in perpetual beta, in hugely uncertain environments. For that, they need to apply a fitting, and contemporary organization model. After 100 years of management, it´s time to reinvent work and value-creation and move towards a complexity-robust way or organizations. Some companies, like Southwest Airlines, W.L.Gore, dm-drogerie markt, Guardian or Handelsbanken, have done this for a couple of decades now, and have achieved sustainably superior competitiveness on all accounts: for employees, customers, society and owners.
Q: Can existing functional, departmental structures be maintained when transforming current pyramid organizations to decentralized and networked, or “peach” organizations, as you call them?
Certainly not. Functional division is a terribly bad idea that, unfortunately, became a standard, just like the whole notion of dividing thinkers from the doers. The problem is that functions and departments can only be driven from above. Through centralized steering and control. The alternative to that is to design an organization not by “grouping similar people” (which is functional division), but by grouping people who actually create value together: and usually means grouping people who are not that similar! By applying this principle, and by thinking the organization from the outside-in, you arrive at completely different structures, and it usually leads to dissolving functions that no healthy start-up would have, but that are common in larger firms: like sales, or HR, for example.
The answer to your question is: functions and departments are the wrong thinking turned structure. The right thinking will always produce an “outside-in” organization in which formal hierarchy is seen as what it actually is: a rather trivial thing that shouldn´t interfere with the work. You end up developing something like a radically decentralized cell structure design for how the organization actually works.
Q: Who should set and, if the need arises, change an organization´s goals?
We have learned from the pioneers of the decentralized, networked organization model that within an existing business and organizational model, teams can very well set their goals themselves, and that they can self-direct effectively. I know that´s hard to imagine for everyone who´s used to command-and-control from the top. But the bureaucratic machinery that most of us know or even learned to run, including management by objectives, target and incentive negotiation, bonus-setting and plan-actuals deviation control doesn´t work at all, in fact. We have seen that over and over in practice, and the reasons why bureaucratic control fails are well researched and rather obvious. The alternative mechanisms that highly self-organized organizations employ are not new at all , but less well-understood in practice, where command-and-control remains the standard. Like the move from bonuses to profit sharing. The move from hierarchical control to transparency, combined with peer pressure. From fixed targets to team league tables and benchmarks or “relative targets”, from a plethora of indicators to very few, simple and widely understood measures and a shared understanding of value-creation. Once you apply these principles, an organization´s goals set themselves quite easily and they don´t even have to be re-negotiated any more every year. To give you an example: Handelsbanken, Scandinavia´s largest bank and Europe´s most high-performing bank for a stunning 39 years in a row, hasn´t changed its corporate goals since 1971. Can you imagine that?
In fact, you cannot really bring Agile to life entirely in an organization if you don´t move to a set of alternative performance practices and principles. And that means: abolishing bonuses, performance appraisals, budgeting, fixed target-setting and the likes, if you have that kind of practices. What I can tell you is that management by objectives is dead. Stone dead. We actually wrote a comprehensive, easy-to-read paper about that that I can highly recommend. It´s called Making Performance Work.
Q: If budgets and fixed, annual resource allocation are a relic, who should then plan, receive and distribute the resources?
The problem with that question is that there is no useful answer to it. The question is not “who”, but how? And the funny thing is that everybody already knows the answer! Look, in the Soviet Union, centralized planning was used for economic coordination. Did that work? Of course not! Because you cannot effectively run a system as complex as a country´s economy through centralized steering. In an uncertain context, planning becomes a completely useless mechanism of coordination. You need more adaptive, more decentralized, more agile ways of coordination. And that inevitably leads to a notion of “markets”: Of all market participants talking to each other, of pricing, of relatively free choice, and of governments setting the framework, and then getting out of the way.
Organizations must learn to do pretty much the same. Budgeting and all those other planning rituals are more mythical rituals then functioning coordination mechanisms. They are always part of command-and-control: They disempower people in organizations and treat them as irresponsible children. And they create all kinds of incentives to manipulate the system, to self-optimize instead of doing the right thing. Market forces are not perfect, of course. But they are way more effective to coordinate resources – especially once markets become volatile and highly dynamic. Just as a sports team or a runner looking to run a marathon, organizations need fitness and preparation. Not planning and soviet-union-style centralized command.
Q: Who should take up the function of strategic planning, is it necessary – how it will work?
Strategic planning is another one of those concepts that seem to make a lot of sense in command-and-control, but that doesn´t make not much sense in decentralized network organizations at all. Strategy and strategic planning became fashionable in the business world in the 1970s, because it served the interests of consulting firms and business schools, and also because if gave analytic specialists in the corporate world influence over “operational” functions that had up to then held the power in most corporations, like sales and production. In the new power game, marketers, strategic planners and other central staff could dominate those traditional functions, and consultants could grow significantly, by offering scalable analytic services that any parrot could deliver.
And the notion of strategy makes a lot of sense in organizations where, following Frederick Taylor´s principle for the industrial age, thinkers are separated from the doers, and where the thinking basically happens once a year, where plans and performance contracts and controls are set, and where then people “execute” for the rest of the time? We then call that thinking “strategy”, and the execution “operational”, and the corporate machine can run until the end of the year, right? You see, this kind of dogma of how things should work is part of management, the social technology. The problem is that things just don´t work that way any longer. Strategy has turned out to be nothing more than a thinking placebo. It is neither strategy nor execution that´s missing or that has failed in the business world: What´s wrong is the notion that you can still divide the thinking from the doing!
Q: Without centralized control, do organizations need self-control, and can it be achieved?
In decentralized organizations, there are several ways of control that work and which are largely absent from typical command-and-control organizations, as these rely mainly on supervision from the top. A highly effective control mechanism for self-organized organizations is transparency. Which means opening the books and making almost all information visible to all org members – at the same time, in the same way. Some colleagues go so far as saying transparency is the new control! And they are kind of right. But there are other effective control mechanisms are always part of highly networked organizations, and one of these is social pressure, or group pressure. What that means is that you don´t rely on bosses controlling “their” people, from the top down. But that you rely on peers controlling peers, on consultation among people, regardless of rank, on dialogue and the fact that people want to win together.
The power of peer pressure is often underestimated or entirely ignored by command-and-control thinkers, of course. And the impact of supervision by bosses is greatly overestimated by its practitioners. That kind of arrogance, or actually ignorance is part of why command-and-control is ever more often leading to dismal performance, lack of innovation, scandals, and organization’s implosions. Management has become a very shaky concept. We should actually put it onto the garbage heap of history, or into museums. Next to typewriters. Or bloodletting.
Q: The main goal of the management seems to be to satisfy the shareholders, while a company’s goal is to satisfy the clients. Isn’t this conflict of interest?
There are many misconceptions in the realm of management. One is to confuse outcomes with objectives, or goals. Another is to see stakeholders as competing forces to each other and to the organizations´ interest– a notion that Michael Porter popularized in the 1970s and that is completely wrong, and indeed proved destructive. This trend culminated in the 1990s concept of “Shareholder Value”, a concept that put shareholder´s interest atop of anybody else´s, and that only a decade or so later was started to be seen as what it is: an anti-social dogma.
The misunderstanding that Porter and most of his followers fell prey to is, on one hand, to perceive stakeholders as competing, which they are not. Organizations are “social” by nature, and they serve multiple constituencies, or stakeholders. It is important to understand that their “reason of being” is to create value for people, by bringing together people to make that happening. So the business of business is people – yesterday, today, and forever. There are no competing forces in that: companies, or organizations overall, must also adhere to society´s norms, and they must produce some kind of shareholder return to survive. But that´s not the goal or the organization´s reason of being: It is just necessary for survival, as breathing is to the human body.
Any manager who confuses profit with a company´s goal is on the path down the road to immoral behavior. Any organization that starts pursuing profits directly, and not through bringing together a great team for great customer value creation is un-sustainable. Because you cannot go for profits directly, they must, in the long run, be a residual of value creation for customers and society. Period.
Q: Can an army work based on the kind of decentralized, networked model that you describe?
Niels: More advanced military organizations are already operating under this kind of model. After much failure in successive wars , like the Vietnam war, the US military came up with the notion of radical decentralization of decision-making a couple of decades ago. They went a long way at empowering soldiers in the field. Now, given the nature of business, certainly even further decentralization is possible than in the world of military operation. But it´s really not the military that´s lagging behind: it´s companies and corporations. And now it´s time to catch up!
Further information: For more about this topic and about Niels´ work, read the BetaCodex Networs papers at betacodex.org or slideshare.net/npflaeging/presentations. Niels is also an active member of the Stoos Network stoosnetwork.org. He tweets at twitter.com/NielsPflaeging.
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