Thursday, February 21, 2008

The Death Spiral: Recognizing the Symptoms of a Dying Organization

It is an observable fact, that as organizations grow in size, they become more efficient in the generation of output; for a limited period. Unfortunately, as they grow in complexity, they become less effective in the generation of throughput.

As time continues, increases in size and complexity begin to drive down both effectiveness and efficiency. This often leads to adding layers of management; which strain the bonds of discipline and begins to form centralized bureaucracies.

To understand why this happens, it is important to understand that an organization is a confederation of stakeholders with different interests. In the beginning, organizations are formed to concentrate assets, resources and different forms of human energy in order to satisfy mutual interests – investors seek returns; workers seek employment; vendors seek customers; customers seek suppliers.

Every partnership known to humankind requires a system of administration (decision-making) that is tied to accountability of mutual interests. In the eyes of our laws, management is central to all stakeholders. They are the legal “custodians” of the collective relationship between stakeholders, they are the legal “agent” who acts on behalf of the collective organization; as well as “stewards” to the individual interests of the stakeholders.

In the beginning, successful organizations must have raison d’ĂȘtre (reason to exist), commonly known as a purpose. In other words, it must provide a benefit. The failure of an organization to fulfill the beneficial purpose eventually results in demise of the organization.

Organizations are a collection of individuals. In addition to purpose, they must have a philosophy of behavior that provides the order of logic; and they must have discipline of behavior that provides the order of governance. Without the structure of discipline and philosophy, organizational agendas decay to the personal agendas of those with power and influence and chaos provides the rules of behavior.

In times of economic expansion, a rising tide lifts all boats, including those of the stakeholders. In times of economic recession or stagnation, the interests of the stakeholders begin to conflict. The pressures such as price inflation begins to drive a wedge between the stakeholders; investors to seek higher returns; workers seek higher wages; vendors to seek higher prices; customers seek lower prices.

Anyone can lead an organization of diverse interests when dealing with the pressure of an expanding economy. Only great leaders can lead an organization with conflicting interests in time of economic trouble.

How can stakeholders tell their organizational ship is doomed in an economic down turn? The key is to examine the culture promoted by management. They set the tone for how well the stakeholders function together.

The world is filled with a variety of personalities and cultures, at the macro-level they are perfect compliments, but at the micro-level, they are in conflict. Great leaders work through the storming turbulence of forming a diverse culture in order to realize the synergistic benefits and innovation later. If every one looks the same or thinks the same, trouble looms.

Minds closed to the things they do not agree with. It is difficult for stakeholders to agree with the demands of each other when they competing for shares of the same profit. If management picks sides, the cancer of arrogance eating up the organization.

A rationalization of the way people should behave or the way things should be. This is normally tied to the phrase, “because we are different”. The problem here, the rationalizations make it almost impossible to accept mistakes and cut losses. The power of groupthink forms black holes that suck the critical resources out of an organization. As great ideas perish for lack of funding, stakeholders begin to seek other relationships.

The use of fragmentation and isolation to analyze, understand and control. When followed with the understanding cause and effect (systems thinking) of Determinism and the fusion and synthesis (strategic thinking) of Holism, the results are amazingly powerful. When reductionism is the only tool of management, the organization is continuously dissected into a non-functioning state that must be placed on life-support. Resulting in departments spend years working on projects, consuming resources, yet produce nothing of value.

Closed Systems:
Organizational cultures isolated in an attempt to preserve the status quo. They develop internal standards and avoid comparing themselves to others. As an organization closes it self off to the views and opinions of others, it also closes itself off to the ideas of others. Creativity and innovation is a product of open and diverse environments. Organic growth of the organization stops and future growth must come from acquisitions. Acquisitions coupled with divestitures are the sign of a hopeful transfusion. Acquisitions without divestitures are a sign of life-support.

Minds closed to the things they do not understand. Defending what they believe, feel and think is true; individuals and entire cultures will question and avoid any new knowledge. An organization defending the ignorance of its culture tends to prefer “real life experience” over “academic theory”. This creates an imbalance that eventually leads to collective organizational incompetence.

Behavior or performance that is not in compliance with established professional standards. The production function of an organization transfers the value of knowledge, skill and experience from the worker to the product. While defects and failures cause by incompetence will always reduce throughput to the customer; output may continue with the belief that inventory assets are being added to the balance sheet. An organization building more than their customers are buying is a sign of trouble.

The elimination of individuals that question or oppose the organizations cultural practices. Large organizations are not designed to be dysfunctional. The dysfunction evolves as if an infection. Practices become dated and inefficient. In time, they become obsolete and ineffective; able to produce output, but not throughput. The people who made the investments of developing the practices and publicly supporting them are now bound to defend them at any cost. Ridding themselves of threats is a sign the disease has reached a terminal state.

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