On the theory of the pathological firm

On a similar theme to the last post, this Twitter discussion led me to something interesting:


The linked Harvard Business School paper, which is good and worth reading, concludes that the craze for delayering in business since the 1980s, which was sold as a way of devolving decision-making authority to lower levels in organisations, actually resulted in the imposition of tighter controls and the referral of more decisions to the CEO. It also points out that, whatever the consultants and business schools thought, CEOs typically adopted delayering because it promised to give them more power.

Now, I was stuck on a plane with this paper and my laptop, and I ended up drafting a substantial piece. (Yes, I do worry about my life in that it involves drafting responses to HBS papers on aeroplanes. I’d better own it.)

So, HBS found that top executives liked delayering because they could “get closer to the business”. This was the opposite of the stated aim. Stafford Beer would, of course, remind us that the purpose of the system is what it does. And a few basic stylised facts about society would back him up. In the period under discussion, top managers have been lionised by society, have been paid more and more, and the intensity of management has increased. Workers, for their part, put in more and more hours. This didn’t necessarily mean the additional time was well spent, of course, and didn’t even translate into wages much. Unless you were in top management, in which case you did very well indeed. Basically, I include by citation the famous Piketty-Saez chart here and invite you to occupy everything.

I would argue that the bridge between the stated purpose and the real purpose here – the shadow that falls between the idea and the reality – is the role of the pseudo-expert. Philip Tetlock coined the phrase to describe the political pundits he studied, whose predictions he found to be considerably less useful than picking outcomes at random. Pseudo-experts serve a number of purposes, of course, the purpose of the system being what it is, and they are as follows:

1) They fill up Kolakowski’s Infinite Cornucopia

Leszek Kolakowski supposedly stated a Principle of the Infinite Cornucopia, which says that there is an infinite cornucopia of reasons that can be used to justify a course of action once you have decided to take it, quite independently from your real reasons or lack of them. (I may be misquoting, but I have it on Tim Garton Ash’s word, so write to him c/o St. Anthony’s College, Oxford. Don’t bother me.)

Who puts the corn in the cornucopia? Answer: Pseudo-experts! In this sense, guff about delayering provides legitimacy for decisions taken by top managers in their own interests, and therefore guff-production is worth paying for.

2) Delegitimising real experts

One thing you can always do with the output of pseudo-experts is to use it to bash real experts. Anyone who lived through the beat up for the Iraq War and isn’t directly complicit or thick enough to have a Ryanair credit card is well aware of this. Similarly, when it looked like no-one would touch the privatisation of Railtrack because of the projected costs of the WCML upgrade, the government just found people who would provide different projections – as it turned out, pseudo-experts.

3) Devaluing competence itself

One of the things I’d been thinking about that morning on the Emirates flight was the housing benefit/buy-to-let fiasco, and how it became acceptable for a politician to just not know that housing benefit is an in-work benefit, and worse, to just not care that they didn’t know. A culture of competence values it as an abstract quality like beauty or truth. It is simply part of being a proper adult that you ought not to be spectacularly ignorant on issues that aren’t actually hugely recondite. Pseudo-expertise is a force in the other direction.

With this, I reach the point I made in this tweet:

The prevention of management is an important feature of middle managers. In part, they serve to protect their direct reports from predatory top managers. They also filter the noise. One of the tragic things about the HBS paper is the number of people they spoke to who were desperate to interfere with more and more elements of their business, to the extent that their private offices ballooned with additional staff to provide the information filtering capability they were frantically stripping from their organisations.

Another important function is to balance the feedback loops. On the principle that “everything good is in Erik Lund’s awesome blog“, I will mention that back before we really had a theoretical and mathematical framework to understand feedback control, there used to be a quality called “stiffness”, which mapped roughly to what we would now call “stability”. Insufficient stiffness caused things like 16″ naval gun turrets thrashing wildly as the unstable control loop hunted under positive feedback. These days, everyone demands “flexibility”, or should that be “floppiness”? Lags and filters in the flow of information can be a good thing.

In general, then, they are there to provide rationality in the sense Keith Stanovic and Richard West use the term – see my Kahneman review:

the fascinating idea that there may be a difference between intelligence and rationality – that the two are independent vectors. Kahneman gets this from Stanovic and West, who theorise that as well as intelligence in the raw-smarts sense, there is a further independent quality of reason that denotes executive function, kinaesthetic skill, and meta-cognition, the awareness of one’s own thinking and its limits (the inverse of the famous Dunning-Kruger effect)

Now, how did we get here? The idea of pushing decisions down the organisation originates with the military, and specifically the German army’s reorganisation in 1917, which worked well enough to knock Russia out of the first world war and come unpleasantly close to taking out Italy and France.

The term of art is auftragstaktik, translated rather badly into English as “mission command”. Auftragstaktik implies that decisions are taken as low in the organisation as possible, that orders convey objectives and constraints but leave execution to the people who execute on them, and that having given orders, the commander should go to the most important point in the main effort and lead personally.

The Germans did actually flatten their structure, de-emphasising some of the layers in the chain of command, but as we saw earlier, delayering structure doesn’t mean empowering workers.

There’s also a pathological variant. Since Bosnia in the 90s, generals have been talking about the “strategic corporal” – the guy on the front line who can fuck up at any moment, and because he’s on TV, change the political situation dramatically. The flip side of this is the 10,000 mile screwdriver. Classic examples include Martin van Creveld’s point that the US command structure in Vietnam tended to literally stack up vertically over the fighting, with a platoon leader looking up to see the battalion commander’s helicopter, the brigade commander’s (bigger) helicopter, the division commander’s plane, and metaphorically, the communications satellite over which the president was following events. The same communications technology that means the strategic corporal’s bloody mess gets reflected all over the world lets someone in Florida staring at the drone video interfere with a squad-level fight in Afghanistan, as Sean Naylor memorably wrote about the battle of Shah-i-Kot in Afghanistan. And, of course, Lynndie England.

Getting back on the HBS paper, we can see how this is working out from their points about the evolution of headquarters organisations. Strategic-level staffs have been expanding to support the increasing CEO-level span of control – they ought to be shrinking. Tactical-level ones are shrinking as they get downsized, when they ought to be growing, both to support decision making by key leaders, and to help divisions crack on while the boss is focusing on the main effort (a very important point in the auftragstaktik model).

This implies that the purpose of delayering is the opposite of its stated purpose. The purpose of the system is what it does, and what it does here is foster:

1) a neurotic, overloaded, micromanaging style
2) expectations that are impossible to meet
3) the bully ethos

Interestingly, companies that invested heavily in IT tended to move lawyers and financial people up to the CEO’s office. This explains the growth of the strategic HQ; as well as trying to cope with the overload, it has also been absorbing high-status people climbing to safety in order not to be downsized.

Auftragstaktik made the function of the chief of staff very important – after all, it was invented by the most powerful general staff in the history of warfare, what would you expect? – because someone has to keep the organisation ticking and the information flowing while the chief heads for the critical strategic focus. But, HBS notes, many organisations actually got rid of the chief operating officer.

People HBS asked said they wanted unfiltered information. But the only thing you can do with unfiltered information is to create a filter. Filtering, someone said to me not so long ago, is both a public good and a task that is easy to distribute. This may represent its privatisation, or it may be that staying overloaded serves a purpose.

So. Flatteners seek horizonality, the opposite of the French army command structure of 1940, networking, informal innovation, all that good stuff. They get Enron, internal civil wars, cultures where the best thing you can do is beat a colleague. What’s up?

The answer is anti-social networking. In the pathological firm, bad ideas spread and drive out good ones. Nothing goes viral quite like bird flu. This pattern can be observed at Abu Ghraibh, where the bad ideas introduced by a small caste of torturers spread into the guard population, being remixed and added to, with the result of much more torture. It can be observed if you look at the 1980s children’s home scandals (and I’m really sorry to drag that in). It can be observed in the banking world and in the way so many late 90s telecoms companies’ sales departments independently discovered the joys of reciprocal IRU agreements.

The anti-social networks of the pathological firm first of all destroy the informal networks of competence. Diego Gambetta’s Codes of the Underworld: How Criminals Communicate documents the practice of adopting incompetence as a guarantee of your reliable crookedness among mafiosi and among university professors. They therefore clear the field for pseudo-experts.

Why does this happen?

The first reason is the end of the prevention of management. People cheat because they can’t keep up. The pathological firm is an environment that favours pathological people, so they are preferentially selected. Criminality becomes compulsory.

Another reason is the idea, taken from the history of Nazi Germany, of working towards the Fuhrer. In pathological organisations, it is very common to find that nobody ordered some specific piece of viciousness. Instead, someone came up with it because it was the sort of thing that went down well with the boss. Then, someone else tried to top that. Nazi Germany, like pathological organisations, was characterised by polycentric chaos and incremental radicalisation.

Antisocial networking helps to spread the norms of this environment. It also carries out another Nazi term, Gleichschaltung, the “synchronisation” of intermediary organisations with the aims of the powerful.

And the biggest reason is: because nobody stops it. You needed Hugh Thompson or Alison Taylor. But they weren’t available.

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