The concept of externalities is widely understood by followers of economic theory. However, this concept can also be applied to the business context, in order to help explain and understand a reality that arises in all traditional organisations that, in effect, is damaging their ability to fully realise their potential.
An externality can be defined as ‘the indirect costs or outcomes that accrue to a third-party as an effect of another parties activities’. So, for example, an externality of the industrialisation of the modern world is air pollution. The resulting illnesses and their associated human and financial costs are not carried by the organisation that caused them but by the third parties, often taxpayers, that have no direct say in the polluting organisations.
From the perspective of this article, businesses and organisations are experiencing multiple externalities on a daily basis as a result of the way the organisation is structured, the bureaucracy that arises from it, and the incentives that keep it in place.
The aim of this article is to give the reader an understanding of bureaucracy, how it arises, what the negative effects are, and what can be done about it.
In order to fully understand what bureaucracy is, and how it has come about, we first need to define it in order to have a shared understanding of its meaning. From this perspective, according to the Oxford Dictionary, bureaucracy can be defined as “…a system of governance in which most of the important decisions are taken by state officials rather than elected representatives” furthermore, this definition can be extended to include: “excessively complicated administrative procedures”. From the definition, it can be concluded that bureaucracy is an unplanned outcome of the structure of governance that manifests itself due to the flow of decision-making power within an organisation.
Hierarchies and the bureaucracy which arises within them, help the power structures within organisations to exert authority and control in order to become more efficient in doing the specific activities that the organisation is engaged in - which works really well when the environment within which the organisation operates is relatively predictable. However, the modern business environment is characterised by volatility, and as such is much less predictable than what it was 20 years ago, making the effective use of the traditional hierarchical structure that much more challenging.
Bureaucracies and their supporting structures have a number of distinct characteristics, these include, but are not limited to:
Hierarchies take the form of a pyramid, with a few individuals at the top, and larger groups occupying the lower echelons in the structure. Additionally, as you move towards the bottom of the structure, there is less autonomy and decision-making power.
Rules and regulations governing the roles, activities and decision-making capabilities are created by the top few individuals that wield the power within the organisation, and more often than not are designed to cover all hypotheticals and possibilities. These rules tend to make the organisation reactive in the environment, and slow to respond to changes.
A product of bureaucracy is people and teams being placed in more and more walled off silos that start to compete rather than collaborate
While these centralised hierarchical structures have served humanity well for thousands of years, there is a changing dynamic within the world that is revealing a number of friction-points within the structure that need to be addressed.
The distinct characteristics of a bureaucracy lead to a very specific experience for the individuals that account for the bulk of the structure. From the individual perspective of those sitting within bureaucratic structure, the following experiences ring true:
As an antidote to the experiences mentioned above, in recent years there has been a marked shift to what has become known as a purpose-driven organisation. A purpose-driven company can be defined as ‘A company that stands for and takes action on something bigger than its products and services’.
From this perspective, purpose-driven organisations are quickly gaining momentum as the new competitive point of parity in many of the world's economic industries. Within these organisations, purpose - or alternatively the pursuit of making a positive impact on the world is being primarily driven by the up and coming generations (Gen Z, Gen Alpha and a large contingent of the younger Millennials) and unless organisations establish purpose as being at least as important as profit, they are beginning to find it extremely difficult to compete in the short to medium term, from both a talent acquisition and retention perspective, as well as a revenue perspective.
The shift to purpose, however, does come at a cost to the company, it requires nothing less than a complete reevaluation and restructuring of the organisation in order to be meaningful and deliver meaningful results. For clarity, the pursuit of purpose requires the individual team members to lead their own work, and as such thrives in a decentralised structural state. The current hierarchical, bureaucratic structures are not ideal for the pursuit of purpose simply because they afford no autonomy and decision-making power to the very individuals that can use them most effectively.
In recent years, decentralisation has emerged as a viable and effective means for organisations to actively pursue purpose. The idea of decentralised organisations are by their very nature designed to pursue purpose by virtue of their structure. The biggest differences between traditional and decentralised organisations is how they organise, share information, and make decisions, as well as how to view/approach power dynamics and human relationships.
From the perspective of decentralised organisations, they are generally self-organising, which means that the individuals within the organisation share and partake in the vested power of the organisation, as and when decision-making opportunities arise, which results in the minimum viable governance and bureaucracy prevalent within the organisation. Additionally, decentralisation allows the organisation to be truly agile and facilitates it being able to respond in real time to the realities of the environment, rather than having to implement a series of actions designed to react to hypotheticals. In effect, decentralisation actively facilitates the removal of traditional and stale governance within the organisation through its approach to roles rather than job titles.
It should be noted however, that decentralisation does not eradicate bureaucracy from an organisation, but rather transmutes it into a nimble and sufficient form of bureaucracy, that actually helps to propel the organisation instead of stifling it. To illustrate this point, one could think about the rules of the road as an analogy for helpful bureaucracy. On the road there are a few simple and helpful rules - every driver must stay on the same side of the road, they must overtake on the same side, they must stay within the demarcated lines, and they can travel up to a certain speed should they need to - this form of useful bureaucracy works to increase the speed and efficiency of road transport by allowing the drivers to make their own decisions as they progress on their journey and facilitates a speed that mitigates danger on the roads.
While decentralised structures hold a number of valuable opportunities for the simultaneous pursuits of purpose and profit, it is important to note that they require unique tooling in order to realise the advantages. This tooling requirement is in direct relation to governance, information sharing and decision-making, as these are the parameters that allow for the fast and efficient progress along the pursuit of purpose.
From this perspective, a platform like Nestr offers the perfect digital tooling solution for decentralised organisations due to the fact that it was specifically designed and built to place purpose at the heart of all organisational activities.
We live in a world where every action has an equal and opposite reaction, and the implementation of the traditional hierarchical structure within the business domain may have up until now been the best option that we had available to us, however, it has come at the cost of bureaucracy, and this bureaucracy may just be the reaction that we can least afford in the modern business environment.
As a result, the pursuit of purpose is quickly gaining traction as not only a way to extract maximum value from the people within the organisation, but also from the market, as the values and preferences of the new generations are indications of where the bulk of their purchasing power is flowing. In order to stay competitive within the medium to long term, it is becoming vital that organisations begin to reevaluate what has worked for them in the past, and begin to plan for a future that is highly likely going to look and require something different.