Wednesday, April 29, 2020

Ineffective Efficiency: Designing Organizations for Surprises

Those of us who teach management are used to handling a paradox common in firms and other organizations: the most efficient and admired firms are often those that fail most spectacularly when facing unexpected problems. This is, or should be, a reason for modesty for those teach or manage, and it is also be a reason to think about the source of failure.

In research published in Industrial and Corporate Change, I examined this issue with PeterW. Glynn and Hayagreeva Rao. We did not embark on a study of failures in famous firms – it has been done so many times before. Instead, we modeled different ways of designing organizational structures to see how well they performed. The idea behind the model is that, in addition to whatever else it does, any firm faces a sequence of incoming problems that it needs to spend time solving, and it matters how quickly these problems are solved. This is an easy conceptual model that takes some advanced math to solve; and looking at it we got some surprises.

First, problem solution times can vary tremendously, especially when the firm is busy. This is important because efficiency comes from not having too many resources at hand, which means that efficient firms are busy. It is one reason that success and failure are so closely linked.

Second, managers can make the problem worse. Adding any level of approval of a solution multiplies the time it takes to finalize, which is very problematic when the solution time is already long. Large span of control (many subordinates), as we see in many lean organizations, makes this problem worse. It is another reason that success and failure are so closely linked.

Third, teams can solve the problem. If they communicate well, a team will much more rarely have very long solution times than an individual, even if the individual has exactly the same expertise as all team members combined. This sounds surprising, so I should be quick to add that communication slows down teams significantly.

Fourth, smart rule-breaking can help solve the problem. Specifically, a worker who selectively solves some problems without forwarding the to the manager for approval can reduce the number of problems that take a long time to solve. Similarly, a worker who simply tosses out some problems instead of solving them can radically reduce the number of problems that take a long time to solve. Naturally, rule-breaking is only good for the firm if the workers can identify problems that don’t need approval or don’t need a solution.

These are simple facts useful for putting together an organizational structure and its processes. A designer who knows them can make the right choices between efficiency today and resilience tomorrow, because they dictate how much slower reactions to surprises are when a structure is set up for efficiency. Perhaps the main lesson is exactly in understanding that this is a trade-off. Efficiency is great until the day it isn’t, and it instead becomes the source of failure.