CENTRALIZE/DECENTRALIZE

Posted on April 7, 2004 by Dave Pollard

Live long enough, they say, and you’ll see everything. Last evening Judith Meskill brought to my attention this post in CIO magazine describing The Decentralization Imperative. In it, writer Sue Bushell critiques a new book by MIT management theorist Thomas Malone entitled Future of Work: How the New Order of Business Will Shape Your Organization, Your Management Style, and Your Life. According to Malone’s colleague, Mitchell Resnick, human beings have an inbuilt, subconscious tendency to assume that things are best managed in a centralized way. Malone thinks that by “overcoming the centralized mind-set”, we can open ourselves up to the benefits of decentralization, especially (this being a management book and all) decentralization in business decision-making.

The article outlines four forms of decentralization:

Loose Hierarchies — with flat organization structure and substantial autonomy granted to individual business units, subject to overarching principles, review and budget control (e.g. consultancies, universities, technology developers)
Democracies — where all employees, or all managers, get an equal vote on some or all key corporate decisions
External Markets — where most of the non-executive jobs are outsourced to independent businesses and contractors, so all ’employees’ essentially become ‘suppliers’, with the commensurate rights and autonomy
Internal Markets — where each business unit, and even individuals within business units, contract with each other as if they were dealing at arms’ length, so, every business unit and every employee acts much like an autonomous business

Needless to say, Malone sees offshoring of jobs as inevitable and desirable, and, as any regular reader of these pages will know, I think that indicates he needs to get out of the ivory tower more and find out how things work in the real world. Malone also sees decentralization as driving the need for communication (including video/audioconferencing), collaboration, opinion canvassing, and telework technologies. In the real world, management thinks offshoring and outsourcing is the perfect opportunity to reduce (and even outsource entirely) technology costs and infrastructure.

Those of us that have been around long enough have, of course, seen and heard all this before. I’ve watched both business and government go through at least three cycles of (a) “centralization is good — it brings economy of scale, rigour to the decision-making process, and reduction of waste and duplication”, and (b) “decentralization is good — it brings agility, customized solutions, appreciated autonomy, empowerment and the benefits of an internal free marketplace for people, goods and ideas”. Sometimes large organizations are doing both, in different areas, at the same time. Often, decentralized and centralized systems are layered on top of each other, bringing the worst of both worlds. And even more often, compromise and complexity produce hybrid structures that prevent the benefits of either decentralization or centralization from being realized.

The most obvious (but certainly not only) example of this is in government, where there is a constant tension between federal, state, county, and municipal governments for power, authority, and dollars. The result is massive inefficiency, waste and duplication, and incompetent decisions because those with authority are too far removed from the problem to see the optimal solution. The same horrendous, debilitating, bureaucratic state exists in most large corporations — different decisions are made at different levels, there is constant friction between the levels, and decisions are made by those far-removed from the problem.

The problem is not one of level of autonomy, resource allocation or decision-making. The problem is inherent in large organizations, public and private: As the size of the organization grows linearly, the complexity, and opportunities for conflict, misallocation, inefficiency, error, miscommunication, fraud and sub-optimal decision-making increase exponentially. Whether these megaliths are centralized or decentralized really doesn’t matter — wait long enough and they’ll cycle around anyway. The only reason large organizations are so dominant in our society is that size is power — power to unduly influence governments and consumers, power to form oligopolies and trusts, to fix prices, to monopolize sources of supply, and to buy, sue or crush smaller competitors out of existence.

The solution is not organizational, but political. We need laws that will restore corporations to their original purpose (the effective raising of inexpensive capital), revoke their “rights”, and make them once again responsible to society as a whole, not merely to the investors and speculators who momentarily own their shares. The inevitable consequence would be the rapid break-up of large corporations, because of their inherent inefficiencies, into truly autonomous small, agile, responsible, community-based businesses. That would be real decentralization. That would be a truly free market, not the illusory free market that Mr. Malone espouses.

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8 Responses to CENTRALIZE/DECENTRALIZE

Bob Morris says:

April 7, 2004 at 15:03

In a vaguely related vein, check out Networks and Netwars: The Future of Terror, Crime, and Militancy, John Arquilla, David Ronfeldt (editors) from the Rand Corp. http://www.rand.org/publications/MR/MR1382/Written before 9/11, it details how network organizations like al-Qaida are difficult for hierarchical organizations like the US military to understand, much less defeat, and goes into great detail on the differences between the two structures. Fascinating stuff.From the summary:The fight for the future is not between the armies of leading states, nor are its weapons those of traditional armed forces. Rather, the combatants come from bomb-making terrorist groups like Osama bin Laden’s al-Qaeda, or drug smuggling cartels like those in Colombia and Mexico. On the positive side are civil-society activists fighting for the environment, democracy and human rights. What all have in common is that they operate in small, dispersed units that can deploy anywhere, anytime to penetrate and disrupt. They all feature network forms of organization, doctrine, strategy, and technology attuned to the information age. And, from the Intifadah to the drug war, they are proving very hard to beat.
Dave Pollard says:

April 7, 2004 at 15:17

Bob: What’s interesting is that the Bush Admin doesn’t much differentiate between ‘bad’ insurgents (Osama) and ‘good’ insurgents (environmental deomonstrators = ‘ecoterrorists’, peace protesters = ‘supporters of Saddam, etc.)In a way it’s good to know something works against the monopoly of corporatist power in every element of our society. What do you think of your Prius, and why do you think they gave it a phallic name? ;-)
Denny says:

April 7, 2004 at 17:12

Legislate commerce and corporate structure? Hmmm. Even so, I’m surprised that after 20 years academicians are still writing about decentralization as some kind of new approach, that publishers still believe this topic sells books. Maybe it’s because corporations persist without change, regardless of all the ideas written all the books.
Jon Husband says:

April 8, 2004 at 02:54

I think you’ve absolutely nailed it, Dave.It’s not an organizational structure nor organizational design issue, nor vision of purpose of the organizations (as they are currently constituted in our capitalist societies). It is rather THE issue of what purpose corporate and business oriented organizations serve in a human system, which then leads to the design and structural issues, after that larger issue is addressed – which then (probably) leads to the design parameters such as the ones cited at the begoinning of your post.It’s taken the wiring, interconnectedness and early stages of “transparency” to shine the lights more intensely on this critical issue.That’s the ongoing issue I have with lots of management theories and theoists – they just take for granted the very fundamental assumptions, and do not go to the very deep issue of the purpose of business in society, in 2004 and beyond.Thanks for the post.
Jon Husband says:

April 8, 2004 at 03:49

Denny – I may put my ignorance on display for all to see, but … isn’t it fair to say that commerce and corporate structure are indeed legislated ? And that the question is how should that legislation be changed or amended ? It seems clear to me that there is much in the way of legislation that operates to the benefit of large shareholders and management in the way(s) that commerce is regulated (or not, by exemption or ommission). And structure as such is legislated/regulated often through whatever applies to the ways managerial capitalism is compensated, and the ways corporate governance are currently allowed to operate – and then there is such legislation such as Equal Pay for Work of Equal Value (comparable worth legislation in the US) which artificially keeps organizational structures more hierarchical than they need to be – maintaining the mental model of relatively static “jobs”, when I believe it’s apparent that many jobs change focus and shape quite regularly.And then there is much reasonably obsolete employment and labour legislation, which to date has contributed to the general mindset that it’s easier to cut jobs to reduce expenses rather than re-design organizational structures or compensation strategies and practices.And then there are subsidies, and specialized tax incentives for regional stimulus, and compensation for sunset industries, and…, and…Legislation only provides design constraints … and so today we have the structures we have shaped thus far, which in turn have shaped “us”, and now the interconnected “we” may be beginning to shape back …
Bill Anderson says:

April 10, 2004 at 14:41

Dave, in 2001 Peter G. Brown, Professor at McGill University, published a book titled “The Commonwealth of Life: A Treatise on Stewardship Economics” (Black Rose Books, Montreal, CA). The idea of stewardship provides objectives for economics, and for the roles of individuals and governments in participating in and regulating economic activities.The book presents a program that can change how citizens, businesses, non-profit institutions, and governments think about, and act on, today’s pressing social, environmental, economic, and political problems. He presents a moral basis for the very practical decisions required to balance the needs and rights of all life with the economic and government institutions required to secure them.
Rob Paterson says:

April 11, 2004 at 06:03

I am finding that most organizations that i deal with have lost sight of their purpose. However they started, they now place the survival of the existing structure above all else. So a university is not really interested in educating undergrads but in gaining enrollment = funding. Health systems are not interested in our health but in their employment and guilds etc. Whether you centralize or decentralize this type of system means nothing – they are not built around serving the outsider – think of any government – they exist only for their own needs.Is this not the prior issue before we get to how we organize – is this what you mean Dave when you say that the issue is political?
Bob Morris says:

April 11, 2004 at 22:37

In answer to your questions:1) My Prius is great! 46 mpg. Local dealers want to buy it back but I ain’t selling! I’ve no idea why the name is so odd!2) The Netwars book repeatedly points out that networks have an easier time understanding hierarchies than the other way around. They said in the book, written pre-9/11, that killing bin Laden probably would do little to stop al Qaida. The authors, who possess stratospheric security clearances, said at a book signing (after 9/11) they had a difficult time convincing generals of this.