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Nested Bureaucracies

By definition, ineffective bureaucracies (are there any effective ones?) consume more resources than they produce in equivalent value to their users/consumers. According to Russell Ackoff, the only way an ineffective bureaucracy can remain in place is by external subsidization that is totally disconnected with its performance. In other words, bureaucracies rely on clueless sugar daddies supplying them with operating budgets without regard to whether they are contributing more to “the whole” than they are withdrawing. Unchecked growth of internal bureaucracies siphons off profits and it can, like a cancer, kill the hosting org.

The figure below shows a simplistic bird’s eye view of an American economic system dominated by CCH bureaucracies. The irony in this situation is that even though the Corpo Granite Heads (CGH) in charge of the CCHs are staunch supporters of the distributed free market model which rewards value creation and punishes under-performance, they run their own orgs like the old Soviet Union. Ala GM and most huge government departments, they operate as centralized, nested  bureaucracies where the sloth at the top trickles money down to the mini-bureaucracies below – without regard to value produced.

Bureaucracies, being what they are and seeking to survive at all costs, jump through all kinds of hoops to camouflage their worthlessness and keep the money flowing down from the heavens. Since the cabal at the top is too ignorant to recognize that it’s a bureaucracy in its own right, it’s an expert camouflage spinner to the corpocracy’s stakeholders (who gobble up the putrid camouflage with nary a whimper) and it sucks much more out of the corpo coffers than it adds value without being “discovered and held accountable”. In the worst nested bureaucracies, none of the groups in the hierarchy, from the top layer all the way down the tree to the bottom layer, produce enough value to offset their ravenous appetite for resources. They collapse under the weight of their own incompetence and then wonder WTF happened. From excellence to bankruptcy in 24 hours.

The really sad part is that before a bureaucracy auto-snaps into place, it wasn’t a bureaucracy in the first place. Everybody in the “startup” contributed more than they withdrew from the whole, and the excess value translated into external sales and internal profits. Like the boiled frog story, the transformation into a bureaucracy was slooow and undetectable to the CGHs in charge. Bummer.

The answer to this cycle of woe, according to Ackoff, is for the leaders in an org to operate the whole (including themselves) as a system of nested free markets, where each internal consumer of services gets to choose whether it will purchase needed services from internal groups, or external groups. Each internal group, including the formerly untouchable head shed, must operate as a measurable profit and loss center. Mr. Ackoff describes all the details of nested free market operation, including responses to many of the “it can’t work because of……” elite whiners,  in his insightful book: Ackoff’s Best. Check it out, if you dare.

  1. Ray
    January 6, 2010 at 2:05 pm

    The key is the “untouchable head shed”. There always is this debate on what profit comes from the directions of the people in the “untouchable head shed”. who is going to be accountable for final results of the decisions.

    An example.

    Moving work offshore was to increase profit. But when in the final analysis it didn’t or ends up costing more. Are there going to be rewards and penalties or is it going to be swept away.

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