Redesigning corporations for success

June 7, 2018
June 7, 2018 Chandrabhan Singh

There is an interesting debate that happened between my ex-boss (CEO of the organisation I worked with in Past) and me regarding organisational structure. How some organisations are doing so well while some simply survive. I said, if you look closely top 10 organisations every decade have new 5 entrants and those numbered 8-10 mostly stay the same for decades while top 5 are nowhere to be seen 3 decades down the line. This was on 12th of May and since then i have not being able to stop thinking about the questions eventhough i had tried to answer him as mentioned, that time at lunch.

My views that time and now also are that..

Corporates exist because they reduce the costs of getting large number of people to act in a coordinated fashion to accomplish future goals and because they make the future more predictable.

  • In this context it is useful to compare the way knowledge and efforts are organised by the corporations to the way they are organised by markets. By the way corporations exist to serve the market only. Corporations tend to pay people based on whether they do what they are expected to do. Markets on the other hand pay people on only 1 criterion: What they do. Ideally my local Kirana shop owner doesn’t make any more money if his sales at year end beat his expectations.
  • Top down corporations give people an incentive to hide information and dissemble. in the market , on the other hand, businesses have an incentive to uncover valuable information about what kind of bikes are getting popular or what kind of shoes are likely to be bought given the taste and preferences change. As soon as the markets know the information becomes public.

Managerial compensations

Managerial pay is often based not on how one performs but rather on how one performs relative to expectations. Many organisations structure their bonus system or incentives (the disproportionate ones) only when the manager surpasses a given target. Cos do this in order to push executives and encourage them to meet goals that seem unattainable.

Real effect of these kind of targets is to encourage people to be deceptive. As Harvard business school professor Michael. C . jenson said, ” Companies are paying people to lie..”. My own experiences as a shop salesman, at an eyewear shop, during my summer holidays while studying at Delhi University, taught me few lessons. Apart from a fixed Rs1600/month salary, we were paid according to what i understand today, as piece rate incentive if we surpass a monthly target. Once we hit a certain target our rate per piece shot up and once we got over the 2nd hurdle, rate per piece went up again and then got capped there.

Being a student of Economics, only thing i remember teaching my fellow sales man is that we should worry about how high the hurdle will be set. In a way, I realised that if we worked too hard or too fast, the hurdle would be raised since the shop owner won’t reward us for doing what was reasonable. Not surprisingly we restricted our output and worked more slowly than we might have. Now I see the same concept on rate per MT being adopted in cement manufacturing and I don’t need rocket science to understand (given my own experience) as who is gaming whom. Instead of trying to be productive, workers spend their time figuring out how to manipulate the rate per piece (or MT) so they could make as much money as possible.

Same things happens in head offices. First managers will attempt to set the target that are easily reachable by lowballing their estimates for the year ahead and poor-mouthing their prospects. Once targets are set, they will do anything to achieve them including engaging in the kind of accounting gimmickry that boosts results or giving promotions after promotions & setting wrong price-value benchmarks.

Delegation of power vs illusion of power

Assumption that integration, hierarchy and the concentration of power in few hands leads to success- continue to exert a strong hold on many Indian/global businesses. The endless layers of management make people less willing t take responsibilities for their own work. Managers think they can simply sign off on advice submitted by their subordinates and then pass the information higher up. However, since the subordinate knows that their boss is ultimately responsible for the information be passed along, they assume he would make sure everything will be as it should be.

Thats because power is not being delegated so much as illusion of power, there is little incentive for workers lower down the totem pole to show any initiative. The deepest problem with highly hierarchical organisations was and is that it discouraged free flow of information, in no small part because there are so many bosses, each one potential symboling block or future enemy. Thats the reason why so little innovation takes place in India and evident in the number of patents we file.

On the other hand are organisation who claim to have a collective decision making approach also wallow in the mire of their own sanctimonious ideas as they confuse collective decision making with consensus driven approach. You don’t need a consensus to tap into the wisdom of group, simply encourage discussions , choose the lowest common denominator which offends no one rather than excite everyone. Consensus driven groups- specially if the members are familiar with each other tend to have a familiar & squelch provocative debates. As James soroweicki said, ” Camel is horse produced by a committee, it was undoubtedly made by a committee looking for consensus”.

In the recent study by Nitin Nohria & William joyce found that best companies , Employees and managers were empowered to make many more independent decisions & urged to seek out ways to improve the operations , including their own..”. More responsibilities people have for their environment, more engaged they will be.

Chasing too much of efficiency is NOT really great for the organisation.

Apart form that, I see every organisation chasing only 1 thing ‘Efficiency’ and that in simple terms means cost cutting. Mostly it means ‘right sizing’ manpower. In this context I remember my Boss Suresh sukumaran used to do at Philips.

  • We will mark all the external + Internal communication to everyone in the marketing team so that all of us were aware what other person is doing. If one of use was on leave or not in office, either of us could answer for the product category handled by absentee.
  • He would encourage or rather force us to take minimum 15 days holidays and plan for it.

In a way he made sure the work survived in absence of anyone of us. He built the redundancy through these measures. If someone is not there for 15 days, work doesn’t stop on product development or communication. I have incorporated this learning in my working through the years.

Look at any jet airliner. It carries back ups of back ups and even if 1 engine fails, it can still land even if both engines fails on rudder. However, corporates have this funny concept of ‘Key people’ now and what happens if someone quits, dies or gets sacked? There is no back up but this ‘Key people’ concept looks so nice (self importance) and also pays to these people in form of disproportionate emoluments.

Given the future is uncertain and forecasts are not worth the paper they are printed on, it’s the system that has enough flexibility and redundancy built that survives. People would be shocked to know that Bill gates, kept a year’s salary and expenses for entire Microsoft as cash in banks, his entire career. Even Balmer continued the practice. As Morgan Housel said, “Risk does not like prophets. It’s not even fond of historians. You can plan for every risk except the things that are too crazy to cross your mind.”

And those crazy things do the most harm, because they happen more often than you think and you have no plan for how to deal with them.Risk in most professions is managed by studying what’s common. Maybe 10 topics and their solutions, said slightly differently, dominate business and investing books. The problem is that historical risks you can study are dwarfed by risks you actually experience. There are a zillion treacherous risks, but most on their own are not common enough to take seriously or collect data on.

Look at organisations that survived more than 100 years. They all invariably are little inefficient, grow slower than industry but innovate a lot in multiple domains i.e. Philips, Unilever, GE , Mitsubishi, Tata group (closer home) thats largely due to a trained, secure and committed pool of manpower. Remember, as human beings, we hate uncertainty and given a choice between uncertainty and lesser compensation, people will invariably choose later.

So..

  • Delegate powers for tactical manoeuvres to the trenches as they are closest to frontline. Lesser hierarchies- Flater organisations fare much better as information is NOT lost in the translation.
  • Consensus driven organisation necessarily are NOT the answer, consultive are
  • Understand the business environment and set reasonable targets and don’t encourage people to lie or take short cuts.
  • Some redundancy & flexibility is a MUST. Hiring and keeping people with different cognitive skills is a must for survival. They are not costs but insurance for survival.
  • Rationalise the compensations to what actually a role does as the link between company performance and top management pay has nothing in common. Too much faith in Superman is ruining the health of organisations and putting undue pressure on them treating them a Gods of know all. Worse is that some of them starts believing the rumours of them being gods. Research after research has proven that CEO’s make a very minimal impact on business performance.
  • First goal is to survive… important to live and fight another day. On this last point Warren buffet too holds the exact view.
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