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Complexity and Organizational Structure by Emily F. Breuner
Chapter 2 The Trend Toward Decentralization and Distributed Authority
The Ubiquity of Decentralization Decentralization is not a new idea. Eastern philosophy has trained Eastern cultures to favor a more decentralized approach since it does not emphasize the power of single omniscient being.⁽¹⁾ Similarly, long before there were multinational conglomerates or immense holding companies, the merits of centralized and decentralized organizations have been debated, most often through the lens of politics. Thomas Jefferson's concept of the federal government is without question an expression of the merits of decentralization and distributed authority. The similarities between a federal political structure and that of a decentralized corporation have not escaped writers such as Charles Handy⁽²⁾ and will be discussed in more detail in Chapter Six.
Having noted decentralization's lack of novelty, it is nonetheless important to remark that notions of decentralization are cropping up across multiple disciplines, and that the ubiquity of these notions seems to imply an important trend. For example, Mitchel Resnick has compiled an interesting and varied list of the areas in which decentralization has become a focus:⁽³⁾
Politics The recent collapse of centrally planned economies is seen as proof that central planning is inherently dysfunctional, while even here in the U.S. the Gingrich congress is vowing to return both authority and responsibility back to the states' control. Education The U.S. is exploring alternate forms of structuring the public school system, allowing each school greater autonomy. In particular, the government wants to use market forces to encourage higher quality education by allowing parents to choose which schools their children will attend. Technology Computer architecture has been based on the central processing unit or CPU for some time. Now, engineers are developing massively-parallel processing architectures which leverage the power of many processors working simultaneously. Similarly, the proliferation of personal computers on networks is leading software engineers to design software that takes advantage of the processing power distributed on each desktop, rather than relying on a central mainframe processor for all computational activity. Biology As scientists learn more about how the structure of organisms enables evolutionary development, they realize there is less hierarchical control than they had thought in the past. Psychology Psychologists are now thinking about knowledge itself as being decentralized. As information is transferred among individuals, each constructs knowledge from that information based on his or her unique experiences and physiology. The implication is that there may not be anything such as a centralized concept of truth.
The above is an intriguing list that leads one to ask what forces might be at work to cause such a wide-spread trend. Resnick says it is antithetical to look for a single root cause when you are studying decentralization.⁽⁴⁾ However, there is an unprecedented force at work in our society today that is clearly radically changing the way in which we are able to organize, and that is the force of information technology (IT). With its power doubling and its cost halving every eighteen months, information technology is a powerful lever on the pace of change and the need for innovation around traditional control and coordination paradigms.
The Accelerated Pace of Change The signs of the accelerated pace of change in the business world are all around us, as Alvin Toffler has described in his books Future Shock and The Third Wave. For example, only a little more than a decade ago, Peters and Waterman profiled such companies as IBM and K-mart in their book In Search of Excellence.⁽⁵⁾ These giants have since stumbled and fallen, unable to keep pace with the changing environment around them. As a result, the business press is filled with articles about the causes of the change and tactics for keeping up with it.
At a macro level, we see that people have more information about products and services and are able to make decisions with greater knowledge. They are also more aware of products that are available, and increasingly sophisticated in their ability to evaluate features.
Armed with full information and the ability to source goods over a wide geography, consumers have acquired market power from the manufacturers of good and services. As a result, companies have been forced to differentiate themselves via intangibles, that is non-product specific attributes like customer service, quality, and distribution methods, all of which increasingly effect purchasing decisions. The free flow of information and the geographic dispersion of suppliers has a ratchet effect in that companies must respond quickly to competitive action. Those organizations not structured to do so are quickly overtaken by agile competitors. While there are many other forces at work which are too varied and complex to cover here, the effect is that good tactics for managing change are essential in today's business environment.
Decentralization Allows Organizations to Respond to Change Seemingly there are two ways make an organization more agile. Control can be centralized under one person who has the charisma and vision to anticipate changes in the environment and quickly mobilize an organization to react. Not surprisingly, geniuses who are capable of this kind of leadership and management are few and far between. They are also in danger of relying too much on their intuition, leading them in one direction and causing them to overlook how changing conditions affect their fundamental assumptions about the industry. Nonetheless, if the right person can fulfill the requirements of this role, one will find a highly successful organization that can respond quickly to changes. Many would cite Bill Gates of Microsoft as an example of one of these exceptional individuals.
Given that there is a scarcity of these individuals, how else might you design an organization to enable quick adaptation to changes in the competitive landscape or industrial context? Several authors are touting decentralization as a means of doing just that. Many of the current buzzwords of the management literature refer to various elements of a decentralized, distributed structure:
Empowerment When people talk about "empowering" their workers, they are talking about moving decision making authority to employees at lower levels of the organization. This has at least two effects: employees become more mindful of how their actions can positively or negatively effect the organization, and employees use their specific knowledge and experience to develop the best local solution to a problem or issue. Re-engineering As organizations examine their processes and procedures, they try to identify what elements of those processes are repetitive, superfluous, or easily automated while separating out exception handling. In evaluating these types of issues, they often look for ways to decrease the amount of central processing that must be done, leaving information that effects the periphery at the periphery, while centralizing only that which needs to be used by other parts of the corporation. Outsourcing and Partnering Another common theme in the management literature concerns what functions of a business should be outsourced or handled through partnerships with other organizations, allowing the business to focus on its core competency. In effect this is a form of decentralization since the business no longer has direct control over functions that have been moved outside, yet it also does not bear the risk and cost of remaining flexible in these functional areas. That is another way of saying that as different functional parts of an organization change at different rates, the organization will have the ability to swap in partners who have developed best practices in these functional areas, while incurring less risk.
Learning to Structure the Decentralized Organization Decentralized Thinking Although there is general agreement about the merits of decentralization, there is no recipe for creating a decentralized structure. For one thing, Westerners have a hard time truly understanding the nature of decentralization. In a recent address at the Center for Coordination Science, Mitch Resnick noted that when you ask how a flock of birds determines what direction to fly, people almost always state that there is a leader bird who moves the flock in some direction. In reality, ornithologists have determined that there is no such leader, but that some decentralized coordination method is being used. In Resnick's words, "people assume centralized control where there is none, and impose centralized control where none is needed."⁽⁶⁾
Even Adam Smith, who argued so convincingly the benefits of markets and their lack of central control, could not resist using a metaphor that nonetheless implied it. By saying that the market was guided by an "Invisible Hand," he unwittingly communicated the vision of a singular being somehow guiding the market. Yet the benefits of markets seem to stem from the minimal coordination required. The following definition of market highlights this point: market. A system of exchange where the demands of buyers interact with the supply made available by sellers, thus in free markets, determining the resulting price...it is preferred to every rival form of distribution, e.g., because it permits the emergence of equilibrium despite the fact that buyers and sellers remain largely ignorant of each other's desires whereas... equilibrium under a socialist planned economy requires an immense amount of, probably unavailable, information about the consumer.⁽⁷⁾ (emphasis mine)
Thus markets enable exchanges without the kind of centralized information flows that we often build into mental models of organizations. That is, a buyer in Chicago need not know the motivations of the seller in New York so long as the buyer can purchase goods at a price s/he is willing to pay.
As information technology drives the cost of performing a market transaction down, market-based resource allocation and coordination become more feasible in new areas. Malone et al(8) envision a world in which theoretically all employment could be coordinated through market mechanisms. In such a market, companies needing individuals with a certain set of skills would bid on a day by day basis for those skills. As communication technologies improve, the market reaches more people, and constraints like geographic location become immaterial. Ultimately, you might have millions of one person companies that combine each day via the market to produce ephemeral, transcendent organizations, or as Alvin Toffler calls them, "ad-hocracies."⁽⁹⁾
A Continuum The market also teaches us another important lesson in decentralization: it is not bi-modal but rather a continuum.(10) The market economy in the United States is neither completely decentralized nor completely centralized; a mixture of the two philosophies that includes price supports and trust-busting seems to work to produce the desired results. Similarly organizations will almost always have centralized as well as decentralized aspects.
Bottom Up Approach So far, I have talked about decentralized systems at the macro level. However, another important aspect of understanding the dynamics of a successfully designed decentralized organization centers around thinking about how the system can be designed as a federation of similar entities rather than a superstructure with many parts. That is, it is important to view the decentralized organization as a collection of parts, not as a whole. This perspective will be more fully explained in Chapter Six with data from Visa and the Internet that support such a claim.
With this overall trend in mind, we move on to the methodology and analysis of the Internet and Visa International.
< Ch. 1 Ch. 3 >
Footnotes (1) Sardar, Ziauddin, "Conquests, chaos, and complexity. The Other in modern and postmodern science," Futures, Volume 26, Number 6, 1994:665-682. (2) Handy, Charles, "Balancing the Corporate Power: The New Federalist Paper," Harvard Business Review November-December, 1992: 59-72. (3) Mitchel Resnick, "Beyond the Centralized Mindset: Explorations in Massively-Parallel Microworlds," dissertation, Massachusetts Institute of Technology, 1992, 14. (4) Resnick, 21. (5) Tom Peters and Robert H. Waterman, Jr., In Search of Excellence, Warner Books, New York, New York, 1982. (6) Mitchel Resnick, "Can Organizations Behave like a Flock of Birds?" lecture, MIT Center for Coordination Science, April 7, 1995. (7) Roger Scruton, A Dictionary of Political Thought, (New York: Hill and Wang, 1992). (8) T. Malone, J. Yates, R. Benjamin, "Electronic markets and electronic hierarchies," Communications of the ACM, 1987b: 487-497. (9) Alvin Toffler, Future Shock, Bantam Books, New York, 1970. (10) Mitchel Resnick, April 7, 1995.

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The Ubiquity of Decentralization

The Accelerated Pace of Change

Decentralization Allows Organizations to Respond to Change