Winning the War against Bureaucracy

How bureaucracy develops | Imagine if we could eliminate bureaucracy | Join the war against bureaucracy

How bureaucracy develops

Bureaucracy tends to enter organizations at the point they think they are most successful: High growth, profitability, impressive new products. And as bureaucracy develops, organizations develop a blind spot which prevents them from realizing exactly that. Here are the five main steps typically involved in the process:

  • Bureaucracy is driven by three factors: size, age and success of organizations. The larger, older and more successful an organization becomes, the more bureaucratic it gets.
  • As organizations grow larger, older and more successful, they introduce more management layers, more departments, more procedures, plans, budgets, reports, meetings, traditions and the like.
  • This leads to management developing its own agenda, increasingly detached from employees and customers. It becomes more important to win awards than to care for customers and employees. Management loses touch with the business, which becomes increasingly complacent and even arrogant.
  • At some point, company performance does not meet targets, but management doesn’t take responsibility. It blames the USD exchange rate, competition from Asia and changing cus-tomer demands.
  • This all leads to less action, slower action and no action outside the well-known patterns.

At various points in this process, organizations turn to mergers and acquisitions in order to achieve the growth they are unable to create. Core business becomes cash cow business and passionate leaders get substituted by financial managers. The organizational life cycle has turned into a death cycle.

Imagine if we could eliminate bureaucracy

I asked Jacob Ramskov Larsen, senior researcher in the Danish Government’s think tank on economic policy, to quantify the real growth rates – or lack of growth rates in the United States of America for well-established firms. Here is a summary of his analysis. My comments are shown in italics:

In the US about 1.5% of all enterprises have more than 500 employees. About 2/3 of the workforce work in these enterprises, but their share of the national output (in the private non-agricultural economy) is less than 50% or around USD 4 trillion.

What does that mean? This means that large enterprises produce less output per employee than small enterprises. Where does the energy of employees go? To sustain bureaucracy, I would argue.

Mr. Larsen continues: The annual growth rate in the employment from 1998-2001 was 3.5% in the large enterprises. During the same period small and medium enterprises experienced an annual growth rate at 1.7%. In the growth rate for large enterprises only about 40% of the jobs are new jobs while 30% derives from acquisitions of small and medium enterprises and another 30 % derives from “gazelle” enterprises shifting from being a medium enterprise to a large enterprise in the statistics.

This means that about 60% of the growth in the large enterprises only has value for the firms at a micro level and not for the economy as a whole as they do not create any new value but is only calculated as a reallocation in the total economy.

In other words: large companies grew only about 2 per cent per year in employment terms.

Comparing growth in labour productivity between large enterprises and small/medium-sized enterprises also revealed differences. From 1996-2001 the small/medium-sized enterprises in US experienced an annual growth rate between 1.9 and 1.54% while it among large enterprises was 0.81%.

So large firms added less productivity per year than small firms. Why? Bureaucracy in large firms takes away the attention from their core business.

Mr. Larsen adds a final surprising point: In the literature it is a common conclusion that innovation and R&D investment has a positive effect on productivity. But the picture differs considerably when the gains derived from innovation and R&D investment are compared between small/medium-sized enterprises and large enterprises. Analyses for US enterprises show that the impact on labour productivity from R&D investment is largest among small and medium enterprises. In the group of large enterprises R&D investment have a low or even negative impact on the growth rates in labour productivity. The negative result is primary found in the service sector.

This result clearly shows that large enterprises (and thereby the total economy) do not gain the total benefit from innovation and R&D investment. In order to do this many enterprises will have to change their innovation strategy. Today most of the large enterprises concentrate on incremental innovation. But if they want to achieve a high long term growth rate they have to focus on radical innovation.

In other words: Large firms tend to do “more of the same” instead of radically questioning their current mental model. My argument is that bureaucracy skews the innovation balance from radical to incremental.

Just imagine...If larger firms could eliminate bureaucracy and grow just one or two per cent faster each year, the US economy would be in quite a different state. Impossible? Not if we learn to fight bureaucracy.

Join the war against bureaucracy

Winning the war against bureaucracy is a long-term project. Neither the president of the United States of America, nor the European Commission can win it alone. We must all join into the effort and eliminate bureaucracy in our own organizations, public and private. Managers are in the best position to do it, but the good news are that we can all make a difference.

If you want to be part of the effort, a good place to start is to take a look at my war against bureaucracy weblog.

© 2006 Lars Kolind. All rights reserved.