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Governance in the century of turbulence

Governance in the century of turbulence


This century will erode existing sources of advantage. Natural forces will intensify that will destroy organisations which do not match this with accelerated renewal. The essential ingredient of a response is clarity, paradoxically set in a loose, self-assembling structure.

What needs to be clear are views on the operating environment and preferred responses to it, communications about these and machinery which reinforces appropriate responses. What needs to be "loose" are the ways in which ideas are developed and made useful.

Simplification and "core focus" will not be adequate responses to the dynamics within most industries, the public sector and stakeholder-facing organisations. Extant systems that assign responsibility amongst senior management are inadequate to the challenge. This paper suggests new roles for senior staff.

Erosion and renewal

Around 2.3 billion of the world's population will be graduates in 2020, operating against a background of very rapidly extending scientific and technological understanding. The elderly, currently-rich countries will have a population of about 1.3 bn. Firms, institutions and markets will be increasingly integrated into a web of best practice. Market differentiation may develop far beyond current practice, but - as we shall see in a moment - its component parts will, increasing, be drawn from standard systems of outsourcing. Nobody wants a second best product, and all firms will be forced to international standards of best practice. Nothing - no arrangement, no capability, no market, no form of ownership - will long remain unchallenged in this environment.

All organisations face natural erosion. Products, brands, processes, ideas and forms of social organisation all become outdated. Economies remain vibrant in one of two ways: they force organisations to renew themselves, or they take the assets from those which fail to do so and transfer them to those which can. If the pace of erosion is to increase, then the rate at which renew occurs must accelerate to at least match this. In addition, it must become more effective in its use of resources. As almost no effort has gone into improving this important aspect of the economy, there are evidently great strides to be made. The section that follows assesses some of these.

Renewal is conducted through mechanisms which do no sit easily with the routine aspects of the organisation. Indeed, organisations act in two highly distinct domains. Activities can be exactly defined in advance of their being undertaken, for example, this may not be possible. Organisations may have to iterate, playing with ideas, until new thoughts suggest themselves and are recognised.

There is, in fact, a clean division which can be made. The bulk of what organisations do is tightly specified: that is, the goal of the activity can be formalised in advance of its being done. The component parts can be defined, subjected to project and resource planning. Resource flows can be predefined and closely scrutinised. Similarly, human resources are open to tight definition. Work can be subject to procedural bureaucratisation. Management is structured so as to oversee defined processes.

It is fair to say that twentieth century management evolved around these principles. The procedures which drive efficiency are extremely well understood. There are few companies of any size which do not work hard to minimise their costs and maximise their effectiveness. The same cannot be said of renewal.

Renewal is often problematic precisely because it is not possible to specify exactly what a successful outcome would be. The issue of managing it reduces to the problem of minimising the field of uncertainty within which an unspecifiable solution may be found, and in sharpening minds to recognise one when it presents itself. The task of rendering such a solution viable - that is, defined, open to conventional management techniques - is itself non-trivial, but less conceptually challenging.

The backdrop to renewal

Squid have nerves that transmit signals quite slowly for an animal, such that it can take seconds for signals to travel from a tentacle to the brain and back again. Events often occur faster than the nervous system of a squid - or most organisations - can react. The squid solves this by distributing responsibilities to clusters of neurons which are able to make local responses which are usually right. Modern armies operate in much the same way. Civil organisations, by contrast, have not much done this. They have reacted by offloading complexity onto an operating environment made up of a network of specialist subcontractors. This has several of implications to renewal.

The operating environment is growing in complexity and potential. As noted, complex organisations have tried to simplify themselves in response. Inessential activities are pruned away, or bought in from equally specialised organisations. The conceptual "core" around which they specialise is usually involved in handling some aspect of a much larger network in which value is added - in handling customers, perhaps, or in some aspect of technology or regulation. The organisation is then embedded in the complexities of this network, rather than being captain of its fate. The modern economy has become a vast toolkit of capabilities, in which the key skill is deciding what to do, when and with whom. According to the OECD, around half of all business output consists of patterns of understanding, aimed to modulate these relationships.

The concept of entropy is well known: any complex system is characterised by many "microstates", which are functionally indistinguishable from each other. There are, however, a few states which alter the external properties of the system as a whole. These unusual states may allow the system to do work on its external environment, or deliver information to it. Entropy is a measure of the tendency of the microstates to swamp - outnumber, subvert, dilute - these functional states of the system.

Complex, connected organisations similarly exist in a warm fog of data and distraction, within which indistinguishable urgencies blunder. It is not impossible to waste management time in such an environment. One has to work hard to isolate the few useful configurations and keep them robust. Clarity and communications are the essence not only of renewal but of the knowledge economy.

The specialised infrastructure has other properties. Outsourced activities are almost always fully 'specified'. That is, they can be duplicated, subcontracted and, subject to issues of risk, timeliness and stock cost, parcelled out internationally.

The capacity to specify and modularise implies ease of analysis, duplication, benchmarking. Industry marginal costs come into alignment and prices fall. Margins evaporate when the least and most effective producer have closely-similar cost profiles. Commoditisation is the antithesis of renewal. It destroys industry profitability and forces the firms into an end game.

A network of specialised companies is also relatively easily to enter and to leave. Its relationships are intended to be easily re-configured and they embody neither loyalty nor stability. As a toolkit, its capabilities can be used redesign or subvert an industry.

We face a period in which extremely rapid commercial and public sector change. Short life cycles and high risk mean that new projects are unattractive. Indeed, at least one industry has now fallen into a state in which to fail to innovate is to be superseded, but to invest is not at all to be sure of getting the shareholders' money back. Technology, capabilities, communications and modern commercial infrastructure all set a pace within which it is hard to make clean economic decisions. The distinctive competence of the time has to be the possession of clarity.

Renewal and clarity.

Renewal is a messy business. It made tractable if thought about as a series of discrete activities. These are sketched in as block on the following diagram.

These elements, taken together, can be induced to create clarity. Each are connected in complex ways, and insight is gained in any one of them through iteration. At the top of the diagram are activities which are concerned with insight and understanding. At the bottom, there are procedures for making useful ideas operational. However, the flow of renewal is by no means to be thought of as a flow from the top to the bottom.

This said, let us begin at the top.

It is not always easy to define what are the "relevant aspects" of the changing world, but the exercise of acquiring this information is usually a stimulating and always illuminating one.

Balanced within this analysis in an understanding of the imperatives which act on the domain in which the organisation operates. These might comprise the dynamics which allow a given industry to operate, for example, both now and in prospect. Related to this but separate from it, a third set of issues define the relative position which the organisation possesses or wishes to achieve within this.

Where these three sets intersect is the domain of the possible, and the organisation needs to find ways to talk about this space with its staff, affiliates, shareholders and regulators.

The majority of the staff in most organisations were once lightly educated and directly governed by a small educated clique. This is not true of most knowledge-using organisations today. Most of the knowledge of what might be lies in the heads of middle ranking and junior staff. Their contacts with the outside world and their personal knowledge bases are likely to be the most direct line which senior staff have to threats and options the organisation faces. The issue is, therefore, not merely to put out a party line about renewal, but to set up specific processes which will elicit this knowledge: processes which include meaningful participation in the "higher brain functions" of the organisation, incentives, formal mechanisms of evaluation and development.

Senior management are, for the most part, largely charged with formal responsibility only for highly defined activities. There is almost always no individual who has responsibility for the 'unspecified', for the generation of clarity or for the means by which the less than clear is given flesh and made practical. Indeed, all of the processes which we have just discussed are often seen as extremely unwelcome distractions, to be addressed on occasional away-days. In the current environment, this will not do.

Boards need to change. It is not enough for managers to steer large aggregates through their routine procedures. Plainly, this is an aspect of commercial life which may not be forgotten, but it has assumed a far greater proportion of senior management time than is justified by the marginal added value that they can bring to it. Boards had once been dominated by line concerns. World War II showed how important human resources, finance and other functional responsibilities had become to complex plans. Matrix organisations became increasing appropriate, and have dominated the scene ever since. It may be enough, therefore, for some companies to introduce board level, cross-cutting responsibilities for clarity and communications, renewal and innovation, knowledge capture and process quality. Some have indeed begun to experiment in this manner.

A distinct view is that large organisations need a two tier system, such that the chief executive's office and that of the chief operating officer have different responsibilities, time spans of interest and considerable independence from each other.

The former could be concerned with the long term, the generation of clarity and communications, with the harvesting of knowledge, financial integration and portfolio planning. It would set the framework and terms of reference for the operating officer's concerns, which are those of the line.

This is a straightforward division of responsibility with clear information flows between the two. It is as applicable to the construction of Parliamentary democracy and its chambers as it is to commercial or public sector governance. As operations become more specialised, more open to outsourcing and transparent, so the more strategic office is needed to hold onto the unity of the organisation, liaise with the network in which it is embedded and offset the tendency to fragment and fracture.

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