The Boundless Promise Of Decentralization For Business.

Asked for one single principle for the advance of business in the current digital age, I would vote for decentralization, defined as the intentional and designed release of control and leadership from the center to the edge.

There are two major reasons for picking out decentralization as the primary focus for business improvement. The first stems from the increasing understanding of complex systems, whether from the point of view of economics or business or biology or physics. Across all the sciences, the study of how systems work, and how they can self-organize and self-improve, is revealing new ways of management. The essential finding is: don’t manage. 

The absence of imposed centralized control, i.e. no management from a center or the top of a hierarchy

The autonomous nature of subunits: individuals, teams, divisions, projects, units given autonomy and freed from management restrictions. 

In his book Out Of Control: The New Biology Of Machines, Social Systems and The Economic World, Kevin Kelly describes four properties of complex systems.

• The absence of imposed centralized control, i.e. no management from a center or the top of a hierarchy
• The autonomous nature of subunits: individuals, teams, divisions, projects, units given autonomy and freed from management restrictions.
• High connectivity between the subunits: information should flow freely and multi-directionally between these individuals, teams and divisions, etc, rather than vertically up and down a hierarchy with information sharing dictated by policy and procedure, or “need to know”.
• There’s a webby nonlinear causality of peers influencing peers. The linear connection between cause and effect, as we have always tended to understand it in management, does not apply. At best, there’s a web of causality, and, since it is non-linear, it can’t be predicted. 

These four characteristics could be summarized as the opposite of conventional organizational management in business. Corporate management wants central control, abhors autonomy, limits interconnectivity, and believes in linear causality: if we decree X, Y will be the result.  We’ll congratulate ourselves when it comes about.

Decentralization, incorporating Kelly’s 4 characteristics, can open up the world of business to new forms of organization.

Why should we seek new forms of organization? That question brings us to the second reason for decentralization: the emergent reality that in the digital age, value generation and competitive advantage are correlated with speed, including speed of learning and speed of adaptation. Releasing control will enhance speed and therefore value creation. Speed is the new economic resource; capital and people are no less relevant than before, but speed is the variable that is inexorably increasing in importance while we debate the future of the others.

This raises a new question: how do corporations “do” speed? How do they adapt in the conditions of VUCA (volatility, uncertainty, complexity, and ambiguity) that prevail in the new age? How do they activate and operate the rapid feedback loops and feed-forward loops required for market responsiveness?  How do they implement “explore and expand” – the digital age alternative to strategy and planning –  at speed? How do they do continuous change when their model has always been comparative statics – a one-year plan, a 5-year strategy, a quarterly review?

Some of the answer lies in orientation, an orientation to continuous change, but some of it must be organization and structure. Structure can change when systems change. We have some possible new models. There’s the bossless model of game-maker Valve, interesting because it aims to eliminate structure. There’s the simple rules-based model of CAS. There’s the Rendanheyi model of Haier which follows entrepreneurial principles rather than corporate structure principles, breaking the corporate structure into small self-organizing entrepreneurial groups with paid-by-customer as the business model. There’s the delegated judgment model that keeps structure but enables fast decision-making at the edge. There’s the flow model, which changes corporate hierarchy and structure to a flow, but is not fully fleshed out yet, and has theoretical variants with strong hierarchy, flexible hierarchy, and no hierarchy. There is potentially a networked model of many small specialized firms held together and capitalized by a different sort of financial engineering than today’s.

A winning model has not yet emerged, and there may be many models that succeed. They all would exhibit some characteristics of decentralization, both organizational and structural, defined as the complete release of control from the center for the purpose of speed of change and adaptation. Decentralization has the potential to create more customer value faster and more employee value. Kelly’s book suggests these emergent paths to new value creation;

Adaptability: when environmental change comes along at speed, whether it’s changing consumer tastes or new competitors,, or new regulations, decentralized organizations can adapt quickly, because they adapt at the front line, where the edge of the company interacts directly with the new conditions.

Evolving: over time, adaptability becomes evolution. Evolution is the term we give to long-term change that might look and feel gradual but is, in actuality, massive. From animals that swim to those that walk on earth, for example. Evolution is survival and the purpose of all life – and corporations – is survival. Depending on which decade you study, examining a list of the Fortune 500 companies will show that roughly one-third of them dropped out – failed to evolve and failed to survive.

Decentralization has the potential to create more customer value faster and more employee value. Kelly’s book suggests these emergent paths to new value creation;

Adaptability: when environmental change comes along at speed , whether it’s changing consumer tastes or new competitors or new regulations, decentralized organizations can adapt quickly, because they adapt at the front line, where the edge of the company interacts directly with the new conditions.

Evolving: over time, adaptability becomes evolution. Evolution is the term we give to long term change that might look and feel gradual but is, in actuality, massive. From animals that swim to those that walk on earth, for example. Evolution is survival and the purpose of all life – and corporations – is survival. Depending which decade you study, examining a list of the Fortune 500 companies will show that roughly one third of them dropped out – failed to evolve and failed to survive. Decentralized companies have better prospects.

Resilient: Bad things happen to good companies. It may seem random, although it’s not always clear whether that is the case. But if they’re not resilient – anti-fragile as Nassim Nicholas Taleb frames it – they can’t bounce back. Decentralized structures are faster at identifying damage, more honest about it (no need to defend bad strategy) and quicker to react.

Boundless. What business are we in? A lot of business theory and strategy is about defining boundaries, defending them, and staying within them. Decentralized companies can ignore boundaries, and focus on the interconnections to made from edge-to-edge, perhaps eliminating old boundaries.

Novelty. In the end, business must produce novelty. Defending share, retaining customers, maintaining and sustaining are not enough in the high-speed, always changing digital world of complex systems. Decentralization, letting lot of individuals and teams experiment and explore without asking permission from the center, is more likely to produce novelty. More experiments conducted means more surprise successes. They’ll be reported to the center soon enough.

However counter-conventional it sounds and feels, businesses should make a drive towards decentralization immediately.