Organizational Design Issue: Dealing with Uncertainty and Too Big Too Fail

This post explores my thinking around how to moderate exposure to uncertainty through organizational design. principles. The thoughts draw heavily upon the Work done by Nassim Taleb (especially his recent book: “Antifragile: Things that gain from disorder”)

Organization Design (OD) has a number of purposes, including:

• Enable achievement of an organization’s strategic and operational goals
• Promoting suitable efficiency and effectiveness  goals
• Incorporating talent such that it is effective, efficient and meaningful (both organizationally and personally)
• Enabling the organization to withstand/cope/thrive within anticipated “environmental” volatility

It is this last point I wish to explore further in this post.  I would claim that environmental volatility is a source of uncertainty.

To the degree that we anticipate uncertainty in our environment, how best to organize?

Taleb notes that there are three states we can e in regarding our ability to deal with uncertainty. We can be:

1. FRAGILE – we would fail if we experienced an uncertainty like event;
2. RESILIENT/ROBUST – we can withstand and survive an uncertainty like event
3. ANTIFRAGILE – we can thrive under an uncertain like event.

Taleb, notes that much has been discussed on how we need to be resilient/robust regarding change and uncertainty, but little has been done regarding how to thrive when such events occur.

What is an example of organizational design fragility? Much of the world’s financial industry  going into the 2008 – 2010  financial crisis. Banks and the like were over exposed to uncertainty and went under because of it. Who’s to blame is not the issue here, rather it is the lessons we can learn to minimize such an occurrence again in the future.

One lesson for me is the design principle of simplicity: organizations that make their operations complex in nature are adding to their uncertainty exposure. Why and how? By being big and complex they make themselves exposed to many more fluctuations in their “direct” business environment. More importantly they make themselves more vulnerable to their “indirect” business environments. Example: political sources of uncertainty (in the USA the state sponsored efforts to maximize home ownership in the country).

We can look at bigness and exposure along two lines: Quantitatively and qualitatively.

Quantitatively, this about the analogy of surface area: you have more skin in the game so to speak. You just have more physical exposure period.

Qualitatively, this is about your propensity to be infected. Exposure puts you in more situations of danger. The propensity to be infected is about how you are organized within. To the degree that you are homogenous (e.g., centralized, long linearity through extensive supply chains, etc.) if you start to get hurt, the pain spreads to the whole system.

Many businesses run exacting process operations (e.g., chemical, manufacturing, etc.) often they have to be designed and operated within very tight variance patterns, otherwise they don’t operate or they are unsafe. These are inherently fragile businesses, and where we recognize this we usually put in many safety features to prevent sometimes literal explosions.

Other organizations that are literally huge in terms of their business activities have standardized their operational practices so as to achieve desired efficiencies. This is a form of imposing a “closed system” type scheme on what may be a volatile environment. An example, the increasing reliance on algorithms to assess financial risks (NOT uncertainties). These sophisticated decision support tools over time moved from being “support” to being determining (people became to just rely on them without “mindful” [aka knowledgeable people] oversight). When we organize around closed systems design principles, we need to be aware of the vulnerabilities we are building in (the world is really an open uncertain system). Closed systems are inherently attractive because they are predictable, hence we are dealing only with risk (not uncertainty). Life is so much more comfortable when we are living within closed system settings.

Complexity comes into play when we get bigger too. We have more things to pay attention too. This is a volume issue that at some point can become a multidimensional issue. When something becomes multidimensional we become more exposed to two phenomena:

1. What we have pay attention to has more interdependencies. Inputs from multiple suppliers means we are exposed to the market environments for each and everyone of these suppliers. So we may balance (risk and uncertainty) exposure from over reliance on one/few suppliers across many smaller ones. But we figuratively add more doors to our organization, and with doors, there are more “drafts”.
2. We lose sight of how the business system actually works, because we lose sight of all the interdependencies amongst variables. Complexity means more  of what we deal with is interacting as dependent variables and less as independent ones. This becomes a cognitive issue for the organization, especially for those charged with due diligence and ensuring that overall we stay on course so to speak.

For me the sad irony of ambition, is the desire so large and dominant in our respective market places that we lose comprehensibility of what we are doing. We lose comprehension because we can fathom all the points of vulnerability and we can’t comprehend how the vulnerabilities are infecting us until sometimes it becomes too late.

So a key learning here for me are the limits of comprehension through OD choices.

We can expand comprehensibility through setting up closed system like processes and means of operation. But we live in an uncertain like world. So the more varied and larger the closed systems become the more we will be shocked by uncertain like events. Yet, even though we extol people to use open systems like thinking, we quickly run into cognitive limits of how many variables (many of which can be interdependent) we can mentally hold and manipulate. The problem with systems thinking will always be with the fact we have to draw a line somewhere (to be considered/can be ignored) and a line will over time will always be shown to be imprudent.

So how do we “safely” set up global level organizations? For me I have learned two decision preferences: modularity and minimization of long term commitments. both of these are of course contextually driven as opposed to absolutes. For example, in a high capital infrastructure business (e.g., chemical processing) I would seek an investment strategy that would minimize the costs and efforts of changing how we would use these assets if the need occurred. The cost? undoubtedly some level of operational efficiency and upfront costs. If I could bear the cost of loss of investment, I would tend to chase more efficiency and less flexibility.