Bureaucracy – Success’s Adversary or Savior?

“Hell hath no fury like a bureaucrat scorned.”
― Milton Friedman 

“Keep your friends close, but your enemies closer.” 
― Niccolò Machiavelli

As the older of two children my father, like everyone else on the block, owned his own company.  During my formative years I was surrounded by business owners and spent many weekends with my father at the plant.  When I started my first company at 27 my father’s reaction was “it’s about time.”   I grew up deeply ingrained with the belief that small business owners were our social and economic backbone.

I was an adolescent in the 1960’s.  This was a time filled with tremendous conflict.  There was a ubiquitous desire to live the mythical lifestyle of Sheriff Andy Tailor’s Mayberry.  A time to this day idealized where parents didn’t divorce and children roamed neighborhoods without parents’ fearing sexual predators or drug lords lurking around every corner.  This was however, also a time of great turmoil.  Our Mayberry world relied on an unspoken faith that conforming to convention was the glue maintaining an idyllic life.  But the hippies and youth of the day, that’s probably you and me of today, had other ideas.  This time was to become what we now consider the social foundation for a world where we honor change, diversity and the rebel.  How far we’ve traveled over the course of four to five decades.  Remembering the bumper sticker “challenge authority” summarizes in many ways the battle raging at that time and continuing in a new form today.

Reflecting on this era leads me to make two observations with particularly significance to business.  Change is inevitable and what seems ideal about the past probably wasn’t.  Idealizing the past is usually a symptom of unthinking hope and careless expedience.  The tension created by change and mythical ideals is prevalent today in business and is exemplified with the tension between bureaucracy and entrepreneurialism.

Since the time of my adolescence fashions have changed, music evolved such that we as parents find the music of today as incomprehensible as our parents found our music, in our day.   I’m sure you remember like I do the long hair, tie dyed fashion, micro bus driving gypsies listening to music that made our starched parents cringe.  This was a time when two cultures collided.  One culture with its importance on conformity colliding headlong into a culture of rebellion.  At its root this conflict was about change: resist or embrace.  The tension created between these two conflicting ideologies, conformity and rebellion, is important and deserves not to be carelessly judged adversely rather deserves thoughtful circumspection.  There is now an entire generation, or multiple generations, that idealize this radical bunch of 60’s hippies.  I believe we are seeing the same battle re-playing itself today between entrepreneurialism and bureaucracy.

The mantra of 21st century business management enthusiastically champions abolishing bureaucracy so that entrepreneurialism may flourish.  Business bureaucracy has earned a reputation as a sclerosis clogging the arteries of innovation.  Nevertheless, every business depends on the correct and timely satisfaction of routine tasks.  The fact that a task is routine does not mean it is unimportant, it means that the need recurs frequently.   Many of these administrative tasks, on first impression, seem ancillary to the basic business purpose.  It can be difficult to associate the Accounts Payable clerk’s processing of supplier invoices as core to a business’s success.  Most of the time we think of activities of this sort as a necessary cost of business.  At some juncture most executives feel the frustration of spending money on bureaucracy that makes little contribution to competitive success or financial performance.

I’d like to try to relieve some of that frustration by offering an alternate point-of-view.  Bureaucracy is the word we use to de-personalize the assembly of people responsible for ensuring that all of the routine or administrative actions are completed correctly and timely.  A senior executive can be well served understanding and appreciating the value of bureaucracy and the people attracted to bureaucratic work.  In this issue of The Business Odyssey, I am going to suggest that the bureaucracy is an essential constituent for improving competitive and financial performance.

A reasonable starting point is to adopt a more precise and useful definition for bureaucracy (in the context of business infrastructure).  This sharper understanding is the point-of-departure to harnessing the benefits and avoiding the traps.  Bureaucracy in its true meaning implies an organization conceived to process information in an orderly, efficient, competent, accurate, timely and repeatable manner.  Simply put, bureaucracies are designed to reliably act in accordance with a pre-defined rule book.  The purpose is to ensure that certain routine activities are performed consistently, correctly and timely.  The heart of a bureaucracy are the people competently performing their responsibilities directed by clear standards and equipped with the right tools.

Senior executives want to be sure that their business’s suppliers are paid in a timely fashion while retaining sufficient cash to satisfy those and other obligations.  This seemingly simple task requires that invoices be reviewed to determine that payment is appropriate, meaning the goods or services have been received and comply with expectations of quality, completeness, performance or other terms of acceptability.   Additionally, someone needs to confirm what amounts are owed or perhaps previous credits are available to offset amounts owed.  This Accounts Payable clerk will also be expected to fully exploit discounts or other payment terms.  Separately, the simple task of paying a vendor’s invoice also requires confirming that sufficient cash is available.

The simple payment of a supplier’s invoice is composed of many individually modest tasks.  However, each and every one of these tasks must be performed correctly.  The collection of individuals responsible for managing accounts payable is a bureaucracy.  It is staffed by individuals whose job it is to ensure that these activities happen correctly, timely and produce the right outcome.  These individuals understand the importance of what they do and thrive on doing the same task over and over again correctly.   This detail many sound a bit monotonous.  But I’m dwelling on the boring for a reason.

Most senior executive have better things to do, like find new ways to make money, than to be devoting time verifying and paying vendor invoices.  The same executive probably doesn’t want to devote any time thinking about these tasks.  These executives however, want to know that the system for paying supplier invoices is working and is working properly.  Meaning that actual performance is consistent with expected performance.  Hence the importance of the bureaucracy.  It is the company’s bureaucracy that has the responsibility to perform the routine and to perform the routine correctly and timely.  This happens with a front-end investment of time, and perhaps money, to define the outcome expected, the rules the bureaucracy uses and most importantly, the skills and competencies required to ensure everything works as its suppose to.  Hopefully, this investment is made with careful thought and is required rarely.

This is what bureaucracies do.  According to Niall Ferguson[i], the origins of a bureaucracy were based on “recruitment by examination, training, promotion on merit, regular salaries and pensions, and standardized procedures”. This system is subject to a strict hierarchy with emphasis on technical and efficient methods to ensure the expected outcome.

Now to rescue this from the delete key I’ll suggest that understanding how to employ the business’s bureaucracy is the foundation to using it for competitive and performance advantage.  Businesses employ a variety of bureaucracies to serve different purposes.  These bureaucracies are a very real expense that most would agree is unavoidable.  The challenge is then tailoring the bureaucracy to satisfy business needs as well as contribute to satisfying customers, producing investment returns, and enhancing competitiveness.  To do so first requires eliminating the preconception that bureaucracy is simply a sunk cost or necessary cost of business and replacing it with the challenge To Serve and To Protect.

Bureaucracies appear in different forms.  A few examples: collecting accounts receivable, responding to requests for proposals or bids, ordering parts or materials, processing payroll, maintaining promotional materials, production scheduling, hiring, maintaining accounting transactions, arranging travel, answering the phone, providing customer service, preparing budgets, analyzing data, preparing reports and a great many other things.

Contemporary businesses need to do a lot of things right.  The margin for error shrinks daily.  Businesses can no longer indulge in avoidance, denial or over-simplification.  Failing to resist that temptation will ultimately lead to failure.  And the debate over bureaucracy and entrepreneurialism is an important starting point. More importantly however, is the business’s need to get the biggest bang for their investment.

A well-functioning bureaucracy should not impede a business’s ability to be entrepreneurial or innovative.  In fact, a well-designed and functioning bureaucracy will improve the business’s competitive performance.  But this isn’t going to happen when permeating the business is the attitude that bureaucracy is bad.

Internal controls, business formalities, procedures, systems and tools are too often labeled as bureaucratic.  No question, there are too many occasions where this branding is well deserved.  But, deserved only because these formalities have been adopted and imposed for the wrong reasons.  Ironically, anarchistic practices are acceptable as a necessary price of entrepreneurialism.  Mindlessly delegating “solutions” down the organizational chain sounds so democratic.  However, delegating the responsibility to resolve important business decisions without carefully understanding the consequences and the requisite competencies will produce solutions but solutions that may not serve the business constructively.  This is not to say that seniority, title or status is any assurance that business decisions will be made with any greater care.  Another common trap to avoid.

Mature companies understand the bureaucracy’s contribution.  They do so by knowing what these people do and what these people do not do.  Institutional formalities in the form of systems, policies and practices are tools to ensure that activities and initiatives undertaken will achieve the outcomes expected. These formalities can protect the organization from wayward, nefarious, undesirable or wasteful outcomes.  More importantly, these formalities demonstrate the business’s seriousness and commitment to maturity.

The business infrastructure found in mature and successful businesses uses its bureaucracy to operate, adapt and shape change.

[i]  Niall Ferguson is the Laurence A. Tisch Professor of History at Harvard University

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Andy Harvey

Businesses struggle and fail to perform because they don't grow up. Mature businesses, like mature, well adjusted, functioning adults, have the skills, the tools and the intelligence to perform routine activities, make decisions and cope with uncertainty. Andy Harvey is an experienced management consultant helping middle-market companies mature, overcome crisis and succeed. He has advised companies on growth strategies, corporate finance, business infrastructure, turnarounds, restructuring and crisis management. His thirty-years of consulting and operating experience has included industries such as: manufacturing, aerospace, defense, technology, energy, environmental services, financial services, scrap metal, transportation, distribution, medical devices, interior design and others. He specializes in working with growing, under-performing and distressed companies applying expertise in corporate finance, crisis management, competitive strategy and operating performance. Mr. Harvey has held positions as CEO, COO and CFO as well as CRO (Chief Restructuring Officer). He has navigated companies through Bankruptcy, fraud (alleged or injured), distress, acquisitions, succession and other changes. aharvey@ctmoffitt.com

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