The Dynamics of Organizational Collapse

Helga Drummond

• Publisher: Routledge
• Year: 2008
• ISBN:
  9781134148578
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The collapse of Barings Bank was a commercial catastrophe that resonated worldwide, showing what kind of secrets can lie behind an apparently successful organization. Following Nick Leeson's arrest and subsequent conviction for fraud, investment banks anxiously reviewed their risk management controls to make sure that it could never happen a

1
The paradox of consequences

For thirteen days in October 1962 the world stood poised on the brink of a nuclear holocaust following the discovery by US spy planes of rocket launch pads under construction in Cuba. During the crisis the US government executive committee met daily and spent long hours deliberating the problem, analysing options and discussing how to obtain Russia’s consent to the removal of the rocket sites without losing international prestige. During that critical period one of President Kennedy’s worst fears was that the holocaust would be triggered not by heads of state taking a clear and volitional decision to exercise grave options, but by an inexorable chain of events triggered by a low ranking operative carrying out their duties in a normal fashion responding to pre-programmed events (Allison and Zelikow 1999).

Kennedy was right to be afraid. Large events do not always have large causes. We begin by considering a small but significant failure of control that occurred before Leeson actually reached Singapore. Leeson should never have been allowed to trade financial contracts in the first place because he failed a background check. Yet those responsible for administering the initial background check followed the system. Moreover, the system worked as intended in that it identified Leeson as potentially ineligible to be licensed. Yet Leeson was able to trade with impunity under the noses of compliance officers whose duty it was to ensure that only properly qualified persons were allowed to gain access to the trading floor. How and why did it happen?

Why do organizations exist?

In order to explain why control in organizations is seldom perfect, it is necessary to step back and remind ourselves why organizations exist in the first place. This question is preceded by another. Why put locks on doors? Probably only burglars and economists ever think about it! An economist might say that locks are fitted only where the value of the room’s contents justifies the cost of purchasing, fitting and subsequently maintaining the lock.

Likewise, why go to the bother of creating an organization? In a seminal contribution, Williamson (1975, 1981, 1991; see also Ouchi 1980) argues that organizations take over where market transactions break down. According to Williamson, markets are efficient where transactions are predictable and easy to control. For example, contracts for selling commodities are amenable to market transactions because coffee beans, gold, silver, hogs and so forth can be graded according to weight and quality with simple formulae being applied to calculate price adjustments for minor variations. Markets offer the cheapest way of doing business because the transaction costs are minimal. All that is required is that a willing buyer meets a willing seller and that simple ground rules are agreed between them. For example, commodities markets use formulae for calculating price adjustments where say the weight of a particular batch of hogs is slightly below industry standards.

According to Williamson, markets fail in conditions of high uncertainty and/or where transactions are complex and contract performance is difficult to regulate therefore giving rise to increased potential for opportunism. Opportunism means the seeking of self-interest with guile – including lying, stealing and cheating. In this view bureaucracy in the form of hierarchical control, rule books and so forth supported by mechanisms of surveillance are like fitting locks on doors, a legitimate business expense aimed at discouraging would-be opportunists.

Another view of organizations is that they exist because they can achieve what would either be impossible or hopelessly inefficient by an individual working alone (see, for example, the sustained critique of Williamson’s work by Ghoshal and Moran 1996). In this view organizations exist to achieve certain goals and bureaucracy enables organizations to accomplish their goals with maximum efficiency (Weber1947; see also Blau 1956; Crozier 1964).

Rationality is the key to maximizing efficiency. Rationality means calculation of the most efficient means of accomplishing a particular end. It is not a new idea. Medieval monastic foundations utilized rational methods of production in order to maximize the time for prayer. For example, the monks used forecasting models for bread, ‘The number is always the same, unless through some accident there should be a need for fewer rations; for there is never a need for more’ (Keiser 1987: 112).

The next step was the invention of systems of mass production. Hitherto a pin maker might produce one pin a day. A system whereby ‘One man draws out the wire, another straightens it, a third cuts it, a fourth points it’ (Smith 1983: 110) could enable labourers in a small manufactory to produce twelve pounds of pins in one day – provided they exerted themselves that is. Management’s most influential exponent of rationality was F. W. Taylor. Taylor (1947) recommended separating conception of work from its actual execution, that is, management assumes control of work processes and methods, while employees merely discharge their allotted tasks. Tasks moreover were deskilled, that is, divided into miniscule components to facilitate rapid accomplishment and to require minimal training or knowledge thereby minimizing expense and rendering operatives dispensable.

Specialization means coordination is required so that all the subdivided tasks come together as a coherent whole. In a small organization, coordination can be achieved through interpersonal contact and informal agreements about what should be done. In a large organization this becomes impossible and so more formal mechanisms of communication and control are required. These typically take the form of managerial responsibility exercised through a hierarchy of authority. In theory hierarchies serve to create lines of communication between the upper and lower echelons of organization so that information can flow upwards and downwards and directives can be communicated. In practice, as we shall see later, hierarchies also serve to insulate the higher echelons from what is happening at the lower echelons.

Another feature of bureaucracies is an elaborate framework of rules. Rules serve to create consistency and obviate the need for constant referral – thus helping to minimize cost. For instance, a defining feature of bureaucracy is that if you ask two administrators the same question, such as, ‘What rate of mileage can I claim as expenses for using my car on official business?’, each administrator should give the same answer. Better still, the enquirer can consult the rule book and check the answer for themselves.

Impersonality means that the enquirer gets paid the correct mileage allowance regardless of whether the person processing claim likes them or not. The person processing the claim cannot say, ‘I hate Mr Smith so instead of paying him the official rate of sixty pence a mile I will give him nothing.’ Nor can they say, ‘Sixty pence a mile is far too much! I will only pay ten pence a mile.’

Bureaucracy in practice

We are not concerned with the allegedly dehumanizing aspects of bureaucracy and its applications via Taylorism (for a critique see, for example, Braverman 1974). The point at issue here is why organizations fail despite (or perhaps because of) the discipline and regularity that bureaucracy imposes. Police and intelligence services proved powerless to prevent the attacks on the London Underground system that killed fifty-two innocent people in July 2005 and then two weeks later shot dead an innocent bystander named Jean Charles de Menezes in a bungled surveillance operation. The UK government spends billions of pounds annually on defence, yet combat troops are being sent to dangerous places like Afghanistan and Iraq allegedly without basic equipment. Nor do public sector bureaucracies possess a monopoly on fiasco. Audi invested millions of pounds in its flagship TT sports car. Yet early production models concealed unreliable electrics and a potentially lethal design fault whereby the car could become unstable at high speeds. More recently Sony is being sued for selling potentially dangerous batteries to computer manufacturers like Dell.

In theory, rational bureaucratic organizations offer four key interrelated benefits, namely efficiency, predictability, calculability and control by enabling organizations to deliver goods and services of uniform quality and quantity, via a production system that maximizes output for a given cost (Ritzer 1993). Those benefits come at a price, however. Merton (1936) argues that bureaucracy as a system of action almost inevitably generates side effects that contradict its basic objectives. System of action means the discipline needed for standardized behaviour to be observed. In this view although organizations may be deflected by actors breaking the rules, they may also be undermined by actors adhering to orders.

To begin with, in practice, control in organizations is seldom perfect because, for one reason or another, actors depart from procedure. When Menezes emerged from his flat in Brixton in South London, the undercover police officer who identified him as a potential suicide bomber had gone to urinate behind some bushes and was therefore unable to switch on his camera that would have enabled him to share information with colleagues in command control.

The result of following procedures, however, can be a paradox of consequences known as ‘the irrationality of rationality’ whereby rational systems produce results that are patently absurd and even tragic (Ritzer 1993; see also Drummond 1998b; Watson 1994). The intellectual vehicle for exploring this proposition is the trope of irony. The word ‘trope’ is derived from the Greek language meaning ‘turn, twist’ (Gibbs 1993; Manning 1979; Morgan 1980, 1983). Tropes provide a form of notation for telling reality in a particular way in order to facilitate the conceptualization of experience (Brown 1989; Watson 1994). To be more precise, what is seen in data depends upon the conceptual lens used to analyse it. This is because different analytical perspectives define differently what are to be taken as the basic ‘facts’ of the situation (e.g. Brown 1989, 1977; Morgan 1990). The reader may be most familiar with the trope of metonymy. Metonymy reflects a positivist view of the science which approaches the study of social phenomena in the same way as the natural sciences (e.g. Brown 1989; Burrell and Morgan 1979; Giddens 1995). Metonymy expresses contiguous relations between objects such as cause and effect with its root metaphor of mechanism (e.g. Brown 1989; Gibbs 1993; Morgan 1980). For example, what causes occupational stress?

Irony is defined as a ‘reflective form of metaphorical imagination that involves the interplay of opposites and creates insight through paradox and contradiction’ (Brown 1977: 172). What all ironies have in common is that they are a structure of ambiguities and contradictions that are revealed over time as events ripen to yield an unexpected yet inevitable outcome. Strictly speaking, if something is inevitable it can hardly be unexpected. Analysis seeks to penetrate this paradox by focusing upon the structure of contradictions inherent in the situation itself in order to explain the contrast between expectations and outcomes.

Ironically it is frequently the very strengths of bureaucracy that turn out to be its most dangerous weakness. Being rule governed implies inflexibility – hence President Kennedy’s fear of a nuclear holocaust being triggered by someone at the lower echelons executing their routines. As soon as Menezes was identified as a terrorist suspect, an armed response unit was dispatched with orders to stop him from boarding a tube train. Shortly afterwards officers commanding the operation officers began to harbour doubts about whether Menezes posed a terrorist threat after all. Unlike the suicide bombers of 7 July, Menezes was not carrying a rucksack. Moreover, he was wearing only a light denim jacket and therefore unlikely to be concealing explosives. By then, however, the armed response unit was pursuing Menezes down the escalator of Stockwell tube station. Their radios did not work underground. Menezes stopped to pick up a free newspaper from a stand at the bottom of the escalator (another unlikely act for someone intent upon a suicide mission) and began running as he sighted a train about to leave. Two police officers entered the carriage where Menezes was sitting. Stopping a terrorist who might be about to trigger a lethal explosion leaves no room for asking questions. The drill was carried out in a textbook fashion – exactly according to the rules of engagement. One officer pinned Menezes by the arms, another shot him seven times through the head. The moment the unfortunate Menezes boarded the train he was almost literally a dead man.

Inflexibility is not the only problem created by bureaucracy. Recall, irony focuses our attention upon opposites. It exposes chaos in what appears to be order, order in what appears to be chaotic, differences in things that appear to be similar, similarities in things that appear to be different. Bureaucratic organizations are prone to a phenomenon known as means/ends reversal or the so-called ‘paradox of consequences’ whereby the application of rules, protocols and procedures becomes an end in itself with the result that the organization becomes deflected from its overarching purpose (Drummond 1996, 2001; Watson 1994; Watzlawick et al. 1974).

Just as our attempts to create order can produce chaos, speed cameras can create danger as motorists suddenly slow down in order to avoid detection. Moreover, cameras can create a preoccupation with catching and fining erring motorists. Consequently the overarching goal of promoting road safety through good driving techniques and so forth gets forgotten....