In a world of unrelenting change and unprecedented challenges, we need organizations that are resilient and daring – yet the burden of bureaucratic structures, on which most of our world’s businesses are founded, can choke creativity, stifle initiative and generate huge risks. As leaders, employees, investors and citizens, we deserve better. We deserve organizations that are bold, nimble entrepreneurial and adaptable.
Professor Gary Hamel is one of the world’s most influential and iconoclastic business thinkers. He has been on the faculty of the London Business School for more than 30 years and is the director of the Management Lab.
Hamel has written 17 articles for the Harvard Business Review and is the most reprinted author in the Review’s history. His landmark books have been translated into more than 25 languages. Fortune magazine describes Hamel as “the world’s leading expert on business strategy,” and the Financial Times calls him a “management innovator without peer.” Hamel has been ranked by The Wall Street Journal as the world’s most influential business thinker and is a fellow of the Strategic Management Society and of the World Economic Forum.
For over a decade, Professors Gary Hamel and Michele Zanini have been researching how bureaucracy can be replaced by something better. In their forthcoming book Humanocracy, they lay out a detailed blueprint for creating organizations that are as inspired and ingenious as the human beings within them… organizations that are anchored around motivation, models, mindsets, mobilization and migration.
In this exclusive interview, I speak to Gary Hamel about how we can dismantle the bureaucracy of the industrial age and replace it with Humanocracy, a management system fit for the future and fit for human beings.
Q: Why does bureaucratic structure exist? What was the rationale for this system of management coming into being?
[Gary Hamel]: We’ve had hierarchical and bureaucratic structures as far back as we can go in human history. The Chinese civil service goes back to at least 2000BC and militaries have always been structured as hierarchical. Modern bureaucracy is a mash-up of two ideas. Firstly, the command and control structures which have been core to organized human activity for millennia and secondly, the principles of industrial economics (which were given great impetus by Frederick Taylor).
Like every other technology, bureaucracy was invented to solve a specific problem; that being how to exert control at scale. To do things at scale, we need to ensure things are repeatable and bureaucracy was a way of establishing standards, protocols and controls to make sure that happened. Bureaucracy has made an extraordinary contribution to human development… the fact that we have had 150 years of growing capital and productivity is the result of bureaucracy and it’s not a stretch to argue that bureaucracy may be humankind’s most important innovation. Whether it’s scientific innovation, the invention of the steam engine, locomotive, electric-motor, semi-conductor or antibiotics, none of these would have been possible without the understanding of how to work precisely and repeatably at scale; bureaucracy.
Like all inventions, bureaucracy was of its time – and much like we’re moving away from combustion engines and single use plastics, we need to realize that bureaucracy brings costs we can simply not ignore, or afford any longer.
Q: What are the challenges of bureaucracy?
[Gary Hamel]: Bureaucracy was built to solve the problem of control- it’s an ideology and an architecture. The architecture is the traditional pyramid structure where power and authority trickle-down, with decisions made by rank… The responsibility for strategy and direction is vested in the executives at the top and with the pace of change in todays’ world, by the time a problem or opportunity becomes big enough to capture the attention of someone at the top? It’s already too late. Bureaucratic structures have layers, with gaps and lags – when something happens in the environment (a new competitor, a new customer need, a new challenge) that information travels-up, gets aggregated, competes with everything else that’s battling for the CEOs attention, and it’s too late…
There simply isn’t enough creativity and bandwidth at the top to deal with the level of complexity and change in today’s world. A century ago, information was expensive to acquire and move- bureaucracy was a logical way of bringing information together. You’d have 10 people reporting up to someone, they would aggregate all those inputs and then respond to the layer above- in that environment the CEO is the only person who can claim to be the only individual with a full-picture. The world simply doesn’t work like that anymore. It’s cheap and easy to bring information together and share it yet we still have layers of people who are waiting for a CEO to say it’s OK to act.
If you want to understand why most large organizations are behind the curve… if you want to understand why we have to change, and why deep change is almost always belated and convulsive in large organization you have to understand that in the old hierarchical model, a small group of leaders can hold the organization’s capacity to change hostage to their own personal willingness to adapt and change – they are the gatekeepers – and even if they have the best will In the world, there simply will not be enough of them to deal with the complexity that we have in the environment around us. Bureaucratic structures are antithetical to proactive change.
As human beings, we are also vulnerable to denial and nostalgia- and when you examine any organization and understand who in the organization is most likely to have their emotional equity invested in the past, it’s not young people at the front-line, it’s the people who have been there 15-20 years, who built the old-model, who are emotionally invested in the old-model, who feel the need to defend decisions that were made 5, 10, 15 even 20 years ago. Those are precisely the people who end up in charge of setting strategy and direction- it’s quite idiotic when you think of it. Organizations fail when leaders fail to write-down their own depreciating intellectual capital, and bureaucracies exaggerate that problem by vesting so much power in so few people. As a result, most change management programs are in-fact catch-up programs. In large organizations, those at the top are often waiting for an extraordinary amount of evidence that makes an opportunity unarguable- and by that point, guess what… it’s too late.
The ideology of bureaucracy is control. If you look up the verb manage, the number one synonym is control. Taylorism was anchored around this assumption of uneducated, poorly educated employees who needed a new ‘class’ of individuals to control them; managers. And the primary job of managers in this sense was to control, to make sure people followed rules, product-specs, showed-up on time and conformed to budgets. This ideology of control is toxic to innovation. Research shows that two-thirds of employees say that new ideas are greeted with skepticism or outright hostility and only one in ten employees genuinely feel they have the freedom to experiment with new methods, products and solutions. Bureaucracy is all about standardization and control, and for those reasons both the architecture and the ideology are toxic to resilience and adaptability.
Q: How do management models relate to strategy?
[Gary Hamel]: Very few leaders think about their company’s management model, and bureaucratic models stifle innovation. When examining strategy, the most important thing is that new strategies must be different…. They are an act of innovation… and most leaders simply don’t think about management models as a place to innovate.
Luckily, we are now seeing CEOs who are beginning to recognize this, who see that the problem is not the operating model, logistics chain, customer support… but rather the management model that creates sluggishness, slow decision making, conservatism and politicking. Billions of people around the world work in organizations that are bureaucratic at their core. That model trickles-down- big leaders appoint little leaders, strategists sit at the top, resources are allocated from the top, managers assign tasks, assess performance, compartmentalize jobs, and force people to compete for scarce resources such as promotions. The ubiquity of this model makes it very hard to imagine an alternative and it’s not just business, our governments and religions are structured in the same way – and so we need to really challenge ourselves to think differently.
that template is so familiar as to be basically unremarkable. Everyone around the world, we all work in organizations that fit that template. And so it is very hard to imagine an alternative. If you’ve grown around from business school or wherever you started, if work looks like that, if religion looks like that, if government looks like that, if education, they’re all built on the hierarchical model, it’s a challenge to imagine something radically different.
Q: What is the business case for humanocracy?
[Gary Hamel]: We’ve ended up with organizations that are less capable than the people inside them- which is a little ironic when you think about it. Most organizations suffer from the same disabilities… it takes an extraordinary crisis to drive change… they are highly incremental… incumbents are rarely the source of game-changing innovations and are often inhuman and dispiriting. In the early 20th century, Max Weber said that bureaucracy has been perfected to the extent of its ability to dehumanize.. its very goal was to eliminate the human factor, and to create people as reliable as the machines in the factories they were destined to work. Today we are in a creative-economy where we need enormous amounts of initiative, imagination and passion – yet our work environments don’t allow this. Research shows that 89% of people are happy with the actual tasks of their work yet are frustrated with the work-environment- they are bothered by how they’re managed not what they do. The whole goal of management science was to put constraints and controls around people, and in doing so we infantilize employees. Just think about it- the average citizen is quite capable of buying a car or a dwelling, but they can’t order a $200 office chair without permission – it’s insane. When you dig-deeper, you see the problem gets worse. Only one-fifth of employees believe their opinions matter at work… only one in fifteen employees feel that they have any say in choosing the colleagues they work with… only one in eleven feel they have any meaningful control over their work environment. It’s not an exaggeration to say that most organizations waste more capacity than they use.. maybe there was a time when we could afford it, but not now. Our species faces an extraordinary number of challenges and we cannot afford to waste even a gram of human ingenuity, yet our organizations slaughter it… they create a caste system that separates the thinkers and the doers, the management and the employees, the clever and the compliant… and then we make the mistake of saying we have millions of jobs that are low-skilled jobs… there are no such thing as low-skilled jobs, there are only low-opportunity jobs where people are treated as commodities. We don’t train them.. we don’t give them autonomy… we don’t give them any financial upside… yet when they fail to be creative, and fail to do more than the job requires, we say they just aren’t very clever or capable…. Guess what; if you put someone in leg-irons, they will have a hard time running.
You can’t build an equitable and just society if millions of people in their jobs do not have the opportunity to grow and flourish. Across the OECD, productivity growth has been declining for over 20 years- it’s been called the ‘productivity puzzle,’ and whilst I’m not going to argue actual causality- it’s certainly interesting that as productivity has been declining, bureaucracy has been growing. Internal bureaucracy is self-perpetuating- every time there is a crisis, you get a new staff-group… every year you discover you need a new CxO of some sort- a Chief Experience Officer, a Chief Transformation Officer, a Chief Diversity Officer… you grow layers and staff groups justify their existence by creating more policies and rules, none of which have a sunset clause.
If you look-back at the last 60 years of organizational innovation, it’s hard to find any ideas that have really made a difference… whether you look at T-Groups, High Performance Teams, Self-Management, Total Quality Management, Agile Leadership, Mindful Leadership… none of them have changed the DNA of management- they are grafts on a bureaucratic rootstock.
It’s also important to realize that people in power are- in general- reluctant to give it up. Managers are fans of everything except lean management. Lean manufacturing? Good – lean distribution? Good – lean anything? Good – lean management? Bad!
Haier are the world’s largest white-goods brand. Their Rendanheyi management structure divided their 80,000 person organization into 4,000 operating units That evolution did-away with 12,000 managerial positions and made people choose to either leave the organization or become part of a new entrepreneurial unit, what it did not allow is for people to stay in a bureaucratic management structure. It works, and it works at scale to create networked organizations. I think now we’ve finally reached the tipping point where leaders recognize that many of the challenges they face today lie outside the traditional levers they have to pull, and require fundamentally different approaches to management structures.
Q: Do we need to change how success and incentives measured?
[Gary Hamel]: There’s a danger of mistaking the scoreboard for the game, but certainly profit is a good measure of organizational success. Profit says that you are using the resources of society in a productive way- if you are losing money, it means that you are taking valuable resources- people, talent and capital, and destroying value… Profit is an important measure, but it doesn’t have to be the only measure and the dilemma is mistaking the scoreboard for the game, because that prevents asking questions like; how do I build stronger business? how do I innovate?
In the past few years, we’ve seen trillions of dollars of share buybacks… companies have bought back huge amounts of their own shares using debt. Why? CEO compensation is paid at the share price, and it’s the simplest way of raising the price of shares- take them out of circulation. We give CEOs these crude scorecards and so they expend a huge amount of energy around financial engineering and not creating value. The same is true of internal targets, KPIs. Jim Hagemann Snabe is the Non Exec Chairman of A.P. Møller – Mærsk A/S and Siemens and before that was co-CEO of SAP (the German software company). When he left SAP they had over 50,000 KPIs across the business. They essentially disaggregated performance into hundreds of very-small targets, assigned those targets to people, and somehow hoped it would aggregate back into success and performance – well, that’s how the Soviet Union worked, and we all know how that ended-up. Bureaucracy is based on an arrogance about the information and cognitive processing capabilities of people at the top. It also explains why entrepreneurial firms have such an advantage- they have freedom, autonomy and can move quickly. They have people who can make decisions, and can pivot between products and markets, and usually keep bureaucracy small and instead have tight decision-making frameworks. They also have upside. In a startup, if you win? You get a payoff. In large organizations, there is virtually no upside or autonomy. Companies like Haier have divided themselves into small units with their own P&L, where people have the autonomy and the financial upside to think like owners. The biggest crisis of capitalism is not that we have a lack of capitalists, but that we don’t have enough people low down in organizations who feel like business-owners and that isn’t about having 5 shares in the company and being a 0.000001% owner, it’s about having autonomy and upside. Large businesses have to think about how to become a confederation of owners that can coordinate across themselves without having ranks of managers.
Q: Is there a theoretical framework around disaggregation, and decentralization?
[Gary Hamel]: Economists make the distinction between markets and firms and by definition the market is decentralized and usually outperforms firms. The New York Stock Exchange has outperformed every firm on the exchange for over 50 years, so we know that markets have an advantage in allocating resources. Hierarchies are very-good at doing complex things- historically, economists saw markets as a disaggregated and decentralized and hierarchies as being centralized – so you were either a market or a firm. Today you are seeing extraordinary hybrids where companies are becoming dense, disciplined, marketplaces where individuals and groups have actual contracts for service or delivery between each other. The social-density and dynamism of these markets allows enough trust and relationship to make this work at scale. It moves from hierarchies of power to hierarchies of expertise- your power and influence are based on your peer-attested competence, not your position. If you aren’t adding value, your authority immediately starts to diminish because it’s not invested in a position.
In a typical organization, if you are the Vice President, you have all the positional authority of that role until someone fires you. Power needs to work much more like the web where you are not made an influencer, you become an influencer by attracting followers and when you stop attracting followers, your power disappears. That’s how organizations should work. Markets and firms are not distinct categories of economic activity, you can harness the best of both.
Q: Do we need to redefine leadership?
[Gary Hamel]: We had to learn how to teach people to budget, to create tasks, manage risks, control variances…. And in 1966, Peter F. Drucker wrote The Effective Executive where he summarized 70 years of learnings on what it takes to be a manager. In that book, he used the word ‘manager’ 200 times, and the word ‘leader’ 20 times. By the mind ‘80s it had become apparent that business schools, consulting firms and training companies had fully codified the work of management- there wasn’t much new to say or teach, and we still needed to train managers for these bureaucratic jobs. So, to make it sexy and interesting… we changed the nomenclature and instead of teaching management we taught leadership. The implicit promise was that by doing exec-ed or an MBA you can turn a manager into a leader.
We unfortunately conflate the idea of leadership with bureaucratic rank. Even 50 years ago, organizations were founded as administrative aristocracies where your position was defined by a broader span of control, and increasingly complex tasks. Even today, where the skills are a commodity and are often done algorithmically, organizations still build on this idea that administrative competence is rare- and so don’t invest enough in technology, market and product development.
Leadership training itself is stratified. Most young people don’t get any leadership training, by the age of 30 some high potential individuals do, and then perhaps a few more as people get older. But even leadership training and its language have become corrupted. When people talk about leadership teams, I say, ‘who the hell is that?’ they usually answer ‘well it’s the top executives’ and then you realize that they’re leaders by nature of their role, not because of who they are. Most ‘leaders’ in organizations are in it for themselves, their careers and are fighting tooth and nail to get the CEO job.. the very idea of leadership is near irredeemable. In truth, the nobility of leadership should be bestowed on people at the frontline, solving problems and making a difference in your business every day.
It’s going to be a great challenge for business schools to rethink their value proposition. For a long time, it’s been that you pay your tuition and get a fast-track up the pyramid, but what does it mean in a world where there are no more pyramids?
That has nothing to do with title or hierarchy, a leader is someone who plays a catalytic role – meaning it might not have happened without that person.