Hamming on Centralization vs Me on Bureaucracy

The most obvious illustration is computers have given top management the power to micromanage their organization, and top management has shown little or no ability to resist using this power…

The persons on the spot usually have better knowledge than those at the top and hence can often (not always) make better decisions if things are not micromanaged. The people at the bottom do not have the larger, global view, but at the top they do not have the local view of all the details, many of which can often be very important, so either extreme gets poor results.

Here’s a question I think about: why do mature industries consolidate? I’m going to be referring often to large, highly optimized organizations in mature industries. That’s pretty boring to write and read so I’m going to call them Dragon Wagons.

Scale helps Dragon Wagons sell because it supports the fixed costs of strong branding, which gives customers comfort. Scale also helps production because Dragon Wagons’ products change slowly and linearly. Given enough time and size they can snuff out opposition with a small marginal advantage.

Here’s another advantage to consolidation and my response to Hamming’s problem of micromanagement: you can’t have a real bureaucracy unless you’re big.

There’s a tradeoff between efficiency and innovation and Dragon Wagons focus exclusively on the former. Those that work in a bureaucracy probably marvel at the waste and no doubt the waste is huge. But everything’s huge at huge companies. Dragon Wagons develop highly specialized, silo’d bureaucracies that are incredibly effective at their assigned tasks but otherwise think and move on a geologic time scale. Hamming’s not the first to observe that this sucks; in fact, I’d say his loathing of them is nearly universal.

But if we all hate bureaucracies, why do so many exist? Because they’re damn effective is why. Effective specifically at distributing knowledge through an organization and protecting it from new ideas, the vast majority of which are stupid. As Hamming himself says elsewhere:

Regularly I read or hear I am supposed to believe the new gimmick, typically these days the
computer, will make a significant difference in spite of all past promises which have apparently failed
miserably. Beware of the power of wishful thinking on your part—you would like it to be true so you assume
it is true!

Individuals love feelings of control, of purpose, of contribution. Individuals are stimulated by new ideas and new challenges. Bureaucracy exists because each of these impulses is toxic to a Dragon Wagon. Bureaucracy protects the company from all the better parts of its employees’ humanity.

Hamming frames this problem as one of leadership pushing bad decisions into the firm but a real bureaucracy fights back with passive aggressive intransigence. Here is a quote with a typical sentiment:

Next, an idea which arises in the field, based on the direct experience of the people doing the job, cannot get going in a centrally controlled system since the managers did not think of it themselves. The not invented here (NIH) syndrome is one of the major curses of our society.

I disagree with the last sentence, here’s how I see the fundamentals:

1. Change is hard. Especially in Dragon Wagons where unintended consequences of change can be catastrophic.
2. These problems can be overcome by exceptional people who are exceptionally motivated.
3. You cannot reliably find people who are those things.
4. So empowering people probably means destroying the company.

Don’t get me wrong. Good ideas exist and outstanding managers can identify them and implement them. But these saviors can’t be reliably found. And even with them the costs, whether intended or not, are bigger and harder to anticipate the bigger the firm gets.

And here’s a benefit: because the brilliant leaders are hard to find, having a business model that doesn’t require one means there’s no ‘key man risk’. A founding genius moves on and hands the reigns to the ‘Harvard guy’ with a lantern jaw, a good work ethic and a briefcase full of mindless rhetoric and buzzwords. Doesn’t matter, the firm runs itself.

A common narrative of consolidation is simple megalomania. But this is also about the leader writing himself out of the script. Dragon Wagons cannot be run by a small team but acquisitions can be. There is a peculiar alignment between the megalomaniac and the bureaucracy, if such an entity had a will and desire of its own.

This is a bleak vision, to be sure. And if they are in a competitive industry, Dragon Wagons eventually get cleared out out by startups armed with cutting edge technology. But for industries that don’t change quickly or that aren’t exposed to competition, a bureaucracy provides a protective shell around the vital business processes.

Bottom line: without them, it would be worse.