Information cost

Thank you, Sig, for replying so promptly to my question about “information cost”. It crystallized some thoughts I had on this subject.

Sig’s point (I think) is that it should be possible to reduce the margin between what the producer receives and what the customer pays by disintermediating the transaction. We do this by adopting a more efficient business model. One that has lower overheads and a radically shorter supply chain.

The novelty of this approach is that it is the polar opposite of what many large businesses are trying to do today: that is to consolidate and globalise and rationalize what they do until the uniformity squeezes out unnecessary costs. Some companies within a multinational I am familiar with are attempting to reduce IT support costs by standardising on one model of desktop PC for all staff. Less training required, fewer technicians, standard procedures to follow. As a cost reduction strategy it will probably work until the manufacturer of that type of PC issues a product recall – then you have a business with no computers.

A complete monoculture is inherently unhygenic; it is vulnerable to a single threat, it’s a single point of failure. The usual biodiversity of an organization exists because we tend to allow a little duplication here and there, some variations from the standard, multiple standards. This is the case in most companies I have worked for. It seems to be sustainable although it is prone to consultants saying they can reduce your costs by pushing out these variants (for a fee of course). Many quite senior managers seem to believe them.

I am sympathetic to the idea that we can try pushing in the other direction. In other words we move away from command and control and towards an organization that naturally aligns the objectives of the employees (participants? inhabitants?) with the objectives of the organization. If it works then the first costs that go are the command and control overheads – the uncounted cost of cost reduction.

Size is a big factor in this. Globalization seems to mean trying to hold together a single enormous edifice. A structure so big it needs flying buttresses to keep it together because the walls aren’t naturally strong enough. Small churches don’t need flying buttresses. Villages need a council of elders and some goodwill from the inhabitants; cities need a police department, a fire department, magistrates, tax collectors and a beaurocracy to coordinate them.

What we know is this:

1. A team has a natural size of 5-9 members
2. A team benefits from leadership
3. Organising the leaders into a pyramid of management enables central control and enforcement of strategy but it adds cost and reduces agility.
4. A pyramid with too many levels prevents effective communication

If you try to flatten the management structure then you make the teams too big to be able to be led effectively. If you keep the teams the right size then as the organization grows then so does the size of the pyramid. You can only abandon the pyramid if you also relinquish central control. A familiar problem, and one which approaches like internal markets and a service grid are designed to combat. I can’t actually point to any organization where these have been a conspicuous success though.

Sig thinks he has part of the answer in Thingamy. JP is working towards a partitioning of enterprise architecture into four pillars, which assumes much organizational change. Malcolm wonders how he can direct a large team without a bullwhip (except as a fashion accessory). Sean pursues a new revenue model which needs a new infrastructure to support it. All seem to agree that getting the big machinery out of the way of the relationship between customer and producer is the right way to go.


1 Response to “Information cost”

  1. 1 dominicsayers August 31, 2006 at 10:05

    I seem to have a mental block about the spelling of bureaucracy. It’s a known error, repeated by many other people. In my defence, let it be known that I am left-handed.

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