Monday, March 16, 2015

189. Decentralization and self-organization

Here I use the notion of scripts to clarify the difference between decentralization and self-organization.

In decentralization, the overall structure (script) imposes minimal constraints on the components (nodes), delegating responsibility for their functioning, and yielding openness, allowing for alternative ways of ‘filling in’ the node. For example, teams are allowed a wide discretion in what they do and how they do it.

The advantage of this is that one takes into account that the nodal activity is a specialism that one engages because one does not oneself have the capability to perform it. Then it is odd to claim, nevertheless, that one can effectively monitor and control the activity from outside.

The next step is to apply ‘horizontal control’. Here one asks the nodal activity to propose how it is to be evaluated or controlled. This ensures that points of control are minimal, since the node wants minimal outside interference, and for the controller it minimizes cost of control. They are also effective, since they arise from the shop floor. If there is cheating in this, control falls back on full top down, outside control. I will discuss this in more detail in a later series on economics and markets.

Self-organization goes further than decentralization. There, nodes develop by themselves and subsequently seek partners to utilize opportunities for combinations and complementarities.

The nodes don’t follow the script, but vice versa: scripts emerge from interacting nodes, in connections that are more or less durable.

One should not overestimate, let alone romanticize, self-organization. As I argued in preceding items in this blog a combination is needed of unity and diversity, of the script perspective and the node perspective. The challenge is to forge minimal unity needed while allowing scope for diversity.

In a book[i] I proposed to see organization as a ‘focusing device’, while maintaining adequate scope for ‘cognitive distance’. The more innovative an organization is to be, the more scope for variety it needs. It can also access variety in collaboration with others, at a larger cognitive distance.

Some interdependencies do require integration or close coordination and alignment. This is illustrated by the failure of the separation, in the Netherlands, of a privatized organization for operating trains and a public organization for the rail infrastructure. They are operationally too connected to allow for that.

Also, as discussed earlier, in item 59 of this blog, there is a need for a certain durability of connections when those require investments that are ‘specific’, i.e. can be recouped only in that particular connection or relationship. Those will be made only when there is a perspective for a sufficient duration or volume to recoup the investment. One should go not for maximum but for optimal flexibility of configuration: durable enough for depth of collaboration, flexible enough to prevent rigidity.

The most extreme case of self-organization is the ideal market, without any outside coordination, with Adam Smith’s invisible hand’ of competition.

However, when specific investments require some minimal duration of joint activity, this entails temporary exclusiveness, limiting competition, which is then forbidden by competition authorities.

The perverse effect of that is that it yields an incentive to integrate the activities into an overarching organizational script, by merger or acquisition, which takes out the advantages of self-organization.

However, self-organization may produce undesirable effects. Worse, it may yield what earlier I called a ‘system tragedy’, where activities are integrated in scripts of interdependence, joint lobbying, imitation, complicity, and mutual protection, or hiding behind each other, with a loss of traceable and attributable responsibility, with everybody pointing to everybody else.

A salient example is the banking sector, generating economic crises. I discuss that in more detail in the next item.     

[i] Bart Nooteboom, A cognitive theory of the firm: Learning, governance and dynamic capabilities, Edward Elgar, 2009