Saturday, January 19, 2013

75. Horizontal control

Traditionally, and perhaps instinctively, control is seen as vertical, ‘top-down’. ‘Someone has to be the boss’. Economists talk of the principal who mandates and controls the agent. The principal is ‘the boss’.
We find this in the management of organizations and in how buyers deal with suppliers.

In many conditions, vertical control is counterproductive. The controller pretends to be able to judge the conduct of the controlled party effectively and efficiently. Effectively, in taking circumstances into account, judging how far competencies go and should go, and what the causes are when something goes wrong (see the causal ambiguity discussed in item 72 of this blog). Efficiently, i.e. without costly superfluous control. And all that is hardly the case in relationships with high added value, where workers or suppliers are valuable because they know and can do things that one could not do oneself. Then how can one pretend to be able to adequately judge them?

The alternative is what has come to be called horizontal control. There, one asks the one to be controlled how he/she can best be controlled. The advantage is threefold. First, it is efficient, ensuring that control is reduced to the minimum, since redundancy is costly to both parties. Second, it ensures that control is effective, i.e. fits the realities of work processes. Third, in the negotiation about controls to be agreed upon the controller learns a lot about what works and what does not, in a variety of work processes. This improves its capability in negotiation, and this may even benefit the party to be controlled, in improving his/her knowledge about possibilities and benefitting from experience elsewhere. In other words, horizontal control is a learning system.

What if the party to be controlled cheats and proposes ineffective controls, exploiting the controller’s limited capability to judge? Then, when this comes out, as sooner or later it will, in the learning system, the penalty is heavy. The cheat will no longer have the advantage of participating in the horizontal system and will face old-fashioned, inefficient, ineffective bureaucratic vertical control.

The system of horizontal control is not just theory. It has been implemented, for example, in the Dutch Ministry of Finance (with my help), in the tax system for large firms (for small firms the transaction costs of negotiating controls separately for each firm are probably prohibitive) and in the internal accountancy of the civil service.

In business, the basic logic of horizontal control is becoming familiar in buyer-supplier relations of high added value, where suppliers are involved in the improvement of quality and in innovation of the buyer’s products. Secrecy about what goes on is counterproductive, in obstructing the pooling of complementary resources that adds most value.    

A problem is that this approach goes against the perspective, instinct perhaps, of the present generation of managers and buyers, to whom the old view was brought home in training and in practice. That was, and perhaps still is, the case, for example, in the building industry. And classes in economics perpetuate the old view.


  1. Thank you Bart for this interesting blog. Horizontal control as a learning system, what beauty. And what happens if you cheat. You make that clear. What puzzles my mind is the contribution of vertical control in a fast growing economy like ours was and China's is. Topdown decisions and control make developments faster I think. But faster is not always better of course. So leadership, by the 'I have a dream' person, can start horizontally. After the growth of the company it seams easier to have a top down policy. Only if you devide the company in small parts horizontal control works well. The things you can see in your own perspective. What about the parts that are outside your focus, but of great importance to the company or state?

    1. Noud, Note that I am talking here only about control, not management and organization more widely. Control is to verify whether people follow rules or agreements. Management also includes the making of plans, specification and distribution of roles and tasks, and the making of rules and agreements. Top-down decision making is indeed faster, but as you suggest, what counts is not only the speed but also the quality of decisions. A crucial question is whether the top has sufficient knowledge and experience to adequately judge everything. And while involving others in decision making slows down decisions it may speed up and improve the quality of execution.

      You say that in a large organization there needs to be more top-down. As you suggest that is not necessarily the case: one may allow for large autonomy of parts of the organization. And the question should always be why the organization needs to be big; what should be done within the organization and what in outside organizations with whom one can exchange or collaborate. There is an extensive logic for that which I cannot fully discuss here. It answers your question concerning the need of adding things outside your focus: yes, for that you need to employ outside partners.