Why organizations fail

https://erikbern.com/2016/04/18/why-organizations-fail.html

Everyone in the team just comes in every morning and asks themselves: what is the highest ROI thing I can do today? And they just do it. Nothing else is needed. Why can’t that just work?

It’s of course an incredibly naïve idea – but where does it fail, exactly? It turns out there’s in two places. Nothing more, nothing less:

1. Incentive problems (agents do not want to act in the organization’s interests)
2. Bounded rationality problems (agents do not have the necessary information to do so)

I can’t stress enough that there is no other reason.

Why Organizations Fail: Models and Cases.

With the two bullets above our model is basically complete. The beauty of thinking about it this way is that it breaks down management recursively. As a manager the best way to get value out of other people is to:

1. Make sure people’s interests are aligned with the company’s
2. Make sure everyone in the team has the necessary information they need

Everything else follows. Anything else that 1. and 2. is useless to spend time on as a manager. For instance it explains why micromanaging is useless: all you need to do is give people the information they need to make the right decisions, and reward good behavior. Similarly the model also highlights why it’s important to delegate projects with their full context: without enough information people will make the wrong decisions. And it points out that you should reward people for delivering business value: rewarding people for anything else and you misalign people’s interests with something else than the company’s.