Scale & Bureaucracy

From Charlie Munger's "Mental Models" speech

Hello newsletter friends! For my first post, I’m dusting off something I started a few years back but never finished… it’s on the topic of bureaucracy. It’s a bit dense but hopefully thought-provoking heading into the weekend. Thank you for reading!

I was finally able to get through Charlie Munger’s speech on Mental Models from USC Business School in 1994 (Full speech here). The sheer brainpower is something to behold... What struck me most was the section of his speech on scale versus bureaucracy:

The benefits of scale are clear: the larger an organization becomes, the more power and resources it has with which to accomplish its objectives. However, the larger the scale, the larger the bureaucracy. The more bureaucratic you become, the less productive work occurs in the organization and then nimbler rivals rise and take over only to repeat the cycle.

One key insight though is that the costs of bureaucracy aren’t just slower work but a corruption of what work actually is. Two key quotes from Munger:

“[In] a bureaucracy, you think the work is done when it goes out of your in-basket into somebody else’s in-basket. But, of course, it isn’t. It’s not done until AT&T delivers what it’s supposed to deliver. So you get big, fat, dumb, unmotivated bureaucracies.”

 “[Bureaucracies] also tend to become somewhat corrupt. In other words, if I’ve got a department and you’ve got a department and we kind of share power running this thing, there’s sort of an unwritten rule: ‘If you won’t bother me, I won’t bother you and we’re both happy.’ So you get layers of management and associated costs that nobody needs. Then, while people are justifying all these layers, it takes forever to get anything done. They’re too slow to make decisions and nimbler people run circles around them.”

The key example that Munger provides of a company taking advantage of other’s bureaucracy is Wal-Mart:

“On the subject of advantages of economies of scale, I find chain stores quite interesting. Just think about it. The concept of a chain store was a fascinating invention. You get this huge purchasing power — which means that you have lower merchandise costs. You get a whole bunch of little laboratories out there in which you can conduct experiments. And you get specialization.

“[Sam Walton] played the chain store game harder and better than anyone else. Walton invented practically nothing. But he copied everything anybody else ever did that was smart — and he did it with more fanaticism and better employee manipulation. So he just blew right by them all.

“And it’s also an interesting model on the other side — how with all its great advantages, the disadvantages of bureaucracy did such terrible damage to Sears, Roebuck. Sears had layers and layers of people it didn’t need. It was very bureaucratic. It was slow to think. And there was an established way of thinking. If you poked your head up with a new thought, the system kind of turned against you. It was everything in the way of a dysfunctional big bureaucracy that you would expect.”

Of course, Wal-Mart is now suffering a similar fate a few decades later but Munger’s points still hold. While the Innovator’s Dilemma is often seen as more thorough view of how companies get disrupted, I think this is a bit simpler: bureaucracy is a necessary evil that needs to constantly be put in check. Organizations that let it grow indefinitely become zombies.

How much of Yahoo!’s fall was bureaucracy? How much of Egypt’s? Brazil’s? Take any organization that you see falling into disrepair and there is almost always a bloated bureaucracy going down with it.

One drastic and problematic example is from the United Nations’ work on climate change. To quote from Elizabeth Kolbert’s excellent piece, “The Weight of the World” (2015):

The United Nations Framework Convention on Climate Change, or U.N.F.C.C.C., has by now been ratified by a hundred and ninety-five countries, which, depending on how you count, represents either all the countries in the world or all the countries and then some. Every year, the treaty stipulates, the signatories have to hold a meeting — a gathering that’s known as a COP, short for Conference of the Parties. The third COP produced the Kyoto Protocol, which, in turn, gave rise to another mandatory gathering, a MOP, or Meeting of the Parties. The seventeenth COP, which coincided with the seventh MOP, took place in South Africa. There it was decided that the work of previous COPs and MOPs had been inadequate, and a new group was formed — the Ad Hoc Working Group on the Durban Platform for Enhanced Action, usually referred to as the A.D.P. The A.D.P. subsequently split into A.D.P.-1 and A.D.P.-2, each of which held meetings of its own. The purpose of the U.N.F.C.C.C. and of the many negotiating sessions and working groups and protocols it has spun off over the years is to prevent “dangerous anthropogenic interference with the climate system.” In climate circles, this is usually shortened to D.A.I. In plain English, it means global collapse.

It’s hard for me not to read this and get angry that our species is so bad at solving large problems. I find comfort though in thinking of bureaucracy as a consequence of scale - a natural phenomenon to be understood and mitigated.

I’ll try to write my next post again in a week.

Comments/Thoughts? On Twitter @gasca