Why do organizations fail in large numbers?

A look at the prevailing corporate structures and processes does not give one the confidence that firms are created with any deep understanding of human behaviour

Photo: iStockphoto
Photo: iStockphoto

According to the Boston Consulting Group, banks the world over have paid $321 billion in fines since 2008 for regulatory failings ranging from money laundering to market manipulation to terrorist financing. The New England Journal Of Medicine found out that despite dozens of years of heightened awareness, medical errors result in thousands of deaths each year, hospitals have not become safer. Several studies have shown that more than 70% of the change management programmes in organizations fail.

As if to sum up all the above-mentioned bad news, comes the information that the lifespan of a corporation in the S&P 500 has declined to a paltry 15 years. In the 1970s, the average lifespan of a company in the S&P 500 was 27 years (already down massively from the 75 years seen in the 1920s).

One can possibly understand if these levels of failures come to nation states. Every nation state has citizens belonging to various demographics and psychographics. A government cannot choose its citizens—it has to manage all the individuals who are its citizens. And the nation has limited incentives at its disposal, but has to rely on disincentives for deviant behaviour through laws and punitive action.

On the other hand, corporations have a strictly controlled internal environment. Each employee is selected from a pool of applicants through a rigorous process. Each employee undergoes several training programmes to make them perfectly fit into the role they have been selected for. Every employee has clear job profiles that define their responsibilities. There are performance appraisal systems to reward the best performers and weed out the non-performers.

In the euphoria of the progress of the global economy or few national economies doing well, we conveniently forget the humongous failure rate of individual organizations. While a few unicorns are created every now and then, we forget that many more companies (some of them world leaders like Nokia) are biting the dust at an alarming rate. Management experts and analysts are more interested in talking about the few good organizations that have gone on to become great companies. Very few of them analyse why companies that were deemed icons of excellence are nowhere to be found just a few decades down the line.

What explains the unexpectedly high failure rates of organizations?

Much more than the technology that runs the machines in the organization, and the financial resources that keep an organization alive, what matters most is the employees of the organization. Their behaviours—from walking the extra mile to questioning the status quo to having an appetite for constant learning—determine if the company sinks or swims.

A look at the prevailing organization structures and processes does not give one the confidence that organizations are created with any deep understanding of human behaviour.

The most prevalent organizational structure is hierarchical. As one moves up the hierarchy, the power at one’s disposal increases. Since the number of individuals keeps decreasing as the levels go higher, there is concentration of power at the top. Most organizational theories still hold a managerial bias. Employees lower in the hierarchy are viewed as manipulable by top management for the aim of increasing organizational effectiveness.

On the other hand, nation states moved out of monarchy, a similar power structure, and moved towards democracy, where power was devolved to the individual citizen.

The basic assumption most organizations have about human behaviour is that human beings are rational beings. Since the rational man is assumed to act according to the information given to him, it is not surprising that organizations focus their behaviour change initiatives on training programmes—a whopping 46% of the $70.6 billion training expenditure in the US is delivered by a stand-and-deliver instructor in a classroom setting! Organizations take this rational approach to the extreme by codifying all processes and decisions into hard-bound manuals—the McDonaldization of corporate processes.

New behavioural sciences remind us that humans are mostly irrational, and emotions drive most of their decisions. They are social animals who desire to interact freely with their fellow beings. But policy manuals within modern organizations ensure that there is little opportunity to express their authentic human nature. Most modern corporations, with their hierarchical structures and standardized decision-making processes, look like artificial entities in an organic larger society. Few organizations can claim to have a genuine connection with the ecosystem outside their high walls.

While modern corporations cling to their traditional understanding of human behaviour, surprisingly several nation states are trying to use new behavioural sciences to build a stronger and more humane connection between the government machinery and the citizen. Nudges derived from the philosophy of “libertarian paternalism”, implemented in the spheres of taxation, transportation safety, and even sanitation, are slowly but surely replacing traditional policies.

A closing thought. All nation-states have armed forces which consist of individuals who are willing to sacrifice their lives for the country. How many corporations in the world, with all their management systems and resources, have managed to create employees with such dedication?

To effectively manage their employees, organizations have to learn a lot more about human behaviour.

Biju Dominic is the chief executive officer of Final Mile Consulting, a behaviour architecture firm.

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