Why Networks Of Competence Also Require Hierarchies

On December 19, 1154, in Westminster Abbey in England, Henry FitzEmpress, an educated 21-year old, became the first man to dare to crown himself “King of England”. His aspiration was to create a nation. His problem? The country was in chaos. After a disastrous civil war, robbery was rampant. After the crusades, squatters occupied vacant castles. No one knew who owned what. Henry saw that if being king was to mean anything at all, he would have to establish a system to prevent crime or administer justice, while establishing his own power as the source of justice.

1154: England Creates A System Of Self-Organizing Juries

Henry knew that the ancient Greeks had resolved criminal cases by allowing groups of citizens to make decisions. So he followed their example and proposed to settle difficult land disputes by summoning “twelve free and lawful men in the neighborhood” and asking them to determine, based on their own knowledge and judgment, who was entitled to possess the property.

The idea that a group of laypeople might do better than the experts was revolutionary one at the time, and it still is today. It requires trust in people’s judgment to sort out testimony. Surprise! This offbeat idea actually worked. Groups of laypeople got the job done.

The fundamental insight was that of a self-organizing group. It brought together a relatively small group of people who could be expected to have different information and perspectives on the issue at hand. No one was put in charge. The authorities stepped back and let the jury figure out how to approach the problem and what the best answer was.

The most startling aspect was the radical shift in power. Henry could have followed the French practice of appointing judges who effectively made the decisions to favor supporters and punish enemies. Instead, Henry’s jury system was a transfer of real power. The decision of the jury stood, whether it pleased the king or not. He gave up the power to make the decision in the specific case in return for the greater power that would be achieved by the system as a whole. Over centuries, the jury system of decisions by self-organizing groups of ordinary citizens spread throughout many countries.

MORE FOR YOU
FBI Warns iPhone, Android, Windows Users—Do Not Install These Apps
New Hacking Disaster Warning For Gmail, Outlook, Apple Mail Users
Projecting Roki Sasaki Onto The Dodgers, Padres, And Blue Jays

The other key point is that hierarchical power had been necessary to establish the system of self-organizing groups in the first place, as well as to defend it from periodic efforts to undermine it, which occur even today. Hierarchical power also established the rule-set that the juries were asked to apply.

2002: Amazon Shifts To A Network Of Self-Organizing Teams

Fast forward to the summer of 2002, Amazon CEO Jeff Bezos had just come back from vacation. His firm had survived the dot-com crash of 2000, with an obsessional focus on customer value. Amazon's annualized total return since going public was 32%—more than triple the performance of the S&P 500.

But Bezos could see that growth was slowing. The silos and layers spent too much time discussing how things needed to be done, rather than doing them. His directives to focus on customer value and an emphasis on decentralization and independent decision-making were being ignored. To his horror, Amazon was starting to resemble just another slow-moving hierarchy of authority. “I’m still trying,” Bezos said ruefully, “to get people to do occasionally what I ask.”

Upon his return from vacation, Bezos informed his startled top management team that in future, Amazon was going to be run differently. The company was to become a network of autonomous self-organizing teams. Initially, they were to be small “two-pizza teams,” although ultimately some teams became larger “single-threaded teams.” Teams were to be entrepreneurial in spirit, with minimal managerial supervision. Once they had an agreed goal and agreed measures by which progress would be tracked, they were “independently set loose on Amazon’s biggest problems, with direct managerial supervision. They would likely compete with one another for resources and sometimes duplicate their efforts, replicating the Darwinian realities of surviving in nature.”It had to be able to expand forever,” Bezos said. “This has to scale to infinity with no planned downtime. Infinity!”

2002-2012: Amazon Implements A Network Of Competence

It would take several years of intense effort for Amazon to realize this astonishing vision, with defined interfaces (APIs) between the autonomous teams so that they could operate independently of each other and beyond, with minimal communication and performance measures established. And it would be more than a decade before the larger, single-threaded teams fully materialized beyond Amazon’s retail operations in businesses like cloud computing (AWS).

The results were extraordinary. The well-known “diseases” of big company growth were largely avoided.

· Customers were delighted with the diversity, quality, efficiency and reliability of services, which were often experienced as different and superior to those of competitors. Eventually, over 5 billion retail deliveries were made each year.

· Amazon’s information of customers’ purchases enabled it to focus its offerings of products and services that customers actually wanted,

· Exponential network effects were achieved as customers themselves spread the word.

· Growth continued. In the decade after 2002, Amazon’s 5-year total return grew by 1,556%, compare to the S&P 500’s growth in that period of only 12%

· The speed of Amazon’s services also steadily improved.

· Operating costs consistently declined. Value was created by competent people doing less work, because they stopped working on things that created no value.

· Processes were systematically re-defined to ensure alignment with the firm’s goals.

· At the upper levels and in the knowledge work of the firm, staff engagement levels were above average, although at lower levels, they were below average.

· Top management control of the company was also enhanced: Bezos now had the tools that finally did steer the whole corporation.

· And the firm grew dramatically. Today, Amazon has a market capitalization of $2.4 trillion.

The hierarchy also had to make sure to align the rest of the organization with the autonomy of the teams. Thus if the pay was predicated on the size of a group in Amazon, guess what happened? Senior leaders would start reinstating hierarchy in their group so as to get more pay! So in Amazon the size of your team is irrelevant to your pay, which is linked to the success or failure of Amazon as a whole, not just the team. That's a decision that only the hierarchy can make.

Like Henry FitzEmpress, Jeff Bezos and the hierarchy at Amazon had given up power to make decisions on individual cases in return for greater ability to focus effort in pursuit of the firm’s goals.

The Bottom Line

Amazon of course is not alone. Performance data on other firms on a similar track are shown in Figure 2. They are crushing firms that are run in the old way as hierarchies of authority. But meanwhile, an additional $20 trillion has been created and there are an awful lot of engaged staff and delighted customers, and thrilled shareholders.

In a rapidly-changing digital economy, it’s not surprising that organizations systematically based on competence outdo organizations based on historical authority, where the highest paid person’s opinions—the HIPPO—are often decisive. Yet those doing the work, on the ground, and in touch with customers and other collaborators, on a daily basis, as well as being more in touch with the digital economy, often know best.

And read also: