Why Large Companies Change Slowly

Photo by Ryan Johnston on Unsplash

During the last weeks, I reflected on the difference between the startups and the large, established companies that I work with. One of the main differences seems to be the amount of freedom that individuals have. When a company is first formed and the initial team is assembled, there is of course the normal “storming, norming and forming” phase but the amount of constraints and expectations that are instilled on individuals is still quite limited. Once the company grows, however, with every step in size, there is an additional layer of bureaucracy, rules and constraints added to the operations of the company. Continue this for long enough and you’ll end up with the typical situation at most large companies: a straitjacket that we built ourselves.

There are at least three ways in which companies build up this straitjacket for their employees. First, functional organizations divide employees into different functions that each have their responsibilities. Each function, e.g. finance, legal, systems engineering, software R&D, customer support, etc. has its incentives and some of these incentives require that other groups in the company behave in a certain way. This means that on a periodic basis, new rules and regulations are distributed for everyone to adhere to. In the vast majority of cases, these do not replace rules and regulations already in place, but are of course put on top of everything else.

We see this in society at large as well: the amount of regulation is constantly increasing. For instance, in the finance and banking space the rate of new regulation is constantly increasing and many financial institutions, already under attack by the fintech startups, are buckling under the load.

The second pattern is a tendency towards irrational responses to issues. Some problem surfaces somewhere in the company and the response is to put new rules and constraints in place to ensure that the problem can never reappear. In many situations, the new rules and constraints are a cure that is much worse than the ailment. In the worst situation, the cure will not even fix the problem, but just put additional bureaucracy on individuals and teams.

An illustrative example of the above, to me, seems GDPR. Although I am no expert on the topic, it seems to me that the main purpose was to limit the power and lock-in that the “big five” tech companies have over consumers. In practice, thousands of organizations and millions of people had to go through ridiculous amounts of bureaucracy to meet the regulatory demands whereas the effects on the originally targeted players are minimal.

The third pattern is what I refer to as the “illusion of control”. Although many look up to and admire C-suite executives, the fact is that these are individuals that often have very little real power in terms of driving change. Communicating a direction over many layers of organization and past the permafrost of middle management such that the front-line understands what we’re looking to accomplish is very difficult. Instead, it’s much easier to express, through rules, what people can not do. Especially when new executives are put in place, there often is a phase where there is a centralization of power. During that phase additional rules and constraints are put in place that, unfortunately, further consolidate the current situation rather than help drive change.

Even if we would be happy to accept the straitjacket of existing large organizations, there are real and tangible disadvantages associated with it. The foremost being the lack of business agility. For large organizations, the ability to respond to changes in the marketplace and the competitive landscape is highly limited. And this does not bode well for the competitive position going forward.

Concluding, most organizations increase bureaucracy continuously and relentlessly. To avoid falling into this trap, I have only seen two approaches: internal reinvention and competing units. Internal reinvention is the application of zero-based planning to the regulatory framework in the company, meaning to periodically throw everything out of the window and start from scratch with the minimal set of rules that the company needs. Second, if internal change is impossible, the alternative is to form a new unit outside the walls of the existing organization that can build up its own culture and rules from scratch and allow it to compete with the existing organization. Neither of these approaches are pretty and both lead to significant tension in the company, but the alternative, I believe, is even worse: running on the rails that you’re on until you run out of rails and then crash.

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