Bound to Fail

Clay Shirky has written an interesting post explaining why big complex businesses fail to respond to a change in the business environment. He says that they get so complex that they become entangled and unable to respond to a need to face new times. For example, media companies are complaining that they can't make money off the Internet. As Shirky points out, you have two choices: (1) raise prices or (2) cut costs. But in today's environment you can't do either. So they are bound to fail.

He bolsters his argument with a bit of theorizing from the past:

In 1988, Joseph Tainter wrote a chilling book called The Collapse of Complex Societies. Tainter looked at several societies that gradually arrived at a level of remarkable sophistication then suddenly collapsed: the Romans, the Lowlands Maya, the inhabitants of Chaco canyon. Every one of those groups had rich traditions, complex social structures, advanced technology, but despite their sophistication, they collapsed, impoverishing and scattering their citizens and leaving little but future archeological sites as evidence of previous greatness. Tainter asked himself whether there was some explanation common to these sudden dissolutions.

The answer he arrived at was that they hadn’t collapsed despite their cultural sophistication, they’d collapsed because of it. Subject to violent compression, Tainter’s story goes like this: a group of people, through a combination of social organization and environmental luck, finds itself with a surplus of resources. Managing this surplus makes society more complex—agriculture rewards mathematical skill, granaries require new forms of construction, and so on.

Early on, the marginal value of this complexity is positive—each additional bit of complexity more than pays for itself in improved output—but over time, the law of diminishing returns reduces the marginal value, until it disappears completely. At this point, any additional complexity is pure cost.

Tainter’s thesis is that when society’s elite members add one layer of bureaucracy or demand one tribute too many, they end up extracting all the value from their environment it is possible to extract and then some.

The ‘and them some’ is what causes the trouble. Complex societies collapse because, when some stress comes, those societies have become too inflexible to respond.

I find the argument compelling. I worked inside a "big" small company, one big enough to have developed a bureaucracy, and I attended several meetings where management mulled over how to face a changing business environment. I even remember trying to push for hiving off a part of the company to reduce overheads so they could be viable in the tougher economic environment. But this was anathema. The culture was too deep. They survived several of these crises by shifting into new product areas where they could maintain their margins. But I could easily see that one day one of these shifts won't work and it will be "game over" for the company. They just couldn't face the idea of radically restructuring costs. That's why so much change come from outsides, from new small companies that are doing things a new way.

The bottom line for Shirky is that change must come:

When ecosystems change and inflexible institutions collapse, their members disperse, abandoning old beliefs, trying new things, making their living in different ways than they used to. It’s easy to see the ways in which collapse to simplicity wrecks the glories of old. But there is one compensating advantage for the people who escape the old system: when the ecosystem stops rewarding complexity, it is the people who figure out how to work simply in the present, rather than the people who mastered the complexities of the past, who get to say what happens in the future.