Built to shrink

Barclays and Royal Bank of Scotland (RBS) and a number of other firms are currently fighting it out to buy Dutch banking group ABN Amro for around £45 billion.

A successful bid could end up being the biggest takeover deal of all time and would certainly create one of the world’s largest financial institutions. Another example of Big merging and acquiring to keep growing bigger.

The problem is, the larger an organisation gets these days, the harder and more expensive it becomes to coordinate people working together. Business thinker Peter Drucker, the man who first introduced the concept of “knowledge workers” in the 1940s, once calculated that “ninety percent of what we call ‘management’ consists of making it difficult for people to get things done.” More recently, top tier consulting firm McKinsey grumbled about all the “internal joint ventures, co-heads of units and proliferating task forces and study groups” which waste everyone’s time trying to find their way around labyrinthine organisational structures.

In fact, the rise of management consultancy itself can be seen as a function of the growing impossibility of understanding these gigantic, modern organisations. Over the last quarter of a century,

UK management consultancy fees alone have risen 13,115% from £61 million pounds in 1980 to around £8 billion pounds in 2006. Needless to say, the nation's rate of GDP growth of around 2% a year during this same period hasn’t quite matched the stratospheric increase in advisory fees.

Drucker, who once joked that the only reason journalists called him a “guru” was because they couldn’t spell “charlatan”, also said this at the turn of the millennium: “The corporation as we know it, which is now 120 years old, is unlikely to survive the next 25 years. Legally and financially yes, but not structurally and economically.” So does any of what’s happening online today tell us whether one of the most important management thinkers of the 20^th century was right?

You’d certainly need plenty of space for names on a memorial for industry giants and household name brands that lost their corporate lives battling global market forces armed with more advanced technology. Most of whom - Digital Equipment Corporation, say, or American Motors - would have been added in just the past 30 or 40 years; only 16 percent of over a thousand companies tracked from 1962 to 1998 are still around.

Periods of market dominance are also getting shorter: in the 1930s companies spent an average of 75 years on the S&P 500 index, these days it’s more like 15, and it’ll be down to a decade by 2020. The list of companies “Built to Last”, as author Jim Collins once memorably described them, seems shorter by the day.

The crux of the matter is not whether individual companies like General Motors will still exist in 30 years time (although I wouldn’t bet my pension on it), but whether the global economy will still rest on a small number of very large players. I think it’s hardly likely that there will be no concentration of global power and wealth but rather, as Drucker says, that the dominant enterprises will operate and organise in unrecognisably different ways.

This doesn’t mean that the world ends up less globalised in large units, but that it will be a different kind of globalisation. One where Big business is composed of collections of much smaller groups, organised differently and bound together by information networks.

Apart from anything else, if the trans-national titans of the future do not evolve into far more fluid and de-centralised networks, they risk collapsing under the weight of their own top-heavy bureaucratic loads.

 

 

Comments

[Jamie Andrews]

Interesting stuff. Have you heard of www.simpol.org? It's a horrible website at present, but well worth a second look and ties in with some of the ideas you allude to. James Robertson (co-author of Small is Beautfiul) has co-authored a title on Monetary Reform with Simpol's founder John Bunzl. It all ties in quite nicely with the New Economics Foundation stuff and the ideas you are exploring.