It’s not uncommon for large businesses and non-profits to face situations where one group draws upon the resources of another group in a way that looks more like a business transaction within a business (as opposed to a cross-functional work team). Here are some common situations I’ve come across:
- IT, accounting, or legal resources are a separate group (or even business) that other parts of the business draw upon.
- Organizations are set up so they are matrixed, which means a “dotted line” relationship exists with a capability group (like HR, operations, etc).
- There is a centralized function that cuts across the business and just flat out makes more sense to have as a separate group. On example may be procurement.
- There is a location-based structure so that you have employees who report into a main site and others who report into local sites, even though they are roughly focusing on the same things.
These types of situations tend have common problems:
- Unclear ownership: who is making the final decisions? What team is actually responsible for that piece of the business?
- Accountability becomes difficult, especially when priorities are mismatched. For instance, when my computer isn’t working I think IT should be helping me right now. What I don’t know is that my IT support is helping someone who is working on something more important than me. When I’m asked for feedback I complain because I had to wait for so long.
- Costs and benefits often disconnected from one another: This often comes in terms of someone or something being viewed as a free resource. To carry my IT example over, if I just can call and get IT support without having to pay for it, I’m likely going to be calling IT a lot (versus trying to figure it out myself or prevent problems).
In MBM, when we encounter a new situation we try to step back and ask what the market does in similar situations and apply the principles to what we do. Let me start with the obvious solution and provide a strong dose of caution.
Internal Markets: Markets solve all of the problems listed above. They thrive on clear ownership, accountability happens automatically and costs and benefits tend to go hand-in-hand. One way these problems have been solved is to by making a market internal. Sometimes this is done by literally charging within the business to use certain resources. This often sounds like a good idea, but can have some serious downsides:
- You lose some of the benefits gained by being in an organization together. You now have to have people who administer internally (billing, invoice, etc) just as you do with external customers. This will likely increase headcount.
- Prices aren’t really “prices.” I mean this in the sense that internal markets require someone to set prices within the company, but rarely is there a large enough company or a good enough benchmark for it to reflect the complete reality of what a true market would achieve.
- Some companies make it impossible for internal groups to feel the market pressure by requiring that you work with the internal group and not seek outside competitors. This almost always creates an unfriendly situation between groups and the internal group starts to lag behind the market.
- There are all sorts of compliance implications (which I am in no position to brief you on) about how to handle this type of internal set up.
I’m not saying “don’t use internal markets.” I am saying that in my experience internal markets don’t work in as many instances as people would expect and they can create as many problems as they solve. Instead, let’s try to step back and think about the principles of markets that make this work so brilliantly out in free societies and how they might be applied inside the company.
One key aspect of markets that resolves a lot of the knowledge and accountability problems involves the price-setting mechanism. Of course internal markets can bring a literal price into the organization, but what are some key aspects of prices that we can translate into the organization? Prices direct producers as to where they should put their resources. Measures can serve the same purpose inside the company. Whether it’s a clear expectation on an RR&E Summary Document or a group-wide measure, measures should reflect the where the person/group can put their resources to yield the highest value.
Private Property Rights
Private property rights help individuals know what they own and what they can do with their property and help solve accountability problems. Inside an organization, responsibilities and individual decision rights can serve the same purpose. However, there are some big “ifs” associated with this one:
- If leaders have the backbone to make these things clear to everyone involved.
- If leaders have the courage to hold people accountable (both positive and negative).
- If employees have the backing to say “no” when appropriate.
- If visions are clear enough to have a good point of view on who should be doing what.
I find most of the time that this type of thing has to go up to a leader who can see the big picture. For instance, if I’m having a disagreement with another MBM person in another location about who has decision rights, it generally has to go to a level where a leader can understand the tradeoffs and implications, which may be several levels above where the disagreement is happening.
Free Speech and Competition
Free speech – the ability to endorse, complain, disagree, and so forth — and choices are key aspects of markets. Think about this in terms of an organization. If a person within your organization is stuck (or feels stuck) with whatever/whomever they have to rely on to get things done, it’s a recipe for disaster. The challenge process has to be alive and well in the culture to overcome this difficulty. If I cannot go my IT support and suggest a different way, lodge a compliant or give a positive feedback about a specific situation, then I’m just at their mercy. Coupled with this, is that generally there has to be some competition. This can be as simple internal recruiting group that knows the organization can use outside recruiters. If the organization starts using the outside groups and gives feedback it can serve much the purpose as free speech and competition do within the market.
I gave some high level things that I believe can help with internal transactions. What have you seen that works in these circumstances and is consistent with MBM? What are some things you’ve seen that have failed?