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How To Eliminate Organizational Debt

The debt that’s crippling your company isn’t on your balance sheet. Here’s what to do about it.

Aaron Dignan
Jun 30, 2016 · 6 min read

Organizational Debt: The interest companies pay when their structure and policies stay fixed and/or accumulate as the world changes.

Let’s unpack that. As time passes, companies create roles, structures, rules, policies, and other norms that become fixed, and often, difficult to change. This is by design. For example, a company’s travel budget may balloon one year, only to be restricted by a travel policy the next — a well intentioned control designed to reduce expense. If that policy starts costing more than it’s saving (e.g. by reducing commercial success due to a lack of face time, frustrating top talent, etc.), it becomes an unacknowledged debt. The “interest” comes in the form of reduced speed, capacity, engagement, flexibility, and innovation that ultimately undermine the macro objectives of the firm: to survive, thrive, and achieve its purpose.

Obsolescence-based debt occurs when structures or policies become unfit amidst new market conditions.

We live in a VUCA world now. Everything, both inside and outside the organization, is changing faster than the organization itself. As a result, our roles, structures, rules, and policies are becoming obsolete all the time. This lack of “fit” with the environment is the interest on the debt, building up over time. If you’re Kodak, and your capital allocation process aggressively favors film (or any incumbent technology), that’s debt. If you require customers to fax or mail you written instructions to make changes to their account in 2016, that’s debt. If you can’t give a reasonable customer the thing they want because “our policy says,” that’s debt. These policies may have had the best intentions, but circumstances have changed. The true cost of not having the requisite structure and governance for the context you’re operating in may be hard to quantify, but it is real, and it is growing all the time.

Accumulation-based debt occurs when structures or policies are repeatedly added but never removed.

Every time something goes wrong, or we figure something out, our instinct is to codify that knowledge and prevent future mistakes by instituting a new role, structure, rule, or policy. Unfortunately the creation of new ways to eliminate variance is all too common, but we very rarely eliminate them. And so a one-step process becomes a twenty-step process over the course of a decade. Or worse, ten different processes intersect over time. Ten different roles are required to make a decision. And the list goes on and on. This increase in complexity creates risk, and we create derivative roles and rules to manage that risk (they’re called PMOs). Because we change jobs with increasing frequency, no one knows why we do things the way we do. It’s the bureaucratic machine as Chesterton’s Fence. We should understand the origins and intent of our policies. And, if they no longer apply or create unintended consequences, they should be removed.

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1. Launch a bounty program.

In the world of software development, some companies offer a “bug bounty” — a small cash bonus — to anyone who can find an error in their code. One of our clients within GE recently launched a related program called Process Bounty. With Process Bounty, any employee that encounters a policy or process that is hindering their ability to deliver value to the customer can submit the policy/process (and a recommendation) to the program website. The Process Bounty team is then empowered to explore the intent of the policy/process through an advice process with relevant parties and then revise or eliminate it.

2. Practice continuous participatory governance.

You can offer your team(s) a regular mechanism for editing the organization itself. If individuals have the power to recommend changes to their own roles and rules, and teams have a process for vetting and shaping these proposals, something extraordinary happens: the firm gets smarter every day. The most popular flavor of this is the governance process from Holacracy, but there are many ways to do it, including some emerging software options.

3. Don’t rush to a policy and process for everything.

As we discussed, our natural instinct is to create a role and rule for everything, especially after something goes wrong. But the truth is that we can get away with a lot less structure if we hire smart people and let them figure things out. One incident is just that… one incident. Don’t overreact. Let the culture learn. Jason Fried at Basecamp wrote about this in a recent post — referring to knee-jerk policies as scar tissue. There may be an efficiency cost to keeping things open-ended, but in a rapidly changing world that’s often worth it.



The Ready

Lessons from our quest to change how the world works.

Aaron Dignan

Written by

Founder @theready, investor, friend to misfit toys. Author of upcoming book on self-organization and transformation: http://theready.com/book

The Ready

The Ready

Lessons from our quest to change how the world works. Topics include org design, self-organization, and dynamic teaming.

Aaron Dignan

Written by

Founder @theready, investor, friend to misfit toys. Author of upcoming book on self-organization and transformation: http://theready.com/book

The Ready

The Ready

Lessons from our quest to change how the world works. Topics include org design, self-organization, and dynamic teaming.

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