Corporate Rationing and the Challenge of Disruption

by Simon Terry

The Russians have absolute proof that the Bible is Wrong. According to the Holy Book originally there was chaos and then there was order. The Russians know from experience that this is not so. First there was planning then there was chaos. – Soviet era joke from Russia. 

In the Soviet era in Eastern Europe jokes about queues and rationing were plentiful. People laughed in an effort to mitigate the real economic damage of central planning. In dealing with disruption, the consequences of rigid corporate planning can have real damage on the ability of the organization to meet the market.

Corporate Rationing

We do not apply the same standards to our companies as we do to our political systems. To achieve their quarterly earnings per share (‘EPS’) expectations, many large corporations resort to central planning processes with a goal of excluding any uncertainty from performance. Budgets are set and allocated in advance to deliver a number. As a result, there is limited flexibility for the organization to respond to changing circumstances or new opportunities.

Budgets are often based on hierarchical silos, further limiting the ability of the systems and processes within the organization to respond. Reallocation of budgets across silos is a major challenge within a plan year, as it has consequences for power and status of leaders, the achievement of silo-based performance and incentive plans and potentially the fate of entire functions.

The consequence of this central planning is that the modern corporation is full of rationing processes and queues. The rationing goes under many names, such as strategic priorities, investment management committees, project pipelines, resource availability, etc. The business impact is that a corporation has many barriers to responding to the market around it. To deliver certainty of the EPS outcome, the organization deliberately constrains its response to improvement opportunities and declines or delays profitable customer opportunities.

Rationing in organisations can be as absurd as that under central planned economies. Resource plans across silos or measures are often mismatched so that a budget may exist for an activity but the ability to hire additional full time employee equivalents or spend the money on vendors does not exist. Growth in sales may not be matched with additional resources to manage onboarding of customers or ongoing support. Frustration of employees inevitably rises.

Rationing also has a consequence for the scale of economic activity that organisations will consider. Given the effort required to manage the way through the rationing queues small projects are often simply abandoned. Many organisations even limit entry to the rationing process to investments of a significant scale. Each of these further constraints creates more areas in which an organistion will not respond and constrains smaller or marginal lines of business.

Consequences for Disruption

If all your competitors ration to achieve comparable metrics of performance this system of corporate rationing is sub-optimal, but rarely fatal. Everyone playing the game plays with an assumption of limited resources. The big players resources will still be bigger than smaller players and dramatic change is less likely.

However, the introduction of disruptive competitors changes the game. Disruptive competitors often deliberately choose different performance metrics to incumbent players as they see the customer opportunity and the business model differently. They are not constrained by the rationing systems that restrict decision-making and action in the larger incumbent players.

Accentuating the difference in approach, many digital disruptors enter markets with an abundance mindset and not a constrained mindset. They embrace risk and experimentation. Many a traditional organization has bemoaned their ability to compete as a large corporate when your new small agile competitor has more fundraising capacity than you, is more willing to deploy capital quickly and disregards the measures of performance that you traditionally demand?

Before an organization can respond to the market in this situation, it needs to tackle the challenge of undoing its traditional model of hierarchical rationing. The organization needs to become more responsive to its market and pursue the economic opportunities in front of it, instead of an arbitrary central plan. Power to act needs to be devolved from central functions and all areas of the organisation need the capacity to respond to demand, threats and opportunities.

These change are easy to say but incredibly difficult. Change on this scale involves the creation of an entirely new system of economic activity. It changes the roles of participants in the system of the corporation from employees, to managers to the shareholders of the organization. That kind of change is complex, hard and takes time that an organization under threat lacks.

Every company that relies on central planning and rationing as part of its management process should consider the implications of this approach and go looking for the hidden consequences. The time to build a more Responsive Organisation is before it is needed to fend off a digital competitor.

At the May Day Parade in Moscow, Leonid Brezhnev and other Russian officials watched as usual as the long parade of Soviet Military power – missiles, tanks, armoured cars and the like. At the end of the parade came a little truck with three middle aged men sitting in it. Comrade Brezhnev turned to the Defence Minister and asked: “Who are they?” The Defence Minister replied “Those are three economists. You would not believe the destructive power that they possess.” – Soviet era joke from Russia 

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