Bureaucracy kills innovation. We all know that. But why? Partly, it’s because bureaucracy grows out of prudence, a desire not to repeat the mistakes of the past. With the current economic crisis, for example, you can be sure that a lot more checks will be put into place—both in Washington and in corporate boardrooms—to prevent the excesses that got us into this situation from happening again. Governments and corporations alike react to crises by implementing more rules and regulations.
Putting checks in place, after all, is the prudent thing to do. But bureaucracies, and the checks they impose on companies, have their unintended consequences. Paul Graham takes a stab at exploring these costs in a new essay. He writes:
Every check has a cost.
. . . Checks instituted by governments can cripple a country’s whole economy. Up till about 1400, China was richer and more technologically advanced than Europe. One reason Europe pulled ahead was that the Chinese government restricted long trading voyages. So it was left to the Europeans to explore and eventually to dominate the rest of the world, including China.
In more recent times, Sarbanes-Oxley has practically destroyed the US IPO market. That wasn’t the intention of the legislators who wrote it. They just wanted to add a few more checks on public companies. But they forgot to consider the cost. They forgot that companies about to go public are usually rather stretched, and that the weight of a few extra checks that might be easy for General Electric to bear are enough to prevent younger companies from being public at all.
The bureaucracy of large corporations can be just as bad. He gives the examples of checking to make sure suppliers are solvent before allowing them to bid for business or approving large software purchases by committee. On the surface, these are prudent precautions, but they end up imposing costs that also need to be taken into account:
The purpose of the committee is presumably to ensure that the company doesn’t waste money. And yet the result is that the company pays 10 times as much.
Checks on purchases will always be expensive, because the harder it is to sell something to you, the more it has to cost.
Suppliers, whether they are plastic manufacturers or software vendors, will incorporate the cost of complying with bureaucracy into their price. And it is not just outside vendors that make this calculation. So do employees. Throw too many rules at the employees who create your product and the most talented ones may decide it is not worth their while. Graham gives the example of software programmers frustrated by longer release schedules after their startup has been acquired by a larger company with more rules in place. He warns:
And just as the greatest danger of being hard to sell to is not that you overpay but that the best suppliers won’t even sell to you, the greatest danger of applying too many checks to your programmers is not that you’ll make them unproductive, but that good programmers won’t even want to work for you.
This is the cost of prudence. Sometimes it is worth it, sometimes it is not. Releasing software that actually works might be better than releasing early and releasing often, depending on what type of software it is and on your customers’ tolerance for failure. Stronger rules regulating the buying and selling of credit derivatives would have definitely been in the “worth it” category. Imposing Sarbanes-Oxley equally across companies both big and small was overkill.
Rules need to be judged not only by what they are designed to accomplish or protect against, but also by the hidden costs they end up imposing on everyone who follows them.
(Photo by redjar).
very thought provoking essay-it seems logical too!
I totally agree Amman, the more people and organizations strive for stability to avert risk, the more prone they come to what they are trying so hard to avoid.
Jon
http://DreamClue.com … get the message!
I don’t think there is much really being said in this essay. Everyone knows that regulations and checks impose a cost. That’s why people dismantle them in order to be more ’streamlined’, ‘productive’, and ‘efficient’. Then disaster strikes because of the lack of oversight and everyone is reminded of the huge cost of no regulations or checks. So people clamor for more regulation and then the cycle repeats. What’s really needed, of course, is simply good judgment. Unfortunately that takes effort and sometimes experience and wisdom. And who has time for that?
There is a lot to say about what you wrote.
FIRST, as evidenced by the last election and many, many prior elections, not many people know the damage caused by over regulation.
The crew just voted into office in DC are the types who LOVE regulation. We’ll see tons of new regs applied with unknown and (obviously) untested enforcement plans. Thus, many business plans will be in limbo because the mere threat or risk of government action is far for important to many business plans than silly things like market conditions and competition.
The worst part of this new regulatory environment will be that the threat of regulation will now be constant, with all sorts of rumors flying around as the market’s power dwindles and the power of a few Congressmen and Senators grows. Watch the trade rags and see if more focus is put on Washington and what “Washington will do.” That’s the clearest sign that we are in big trouble.
It’s going to get a lot more expensive to start and run many businesses – and the big guys will be spending even more on lobbying.
SECOND, we have to segment the “pro-regulation” forces into at least two types. The first type includes people who genuinely care about safety, clean markets and stopping corrupt practices. Their issue is they rule by exception, not with a full array of facts.
This is fine and we can tolerate some of this, but it’s the second type that is disturbing and dangerous to Democratic Capitalism. These are the people with Socialist bents. These people don’t like Democratic Capitalism. I think most of them can’t see how Capitalism could ever work. These are the people who are clamoring for regulations.
This second group doesn’t push for regulations that will help the market, but they push for regulations that tear apart the market or make it very hard for anyone in the market to succeed.
An example is the rabid environmentalists. Think about how safe oil exploration, production, refining, distributing, etc. is. Yet, these people spend every effort to stop the industry – even when many people are hurt financially or it costs the country huge sums of money because we are ignoring our own supplies. Hint: it’s not about the environment; it’s about trying to stop progress.
Remember what Obama said about the coal industry: he’ll force it into bankruptcy by regulating it to death.
What will happen when this same screwy Socialist mentality is applied to high growth industries like tech????
Unfortunately, Obama’s background is with people in the second group. Also, the Soros influence is with the second group. The bottom line is people need to start waking up and we all need to fight these liberals.
Socialism doesn’t work!
It’s not just IPOs. When we sold to a public company, the deal was structured to keep us as a small nimble entity, but to grow more quickly with more cash and a bigger network. I noticed that with Sarbanes-Oxley (and other bureaucracy of the parent company), it suddenly took twice the resources to get anything done. Gone were any of the small scrappy projects, we had to take on only those clients that could afford longer timelines and heftier markup.
I wonder if the scarcity of talent factors in here. As your org grows, you naturally have to move down a gradient of talent as you try to quickly fill needed positions. A longer distance from top to bottom and a divide in talent erodes the kind of trust that empowers middle-managers to make their own decisions, and places instead a rigid system of checks and rules.
You know, there really are people in large corporations who want to change things, but convincing people – hundreds of people, to adopt a new idea that may not be standard, requires people to stand up and take accountability for what’s going to happen.
Unfortunately, most people in corporations are there to work and get a paycheck. They aren’t there to make innovative revolutions in their businesses.
Entrepreneurs on the other hand, have vested interest in being innovative because that’s the only way they can compete.
So, being an entrepreneur, the longer corporations stay stuffed with bureaucracy, the better.
Think of how humiliating it was for Greenspan – who had been put in a pedestal by Congress – to be finally forced to admit that the totally free, non regulated system he’s always advocated does not work.
It appears that human nature, extreme competition, greed lack of empathy, pressure etc – are just too dominant in human business interaction to allow for government passivity.
We wait until there is a major tragedy to rethink and our ideals and reform our behaviors.
“the totally free, non regulated system he’s always advocated does not work”
Are you suggesting that the Federal Reserve system is a libertarian system?
The Fed, Fannie Mae, Freddie Mac, the Community Reinvestment Act, and yet Greenspan, Obama, and others claim that the free market failed.
Then, of course, there’s terrible, horrible greed. The same motivating force that produced your car, your computer, your clothes, and, quite possibly, your job.
Actually, Ford created the car for humanitarian reasons. The computer was created as part of the war effort. Clothes are a basic necessity, like fire. Hell, the internet was a government-funded (i.e., socialist) research project.
Hm….Sounds like government isn’t all that bad.
On the other hand…we’ve seen what lack of regulation can do: Great Depression, Oil Crisis, S&L crisis, Asian Collapse, Millennial Depression, China and any good it exports…
The cost of the shit hitting the fan when regulation is out of the picture so outweighs the costs of complying with regulation that it’s like comparing a supermassive black hole with a mouse.
I go to work to make money doing something I love. Even subsisting on a personal farm requires a modicum of greed, or self-interest. Ford himself cited the ‘wage motive’ as his reason for raising wages. He got the best employees by paying them more. Sounds like an appeal to greed to me. (He didn’t “create the car”, BTW.)
There are also explanations from free-market economists for the crises you cite.
In more recent times, Sarbanes-Oxley has practically destroyed the US IPO market.
Does he offer any proof of this beyond that SOX happened and IPOs went down?
Here’s a sign of how much programmers like to be able to work hard: these guys would have paid to be able to release code immediately, the way they used to. I asked them if they’d trade 10% of the acquisition price for the ability to release code immediately, and all three instantly said yes.
Gee I’m shocked, shocked that people that code for a living want to see their code used.
While I’m in general agreement about the tone of this article I feel like Paul’s articles are the Just So stories of the 00’s. What tipped me off to this was a critique of “hackers and painters” not being about pastry chefs instead.
Working in DC seems to make all of this some sort of necessary evil. It seems that those of us who work in the private sector are so used to dealing with bureaucrats that it becomes something that we just automatically expect and end up using unnecessary processes on each other as well.
Sometimes I wish I could just focus on getting things done and let someone else decided how it is going to be documented and categorized.
“Stronger rules regulating the buying and selling of credit derivatives would have definitely been in the “worth it” category. Imposing Sarbanes-Oxley equally across companies both big and small was overkill.”
Hindsight is always 20/20
“Stronger rules regulating the buying and selling of credit derivatives would have definitely been in the “worth it” category”
May I ask why you think so?
Banks loan money into existence and the federal reserve central banking system and the institutions who are first in line to the money can profit from the risk they take and get a bail out when things go south.
Though we spend most of their waking hours chasing money, most of us don’t know anything about our monetary system, and in the absence of such understanding economic discussions are somewhat pointless.
Benevolent Dictatorship is the most effective and efficient form of ruling.
Says Bush to Mao…
They were not Benevolent. Ellison or Jobs are great examples.
Ellison and Jobs were not dictators – Jobs was overthrown in the ’90s, and today the powers of both Ellison and Jobs are kept in check by their competitors in the consumer market and owners in the stock market.
As Barack is found of saying, we don’t necessarily want big government or small government, what we want is smart government. The fact that SOX is a disaster is an argument against dumb government. But even that may be unfair, with problems as complex as the prevention of the next Enron implosion there are bound to be many unintended consequences. That doesn’t mean that government’s should not act. They should act with the best information available and then iterate until they get right. Of course the latter does not happen often, but a “smart” government needs to be focused on exactly that.
Anyone really believe that we are going to get healthcare reform right the first time?
The founders understood that checks and balances keep government healthy. Regulatory agencies need some.
It’s almost impossible to predict the net result of new rules at the time they’re made. What we’re missing in the design of government is responsibility in the courts (or another body separate from the regulatory agencies) to regularly review the outcome of regulations and roll back crappy ones – not just based on their constitutionality, but on their effectiveness. Regulation is too much a one-way street where agencies foist more and more bad rules on us until a political backlash builds to throw out the entire apparatus. A more sustainable path to evolving effective rules would include a process of continuous evaluation of those rules and pruning of bad ones.
I didn’t see the use of bureaucracies for a long time.
Software is just software. It has to be a means to an end. If the people at the company do not agree on a software feature if they are developing, or agree on a purchase if they are purchasing, then it shouldn’t happen.
Software has to achieve a purpose. That purpose is the will of the whole company, or organization.
When you say that bureaucracy can stifle innovation, perhaps the people that voted did not want or need that innovation in the first place. We are people making software for people. Not to achieve some prize.
PLENTY of software companies make astounding innovations and fail because they didn’t take the people factor into account. Many times developers fail to realize what it is that is needed without the help of others.
Look at Arrington with the TechCrunch tablet. He had a vision. A vision that was applauded by a few tech elite, but that the general public did not really want.
Arrington sits on a throne with nobody opposing him much like a king. If he had to sit amongst superiors and push his idea through, it may have actually succeeded.
Seems a little disingenuous to criticize prudence a week after one of the companies in his portfolio broadcast a teen suicide live.
We miss the point — We need rules, and we need freedom — but good rule drafting should minimize imposition of unecessary costs. This is a rule drafting COMPETENCE question, not a META or POLITICAL question. I discuss this further in my post … URL above. Thanks for focusing attention on an important issue.
Well — the system did not post the URL — if you are interested, do a Google search for Quickthink – the post “Addicted to Rules?”
But isn’t having no checks or regulation worse? Example: The current financial crisis?
You don’t understand. The present fincial crisis was not created by lack of regulation, it was created by a failure of regulation. these are ALL regulated industries. and have been for over 100 years in the US.
keep seeing people making this mistake. Most of the press does too.
As Einstien is reported to have said, “insanity is doing the same thing and expecting different results,”
Public*Relations said, “Think of how humiliating it was for Greenspan – who had been put in a pedestal by Congress – to be finally forced to admit that the totally free, non regulated system he’s always advocated does not work.”
I cannot even figure out what Greenspan is talking about when he says the models he idolized failed. Additionaly, this theme that the U.S. is unregulated is downright ridiculous. The housing catastrophe happened because it was designed to happen. President Clinton’s HUD department created rules that forced lenders to give loans to people who traditionally cannot afford loans. There you have it: One hundred years of regulations designed to improve the system down the drain with one INTENTIONAL act.
“Michael” is right on. Our state and federal governments can develop simple rules, that have minimal costs associated with compliance, but which are extremely effective.
And Silicon Valley, the center of the universe for IPO’s, is a product of war and defense systems research:
http://www.yout...h?v=hFSPHfZQpIQ
Somehow also government controlled and regulated.
“The world is my computer program, and here is how I programmed it.”
cool post
“Michael” is right on. Our state and federal governments can develop simple rules, that have minimal costs associated with compliance, but which are extremely effective.