Why Organisations at all?

As an admin note, I’ll be away from 12 January to 18 January – the timing of the posts will be affected by this. I’ll probably have a post on Friday, and maybe another on 19 Jan.

Why do organisations exist? For all my discussion on organisations and change, I have not dealt with the important question of why do organisations exist in the first place. The other point I should address is why is it that I start a discussion on change-making from an organisational point of view.

With this post, I’ll answer the fundamental question first; of why do organisations exist. Organisations exist in contemporary society mainly as a way for groups of people to come together to achieve a common purpose over some period of time. This is certainly a laymen’s foundation, but it’s a decent starting point. The telos over time is what separates an organisation from a social movement.

Some responses can seem obvious – that organisations exist because there are things that need to be done by a group of people with different abilities. Is a community an organisation? I can’t say for sure. I think community deserves its own term. Communities might be one example of how people are organised, but I’m not sure that communities are telic (ends-driven, from telos) organisations, unless one were to accept a broad definition of telos.  The state – the bureaucratic structure of governance – is an organisation, or a collection of organisations. Is a family an organisation? How about a tribe? They are certainly forms of human organisation – and in a loose sense, they are organisations in themselves too.

So organisations are a basic form of human activity.

A more rigorous view of human organisations advanced with Coase’s theory of the firm. Why do companies exist? Why can’t the disparate functions of the firm be parcelled out to smaller units? As I understood it, Coase was referring to transaction costs, and one way of reducing it was to have these functions incorporated under a single authority. This could presumably reduce the communication costs compared to having them outside the firm. So if dealing with internal departments was difficult, think about how much more difficult it would be if those departments were separate firms to be negotiated with.

This is also an appropriate place to talk about information and the ways the flow across the organisation. In more abstract terms, an organisation is a way for social information to be concentrated and managed in ways that result in decisions and then ultimately, in actions in the environment. The concentration, management and enactment of information are important functions of an organisation.

This also ties back in the prior discussions on indicators. The way information moves around the organisation can be represented in terms of stocks and flows – and lend themselves to systems analysis.

Information flows are the result of information asymmetry – that someone out there has more information than someone else. In the market system, prices were signals that aim to reduce information asymmetry. In the examples of the firm, having departments within the firm reduces the information asymmetry for the entire company to get something done. Achieving information flows is thus one reason for the existence of functionally-self-sufficient firms.

The other concept that comes out of this discussion on information flows is the principal-agent problem. The principal-agent problem is one representation of information asymmetry – what happens when the agent – the person acting on behalf of the principal, who is often a superior responsible for the agent – acts for himself. This happens when the agent has typically more information about actual circumstances, and can often exploit the situation for their own benefit, and not for the principal’s benefit. When people talk about aligning incentives, or reducing corruption, the abstract issue is often those of information asymmetry or the principal-agent problem.

And organisations do not stand on their own. They are interacting with other organisations in society, with other companies, community groups, and politicians. The internal dynamics within any organisation come into contact with other organisations, and with the physical environment. The issues of information asymmetry, principal-agent problems, information management and decisions-making all come together in reality. Without first identifying the nature of the monsters we are looking at, our actions are often impotent, or worse, cause issues to deteriorate.

With this post, I hope I’ve clarified why I’ve gone through a long and tedious process. The next post will directly address why I’m looking at change within organisations specifically.

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