Monday, 17 September 2012


The Viable System Model and Structural Recursion

Stafford Beer’s Viable System Model and in particular his Recursive System Theorem are often the subject of discussion. In this blog rather than explaining Beer’s work I want to explain how I use it. Indeed I’ve used the VSM for a long time, since the old days in Chile, and in particular I’ve applied the idea of structural recursion to enterprises of all kinds. 
I see structural recursion as a possible consequence of the often tacit strategies used by members of an organisation to manage the complexity that they create, regulate and produce as they deal with a self-defined problematic situation in their medium/environment. I use the term create to point at the meanings (policies, purposes, values and products) that they define to guide their collective actions. These actions produce the organisation’s meanings as experienced overtime by stakeholders. Aligning meaning creation and production requires regulation supporting the organisation’s cohesion and adaptation to its medium/environment.
It is apparent that members of any organisation, whether they are senior managers or shopfloor workers, share the same biology and therefore have similar complexity management capabilities, but often their potentialities are very different. Since potentially problematic situations can imply exceedingly large complexities, a strategy to deal with them is chunking the global problematic situation into chunks (or primary activities as I call them in my work) that we may expect people strive to align with global policies, purposes and values. If these aligned chunks manage to be autonomous themselves and succeed creating, regulating and producing their particular policies and products, the structural and processual implications are amplifying, perhaps in orders of magnitude, the mutual constitution of organisational and environmental complexities. In the end achieving a constructive synergistic ‘unfolding of complexity’ hugely increases the overall situational and organisational complexities. This implies that in the same way that the global organisation articulates its problematic situation, the aligned chunks create, regulate and implement their own meanings; in other words are autonomous themselves creating and dealing with much more complexity than if they were following hierarchical instructions. Indeed this unfolding (i.e. chunking) may now happen within each of the chunks and therefore we are now witnessing a proliferation of situational and organisational complexities relying on the creativity, flexibility and inventiveness of their members. The number of structurally recursive levels in an organisational system is the number of autonomous structural levels producing the organisation’s self-defined meanings. 
Thus, each of the chunks needs resources and competencies to create, regulate and implement their self-defined products; these are systems 5, 4, 3, 2 and 1 in Beer’s VSM or the systemic functions of Policy, Intelligence, Cohesion, Coordination and Implementation in my own language.  These functions must recur in all viable chunks at all structural levels. More significantly, communications among them in the organisational system and with agents in their medium/environment produce recursive relationships of performance, cohesion and adaptation. In viable organisations these relationships emerge from effective complexity management strategies, which rely as much as possible on self-regulation and self-organisation for balancing what in general are asymmetrical varieties (I’m using variety in the Ashby’s sense). This recurrence of systemic functions and relationships for each autonomous chunk is for me the meaning of structural recursion.  The platforms for this recursion are the meanings or policies created by the members of the organisational system, which give them the closure of an autonomous organisational system. These policies are their purposes, values, norms emerging from their communications with agents constituting problematic situations and also most significantly, from their cultural contexts. These are multiple loops of circular causality, boot-strapping and so forth.
Beer’s first insights about this model came from his appreciation of the complexity management strategies of our nervous system as humans co-evolved with their medium. Methodologically, the insights coming from a scientific situation (neurophysiology) helped him to offer a model relevant to organisations and management. This methodology, which connects nature’s evolution and learning, is used in artificial intelligence and engineering today (e.g. mimicking the behaviour of ants, bees and birds).  With adequate methodological support, particularly accounting for people’s purposes, it can also be a most useful methodology for social situations.
I’ve applied structural recursion in a wide variety of situations; there are easy cases where the managerial situation clearly recognises autonomous chunks; this is the case of large corporations that over the years have evolved from functional, centralised structures, to autonomous divisions and strategic business units.  But, for smaller units in SBUs as well as for small and medium sized enterprises it is not uncommon to find that there is no structural recursion; simply, often, chunks are the outcome of hierarchical relationships. Indeed, empirical evidence may suggest that no recursion is happening.  Indeed in all cases recursion can only be established empirically. Of course we can always recognise shortcomings in these ‘unfoldings of complexity’ but in one form or another we start hypothesising chunks and levels creating, regulating and producing their own meanings and then test the hypothesis. There are structural and identity shortcomings that tend to be archetypical, which in practice limit the scope of recursive chunks (see Organisational Systems; Managing Complexity with the Viable System Model, by R. Espejo and A. Reyes, Springer 2011).
More interesting examples of complexity unfolding happen with reference to government policies,  such as health, education, nuclear waste management and so forth, where we find that processes of self-organisation evolve towards some form of structural recursion of the multiple institutional parts creating, regulating and producing that policy, which overtime develop connectivity that eventually may give viability to the policy.

Thursday, 22 March 2012

Review of Cybernetic Revolutionaries by Eden Medina, MIT Press, Cambridge Mass, 2011

March 2012

In this book Eden Medina offers a historic review and reflexion of an unlikely project; Cybersyn. It happened in the Chile of Presidente Salvador Allende in the early 1970s. The book offers a most compelling account of an attempt to use science and technology in support of the management of a highly turbulent political process. I was its operational director and therefore had a privileged participation in its unfolding.
Cybersyn, the brainchild of Stafford Beer, was conceived and developed at the same time of publishing Brain of the Firm, the first of his trilogy about the Viable System Model (VSM). He had been pondering about this model for some years and Chile offered the opportunity to use it.
Eden’s historic account is well researched and balanced. As a participant, this account resonates fairly well with my memories. Indeed I disagree here and there with particular recollections and in occasions, as I illustrate below, I would have put the emphasis differently, but overall I feel comfortable with her account even if sometimes it is not favourable to individuals or the project as a whole. Yes, I would have emphasised differently the roles of the Operations Research and Design teams in the project. I would have liked to read more about the huge contribution of the Operations Research group at the State Technology Institute. This team was responsible for modelling some of the technological processes of the public and nationalised enterprises and for designing performance indices to support managers. On the other hand I felt that the role of the team that designed the Operations Room (also operating from the same Institute) appeared over emphasised. No doubt that this latter team made a most powerful contribution to the project, but its overall scale was smaller than that suggested by the book.
Cyberstride, the idea of managing in real time the economy, was the driving force of Cybersyn and in my view it was Stafford’s most powerful vision at a time when global and local management were dominated by historic reporting operating with huge time lags. His concern was reducing the complexity natural to the industrial activities of the country to meaningful levels for effective managerial action, respecting the autonomy of the people, enterprises and overall industrial economy. He referred to this concern as variety engineering. In this engineering he saw computers as nodes in action networks rather than as number crunching machines. At a time when computers were used to routinize operational activities, Beer saw the role of computers in society and the economy as machines to give information to the people for them to act and control their destinies.
Eden rightly gives to Beer’s Viable System Model an important role in the project; however she makes apparent that “Beer was more interested in studying how systems behaved in the real world than in creating exact representations of how they function.”… “Beer’s emphasis on action over mathematical precision set him apart from many of his peers in the academic operations research community who, Beer believed, privileged mathematical abstraction over problem solving”
Stafford arrived to Chile with the manuscript of the book “Brain of the Firm”, which instantly captured the imagination of all of us and also of people further afield. Eden clearly states that from a historic perspective her explanation of the VSM had to be rooted in that book and not in its further developments after Cybersyn and she offers a good introduction to the model. Perhaps what this introduction does not make apparent is that Stafford had not spent much time in methodological considerations for its application and that in fact an important contribution of the local team was unravelling its use. However, the VSM was not used to model the Chilean economy but as a reference for engineering its variety. It gave us a heuristic for designing indices of performance at a number of structural levels, which were hypothesized as recursion levels of the industrial economy in line with the insights of the VSM.
Eden gives compelling evidence about the unavoidable interdependence of technology and politics. Cybersyn, as a technological device, could not free itself from the on-going politics of the day. Its relevance to politics is clearly instantiated by the increasing influence of Fernando Flores - the political leader of Cybersyn- on President Allende’s decisions. At the same time her account of the project itself makes apparent the limited relevance of Cybersyn in the Chilean economic scene. This was the case in spite of Beer’s efforts to catch up with the political chaos. She illustrates this conflict between politics and technology with reference to the publicity received by the project at the time and the project’s schizophrenia. Stafford’ main public speech about Cybersyn at the time was the Richard Goodman Lecture in the UK and she states with reference to this lecture that “By emphasizing technology instead of Cybersyn’s relationship to the social and economic goals of Allende’s nationalization program, Beer failed to definitively separate himself from the technocrats he criticized.”
This book offers a wonderful story about unlikely events that happened 40 years ago that are still relevant today. Personally, with the benefit of hindsight, I could make many criticisms to the work of those difficult but adrenaline-charged days, but in a book with a historic emphasis it would be unfair to criticise Cybersyn with the eyes of the 21st Century and certainly Eden Medina does not do that as she offers a balanced a well contextualised account of Cybersyn.


Raul Espejo

Thursday, 14 April 2011

The Viable System Model, Cybersyn and the Financial Crisis

This blog was triggered by a friend’s comments about the value of models and the need to have them for planning purposes. I don’t ignore the value of models, but rather raise the need to connect them to effective action capacity. This point seeks to emphasize the need to embed modelling activities in processes capable of supporting individual and organizational learning thorough the use of models.

The risk I see in the activities of think tanks is that they often are not underpinned by learning mechanisms aligned with the purposes that they manifestly seek to serve. This view emerges from the contrasting experiences I had in the 70s, first in Chile, in the context of Stafford Beer’s inspired CyberSyn Project, and later on at the International Institute for Applied Systems Analysis (IIASA), in the context of my contribution to the Large Organizations Project that included work in the Soviet Union. For almost two years I had the opportunity to experience (albeit at a distance) GOSPLAN’s massive planning processes.

The Chilean experience was an attempt to avoid large planning models in the benefit of models clearly focused on decision groups at the appropriate structural levels, supported by performative indices monitoring the consequences of their use. At least that was the intention. Unfortunately, in addition to the 1973 military coup, which gave no time to underpin structurally these models for effective organizational learning, this project was ahead of its time and lacked the necessary technological infrastructure to be successful. In the Soviet Union planning was supported by very sophisticated models but in practice these were models that reflected the perspectives of scientists at the global level and failed to incorporate the experiences of those affected by them at the intermediate and local structural levels. They had thousands of planners who were planning from the centre the activities of millions whose problems they vaguely understood. This goes without saying that not then, not today, nor in the future they could have the technological infrastructure to make viable this centralising dream.

The complexity of social systems, because of their human fabric, is so large that efforts to manage it with mathematical representations, developed at privileged central positions, are a mirage. In free societies the generation of complexity is distributed and so needs to be its management. This is the complexity management strategy offered by Beer’s Viable System Model; this is the strategy of recursive organizations. Rather than the delusion of large sophisticated representational models to manage social complexity, the strategy is a reflective matching of global, intermediate and local models with organizational response capacity. This matching is a performative strategy that recognises the all too common and often unavoidable errors where there is cognitive (response) capacity to deal with them, and these are errors that reflect socially agreed purposes, which support individual and organizational learning over time.

Ironically, the same mistakes that made planning ineffective in the Soviet Union for decades appear to have played a role in the financial crisis of 2008. These mistakes are evidenced by the behaviour of centres of excellence for economic research and economists before its inception. They supported building complex mathematical models divorced from the complex entanglements of the multiple institutions constituting the global financial system. They failed to see the organizational system, let alone its huge unknowable complexity. They failed to see that this organizational system required the alignment of their tacit global, intermediate and local modelling efforts, on behalf of multiple institutions, to social structures with requisite action capacity. This global organizational system had to be consistent with the visions, purposes and values of political, social and economic policy-makers, beyond the insatiable thirst for profits of financial institutions. This organizational system was necessary to enable structural capacity for distributed learning. This would have given their financial models the capability to support action in the direction of desirable political, social and economic outcomes. This proposition may be seen as idealistic, however we are now hearing from people like Gordon Brown, a past UK prime minister, institutions like the IMF and others the need for global financial regulation, but no one appears to recognise that without, at least, aligned economic projects this regulation will be rudderless and therefore ineffective to avert future financial crises.

Wednesday, 26 May 2010

Systemic and Cybernetic Views of the Euro

At the time when Europe was debating adopting a single currency one of my Swiss colleagues asked me about the Euro’s likely success in the longer run. My answer was not an optimistic one. Now, when Europe’s concerns about its currency are increasing by the day, we hear more and more about better fiscal checks and more penalties for those countries that do not comply with the requirements of prudence. Furthermore, some see in the recent decisions to prompt the Euro a whiff of political integration. Let’s reflect upon these concerns and decisions in systemic and cybernetic terms.

It is becoming increasingly apparent that the European Union (EU) is facing a systemic problem; either it accepts that some individual countries, unable to pay their debt, abandon the Euro and take their own decisions or accepts that there is a systemic bond among its members and is prepared to support each of them as they face the relentless and unforgiving forces of the financial markets.  In my view the problem is to go ahead with this second option -apparently the preferred one- without proper acknowledgment that it implies far more than setting stronger controls over the fiscal behaviour. This is a crucial moment for the European project; is it about a European union, as some want, or is it about economic collaboration as some others want? I discuss below the cybernetics of these options.

Are European countries accepting to use a single currency unaware of the operational implications of this acceptance? Is it not that the European Union appears blind to the costly longer term consequences of this acceptance? Let’s discuss the cybernetic argument.

To visualise the argument let’s think about the old Deutschmark at the time of the unification of West and East Germany. At that time Germany made apparent that it was prepared to accept the cost of unification. There we had two countries with significant institutional and economic differences; however the political will to bring them together was unequivocal. West Germany was prepared to allocate the resources, take the time and move relentlessly in the direction of an integrated democratic German state. Over time two states with different degrees of development were prepared to accept the pains of achieving a shared institutional framework, symbolised by the Deutschmark. For the Euro the situation is indeed different. EU countries not only have larger historical, institutional and economic differences but furthermore don’t have the will of an effective integration. Simply, reducing the problem to financial policies supported by strong checks and gruesome penalties is not going to make the trick. The complexity of the situation is far greater; balancing historic, cultural and institutional difference does not happen simply by an institution such as the European Central Bank (ECB) imposing common rules to all member countries. Different institutions in the participant countries imply different meanings for the same rules; some of these institutions may not have the operational depth to produce necessary distinctions nor the practices to achieve expected performance. Even if politicians and economists in these countries shared a similar grasp of these rules the likelihood is that the moment-to-moment actions of millions of citizens in each of these countries will not be aligned. In practice this implies different degrees of compliance with the ECB’s rules and norms. This situation would be very different if countries joining the Euro were ready to leave it as operational stresses suggested that it was better for them, and for the rest of the European Union, to face the situation individually. They would have a larger repertoire of responses; for instance they could devalue their currency, apply local idiosyncratic fiscal policies and even accept a carefully managed default (see Crisis watch by Simon Johnson and Peter Boone, in Prospect, April 2010).

The issue is the degree of cohesion that is expected between the countries belonging to the Euro. The Euro is an institutional mechanism that coordinates operational transactions throughout the countries that accept it as their currency. However, in the end it has to reflect an operational coherence among these countries. If the productivity of some of them is lower than that of others, sooner or later this will be reflected by imbalances in the operational domain. Some countries will succeed exporting their goods and services at the expense of the relative failure of the others. For sometime this imbalance may be absorbed by exports to third countries, however in the end a chronic relative low level of productivity within some countries in the Euro zone will be reflected in financial imbalances. But, the mechanism of devaluation to balance differences in productivity will not be available. Whether or not the financial markets understand the cybernetic underpinning of these imbalances they will taste blood, smell profits and act accordingly.

Audits and checks of the countries’ financial behaviors will not be enough to produce the required balance. Audits may be useful in the informational domain but, unless they are supported by investment and institutional changes the necessary operational adjustments between the member countries will not happen. The loose political arrangements of the Euro zone seem to be a long way from the unification experience of the two Germanys. Operational imbalances are being exacerbated by the recent expansion of the European Union, as well as by the relatively slower economic development of some of the old members. Resources that had supported the development of some of the Mediterranean countries are now flowing to Eastern Europe. The wealth of the union is being spread too thinly and the longer term implications of these policies are glaringly clear; the necessary operational coherence for a shared currency is further and further away.

In summary, in my view, now that the European Union includes 27 countries (and 3 in prospect) of significantly different institutional and economic development, the goal of a unified currency is more and more remote. The cybernetics of this situation supports a looser currency arrangement, where some of the current members of the Euro should be ready to abandon it and where the acceptance of new members into this Club should only happen after passing successfully significant operational and financial tests.


Thursday, 29 April 2010

Centralization and Decentralization

My last posting reflected upon “What’s System Thinking” and referred to the issue of centralization and decentralization in organizations. Is it always desirable to make decisions locally? When are local decisions more advantageous than global decisions and vice-versa? Indeed there are multiple factors impinging on these choices. In particular new communication and information technologies are changing the balance in both directions for different issues. The cost of communications has been falling dramatically in recent years. Today more people than ever before can be involved in local decisions. Equally, today more people than ever before can contribute with local knowledge to global decisions.

Structurally, it is desirable to have relatively small teams responsible for the full value chain of a business process. They can operate from inputs to outputs through a transformation process that is theirs. These teams absorb most of the customers’ variety locally. This approach allows these customers to recognise the ‘faces’ of those responsible for the products and services they consume. For instance citizens in need of housing services would be able to interact with the unit responsible for assessing their needs as well as for delivering the services. This avoids fragmenting service delivery; proximity allows for the right hand to know what the left is doing. However, the increasing complexity of people’s demands and the constraints imposed by culture and resources tend to force some degree of centralization as organizations look for synergies and economies of scale. People are distributed in varied geographic areas, require different types of services, have different urgency and so forth. These are complexity drivers guiding the structuring of housing services and if this structuring is not thought through the chances are that poor service delivery will dominate their interactions with citizens.

Most significantly, local teams need global information to close effectively local loops. Among others, policy priorities are decided globally, specialised knowledge and resources are often pooled together beyond local teams and the economies of scale offered by available technologies may tempt centralisation. But, centralization increases the chances of functionalism at the expense of holism. Service delivery teams risk becoming customer service units with limited appreciation of, and responsibility for, the total service they offer.
Beyond managing the value chain, those providing services at the local level need to have flexibility to define their own policies. This is necessary to respond to local needs and avoid the uniformity of ‘faceless’ bureaucrats following the dictate of global policies. Distributing the activities of the value chain at different structural levels, beyond the flexible response of autonomous local teams, increase the chances of reducing local officials to the role of post boxes distributing to other groups the responsibilities to deal with customers’ requirements. As they do this officials lose contact with the very people that they are supposed to service. This is why local services for large markets require creating local policies within the framework of a global policy. They also require negotiating and accepting specific programme requirements, including the use of scarce resources. To avoid fragmentation it is necessary truly systemic, synergistic, organizations that succeed balancing local responsiveness with global coordination of policies. Organizational systems need cohesion and adaptation to manage the complexity of their tasks.

In this effort for holism the cost of communications is changing the balance between centralization and decentralization. Today’s decreasing cost of communications makes possible creating virtual teams that facilitate decentralisation. Members of centralised groups with specialised knowledge can be effective contributors for the creation and implementation of local policies. People responsible for the use of expensive centralized resources can be made (virtually) part of local teams and thus accountable to the team. These are cases of resource centralization and functional decentralization. Equally, those working in these groups, with local knowledge of stakeholders can influence more effectively global policies by communicating to policy-makers local responses to exiting policies.

From the perspective of organizational design the challenge is fostering a cascading of self-contained product/service teams which make possible the progressive integration of functions into larger self-contained groups that match customers’ needs at different performance requirements. For instance, for housing services, local teams focused on providing particular types of services can be embedded in regional units with functional capacity for the deployment of building and maintenance resources according to local needs. What is particular to this proposition is that building and maintenance resources provide a more global performance requirement, namely building and maintenance capabilities, at the same time that they are contributors and accountable to local teams for local services. As the cost of communications is reduced the allocation of resources can be reconfigured transforming the organization’s capabilities. Constituting effective local teams and coordinating these multiple teams in a global context becomes increasingly challenging but also, with the support of new information and communication technologies, manageable and potentially more effective.

Wednesday, 14 April 2010

What is Systems Thinking?

I have just finished reading the book “Systems Thinking in the Public Sector; the failure of the reform regime and a manifesto for a better way” (2008) by John Seddon, Triarchy Press, Axminster, UK. This book has received good reviews from politicians, seniors civil servants and specialised journalists. And, indeed, Seddon's understanding of systems thinking is compelling; it makes apparent through many examples in the public sector the always present tendency to fragment policy implementation. In particular his focus is on the current tendency to fragment services between the front end work and the back room support. He illustrates abundantly how front end civil servants take off their sight from customers’ request by passing them to back end workers. No one person or team deals from the beginning to the end with the particular customer, fragmenting the service and leaving in no one’s land responsibility for its performance. The voids in between the end-to-end time for the service grow and grow, transforming a service that could have taken days in one that takes months. This kind of performance is a consequence of the targets imposed to local providers by central government (the regime in his words); these targets are focused on performing activities rather than on the purposes of the service. An activity can be the number of customer calls that are discharged within a certain time, regardless of whether this discharging meant satisfying the client’s needs or not. Following Deming's work Seddon argues for a statistical measurement of the system's capabilities to work out what the current configuration of resources permits the system to do for its customers rather than for the civil servants in central government.

He makes the very useful distinction between failure and value demand. The statistics he gives are frightening; most of the activity of civil servants is responding to failure and not adding value to the client's needs. Seddon's argument, following Toyota's experience, is that a focus on the value adding flow of the service is the essence of systemic thinking. For this he argues it is necessary to understand the customer's needs. For public services, perhaps differently to manufacturing activities, the variety of these needs is very large indeed and it is necessary to design a service that absorbs this variety rather than trying to constrain it through predefined processes. People suffer as a consequence of this predetermination; the service delivery takes too long, costs are too high and the available resources are squandered to the detriment of better services. The purpose should be offering services that match the customers' variety. It is essential to understand in depth these needs and organize the activities' flow in such a way that they match these requirements. And, in his view, the use of IT for these purposes has been counterproductive in recent time. Usually this technology has reinforced the operation of badly designed processes.

He is aware that changing the regime is almost impossible; the only option is dismantling it. The rules and legislation in place make it very difficult to alter the service delivery procedures in place. Service providers are torn between satisfying counterproductive targets and being assessed poorly by contrived inspections. The whole machinery for service provision is inadequate and squanders a huge amount of resources. In spite of these views he ends up the book offering a list of situations where the use of systemic thinking has produced significant improvements.

Though my overall assessment of the book is positive I think that it offers a superficial view of systems thinking and little methodological guidance to use it. This is paradoxical since throughout the book Seddon insists that the problem with the regime is that for policy implementation offers no methods beyond the dogmatic delusion of what he calls deliverology. For those being initiated in this way of thinking the book is useful but there are some issues that need further reflection:

-Centralisation-decentralisation; which structures make beneficial the sharing of resources? No doubt fragmentation is a risk when a service process is divided between front end and back end activities, but the issue is how to overcome this fragmentation at the same time of making possible the sharing of scarce and expert resources.

-How to absorb front end variety? Accepting variety face value is likely to overwhelm service providers. Service providers must find ways of limiting this variety without hindering the main purpose of the service. In the end there must be a trade off between accepting customers' unconstrained variety and restricting it with ingenuity to avoid being overwhelmed by its proliferation. Variety engineering is a key issue in service provision that should take into account purpose, resources and acceptable performance.

-relevance of IT in service delivery; no doubt there are multiple examples of a counterproductive use of ITs. However Seddon's advice to turn off IT changes to understand and design work as a system and to 'pull' the necessary IT when the new design is stable, makes apparent a lack of appreciation of the co-evolution of service processes and technology. Ingenuity in the design of services is deeply related to technological changes and new processes should take into account these new technologies. Politicians, experts and civil servant need this ingenuity badly in their own spaces of action.

Monday, 2 March 2009

Enterprise's vulnerability

Beyond measures of achievement and potentialities (possibly emerging from business intelligence), organisational cybernetics is principally concerned with the ‘body’ of the enterprise. It is perfectly possible for an enterprise to be doing well (i.e. it is selling well its services, making profits and so forth) at the same time that a proper cybernetic study of its organisational structure makes apparent that its ‘body’ is not healthy. I have called this type of revision ‘second order auditing’; this is the auditing of the enterprise’s organisational processes, which is done using Beer’s Viable System Model and Espejo’s Viplan Method. Outcomes of this auditing may well be the diagnoses of over centralisation - thus making the enterprise’s businesses less flexible-, poor monitoring of these businesses - thus increasing chances of decentralised businesses failing without any warning (see previous blog)- and so forth. This kind of auditing has been done in hundreds of enterprises. It is through ‘second order auditing’ that I have proposed identity and structural archetypes of, shall we say, archetypes of enterprise’s vulnerability (see www.syncho.com).

Tuesday, 10 February 2009

Financial Crisis and Organisation Structure

Financial Failure and Systemic Enquiries

The House of Commons and the ‘near’ collapse of two British Banks

This morning the recently resigned chairmen and chief executive officers of the Royal Bank of Scotland (RBS) and Halifax Bank of Scotland (HBOS) were grilled by members of the UK Parliament’s Treasury Committee. The four ex senior managers apologised for the turn of events and the fact that tax payers had to bail the banks out of the crises. The Committee’s Chairman stated that either the bank bosses were incompetent or systemic reasons were responsible for this turn of events. Since the track record of these senior managers were well known the first option was not credible, leaving the option of systemic failures as the main reason. Also, much was made of the fact that the two chairmen were not bankers at the time of their appointments and that of the main four UK banking institutions only the two under scrutiny had had the tax payers bailing them out.

Unfortunately there was nothing in the questions and the evidence given that suggested that either politicians or managers understood the nature of systemic failures. They all stated that the events could not have been anticipated; things happened too quickly and they could only recognise their errors with the benefit of hindsight. A strong line of questioning was along their apparent inability to assess the risks of the products they were selling; did they understand these risks? Where they up to the complexity of the products they were offering? What struck me were the difficulties that the Committee members had to articulate the necessary questions to unearth the systemic aspects underpinning the managers’ failures. Both politicians and policy-makers don’t have an adequate training to visualise the structural underpinnings of their decisions. It is not difficult to appreciate that their judgments are supported by far more resources than those of lay citizens but they seem to be more at ease talking about concrete events and situations than to scrutinize the structures supporting their judgments. It became clear that the RBS had significant banking activities in the USA, and worldwide they had more than 25000 employees outside the UK, yet no question was directed to establish the quality of their knowledge of the USA subsidiaries; how well had these subsidiaries recognised the depth and magnitude of the sub-prime lending problem? Were they receiving good quality information about the situation of sub-prime mortgages as the situation was unfolding in the USA? Did they have adequate capacity in Headquarters to monitor the performance of these companies? Did RBS have mechanisms to cross check their experts’ assessment of the evolution of the markets with the results reported by their subsidiaries? These and many more systemic questions could have been asked but they did not emerge at all.

The problem was not that the RBS’s Chairman was an ex-pharmaceutical industry boss; in systemic terms the problem was that he and the other people in the bank’s Board did not share a good model of the organisational structure they were responsible for. This structure was responsible for inadequate distributed risk assessments that finally underpinned their judgments. Unfortunately, they and we (tax payers) are paying for the consequences of these bad assessments. The Chairman and the CEO could not know the details of the businesses they were running; their better chance for success was to improve their judgments by using the bank’s thousands of the highly paid executives and employees to the best of their abilities. Hopefully the effect of these structures should be better than adding or cancelling the individual abilities of these people; indeed this is what organisation structures are for. Competent people, supported by effective structural mechanisms, should be responsible for submitting good policy options for the consideration of policy-makers. Of course risks can never be eliminated but they can be ameliorated, in this case, by the collective work of thousands sharing the benefits of an unlighted leadership that enables their communications to the best of the stakeholders’ interests (not to the benefit of their own interests!). From this proposition many questions emerge that could provide light about why things went wrong and how things can go better in the future. Somehow I’m suggesting that both MPs and senior managers have much to learn about this kind of systemic inquiry.

Thursday, 5 February 2009

CyberSyn

A novel about Cybersyn

SYNCO (2008) by Jorge Baradit Ediciones B, Santiago de Chile

I’ve just been in Chile where I found the novel SYNCO. It was one of the local literary events of the end of the year. The novel is about the CyberSyn Project that took place in Chile during the Salvador Allende’s government in the early 1970s. I was the operations manager of that project and responsible for the project’s local name: SYNCO. The name came about as a composition of the word Synergy and the Spanish word cinco (‘five’ systems of Stafford Beer’s Viable System Model). Naturally I bought a copy and read it.

It starts with an introduction to the CyberSyn Project, including a photograph of the Operations Room (you can see it in my paper ‘CyberSyn and the re-construction of a holistic nature’, offered as a download in this website: http://www.syncho.com/). The project’s objective is defined as “...converting Chile in the first Cybernetic State in history, underpinned by a network which anticipated in decades the Internet as we know it”

It is a ‘retro-futuristic’ novel that takes place in 1979. Its assumption is that the coup of 11th September 1973 did not succeed and that the Allende’s government continued with the support of General Augusto Pinochet. In this note I don’t want to develop its argument but to comment the extent to which it fails conveying what a Cybernetic State would look like.

Baradit portrays Chile after the six years of the attempted coup as a neo-fascist State, dominated by the SYNCO machine, which controls all aspects of private and public lives. One of the protagonists who is trying to counteract the state’s drift towards a technocratic rightwing society, says: “SYNCO, a god made of wires and a shared mind, a beehive, will establish the first technological dynasty in history...But we are building up an army of code breaking children. We have educated them in the secrets of SYNCO ... a battalion of mind focused soldiers which will face up with their keyboards a new type of war for which they (the government) are not prepared”. Furthermore, some else states in relation to the government’s socio-economic direction that “The third way is an illusion” produced by a network of black covered cooper wires. Overall it appears that Baradit accepts as the lesser evil for Chile a successful military coup; the alternative was too awful to contemplate.

It is sad that this popularisation of the SYNCO project appears to give credence to the fears expressed by the right wing political press just before the coup in 1973. It re-enforces the view that information and communication technologies could only have led Chile to a neo-fascist, totalitarian outcome. This is a trivialisation of the argument that betrays lack of grasp of organisational cybernetics as a science of effective governance and not of autocratic control.

In my paper ‘CyberSyn and the re-construction of a holistic nature’, which as I said above you can down load from this website I say:
“Did the CyberSyn project succeed in re-constructing the nature of the Chilean society? This project, an invention of Stafford Beer, was an alternative to the extremes of running a centralised planning system or an unrestricted free market. This third way wanted to favour governance for social cohesion and distribution of power.”

Furthermore I say:
“CyberSyn was a project ahead of its time. Its creation was visionary; however its intended implementation did not have requisite variety. The necessary social and organisational contexts to re-construct the nature of social relationships did not exist; however desirable it might have been to provide information in real-time and by exception, the necessary relationships for cohesion and adaptation had not evolved enough to reinforce effective autonomous action throughout the social economy. A mooted point is whether a longer period of implementation, uninterrupted by the coup d’├ętat of September 1973, would have supported this requisite learning. Some participants in the project had an appreciation of the need to embody these relationships in the social fabric of the economy but collectively most of us did not see CyberSyn beyond being a powerful theoretical framework and our practice was biased towards a technical implementation at the expense of the values of building up a truly autonomous decentralised industry and furthermore an inclusive democracy. In conclusion, my view is that CyberSyn did not succeed in reconstructing a more humane and just social nature in the Chile of the 1970s.”

However, the safeguard against any technocratic tendency was precisely in the very implementation of CyberSyn, which required a social structure based on autonomy and coordination to make its tools viable. Without a culture of autonomy and resources for coordination these tools were too weak to have any social impact. The control against autocratic tendencies was intrinsic to the design itself. Of course politically it was always possible to use information technologies for coercive purposes however that would have been a different project, certainly not SYNCO; not only its political and conceptual underpinnings were those of a democratic society, but its tools were orders of magnitude less resource consuming than those required for centralised control. With the benefit of hindsight I believe that had the 1973 coup failed, and should the people and its socialist governments had supported the 3rd way offered by the CyberSyn project, Chile would have experienced years of painful development of which it would have emerged as a more equal and just society.

Wednesday, 10 December 2008

The Cybernetics of Relationships

Dear Graziano,

Many thanks for your comment. From a structural point of view it is apparent that in the UK social services are devolved to local authorities and therefore that it is their responsibility to enable conditions for good services. This requires not only that they allocate sufficient resources but also that they develop trustful relationships within the authority. This is necessary to increase the chances of setting in action support networks before incipient problems generate a crisis, like the death of the Baby P (that is, this is a strategy to reduce risk). These relationhsips should be the outcome of on-going (but not too frequent) communications that respect the services’ autonomy as pre-condition to allow their self-organisation and self-regulation. In contrast to this approach the picture that emerged from discussions in the press was that a national regulator, who by definition is far from the local social service units, was attempting to do this monitoring based on reports (i.e. information) and not on communications (i.e. utterance, information and understanding) and that to improve the situation it wanted to visit these units one a year as if these visits were enough to develop trustful relationships (rather than just fear to a distant controller) and reduce future risks.


This example illustrates my point that organisations don't understand the "cybernetics" (communications and control) of the situations they are in.