Digital transformation, big data, and Generation Y present businesses with a number of new challenges. The research project “The Agile Company” deals with the structural change of companies: as an approach to be able to keep up with the dynamics and complexity of the modern age.

One who deals intensively with the topic of organizational effectiveness and change in complexity is Niels Pfläging, who recently published the books Organisation für Complexity (2014) and Complexithoden (2015 – together with Silke Hermann). Niels Pfläging studied business administration in Hanover and Seville, after which he was controller in German corporations for several years. His career took him to Argentina, Brazil and the United States. For five years he was director of the Beyond Budgeting Round Table BBRT and the open-source community BetaCodex Network. Today he works internationally as a business speaker and consultant.

In connection with the research around the agile company, I had a conversation with Niels Pfläging – and together i-e. evaluated theses and insights from his books. The aim was to better understand these theses and to gain insights for the research project.

“Forty years ago, the complexity of social technology management was over. Since then we have been riding a dead horse called Management.”

The two books mentioned above by Niels Pfläging deal with complexity and its impact on companies. In the first part of the dialogue, we jointly evaluated why complexity is such a big issue.. “No matter from which point of view you look at companies, from which area of corporate governance we come from – everywhere surprise and the impossibility of control force us to a paradigm shift,” so Pfläging. “A deep understanding of complexity and its consequences for value creation and collaboration therefore provides crucial insights into how organizational structures and performance systems should be designed.”

“Social technology management as we know it – with plenty of planning, hierarchical control and functional division, is suitable for complicated value creation with little complexity and dynamism. In highly complex markets, however, central ized control and complicated-regulating organizational tools such as target agreements, budgeting, cost management, working time rules or strategic planning fail. We’ve been riding a dead horse called Management since the 1970s – and companies are noticing that so slowly!”

Niels Pfläging argues that the market environments of companies have changed considerably, making decentralized, federal, networked organizational structures in companies increasingly vital. “In complexity, the centre loses its power of information and interpretation, central control fails. The collapse of organisations can therefore only be prevented in highly dynamic, competitive markets if decentralized decision-making and leadership are switched instead of centralised control. In other words, the periphery must take power. This is not a question of style, opinion or taste. It is a systemic necessity. Radical decentralization is the only way to agility and to use existing intelligence in companies. So far, however, only a few pioneering companies have faced this reality – the DMs, the Toyotas, the W.L.Gores, and the Googles of this world,” he said. so Pfläging.

“The status quo in companies: We confuse leaders with leadership, planning with effective control and security, control with effectiveness.”

Most companies are still organized in principle of “direction and control”, says Pfläging. However, there is now great curiosity about what the alternatives might be. “That was the abolition of budgeting, business planning and management by objectives in the Beyond Budgeting Round Table at the time I started. Today, there is a great willingness everywhere to question common organizational and leadership practices. Which does not mean that appropriate action has already been taken everywhere” And: Today, it is not only large, established companies that have to deal with overcoming management as central control: “Startups” and “fast-growing” companies also have a strong tendency towards hierarchization, external control and control. Pfläging calls this tendency to hierarchical-bureaucratic encrustation “sidewind susceptibility”: “Actually, no one who works in a startup wants central control, bosses and bureaucracy and overregulation. But at some point, these things creep in. At some point there is a Manfred or Klaus who likes to fly business class, and there are envy who complain about it, and an owner or boss who likes to avoid direct conflict – and Schwupps! a travel expenses directive is drawn up. Just because someone wanted to avoid an awkward conversation or conflict. Something similar happens again and again in growing, maturing companies that are leaving their organizationally naive start-up phase. Somewhere there is always a crisis in a company, and you always want to do something to get to grips with the problems – actually problem symptoms. Sometimes you start a sales department. A personnel area. Sometimes you introduce rules instead of constantly taking on the responsibility, and another time you suddenly make annual planning or get a bonus. This turn cool startups into un-agile silo structures. We call this functional differentiation and centralized control.”

Hierarchically-controlling thought patterns then form as if “unnoticed” and reflexively – not by intention or within consciously reflected organizational development. Practices are copied by competitors, corporations, customers or suppliers. Or whispered by consultants. “The others do it that way.” The continuing omnipresence of social technology in management in almost all organisations means that the still rather rare alternative – namely decentralized network-oriented leadership – is overlooked. Pfläging calls this alternative, today the rather rare organizational model “Beta”.

In this context, Pfläging notes that certain basic assumptions about effective organization make the necessary change from centralized governance to decentralized leadership even more difficult. “Leadership is usually personalised – i.e. attached to individuals. Mostly managers. Legendary organizational researcher and consultant Mary Parker Follett criticized this attribution error more than 80 years ago. She argued that leadership is something that happens in the dynamics of social groups – almost in the space between the people who work together and for each other. Instead, we still like to believe in the formula “Controlling Leader + Willing Followers = Leadership” . And this over-trivialization of the phenomenon of leadership is proving fatal today, in complexity.” For this reason, according to Pfläging, more conscious work or “education” in the direction of contemporary ways of thinking about organizational development and leadership is necessary. “It’s not the people in the organizations that are the problem. But it is their mental models, their theories about organization, collaboration and the nature of performance and value creation. The good news is that everyone can work on these mental models. This is called learning. “

organizational physics
Pfläging divides companies into alpha and beta. Alpha companies are highly hierarchical and, according to Pfläging, no longer up-to-date.

“By creating islands of bliss in companies, you can’t get any closer to organizational transformation.”

A major theme of the 2nd Roundtable on Agility is “Start-ups in Companies”. Niels Pfläging warns against seeing this as a solution or as a panacea and exposing “weaknesses of the structure” through “temporary encapsulation” as in a startup. Pfläging cites as a reason that permanent change in the company is not possible through laboratories and pilot tests. In these enclaves, only so-called “islands of bliss” would emerge, which could not be seen as independent units as a model for the rest of the organization. “An island of bliss cannot radiate to the rest of the organization – because outside the island there are different beliefs and logics that can only be questioned internally. Incidentally, there is not a single example of organizational transformation that began with a laboratory or experiment. Transformation begins with the heart and brain – and then goes to hand. Not the other way around! One cannot try to build a better organization in the hope that the corresponding thinking will develop sometime later. That’s why laboratories, pilots, experiments or hacks are not the solution. Rather, it’s a lavish hocus-pocus. “

“All companies are already on the backstage something like networks of startups or mini-companies. Just secretly – not officially!”

Pfläging thus turns the question around the role model character of startups: Why should there only be startups outside the company? Why can’t entire companies and corporations consist of a large number, even hundreds, of functionally integrated mini-companies – similar to startups? According to Pfläging, this type of organization is not only possible – it already exists at companies such as Gore, Google, Southwest Airlines or DM. However, this decentralized, market-self-organized network organization requires successive cell division: limited team sizes and sustainable, never-ending decentralization of decisions toward the periphery.

Startups are, according to Pfläging, something like “naive beta organizations”. They rarely have knowledge of what makes them successful. “In startups, there is rarely a strong awareness that one’s own seemingly chaotic, but consistently subject to value creation in good startups, structure is the reason for success and effectiveness. And not the products or services. That is why this structure is recklessly squandered and thrown overboard in the first corporate crisis. In retrospect, it says: Weirdly, since the year we started introducing budgets, key account management, product managers and a matrix structure, we have never brought about real innovation again. But it’s not a coincidence.’

Like the discussion in the Roundtable, Pfläging notes that sooner or later, starting with a certain number of employees and size, start-ups will move to “hierarchization” or “bureaucratization” and thus consciously or unconsciously find a way into the “traditionally controlling, functionally differentiated management model”. However, there are a few companies that have not taken this path, but are organizing themselves on the basis of a new organisational model. “Examples of this are Southwest Airlines, Google or W.L.Gore – all large companies that have always managed to prevent the dominance of central ized control,” pfläging said.

“The necessary change can only begin with thinking. With each individual.”

In many articles and publications, managers are portrayed as “preventers” of change. They are driven by “preservation of power” and have “fear of loss of control and status.” However, Pfläging disagrees with this popular thesis and sees “outdated patterns of thought” of each individual – including employees, managers, works councils, and owners – as the main reason for the rarity of organizational transformation to the present day. For many years, managers, employees, works councils, etc. were shaped by an old human image. And their behavior conditioned towards direction and control or dependence and willfulness. The alternatives are hardly known until now – but a rethink is only possible if one knows the alternative “beta” at all and has terms for it. “This is one of my roles as an organizational researcher, author and influencer: to provide terms that can be used to think and bring complexity-robust organization into the world. This requires terms such as centre and periphery, the distinction between planning and preparation. complextestes such as organizational hygiene and relative goals.”

“Understanding and managing complexity in organization requires knowledge of organizational physics.”

The concept of organizational physics is a meta-model of organizational development, which Niels Pfläging and Silke Hermann developed together and described in more detail for the first time in their book Complexithoden. Organizational physics means that each organization has not only one structure – which could be described in the form of an organization chart – but three. “This is, so to speak, the first natural law of organizational physics: every organization, no matter where, no matter what size, has these three structures: formal structure, informal structure and value creation structure. Performance and success can only be achieved in the last of these three structures’. According to Pfläging, these three structures do completely different things, but they are connected by the actors of an organization and constantly interact with each other. “The balance of these structures is critical to the effectiveness and performance of an organization. Every organization needs a formal structure for compliance and legality – but if you try to solve value-added problems with it, it will inevitably lead to accidents or a waste of the exercise of formal power or hierarchy by managers harms today’s complex value creation.” The informal structure is the one in which the social network of an organisation is shaped. It is very “living”, fleeting and often even taboo. It is the value creation structure in which the actual work takes place and in which network-like performance, success and innovation are created.

All three structures of organizational physics are inevitable and indispensable for a company – and they exist in a certain interaction with each other. It is important not to expect too much formal structure. As Pfläging says in hisbook: “Too much hierarchy: then value creation suffers. Informal structure reacts in a secure, political, preventative manner. Excessive Informal Structure: Value creation becomes unstable, formal structure sanctioned bullying. Value creation structure without compliance: Then everything is done – in extreme cases, child labour is tolerated and corruption is released.”

According to Pfläging, companies can only be considered effectively in three structures. As an interaction between informal, formal and value-added structure. “These structures fall on top of each other.”

Companies are divided into 3 structures. Pfläging summarizes this in the concept of organizational physics.

“From a cool start-up to a boring giant stall, this path is avoidable.”

Niels Pfläging notes that bureaucratic structures and hierarchy are usually created by growth – and thus collateral damage to one’s own success. Pfläging says: “Bureaucratization is almost always unintentional and surprising. Just as a strong gust of wind can sweep a cyclist out of nowhere. Basically, most companies today are bureaucratic out of helplessness. Because they do not distinguish symptoms from problems and confuse complicated with complex. These confusions lead them to use the completely false or ineffective organizational witnesses. For example, planning and target agreements to deal with an unpredictable future.” According to Pfläging, the trigger for the organizational petrification was not only its own growth, but also crises: there were reflexive calls for “more structure” and efforts for “professionalization”, best practices, processes and rules. According to Pfläging, however, these are all means of formal structure, and thus completely unsuitable for improving value creation.

The alternative and better way (pledging calls it “beta transformation”) can only be pursued with a high degree of awareness of the organizational model, in contrast to bureaucratization. Pfläging gives the following reasons for this. To this day, bureaucratization is the standard that is taught and practiced almost everywhere. He is omnipresent. In addition, the collective unconscious is still pre-democratic: a beta-organizational model, however, requires dealing with power and communication at a higher level of complexity. This has not been learned, it does not correspond to the thinking that still dominates to this day. “We have to retrain the reflexes. And overcome mental models from the industrial age,” so Pfläging.

More about organizational physics

Would you like to learn more about organizational physics? Then I invite you to participate in the roundtables and discuss relevant topics with me and invited experts. I would like to thank Niels Pfläging very much for the time he took for the interview above. You can find out more about Niels Pfläging’s work on his website Read also my articles on complexity in management or digital work. Also look at my further dialogues with agile minds. Have a look at the books of agile experts.

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