Complicated or complex?
The financial crisis of 2008 contained some important lessons for managers.
But they weren’t about honesty, transparency, or even really related to finance at all.
The key to understanding how fraud occurred, and created the bubble that led to recession, comes from understanding the difference between Complicated and Complex systems.
Complicated systems have many moving parts—like a watch—but each part performs a predictable task, and only interacts with a set number of other components. Complex systems have many and varied moving parts that interact in many and varied ways, rendering them more unpredictable.
Unfortunately, it is very difficult to say that one is better than the other—more important is recognizing what you have, what you need, and whether you are managing it accordingly.
The housing market in the early years of the new millennium was a decidedly complex one: lots of players, lots of points of interaction, and lots of overlapping incentives: a ripe environment widespread fraud.
“In any sort of legal market, there are relationships between different levels of the marketplace, and these different relationships create criminological opportunities,” explains Dr. Michael Benson, Professor of Criminal Justice at the University of Cincinnati. “We had a bunch of these when we looked at the structure of the mortgage market between 2000 and 2008. Each level has motivations which feed upon, and are activated by, the other levels.”
The different motivators and operators across the financial system that led to the Great Recession made it difficult to attribute blame fairly and accurately, as well as to implement changes and regulations that would prevent the same thing from happening again.
Not every system—or company—is vulnerable to criminal activity of the scale that afflicted America’s housing market; but they are certainly subject to asymmetrical motivations, poor regulation, and ultimately, implosion without appropriate intervention.
Understanding the strengths and weaknesses of both complex and complicated systems can enable leadership to balance them against the needs of their organizations.
The more points of contact—interactions—separating goals from outcomes and directives from products, the more opportunities for problems. That doesn’t mean there is no room for autonomy, but it does require leadership to look critically at their mission, culture, and structure to determine where these points of contact are, and how they can be aligned.
Strictly hierarchical systems tend to be more complicated than complex: top-down management and approval may keep things running smoothly and predictably, but are more likely to be less resilient and slower to respond to change. In a change-prone environment, this can be disastrous. However, the ability to make different roles interchangeable also makes disruption in staffing or labor less impactful: with some basic training, productivity can catch right back up.
Resilient teams are comprised of many people with many points of contact, and this is where company culture is critical. If any individual isn’t on board and in sync, it can throw everyone out of line. After all, the problems with that one person can be duplicated and compounded by the many points of contact that person has. In a company with the legacy and clarity of vision to hire, retain, and reward individuals who exemplify the culture, hierarchical approval and oversight are unnecessary, because everyone is operating according to shared goals.
Not every business needs every employee trained and apprised of the global vision for the company; then again, not every company can take an assembly line approach to operations, where individual cogs in the great machine don’t see beyond their specific role.
It should be the goal of every manager to create a company and culture that is capable of adapting to change and exhibiting resilience, yet preserves oversight and accountability. Recognizing when the situation calls for complexity, and when a complicated approach is more appropriate, can mean the difference between survival, and catastrophe.