Bureaucracy is an age-old challenge that plagues most established organizations in the GCC and around the world. Yet, that need not be the case. Instead, by measuring how bureaucracy in organizations relates to performance, impact and risk, companies can take measures to reduce the burden of red tape and also prune their costs.
Bureaucracy takes a significant toll on time, money, productivity and employee morale. As the pace of business accelerates, the inherent costs of bureaucracy increase, because it hinders an organization’s ability to swiftly respond to market changes and focus on what it’s really good at.
Compounding the challenge is that bureaucracy can be difficult to measure or quantify. At many organizations, bureaucracy has become so ingrained in the way people work that it has become habit that nobody ever challenges. As a result, when people try to reduce bureaucracy, they often resort to cutting things they can measure, such as waste or overhead.
Those measures typically fall short, because organizations apply a blunt tool to cut back processes en masse. That risks eliminating some processes that are truly valuable. This is because not all bureaucracy is bad. Organizations need some level of management and processes to meet regulatory standards, handle risk and operate effectively. The trick is to determine the right level for a particular organization and what it is trying to accomplish.
To that end, we have developed the Bureaucracy Measurement Index (BMI). This is a quantitative means to gauge bureaucracy in an organization, compare it to benchmarks for similar organizations and industries, and highlight problem areas. By applying this approach to the 20 most bureaucratic processes, we have found, companies can make their organizations 35 percent more effective and efficient.
The BMI looks at all of the processes in an organization and assigns them a numerical score in three areas: performance, risk and impact.
Performance considers how quickly and with how much effort an organization can deliver a particular process. The performance score factors in quality and volume requirements, and can adjust for each, depending on how important they are for a particular process.
For example, think about an accounting firm that conducts financial audits. Quality is critical – the audits need to be mistake-free – meaning that sheer speed is less important. Conversely, for an insurance firm that handles hundreds of claims each day, speed matters. The performance score adjusts for each aspect accordingly.
Risk is the second scoring element of the BMI. What risk measures is the likelihood that a process leads to a negative outcome and how severe that outcome would be, in terms of financial, operational, reputational, or other consequences.
Again, consider the accounting firm. If it missed something important in a client company’s financials and that company later went out of business, the accounting firm’s reputation would be ruined. The odds of that happening are low, yet the consequences would be disastrous.
For an insurance company, however, the odds of making a mistake on a customer’s claim may be higher, but the consequences would be less significant. The risk score considers both elements.
Impact is the relative importance of one specific process on an organization’s overall mission. Understanding the impact of a process indicates how much the performance and risk scores for that process should be weighted.
For example, consider a manufacturing company that sells low-margin commodities, such as stone or cement. In this industry, it’s critical to have very efficient manufacturing processes, to keep prices as low as possible. Bureaucracy in manufacturing would be a big problem, so the impact score for those processes gives a higher weight to them.
For a technology firm, by contrast, innovation through R&D has a far higher impact. This is because it drives the business and because this kind of company tends to reinvest a much higher proportion of its revenue in R&D. Therefore, R&D would receive a higher impact score.
To apply the BMI, organizations break down everything they do into processes and sub-processes, and then assign a performance, risk and impact score to each. Leaders can quickly scan through all of the work the organization does and easily identify the biggest problem areas by taking this systematic approach.
Notably, a high bureaucracy score in one business unit or function doesn’t automatically mean a problem. Instead, executives need to look at the relationship among the three scores. The biggest priority should be processes that are performing very poorly, have little risk and have a substantial impact on the overall organization. There’s little danger in streamlining these processes.
By contrast, companies should tread lightly in terms of how they treat processes that entail high risk, even if they are highly bureaucratic. Removing bureaucracy may be a good move, but not if it exposes the company to new vulnerabilities.
In some cases – such as processes with exceptionally low bureaucracy and high risk – companies may want to increase the amount of control and oversight. Indeed, such processes may actually suffer from insufficient management.
We recently applied the BMI methodology to a major global company. Our analysis showed that the company’s bureaucracy scores were several times higher than the median for its industry.
One problem the scoring highlighted was that the process for making decisions about capital projects was far too cumbersome. Many people, including senior executives, needed to approve requests. That complicated matters without reducing risk and it was out of line with benchmark companies in the industry.
In response, the company pushed decision-making authority down to lower levels – in line with the company’s risk tolerance. For capital expenditures above a pre-defined level, the board or executive committee would continue to give the final approval. For less-expensive projects, approvals were given to business unit leaders.
That move empowered people to do their work more independently. It also concentrated accountability. People could no longer hide behind a committee or co-approvers if a decision turned out to be wrong.
More importantly, pushing control authority down the chain of command in an organization allowed senior people to focus on topics with greater strategic value. Instead of signing purchase orders, they could consider the company’s competitive position, large-scale investments and other areas with a larger impact on performance. Reducing bureaucracy in this way made the company more productive and agile.
Although bureaucracy is a problem with deep roots in many organizations, the BMI gives leaders a way to measure the problem, highlight priorities, and attack them systematically.
Eduardo Alvarez is principal with Strategy&, PwC’s strategy consulting business; Georges Chehade is partner; Olaf Schirmer is principal; and Manish Mahajan is director with Strategy& (formerly Booz & Company), part of the PwC network.