VSM as an organization design method?

You could buy this shopping bag or other merchandise that says "Free as in Stafford Beer". It goes to show what kind of rock star status this writer on organizations has reached in certain communities. A free thinker he was indeed. Stafford Beer was probably too much of a rebel to subsume his work to the cumulative knowledge building standards that prevail in the academic community.

As a consequence, the VSM has not gained much influence in the academic field of management and organization science. To my knowledge, no empirical studies on the approach have been published in any of the leading high-ranked research journals in the field. It was probably also this flamboyant rebellious character that gave him the freedom to concentrate on developing his own framework, and it likely contributed to his appeal as a pathbreaking management guru. But it also set the VSM somewhat apart from the rest of the community of organization design scholars, and made the model virtually exempt from the cumulative iterative process of empirical testing and conceptual refinement. As Pfiffner argued (2017), the model is conceptualized at such a high-level of abstraction that it is difficult to formulate falsifiable empirical hypotheses.

So to what extent is VSM a helpful organization design method? In this article, I evaluate the VSM against the backdrop of the three universal problems of organizing explained in a previous article : goal-setting, task structure and planning. To what extent is VSM helpful for tackling these three challenges? This article reviews Beer's ideas on the basis of his seminal book Brain of the Firm. Page references throughout the text come from the 2nd edition,?published in 1981.

VSMs five systems

One of the rare empircal academic studies that set out to evaluate the effectiveness of the VSM is Michael Pfiffner's 2017 PhD. dissertation at Utrecht University. In order to arrive at an empirical operationalization of VSM he came up with a more concrete description of the core ideas of the model. He defined the quintuple systems that are the core of the VSM as follows:

• System 1: where the primary value creating work is done, the service units, that ought have the sole responsibility for logically definable market areas;
• System 2: where the frictional losses between the activities of service units are minimized through for example, instructions, systems, standards, coordination meetings, and so on;
• System 3: operational management that optimizes overall results and performance and allocates resources, on the basis of management information that is uninfluenced by line interests;
• System 4: environment analysis and planning for the future, integrating external and external elements in decision making;
• System 5: normative management and identity, determining the norms and values and do fundamental governance.

Pfiffner made a short standardized questionnaire that basically evaluates how well an organization handles these 5 system functions. The questionnaire was designed to evaluate the organization on each function, with a likert scale that ranged from 'poor in this area' to 'good in this area'. For example, for system 3 (operational management streamlining), respondents where literally asked to evaluate to what extent the overall performance of the organization is monitored "following appropriate rules" and to what extent "opportunities, risks and synergies ... are always recognized, utilized or respectively dealt with appropriately." He then asked bankers and management consultants as external experts to serve as respondents to review 135 case organizations. The dependent variable in his research was the 'occurrence of crisis'.

Pfiffner found a significant negative correlation between on the one hand how reliable these five systems functions were executed in a case organization (according to the perception of the respondents) and the occurence of crisis (also according to the perception of the respondents). In line with the writings of Stafford Beer, who was wary to provide concrete organizational design guidelines, Pfiffner only evaluates to what extent the system functions are perceived to be performed, without investigating further the concrete organizational units or layers to which these functions were allocated. His study shows that the VSM can be usefully applied to diagnose an organization on the five system functions, but does not investigate further how organizational structure helps to achieve control. The question thus remains, is the VSM useful as a practical method to make organization design decisions?

The VSM leaves goal-setting deliberately out of scope

Beer promotes horizontal autonomy at the lowest operational level of an organization (system 1) comparable to the functioning of the spinal cord in the human body: “the spinal cord is concerned with the lateral control axis” (p.92). Lateral control is autonomous in the sense that it happens without interference from higher-ordered systems: “so this is autonomic control, which takes a basically operational system and a basic set of instructions for granted, and then proceeds to keep what is happening in balance and in economic health” (p.116-117).

But what are the goals that an organizational unit or system should autonomously pursue? Given that the VSM focuses on effective control, I find that little attention is given to the challenge of goal-setting in Brain of the Firm. In fact, Beer leaves the challenge of goal-setting deliberately out of scope. “Who is to say what really is the prior issue? This judgement itself is of the sort we just defined ‘political’. …. Our search paradigm must be priority free” (p.209).

A search paradigm may be prioirity-free, but that doesn't take away the need to align organizational structure with the nature of the priorities that are chosen. Different types of goals generate varying levels and sorts of complexity in a task structure that have to be sorted out in the organizational structure. For example, Pfiffner's operationalizes system 1 as 'service units' without specifying what constitutes a service unit in the organizational structure. Yet, a service unit can be set up along many different lines, and these choices are far from neutral: geographical (eg. Service Unit South, Service Unit North), technological (eg. Service Unit Technology A, Service Unit Technology B), or client-specific (eg. Service Unit Type A Customers, Service Unit Type B customers), .... Such choices determine the nature and the amount of variety a unit needs to control, and not control. Goals also determine the need for horizontal alignment across a workflow. A company that wants to excel at cost-efficient mass production will need a different organization design to accomplish that sort of goals than a company that wants to deliver highly customized goods and services to its customers. In the first instance, there is more repetitiveness, and therefore less variety to control compared to an engineer-to-order type of business.

In sum, different sorts of goals generate different levels and sorts of variety, an issue that doesn't seem to be addressed explicitly in the VSM, at least not in Brain of the Firm, a book that is a cornerstone in the VSM literature. Without specifying the control consequences of goal-setting, how can VSM be helpful in making clear what kind of variety a unit should autonomously control? Shouldn't a theory on controlling variety in organizations provide insights on how different types of goals need to be controlled in different kinds of structures? I believe it should.

VSM focuses on vertical task structure, with little attention to horizontal alignement

There’s nowadays much to do about cross-functional autonomous scrum-teams in IT, along with cell-based autonomous teams in manufacturing (eg. the Quick Respons Manufacturing approach), and other methods to foster team-based problem solving that promote horizontal coordination at level-playing fields (like Sociocracy or Holacracy).

Both in large-scale organizations, as well as in SMEs, strategies that aim for customer intimacy and innovation requires to shift gears quickly in the workflow. If organizations have to adapt to the specific needs of each individual client, or if the product and service has to be innovated often, there is lots of variability to cope with. The tendency is therefore to resort to cross-functional teams that more or less combine the functions of system 1 to 4, for a dedicated workflow end-to-end. This idea was already adopted in James March’s 1965 Handbook of Organizations arguing that enables autonomous work groups “was better able to maintain efficiency as well as improve cycle regulation with much less need for managerial intervention than under the conventional system” (p.1189). Long before Beer wrote Brain of the Firm, Trist and Bamforth had coined their ideas socio-technical organizational design in 1951 promoting strong horizontal alignment within one coherent organizational system (or team).

Beer could have adopted these ideas in his writing, since they were already widespread at the time he developed the VSM. The socio-technical perspective on horizontal alignment, and the 5 systems of command in VSM could have been combined in one complementary framework. Instead Beer seems to leave the issue of horizontal alignment largely aside, and instead appears to argue in Brain of the Firm that there is no alternative but to resort to vertical organizational structures when an organization grows. Once an organization reaches a certain size, Beer argues that it will lose its ability for autonomic horizontal control: “If two men go into partnership, then they are likely to divide the functions of the firm between them. Suppose that one of them makes things, while the other goes out to sell them. … Undoubtedly these two men will talk together, and if the partnership is good they will mutually decide on the filtrations, on the control actions at every level, and ultimately on the firm’s policy (p.119-120). But, “once the firm grows to any size, the intimacy of what used to be a partnership is lost. The people simply do not have sufficient time to do as much talking as information theory would calculate they need to do if complete harmony is established” (p.120).

According to Beer, this breakdown in lateral cross-functional coordination is unavoidable: “we must note that this applies to the best of all worlds (p.120).” And so his claim is that when an organization grows, it always falls apart in subsidiaries or departments that decrease the ability to set up lateral coordination. This is a questionnable argument. If a growing company would apply the ideas of more integrated horizontal organization design to ensure (Emery and Trist’s socio-technical concept, Skinners’ focused factory concept, or even the more recent concept of cross-functional scrum teams), it’s that not self-evident at all why smooth horizontal coordination cannot exist even in large firms.

The VSM, in its preoccupation with vertical alignment across 5 hierarchically positioned systems, has largely neglected the conditions that ensure effective horizontal alignment in organizations. Although VSM promotes autonomous management at the level of system 1, it has little to say about how this system 1 ought to be designed.

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Planning: VSM's conflation of uncertainty and variety

With regard to planning, Beer argued for a quintuple chain of hierarchical systems, between which effective and timely feedback-loops can be put in place.?In Brain of the Firm, Beer appeared confident that it is possible to define the key metrics that are required to monitor and adapt an organizational system across the five levels of command. We simply should “apply the measures of performance we have designed to the activities, and demand that the information system classifies the operational world on our behalf” (p.169). Selecting these measures should not be unsurmountable difficult, so he claims: “we shall need to store quite simple models of potentiality and more complicated models of capability which have been evolved by operational research” (p.169).

In Beer’s mind, planning can be made insightful by simply mapping out the variety that needs to be controlled. Once that variety is taken into account, uncertainty on how to manage an organization is no longer an issue : “uncertainty, as we have seen, is a function of variety. Variety is a measure of the number of possible states of the system” (p.212). However, in the reality of management and organizational development, uncertainty is not merely a function of variety, and the VSM’s downplaying of uncertainty leads to overconfidence and a failure to acknowledge the boundaries of applicability of the model. There are unknown variables, obstacles that you stumble upon along the way but that you could not see beforehand. Planning in conditions of uncertainty is in that respect a very different organizational challenge than planning for known variety.

Consider Beer’s advice for system 5 decision-making (“the direction of the enterprise”, “the thinking part of the whole organization” – p.201). The task for system 5 (the governance system of the organization is is that they “should first identify n logical dimensions, and identify also the relationships between them” (p.211). If only the management had an up-to-date overview of these n logical dimensions, without overlooking any of them, ...?Strategies that aim for customer intimacy or product innovation by definition provoke uncertainty. Customer needs and technological evolution are imposed on you in unanticipated ways and you will have to set up an organization without knowing beforehand precisely what variety is coming towards you.

By conflating the concepts of variety and uncertainty the VSM provides little concrete advice on how to deal with this. In reality, variety and uncertainty are to a large extent independent from one another. A car configurator on the internet enables us to order a wide variety of autonobiles, none of which may provoke much uncertainty on the assembly line. This is a situation of high variety and low uncertainty. Controlling variety is one challenge, absorbing contingencies is a totally different one. The work of an IT-team that has to develop a new application from scratch is likely to face both high variety and high uncertainty. Business requirements are hard to make explicit and they often shift along the way in directions that cannot be predicted beforehand. In conditions of uncertainty it will be difficult to install feedback loops across a quintuple hierarchical system to deal with bumps and hick-ups along the way.?In those circumstances an organizational design that knits the 5 systems function closely together in integrated units will be needed. From what I read about VSM, such design guidelines are not readily provided.

Limits to the analogy between 'nature' and 'organizations'

Organizations and societies are build on socially constructed ideas. Our world is the concrete realization of discourses, narratives that project the way in which societies and organizations should function. As humans, we have frames and ideas in our heads about how a market should function, what a valuable product is, what a fair wage distribution is, how an organization should be structured, ... These discourses have concrete repercussions in the language, interactions, social norms and codes that we live by, and they shape the license to operate for organizations.

Management and organization scholars and consultants diffuse frames about how working life should be organized. That's an important responsibility. We should be careful and self-critical about this task. In my opinion, our frames should be helpful in finding solutions to three interrelated problems of organizing: goal-setting, task structures and planning (see my previous article ). In this article, I have highlighted a number of reasons to be sceptical about the VSM on each of these three problems of organizing. I am open to stand corrected if my interpretation of the model is misguided, but it seems to me that the VSM is only partially helpful in tackling these universal problems of organizing. It's clear that the five systems point to important functions that have to be dealt with in organizations. Those are very valuable insights. What's much less clear from the model is how these functions should be concretely allocated in an organization.

The analogy with natural systems hits its limits here. The metaphor is powerful to highlight deficiencies in man-made organizations, but is it useful as a method for organization design? Stafford Beer was very confident about this: “cybernetics illuminates the problem, indicating the solution towards nature itself has evolved. Cybernetics provides a language sufficiently rich and perceptive to make it possible to study the problem objectively, without heat” (p.180). The task of management according to Beer then “is essentially that of tracking a target” (p.198). This, Beer claims, should pose no problem since “the entire servomechanics of such tracking system are also well understood, therefore it is worth repeating that the only missing link in the realization of a project of this kind is the managerial intention itself” (p.198).

There are however important differences between ecosystems in nature and organizations build by humans. Ecosystems in nature are not so much concerned with goal attainment, and they do not worry about uncertainty. It is therefore not surprising that the VSM doesn't address these challenges so much. Ecosystems evolve on evolutionary waves, not on the basis of the fulfillment of predetermined goals. Furthermore, the ecosystem doesn't bother with unknown variables. It doesn't overlook any variables, since the state of the ecosystem is always defined by all of its constituting subsystems. The human designer by contrast has to organize in view of meeting a set of expectations from its environment, he faces uncertainty and yet to be revealed variables. Organizations are build on the basis of socially constructed recipes instead of longwinding evolutionary pathways. In man-made organizations, these socially constructed recipes involve conscious goal-setting, and an intentional attempt to delineate the 'to be controlled variety'. In natural ecosystems, there's in no intentional designer, there is no variety that is out of scope of that designer, and there are no socially constructed recipes to live by.

The comparison between the boundedly rational human designer and the design of an ecosystem is in that respect somewhat unfair. The human body has evolved over millions of years to get accustomed to a large variety of repetitive biological processes. Over those millions of years of evolution, your body has learned to cope with most of the variety a human body has to deal with over its lifetime. The solutions for managing variety are encoded in your cells and DNA. Organizations, by contrast, often have to adapt to fairly unique circumstances over short periods of time. As a result, organizations as social systems often tend to be suboptimal and out of balance, at least as seen from the vantage point of the goals that are intentionally chosen for such organizations.?VSM sheds light on a good deal of such problems of organizing. But if we take the analogy too far we may exaggerate the potential of the model and risk to infuse additional unhelpful biases in the practice of organizing.