The Cost of Organisational Silos

Silos stifle innovation

Fighting the war in Iraq against Al Qaeda may seem like an unlikely place to examine the barriers to innovation and adaptation. But it was in these most pressing of circumstances that a US Army four-star general, Stanley McChrystal, had to look at how silos were preventing the US from making progress.

McChrystal led Special Forces Joint Task Force. At the beginning of the campaign in 2003, the US military deployed the conventional mechanistic, siloed and hierarchical approaches they had honed over decades. Based on the archaic idea of sharing information on a ‘need to know’ basis, or what McChystal called compartmentalised ignorance, each intelligence institution was structured with “intricate matrices of clearances and silos”.⁠

But when the enemy confounded the US Army, the Task Force was compelled to question everything that they had previously known and relied on. Al Qaeda were “small, agile, and dispersed”⁠. To understand them, match them and beat them, the Joint Task Force had to swallow its pride and copy the structural components of its enemy, moving to a networked model in which power and authority were decentralised. The core change was breaking down the silos that were inhibiting them from having the agility to innovate to face into a complex, rapidly changing environment. It meant shifting from a command structure along functional lines towards integration between teams built on deep trust as they coalesced around a shared purpose.

This chimes with what Harvard Business School researcher, Rosabeth Moss Kanter⁠ explored back in the early 1980s. Companies with a productive entrepreneurial spirit have an integrative way of solving problems. These companies focus on what they don’t yet know rather than on controlling what they do, and they build an organisational structure to support this. They’re designed to reduce isolation between departments, create mechanisms for information exchange and ensure coherence and direction across the entire organisation.

Segmenting departments according to functions can protect you against upheaval and chaos, but it also debilitates change and innovation. Breakthroughs in innovation typically happen when there is a cross pollination of ideas from different domains merging in new and unexpected ways.

Silos conceal risk

It’s not just innovation that’s hindered by organisational silos. It can expose even the most diligent and conservative organisation to catastrophic risks. UBS, the Swiss bank with a 150-year legacy, was almost destroyed in the financial crisis, in part because it lost sight of what was happening in different parts of the business in the lead up to the 2008 financial crisis.

In a bid towards size and might with the greatest on Wall Street, UBS moved into the area of finance known as securitisation and in particular the subsection linked to mortgage bonds. We all know how that story ends.

At the time of the crash, UBS’s Investment Bank chairman, Marcel Rohner made the spectacular admission that the group had unwittingly accumulated $50 billion worth of US subprime mortgage securities on its balance sheet, apparently without the knowledge of the UBS. What followed was a spectacular fall from grace by an institution once considered one the most fiscally responsible in the world. It would have collapsed but for a Swiss Government bail-out.

The popular idea that was touted at the time was that the financial crash was due to the greed and recklessness of bankers deliberately betting the system. An academic at the University of Zurich, Dr Tobias Straumann, was asked to review what had happened at UBS and prepare an expert opinion. Straumann rejected the notion that the UBS leaders “behaved like gamblers at a casino, constantly taking greater risks as their profits and bonuses increased” and argued that it was their complacency, not their greed that had contributed to the crisis. These executive leaders believed that the bank was both healthy and safe. UBS had become so large and complex and “riddled with structural silos” that no-one really knew what was going on. Not the leaders, not the risk managers, not the regulators.

As the crisis unfolded these themes were found in institution after institution. “Almost anywhere you looked, banks, insurance companies, and asset managers had failed to spot the risks building up in separate desks and departments, because different silos of gigantic institutions did not communicate with each other and nobody at the top could see the entire picture”, said Gillian Tett of the Financial Times. In these cases, silos played a significant contribution to enabling the crash to happen because they made it harder to take a holistic perspective or the organisation.

What can we do?

Given the size and complexity of today’s organisations it is easy to see why we break work down into specialisms, teams and geographies. Silos help us create order from the chaos and streamline approaches, thus making work more efficient. But the unintended consequences of breaking work down into its smallest components parts is having a huge impact on the effectiveness of today’s organisations.

When we try to solve the problems that silos have created without working on underlying structure that creates those problems, we spend vast amounts of organisational energy solving the wrong problem. Western society has focussed on logic and reductionism over intuition and holism since the Industrial Revolution. We need to rethink silos as the default design in our organisations.

References

Moss Kanter, R. 1983. “The Change Masters: Innovation & entrepreneurship in the American Corporation”. Simon & Shuster, New York.

McChyrstal, General S. 2015 “Team of Teams: New rules of engagement for a complex world” Penguin, New York.

Straumann, T. 2010. “The UBS Crisis in Historical Perspective” University of Zurich.

Tett, G. 2015. “The Silo Effect: Why putting everything in its place isn’t such a bright idea”. Little Brown, London.

Originally published at https://waldencroft.com on March 15, 2019.