Bureaucracy is expensive

- Here's the second critical point. Bureaucracy is expensive. In a bureaucracy there are lots of managers, layers of 'em. For example, I know a much-admired high tech company with about $4 billion in revenue that apparently needs more than 600 vice presidents, and those managers don't come cheap. Based on data from the Bureau of Labor Statistics, my colleagues and I estimate that there're about 18.5 million managers and supervisors in the US workforce. In addition there are 5.3 million individuals working in administrative support functions like human resources, accounting, and compliance, but excluding IT. That means that out of the labor pool of about 135 million people, not counting farmworkers and unincorporated self-employed, there are 23.8 million bureaucrats. That's nearly 18% of the workforce or one bureaucrat for every 4.7 employees. The cost of all those managers? About $2.7 trillion in 2014 or 30% of all wages and compensation. Beyond this is the cost of the busywork bureaucrats generate for everybody else. A Deloitte study found that in Australia, workers there were spending 16% of their time complying with internal rules. Let's assume the same holds true for the US. Effectively then out of the 111 million US workers who aren't managers or administrators, there are nearly 18 million people who spend the entire year performing bureaucratic chores. That's $970 billion in additional payroll costs. Think about it, 23.8 million bureaucrats plus 18 million paper-pushing underlings, that's 42 million souls or about 30% of the entire workforce. Now despite all the talk about the gig economy, the bureaucratic class has been growing, not shrinking. Since 1983 the number of managers, supervisors and support staff in the US economy has nearly doubled while employment in other occupations has grown by less than 40%. Meanwhile the number of Americans who are self-employed has dropped to an all-time low. Now obviously every organization needs people who do what managers do, who plan, allocate, schedule, review, coordinate, coach and so on. I mean, golly, someone has to go to all those meetings, but do we really need 42 million people to keep our organizations running smoothly? No, definitely no, frick no. A growing number of vanguard companies have proved that it's possible to run large complex businesses with little or no bureaucratic overhead. These companies are highly efficient, highly profitable, and almost entirely bureaucracy free. Exemplars include Morningstar, a California-based company that's the largest tomato processor in the world. W. L. Gore, a $3 billion high tech company famous for its Gore-Tex fabrics. Nucor, America's most profitable steel maker. Svenska Handelsbanken, a Stockholm-based bank with more than 800 branches across northern Europe. Haier, the Chinese company that lays claim to being the world's leading home appliance maker. And General Electric's Durham, North Carolina plant, which assembles some of the world's largest jet engines. Take the case of Svenska Handelsbanken. Its return on equity has beat that of every one of its European peers every year since 1971. That's just crazy, and it gets crazier. In an organization of 12,000 associates, there are only three levels. Operating decisions are almost entirely decentralized. Each branch make its own loan decisions, set its own pricing on loans and deposits, controls its own marketing budgets, runs its own website on a shared platform, and serves all customer segments from individuals to multinational companies within its local market. Nucor, the most diversified steel company in the United States, is another management rebel. Nucor's revenue per employee, more than $900,000 in a recent year, is nearly twice that of similarly sized U.S. Steel. Nucor's comprised of 90 autonomous profit centers. Individual plants make product and pricing decisions and are responsible for their own product development. Self-managing teams within each facility oversee operations and are responsible for innovation, training, and other tasks that are normally assigned to staff groups. With more than $20 billion in annual revenue and 23,000 employees, Nucor has a head office staff of fewer than 100 individuals, 1/10 of that of similarly sized rivals. And like Svenska, Nucor's return equity and return on assets consistently exceeds that of its peers. The average span of control in these and other vanguard organizations is more than double the US average, and sometimes way more than that. GE's Durham plant, to take a dramatic example, employs more than 300 technicians and a single supervisor, the plant manager. Not surprisingly, the facility is more than twice as productive as its sister plants in GE's aviation division. Although these companies operate in very different industries, the vanguards share a lot of things in common. Small autonomous teams are empowered to make operational decisions like hiring, staffing, pricing, and buying equipment. Compensation links pay to profitability and encourages employees to think like business owners. Support services are provided to operating units at cost or are even optional. There's a general aversion to formal titles and job descriptions and preference for dynamic, natural hierarchies based on demonstrated competence. There's a high degree of transparency around financial and operational information. There are also shared norms and a strong sense of mutual responsibility for unit and enterprise success. In these organizations the work of managing has been distributed to the periphery, to those who are closest to the marketplace. In these companies management is a tool, not a job category. Based on the experience of the vanguard, there's no reason why it shouldn't be possible to increase the ratio of employees to managers and administrators from the current average of 4.7 to one to something like 10 to one. Doing so would reduce the number of managers and administrators by 12 and 1/2 million people. It should also be possible to get rid of 50% of that bureaucratic busywork. That would free up the equivalent of another 9 million employees. Take those 21 and 1/2 million people who are currently adding little or no economic value and redeploy them into productive work, and you'd increase US GDP by about $3 trillion. That would be a mass of productivity boost for the US economy, and similar benefits could be reaped in other developed economies as well. Bureaucracy may be familiar, but doesn't come cheap. It's a tax on human effort and it's time we abolish it.