Institutional dynamics, why you should simplify your organization

I live in Paraguay where labor is cheap. Everywhere you see people performing work which could easily be automated or done more efficiently. That is what I noticed when I moved to Germany. There weren’t security guards in front of every medium to big business, not even in the banks. Sure, it is safer over there, but the staff in markets, service stations etc was also less numerous than in Paraguay. In Germany, labor is expensive so businesses try to automatize everything they can. For instance, when there was something going on on the road, you would often see a portable traffic light.

In Paraguay, there would be (at least) one traffic police officer standing or sitting there all day long. Without going into an extensive debate, I think automatization is a good thing because it frees people from the boring, repetitive work. Sure, there are fewer jobs, but that isn’t necessarily a bad thing. As the economy’s productivity rises, our lives become more comfortable. A common person in a first world country today lives better the kings did centuries ago. And fewer jobs are a natural side-effect of a more productive society, the problem has just to be addressed in the right way. Sooner or later we are going to need universal income anyway. But let’s talk about Warren Buffett.

The book Buffett: The Making of an American Capitalist explains how Buffet runs Berkshire Hathaway so very efficient. In the mid-to-late eighties, Buffett’s corporate staff consisted of just 11 people, despite Berkshire being a Fortune 500 Company already. Two secretaries, a receptionist, three accountants, one trader, one treasurer and an insurance manager, his longtime assistant Gladys Kaiser and the boss. How could Warren run his company with so little personal? 

This style of running a company with little overhead was Buffett’s way of minimizing what he calls “institutional dynamics.” If he’d hired a floor of traders, they would have found something to trade, lawyers, someone to sue. 

A compact organization lets all of us spend our time managing the business rather than managing each other.

It is rather obvious that if you hire people they will want to make themselves useful, so they will find something to be busy even if there isn’t that much to do for them at all. In my future company, I will think thoroughly if it is really necessary before I hire new people.


Also published on Medium.