The Silo Effect – Gillian Tett [Book Summary]

by Nick

Gillian Tett offers in his book to look at the problems of modern organizations from an unexpected perspective – not from the point of view of management or finance, but from the point of view of social anthropology.

The experience of a financial journalist and a degree in anthropology helped the author to discern the phenomenon of “mine syndrome”, which in one form or another manifests itself in various organizations, behind unsuccessful decisions by leaders of influential political and corporate structures.

Perhaps the idea that the main cause of mistakes worth tens of billions of dollars is a certain sociocultural phenomenon, will seem extravagant to many readers, but Tette cites more and more evidence of his hypothesis. Particularly convincing are the frank confessions of managers about the origins of their mistakes, sounded in personal communication with the author. Tette builds the story about the cuisine of modern commercial companies, financial institutions and municipal structures on the principle “from particular to general” – from analysis of specific situations to theoretical generalizations.

Not limited to methods for diagnosing the syndrome, Gillian describes effective methods for its prevention and treatment, tested by a number of successful companies.

This book is available as:

Audiobook | eBookPrint

“Silo Effect”

In the 21st century, humanity has achieved an unprecedented degree of interconnectedness thanks to modern technology and globalization. But at the same time, a characteristic feature of our time is a strict demarcation of “functions, powers and ideas”, which is manifested both in the behavior of social groups and the activities of organizations and in the minds of individuals. This phenomenon is “structural-functional fragmentation”, or “ silo effect. In the professional sphere, this syndrome manifests itself when people become isolated in their narrow specialization (in the “mine”), poorly representing, and often not interested in what is happening in related fields. Of course, professional specialization is inevitable – it allows you to perform work with maximum efficiency. But its side effect can be mental blindness,

“The Sony story … serves as a good example of how devastating the impact of fragmentation on innovation can be.”

“Silo effect” is a cultural phenomenon, and it needs to be studied using methods of social anthropology. It arises every time when a certain community builds its own system of systematizing the world, which becomes the basis for the formation of independent culture. Community members brought up within the framework of such a culture adopt a template classification, perceiving it as natural and normal. Perceptual patterns are emerging in the communities of bankers and doctors, officials and programmers.

However, often these unconsciously acquired models deprive us of flexibility and prevent us from seeing reality holistically and impartially. Eight stories tell about the manifestation of “mine syndrome” and attempts to overcome it by various organizations.

The Summary you might like: Finance and the Good Society

New York City Hall and Fire Safety

At the beginning of the 21st century, an average of 2,700 fires per year occurred in New York’s residential sector. It was believed that it was impossible to prevent them. Inspectors did not have time to check tens of thousands of complaints about violation of fire safety rules, and inspections revealed violations only in 13% of cases.

In 2010, Mike Flowers came to work in the New York government, who found the key to solving the problem of destroying the “partitions” between the divisions of the city hall. Communicating with employees of various services, from patrol policemen to building inspectors, and analyzing disparate databases, his assistants found out that potential objects of fire are characterized by four signs: delay in the mortgage, violation of construction standards, the development until 1938, poor quarter.

Checking buildings with all four attributes found violations in 70% of cases. The efficiency of the fire inspection has quadrupled without any additional costs. The same approach – combining and comparing databases of different structures – helped Flowers and his team find points of sale of smuggled cigarettes and the illegal sale of pain medications, as well as restaurants that pollute the sewer with waste vegetable oil.

Sony Corporation and Innovation Leadership

In 1995, Nobuyuki Ideas became the CEO of Sony Corporation. To improve manageability, he singled out each business line as an independent company, borrowing this approach from the Nestlé corporation, on whose board he was a member. However, in the case of Sony, this model only led to a break in ties between its enterprises.

Autonomous companies saw each other as competitors and refused to exchange information, ideas, employees and best practices. Moreover, they did not pay any attention to the fact that their colleagues were developing a similar product. Therefore, in 1999, Sony launched two digital audio players, the Memory Stick Walkman and Vaio Music Clip, immediately followed by Network Walkman. The corporation’s own developments competed with each other.

As a result, Sony devices lost to Apple iPod in which there were no functional partitions and all departments worked on the new product together. Sony, which 20 years before this conquered the world with its Walkman cassette player, has lost its innovative leadership on the threshold of the 21st century. He resigned his ideas, and Howard Stringer, who replaced him in 2005, reunited the various directions into a single structure. However, Sony failed to regain its former success.

UBS Bank and the Mortgage Crisis

At the turn of the 20th and 21st centuries, Swiss bank UBS was the largest bank in terms of assets in the world, but in the investment field, it was significantly inferior to the leaders – the American and British financial groups.

In an effort to close the gap, UBS entered the US CDO market in 2005 – secured debt instruments, mainly mortgage-backed securities. A special unit has been set up to carry out CDO transactions at UBS New York. In 2007, when the mortgage crisis began in the USA, it turned out that the CDO department secretly organized a “warehouse” of mortgage securities from the board, where it accumulated assets totaling $ 50 billion. Losses UBS caused by the fall in prices for these securities in 2007-2009, exceeded $ 30 billion.

One of the most important reasons that the top management of the bank, having a reputation as an extremely conservative and cautious institution, did not notice the dubious operations of its traders, there was an extreme disconnection between the divisions of UBS. Departments and departments hid information from each other, did not exchange data, avoided cooperation and even quarreled. So, the bank had three whole risk management units, each of which specialized in a separate type of risk, without interacting with the others.

This is what traders in New York took advantage of. Noting that CDOs generate income that increases the profit of the department and, accordingly, the bonuses of its employees, they increased the volume of these securities. At the same time, CDOs were either combined with other securities with the highest credit rating in the reporting or were not reflected at all. there has been utter disunity between the divisions of UBS. Departments and departments hid information from each other, did not exchange data, avoided cooperation and even quarreled. So, the bank had three whole risk management units, each of which specialized in a separate type of risk, without interacting with the others. This is what traders in New York took advantage of.

Noting that CDOs generate income that increases the profit of the department and, accordingly, the bonuses of its employees, they increased the volume of these securities. At the same time, CDOs were either combined with other securities with the highest credit rating in the reporting or were not reflected at all. there has been utter disunity between the divisions of UBS. Departments and departments hid information from each other, did not exchange data, avoided cooperation and even quarreled. So, the bank had three whole risk management units, each of which specialized in a separate type of risk, without interacting with the others.

This is what traders in New York took advantage of. Noting that CDOs generate income that increases the profit of the department and, accordingly, the bonuses of its employees, they increased the volume of these securities. At the same time, CDOs were either combined with other securities with the highest credit rating in the reporting or were not reflected at all. the bank had three whole risk management units, each of which specialized in a separate type of risk, without interacting with the other.

Bank of England and the “Shadow Banking System”

In the zero years of the XXI century, Great Britain, like other Western countries, experienced a period of “great stability”, characterized by low inflation and steady economic growth. The concern in the Bank of England was caused only by the growth rate of the money supply, several times faster than inflation. Behind this deviation was an overloaded economy with credit funds, resulting in an “overheating” of the securities and real estate markets.

The rupture of the bubble in 2007 marked the beginning of the global economic crisis. Due to the “mine syndrome”, the financial authorities of the leading developed countries were not able to prevent or at least predict emerging problems. The world economy was pumped by borrowed funds through “shadow banks” – intermediary structures involved in transactions with CDOs and other exotic financial instruments.

And financial supervisors focused on monitoring the official banking system. At the Bank of England, “shadow banks” were categorized as “other financial intermediaries” (OFPs), and none of the central bank’s units was involved in monitoring the “intermediaries”. And although some of the Bank’s employees were concerned about the activities of OFPs, they preferred not to go beyond their official duties. As it was later calculated, by the beginning of the crisis, the “shadow banking sector”, unnoticed by the financial authorities, had reached $ 27 trillion.

Chicago Police and Street Violence

Fighting mine syndrome does not necessarily imply organizational reform. It can be conducted personally. Destroying the barriers of your own thinking and life stereotypes can be a source of insights and changes for you. This is exactly what happened with Brett Goldstein, who left his IT job in 2006 to become a patrol policeman in Chicago, a city that doubled the number of murders per capita by half that of New York and Los Angeles.

In 2009, Goldstein was asked to help predict street crime spikes, and his knowledge of a computer analyst came in handy. Chicago police departments were reluctant to exchange information with each other, but when Brett integrated their crime reports into a single database, he managed to create a system of “storm warnings” about the likely places of bloody clashes. Special forces began to send in advance to such points, and already in 2010, the number of murders in Chicago fell to the lowest level since the 1960s.

Facebook and Disunity Prevention

“We want to be the antipodes of Sony, the antipodes of Microsoft – because, looking at such companies, we clearly see what we can’t turn into”, – this is the position of the Facebook leadership, which aimed to prevent the “mine syndrome”. To do this, Facebook used a number of tools. So, each new employee of the company, regardless of experience, is sent to the “training” – to a six-week introductory course in a small group.

The members of the group then fall into different teams, but the communication between them continues, helping to maintain communication between units. There is also a rotation program on Facebook – “hack-month” – when a specialist is sent for a month to work in any department of his choice, with the right not to return to his old place.

Also, once every one and a half months, hundreds of programmers gather in the company’s conference room at the night hackathon and discuss programming problems unrelated to their daily work until the morning. The design of the company’s campus is also aimed at overcoming disunity: the glass walls of the premises (even in the office of the head of the company Mark Zuckerberg), elevated passages between the buildings, a platform for general meetings under the open sky, motivating posters on the walls.

Cleveland Clinic and Patient Satisfaction

Cleveland Clinic (Ohio) is one of the largest multidisciplinary medical centers in the United States with a team of over 40 thousand people. In 2004, when Toby Cosgrove was appointed CEO, the clinic was considered one of the best in the country, but soon the director was faced with complaints from patients about a heartless attitude.

He decided to review not only the organizational structure of the clinic but also the established classification schemes. First of all, he canceled the division of staff into doctors and nurses – now all employees have become “guardians”, which emphasized their obligation to take care not only of physical health but also of the emotional state of patients.

The division into surgeons and therapists is also a thing of the past: they were combined into 27 institutes, each of which was involved in the treatment of a specific disease or system of the body. So, if earlier cardiologists and cardiac surgeons did not cooperate with each other at all, now they began to work together at the Institute of Cardiovascular Diseases. In addition, Cosgrove created a “Patient Satisfaction Service” at the clinic and ordered all staff to complete a “sympathetic attitude training course”.

In 2013, the Cleveland Clinic, ten years earlier, was an outsider of the Patient Satisfaction Rating, took its first place.

Blue Mountain Capital Hedge Fund and JP Morgan Chase Bank

The silo effect turned into losses not only for UBS but also for the largest US bank JP Morgan Chase. In 2012, the bank lost about six billion dollars in risky transactions committed by traders at its Main Investment Bureau (CIO) in London, working in isolation from other divisions. In financial markets, the loss of one is the profit of the other. In this story, the winner was the Blue Mountain Capital hedge fund led by Andrew Feldstein, who learned how to make money from mistakes made by the mining structure of large companies. In the summer of 2011, Feldstein and his traders discovered that JP Morgan, the main investment bureau, had inflated the price of the IG9 index, which insures against the default of 125 US companies.

The hedge fund decided to bet on the fall of IG9. The forecast came true: In the spring of 2012, the index collapsed and the hedge fund first earned on its fall and then received even more for helping JP Morgan Chase gets rid of the accumulated CIO derivatives. By the way, Blue Mountain Capital is taking special measures not to become a victim of “mine syndrome” themselves.

It rejected the separation of securities market analysts, traditional for investment companies, into two departments — stocks and bonds: all specialists work together and bring investment ideas into a common base; the reward of each of them depends on the results of the whole team.

It rejected the separation of securities market analysts, traditional for investment companies, into two departments — stocks and bonds: all specialists work together and bring investment ideas into a common base; the reward of each of them depends on the results of the whole team. It rejected the separation of securities market analysts, traditional for investment companies, into two departments — stocks and bonds: all specialists work together and bring investment ideas into a common base; the reward of each of them depends on the results of the whole team.

Five Lessons to Overcome Disunity

The above stories – and many other similar cases – allow us to draw conclusions about effective ways to prevent and overcome “mine syndrome”.

  1. Do not draw hard boundaries between structural units of the organization. Come up with programs and events that will help departments collaborate and simply communicate with each other. Design the office so that there are places where employees from different departments could intersect with each other – both intentionally and spontaneously. Practice staff rotation like on Facebook.
  2. Build a pay system that encourages collaboration between departments. If the amount of employee remuneration will depend only on the results of the work of their departments, they will not interact with each other.
  3. Provide free movement of information flows within the organization. Specialists of each unit use a technical language that is not understood by the rest. Large organizations need “communicators” who understand several topics and therefore can take on the role of “translators” in the dialogue between departments.
  4. Review established classification systems. Adherence to outdated principles of systematization makes mistakes and prevents progress.
  5. Use information technology more actively. By organizing the data in various ways, IT will help you take a fresh look at your familiar situation and reveal hidden patterns, as happened in the New York City Hall and the Chicago police.

Conclusion

  • “Silo effect” is a distinction of functions and powers, different ways of perceiving reality, characteristics of social groups and organizational units.
  • “Silo effect” is manifested in isolation, unwillingness to cooperate, biased thinking and inability to perceive the whole picture.
  • In the early 2000s, competition between Sony divisions led to its defeat in the competition with Apple.
  • Disunity between the divisions of the Swiss bank UBS resulted in losses of more than $ 30 billion.
  • In 2007, “mine syndrome” prevented the Bank of England from predicting and preventing an impending mortgage crisis.
  • Combining the reports of the district police departments has dramatically reduced the number of killings in Chicago, and comparing the databases of different departments of the New York City Hall has increased the efficiency of the fire inspection.
  • Measures to overcome disunity among staff helped the Cleveland Clinic become a leader in patient satisfaction ratings.
  • Rotation of staff, joint events and thoughtful design of the office contribute to establishing links between departments of the organization.
  • Staff remuneration should depend on the performance of the entire organization.
  • It is necessary that information flows freely move within the company.

Why You Should Read “The Silo Effect”

  • To look behind the curtains of the most influential institutions on the planet
  • To understand the origins of the shameful mistakes that are shaking the world every now and then
  • To gain a clear understanding of the world-changing activities

This book is available as:

Audiobook | eBookPrint