How Organizations Collapse

Allen Faulton
14 min readApr 11, 2020

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The Modern Survival Guide #111

Photo by Kerimli Temkin from Pexels

This is the Modern Survival Guide, a guidebook I’m writing for things I think people need to know about living in the modern world. The views expressed here are mine, and mine alone. And I know that right now things seem like they are breaking down (I’m writing this in the time of Coronavirus). That’s because things are breaking down.

Oh, you thought I was going to be optimistic? Nope. Organizational collapse is a common thing in times like these, for reasons which we shall explore. I think it’s important to understand this process — and not just the breakdowns that happen in crises, but the common, everyday organizational collapses that happen in times of plenty and peace.

The bottom line up front: every organization that humans invent is flawed. Every organization has the potential to collapse or be rendered ineffective to its core purpose. And this will, inevitably, happen to every organization.

The is incredibly important to your survival in the modern world. The concept of self-sufficiency is effectively dead, and we are all increasingly enmeshed in a specialized economy and governmental system where organizations determine large parts of our lives.

Most of us cannot grow our own food — we rely on food distribution organizations and logistical networks. Most of us cannot build or fully repair our own tools — we rely on mass production organizations. We are simply incapable of individually doing the big things — providing for common protection, national defense, disaster response, etc. So it’s not like we can effectively get away from organizations without neutering all the benefits of the modern world.

And that’s the core issue, we’re not getting away from the concept or reality of organizations affecting major parts of our lives. The ability to organize into complex social and work structures is the key aspect of the success of the human species — the ability to form complex cooperative groups and pool resources to address big issues. That’s how we triumph as nations and communities. But when things go wrong, it’s a major liability.

So let’s talk about how it all falls down. When I say that an organization “collapses,” what I mean is that it fundamentally becomes incapable of performing its primary function. This is how the cookie crumbles, how the center fails to hold, how the world comes tumbling down, because when core organizations stop functioning, nothing else is around to take their place. This is a recipe for chaos and confusion until something else pops up to take the load.

Fundamentally there are three ways in which an organization — any organization — collapses:

  1. External shock
  2. Internal malaise
  3. Deliberate attack

Yes, this is a broad-scope article. But these three points are broadly applicable, and I’ll try to throw in some examples to demonstrate these points. Let’s dive in and see how things break down.

External Shock

An external shock is anything that hits an organization from an outside source with a major detrimental effect. External shocks can be all kinds of things, but they all have three key features for this discussion: they are intensely disruptive to the ability of the organization to operate normally, they are unexpected, and they usually cannot be attributed to any one party.

For example, a stock market crash is a major external shock to a lot of business organizations. They can’t control it, and in many cases it’s impossible to adjust internal processes in response. A sudden loss of liquidity caused by stocks falling through the floor has been the death knell for many a business over the last few centuries.

It’s also worth noting that an external shock can be too much of a good thing — lots of small businesses call it quits because they outgrow the ambitions of their owner. Going from 700 orders to 70,000 orders overnight is a major shock to any business.

And of course, we are currently in the midst of a massive external shock in the form of the COVID-19 virus outbreak and consequent quarantine of the major world economies. This is going to have extreme impacts which we’re only starting to see.

External shocks cause organizational collapse by over-stressing particular points in the organization’s system. These could include the ability of personnel to perform work, the timeline on which work is completed, the resources available relative to the volume of work to be performed, or the cost of doing work, just to name a few things. A minor external shock only disrupts one of two aspects of a system. A major shock disrupts most or all of them.

Again, to use COVID-19 as an example, the major fear of officials around the world is the risk of healthcare collapse as a result of the virus. This could happen in multiple ways. A significant volume of healthcare workers getting infected (say, around 20–30% of staff) would cripple the average hospital. A huge volume of new cases would overwhelm any healthcare system and result in mission failure (which is a euphemism for a lot people dying, in this case) simply from lack of treatment space. Insufficient available resources — lack of ventilators, tests, and personal protective equipment — will do the same thing. This is why staying quarantined is so important, and why all the healthcare providers are freaking out.

External shocks are dangerous because they are typically unforeseen or, more often, unprepared-for events. To paraphrase an old saying, it’s never the rock you see that trips you. Consequently there is often a degree of chaos in the immediate response to an external shock as people try to figure out what the hell to do about it. This usually reveals the weak points in an organization. The degree to which these weak points can be mitigated, and the timeline for doing so, typically determine whether an organization collapses or just suffers a major setback.

For example, let’s say you’re a business following a stock market crash. You rely on the sale of stocks in addition to business loans and personal investments to maintain liquidity (the amount of cash you have on hand) to pay workers, buy raw resources, and maintain your equipment. You generally float this liquidity while your product gets to market, whereupon you pay back your creditors and make some profit on top. This is an oversimplification, but you get the idea.

A stock market crash hits you in several equally bad ways. Your stocks dry up as a source of liquidity. Since this happening to everyone else, the economic system as a whole starts to seize up and consequently you lose customers. Because everyone is suddenly borrowing money, you might also lose the ability to get cheap loans (this is why the Fed always cuts rates in a recession). However, your costs remain the same unless you can do something about it. You respond by cutting your purchase orders and slashing your workforce. If you can do that fast enough, and you don’t have a lot of overall debt, and you can maintain a reasonable profit margin from your sales, it might be enough to save your business. If you can’t, you fail, and your business collapses.

From this example we can learn one last general concept about external shocks: the conditions for the survival or collapse for any organization are determined before the external shock occurs.

Internal Malaise

Lots of organizations fail because of internal rot of one form or another. You’ve probably worked for an organization that had this problem. I know I have. There are many potential causes of collapse from the inside out, and here are some common ones:

  • Lack of flexibility due to rigid processes or complacency
  • Laziness or indifference in line workers
  • Laziness or indifference in management
  • Poor decision-making
  • The Iron Law paradox

A lack of flexibility is generally a problem because it means an organization can’t change with the times, adapt to customer demands, or meet new challenges. This problem tends to affect established organizations which have had time to develop their internal culture and bureaucracy, and is usually characterized by overly complex procedures, an ossified management culture, or an organizational attitude of “we’ve always done it that way.” It also tends to affect successful businesses which get complacent: if something is working why change it, and if you have customers today you’ll definitely have customers tomorrow, right?

For example, the US steel industry and automotive industries got clobbered during the 1970s and 80s due to competition from Japanese companies. The US companies were using outdated techniques and equipment, and generally producing a poor product, but they had been the only game in town for decades. They were fat, happy, slow, and complacent. The Japanese companies came in with new factories, new equipment, new technology, one hell of a work ethic, and a better quality control mindset. The US companies were structurally unable to adapt for years, and this ended many US organizations as a result.

Lazy or indifferent workers, on the other hand, are generally considered a symptom of problems in management. Nonetheless this is a symptom that can rapidly turn into its own disease, since a workplace culture is determined by the accepted attitude of the personnel. Particularly in service industry organizations, bad employee performance at the front line can be largely invisible to management unless the organization has a scrupulous “secret shopper” or similar program.

Bad workers create organizational collapse by undermining the point-of-contact experience for the customer or failing to meet efficiency standards. For example, if people get sneered at when they’re ordering their burger, they probably won’t come back. Over a relatively short timeline that translates to a customer base problem at that particular location. If the organizational culture adopts this attitude, that can cause collapse by simply pissing off enough people that the business’s revenue stream dries up.

Lazy or indifferent management is not only how you end up with lazy and indifferent workers, it’s also how really nasty structural problems get started. Things like poorly balanced accounts, auditable or legally actionable missteps, and poor internal communication all can be ultimately blamed on lazy management in many cases. If the people at the top don’t care or can’t be bothered to do manager things, the whole organization suffers.

Poor decision-making is how you wind up behind the 8-ball. This is what happens when companies or organizations go off in a completely wrong direction, sink too many resources into that decision, and then get screwed because it was the wrong choice. Blackberry did this a few years ago; you could also argue that the various hedge funds suffered from this problem back in ’07.

The core similarity of these cases is that bad decisions cause so many internal problems that the organization simply trips over its own feet — it falls and it can’t get up because it’s too weak to adapt or too invested in a bad choice to survive. When capitalists apply the brutal logic of survival of the fittest to business, this is the kind of thing they argue is being weeded out. They’re not wrong. But it also applies to non-profits, religions, governments, volunteer groups — all the other organizations that we need or rely on, and which aren’t so easy to replace.

It’s very worth your while to keep track of which organizations you use that fall into this category. Those are the ones that need auditing, public transparency, and preferably a regular organizational update schedule.

Finally, the Iron Law Paradox is a problem that occurs when the Iron Law of Bureaucracy comes into conflict with an organization’s ability to do work. Put simply, this Iron Law states that every institution will first and foremost take actions which preserve the institution itself, accomplishing its stated mission purpose as a secondary goal. Under most circumstances, this is a rational action; you can’t get anything done if the system for getting things done falls apart. However, under some circumstances the Iron Law turns into a situation where an organization ends up unable to do anything at all because it’s more interested in survival than it is in doing work.

Government agencies periodically suffer this problem — there’s a reason why the Department of Homeland Security was such a shit show for years: all the little agencies that it incorporated were fighting each other for their individual survival.

Charities and non-profit groups often suffer from this issue as well, but usually from the angle of pushing more and more resources into overhead, side projects, and executive salaries, at the expense of their stated mission. For example, the charity Feed the Children went through an extremely tumultuous period in recent years as its founder engaged in a series of questionable activities. Seriously, click that link, it makes the Trump Organization look tame.

Last but not least, we have the penultimate example of the Catholic Church trying to shield itself from pedophilia prosecution by protecting priests instead of victims. Which just goes to show that even the most purportedly morally upright groups are not by any means immune to this kind of problem.

Deliberate Attack

It’s worth remembering that most major organizations come under deliberate attack on a frequent basis. It’s often overlooked that just about every organization has to deal with politics. Remember that politics is primarily concerned with resource ownership and distribution. Every organization requires resources, and there’s always someone who thinks those resources should go elsewhere.

Sometimes this is a competing company. Sometimes it’s an interested citizens group. Sometimes it’s a government agency or media organization. And sometimes they launch an attack on the organization in question. This can take two forms: direct assault, and sabotage.

A direct assault on an organization involves a formal challenge to that organization and is usually conducted out in the open. It might involve public hearings or accusations of malfeasance. It might involve conscientious research and rational argument before an oversight group. It might involve inciting local or mass media attention. In some cases it might involve punitive lawsuits or hostile corporate acquisitions. In extreme examples it might even involve violence.

All of these serve the same general purpose: preventing an organization from fulfilling its mission and re-routing its resources or base of support. An excellent example of this type of thing in the US is the sustained campaign against Planned Parenthood. Whatever your feelings on the politics, it’s arguably one of the most successful modern attacks on an entrenched and successful organization, incorporating a smear campaign, political undermining, and an onslaught of attack ads, YouTube videos, and print media op-ed articles. It worked, too, in the sense that Planned Parenthood lost federal support.

In recorded history, the most common example of a direct assault on an organization is warfare — every war is fought over either tangible or intangible resources: money, resources, religion, or political philosophy are the causes of mass violence since people started walking upright.

A sabotage campaign against an organization, on the other hand, is characterized by either subterfuge or a guerrilla campaign, where the first involves clandestine attack or infiltration, and the other involves actions which do not directly challenge the organization but nonetheless hurt it.

Clandestine sabotage might take the form of industrial espionage or sting operations designed to undermine the organization’s legitimacy or steal secrets rendering it non-competitive. Again using Planned Parenthood as an example, they were the subject of video surveillance by an anti-abortion organization known as the Center for Medical Progress back in 2015. This footage was edited (rather creatively, as it turned out) in an attempt to portray Planned Parenthood as an amoral flesh trader.

Guerrilla campaigns, on the other hand, are broadly based around the concept of “death by a thousand cuts,” using several different attack vectors over a period of time to slowly and insidiously starve an organization of funds, resources, or personnel. It’s arguable that this has been the strategy of the US Republican Party in recent years as part of a campaign to “starve the beast,” in operations characterized by defunding or limiting personnel to US federal agencies, waiting for the agency in question to fail because it lacked funding or personnel, and then publicly excoriating the agency for failure, thereby justifying additional cuts.

The primary point of a guerrilla campaign is to force organizational failure without taking blame (or credit, as the case may be). More precisely, it’s an attempt to force organizational failure without taking blame for negative consequences. This is important in many different situations, because collapsing an organization means removing whatever jobs, systems of support, or dependencies the organization promoted.

Again, to use the “starve the beast” campaign as an example, it is more useful to the people who want federal agencies to fail to make it look like the agency failed on its own, rather than as a result of their efforts. That’s usually because, whatever voters claim to believe, they tend to react negatively when you remove a supporting institution from their lives. This is why you get sound bites of people railing against “entitlements” but also loudly demanding that no one touch their Medicare, and it’s why support for Obamacare has increased year over year. This makes cutting government actually a rather tricky exercise, without at least a little bit of slight-of-hand.

Sabotage, then, is something that’s important to recognize when it’s happening. Not all the time but most of the time, people resort to sabotage when they know that an organization enjoys a base of support that would make a direct attack unpalatable. In any case where an organization consumes significant resources, occupies a large market share, or controls an important function, sabotage becomes increasingly likely.

It All Falls Down in the End

There is an important lesson to take away from all of this, and it is: all organizations collapse. All businesses eventually shutter their doors. All institutions suffer cycles of failure and renewal. All nations fall in the end. There is no such things as an immortal organization; over a long enough timeline at least one of the things on this list will make an appearance in sufficiently devastating fashion that the organization collapses.

Therefore it is important to manage the aftermath. Remember, an organization collapses when it fails to achieve its mission goals; that doesn’t mean the organization itself vanishes. It is quite possible for an organization to collapse, stand itself back up, and collapse again in cycles. Other times the organization is destroyed utterly, and creates a void.

Nature abhors a vacuum, and so do human societies. See a need, fill a need is still the watchword for most of the world. The question isn’t whether someone will pick up the pieces after an organization collapses in spectacular fashion, it’s who will do it, and what form the new organization will take.

Remember: the point of organization is to direct the flow of resources. Sometimes organizations collapse because they can’t do this, or because they’re bad at it. Sometimes they collapse because other people don’t like the direction the resources are flowing. If you are reliant on a resource, it is worth your while to pay attention to the organization providing it — because without any shred of doubt, someone else wants that resource.

Within the business community, this becomes a lot more important if you own the business as opposed to being a consumer. Within the medical community, this becomes a lot more important if you are the consumer. Within the public policy and governmental fields, it is important to remember that there is a constant battle between publicly-sourced and privately-sourced social goods, and this will bleed into a battle over organizations.¹

So pay attention to the organizations in your life, and prepare for their collapse. I’m not saying that you should become a prepper and dig a bunker in the backyard. But I am saying that it is worth your while to have backup plans. Know what you need to do if you lose your insurance, or your job goes under, or your favorite brand of chips stops being a thing. Know what you need to do if your Social Security dries up, or the government goes belly-up, or your religion has a schism, or your political party breaks apart.

Know what to do when your organizations collapse. Because one day, they will.

¹A “social good” in this sense is a product or service that everyone in society can use, and which is likely of benefit to specific people within society more than others. Medicare, for example, is a social good — everyone can use it, some people depend on it, but not everyone takes part.

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