On internal monopolies

Internal monopolies are created when companies decided to centralize services without taking close care of the alignment of incentives.

These days it is common to assign ‘centralised’ roles to departments for serving the whole company. That can mean providing IT developing services, testing services, quality assurance consulting, etc.

This approach is a good idea on paper, if you consider that the centralisation tends to improve sharing of knowledge, ease the building of specific knowledge areas and reduce redundant work.

What few executives consider when deciding this, is that they are creating a monopoly inside their companies.

Some executives claim this is a way to show focus. I would argue that it is the exact opposite.

For example, when you can get software development services from one department only, you are limited by:

  1. Their methodologies (good or bad)
  2. Their technical limitations
  3. Their ego
  4. Their resource constraints
  5. And most important: politics.

And yes, the same applies if you get help desk services, HR services, catering services or any other thing you can imagine.

The problem with centralisation of tasks

The idea of centralising certain aspects of the business without providing an extremely clear competitive edge misses a crucial point: the tendency we have to become complacent.

It incentivises a department to run their own business well as opposed to helping their stakeholders deliver on their core objectives. It leads people to talk about work instead of delivering work.

Let’s get one thing out of the way. Centralisation will not stop redundant work. Worse yet, will not prevent useless work from being done either.

Economy theory shows us that the main benefit of a monopoly lies in the economies of the scale it can achieve.
However, that touches on the main issue with monopolies. They never achieve the economies of scale because they do not have to.

Monopolies do not need to stretch themselves to get new clients.
Monopolies do not need to search for innovative ways of solving problems.
Monopolies do not have to search for cheaper or quicker ways to deliver.

Monopolies are the real embodiment of the status quo.

The alternative to internal monopolies: incentives

To avoid the internal monopoly and still deliver strong services inside your own company, a three sided approach is required.
You are not allowed to fail in any of these aspects.

Get the incentives right:

The power of incentives are vastly underestimated.
When we think of incentives we usually think of bonuses, promotions or, sometimes, layoffs.

These are important ways of applying incentives, however, the most important aspect is what are you incentivising.

For service providers it is key that the incentives are aligned to the core of the goals of the stakeholders you serve.

Let’s suppose you manage a big IT department in a company. You are measured based on how quickly you close your help desk calls.

This is a classic. For all my IT friends: your stakeholders don’t want you to close your help desk calls faster.

They don’t want to have to call you in the first place!

Oh, and when they do, they’d rather have your people to spend a good amount of time showing respect, consideration and solving the problems for real.

This is a classic case of misalignment in the incentives that get organisations to go astray.

Performance assessment done by the stakeholders as opposed to self-assessment

Now, let’s assume that you have got the incentives right in your organisation. You and your people are measured by the same standards your stakeholders are striving for.

In this situation the next obvious step is to let your stakeholders tell you how well you are doing.

Instead of having managers assessing their people, let the ones actually using the service tell you what they think about the quality of the deliverables.

This is good for two reasons:

  1. If you fail in getting your incentives right, this will become evident when you get feedbacks from your stakeholders.
  2. As a manager you can only see so much. You cannot feel the pain of the ones receiving the service. You cannot know what it is to be in their shoes (in most cases) and you will always tend to empathise with your people.

So, let the clients tell you what they think.
Introduce the net promoter score or similar for your area and see what you learn from it.

Competition with other areas or externals in the same playing field

It is tempting to say that one should allocate resources to one area and not hire externals, or build our own competences in this field.
After all, the investment is done and we should not spend double.

This is what makes it a monopoly.

If somebody wants to bring in competition and the arguments are not refutable. You should get out of the way.

If one of your stakeholders wants to build in-house capabilities because your internal team is not delivering fast enough.
Get out of the way.

If one of your stakeholders wants to bring consultants to deliver something you can’t.
Get out of the way.

And more importantly, if one of your stakeholders wants to work with somebody else because you became too bureaucratic or slow.

Please, get out of the way.

And stay out of the way, until you have fixed the situation and became competitive again.

Internal monopolies, are hard to identify and most managers will have hundreds of explanations and reasons as to why this is a good idea. The reality is that its side effects are hard to measure while at the same time being damaging to the firm. Avoid it.


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