Bureaucracy’s $3 Trillion Price Tag
What’s the least efficient activity in your organization? What sort of work delivers the least value per dollar? We think it’s management and administration. The fault isn’t with any particular leader, but with the top-heavy, bureaucracy-infused management structures that predominate in most organizations. We believe that an excess of bureaucracy costs the U.S. economy more than $3 trillion in lost economic output, or about 17% of GDP. Here’s the data.
According to the U.S. Bureau of Labor Statistics, in 2014 there were 23.8 million managers, supervisors and administrators in the American workforce. (This figure does not include individuals in IT-related functions). That works out to one bureaucrat for every 4.7 employees. Overall, bureaucrats comprised 17.6% of the U.S. workforce and received nearly 30% of total compensation. (See Figure 1.)
Figure 1. Employment and compensation share of U.S. managers, supervisors and administrators.
The question is, how many of these 23.8 million overseers do we actually need? We can get an answer by looking at the management practices of a small but growing number of post-bureaucratic organizations. Their experience suggests it’s possible to run large, complex businesses with less than half the bureaucratic load found in typical companies.
Among the vanguard are Morning Star (the California-based tomato processor), 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 and the UK), Sun Hydraulics (a class-leading manufacturer of hydraulic components), Valve Software (a pioneering developer of online games), and General Electric’s Durham, North Carolina jet engine plant.
The case of Svenska Handelsbanken is illustrative. Its return on equity has surpassed that of its European peers every year since 1971. In an organization of 12,000 associates, there are only three levels. Operating decisions are almost entirely decentralized. Each branch makes it own loan decisions, sets its own pricing on loans and de- posits, controls its own marketing budget, runs it own website (on a shared platform), and serves all customer segments, from individuals to multinationals, within its catchment area. Nearly all of these practices run counter to conventional banking wisdom, which holds that to be efficient a bank must consolidate operational activities and centralize decision-making on matters like pricing and lending. Though a rebel, Svenska Handelsbanken has consistently posted industry- beating cost-to-income and loan-loss ratios.
The average span of control in these and other vanguard organizations is more than double the US average. 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 within GE’s Aviation division.
The experience of the vanguard suggests it should be possible to double the ratio of employees to managers and administrators from 4.7:1 to 10:1. Doing so would free up 12.5 million individuals for other, more productive work.
In addition, there would be indirect savings. Bureaucrats have a penchant for wrapping their colleagues in red tape. In his anti-bureaucracy screed, The Utopia of Rules, David Graeber bemoans the fact that “no population in the history of the world has spent ... so much time engaged in paperwork.” A myriad of studies have documented the time lost to low-value management processes—from budgeting to the performance review. On the basis of this evidence (further discussed here), it’s reasonable to assume that as much as 50% of all internal compliance activity is of questionable value. According to our estimates, this translates into a waste of 9 million worker-years.
In total, then, there are 21.4 million individuals in the US workforce—12.5 million managers and the equivalent of 9 million bureaucracy-hobbled subordinates, who, through no fault of their own, are creating little or no economic value. This means the US could achieve current levels of economic output with 15% fewer people in the the labor force. That would boost GDP per capita from $120,000 to $141,000.
The goal, of course, isn’t to put 21.4 million people out of work, but to redeploy them into wealth-creating activities. If every one of these individuals was contributing $141,000 to economic output each year, rather than adding nothing, U.S. GDP would grow by $3 trillion—and the figure could be higher. Managers and administrators tend to be better educated than the workforce at large, so we should expect them to deliver better than average output per capita once reassigned to more productive work. Critically, our figures don’t include the productivity benefits that would come from a newly-empowered workforce less entangled by red tape.
Three trillion dollars represents 17% of US GDP. If the bureaucratic burden on the U.S. economy was cut in half over the next ten years, productivity growth would increase by a compounded rate of 1.3% percent annum, essentially doubling the post-2007 productivity growth rate.
This productivity bonanza would be even larger outside the US. In 2014, the combined GDP of the 35 countries that comprise the OECD amounted to $49.7 trillion, of which the non-US share was $32 trillion. If bureaucracy is as ubiquitous in these economies as it is in the U.S., and there’s little reason to believe it’s not, there’s another $5.4 trillion to be saved by eliminating the bureaucratic tax—an amount that exceeds the value of the entire Japanese economy.
In recent years, productivity growth in the U.S. and other “advanced” economies has been anemic. Around the world, stagnating incomes and diminished economic hopes are feeding a growing appetite for protectionism and spawning divisive, us versus them, political forces.
While some hold out hope that robots, genomics and the internet of things will one day yield a productivity bonanza, we believe a concerted effort to reverse the rising tide of bureaucracy offers a more immediate and less speculative route to enhanced economic performance.
So what do you think?
- Should busting bureaucracy be a national economic priority?
- If so, what steps could policy-makers and CEOs take to accelerate progress?
To learn more about the $3 trillion price tag of excessive management, you can download our research paper here.