9.1 Function
In HOE System Three is “the component of the metasystem that is synoptically and synergistically concerned with the optimal operation of System One — the inside and now of the enterprise” (HOE 1979: 142). By this point the model has autonomous operational elements and, in System Two, a device that stops their interactions from oscillating (see chapter 8). Nobody yet looks at System One as a whole. Beer’s definition fills that place, and it is compact, stated in terms of place and time. DTS gives it together with its counterpart: “If System Three has been discriminated within Senior Management as responsible for inside-and-now, then we shall also need to discriminate a System Four — to deal with (let’s call it) the outside-and-then” (DTS 1985: 111). The two adverbs in the HOE definition carry the argument. “Synoptically” means that System Three sees all the operational elements together, which none of them can do for itself. “Synergistically” means that it looks for what the elements can achieve together and would not achieve separately. The preceding sentences of the same summary give the reason. Much of the vertical variety of System One is absorbed “by happenstance”, but “this containment of variety is not enough. It is only when System One is synoptically reviewed as a whole that its potential synergy can be understood, and the need to contain residual vertical variety (left over from happenstance) can be perceived” (HOE 1979: 142). System Three exists to deal with that residue. HOE also gives it a managerial name: Beer “nominated it an Operations Directorate” (HOE 1979: 241). Brain of the Firm places the same subsystem on the boundary between two kinds of management: “Here is the highest level of autonomic management, and the lowest level of corporate management. Its function is primarily to govern the stability of the internal environment of the organization” (BOTF 1981: 175–176). Three kinds of information converge on it. (1) The vertical command axis: System Three is part of corporate management and receives information about the internal environment, which it handles “as a metasystemic controller downwards”, “as the most senior filter of somatic news upwards”, and “as an algedonode”. (2) System Three is “the only recipient of information filtered upwards from System Two”. (3) It handles the parasympathetic information circuits (BOTF 1981: 176), which Beer describes as “antithetic to those of the sympathetic (System Two) circuits” (ibid.). Why can System Three not simply rely on the regulators below it? BOTF answers. Systems One and Two are error-controlled regulators that measure deviations against paradigms of standard behavior. Such paradigms, Beer writes, “take no account of the external environment of the organism as a whole — only of the external environment of their own divisions. They may be regulators of local homeostasis, then, but System Three is the only competent regulator of organic homeostasis, since it alone has a System Four input” (BOTF 1981: 176). The sentence already points to section 9.5: System Three’s competence depends on its link to System Four.
9.2 The six vertical components of cohesion
Beer builds System Three out of channels, and he organizes them around a variety balance. The operational elements generate variety on the horizontal plane, in dealing with their own environments and operations. If the enterprise is to hold together, that variety has to be absorbed on the vertical plane. The First Axiom of Management states the requirement. In HOE: “The sum of horizontal variety disposed by n operational elements = the sum of vertical variety disposed on the six vertical components of corporate cohesion” (HOE 1979: 217). DTS gives the same axiom in words: “The sum of horizontal variety disposed by all the operational elements EQUALS The sum of vertical variety disposed on the six vertical components of corporate cohesion” (DTS 1985: 84). Beer lists the six components twice, with different emphases. In HOE (1979: 142–143): three components arise “by happenstance”, from the nature of the enterprise: the environments of the elemental units constrain each other; the operations constrain each other; and “the stamp of the manager’s personality on his own elemental unit, coupled with the attempt of all System One managers to act as a team” (HOE 1979: 142). Three more “must needs be designed”: the command channel, System Two, and auditing (HOE 1979: 142–143). Beer derives the third designed channel from the limits of the first two: “The first is obvious: it is the command channel. But we have already learned to minimize its variety attenuation. The second is System Two: but (as we know) its absorption of variety is by definition limited to oscillatory behaviour. Thus the necessity for a third metasystemic linkage is established: it may be called auditing” (HOE 1979: 142–143). The summary follows: “These six vertical loops (of which only one, the command loop, is customarily acknowledged in management theory) must absorb the total variety generated by the horizontal loops of the elemental units” (HOE 1979: 143). In DTS (1985: 81–82): “(i) the Corporate Intervention, (ii) the Resource Bargain, (iii) operational (squiggly-line) linkages, (iv) environmental intersects […] (v) System Two: anti-oscillation” (DTS 1985: 81), and as the sixth the audits (DTS 1985: 82). DTS adds an observation that matters for the sixth channel: “NOTE that all five linkages refer to relationships that are routine” (DTS 1985: 81). Textual note: The two lists are not identical. DTS splits the command channel into “Corporate Intervention” and “Resource Bargain” and does not list the interaction of the System One managers separately. Channels (iii) and (iv) “absorb whatever variety the circumstances of the enterprise dictate”, channels (i), (ii) and (v) “whatever variety we have designed them to absorb” (DTS 1985: 84). The residue from 9.1 comes back here as arithmetic. Because the First Axiom must hold, “it NECESSARILY FOLLOWS that Variety of Audit Channel (vi) = Total horizontal variety generated by System One minus Varieties (i) + (ii) + (iii) + (iv) + (v). The Audit Channel CLOSES THE GAP” (DTS 1985: 84). The audit is therefore no optional extra added out of distrust. In Beer’s argument it is the channel that absorbs whatever variety the other five leave over. He anticipates the objection that such varieties cannot be measured precisely with the example of bricks in a wall: nobody counts them, and yet the wall shows no gaps (DTS 1985: 84; the example is developed at length in HOE 1979: 85).
9.3 The resource bargain
“The Resource Bargain is the ‘deal’ by which some degree of autonomy is agreed between the Senior Management and its junior counterparts. The bargain declares: out of all the activities that System One elements might undertake, THESE will be tackled (and not those), and the resources negotiated to these ends will be provided” (DTS 1985: 38–39). Most of the everyday dealings between senior and junior management take place on this second DTS channel. Its counterpart is accountability (labelled “ACCOUNT-ABILITY” in Figure 9 of DTS, DTS 1985: 39). Beer draws the bargain as a loop that keeps running after the deal is struck: “The homeostatic loop sketched into the diagram properly indicates that a dynamic process is involved. It is essentially attenuative, because it excludes a huge range of alternatives” (DTS 1985: 39). The attenuation is the price of autonomy, since System One is free within what has been agreed. The loop can also amplify. Senior management “may, by superior knowledge or through unexpected financing, open up opportunities not conceived by System One on its own initiative” (ibid.). The bargain is Beer’s alternative to indiscriminate intervention. He calls the question a “nettle to grasp”, “because the senior management often assumes — and likes to exercise — the power to poke around in the intimate managerial detail of its subsidiaries in System One. But THINK: the so-called prerogative to intervene indiscriminately does not have Requisite Variety. It cannot be competently done” (DTS 1985: 38). Once the bargain is struck, the upward message can in principle be very short. DTS describes poor managements that ignore their filters: “they disregard the resource bargain (where in principle the homeostatic message upward needs to be only ‘OK’), and invigilate the horizontal activities with all the zeal of an Inquisition” (DTS 1985: 82).
9.4 Audit (System Three*)
Routine channels filter by design, through totals, averages and agreed reports. Beer asks in DTS: “what happens if what the management most needs to know is FILTERED OUT (by the use of totals, averages, and so on)?” (DTS 1985: 82). The Inquisition just described is one answer, and the wrong one. Beer’s answer is a different kind of channel: “there is a whole set of acceptable management practices that do not involve this centralization of manifest power, which — properly designed — are capable of generating enormous variety” (DTS 1985: 82). The audit channel works “sporadically (not as a perpetual routine […])”, and “by agreement with System One management” goes “straight to the operations themselves. These procedures, which may generically be called ‘audits’, are indicated as the sixth vertical channel” (DTS 1985: 82). Three features define it. It is sporadic, so it does not become a second routine reporting line. It is agreed with System One management, so it does not undermine the autonomy granted by the resource bargain. And it reaches the operations directly, so it carries high variety where the routine channels carry low variety. That is how it can close the gap the other five channels leave. In the later chapters of DTS the audit is “a typical 3* function”; the channel represents “sporadic — high-variety intervention in actual operations” (DTS 1985: 144). In the same passage Beer warns that the model can be misread: “There is no ‘correct’ interpretation of the VSM”, but there may be incorrect ones, and “this is nowhere more likely to occur than in Systems Two and Three Star” (DTS 1985: 144). He asks the reader to design these channels deliberately: “They really do need to be designed, in relation to the two command channels that are central to regulation” (ibid.). Terminological note: The label “3*” for the audit channel belongs to DTS. In HOE the same sign is used differently: in the discussion of System Five, “mini-boxes marked 3* and 4*” denote the models of Systems Three and Four that System Five contains (HOE 1979: 352). HOE calls the sixth channel simply “auditing” (HOE 1979: 143); later it is “the new System Three channel that runs directly to the operations” (HOE 1979: 215). In the text of HOE “3*” occurs only in the System Five sense (HOE 1979: 352, 354).
9.5 Three–Four
Dedicated to the internal environment, System Three cannot also take on the external environment and the future. They need a system of their own: “System Three is debarred, because it is dedicated to the internal environment, and System Four is born” (HOE 1979: 143). BOTF has already given the reason why the two must be connected: System Three is the only competent regulator of the whole organism’s internal stability “since it alone has a System Four input” (BOTF 1981: 176). Later in HOE Beer summarizes the resulting structure: “The Inside-and-Now was found to depend on Systems Three-Two-One. The Outside-and-Then was found to require Systems Three-Four-Five. System THREE is the common element: it is the managerial fulcrum of viable organization” (HOE 1979: 263). Chapters 10 and 11 take up how Three and Four are balanced.
References
- HOE — Beer, Stafford (1979). The Heart of Enterprise. Chichester: John Wiley & Sons.
- BOTF — Beer, Stafford (1981). Brain of the Firm. 2nd ed. Chichester: John Wiley & Sons. (1st ed. London: Allen Lane, 1972.)
- DTS — Beer, Stafford (1985). Diagnosing the System for Organizations. Chichester: John Wiley & Sons.