Systems theory isn’t something commonly discussed in financial services. It is usually confined to science, engineering and technology yet the study of systems (interrelated, interdependent groups both natural and human-made) provide an insight into why some species, societies and organisations thrive while others fail.
In the context of today’s uncertain, rapidly changing financial services landscape, systems theory is particularly relevant, as advice businesses determine the right structure and strategy for future growth.
At a high level, there are two key organisational systems: loose and tight.
A tight system is one that is highly centralised and rigid. Protocols, schedules and production sequences must be strictly adhered to. They are designed for a particular set of circumstances and, in that specific environment, they are highly effective but if those circumstances change, a tight system can’t adapt quickly, if at all.
Loose systems are characterised by decentralised operations and flexible processes.
Counterintuitively, loose systems are often better and “almost always more stable, flexible and efficient in the long run than neater systems,” according to Draper L Kauffman, author of Systems 1 and a lecturer at the University of Houston in Texas.
While loose systems look sloppy compared to systems that are purpose-built and suited to a specific situation, loose systems are agile and more sustainable. They are able to survive different market conditions because they are able to tolerate moderate fluctuations in things like demand and supply, pricing and customer preferences.
Yet large organisations and institutions typically opt for tight systems.
This is not only about meeting legal, moral and ethical obligations and managing risk, which are critical for any organisation, it is about restricting activities, controlling behaviour and maintaining order.
Bursting the bubble
From the mid-1990s to around 2018, financial services in Australia could be described as a tight, closed system.
It almost operated in a bubble. Institutions told advisers how to run their businesses including how much to charge (commissions), the types of customers to target, and the products, platforms and technology solutions to use (approved product lists). They tightened their grip by building centralised back offices.
Advisers were not encouraged to think like entrepreneurs or act like professionals but conditioned to swim within the narrow flags set by their licensee.
Institutions flourished (for a period) under this system, due largely to the industry’s fledgling state and favourable regulatory and market conditions.
But, in just three short years, their tight system has imploded. It could not change with the times. Furthermore, organisations that cling to tight controls waste considerable energy and resources trying to maintain control but fail to adapt to cyclical changes, as Kauffman observed in Systems 1.
Fortunately, smaller, younger businesses tend to be more nimble and adopt a loose approach.
As accounting and advisory firms grow and super firms start to emerge, they’ll need to decide how tightly they want to control their system.
In the same way that engineers design engines and structures before they build them, taking into consideration every possible problem and objection, advisers must spend time today thinking about the best system for tomorrow.
To ensure the right system, they should continuously monitor how decisions are made in their business, the ability of people to think critically and do their job autonomously, and their openness to feedback.
At a granular level, something as simple as having an open door policy, where CEOs and managers can be interrupted and, if necessary, challenged, indicates a loose system.
Where and when
Tight systems are commonly exposed by a dominant founder or leader with immovable opinions and a heavy handed, top down management style. Most of us have worked in organisations like that, for bosses like that. Sorry if you’re still stuck in that system.
While every organisation needs structure, robust processes and clear boundaries to operate efficiently, they also need to create room for fresh ideas, diverse opinions and growth because that is when the magic happens.
Since the best ideas rarely come from the CEO or their management teams, a loose approach gives an organisation the best chance doing something truly innovative.
In a highly regulated industry like financial planning, tight controls are essential to ensure strong consumer protections and the compliant delivery of high quality advice.
At the same time, financial services is also a rapidly changing industry, therefore, success is closely linked to maintaining a loose system.
The key is knowing where to be tight and where to be loose.
When it comes to running a thriving accounting and advisory business, there is no single formula for success. A loose approach recognises that there are many different ways to achieve stellar outcomes. At AZ NGA, we do not hold house views on the how things should be done.
We’ve all seen the impact of tight systems in financial services. As such, we back the visions and ideas of entrepreneurial advisers.
Like any relationship, whether it’s with your spouse, child or horse, holding on too tightly only guarantees that they’ll buck.
Read more of Paul Barrett’s articles in Professional Planner.