Self-organization makes for smart managing: a few pioneers like American Express and Southwest Airlines have adopted a new system of budgeting and decision-making that eschews top-down finance controls. Instead, it recognizes the efficacy of empowering the rank-and-file and stressing flexibility.

• Author: Millman, Gregory J.
• Position: COVER STORY - Cover story - Company overview

The insights of Friedrich Engels, co-author with Karl Marx of The Communist Manifesto, might seem an unlikely inspiration for corporate strategy. The foraging and nest repair behavior of ants might seem, if anything, even less likely. Of course, anyone who has been on a picnic knows how quickly ants converge on an opportunity; fewer know that the same worker ants spontaneously redeploy from foraging to nest repair or other jobs when necessary, and solve challenging problems in optimization even though no ant has studied mathematics.

Ants manage to do this with no centralized direction, no headquarters and no command-and-control mechanisms. There are no ant CEOs, generals or CFOs. Each ant merely follows a few simple rules, and otherwise acts more or less freely. The result of thousands of ant "decisions" is a phenomenon known as self-organization, so powerful that even the Biblical Book of Proverbs commands, "Go to the ant; consider her ways and be wise."

A similar phenomenon was at work in Manchester, England, the city where the young Friedrich Engels helped manage a textile factory owned by his father. Manchester was an unplanned industrial area that had grown up more or less spontaneously and didn't have the usual administrative structure of a city. Yet, Engels observed that, without any zoning, centralized direction or city planning, residents spontaneously organized a commercial district and distinct residential areas for various classes. The urbanist Jane Jacobs, who campaigned to save New York's Greenwich Village from developers, would underscore the importance of free, individual, random encounters and decisions in the vitality of cities a century after Engels.

Now, self-organization has come to corporations, too, and a few have found it to be a powerful tool. The fact that the free decisions of individuals are a source of competitive advantage is a fundamental principle of management at some leading companies. "When there is a challenge out there, our employees rise to the occasion," says Laura Wright, CFO of Southwest Airlines and an FEI member. "That's when they shine the most--if you educate them and explain what's going on, you get the buy-in."

Southwest is among a growing chorus of business practitioners and business advisors that in the past few years have sounded the refrain that conventional budgets, targets, performance metrics and many of the managerial impedimenta that we take for granted not only fail to help companies achieve success but may actually help make success unachievable. In place of such traditional management tools, they advocate something approaching managerial minimalism.

What these companies are responding to is managing unpredictability. In a world of rapid and continuous change, the assumptions that go into conventional planning are obsolete within weeks. The traditional approach offers the impression of knowledge, control and accountability. But, says David Martin, CFO of Dimensional Fund Advisors, "Conditions change too fast. In fact, people aren't going to be accountable--they literally can't be accountable. You're going to be throwing out the plan by January, and then you start relying on variance explanations. It's a false sense of security."

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Mark Millemann, a consultant who has worked with BP plc, Borg-Warner Inc. and Sears, Roebuck & Co., is co-author of Surfing at the Edge of Chaos, a book that recounted the experience of several companies with self-organization. He says, "Most organizations have sufficient internal intelligence to solve complex problems. In contrast to deploying the intelligence of a few at the top, the benefit of tapping collective intelligence is the possibility for superior strategy informed by what's happening in the market."

For most companies, this is certainly not business as usual. "Past practice was very much a mandated, hierarchical structure, down to a very granular level--even what you spend on travel, top-down and mandated," says Brian F. McCarthy, executive partner of the Finance and Performance Management service line at consulting firm Accenture. "I would say it's prevalent in 80 percent of...