A decentralized organization is a crucial part of the mankind's future. To truly understand how decentralized organizations work and why they are so important, you must get a deeper understanding of decentralization and what that potentially means for an organization to be part of decentralized organization.
We will take a closer look at the most common definition of a decentralized organization. Then we shall see how these types of organisations compare to centralized ones. After reading this, you will be able to understand decentralized organization clearly and succinctly. You will know examples of each, and be familiar with real-world examples of successful decentralized companies.
Before you can understand the role of a decentralized organization, you need to get a better understanding of the definition. These are organizations where the authority responsible for making decisions is not a central group or figure. Instead, many decentralized organizations give power to all members of their hierarchical structure with influence in decisions.
By contrast, a centralised organization involves making all the decisions at the top of the hierarchy. For example, from the CEO or board of directors. The traditional structure for organisations is centralised. All major decisions would go through the company president or a board of trustees.
However, more and more organizations are moving towards decentralization. This can mean voting on major decisions or simply allowing each member of the organization to make their own choice on smaller, less-important matters.
Simply reading about how centralized and decentralized organizations differ is not always enough to get a firm grasp on how they operate differently. We feel that the best method is a comparison of the structures of each type of organization.
Remember that an organizational structure refers to the company’s frame, as well as how it manages business operations. In a centralized organization, a single individual will typically make the important decisions. This is particularly common for small businesses, where the owner takes responsibility for daily operations. By contrast, decentralized organizations will typically have more of a team environment, with some autonomy at each level.
Decentralized structures are particularly useful in the case of those that are large or geographically diverse. For them, it is not practical to wait for a single person to make all important decisions. With members across various locations, it typically is inefficient to follow a centralized structure. This is particularly the case if the team members work in different time zones. From another perspective, centralization has a top-down philosophy where the top members of the organization are in charge. Decentralization, on the other hand, follows a bottom-up philosophy.
Like we said before, decentralization has more of a democratic feel. It is also more detail oriented, as many decentralized organizations have an organic ‘feedback loop’ from every level anytime someone makes a decision. There is also an increase in the flow of ideas from the ground level of the organization thanks to enhanced autonomy. This can help a company make greater advances.
No attempt to define decentralized organizations is complete without taking the time to consider that there are several types of decentralization. However, there are actually three types of decentralization, something even those in decentralized organizations may not be aware of. These are de-concentration, devolution, and delegation.
De-concentration is the weakest level and takes a minimal approach to decentralization. This manner spreads the power out among the lower levels within a given centralized power structure. Delegation enhances power diffusion with the creation of smaller groups that are semi-autonomous. These groups can make decisions outside of the centralized structure, while still being accountable for it.
Devolution is the strongest stage of decentralization and is when autonomous organizational units have the full authority to make decisions. This final definition is the type of decentralization that many Blockchain technologies aim to achieve. These are actually all types of administrative decentralization; the type of decentralization most commonly used by governments.
You can also find slightly different definitions for political decentralization, fiscal decentralization, and market or economic decentralization. However, when talking about organizations, administrative decentralization is the most applicable type of decentralized structure. This is often the case, whether the organization in question is a government or not.
Now you have a clear grasp of the idea of decentralization and how it compares to centralization. Suddenly, you will start seeing examples of decentralization all around you. The invention of democracy is arguably among the most important decentralization moments in our history. A dictatorship or monarchy would then be an example of centralization, since a single person holds all the power.
When Athens first introduced democracy, it was the beginning of a decentralized government to some extent as only white males who owned land and were citizens could vote. But it was a dramatic step forward. The decentralization of democracy thus became a way to give the power to the people.
We have not yet created a political system that is completely decentralized. However, democracy embraces many of the features that this type of system would have. While we still have not found fully decentralized systems for governing a single country or state, there are larger government structures that are decentralized, like the European Union.
In the European Union, there is not a single person in charge who makes decisions for all the countries within the Union. Instead, every Member State has its own representatives that work together to produce decisions and policies. Another example of decentralization is the internet (Ref 8). With its introduction, media and methods of communication have become much decentralized.
Prior to the internet, just a few key players provided us with the news. They did this via newspapers, radio, and television. This put them in control of the information we received. Now, we can get news from thousands of sources online. This grants us unprecedented manners of verifying what we hear and read is actually true. We can hear different sides of a story with great ease.
Depending on the situation, choosing to make a decentralized organization instead of a centralized one can lead to advantages or disadvantages. There are overwhelming benefits to decentralization, which is why it is a growing trend.
In the case of an organization, going with a decentralized structure empowers the employees and members of the group. With decentralization, employees have the autonomy to make decisions themselves. This increases engagement and motivation, key requisites to overall organizational effectiveness.
In addition, it also increases the experience of employees, leading to them taking the initiative and move companies forward. John Kotter (who is an expert on Leadership and change) in his book XLR8 articulates how a decentralized ‘network’ of employees ultimately lead to more agility in organizations.
Decentralization also reduces the stress placed on the upper management. For example, whilst a trivial example if a business owner lets employees order supplies without their approval, the owner can focus on growing the company. In reducing the responsibilities of the owner of a company or an organization leader, a decentralized organization then is more able to quickly make decisions, particularly compared to centralize ones.
This results in more efficiency and increased productivity. From a business perspective, decentralized organizations are also better prepared for emergencies. What would happen if a single person is in charge of a company or organization and they get severely ill or hospitalized for a few days?
If all decisions normally must go through that one person, nothing can get done. With decentralization, however, others will be able to approve those decisions in the meantime. This allows the organization to run smoothly even without its figurehead. It is also much easier to expand a decentralized organization than a centralized one since the inherent structure supports this type of setup.
If a decentralized organization opens a location on the other side of the country or in another time zone, it could act autonomously. By contrast, a centralized organization would still require the new location to run decisions by the existing one, which negatively impacts efficiency and agility.
When discussing decentralized organizations, not every organization will be a company; some will be networks or other nonphysical entities. A decentralized piece of technology, like a network, shares some of the advantages mentioned above. Efficiency, for example. However, it also adds another layer of benefits. Decentralized networks do not have single points of failure. If one node goes down, this does not interrupt the entire network.
For a system-wide failure, every single node needs to fail. For a decentralized network, this would be an extremely unlikely event. Compared to centralized networks, decentralized ones also tend to be more open for development. While centralized networks limit who can access the system, decentralized ones let anyone use the network to create services, products, or tools, benefitting the community as a whole.
On a related note, there is a common misconception that decentralized networks cannot let companies earn money. However, by letting developers build on the network, you increase the usefulness of it, improving the business opportunities. One of the biggest reasons that decentralized networks are growing in popularity is the fact that you do not need to trust a central authority. While we do regularly place trust in companies or governments, there is always a risk of them taking advantage of the data.
As Stated In Our White Paper: "Governmental and private institutions are becoming increasingly more adept at gathering data on citizens. It has, in fact, become both a science and a business. What data to gather, how to gather and analyze it for practical use. The contemporary media is full of articles on how lines are being crossed and how grey areas lack definition. In addition, passed legislature is allowing for such wide digital surveillance on citizens without justifiable cause, that the old adage “innocent until proven guilty” no longer even applies. These laws appear to assume malicious intent from each and every citizen, allowing surveillance on a level that presupposes that we are already suspects in ongoing investigations."
Decentralized networks do not have a single entity in charge of the information. This mitigates the risk of your information being misused and eliminates any trust-related concerns. Decentralized networks can also be set up with a more meritocratic structure, reduce censorship, and empower contributors to the network by providing them with ownership of their ideas.
Just like everything else in the world, decentralization cannot be one-hundred percent perfect in every situation. While it has a lengthy list of benefits for organizations, networks, and more, there are also some downsides when compared to centralization. After all, centralization still exists for a reason.
The fact that decentralized organizations spread out the power to various members can lead to issues when disagreements arise. If there are differing opinions on a subject, decentralized organizations will need to figure out how to come to an agreement and move forward. Taking the ability to make decisions at various levels in a different direction, there is also the potential problem of someone making a decision that helps them but hurts others.
Assume that you are in a decentralized business where managers of different departments have the authority to make decisions. What happens if the manager of one department makes a decision that helps their department but hurts yours?
Decentralized organizations must create some sort of census mechanism or come up with another method of avoiding these problems. Those in charge of a decentralized organization, such as the founders or business owners, may also feel that they lose control when a decentralized model is implemented.
Ideally, a decentralized organization will still follow the goals of the original founder, but this may not always be the case. Sometimes, the leader of a decentralized organization may not approve of or even be aware of the decisions that lower management makes. Because multiple people in decentralized organizations have the authority to make decisions, you must ensure that everyone in the organization is qualified to do so.
This can prove incredibly challenging and also requires creating uniform policies and figuring out how to enforce them.
Sometimes, the systems in place to combat these disadvantages will come with other issues such as higher costs or decreased efficiency. For example, if instead of letting each manager of a department make their own decision via decentralization, you require input from all department managers, this can end up taking longer than it would have with centralization, as everyone must be consulted. Additionally, you can overcome the issue of having qualified personnel includes providing training, but this increases the time spent on that training. Furthermore it increases costs, because of the training itself.
There are actually many semi-decentralized businesses already in existence. For example, both Airbnb and Uber are decentralized companies to some extent. They both empower members of the organization, either the property owners or drivers, to make decisions themselves.
However, both companies are also centralized, as elements such as what big decisions the CEOs make or what rates Uber driver earn are outside the control of members. In fact, organizations like Uber and AirBnB that were once applauded for their innovation and decentralization, have now created semi-monopolies that prevent truly decentralized businesses from springing up.
Instead, these are part of the sharing economy, and experts predict that true decentralization will disrupt these companies. Despite their semi-monopolies. In the case of Uber, the replacement would be in the form of a decentralized peer-to-peer ridesharing marketplace. AirBnB would be disrupted by a similar decentralized marketplace, but one aimed at home and apartment short-term rentals.
In addition to the semi-decentralized companies that have seen success but may be uprooted by true decentralization in the future, there are other companies which are actually decentralized and successful. In fact, Nicholas Bloom developed a paper a few years ago expressing his idea, with plenty of evidence, that decentralized firms are better able to make it through recessions.
He looked at the performance of companies before and during the recent Great Recession. His research found that firms with decentralized decision-making were less likely to see drops in their sales and saw quicker productivity increases. A prime example of a decentralized company is Johnson & Johnson. The company’s CEO actually explicitly discussed the decentralization ten years ago.
In today’s world, perhaps the best example of a decentralized organization is the Blockchain, which is based on the idea of decentralization. Specifically, Blockchain technology uses logical decentralization, where there is zero probability of system failures and the ability to tolerate accidental system faults.
Those interested in the Blockchain and its technology agree that one of the most useful features of it is decentralization. The decentralization of the Blockchain means that it has an open-source ability for processing and data storage, based on a consensus mechanism. The invention of Bitcoin was also closely tied with decentralization. There had been previous ideas for cryptography electronic money, but no one had been able to create one that did not rely on a single party, making it centralized.
Satoshi Nakamoto changed this with Bitcoin and its decentralized Blockchain. This also had the side effect of making people think harder about decentralization, renewing interest in the subject. Now, there is an incredible number of startups around the world based on the Blockchain. All of them are aiming to use the Blockchain’s decentralization and technology to decrease risks associated with the intermediaries in a traditional centralized system or even a semi-decentralized one.
The perfect example of these risks would be when a company like Uber increases its commission and hurts the cab drivers. If all the intermediary functions are performed by code on the Blockchain, you can get rid of the intermediary, which in this case would be the actual company of Uber. Instead, the example would have drivers directly connecting to those in search of rides. Many of the Blockchain startups found today focus on this type of removal of intermediaries to cut costs, helping both those offering services and those buying them.
While decentralization delivers many benefits for many organizations, it is not always the right solution for a particular company, particularly if it has a set structure in place that is not easy to change. For example, some organizations will try to decentralize their HR team to put human resources closer to their employees, only to discover it is more challenging than they initially thought.
Some companies may notice a decrease in employee satisfaction following centralization, but others achieve success. By looking at the failures and the successes, you can see some patterns to get a better idea of what an organization needs to keep in mind to be successful with decentralization.
Start by ensuring that the people in the positions which are decentralized are talented and engaged. Companies that fail at their attempts at decentralization typically do not have sufficiently knowledgeable employees in the relevant positions or typically do not offer enough training. By contrast, companies which successfully transition to decentralization orientate employees to embrace the increased authority then have.
They also have regular calls and retreats, to decrease feelings of isolation, such as in the case of HR for a company spread across the country. In other cases, attempts at decentralization fail simply due to resistance from those involved. Those who currently hold management positions may not be happy to lose some of their authority. Or perhaps lower-level employees may not feel that they have the skills and knowledge necessary to gain responsibilities.
Those in the know agree that it is much simpler to use decentralization for a startup than to incorporate it into an existing organization, but you can still do either. If your company has been around for a long time, it likely has deeply entrenched hierarchical structures of centralization that will be challenging to overcome.
When done correctly, adding decentralization to an existing organization can dramatically improve employee morale as well as efficiency. However, you will need to figure out how to go about decentralizing your company. It is also crucial to remember that every organization has its own ideal level of decentralization. Experts have been suggesting moves towards decentralization for well over a decade.
Even then, those in favor of decentralization expressed caution. They urged organizations to make sure they could afford the costs associated with restructuring. They also wanted them to make sure they had a plan in place for efficient, quick decisions without a central authority in control. With such a long history of experts suggesting a transition to decentralization, it is no surprise that there are many tried and true recommendations for turning your company into a decentralized organization.
Start by rethinking the structure that is best for your company (Ref 30). Instead of the traditional hierarchical structure found in most companies, try to organize your employees into various autonomous squads for each discipline. Encourage conversations and sharing of ideas across experience levels, so everyone knows they are on the same team. Creating a common goal is also crucial. This way, everyone knows what they are working towards, so every level is on the same page.
After all, with decentralization, everyone makes important decisions, so they need to know what the end goal is.
There is no better way to figure out how to best move your existing organization towards decentralization than looking at examples. This will give you an idea of both what to do and what not to do. Zappos is a perfect example, as it transitioned towards holacracy.
This type of decentralization eliminates bosses and titles, but it did not work well for Zappos. The company quickly discovered that without the ability to climb a career ladder and get a promotion, many employees lost motivation. By contrast, Unilever worked to incorporate decentralization during the company’s expansion. Each of the divisions around the world is its own self-sufficient unit, letting them make adjustments based on the local market conditions to appeal to their particular consumer base. At the same time, Unilever kept some elements of centralization, like the main headquarters and the titles.
There is also the example we already mentioned of Johnson & Johnson (Ref 32). There is still a CEO of the company, indicating hints of centralization, but the company also displays many elements of decentralization. Johnson & Johnson’s CEO has said that employees are empowered to create their own ideas via internal ventures and local management of overseas operations, allowing for a deeper understanding of the consumer.
Between startups and existing organizations turning to a decentralized structure on a greater scale, there is a trend away from centralization. One of the areas where many people predict decentralization will experience massive growth in the near future is marketplaces.
A big portion of this trend goes back to the intermediaries we already discussed and the desire to cut them out. By getting rid of the retailer in a marketplace, sellers can make larger profits and buyers can get cheaper prices since a retailer will not take a cut. They are not subject to the whims of a centralized authority, such as when Etsy recently made headlines for increasing the fees charged to sellers. This caused outrage among sellers, as they suddenly could not make a profit or had to increase prices.
With a decentralized marketplace, this would not be an issue since there is no retailer to raise the commissions. Additionally, the lack of a single central authority in a decentralized marketplace means there is no single point of failure. This means that an outage or natural disaster at one location would not shut down the whole marketplace. In addition, there is resistance to censorship, such as cities that banned AirBnB or Uber.
Decentralized marketplaces additionally can deliver the value to those who provide the most value to the market, those who first got it up and running. This is particularly true when decentralized marketplaces use Blockchain technology that incorporates its own token, which can then increase in value.
When done on the Blockchain, decentralized marketplaces are also instantly global, working for everyone. No wonder dozens of decentralized marketplaces already exist based on the Blockchain. These marketplaces represent everything from physical goods to services.
We hope now you are aware of what it means to be a decentralized organization and that you have learned some truly useful information. Decentralization is the way of the future in many ways and in various sectors, from marketplaces to the structure of individual organizations. Let us know what you think about decentralized organizations and if you have any further insights into the topic to share.