Book Review on: Complex Organizations—a Critical Essay
(by Charles Perrow, 1986, 3rd edition)
By: Ling Zhou
I will first briefly summarize the content of the book by chapters, and then try to discuss
several interesting points in the book that may be of interest for accounting studies.
1 Summary
The book starts with the necessity for the existence of bureaucracy (formal organization).
Bureaucracy is usually attacked for being unadaptive and stifling the humanity of
employees. Perrow argues that these sins result from a failure to bureaucratize properly
rather than bureaucracy itself. In fact, if we want our material civilization to continue, we
will have to have large-scale bureaucratic enterprises in the economic, social, and
governmental areas. The development of industrialization has made this the most
efficient way to get the routine work of a society done. Perrow introduces Weber’s model
of bureaucracy in detail which contains three groups of characteristics: those that relate to
the structure and function of organization, those that deal with means of rewarding effort,
and those that deal with protections for the individuals.
Perrow then summarizes the development of managerial ideologies. Before 1870, the
classical management study focused on specific problems like planning and coordination.
Then came some more general models like the social Darwinism which says that only the
fittest survives. With the appearance of unions, people began to notice the collective
power. Around 1915, scientific management emerged. Separation of management and
skilled craftsman became possible. This theory suggests that it is the cooperation between
labor and capital that brings success. After World War I, Dale Carnegie proposed that the
managers needed to manipulate the workers in order to have them work. Then Elton
Mayo suggested in mid-1930s that it was natural cooperation, rather than manipulation,
that made workers work. On the whole, the changes in management ideology are toward
cooperation.
Perrow then introduces several different models on organizations in turn. First, he
discusses the positives and negatives about the human relations model. This model was
inspired by the “Hawthorne effect”—the productivity is increased when a group of
workers are picked out and work with the knowledge that they are in an experiment. The
researchers believed that the productivity increased because the workers felt special, not
because the objective conditions had been improved. This model concentrates on group
norms and sentiments as the bases for explaining behaviors. It counters the extreme
rationality of scientific management with a “romantic rationality” wherein all sorts of
unconscious needs are posited. But Perrow points out that little empirical evidence
supports this school, that one cannot explain organizations by explaining the attitudes and
behavior of individuals or even small groups within them. We learn a lot about
psychology and social psychology from the human relations model, but little about
organizations per se in this fashion.
The Neo-Weberian model is a contrast to the human relations model in that it focuses on
the technology instead of psychology. This model indicates that organizational structure
varies with the type of work done. A fundamental fact about organizations is that they do
work. The characteristics of this work process will tell us more about the structure and
function of the organization than the psychological characteristics of the members. If the
technology does not fit the structure, the organization will pay a heavy price in terms of
efficiency. So in the long run, the technology will predict structure.
Compared with the above two models, the institutional school is closer to a truly
sociological view of organizations. The descriptive and historical nature of this school
gives an essential “feel” for how organizations operate. The main contributions of this
model are as follows. First, there is the inescapable variety of organizations, a variety that
the technological school cannot hope to reflect. Second, it brings up the possibility that
organizations do develop an inner logic and direction of their own that is not the result of
those who appear to control them. Third, this school has taken the environment seriously
and tried to understand the organization’s relationship to it. Neither of the first two
models touches environment.
Although the institutional school has emphasized the environment, it did not do it selfconsciously, and it did not conceptualize it in a distinct way. The environmental school,
in contrast, tries to conceptualize it. The basic idea is somewhat anthropomorphic:
environment act, organizations respond; environments select some organizations for
extinction and allow others to survive. The ecological model identifies three stages in a
process of social change: first is the occurrence of variations in behavior, either intended
or unintended; second, natural selection occurs as some variations are eliminated and
others are reinforced; third, there is a retention mechanism that allows those positively
selected variations to be retained or reproduced. The dark side about this model is that it
removes much of the power, conflict and social-class variables from the analysis of social
processes. Some evolutionary model has been developed to bring in some institutional
factors.
At last, Perrow introduces the agency theory and transaction-costs economics and
discusses power in organizational analysis. He defines power as “the ability of persons or
groups to extract for themselves valued outputs from a system in which other persons or
groups either seek the same outputs for themselves or would prefer to expend their effort
toward other outputs”. Power is exercised to alter the initial distribution of outputs, to
establish an unequal distribution, or to change the outputs. This definition of power deals
with the type of pie and the division of the pie, not its size. So the power of some can be
at the expense of others. Perrow argues that organizations facilitate the generation of
zero-sum power, and organizational theory should attend to this problem.
2 Discussion
Perrow’s definition of power is quite similar to the bargaining power in economic theory.
Those with a higher bargaining power may get a larger piece of the cake. Bargaining
power might be determined by the substitutability of each member. Managers usually
have a high bargaining power because they are hard to be substituted. The market for
managers are not so liquid as the market for other employees. Note that even when there
are a lot of people in the market with similar managerial expertise, they usually lack the
knowledge about the particular firm.
This definition of power shows that any member in an organization can be “powerful”
regardless of her position. For example, an engineer can be “powerful” if she has special
expertise that makes her hard to be replaced. On the other hand, a shareholder who is
usually assumed to be “powerful” need not to be, if she only owns a small fraction of the
firm’s stock and if the capital market for the firm is liquid.
As a criticism to bureaucracy, Perrow mentions rules. People often complain that there
are too many rules and these rules are reducing the flexibility of organizations. I have
discussed in class that if we regard rules as explicit contracts, this is essentially a problem
as when we should have explicit contracts and when we should have implicit ones. I have
identified some necessary and/or sufficient conditions for explicit and implicit contracts.
Two particularly important ones are common knowledge and self-enforcement. These are
necessary for a contract to be implicit. When these are not true, rules (explicit contracts)
have to be there.
Perrow also talks about the relationship between professionals and their clients when he
touches on the conflicts of interests within an organization. I find this topic particularly
interesting as accountants, especially auditors, face this problem everyday. Perrow
identifies some specialty about the relationship between professionals and their clients.
First, there is less competition among professionals. The reasons might include the
entrance hurdle, the restrictions on pricing etc. Second, the professionals are more
knowledgeable than the clients making it hard for the clients to judge whose service is
better, and the service quality is usually difficult to measure. Third, it is usually costly to
change from one professional to another. When related to the accounting (and consulting)
business, the third point may not seem valid as sometimes auditing (consulting) firms
offer low starting price to attract new business. This should make it cheap for the client to
transfer. But note that the reason the auditing firms are offering low starting price is that
they are expecting for bigger future profit (in particular, they may expect to get the more
lucrative consulting work from the client in addition to auditing). While it is still hard to
say that transfer for the client is costly, it is easy to see that transfer is costly for the
society: the old auditing/consulting firm has got to know the client, while the new one has
to go through the starting phase again to develop some knowledge about the client. This
is a waste from the society’s view.
Auditor independence is one of the problems concerning the relationship between
accounting professionals and the clients. SEC’s new deal with AICPA addresses
investors’ concern about auditor independence when the auditors are also providing
consulting services to their audit clients. One of SEC’s points is that the important thing
is that the auditors should “appear” to be independent to investors. I think the reason is
closely related to the superior information or knowledge of professionals relative to
others: the investors cannot tell whether or not the auditors are really independent. So
they need the auditors to “look good”. When the auditors are providing much consulting
services, the investors are in doubt.
There are many other interesting research topics in this area. Perrow’s insightful
comment on the special relationship between professionals and clients is quite suggestive.
Perrow’s Complex Organization is a very nice summary of the organizational theories in
sociology, and when related to accounting and economics, it also initiates a lot of
fascinating research topics.