Negotiated order and network form organizations

SystemsResearchandBehavioralScienceSyst. Res.22, 431^452 (2005)Publishedonline inWiley InterScience (www.interscience.wiley.com)DOI:10.1002/sres.717

& ResearchPaper

Negotiated Order and Network FormOrganizations

Annaleena Parhankangas1, David Ing2*, David L. Hawk3, Gosia Dane4

and Marianne Kosits5

1Department of Industrial Engineering and Management, Helsinki University of Technology, Espoo, Finland2IBM Business Consulting Services, Markham, Ontario, Canada3New Jersey Institute of Technology, School of Management, University Heights, Newark, New Jersey, USA4University of Iowa, Fairfield, Iowa, USA5IBM Relationship Alignment Solutions, Allendale, New Jersey, USA

Throughout the 20th century, the industrial age roots of hierarchical top-down planningand command-and-control supervision have been the foundations for managementthinking. At the beginning of the 21st century, many futurists and systems thinkers havewidely declared that businesses must equip themselves to be more responsive to rapidlychanging environments. Dynamic, knowledge-based businesses require that rigid formsof business governance give way to networked forms.Since many successful businesses have shifted from autonomous independent

enterprises to building alliances and inter-organizational relationships, we advocate arenewed examination of negotiated order and a focus on the fluidity enabled by it. Thetraditional advantages of legal order are being outweighed by its inherent rigidity. Underconditions of rapid change, maintaining an internally consistent set of rules, essential tolegal order, is inefficient and relatively ineffective.Systems of negotiated order are characterized by situational coordination of interests,

flexible definitions of desired end states, and spontaneous initiatives by interestedstakeholders. We examine the development of the Linux community and its negotiatedsystem of self-governance, and offer three additional business examples that suggest hownegotiated order may provide a platform for stakeholders to innovatively leverage thedynamics of the contemporary environment. Copyright # 2005 John Wiley & Sons, Ltd.

Keywords negotiated order; legal order; network form; systems limits; Linux community

Copyright # 2005 John Wiley & Sons, Ltd.

*Correspondence to: David Ing, IBM Business Consulting Services, 3600 Steeles Avenue, Station H7, Markham, Ontario, Canada, L3R 9Z7.E-mail: [email protected]

INTRODUCTION

Will 21st-century businesses be managed andgoverned significantly differently from those inthe 20th century? The conventional approach tobusiness, as practiced by most western businessexecutives and taught in graduate schools ofmanagement, represents a small variation on themass production approach developed in the ageof Henry Ford (Chandler, 1977). In the 1970s and1980s, the concept of business evolved to includethe ‘social architecture’ of multinational corpora-tions (MNCs) (Perlmutter and Heenan, 1979)and heterarchical (or non-hierarchical) form(Hedlund, 1986). In the early 1990s, researchinto the ‘network perspective’ on studyingorganizations (Nohria, 1992) became morewidely understood with characterization of ‘net-work organization’ (Baker, 1992). Powelldescribed network forms as

. . .non-market, non-hierarchical modes ofexchange [that] represent a particular formof collective action, one in which:

* cooperation can be sustained over the longrun as an effective arrangement;

* networks create incentives for learningand the dissemination of information, thusallowing ideas to be translated into actionquickly;

* the open-ended quality of networks is moreuseful when resources are variable and theenvironment uncertain;

* networks offer a highly feasible means ofutilizing and enhancing such intangibleassets as tacit knowledge and technologicalinnovation. (Powell, 1990, p. 323)

Since the late 1990s, the rise of increasinglyloosely coupled business arrangements hasgained prominence. The boom of regionaltechnology clusters (e.g., Silicon Valley), coop-erative incubators funded by venture capitalists,and offshore outsourcing (e.g., call centers inBangalore, India) is often cited as a challenge tothe corporate form of the 20th century. Busi-nesses are not just exploiting the cost advantagesof broadband Internet communications. They areextending their reach by reorienting and restruc-

turing their form. We amplify Powell’s identifi-cation of a unique arrangement in contrast tomarkets and hierarchical forms, and refer tothese social systems—particularly in business,but possibly also in not-for-profit and publicinstitutions—as network form organizations.

Other researchers have similar and compatibleideas under variants of this name. In contrast to aconcept of a business enterprise as driven byexecutives at the top of a corporate ladder,Castells describes a ‘network enterprise’ as

. . . that specific form of enterprise whose system ofmeans is constituted by the intersection ofsegments of autonomous systems of goals. Thus,the components of the network are bothautonomous and dependent vis-a-vis the net-work, and may be a part of other networks,and therefore of other systems of means aimedat other goals. The performance of a givennetwork will then depend on two fundamen-tal attributes of the network: its connectedness,that is its structural ability to facilitate noise-free communication between its components;its consistency, that is the extent to which thereis sharing of interests between the network’sgoals and the goals of its components.(Castells, 1996, p. 171)

The shifts to network form organization requirethat the introversion characterized by the M-form(multidivisional form) organization give way tothe openness of the E-form (ecosystem form)organization (Moore, 1998). Hedlund suggests thata view of the firm beyond the M-form ‘logic ofhierarchical organization’ be called the ‘N-form’,where ‘‘‘N’’ stands for ‘‘new,’’ and ‘‘novelty,’’ andcomes after M’ (Hedlund, 1994, p. 82). From asystemicperspective,Hedlundargues thatM-formcoincides with arithmetic thinking as addition andsubtraction, as compared to the N-form, whichbetter links to multiplication. He describes sevenmajor themes for the N-form corporation:

(1) putting things together, combining ratherthan dividing them;

(2) temporary constellations of people and unitsrather than permanent structures;

(3) the importance of personnel at ‘lower’ levels ininterfunctional, interdivisional, and interna-

RESEARCH PAPER Syst. Res.

Copyright � 2005 John Wiley & Sons, Ltd. Syst. Res. 22, 431^452 (2005)

432 Annaleena Parhankangas et al.

tional dialogue, rather than handling coordi-nation through ‘managers’ and only at the top;

(4) lateral communication and dialogue ratherthan vertical;

(5) top management as catalyst, architect ofcommunications (technical and human)infrastructure and protector of knowledgeinvestment rather than monitor and resourceallocator;

(6) focusing the corporation on fields with richpotential for combining knowledge elementsrather than diversifying to create semi-independent parts;

(7) heterarchy as the basic structure rather thanhierarchy (Hedlund, 1994, pp. 82–83).

Our thinking coincides with these themes. Inrespect to Hedlund, though, we resist co-optinghis ‘N-form’ designation to mean ‘network form’organization. We trust, however, that we wouldhave his concurrence that network form organi-zations require governing and managing in amindset different from the traditional view of a20th-century corporation. Such shifts may beseen as more than a ‘third industrial revolution’,and as an ‘economic revolution’ (Cortada, 1999).

The network form organization is most inter-esting as a response by businesses that mustoperate in turbulent environments. In 1965,Emery and Trist established their causal textureframework, which suggested that businessesshould approach strategies and organizations inways appropriate to their environments. In placidand placid–clustered environments, simple goalsand rules are sufficient. In disturbed–reactiveenvironments, competition requires strategy andtactics to deal with competitors. In turbulentenvironments, building alliances with dissimilarorganizationswould lead to success for all parties.

The emergence of network form businesses atthe dawn of the 21st century leads us to considerhow organizations and inter-organizational rela-tions require different practices and methods ofcoordination, in comparison to their industrialage predecessors. In this pursuit, our thinking isstructured into the following five sections:

(1) What is happening to businesses, as systems,reflected in the restructuring from integratedenterprises to network form organizations?

(2) How does business predominantly orientedtowards negotiated order contrast from thatpredominantly oriented towards legal (rule-based) order?

(3) In what ways does negotiated order businessoperate differently in network form organi-zations? The history and development of theLinux community in the software industry isexamined.

(4) In what ways do features of negotiated orderappear in more traditional business settings?Three additional examples from a variety ofindustries are described.

(5) When should a business proactively choose anegotiated order approach? When is itadvisable, and what are the risks?

In contrast to system design approaches thatare specifically oriented towards intervention(e.g., Ackoff, 1981; Flood, 1995; Haeckel, 1999),our approach is inductive (Flynn et al., 1999). Weare not prescribing a universal ‘best way’ to dealwith structural changes in the business environ-ment. Instead, we have observed the nature offour businesses—the oldest less than 50 yearsold, and the newest in operation for less than10 years—and suggest that alternative appro-aches to business governance are feasible. Thesealternatives may be worth consideration byindustrial age businesses that believe that theymay be reaching their limits in the 21st century.

The path on which the reader is led is intendedto weave concepts with stories of businesses thatillustrate key points. Negotiated order is not anew idea, but it has been under-appreciatedover the past few decades. The businesssystems discussed are not necessarily intendedas exemplars, but instead concrete exampleswhere different examples to governance may bediscussed.

BUSINESSES REACH THEIR SYSTEMSLIMITS IN COMPLEXITY

Modern corporations are complex systems.Symptoms that indicate that a business is asystem reaching its limits may include:

* Unsustainable economic structure: the enter-prise or industry is unable to generate revenue

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Negotiated Order and Network Form Organizations 433

sufficient to cover operating costs andrequired reinvestment. (This presents anopportunity for creative destruction.)

* Questionable ethics or signs of amorality: theenterprise or industry demonstrates practicesthat are unsavory or undesirable, generatingconsequences without raising internal regrets.

* Inability to adapt to environmental changes:the enterprise or industry falls behind theneeds of customers or other constituents.

* Turnover: the enterprise or industry is unableto retain employees.

In these situations, a business may bedescribed as being ‘at the edge of chaos’, ineither a favorable or an unfavorable way.Industrial principles of order, organization, andmanagement that had been effective in the pastseem inadequate to deal with the symptoms.

Complexities in Industrial Age Businessesare Driving Restructuring

More than 60 years ago, Andras Angyal asked:What happens to a system when it reaches itslimits? His key concern was with ways tomaintain integration in the face of disintegrationtendencies and complex system environments.His answer was based on the 18th-century adviceof William Blake: to learn to see all the world in agrain of sand. In contrast to analytic approaches,Angyal’s philosophy was based on wholeness asa unitas multiplex—a system of interdependen-cies (Trist, 1992).

The integration challenges in social organiza-tions of Angyal’s day—in the 1940s—seemrelatively simple in comparison to the complexinteractions of today. In the first half of the 20thcentury, most industrial businesses were created,operated, and identified by their founders, or atightly woven association of principals. Theyfocused on well-defined lines of business, withstable customer sets and well-known competi-tors. Today’s organizations operate in multi-cultural and multinational settings, wherediverse pulls from disparate constituents makelarge-scale conflicts in value systems an every-day challenge. These conditions set the stage for

the disintegration tendencies we find prevalentin today’s businesses:

* To maintain a corporate form, business execu-tives must comply with an unprecedentedlevel of ‘transparency’ in their actions, withrequirements in the United States such as theSarbanes–Oxley Act.

* To meet the competing and conflictingdemands of customers, today’s workers reportinto ‘matrix organizations’. Therein, they con-front the dilemmas of satisfying two or moredirections via two ormore ‘bosses’, with the 40-hour workweek having become a myth.

* Overseas competition from emerging low-wage countries such as India and China havedriven employers to cut wages and benefits,for current workers, to the point that theseemployees become unable to afford to buy thevery products they make or service.

* Rapid technological advances deter invest-ment into infrastructure and skills that wouldenable the business to escape a death spiral.

These symptoms represent businesses andindustries that are failing as systemic wholes.The dark side of complexity means that the bestthat a business executive can do may be to drawattention to immediate miracles, while avoidingresponsibility for longer-term impacts andissues. At the close of the 20th century, down-sizing and outsourcing became common busi-ness approaches to rationalization, breakingdown integrated monoliths (Miles and Snow,1986; Hagel and Singer, 1999).

Simultaneously, initiatives to improve supplychains or value constellations demonstraterecognition that industrial processes cross cor-porate boundaries (Hagel, 2002). With businessesoperating in a network form, the promise oforder in inter-organizational relations is her-alded over prior inefficiencies in bureaucracy. Ina network form, the organizational alliances andalignments set the content as well as thestructural context. Form and content are bothcritical to improving responses to rapidly chan-ging conditions. The network is seen as aplatform for coordination and governance inwhich relationships transcend the bounds oforganizational lines.




Responses to Reaching System LimitsCan be Passive or Active

Under conditions of environmental stability,hierarchical structures can lead to an organiza-tion rapidly reaching its limits. Even whenenvironmental conditions are not fully under-stood, management often has a bias for action:any change in direction is better than nodirection. If an organizational hierarchy is tootall, say more than five to seven layers, desiredchanges in directions from the top can becomedistorted as word passes down through theorganization. In addition, insight from workersaway from the center of power often doesn’t flowefficiently to leaders. If and when the intelligencearrives from the edges, it can be only incorpo-rated as incremental adjustments to the rulesgoverning an organization’s relations. The usualresponse—flattening the hierarchy—focuses onsymptoms, often only resulting in the moresystemic dissipation of the organization’sfocus. Not only are such efforts a waste, butinternal turbulence increases as individualsmodify their organizational, subgroup, andpersonal priorities.

Three non-responses to a business systemreaching its limits are described by Emery(1997a, 1997b). He outlines three passive mala-daptation strategies that are essentially defensemechanisms:

* Superficiality: ‘Three attitudes associated withlack of depth are highlighted by Marcuse. . . [and] may be paraphrased as follows:

— instead of the critical ‘is this necessary?’the bland acceptance that ‘this is the waythings are’;— not ‘what should be’ but ‘grateful for smallmercies’;— not leisure as free uncommitted time, butas relief from bad feelings. (Emery, 1997b,p. 101).

* Segmentation: ‘The second way of simplifyingover-complex turbulent environments is tosegment society into meaningful parts that areof a size that one might be able to cope with’(Emery, 1997b, p. 107).

* Dissociation: ‘The third form of passiveadaptation is the retreat into private worldsand a withdrawal from the social bonds thatmight entail being drawn into the affairs ofothers’ (Emery, 1997b, p. 109).

Emery (1997a) notes that these three strategiescan be mutually facilitating, and are notmutually exclusive.

The second strategy, segmentation, decou-ples parts of an integrated business. As anincremental restructuring in organizationalform, alignments of parts of the business tocustomer, product, or geographic alignmentscan simplify and refocus efforts. A more radicalrestructuring into a network form reduces tiesso that internal relationships (within the samecorporate enterprise) and external relationships(with external alliance partners) receiveroughly the same preference. Networks areseen as organizational forms that can rapidlyadapt to changing demands and environmentchallenges by connecting and disconnecting—‘plugging and playing’—inter-organizationalrelationships. Parties can redefine their rela-tionships with each other in a fluid, peer-to-peer manner (Hawk and Takala, 2000).Each part (or node) on the network can sys-temically adjust their self-referential systemscontinuously, as decentralized responses tolocal environmental conditions.

Emery cautions, however, that:

If segmentation proceeds without parallelefforts to reintegration it may be a moreserious obstacle to active adaptation than themore visible forms of superficiality and dis-sociation. (Emery, 1997b, p. 107).

If the business is segmented to the point atwhich there is only the network, and no ‘whole’,that system fails to satisfy a reason-for-being.This issue coincides with Sir Geoffrey Vickers’advice that we need to learn to appreciate valuesconnected to facts, as opposed to facts pretend-ing to be disconnected from values (Vickers,1980). Vickers argues that order is maintained inthese circumstances, compensating for the short-comings of such disconnections, through theintroduction of force. This force is a feature of a




system reaching its limits, where the partsassume the whole (Angyal, 1941). These ideastie into the Ashby argument for the need forevolving systems of order, seen in the shiftingforms of stability found in dynamic systems(Ashby, 1952, pp. 54–64). Under rapidly chan-ging conditions, relations between the parts mayrequire a different form of governance.

Successful Adaptation Requires RethinkingBusiness Governance

In mutual social engagements, human systemsstrive for control. Where control does not emergeas a matter of course, humans actively turn tomanagement. When management is ineffectual,attention shifts to governance (Ing et al., 2003). Inthis paper, our contribution is a look beyond themanagement of integrated businesses, and intogovernance of businesses operating in a networkform.

In an integrated business, order is establishedthrough hierarchy and top-down direction. Asorganizations grow, their direction graduallybecomes more formalized via processes of rule-making that lead to procedures that ‘teach’ anevolved understanding of the ‘best way’ toothers. Rules provide consistency in a stableenvironment, supplemented by the hierarchy asan efficient means for leaders to resolve ambi-guities via ‘yes or no’ answers, leading to morerules as policies. Through strong leadership,resources can be aligned via central priorities,and activities can be coordinated around one setof values. When conditions are neither stable norclear, this approach can lead to significantdifficulties.

In a network form business, order is estab-lished by each part acting autonomously, incoordination of a context where other parts alsoact autonomously. In this dance for order,relationship governance must be centered onnegotiation. Negotiation is the most powerfulpath in situations where humans can’t controlthe dynamics in the system, and fail to beeffective in managing.

More generally, there is a growing need fordiverse systems of negotiated order, as well as a

need to reduce reliance on incremental man-dates, pre-established rules, and fixed proce-dures. We argue that a negotiated order is theonly viable active adaptation strategy for abusiness system that has reached its limits. Thesystemic challenge we face is also consistent withthat articulated as large-scale interventions(Flood and Jackson, 1991). Seeing the need toseek a fluid nature for a business is at least asdifficult as finding ways to construct the fluidity.

GOVERNANCE INCLUDES BOTH LEGAL(RULE-BASED) AND NEGOTIATED ORDER

Ordered, or at least ordering, systems are criticalto humankind, who they are, and what they do.Humans need to find an order beyond them-selves to which they can relate. This is the basisfor many non-rational aspects of society, includ-ing religion, politics and poetics.

Legal (Rule-Based) Order and NegotiatedOrder Coexist in Social Systems

Contemporary man has much experience withwhat we now call legal order. We see this inpublic, private, and religious sectors. In religion,this is seen in the reliance on an authoritative‘book’ such as the Bible or the Koran. In sciencethis is seen in the reliance on the most recent‘scientific journal articles’. Legal ordering sys-tems rely on leaders, laws, and formalizedschemas to preorder reality and divine someexternal meaning. This definition of externalmeaning may be completely artificial, possiblyas a response to an absence in internal meaningthat itself may also be artificial.

Legal order attempts to formalize that whichcan be captured and codified in prescribedrules—rules that emphasize what should notbe done. Whatever is not accounted for within asystem of legal order can, and generally will,create future troubles for the ordering system. Assuch, a legal order attempts to describe, a priori,what may arise in the relationship and how itwill be dealt with. Rules as written and adminis-tered are the center of attention and the basis of




operations. Legal order rests on the foundationsof command and control mandates. Legal orderrequires fixed procedures, and relies on thepredictability found in hierarchical forms ofgovernance. Most industrial organizations,including governments, rely on legal order.

Any legal order must be linear, clearly defined,bounded, and formalized. Formalization gener-ally abhors ambiguity. It seeks clarity at all costs,even if the results are clearly wrong. Negotiationis a different kind of process. It seeks the fluidand where it works best is part of the flow.Negotiation frustrates formality because aboutthe only thing that can be clearly said about thefluid is that it is becoming. Negotiated order isoffered as an alternative to the prevailing systemof legal order.

Negotiation is part of a world often forgottenby leaders in large and mature organizations.Negotiation respects spontaneity at the edge ofthe present, as it is simultaneously open to beingguided by ideals of an improved future, jointlycreated. To operate, participants must be highlymotivated in intent yet flexible in direction.Negotiation rests on the presumption that peoplecan coordinate themselves, and their interactionswith each other, without an external ‘ruler’. Forsome, the key message of the negotiated orderperspective is that all social orders are negotiatedorders (Regan, 1995). However, this is only onepart of the story. Strauss positions the two parts:

[T]he concept of negotiated order wasdesigned to refer not merely to negotiationand negotiative processes. It also points to thelack of fixity of social order, its temporal,mobile and unstable character, and the flex-ibility of interactors faced with the need to actthrough interactional processes in specificlocalized situations where although rulesand regulations exist nevertheless these arenot necessarily precisely prescriptive or per-emptorily constraining. (Strauss, 1993, p. 255)

Negotiated order should not be viewed as avirtue by itself, but instead in the light oflimitations emerging from its natural enemy—legal order. Negotiated order and legal order areeach approaches better suited to quite differentenvironments. Negotiation provides limited

value in environments that are filled withpredictability or are based on stability. Nego-tiated success is continuously defined by theconditions of the moment. Success unfolds aspeople are given responsibility to think, coordi-nate, and respond in real time. Pre-planned,fixed, and memorized procedures represent theantithesis of negotiation, but may serve as animportant stimulant to energize the need for it.Negotiation comes with a different set ofattitudes, educational practices, and measuresof performance. The fixed positions and routinesof static organizational structures can bereplaced with fluid networks of people and ideasconnected flexibly in a negotiated order.

Businesses Often Exercise Negotiation Withina Legal (Rule-Based) Context

Negotiated order has been highlighted in pastresearch in diverse fields such as heath care andenvironmental protection. Its relevance to emer-ging problems within contemporary business iseasy to see.

Scholars have long recognized that businesspeople commonly resolve conflicts throughmeans other than enforcing contractual cove-nants. Evidence of a preference towards nego-tiated order over legal order was observed byMacaulay:

Preliminary findings indicate that business-men often fail to plan exchange relationshipscompletely, and seldom use legal sanctions toadjust these relationships or to settle disputes.Planning and legal sanctions are often unne-cessary and may have undesirable conse-quences. Transactions are planned and legalsanctions are used when the gains are thoughtto outweigh the costs. The power to decidewhether the gains from using contract out-weigh the costs will be held by individualshaving different occupational roles. The occu-pational role influences the decision that ismade. (Macaulay, 1963, p. 55)

Perhaps the most cited study in the area ofnegotiated order is the study of two mentalhospitals by Strauss and his colleagues (1963).




They sought to capture how members of variousoccupational groups (e.g., doctors, nurses,patients, lay workers) negotiate the meanings,routines, and tacit agreements of work againstthe backdrop of beliefs about the ‘proper’ nature,goals, and methods of psychiatry. Most note-worthy in this study was that rules governing theactions of various organizations are far fromextensive, clearly stated, or clearly binding. Itseems that hardly anyone knew all the rules,much less to what situations they applied, forwhom, and with which sanctions. In addition,the personnel proved adept at breaking the ruleswhen it suited their convenience or whenwarrantable exigencies arose.

In the situations described by Strauss et al.(1963), there existed a profound belief that thecare of patients calls for a minimum of hard andfast rules and a maximum of innovation andimprovisation. Hence, the area of action coveredby clearly enunciated rules is really very small.Thus actions are governed more by sharedunderstandings than commands. Rules that wererecognized were still continually negotiated,argued, or even ignored at convenient moments.The governing principles were far from universalprescriptions without limitations to their contextor application, or time-frame of validity. Thehospital was a place where agreements wereconstantly established, renewed, reviewed,revoked, and revised.

Strauss (1978, p. ix) has suggested that eventhe most repressive of social orders are incon-ceivable without some form of negotiation. Insuch totalitarian institutions as maximum secur-ity prisons, staff and inmates may negotiate theirown interpretation of the social order, oftenconstructing an alternative that may be just asformal, although tacit, as that it replaces. Themost fundamental, and most used, alternativeform of order is legal order. It is always in thebackground. In the corporate arena, corporationsexist within nations, so they must always beaware of the legal order of their contexts. Thelaws of the state in which a business isincorporated applies to it functioning—althoughthere are continuous efforts at bargaining toreduce barriers seen as unfavorable to com-merce.

Negotiating Order Is Distinct from Bargaining,with Upside Potential

Although the negotiating process is sometimesinvoked situationally to resolve bounded issues,many of today’s business executives may beunfamiliar with its potential power to bringorder into the most systemically untenablecontexts. Negotiation has arisen in response todifficulties in extensive reliance on the fixedfeatures of formalization, and the processes offormal bargaining on which formal organizationrelies.

In its essence, negotiating order must be seenas distinct from bargaining. The interaction ritualin bargaining focuses on who gets more, andwho gets less. The composite economics are heldconstant. With bargaining, one party may beexpected to say ‘What’s mine is mine but what’syour is negotiable.’ This is not negotiation, butinstead arrogance cloaked in bargaining. Estab-lishing order through negotiation was relegatedto a reduced role in the development andexpansion of industrialization.

Negotiated order is a robust means to governprocess and results where all participants cancontinue to seek to improve their standing butcan only find success in finding creative ways toact so as to demonstrably improve the standingof others. Negotiation processes do not shy awayfrom the long-shunned problem of the commons.In this is differs from bargaining that is based onzero-sum arguments over how to divide a fixedpie of resources. Within the negotiation schemathe pie is not fixed and interaction focuses onhow to enlarge it, not how to divide it. Theattraction of negotiation is that the dimensions ofthe pie will be changed. The danger is that it willbecome smaller.

Negotiated Order Enables Rapid Adaptationin Turbulence

Many of the frictions in today’s organizations areposed as minor issues of misalignment, but agrowing portion of them seem endemic, arisingfrom limitations in their systems of governance.The environment of business has become less




predictable. So too have the internal operationsof businesses. The drive for success has shiftedattention away from parts organized in simplisticfunctional hierarchies, towards the interactionbetween parts in networked forms. Instead ofcontrolling fixed entities through supervision,bureaucratic frictions are dissolved to improveflows through linkages. This change in orienta-tion poses difficulties for those who focus onthe understanding, use, and the performanceof entities. Managers can not rely on fixedpresuppositions, rules as written and belief inthe ultimate truth of a legal order. More dimen-sions need to be considered, including theperspectives in which an entity connects and isconnected.

The flexibility offered by a negotiation processencourages individuals to act openly in pursuitof their own interests, while learning what thoseinterests actually are, and then allowing redefini-tions of those interests, to account for theimportance of larger and longer social andnatural interests to which we are all intrinsicallyconnected. This allows participants to see howfragile and tentative contemporary reality is, andthat is increasingly based on networks of inter-ests that operate as fluids. This differs signifi-cantly from seeing organizations as fixed,forceful, and long-lasting locations of positionsof relative authority where positions are seen asso critical to demand immediate filling of the boxwith an ‘acting’ holder. While traditional orga-nizations are set up to take advantage of thepotentials of hierarchy, the clarity of fixed rulesof order and predictable routines, we see howsuccessful organizations now seem to emphasizenon-hierarchical relations, revolutionary experi-mentation, and spontaneous responses. Theseappear to be better suited to govern relations inenvironments that shift quickly and unpredicta-bly.

A similar pattern occurs in the life cycle of aproduct or service. Manufacturers or serviceproviders achieve success in innovation bymatching their offerings to customers’ needs atthat point in time. As they strive to produce tothe scale of mass markets, they lose some touchwith individual customers and clients. Theorganization regains its value through improved

customer intimacy—which may be seen as aform of negotiated order. In the most involvedrelationships, negotiated order may urge thecustomer to adopt some responsibilities of acontributor or a co-producer, deepening theexpertise and communication beyond that nor-mally assumed by a customer in an arm’s-lengthor transactional style.

In the Linux story that follows, the networkform of business operates with permeabilitythrough organizational boundaries. This perme-ability supports open access to parties whodesire greater contributions and/or involve-ments in actions or their consequences. Mutualinterests are served through parallel negotiationprocesses, at the levels of individuals, organiza-tions, and the movement as a whole.

NEGOTIATED ORDER IN A NETWORK FORMENABLES GREATER FLUIDITY

The Linux community has led to a redefinition ofthe software business. At the center of Linuxinitiatives is its operating system, standing inopposition to the principles of commercial soft-ware developers, such as Microsoft. Commercialsoftware has typically been developed withinternals hidden away as proprietary secrets. Incontrast, the source code to Linux is freelyavailable, encouraging private individuals toplay a role in development and enhancement ofthe product.

Diverse Customer Interests Are a Limitfor the Software Business

Software is sometimes described as a uniqueproduct with ‘increasing marginal returns’:the more that customers adopt a product, themore likely that it will become a de facto standardin the marketplace, attracting even more pur-chasers (Arthur, 1996). It is true that the marginalcost of every digital copy of a finished product isnear zero, but development of that ‘first release’of software can be a big bet. Software develop-ment is a brutal business that is both knowledge-based and labor-intensive.




Software without hardware has no function.Software has the advantage and disadvantagethat it can be continually updated and modified.If an automobile was software, customers wouldexpect to see improved fuel efficiency and newfeatures continually added on over its lifetime.Software written without errors is a holy grail.The release of software is an economic decision,based on statistical estimates of defects, and theestimated number of customers that will usespecified features.

Writing software to support a single user isrelatively cheap. Where software developmentcosts escalate is in satisfying broad ranges ofcustomers. There’s always a competitive productthat has a feature that is critical to somecustomer, so continued development can bedirectly traced to more revenue. Customersaround the world will want their native lan-guages supported, at the highest performancepossible on whatever hardware platform theyown. Building on the existing code base is alwaysan incremental investment, as compared tostarting over, so incumbent suppliers haveadvantage over newcomers.

The challenge with commercial softwaredevelopment is that it is founded on capitalistprinciples. Profits come from software compa-nies restricting access to their intellectual prop-erty. Customers may become dissatisfied withpoor product quality, but unless they aresufficiently influential, the bug that impacts themmay fall as a low priority for fixing. On the otherhand, customers have come to expect PC-basedsoftware priced in the $100 to $1000 range, andare unwilling to pay more unless they can makemoney off the software itself.

The Linux Community Was Foundedon the Satisfaction of Niche Interests

In 1991, a 21 year-old Finnish student ofcomputer sciences, Linus Torvalds, purchasedhis first computer. Torvalds needed an operatingsystem which could exploit the full potential ofhis computer, but soon found that the operatingsystems then available in the market were toocostly or too low quality. As an alternative,

Torvalds decided to develop his own operatingsystem, based on an educational version of Unixcalled Minix. Torvalds consulted with fellowhackers over the Internet about some defects.Many showed their interest in his work(Torvalds, 2001; Erkkila, 1999).

Soon, Torvalds released the first kernel ofLinux (the core of the operating system) underthe GNU Public License. Allowing others tofocus on coding, Torvalds focused on coordina-tion of the collective effort. By January of 1992,over 100 users had downloaded Linux and wereregularly updating the source code. Early andfrequent releases enabled the fast elimination ofbugs and the expansion of potential user appli-cations (Kemppinen, 1999; Kauppinen,1995).

The first official Linux version was released in1994. At that time, the users of Linux weremainly Unix hackers and net activists. Linuxstarted to gain popularity among people notfamiliar with the Internet. The Linux operatingsystem then came to be distributed by Red Hatand other distributors. These distributors con-tribute value-adding by assembling, testing, andwarranting the operating system as plug-compa-tible with software under the same brand label(Aasarmoen, 1999; Shipley, 1999; Palojarvi, 1999).

Science and engineering-related industrieshave replaced high-end Unix clusters withinexpensive but computationally superior Linuxclusters. With 12,000,000 users in 1998, Linux hasgained a wide market acceptance, including useas a business server. Computer vendors such asApple, Compaq, Corel, Dell, Hewlett-Packard,IBM, Intel, and Lotus now support Linux(Littman, 1999).

Attitudes and Motivations Contrastto Commercial Software Development

The open source approach to software develop-ment that underlies the Linux community can becontrasted to the tightly managed projectscommon in commercial enterprises. Table 1summarizes points described earlier, on waysin which the business system of commercialsoftware development has reached its limits. Thekey features of the Linux community, as a




business system, listed in Table 1 are described ingreater detail below.

Priorities and the Path from Now to the End State AreAmbiguousSoftware development in commercial enterprisesare planned, with schedules often driven byeconomic considerations: if releases are timedtoo frequently, customers will be frustrated athaving to pay for upgrades; if releases are timedtoo infrequently, customers may switch to alter-native products that have desired features. Theplanning orientation of commercial softwaredevelopment encourages the promotion of‘new’ or ‘improved’ versions. Customers areencouraged to upgrade to the current version,and obsolete editions are no longer supported.Development is typically ‘timeboxed’, withenhancements prioritized and scheduled. Witha known end product and time-frame, develop-ment projects can be analytically managed with acalendar (and stopwatch).

Linux, on the other hand, is understood as aproduct that is continuously developed (Sibley,1999; Raymond, 1999; Moody, 1997). Olderreleases that have proven to be reliable (althoughlacking features introduced later) continue to begenerally available. Linux allows room foruncertainty. The ‘lateness’ of delivery of a release(e.g. version 2.4) is sometimes noted in the press.Each Linux user takes responsibility for its futureby being a part of the engineering team. Before arelease is officially sanctioned for shipment,

however, developers continue to test and fixthe product until it is considered to be reliable.This attitude does not mean that development ishaphazard or not conscious of time. It doesreflect, however, that developers know that theunexpected can and will happen, and that suchdelays should not influence the quality of the endproduct.

Authority Is Decentralized and Largely Self-ManagedCommercial software developers that followgood practices in project management spend asignificant amount of effort on developingspecifications, estimating required effort, defin-ing roles, and tracking progress. Project man-agers may or may not have authoritarian styles,but are responsible for ensuring a project stayson track. Formal titles are recognized, and seniorand junior positions are well understood. Mostdevelopers are expected to come into a sharedcentralized office, and it is not uncommon forhours to be tracked (for productivity metrics, ifnot for compensation).

Linux developers are scattered around theglobe. Contributions of code can come from full-time corporate employees (e.g., working forIBM), independent contractors with specialexpertise, or even from students. Individualscan volunteer for tasks associated with theirparticular interests. If a team has already beenformed and is fully staffed, the volunteer may bedirected to another initiative where skills can beappropriately applied. Activities are negotiated

Table 1. Linux as a response to a business system reaching its limits

Business system Indicators of the business A reformed designsystem reaching its limits with features of negotiated order

Commercial software Bottlenecks on defect reduction (i) Ambiguous path and prioritiesdevelopment and feature development

Demands to support multiplenational languages and variousplatforms

Prohibitive costs to market entry(ii) Decentralized authority(iii) Monetary and non-monetary

forms of capital exchange(iv) Co-producer roles




and coordinated within teams, without super-visors. There is no human resources function thathires and qualifies developers. Coordinationtakes place on a peer-to-peer level. Over time,software developers accumulate a reputation forcompetence and/or compatibility when workingin distributed teams (Moon and Sproull, 2000).

Monetary and Non-monetary Forms of CapitalExchange Are RecognizedCommercial software development runs onfinancial capital. Success means a product thatis developed on time, on budget, to specifica-tions that mean success in the market. In SiliconValley startups, developers often seek to con-vert ‘sweat equity’ in financial rewards byearning modest salaries, in the hopes that theoptions rewarded to them will make themmillionaires.

A developer on a Linux team will never be amillionaire, unless he or she makes a fortune inanother way. The terms of the public licensemake it clear that contributions of code becomeseamless parts of the Linux products. Effort maybe acknowledged in documentation, but the truerecognition generally comes from peers who canappreciate the contribution (Moody, 1997). It isnot uncommon for independent software devel-opers to volunteer in the Linux community, as away to establish credibility for a paying job inother contexts. As an example, a security specia-list who contributes key components to Linux islikely to have little trouble finding companieswho wish to keep hackers at bay.

Customers and Suppliers Become Co-producersIn commercial software development, it isalways clear who is the customer: he or she isthe one footing the bill. This gives one partypower over the other, in an asymmetric relation-ship. On the other hand, the supplier may chooseto serve or not serve a particular client, depend-ing on whether the product is completelyproprietary, or has close substitutes.

In the Linux community, it is not uncommonfor an individual to develop some functionalityfor his or her own purposes, and then releasethe code into the public license (Stallman, 2003).The original developer may gain some benefits if

the code is improved by someone else in thecommunity, but his or her efforts may be totallysuperseded by a better alternative. In the opensource approach, if the original supplier isuninterested in further work on his or her code,a more motivated individual can pick up wherethe originator left off. Eventually, when everyoneis using someone else’s code, and is modifyingthe work of others, the distinct roles of customerand supplier become less important.

In his essay The Cathedral and the Bazaar, EricRaymond (1999) compares the proprietary com-mercial software development to the open sourceapproach of Linux. A cathedral is ‘carefully craftedby individual wizards or small bands of magesworking in splendid isolation, with no beta to bereleased before its time’. In contrast, ‘the Linuxcommunity seemed to resemble a great babblingbazaar of differing agendas and approaches . . .out of which a coherent and stable system couldseemingly emerge only by a succession of mira-cles’. Releasing early, delegating everything pos-sible, and allowing the community to examineevery detail represents an alternative way ofreaching a high standard of quality. In the nextsection, parallels between a bazaar and negotiatedorder should become obvious.

NEGOTIATED ORDER IS LEVERAGEDIN TRADITIONAL INDUSTRIAL BUSINESS

Critics of the negotiated order view might arguethat the Linux community is a ‘special case’ inbusiness, since software development can occur ina decentralized, ‘virtual’ space. In addition to thatexample, we can find features of negotiated orderin some businesses along more traditional indus-trial lines. Table 2 outlines business systems for (a)home furnishingsmanufacturing and distribution,(b) encyclopedia publishing, and (c) outdoorsporting gear and apparel retailing.

While these businesses are not without a legalcontext, they have demonstrated some movementtowards features of negotiated order. They eachhave embraced the permeability of organizationsat the perimeter, with traditional gatekeepers’roles at the center reduced or reversed to bridgethe boundary gaps and enable freer access. Therole of the individual actor in the formation and




evolution of these organizations to represent acommunity of interest is noteworthy. Each systemfrom Table 2 is described in greater detail in thesections that follow.

The Home Furnishings Industry ReachedLimits in Costs and Convenience

For nearly three-quarters of the 20th century, thehome furnishings market remained largelyunchanged. The industry was following anapproach of legal order, planning and distribut-ing furniture in a style that could be described as‘make-and-sell’ (Haeckel, 1999).

Small manufacturers near choice stands ofhardwoods employed shops of woodworking

craftsmen to hand assemble home furnishingssuch as dining-room tables and bedroom chests.These bulky items were then shipped to a smallnumber of chain retailers, and a large number ofindependent retailers. Furnishings are generallypurchased by home-owners infrequently, withperiodicities in the decades. Slow turnover ininventory required relatively high margins tokeep the industry in business.

From the consumer’s perspective, this busi-ness system reached its limits in economicviability in the 1980s. As the baby boom genera-tion became dual-career couples, their budgetsfor consumer durables became squeezed. Inaddition, in a time-starved schedule, shoppingfor furniture was inconvenient and took too long.

Table 2. Examples of traditional industrial business systems reaching their limits

Business system Indicators of the business A reformed design with featuressystem reaching its limits of negotiated order

(a) Home furnishing manufacturingand distribution

Low inventory turnover requireshigh markups

Expensive to ship and deliver

Shopping experience requiresintensive search

Matched product assortmentcustom designed and built bycontractors

Catalog shopping ‘at home’ conve-nience, then pick up at warehouse

Consumers deliver and assembleown knock-down furniture, redu-cing cost

(b) Encyclopedia publishing Collecting and verifyinginformation is labor-intensive

Corrections and revisions are slow

Open content, editable by anyregistered contributor over theInternet

Reversion procedures for the fewentries considered counter-productive

Clear protocols for disputeresolution

(c) Outdoor sporting gear andapparel retailing

Specialized products expensive anddifficult to find

Co-op ownership structure with $5membership fee

Ethical consideration for theecologically minded

Private label products, catalog, plusretail stores

Leading environmental advocacy




Finding pieces that would match a particularstyle either entailed entering an order into thebacklog of a particular manufacturer, or visitingmultiple retailers to see what they had in stock.

IKEA Became Designer/Distributor, with Consumersas Co-producersThe now famous IKEA catalogue was firstpublished in 1950, when Ingvar Kamrad firstsold furniture from his farm called Elmtaryd inAgunnaryd, Sweden. Five years later, speciallydesigned IKEA furniture was produced in piecesto facilitate storage and shipping. Consumersfollowed a two-page instruction sheet to assem-ble the final product at home.

For the consumer, IKEA has practically cor-nered the market in value-priced furniture. Thecompany provides broad assortments of coordi-nated furnishings that can be mixed andmatched to the immediate needs of the consu-mer’s apartment or home. Time is conserved asconsumers can browse through a catalog (andnow a website) to check styles and dimensions,and then make a single trip to pick up his or herselections. Flat-packed furniture componentshelp to reduce shipping costs, and packages aredesigned to be transportable in cars or minivans.It is feasible to furnish an entire house—of anysize—from the product selection available at asingle IKEA store.

IKEA illustrates a systems perspective that isconsistent with the negotiated order approach.The company primarily plays the role of thedistributor, negotiating relationships betweendesigners, producers, and suppliers of furniturecomponents, in an end-to-end integration. Thisintegration includes consumers, who are co-opted with delivery and assembly activities,thereby becoming co-producers of the product.IKEA has now grown to 157 warehouse stores in29 countries (Stodola, 2003).

Encyclopedia Publishing Reached Limitsin Economics and Revising

Diderot, in publishing the Encyclopedie in 1745 inFrance, is often cited as one of the last individualsto ‘know everything’. By outlining the current

state of knowledge about sciences, arts, andcrafts, he made knowledge possessed by the fewaccessible to the many. This may be compared todevelopment of the Oxford English Dictionary,which started in 1879, with the first editionfinally published in 1933–18 years after the deathof the first editor. Maintaining this body ofknowledge represents a cycle measured indecades.

In today’s world, the exponential advance-ment of knowledge has seen traditional methodsof encyclopedia development reach its limits. Nomatter how many researchers and writers areassigned to the staff, content will come in at a rategreater than the ability to check and update theentries.

Wikipedia Empowers Individuals to Contribute andValidate EntriesThe Wikipedia is a free Internet-based encyclo-pedia started in 2001 that follows the GNUpublic license, previously cited as a foundationof Linux licensing. Originally started as anInternet startup project by Jimmy Wales andLarry Sanger, it was based on Wiki software,which allows anyone to register and edit entriesto selected web pages. The initiative was trans-ferred, in 2003, to a not-for-profit institutioncalled Wikimedia (www.wikipedia.com).

TheWikipedia approach is to allow all Internetusers to contribute content, assuming that thelargest majority of people are honest andconscientious. If an individual locates contentwhich is considered wrong, he or she has thepower to edit the page to correct the inaccuracy.Prior entries are automatically preserved, so thatlater editing can be reversed. Abusers can bebanned by various means (e.g., blocking of IPaddresses).

Contributors are encouraged to maintain a‘neutral point of view’ in the pursuit of entriesthat are relatively free of bias. The seriousness ofmaintaining order through negotiation isexplained at length in entries on the ‘powerstructure’ of Wikipedia, referring to anarchy,despotism, and technocracy. Wikipedia is clearnot only on its strengths (e.g., wide accessibility,rapid growth in content, and continual updating)but also its weaknesses (e.g., overemphasis on




popular topics while obscure subjects are under-served, inconsistent writing styles, and lack ofgraphics). The ongoing success in governing thecontent ofWikipedia may be observed by anyonewith access to the Internet.

Outdoor Sporting Enthusiasts WereUnderserved by Local Retailers

In British Columbia, Canada, a number ofrecreational mountaineering enthusiasts werefrustrated at the inability to purchase sportinggear locally. When Canada Customs officialswere thought to be monitoring license plates atthe Seattle REI store, six individuals decided in1971 to incorporate a cooperative specializing inoutdoor equipment.

Mountain Equipment Co-op Leads in Socialand Environmental AdvocacyMEC is a designer, manufacturer, and retailer ofoutdoor gear. The organization is a co-operative,owned and directed by its members, with fivestores across Canada and a global mail orderoperation. With a $5 shareholder fee, it has2 million members—approaching 10% of theCanadian population.

MEC not only is reputed as a good employer,but has followed through on its vision of actionfor a healthy planet. In its Old Growth Policy, itdesigns products and selects suppliers thatprefer recycled fibers, and has been phasing outproducts that endanger old growth rainforests.In the construction of new retail stores, it hasdesigned ‘green’ buildings that meet standardson energy efficiency, minimal environmentalimpact, occupant health, comfort and functionalperformance. The Ottawa store was the firstretail building to comply with Canada’s C2000Green Building Standard.

In support of negotiated order, MountainEquipment Co-op demonstrates that businessescan not only satisfy the minimal legal require-ments, but can reflect the larger values of theirconstituents.

These three additional examples suggest thatthe Linux movement may not be a unique casewhere negotiated order is now playing a larger in

role in business. Escaping the limits imposed bylegal order may be an attractive shift in govern-ance to be considered by businesses of all typesthat are feeling constrained.

SHOULD A BUSINESS SYSTEM SHIFTTOWARDS NEGOTIATED ORDER?

The examples described above illustrate busi-nesses that have rebalanced their governancetowards negotiated order. These examples are allsuccessful businesses that have unique culturesat their core. For businesses that are currentlyoriented towards a regime of legal order, thefeasibility of reorienting towards negotiatedorder is considered in three closing sections:

(a) When is negotiated order most needed in abusiness system?

(b) What role does leadership play in aimingbeyond the limits of its current business?

(c) Is there a risk associated with adopting anegotiated order approach?

These questions deserve deeper investigation,and are more speculative areas to be validated inpotential future research. The spirit of these closingthoughts is to encourage the reader to considertaking action beyond the limits of legal order.

Negotiated Order may be Best at Extremesof Simplicity and Complexity

The focus of this paper has been primarily onmature businesses, where legal order hasresulted in complexity that is stifling to adapta-tion. Under these conditions, negotiated order isseen as a way to revigorate the business.However, in a life cycle view of business,negotiated order is probably the way in whichmost organizations start up. Figure 1 illustrates aconceptual view of the balances between nego-tiated order and legal order, over time.

In this frame, three phases can initially beplausibly described:

(1) Primarily negotiated order. When organiza-tions are small, and still in the formativestages of development, organizational




structures and processes are organic. In theclassical Silicon Valley garage startup, thetechnical and business roles are mixed, andindividuals mutually adjust to get whateveris required done. As the organization growsin size, and its administration becomesunwieldy, the next step may logically betowards a more legal order.

(2) Emergence of a legal order. The role of a formalorder becomes prominent while the role of anegotiating order becomes secondary. Inorder to commercialize an invention, repeat-ability (often as mass production) requiresorganizational roles to be clearly defined,and handoffs from one party to another to becodified as processes. Reporting and com-munication lines are relatively straightfor-ward, with clear articulations of projectteams or functional divisions. In an effort tocreate greater efficiencies, the business mayenter . . .

(3) Primarily legal order. Herein there is an effortto define the heuristics as well as rules withinand between organizations so that the supplychain flows efficiently. Herein, industrialengineers may be called in to perform time-and-motion studies to find the ‘one best way’to use resources.

In this third phase, one of the greatpotential risks is creeping bureaucracy and

ossification. Greater efficiency can be achie-ved by narrowing the scope of offerings andactivities. The full range of customers andconstituent interests may not be served,and/or product assortments may bereduced.

The fourth phase is posited as a continua-tion in the life cycle:

(4) Re-emergence of a negotiated order. We believethat the network form organizationsdescribed earlier may represent a fourthphase—a phase where negotiated orderbecomes prominent and legal order returnsto a secondary status. Therein, the design,structure, and process are modular and maybe reconfigured in a number of ways, to suitthe situation at hand.

The focus turns from these formal aspectswithin and between organizations to the broadercontext and ways to appreciate where it is going.In this analysis, three aspects are uncertain:

* It is not clear that this is a closed loop, and thephase where negotiated order rises and legalorder falls will lead to a system wherenegotiated order predominates. It is possiblethat the successful network form organizationmust be so adaptive that it needs to shed mostof the constraints of legal order, but this is nota certainty.

Figure 1. Changing emphases in negotiated order and legal order




* It is not clear whether the arrows should onlylead in one direction, or whether they can bebidirectional. As an example, once a garageshop operation becomes a viable commercialcompetitor, it is not clear that they can returnto their origins.

* It is not clear whether it is possible to short-cutthe loop, and consciously choose more nego-tiated order before the legal order turns intobureaucracy. Establishing rules requiresbringing certain personality types into anorganization, who may not appreciate redu-cing controls and loosening monitoring.

Leadership Through Negotiated Order Isan Alternative to Charisma

In popular business magazines, businesses thatsurvive traumatic change are often portrayed asbeing saved by a charismatic leader. A style ofnegotiated order should not begin and end withthe regime of an individual.

In two of our examples, charismatic indivi-duals clearly initially led their organizations in aspirit of negotiated order. The influence of LinusTorvalds or Ingvar Kamrad should not bediminished, but the proof lies in the durabilityof continued success of these businesses. Entre-preneurism can create new linkages that allowthe business to evolve flexibly and grow overtime. As the business matures, however, center-ing on original founders can represent a staticelement that is complementary to legal order.

Negotiating order recenters attention fromindividuals (or nodes) in a network, towardsinteractions with other parties. Linkages tosuppliers or to customers can gradually betransformed into co-producing alliances. In analternative view, these organizational systemsinitially succeeded by incrementally extendingthe structures on which they were germinated.When performance of the enterprise plateaus,the way forward is brought into question. Asystems view of business requires more thanheroic leadership.

Negotiated Order Does not Establish aPermanence as Does Legal Order

Some benefits and risks associated with estab-lishing greater order are depicted in Table 3. Theimpacts of taking appropriate and inappropriateactions are outlined.

On the side of appropriate action:

* When greater legal order is required, andgreater legal order is established, performancein the business system should be improved,through better conformance to specified termsand conditions.

* When greater negotiated order is called forand greater negotiated order is established,unforeseen events should be better handled,due to improved alertness to the currentcondition or situation.

Table 3. Benefits and risks of approaches to establishing greater order

Action required

Greater legal order Greater negotiated order

Action taken

Greater legal order Improved conformance to theterms and conditions specified

Reduction of the potentialvalue creation and capture tolowest-common-denominatorterms

Greater negotiated order Situated actions don’t getgeneralized, so responses areinconsistent

Pursuit and capture ofunforeseen new opportunitiesas they arise




On the side of inappropriate action:

* When greater legal order is required andgreater negotiated order is attempted,immediate issues may be resolved, butresponses may not be systemic. Greaterefficiency and greater consistency may beachieved through establishing greater legalorder.

* When greater negotiated order is called for,and greater legal order is attempted, oppor-tunities may be lost through rigidity. In long-term inter-organizational relations expectedwith the network form, parties should be openfor potential benefits unforeseen at the outsetof collaboration.

The challenges of instability from conditions ofambiguity are not trivial. Organized entities, bytheir nature, seek stability as a basis for opera-tions. Sometimes a social group prefers anenforced wrong stability to await a more appro-priate one to emerge. More innovative andflexible ways are needed to respond to theresulting ambiguity. In a word, we need to learnto better manage that which appears fluid. Weargue that this need is met with systems ofnegotiated order.

SUMMARY AND CONCLUSIONS

This paper contributes a systemic understandingof business governance by examining caseswhere businesses have reached their limits. Inparticular, we have compared features of legalorder and negotiated order with a specific focuson turbulent environments. We close the discus-sion by reviewing the larger context of nego-tiated order, and suggesting that 21st-centurybusinesses should adopt a more positive attitudetowards this approach.

Negotiated Order Is not New, andDeserves Greater Emphasis in Business

The ideal of having responsibility for self insocial settings dates back to the ancient Greeks.Aristippus, Zeno, and some early Greek libertar-ians motivated others to action. These same

ideals are later indicated in the writings ofphilosophers of the Age of Reason, such asVoltaire, Diderot, and Rousseau. These philoso-phers resented the abuses of authority andplayed with the notion of a society without agovernment. ‘Humanly devised laws, not being aproduct of wisdom, but a result of fear andgreed, should be annulled and replaced by thedecisions of reasonable men’ (Madison, 1928).

Peter Kropotkin, a cultured and persuasiveadvocate of revisiting the anarchist ideal of theancient Greeks, defined the agenda as ‘the mostcomplete development of individuality com-bined with the highest development of voluntaryassociation in all its aspects, in all possibledegrees, in all imaginable aims . . .which carryin themselves the elements of durability andconstantly assume new forms which answer bestto the multiple aspirations of all’ (Kropotkin,1927). He believed that there is a natural order tothe social as well as the physical world, and hewanted to build a society in which people canlive according to these rules of nature (Mason,1945).

Kropotkin perceived the physical world asself-regulating, where society has the capacity toself-adjust. He played with the concept of naturalorder as an alternative to external social author-ity and as a platform to raise the importance ofthe judgment of the individual. This is related,but quite different to the spontaneous socialorder proposed by Hayek. Hayek describes anorder that emerges in social life without con-scious reflection or planning. This spontaneousorder thesis may be related to principles of self-organizing and self-replicating structures thatarise without design or even a possibility ofdesign, but it can still lead to orders that becomefixed (Gray, 1948). The human fixation on thefixed seems at least as strong as the urge to befree. The importance of our argument is to staywith the fluid even though there is always thepossibility to go towards the fixed or the fixing ofthe fluid. This is in part due to the spontaneousnature of the reality with which we deal, wherewe bring radical ignorance into each situation.

The spontaneous social order to which Hayekrefers can, in fact, organize and utilize fragmen-ted knowledge dispersed among millions of




people, while a planned system only becomesfrustrated with that which does not appear to fit.Hayek’s examples of spontaneous social orderare law and morals, language, market andmonetary systems. Additional spontaneousorders are seen to emerge in natural processes,such as the formation of crystals and evengalaxies (Gray, 1948). Using the term ‘sponta-neous’ for some of the above largely misses thepoint of self-organizing systems and the contextsfrom which they emerge. Promulgation andimplementation of laws and morals are perfectexamples of the tendency to fix that which isfluid, and to formalize the informal emergence ofreality. Many things can, and perhaps should be,fixed, but those are not the subject matter of thispaper and the research that lies behind it.

Negotiated Order Is Evidenced inIndustrial and Network Form Businesses

The four cited examples of businesses illustratethat negotiated order is a workable approach.The Linux community began as a student project,evolved to a rag-tag group of hackers, and hasmatured to gain the respect of large-scalecommercial providers (e.g., IBM). IKEA demon-strates flexibility in its modular design; itsintegration of designers, suppliers and manufac-turers; and its co-opting of consumers withdelivery and assembly activities. The Wikipediahas enabled rapid growth in freely accessibleknowledge over the Internet, with volunteercontributions beyond a select elite to a largerglobal community where personal expertise ofindividuals can be tapped. Finally, MountainEquipment Co-op has not only satisfied theproduct needs of its members, but also leads insocial and environmental advocacy, reflectingthe core social values of its constituents.

Negotiated order should not be viewed as avirtue by itself, but instead in the light oflimitations emerging from legal order. Increasedemphasis on negotiated order provides limitedvalue in environments that are filled withpredictability and stability. Instead, it can beseen as a response to complexity and turbulencein today’s business environment in both network

form and traditional industrial organizations.We also suggest that businesses may experiencechanging emphases in negotiated and legal orderover their life cycles.

We conclude that systems of governanceoriented towards legal order are will be unableto keep pace with rapid change in 21st-centurybusinesses. Fluidity will be a key feature forsuccess. Response and adaptation to conditionsof discontinuous change have long been aconcern of general systems researchers, andspecifically a challenge to systems scientists withan interest in business. Greater attention tostrategies involving negotiated order may helpto improve the sustainability of businesses, infunction, if not in form.

APPENDIX: ENVIRONMENTALCONDITIONSSUGGEST DIFFERENT APPROACHESTO ORDER

As a supplement to the discussion on turbulentenvironments, the other causal textures definedby Emery and Trist (1965) are reviewed, in thecontext of legal order and negotiated order. Inparticular,

* How do legal order and negotiated order per-form under various organizational environ-ments?

In the evolution of a business, negotiated andlegal orders are means by which one organiza-tion will coordinate with another at variouspoints in time. It is possible that the increasingrelative emphasis on one means, over the other,may be appropriate relative to changing points ofdevelopment in the maturity of an organization,or relative to changes in an environment. Table 4characterizes the approaches to establishinggreater legal order or negotiated order undervarying environmental conditions, and resultingconsiderations.

Each of the approaches in Table 3 has beendepicted in the sense of a network form, which isthus applicable both in the context of two sisterorganizations, or two parties operating at arm’slength:




(1) Under placid environmental conditions:* Establishing greater legal order can be

likened to ‘no fault insurance’. Each groupacts independently, but conflicts andcollisions are forecast in advance, andrecourse is established at predeterminedrates. In contrast . . .

* Establishing greater negotiated order is a‘worry about it later’ approach. Interac-tions from independent action are pre-sumed to have inconsequential or minimalimpacts, and can be worked out (ifnecessary) when an incident occurs.

The trade-off between the two approachesdepends on expected impact. In a placid envir-onment, the population is generally consideredto be so sparse that an approach of negotiatedorder would be sufficient. Catastrophes of thetype that Lloyd’s of London would insure (e.g.,an actor breaking a leg) are possible, but rare.

(2) Under placid-clustered environmentalconditions:* Establishing greater legal order is a ‘divide

and conquer’ (or segmentation) approach.Rules are defined for ‘territories’, so thateach party can independently prosper. Incontrast . . .

* Establishing greater negotiated order isa ‘conflict avoidance’ strategy. Bothparties understand that they do notbenefit by direct conflict, and steeringclear of each other by line of sight ispossible.

The efficacy of one approach over the otherdepends not only on environment conditions,but also the size of world relative to competitors.In a crowded world, the definition of boundariesreduces collisions. In a vast world, the need tonegotiate order would be rare.

Table 4. Responses to establishing order under various environmental conditions

Environmental Approach to establishing Approach to establishing Considerations about legalconditions greater legal order greater negotiated order order vs. negotiated order

(i) Placid No-fault insurance: ourgroup can each act inde-pendently of your group,and when conflict occurs,recourse will follow a pre-determined schedule

Worry about it later: we caneach act independently, andif conflict occurs, recoursewill depend on the situation

If the cost associated withdamage is catastrophic, legalorder may reduce anxieties;if the cost associated withdamage is insignificant,negotiated order works

(ii) Placid-clustered Divide-and-conquer: we canmap out the territory foryour group and the territoryfor our group

Conflict avoidance: if we seeeach other in the territory,we’ll work out which groupshould stay and whichgroup should go

If the world is big, nego-tiated order works; if theworld is crowded, legalorder reduces conflict

(iii) Disturbed-reactive

Joint forces: we can create ajoint list of enemies andwork together

Opportunistic aid: if onegroup is in trouble and theother party is nearby, theother party will help

If the number of potentialenemies is high, legal orderenables preparation; ifthreats are low, negotiatedorder tailors to the situation

(iv) Turbulent Build up the dike: when aflood is imminent, we canband together to fightagainst nature

Put out to sea: when a stormis imminent, we can take theships away from shore andeach other

If the biggest threat is fromsources external to us, legalorder ensures we handleeverything; if the biggestthreat is us smashing intoeach other, negotiated orderensures we’re appropriatelyspaced apart




(3) Under disturbed-reactive environmentalconditions:* Establishing greater legal order means

‘joining forces’. The enemy is greater thaneach party can handle individually, so it isin mutual interests that an alliance isstruck in advance of an expected engage-ment. In contrast . . .

* Establishing greater negotiated ordermeans ‘opportunistic aid’. If one party isin trouble and the other is nearby, themoral obligation (or altruistic action) is tooffer to help.

If mutual enemies are well known and at hand,legal order would seem to provide more security.Every contingency is unlikely to be foreseen,however, so negotiated order is always at least inthe background.(4) Under turbulent environmental conditions:

* Establishing greater legal order can belikened to ‘building up the dike’ as a stormapproaches. Through mutual efforts, ourprobability of survival is higher. In con-trast . . .

* Establishing greater negotiated order islike putting boats ‘out to sea’. Boats thatare tethered together have a greater risksof damage by smashing into each other,than by floating independently in a largebody of water.

Legal order is a better bet when the threat isexternal. Combining forces provides greatermutual resistance. When the threat internally isgreater, however, a watchful eye at every momentis more effective than a plan that doesn’t work.

The above conditions illustrate that no onestrategy is appropriate in all environmentalconditions. Our focus has primarily been onturbulent environments, where a business sys-tem has reached its limits and mostly disinte-grated into parts. Across the four causal textures,however, if only one direction were possible,negotiated order provides the more resilientresponse. Legal order is rigid. Negotiatedorder may not, however, provide the mostefficient use of resources when environmentalconditions call for an orientation weightedtowards legal order.

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Negotiated order and network form organizations

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