Your Dysfunctional Organisation Is Working Exactly as Designed

There is a sentence in systems literature that removes your right to complain about your own organisation. David Peter Stroh states it plainly in Systems Thinking for Social Change: systems are perfectly designed to achieve the results they are currently achieving. No matter how dysfunctional a system appears to be, it is producing benefits for the people who participate in it.

Read that twice, because it is not the platitude it looks like. It says that the organisation you find maddening, the one that cannot ship, cannot decide, cannot serve the customer or the citizen standing in front of it, is not broken. It is optimised. It is producing exactly the outputs its structure rewards, reliably, day after day. The dysfunction is the design working as intended.

By now you know I’ve been an internal auditor for a significant part of my career, and some reflexes never wane, and this is the kind of claim auditors learn to take seriously: when a control keeps failing in the same way, the useful question is not why people keep making the same mistake. It is what the current arrangement is succeeding at, intentionally or not. Once you ask it like that, most organisational failure stops looking like incompetence and starts looking like a faithful response to the wrong incentives.

The results a broken system is optimised for

Stroh's argument, developed across years of work with NGOs and public agencies, is that a struggling system is not a machine with a loose part. It is a set of feedback loops that has settled into a stable pattern, and that pattern serves someone. A public benefits agency that processes applications slowly is not merely under-resourced. Slowness protects it from error, from fraud accusations, from the political cost of a wrong payment, and from the workload spike a faster process would create. The delay is not a bug in the service. It is the service the incentives actually asked for. The same holds in a private company whose customer-service desk is quietly optimised to close tickets quickly rather than to solve problems, because closure time is what gets rewarded and resolution is not. The dysfunction customers complain about is the system hitting its real target.

This is why the retrospective question matters more than the reforming instinct. Stroh borrows from the medical essayist Lewis Thomas, who warned that when you are confronted by a complex social system you are dissatisfied with, you cannot simply step in and start fixing, with much hope of helping. If you want to fix something, you are first obliged to understand the whole system. Most reform skips that obligation. It treats the visible symptom as the target and leaves the loop that produces the symptom completely intact.

What the system switched off

There is a second layer underneath the incentives, and Daniel Cable names it in Alive at Work. Human beings come with what he calls a seeking system, the neural drive to explore, experiment, and find meaning in what we do. When it is active, we feel purposeful and alive, and the dopamine that follows makes us want to explore more. Think Tik Tok here for a second. See what I mean? The problem, Cable argues, is that most organisations were built to switch this system off. Modern management was conceived during the Industrial Revolution precisely to suppress the human impulse to learn and improvise, because on an assembly line improvisation was a defect. Most of our organizations have not moved beyond that.

Put Stroh and Cable together and the picture sharpens. A dysfunctional organisation, public agency and private company alike, is not just optimised for the wrong outputs. It is optimised for them by deactivating the one human capacity that could produce better ones. The three switches Cable identifies, self-expression, experimentation, and a sense of purpose, are exactly the switches a compliance-first, defend-against-blame culture keeps in the off position. The people inside are not lazy. Their seeking system has been told, by every reward and every sanction around them, to stand down.

Munger's bridge

Charlie Munger built a career on the observation that we all underestimate this. In his 1995 talk at Harvard, The Psychology of Human Misjudgment, he placed incentives first among the forces that distort human behaviour, and admitted that despite ranking among the best in his age cohort at understanding their power, he had underestimated them his whole life. Elsewhere he compressed the whole idea into a line worth memorising: show me the incentive and I will show you the outcome.

His favourite illustration was FedEx. The integrity of the entire network depended on packages moving through one central hub each night, fast. The night shift kept missing the window. FedEx tried moral suasion, exhortation, everything, and nothing worked, until someone realised the workers were paid by the hour. Paid by the hour, a slow night is simply more pay. The company switched to paying by the shift, and the problem dissolved. Nobody had been lazy. The incentive had been quietly asking for delay, and it received delay, faithfully.

That is the bridge between Stroh and Cable. The reward structure is the mechanism by which a system deactivates its people and locks in the wrong output. Change the words on the mission statement and nothing moves. Change what is actually rewarded, as FedEx did with a single line in a pay formula, and the behaviour changes overnight.

In fairness to the reformer

It is easy to read all this as a counsel of despair, and I want to be fair to the person who actually has to run one of these organisations. When you inherit a service that is failing consumers or even worse, citizens, waiting to fully understand the whole system before acting is a luxury the people on the waiting list do not have. Reform-minded leaders reach for the visible levers, a new digital platform, a training programme, a restructure, a fresh set of targets, because those levers are real, fundable, and defensible in front of a board or a minister or council thereof. Doing something is not foolish. It is often the only politically survivable move.

The trouble is not the wish to act. It is that the visible levers almost never touch the reward structure, and the reward structure is where the dysfunction lives.

Why the reform stalls

Consider a public administration deciding to raise its AI adoption. The programme is real and well meant: tools procured, staff trained, use cases counted. But nothing in the surrounding structure has changed. A civil servant who experiments with a new tool and gets it wrong is still exposed to blame, while a colleague who quietly ignores the whole thing carries no risk at all. The seeking system stays switched off, because the incentive to explore has not been turned on. Adoption stalls, and everyone blames change resistance, or the tool, or the training budget. The actual cause is that the organisation asked people to experiment while continuing to punish the experiments that fail. Show me the incentive, and I will show you the workaround.

Or take a benefits-access initiative meant to help more eligible citizens actually claim what they are entitled to. The stated goal is uptake. The operating incentive, embedded in every audit and every headline about improper payment, is to avoid paying anyone who might not qualify. Front-line staff read the real incentive accurately, because they always do, and they administer caution. The access campaign runs, the messages go out, and uptake barely moves, because the system is still perfectly designed to protect itself against wrong payments rather than to maximise rightful ones. The symptom was low uptake. The reform fought the symptom. The loop producing it was never touched.

Now move the same lens to the private sector, because none of this is specific to government. Consider a listed company that launches a transformation programme: an innovation lab, a digital upskilling push, a mandate to experiment with AI in every team. The language is all boldness and learning. The performance system underneath has not moved. Bonuses still track the quarterly number, promotions still favour the manager who never missed a target, and a visible failed experiment still lands as a black mark at review time. So the ambitious employee does the rational thing, praising innovation in the town hall and protecting their numbers in private. The lab ships demos, not decisions, and leadership concludes the culture is risk-averse. The culture is not risk-averse. It is responding, precisely, to a reward system that pays for the absence of visible failure. Show me the incentive, and I will show you the theatre.

In each of these cases, public or private, the initiative is not defeated by bad luck or bad people. It is defeated by a structure doing exactly what it was built to do, while a layer of reform is painted on top of it.

What to change first

The uncomfortable implication is that the reward structure is not one variable among many. It is the variable. Before the platform, before the training, before the new targets, the question worth sitting with is the one Stroh forces and Munger sharpens: what is the current arrangement actually rewarding, and who benefits from the dysfunction as it stands. Until that is answered honestly, every improvement effort is negotiating with a system that has already priced it in.

This is a posture, not a framework, and I distrust anyone who sells it as a template. It means treating the incentive as the primary object of design, not an afterthought once the strategy is set. It means asking what happens to the person who experiments and fails, and being willing to change that answer before asking anyone to experiment. It means accepting that a mission statement is not an incentive and a value painted on a wall is not a reward. The seeking system does not respond to aspiration. It responds to what actually happens to you when you explore.

Your dysfunctional organisation is not failing. It is succeeding, precisely and reliably, at the thing its incentives quietly ask of it. That is the bad news and the good news at once. A system perfectly designed for the wrong result can be redesigned for a better one, but only by someone willing to change the reward before changing the rhetoric.

Think about it.

Sources and methods

Stroh, David Peter. Systems Thinking for Social Change: A Practical Guide to Solving Complex Problems, Avoiding Unintended Consequences, and Achieving Lasting Results. Chelsea Green Publishing, 2015. Source of the claim that systems are perfectly designed to achieve the results they currently achieve, and of the Lewis Thomas passage on understanding the whole system before intervening.

Cable, Daniel M. Alive at Work: The Neuroscience of Helping Your People Love What They Do. Harvard Business Review Press, 2018. Source of the seeking system, the three triggers of self-expression, experimentation, and purpose, and the argument that modern management was designed to suppress them.

Munger, Charlie. The Psychology of Human Misjudgment. Speech at Harvard University, 1995, collected in Poor Charlie's Almanack. Source of the primacy of incentives, the FedEx night-shift anecdote, and the admission that he underestimated incentive power his whole life. The line "show me the incentive and I will show you the outcome" is Munger's, widely quoted from his talks and Berkshire Hathaway meetings.