Many observers will claim that complex systems are inherently fragile. Some argue for simplifying things instead. But one of the main reasons why many man-made complex systems are fragile is that we often ignore Ashby’s Law.
Ashby’s Law is also known as the Law of Requisite Variety. It is so powerful that it is sometimes called the first law of cybernetics.
Basically, Ashby’s Law states that to be fully effective, a control system must has as much variety as the system being controlled. The control system must be as complex as the system being controlled.
So man-made complex systems often evolve when people decide to add more and more functionality – more variety – to existing systems. Sometimes this includes linking up multiple complex systems.
But humans are really clever and they tend to save time and money by not bothering to even figure out what additional controls are needed to make a newly enhanced system secure. There is often not any appreciation of how much more control is needed when two complex systems are combined.
But look at the literature regarding company mergers and acquisitions. The literature keeps saying that the majority of this activity destroys value. Sometimes that is because the two organizations have incompatible cultures. Executives are becoming aware of that and activities to create a single new culture are sometimes included in post merger activity lists.
But there is an aversion to recognize that there needs to be much more spending on control systems. Most often in a merger, there is a reduction in the amount of people assigned to internal controls, either directly or within a line function. This is usually expected to be one of the synergies or redundancies than can be eliminated to justify the purchase price.
But in reality, if the new merged entity is more complex than the two original firms, the need for control, as expressed under Ashby’s Law, is greater than the sum of the two entities.
Merging without recognizing this means that there is an out of the money put being embedded in the merged entity. The merged entity has lower control expenses than it should for a time. And maybe, just maybe, it will experience major problems because of the inadequate controls.
Riskviews 