Unpriced Internal Externalities and Structural Inefficiency in Organizations
Why organizations waste effort on improvements that secretly work against each other
Organizations often invest heavily in better processes, technology, and governance but see disappointing results — and a new framework explains why. The problem isn't usually poor incentives or hidden information, but rather that internal systems create conflicting effects: a new IT system might speed up one department while slowing another, or a governance rule might improve compliance while hampering innovation. When these opposing effects cancel each other out, organizations waste effort even with perfect execution, and no amount of optimization can fix it until the conflict itself is addressed first.
Most organizations tackle inefficiency by reallocating effort or tweaking incentives, but this framework shows those efforts fail when the real problem is structural conflict. The research suggests a different playbook: diagnose and resolve these internal contradictions before attempting any other improvements. This could dramatically change how executives design organizational changes, suggesting they should first redesign conflicting mechanisms rather than spend money on optimization efforts that are doomed to cancel out.