Section 10: # APPLICATION TO FEDERATIONS > In this Section the VSM will be applied to the question of how Social Economy enterprises may join together to form a mutually beneficial federation. The Section begins with a number of case studies involving attempts by co-operatives in the UK to federate, and contrasts these with the example of the Mondragon co-ops in northern Spain. Some conclusions are drawn in terms of the Viable Systems Model. The question of design is then considered by using the preliminary work of Stafford Beer on a federation of Nation States in South America. The Section concludes with some design consideration which will supplement the step by step methodology developed in this pack, for the specific case of federations of Social Economy enterprises.
# The Federation of Northern Wholefood Collectives The FNWC began in the mid 1970's as a result of Reg Tayler's agreement with the wholefood shops in the north of England to buy their goods through him and thus to establish a co-operative warehouse (Suma).
Once Suma was in business the number of wholefood shops in the region began to grow and over a two year period around 60 retail co-operatives were set up, all buying from Suma.
The FNWC was the umbrella for all of these co-ops, and monthly meeting were held to discuss the kind of goods and services which Suma should offer, to welcome the new shops which had been set up and to attempt to direct the future course of the Federation.
The rapid growth and success of the Federation led to a mood of optimism, and it was not uncommon for people to express the feeling that co-ops had finally managed to make a real impact on society. At that time Co-ops were handling around 60% of the wholefood business in the UK (according to The Grocer trade magazine).
The Federation began to put a levy on all its sales and managed to collect several thousand pounds over a period of a few months.
The possibility of a number of regional warehouses was raised, as the number and geographical spread of the hops was growing. Clearly a local warehouse would provide the best service, but the economies of scale militated in favour of a large central warehouse, and Suma had just moved to a large new premises and needed the support of all the shops in the federation.
It was around this time that the FNWC began to decline. This was partly because Suma had become well established and thus one of the aims of the Federation had been achieved, but also because there seemed to be a lack of direction as to where to go next.
The money which had been raised all went to pay the debts of a restaurant in York, and thus the opportunity to invest in strengthening the FNWC was lost.
Over the next few years attendance at the meetings began to dwindle and it became grudgingly accepted that the loan fund was not operating successfully. After a couple of recipients got into financial trouble and were unable to complete the repayments, the loan fund was abandoned.
Currently, there is little left of the Federation. Suma has withdrawn its discount to co-operatives, and generally trade is the main area of contact.
In retrospect the collapse of the Federation was due to: • Suma's growth and prosperity thus making some aspects of the Federation unnecessary. • Lack of vision. • Lack of the necessary skills to make it work.
# The Federation of Wholefood Warehouses in the UK In the mid 1980s, there was a series of meetings to establish a Federation of the 6 wholefood warehouses which were in business in the UK. The supposed advantages were: • The capacity to offer a local delivery service to any shop in the UK. • A coherent marketing policy. • Joint buying thus giving better prices and saving the labour involved in having 6 businesses all buying the same commodities. • The ability to produce and market a series of own label products. • Sharing expertise.
Despite the apparent good sense of all this, Suma decided not to join. On the information which was available to the co-op it looked as if Suma would pay most of the cost of running the Federation and get very little back in return, The problem was that Suma's turnover was as much as the other wholesalers put together, and thus the buying price advantages had already been achieved. There was also a problem with delivery areas. Suma was in competition with some of the other warehouses in certain areas, and this was never resolved. In one particular area, Suma was geographically close but one of the other warehouses had a long term personal relationship with a local distributor.
Consequently the Federation was formed without Suma, and thus was only able to offer its services to half the country. The ideal of a national federation of warehouse was rendered null and void.
Soon after it was established, one of the founder co-ops went out of business, further weakening the federation. Own-label products were produced, but some of these were in direct competition with Suma's products. Centralised buying and marketing never really happened as the member co-ops were loath to give up any autonomy.
Currently, two of the warehouses in Bristol are in the process of merging as they were operating within 12 miles of each other. And in Scotland two new warehouses have opened in order to provide a more local delivery service over a large and scattered market.
Generally all of these developments happen in a piecemeal fashion, and there is little sense of planning the distribution of wholefoods throughout the UK in a coherent manner.
There are still problems with the "right" to distribution areas. Suma has recently extended its weekly deliveries into South Wales which is close to the Bristol warehouses. And one of the Scottish warehouses is actively selling in Northern Ireland which has traditionally been part of Suma's area.
Without doubt the attempt to get the co-operative wholefood warehouses in the UK to federate and act a cohesive system has failed.
# Federations of Mondragon Co-operatives # Introduction Mondragon is a small town in the Basque region of Spain which has been the location for an extra-ordinary experiment. During the last 50 years the region has been completely changed by the development of 173 separate co-operatives which now employ over 22,000 people.
Everything about Mondragon is impressive: they turn over about three billion dollars; they re-invest vast sums of money in order to keep their buildings and machinery in excellent condition; they have their own research and development labs which are developing state-of-the-art computer and robotic systems They have their own chops, bank and social security system; and they are completely dedicated to the ideal of co-operation.
There is little doubt that the success of the Mondragon co-operatives is to some degree the result of their ability to form alliances and work together at both the geographical and trade-sector level.
The present diagnosis is concerned with the application of the VSM to the way in which they organise separate co-ops into a coherent system at the Sector Level.
# Autonomy and Cohesion Everyone I spoke to was adamant that the member co-ops - which constitute the System 1 or Operation - are completely autonomous. There were accounts of how the members of a small co-op which makes heaters refused to bow to a sector decision and merge with a larger co-op. The Metasystem was informed of this decision and its only recourse was persuasion. The relevant personnel returned to the small co-op, presented the arguments for the merger and eventually got agreement. However, the small co-op could have refused.
In VSM terms, the complete autonomy given to each co-op may be a little excessive: a mechanism should exist which required the merger in the interest of system synergy. However, as everyone I spoke to at Mondragon seems more concerned with the good of the whole than an individual co-op, the system currently seems to work. It was also mentioned that the small co-op faced exclusion from the group if it failed to respond to the arguments for merger.
So while there seen to be no formal systems to ensure autonomy has to become subject to system cohesion, the social pressures are enormous.
# Sectoral Organisation **The General Assembly** consists of all members of the Sector's co-operatives who are on their Board of Directors, or the Audit Group, or managers. Their task is to approve the Sector's policy and budgets, and to modify organisational rules.
**The General Council** is the Sector's higher management made up of between two and four members of the Boards of Directors of the members co-operatives.
**The General Management**: Its function is to predict, plan and stimulate the co-ordinated harmonious joint development of the co-operatives in the Sector.
**The Audit Group**: Also called the Account Control Board, they are charged with examining accounts as they deem necessary, alerting the Management of problems and obtaining information for the membership.
**The Management Council** is an advisory body to the General Management. It consists of the Director General, the Management of the member Co-ops the Central Services manager and anyone else who may be useful in helping the Council.
**Note on Finance**: The member co-ops have to meet the budget quota drawn up in the annual Management plan.
# System 1: Operation The 173 co-ops in Mondragon are currently re-organising from a regional collaboration to a Sectoral base. They are quite clear that in order to compete in a unified Europe, they need to concentrate on the synergy (their words ...) between enterprises in the same Sector. For this study, the System-in-Focus will be a collaboration of typically 8 co-ops in a single sector. Mondragon has several sectors dealing with domestic appliances, castings, food, service industries and so on. The principles on which the collaborations work are identical, although some of the details are different. In general, it will be adequate to talk non-specifically about viability within a Sector, although specific examples will be given. Within each co-operative, there seems no doubt that the organisational systems cover all of the aspects of VSM diagnosis that I have been involved with. The system of autonomous work groups and daily measurement of performance indicators (although not the concept of statistical filtration and thus automatically generated algedonics) has been up and running for a decade, and they find it leads to greater motivation, a more enjoyable work environment, greater productivity and higher standards.
> **SUMMARY: SYSTEM 1** System 1 consists of about 8 autonomous co-operatives. Each co-op functions within the same Sector. Each co-op exhibits the essential property of being a Viable System embedded in the whole. The Mondragon co-operative culture is focused on the whole group of co-ops, rather than the single enterprise. This provides the basis for federation.
# System 2: Stability Perhaps the most astonishing aspect of Mondragon is the systems it employs to ensure all the co-ops avoid instabilities. The word solidarity comes up time after time, and it's difficult not to be impressed by the feeling that all 22,000 Mondragon worker-members are working together. The concept of one co-op benefiting at the expense of another seems difficult for them to grasp, and usually my questions about conflict of interests were met with surprise.
However, the Eroski Food Group are building HyperMarkets which are taking trade from the smaller shops in the group. This seemed a potentially unstable situation (different co-ops fighting for the same market) and looked problematical to me. However, at Mondragon, they don't see a problem for the following reasons: 1. If one co-op in a sector looses money, it is supported by the others. Historically most co-ops have needed support at one time or another from the group, and this is seen as a system of mutual support. It means that there is absolutely no problem with one shop gaining at the expense of another as long as the combined profits of the group are growing. This seems to generate the view that it's the Sector that matters, rather than the individual co-op.
2. All wages are the same throughout the Sector.
3. All profit sharing is made on a Sectoral basis. Thus, if a small shop is loosing trade due a new hypermarket, it is quite possible that the worker-members in the small shop will see the profits of their own co-op fall but get higher remuneration at the end of the year as the profits of the Sector will rise.
(Compare this situation with the UK wholefood warehouses. As each Co-op had its own wages system and there was no suggestion of mutual financial support, the interactions were unstable: there was conflict of interests due to competition for a limited market. The lack of any sort of System 2 to deal with this meant that the federation was doomed.)
The Mondragon co-ops, who share wage scales and profits throughout the Sector, have managed to dissolve all these problems. They see this as solidarity: in Viable System Model terms, it is an extremely effective System 2 which ensures the member co-ops can look beyond the survival of their individual co-ops and concentrate on the development of the Sector.
System 2 is a prerequisite for the articulation of an integrated Viable System.
# System 3: Synergy & Optimisation Each co-op in the Sector sends its General Manager to a Sectoral General Management meeting. Sector General Management is described as stimulating the "co-ordinated, harmonious joint development of the co-ops incorporated in the Group" Clearly this is a System 3 function. Some examples of how they do this follow: 1. Joint education, research and development. This includes education at all levels throughout the co-operatives. (Beyond the means of one, possible for the Sector). 2. Optimised product ranges, trade marks etc. 3. Being able to offer a customer a complete service. (For example there are several co-ops which make castings: each now specialises in one aspect, the Sector can offer the complete range. This also required new co-ops to be established so that the Sector could offer a complete service.) 4. Centralised buying, publicity and marketing. 5. Transfer of technology and expertise between co-ops. 6. Inter-co-operative trading: All the manufacturing co-ops use Mondragon machine tools and control gear. Generally it's accepted that there are enormous advantages to collaboration. At the level of the entire Mondragon organisation there are bodies called "superstructural". These include a research and development institute, a Social Security system, a Bank, a Technical College, and a training centre for co-operative and management skills. None of the services which these offer would have been possible without collaboration, and it is certain that Mondragon would not have developed so successfully if the member co-ops had grown as isolated businesses. The systems they employ to encourage Sector synergy involve meetings of the general managers of the various co-ops in a Sector and the appointment of a Sector Manager. It should be noted that the power of decision is delegated up through the usual Mondragon system of General assembly, and that the member co-ops have to agree to the recommendations. Clearly they take advantage of every opportunity to deal with Sector synergy. System 3 is alive and working well. # System 4: Future Planning The existence of the Sector Management bodies enables the Managers to examine the environment in which they exist and to plan accordingly. This System 4 function is performed with characteristic Mondragon excellence. The FAGOR group, which manufactures a complete range of consumer products, industrial 74