“Everything was perfectly healthy and normal here in Denial Land.”― Jim Butcher, Cold Days
Previously, I was pondering the interdependence and paradox fragility and resilience this implies. In this related article, I build on that and attempt to join some observations from running businesses with what this might mean at a global scale, especially with the context COVID-19 has provided.
I have long pondered the tendency of business to optimise their productivity by narrowing their operating conditions. It’s a normal (pun intended) strategy to optimise profits by eliminating less profitable activities. At a tactical level this is about focusing on higher value clients, products and services; more strategically, it is about markets and territories or even management of portfolios of business units and business to maximise shareholder value. It’s a commonplace business approach, that allows the fixed capacity and capability of an organisation to be focused on a smaller target set of activities. This concentrates the effort where the company can be successful. It’s a mistake…
The assumption is that the market conditions in which a business operates are stable, or change slowly enough for the business to shift with it. History rather denies that logic; sudden and unexpected shifts in the market occur frequently and can have a massive impact on highly optimised organisations. It’s all to do with normal curves.
In the next diagram, the area under the curves are all the same. This area represents the total amount of capability (effort, knowhow, resources or whatever measure you prefer) the organisation has available. Taking on staff, internal reorganisations etc. can adjust this a little, but not by as much as executives (and consulting companies) would like to believe.
The vertical axis indicates how optimal the organisation is; it’s some measure of productivity (you can substitute profit, widgets per minute, billing hours or whatever you prefer). The higher this is the better, generally leading to more profit and shareholder value.
The horizontal axis represents the breadth of activities, where the capability is targeted. This could be a range of countries, markets, services offered, or probably an aggregation of all these and more.
Looking at the red line, there is clearly an optimal set of activities at X=0, resulting in a productivity of 0.4 (don’t worry about the actual values, we are only concerned with the concepts). Other business activities are less productive at x = ±1 productivity is nearer 0.3, so 25% lower.
Let’s assume that the business leaders engage in a major ‘business transformation’. The chances are that it isn’t really transformative, it’s actually an optimisation around x = 0. They change the way to company operates to achieve the blue line by eliminating a bunch of things, focusing activities and then happily watch as productivity soars all the way to around 0.9. Since the area under the curve remains the same, the costs in the business don’t increase appreciably (ignoring any one-off transition costs). They and the shareholders give themselves a big pat on the back (and hefty bonuses).
Then a pandemic strikes (COVID-19). Or there is a national policy change (austerity economic policies). Perhaps market friction increases (US introduces trade barriers). A shake up in overseas relationships (leaving the EU). Or a competitor comes up with a radically, transformative way of delivering what you do (Netflix). Rapidly, x = 0 is no longer the best place to be. In fact, x = -2 is much better. Let’s see what that does to the post optimisation company vs. the pre-optimisation.
The blue curve, at x = -2, has a productivity of zero. It is going to be out of business unless it can ‘pivot’ remarkably quickly. Since survival is on the line, that’s possible, but it’s unlikely to be as productive as it was unless it’s leaders are remarkably good (though Microsoft has demonstrated that such people exist). It’s more likely to shift to the yellow curve initially, productivity dropping from 0.9 to about 0.17. Worse still, the people, skills, plant etc. needed to operate at x = -2 were ‘let go’ during the optimisation (they were possibly even acquired by the competitors). No more bonuses or happy investors.
If the execs hadn’t instigated the optimisation that they were so proud of, then the drop would have been unpleasant, from 0.4 to 0.8, but they still have skills and income and the possibility of survival. They might even seize the day and be the ones to transform to the green line.
The point of this somewhat academic reflection is that optimisation around a single theme can be dangerous. Organisations that trade resilience for productivity and profit place themselves at risk, seeking short term gains at the expense of long term survivability. Business leaders rightly agonise over diversification vs ‘sticking to the knitting’
Referring back to my remarks in my previous article, Fragile and Interdependent at every level, I think we can and must apply this insight to our modern societies.
It’s self-evident that we rely heavily on computers, electricity, petroleum, vehicles and so much more for all aspects of our daily lives. We expect the hugely complex webs of information, supply logistics, financial flows and the other, often invisible, paraphernalia of society to keep working. We allow most of it to be operated by businesses, with shareholders and executive teams (with their self-interests and blind spots)We expect them to deliver all this in a highly productive fashion to minimise our personal and public sector costs; our industries and public sector organisations have responded in accordance with our wishes, introducing just-in-time processes, minimised buffers, minutely scheduled activities and all the rest. Just as many manufacturers have less than a week’s supply of materials to keep up production, so too our cities, nations and the infrastructure of modern life ride a knife’s edge. They also rely on conditions to change slowly and predictably, so that we don’t run out of toilet roll and personal protective equipment, so that there is predictable demand for petroleum, so that intensive care capacity isn’t overwhelmed. We have optimised for normal demand (x=0) and are in some trouble if the new normal is at x=-2 or +2.
“the line between disorder and order lies in logistics”.Sun Tzu, The Art of War
Faced with even minor disruptions, perhaps due to a lack of personnel to run thing or perhaps due to a crop failure of our own making, individual systems can quickly break down. When it does, people are quick to blame the government, workers, ‘fat cat’ business leaders or some other recognisable target; we’ve been conditioned to expect that some “Big Brother will rescue us”. Perhaps we should reflect a little more carefully on what we really expected.
As Jill Richardson, in her article on similar themes, says, “Resilience isn’t always profitable. But we need it now more than ever.”
If I might borrow from that, “Resilience isn’t always cost effective or productive. However, when the unexpected inevitably happens we will be more than glad that a lack of efficiency gives us time to find a new normal.”
It’s not that we should panic yet. However, there is much to learn from the current pandemic and maybe we need to take a view on the balance between productivity and resilience while we have the choice to make.
Tolerating a degree of inefficiency may be the best decision our leaders made.
“Life went back to normal, after that, as it will do if you’re not careful.”Michael Montoure, Slices