Why maximum efficiency doesn’t always pay

We’ve all done it: sat in planning meetings and shaved off costs here while tightening schedules there. We think we’re keeping everything efficient and under control. Since the Industrial Revolution, the prevailing ethos of business has focused on efficiency. Bigger, faster, cheaper. Modern technology accelerated and amplified the theme and made globalisation possible. Just-in-time manufacturing now means that, while Apple’s iPhone is “designed in California”, making it depends on raw materials and suppliers from Ireland, the Philippines, China, Taiwan, Japan, Austria, Korea, Singapore, Thailand, Germany, the UK, the Netherlands, Indonesia, Puerto Rico, Brazil, Malaysia, Israel, the Czech Republic, Mexico, Vietnam, Morocco, Malta, Belgium and many of the United States.

This complex, tightly managed supply chain is designed for maximum efficiency: reducing costs and taking advantage of labour specialisms, employment conditions, currency fluctuations and tax breaks. It is pretty miraculous and has led most organisations to optimise efficiency everywhere they can.

But that’s because we ignore the drawbacks. Such complexity also exposes Apple (and similar manufacturers) to natural disasters (like disease), labour disputes, economic volatility, social turmoil, religious strife, trade wars and political discontent: all unpredictable factors over which the company has no control, little influence and poor foresight. These systems are so dazzling that it’s easy to forget that they multiply contingencies and amplify risk. The belief that efficiency makes everything better is a dangerous myth that ignores the fundamental differences between what’s complicated and what’s complex.

A useful analogy here is air travel. Much in flying is merely complicated. You know passengers will check in, their bags will be loaded onto planes and they will want to eat and drink. Those aspects of flying are managed with a beady eye on efficiency and they work well. But once the plane is in the air, you cannot guarantee with absolute certainty exactly what will happen: whether geese will hit an engine or a part will fail. Too many factors are at work and beyond control to know for sure what will happen. So, aircraft have been designed with more engines and operating systems than they usually need – just in case one fails. Robustness, not efficiency, is their protection against the unpredictable. Just in case.

Confusing the complicated and the complex is dangerous. If you think everything is complex, projects become bloated and overly cautious. If you think everything is merely complicated, you eliminate all margins for the unexpected. The overuse of efficiency in the NHS, for example, left it radically unprepared for an epidemic. Using 100 per cent of the capacity in intensive care or running down stockpiles looks efficient when in reality it’s dangerous.

Often, both the complicated and the complex exist within a single system. That was true of the Dutch homecare nursing system, which was designed to maximise efficiency. This made it a cumbersome bureaucracy where every patient had a standardised contract specifying precisely how nurses should spend their days and minutes with patients. The desire for efficiency meant that patients were being treated “like apples on a farm: just picked and packed off”. Just-in-time management made the work uniform, expensive and largely meaningless.

One of the nurses, Jos de Blok, had a great insight. He saw that, in fact, there were two aspects to this system. One was just complicated – like issuing the contract that assigned a nurse to a patient. It was predictable and repetitive, so technology could make the process more efficient. But the other part of the work, helping the patient recover, was inherently complex, because no two patients are identical and the work cannot be predicted. That part, de Blok thought, should be left to human judgement, because it needs to be more adaptive and responsive. So he proposed an experiment: automate much of the paperwork – but give nurses the freedom to do whatever they believed was best for the patient.

When the accounting firm EY audited de Blok’s experiment, it found that patients got better in half the time, because nurses were free to use their judgement on the spot. And when the experiment was expanded, costs were shown to be 30 per cent lower. The success should spill over into the rest of the health system, too: emergency admissions down by a third and generally shorter. EY estimated that €2bn would be saved if the whole of the Netherlands adopted the system.

Efficiency is powerful with any work that can be standardised, measured and predicted. But not everything can be, and it’s important to know the difference. Trying to standardise and measure all work may instil the illusion of control, but it too often deskills and demotivates the human skill sets that the unpredictable demands. It also robs people of their capacity to adapt and respond with creativity and commitment. Acknowledging the uncertainty inherent to life isn’t a weakness to be conquered; it challenges our humility and our creativity to address the unexpected.

Margaret Heffernan is the author of Unchartered: How to Map the Future Together (Simon & Schuster, £20)

Learning to exercise good judgement

London Business School professor Sir Andrew Likierman explains why leading during turbulent times means making the right judgement calls on the run. Here’s how...

‘Unknown unknowns’ are familiar territory for project management, and good judgement is a key quality for any leader looking to navigate financial and logistical nightmares. Judgement – the ability to combine personal qualities with relevant knowledge and experience to take decisions and form opinions – has six elements. Let’s take each one in turn:

1 What you take in. The danger is not picking up on the key messages in unfamiliar circumstances. Good judgement means making sure you understand what makes this crisis different.

2 Whom and what you trust. Expertise on coronavirus, particularly on timescales and implications, is lacking, so it’s difficult to know who to trust. Question any claims about aspects that are unfamiliar, and put a premium on those who are honest about what they don’t know.

3 What you know about this. What we know for certain is that this is not like any crisis we’ve had before, so beware false analogies. Good judgement means being clear about what is known and what isn’t. Find out what you can about how others – not necessarily in your own industry – are handling challenges, whether bottlenecks, shortages or financing problems.

4 What you feel and believe. Good judgement means bringing your feelings and biases, including optimism and pessimism, into the open and making sure your risk analysis reflects the current circumstances. Two pitfalls are likely to be confirmation bias (when we find evidence to support our point of view) or availability bias (when the latest piece of evidence is given undue weight). Good judgement means understanding risk appetite or tolerance and matching it to the knowledge available at the time. This includes putting on the table all the key trade-offs, such as in conserving cash while managing relationships with suppliers.

5 your choices. Identify the key trigger points for decisions. Cash will be the prime consideration for suppliers, contractors and customers. But this is a crisis with a difference, with government support at an unprecedented level, banks under pressure to be flexible and everyone in the same boat. Your choices need to reflect these special factors. Your 2020 budget should almost certainly have been replaced with shorter planning horizons, featuring ranges instead of mid-points for the medium term. Detailed scenario plans should be avoided until assumptions are solid enough to be worthwhile. As in any crisis, take the opportunity to rethink ‘the way we do things around here’.

6 Delivery. There are special aspects to this crisis when assessing the impact on delivery. These include: everyone is affected; strong secondary effects (such as supply-chain disruption); unexpected tertiary ones (such as the effects of restrictions on movement); and uncertainty about the shape of the economic recovery. Good judgement means being even more rigorous when checking the credibility of claims regarding delivery.

Sir Andrew Likierman has been interested in major projects since serving on a 1975 government inquiry into cost increases in developing North Sea oil. For more information on measuring judgement, see his article ‘The elements of good judgement’ in the January/February 2020 edition of the Harvard Business Review.