Opinion: What’s With This Economy Thing?

Editors note: The author submitted this just days before he lost his job. What is ironic about this "rant," as Bruman puts it, is that it was written seven years ago. Do we never learn?

Recent months have brought disturbing news about the U.S. economy, the stock market, and business leadership in general. While some people try to blame it on an apparent moral decay on the part of our financial watchdogs and business leaders, I am here to say it’s not all their fault.

Yes, they ended up robbing from Peter to pay Paul, and yes they had to endorse what some people may call "creative" accounting practices to make the numbers all come out right. We would be unfair however, if we blame it on a lack of moral character, ethics, or greed. Our leaders have merely followed the same courses of action that seemed to work in the past, and what they were taught in many of our graduate business schools.

I will not attempt to detail all that was done in each of the Enron, World-com, QUEST cases, or any of the other past or emerging financial crises we’ve all witnessed these past few months. I will attempt, however, to draw your attention to some basic similarities that should point us toward some things we were warned about many decades ago by (of all people) Dr. W. Edwards Deming.

One of Dr. Deming’s favorite pet subjects was the view of our world as a collection of interrelated and interdependent systems. Repeatedly, Deming decried the failure of American leaders to regard their organizations with a systems view.

When Deming asked several senior business leaders to draw a picture of their function, nearly every one came up with a model of their internal organization. None of them included the interchange between their suppliers and/or customers. Yet, in the systems view, both of these interdependent groups share in the aim of the system to provide products and services. In manufacturing and marketing, as an example, the customers provide requirements, expectations, and finances to the manufacturer, while the manufacturer’s suppliers provide the hardware that make up the products.

Most people think of a system as a series of processes, each one supplying inputs to the other like the links in a chain. I suggest that it is more like a piece of delicately woven cloth, with processes linked together in several dimensions, with each process both supplying and consuming inputs to and from the system from several different directions.

What differentiates one piece of cloth from another is what Deming referred to as the "aim" of the system. It's the commonality of the aim that creates the system, and keeps it from unraveling into random, disconnected threads of action and effort.

Unfortunately, most major companies or organizations are made up of more than one overall system. This causes the leaders to develop a kind of schizophrenia in an attempt to keep everything from unraveling.

Fortunately, there are tools and techniques that can be used to cross-reference the aims of multiple systems so that common actions and strategies can be developed that support them all. When this is done, a small number of global strategies surface that become the drivers of success for the organization at large.

Very few fortunate organizations have discovered these techniques and principles. Those that have seemed to have undergone a complete transformation in character. Through finding the common threads that create real improvement, they found that optimization quickly replaced compromise, cooperation replaced competition, and communication replaced confrontation.

In direct contrast, we have the performance measurement models that are so popular with business schools today. They have become synonymous with something called total quality management, or TQM, and call for continual measurements of many detail targets and control indicators as independent entities. In other words, leaders and managers at every level are charged with several detail performance targets that are supposed to indicate what their responsibilities are at their level. As their quarterly, monthly, or daily measurements vary and fluctuate, they spring into action every time an indicator starts to drift in a negative direction.

With all these performance indicators being monitored at every level and at every function, and all this springing into action occurring, things start to unravel into what a former (mechanical engineer) boss of mine used to call "rapid random motion." Everyone is preoccupied with achieving their individual performance targets without knowledge or concern about how their efforts impact other employees, departments, divisions, or entities.

Eventually, the organization ends the year with everyone achieving their individual goals and targets. Bonuses get handed out for everyone because they achieved their goals, and everybody thinks everything is peachy.

Quietly, almost unnoticeably, hidden truths begin to surface. The numbers just aren’t adding up. Profit margins are not what they should be. Costs are up while sales are down, customer satisfaction is spectacularly mediocre, and nobody knows what the problem is. Worse yet, few people are even aware that there is a problem.

When somebody figures out that all the numbers don’t add up, everyone agrees there must be a problem with the accounting system.

"We must be measuring wrong."

"Let’s revise our accounting methods."

This last random motion should be a warning sign that, as Gilbert and Sullivan said in H.M.S. Pinafore, "Things are seldom as they seem."

In more than 35 years of watching human nature in the business world, I have never seen it fail. When nobody knows what is wrong, somebody suggests changing the measurement method. Whether it is the diameter of a hole drilled in a block of steel or the sales forecast for the next six weeks, if there’s a problem, at least one person will challenge the measurement that describes it.

If everyone is doing what they are supposed to, achieving their goals and earning bonuses, but the results don’t indicate success, we can only suggest there must be something wrong with the measurements. This is not greed or ignorance. It's merely human nature. If we really can’t explain a paradox, we naturally start to doubt it’s existence and question whatever numbers or data are being used to describe it.

If we assume that our leaders are basically honest men or women, and are really trying to do the best they can, what are some steps they can take to prevent more crises and financial disasters:

1. Develop an aim for whatever systems that are to be led.

Determine the root purpose of the organization. Is it to generate a profitable return to its stockholders, or is it to manufacture or develop and market a valuable product or service to its customers? Yes, the stockholders must be considered, but not usually as the top-level purpose for the organization.

2. Determine what beliefs and values the organization will be founded on.

These need to be real convictions and principles. Not some hollow sounding platitudes that someone read in a magazine somewhere or heard in the lobby of another company. These need to be the sincere passions of the leadership. Ideas that can’t be conveniently forgotten in times of stress or crisis. An excellent place to start is with Deming’s "14 Points" and "Seven Deadly Diseases." Make sure everyone in the organization knows and understands these beliefs and values. Make sure they know they will be expected to make decisions and plan their actions according to these beliefs and values.

3. Develop a hypothesis of how the aim of the organization can be realized within the constraints of its beliefs and values.

This is an exercise in something we use to call policy deployment or Hoshin planning. It allows the identification of a small number of very broad, overall indicators that cut across all of the beliefs, values, and aims of the organization. Actions that help one area at the expense of another are thrown out. Opposing actions that suggest compromise or trade-offs are likewise eliminated.

4. Get started doing what needs to be done when it is needed. Monitor to ensure it is what you planned and intended.

Monitoring should not focused on results or outcomes, but on all the actions that produced the outcomes. Were they according to the plan? Were they done consistently? Were they done in support of the beliefs and values? If the answer to any of these is no, resist the temptation to go back and modify the plan, re-engineer something, downsize, or make any substantial changes. Refuse to change the measurement methodology. Only after verifying that everything was done consistently, according to the plan, should you consider changing anything.

This is what separates the real plan-do-study-act process that everyone talks about (but few really understand) from simple trial and error. Deming said that managing anything by merely measuring the outcome or results is like driving a car by staring in the rear view mirror.

5. Don’t make any decisions based on data without understanding the principles of variation.

If someone says the sky is falling, ask how they know and how they have determined that it wasn’t a coincidental fluctuation in barometric pressure. If you can’t learn the correct questions to ask or how to make decisions based on statistical reasoning instead of emotion or superstition, hire a master to help and advise you. You wouldn’t think of running a business without a legal advisor (or an entire legal staff), how can you consistently know the difference between coincidence and significance without people that understand these concepts. If anybody else that makes decisions doesn’t understand these principles, insist that they learn them and use them. Don’t accept any report, premise, or data compilation that doesn’t have proof of it’s significance. If your Black, Green, or Technicolor Belts can’t define "Profound Knowledge," send them back for more training.

6. Go back and improve your plan.

Change what needs to be changed, don't touch what doesn’t need to be changed, and use statistical reasoning tempered by your beliefs and values to know the difference. Changing things merely for the sake of change will increase variation instead of consistency, and will lead to chaos. Failing to change things that indicate imminent catastrophe will bring about catastrophe.

 

I am sure many people will scoff at these ideas as being either too simplistic, or too vague. I can’t help that. It isn’t rocket science, but it can make rockets go higher, faster, cheaper, and more reliably. It isn’t brain surgery, but it could reduce the cost of health care and reduce medical malpractice suits by eliminating errors and mistakes.

It will work for everyone. It will make your TQM process successful instead of merely looking good on paper. It can help your Sick Sigma initiatives produce real improvements instead of funny-money cost reductions. Finally, it can help everyone in your organization achieve real efficiency, productivity, and joy in their work. Those, in turn, will allow you to produce products and services that will be in demand by your customers, at prices that are determined by your costs rather than competitive pressures.

Will all that increase dividends and stock prices? It will as soon as people realize what you stand for and see with their own eyes what you can accomplish. Best of all, you can do it without everyone scurrying around every month or quarter, trying to make their control panel numbers come out right.

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