This is a story I was told by two friends of mine, Andrew and Julian, and if you find it interesting then please do check out their book “Introducing your Invisible Manager” or email me for more information.
Is the story true? I believe so, but it really doesn’t matter, because you KNOW that the same things apply to YOUR business!
So there were these two guys who ran their own replacement windows business – they would get appointments, visit and estimate price and sell the job, measure up and make some drawings, go back to the workshop and make the new windows, and then go and install them. They also did their own invoicing and accounts paperwork, and took messages from customers on their mobile phones amongst all of the above. They did five windows a week.
They were successful and the business started to grow. First they recruited a PA to take phone calls, do the invoicing, and organise things for them. She had a much cheaper hourly rate than them, and did the job really well, so it seemed like a good idea. Then they bought a new faster machine for making the windows. Then they recruited a sales person who brought in quite a bit of work. Then they recruited a surveyor to help with the measuring up, several production guys to make the windows in a production line system, and a production planner / project manager, a quality controller, and a finance person, and a marketing/social media person, an IT person, and a part time HR person….
By now they had 40 people, they were full time managers of the business, and were producing 80 windows a week and making a lot more money than they did when they first started on five windows a week.
Hang on a minute: when they started, two of them were doing five windows a week.
They’ve gone from 2 people 40.
Now that they have 40 people why aren’t they making 20 times as many windows a week, i.e. 5×20 =100? Why are they only making 80? They have become less efficient in terms of windows per person, even though they have the fancy machine and the production line, specialist sales people, streamlined accounts and IT, etc.
Clearly this is because the accounts person doesn’t make windows, neither does the IT person or the production controller, so it’s almost a miracle that the small number of people in the factory can make 80 a week. They need those economies of scale in order to keep up with doing 80. And similarly the invoice processing lady does the invoices much faster than the original two guys used to, and the sales person is selling 80/week as opposed to their original 5, which is very efficient and impressive. So each person HAS achieved economies of scale by specialising.
But the operation as a whole hasn’t shown economies of scale. Each part is more efficient, but overall it’s not.
How can this be?
Well, we (Andrew, Julian and me) we think that there are four reasons why the organisation disappoints. And by the way, the bigger the organisation gets, the MORE they disappoint. Any person who works for a small company that deals with big organisations will confirm this!!
So let’s look at why:
Reason 1 – Losses between departments
There’s a cost every time a sales person explains to the designers what they have sold (often followed by: “Oh no, why did you sell THAT??”) and another cost when the designers have to explain to production what they want made (often followed by: “Look what a stupid design they have made – if only they understood our world! And also, what idiot SOLD this in the first place?”). We didn’t have any losses when the original two guys were doing everything – it was in their heads, (and also it was impossible for them to sell something that they couldn’t make).
These losses would be bad enough if it was just communication time, but often you have to actually employ a full-time person to be the link – like production control or project management, or customer service, or technical support.
It’s not that the people are bad in any way, but the system makes it difficult for them when they are in silos. Which brings me to:
Reason 2 – The inefficiency of fixed roles
As a business grows it is quite normal that the jobs it does have to be split up. The more it grows the more split up the jobs become. In the case of an accounts department in a larger enterprise, you may have different people responsible for the different ledgers (purchase, sales and nominal). The role of an individual is confined to the role specified in their contract of employment.
So if, using the example above, the company has limited purchasing in a period then what does the purchase ledger clerk do? Their skills are specific and not transferable their contract of employment defines the hours and the skills they are expected to bring. What can they reasonably be expected to do when there is no work in their domain? The answer usually is to slow down.
The people are just victims of the system, usually doing the best they can within their own domains. But it is harder to remain motivated in a divided-up world:
Reason 3 – Lack of ownership
When you only do part of the job, say the design, you can blame any problems on the person who sold it or the person who made it. And even if you’re not the blaming kind, you just don’t feel that you OWN that product. (The accountant may have absolutely no idea as to what the business does, that he is accounting for. The machine operator may have no idea he is making an important part for an aircraft).
And if you DO feel that you own it – which is great of you by the way – you still might feel that the other people are interfering with it and diluting it. The production people often never meet the customer, so there’s less incentive to make it great, and less understanding of exactly what that person wants, or why. It feels as if sales and design and finance are deliberately trying to make your job harder, because they have different objectives to yours. Of course they’re not really, but their KPIs are probably forcingthem to do things that result in making your job harder.
I’ve worked in companies that were so big and annoying that it was really hard to care. You end up spending 90% of your time fighting the system, just trying to get a better deal for the customer, or to reduce the stupid wastes of time and money that go on. Trying to prove (against the drawing office) that the design isn’t cost efficient, trying to prove (against Procurement) that we need a better supplier or (against Finance) that we need a new machine, or trying to prove (against Operations) that lead times are longer than they need to be in the factory and that’s holding back sales. Meetings, politics, feuds and games, all adding to the cost.
If only the system could be designed so that everyone was pulling in the same direction!
Reason 4 – Carrying the weak ones
Did you know that research has shown that in a tug of war you can measure the force that people pull with when it’s 1 vs 1, and once you have 8 vs 8 they are only pulling with five times the force, not eight? (The Ringelmann effect or Social Loafing, 1913). This is because of communication losses (anyone will know in a rowing Eight that the precision of your timing makes a huge difference to the power you can produce) but also that you can pull with less effort and nobody will know. You can either be weaker, (not your fault), or be lazier (maybe still not your fault since your boss has failed to motivate you?!) and nobody can tell.
So because some people perform better than others, when you make organisations larger you don’t get the expected output from everyone, especially when the system is already annoying as described above, because
4a) There is less incentive because individual performance isn’t visible. The people in Ringelmann’s experiment weren’t bad people, they were reasonable people like you and me – it was just how we all respond to the situation we are put in. We work better if we can see the results of our own individual performance.
4b) The bad ones can hide. A small minority of people can and will get away with deliberately doing less work.
Back to 4(a) a minute: “But we DO have performance measurement / performance management surely?”. The answer is sometimes, a bit, but it’s really hard. You can measure the speed of a person on a machine in the factory, but is it their fault if they have a harder job or more smaller jobs? Sales people may have easier geographical patches to cover, lucky breaks, and time lags before results show. And designers – how do you measure THEM? And all of these measures are one step removed from the effect they have on the actual MONEY we make – do more phone calls really result in more income? Does cheaper buying really result in more profit?
If only we could make it simpler to measure the actual effect a person has on the MONEY, directly…
It’s been 105 years or more since Max Ringelmann carried out his famous experiment yet we have never applied this learning to our Organisational Designs.
And if only we could expose each individual person to the clear light of measurement, so we, and they, knew how much effect THEY had on the money, directly…
Then the good ones would show and could be rightly rewarded, there would be a reason to put in the effort, and each person would have genuine ownership.
But how to do this??
Imagine you’ve got a company with 80 people in specialised roles producing windows, or anything else for that matter, and someone comes along and says “Get everyone to do everything”. Get everyone to do a bit of selling, a bit of designing, a bit of making, a bit of finance and quality control – everything. “That’s impossible!” you would cry.
But we did it when there were just two people! I do it in my training business, I sell and design and present and photocopy and plan and invoice. (And I love it! I would hate to present a course designed by someone else! And nobody else can really sell what I do because the customer wants to meet the person who will deliver it, which is me). Lots of builders do it. Most self-employed people do it. Of course there are some things like maybe a skyscraper that HAVE to have a large number of people to build it, due to skill mix and lead time, but what if YOUR business was like my windows example – it COULD be done by one or two people and then multiplied up? Don’t assume it can’t be – it’s always hard to see that starting essence, that microcosm, once it’s become big.
Imagine going back from a complicated company of specialised people back to a whole lot of pairs of people, each pair doing everything. And each pair would do five windows a week (and probably enjoy doing that by the way) so you could either make 80 windows with only 16 pairs = 32 people instead of 40, that’s a big cost reduction which you can use for either more profit or cut prices and sell more. Or you could use your 20 pairs of people to make 100 windows a week, you’d be producing and selling an extra 20 a week which would be handy income and profit.
It’s a completely new and different way to run a company.
But how to get there? How to recruit and organise that many all-rounders? What to do with the people who don’t want to play, or aren’t capable of playing the new game? Not everyone is a flexible multi-tasker. If you have to pay more to get these ‘superior’ people, will that soak up all the extra income you can make? How to organise all the pairs? How to stop them leaving and setting up on their own? How much management would be needed? (Perhaps none??) Would there be some things that couldn’t be taken out of the centre, for example some very specialised skills that are only needed occasionally, and if so, what, and how would be handle those?
That will be the subject of a future post. Or, if you want to know more about all this, you think it might even work for YOUR business – email me!
onwards and upwards