Posts 6 – 10
The problematic relationships between the individual and the organization – Part 1
“Tell me how you measure me and I’ll tell you how I’ll behave.”
This famous citation states an inherent conflict between the individual and the organization. The individual, according to Goldratt, behaves according to the way he is measured, which is not necessarily to the good of the organization.
Why would an organization measure its employees???
Do you measure the performance of your spouse, children or close friends? You have certain expectations, which are not always met, but do you look for ways to quantify your expectations?
What is the gain from performance measurements?
One real and important gain is to know whether you need to analyze much deeper how come the results deviate from your initial expectations. In order to get that objective you need recorded expectations. Now – expectations are never one clear number – are they?
As a father I expected from my children to achieve good grades from school, say B and above. Getting a low grade did not call for punishment, but we tried to understand the reason and what can be done next time. Other parents push their children much more. Is the push valuable? Certainly, treating the grades as performance measurements that invoke positive and negative reactions would improve the grades. The more important question is: would they improve the life of the children?
Do performance measurements improve performance?
Goldratt has shown us how flawed measurements could reduce global performance. There are three different causes for a performance measurement to radiate the wrong message:
- They are the wrong measurements.
- Dependency – the measurement depends not just on my performance, but also on other factors, like the performance of others.
- My performance varies. Some of the causes for the variance can be explained by external factors (like headache) and some have no clear explanation.
How significant is the variation factor? I like to watch sport on TV in order to spot the unexplained variation in the performance of the players. It is most noticeable in Tennis how the number of “unforced errors” and the “first serve percentage” fluctuate within one game. It demonstrates that the variation in our ability to do things is quite significant.
When the performance measurements ignore the impact of dependency and variation, the employee distrusts the measurement and is led to do whatever he can to manipulate them to his own sake.
See what we have got so far: ignoring complexity (dependency), ignoring uncertainty (variation) both are direct consequences of lack of trust.
Trust, or the lack of it, is a critical factor in life as well as in business and most certainly in managing organizations. The fact that the organization does not trust its employees and thus uses performance measurements actually causes the employees to distrust their bosses and pushes them to plan carefully their behavior – against the interests of the organization.
It all starts with the relationships between the CEO and the owners (shareholders and possibly the board). Every CEO likes to make sure the organization achieves the results that please the owners and makes him/her a highly appreciated CEO.
An obvious difficulty for the CEO is to make sure all other employees do whatever they need to do to achieve the results. Thus, when possible, they impose performance measurements to push their subordinates to make more efforts. Do they really make more efforts? Or do they just manipulate their available capacity according to the specific measurements and nothing else is important?
A simple cause-and-effect tree to showing the rush for using performance measurement on employees
Is there anything wrong with the above logic?
What do you think of entity 2.3 – is it really valid in reality? Let’s discuss it further to lead us to the direction of a solution.
The problematic relationships between the individual and the organization – Part 2
A common belief is: Many employees don’t want to make all the efforts they are required to make
The point is not so much whether the belief is true, but whether the belief is self-fulfilling, meaning employees try to avoid too much work and efforts because they realize they are not being trusted. When you are not trusted then the objective of feeling good with what you have done evaporates into thin air.
Suppose management succeeds in creating a culture of trust. Would the employees be willing to be loyal to the organization they work for? By ‘being loyal’ I mean do whatever it takes to achieve more of the organizational goal.
Employees come to work because they need the money. This starting point has several ramifications.
- If the employees think they are getting less than what they deserve – then they become frustrated and hostile towards the organization, which is the opposite of loyalty.
- As the money is important the employees choose to stay in the organization until something better pops up. This forces them to try hard to be considered “good”, or at the very least “OK”.
Other ramifications are caused by the mere fact that the employees spend large part of their life in their work place:
- Most employees prefer to “do something” while they are at the work place, and so they usually work willingly according to what is expected from them, unless they have a reason not to.
- Employees that have the passion to excel look for an appropriate chance.
An important observation:
It is easier for an employee to be loyal to the organization than to the organization to be loyal to the employee.
The organization always looks at the cost and compares it to the perceived value from the employee. However, as we have seen, that value is not easy to assess. It is even more difficult to assess the indirect damage of being disloyal to the employee, as many of the employees become disillusioned and even hostile in a hidden way.
From the above it seems that even when the management trust their employees and is loyal to them there is no guaranty that all the employees would be loyal to the organization. It is enough that a specific employee believes he is underpaid to cause him to betray that trust. And if this is the case then the organization should actively look for signals of low-motivation and disloyalty from the employees.
However, the need for making sure all employees are loyal does not necessarily mean the solution has to be the use of personal performance measurements.
What are the true needs of organizations in assessing their employees?
I can see two such needs:
- Identify employees that generate damage. Some might simply lack the appropriate capabilities. Others might be ‘rotten apples’ – those who are disloyal. Such people might influence others to become disloyal.
- Identify potential ‘stars’ – employees who can bring huge value in the future – if they are nurtured in the right way.
All the rest are good employees who bring value when management makes it possible. Is there a point of measuring performance in a more accurate way?
If the organization would maintain a culture of respect and loyalty then the employees will do their best to organization because this is their work – a substantial part of their life. What the organization has to do is to make sure there is a certain code of work and when there is a signal that the code is broken then, and only then, those employees should be chased out.
In some cases, the organization has no choice but to let people go because they cannot yield value anymore. The point is that when this happen management needs to recognize it as its own failure! Management then has to be aware that they need to re-build the trust and loyalty of the employees who are still in the organization to prevent the next disaster.
The Mysterious Power of Synergy
Synergy means that a system can achieve more, sometimes much more, than the sum of its parts. This extra power is not easily understood and thus it is difficult to manage.
It is straight-forward to see the value of synergy in sports. You can build a basketball team by bringing together great players, each excels in one particular role, and let them play and hopefully win. Does it ALWAYS work?
When it does, one might get the impression that the power of the team is far more than the accumulated level of each player. This is when the mystery of synergy works.
When it does not work then there is no ‘team’ but just a group of excellent players, each playing according to his own interests. We in TOC call it: local thinking rather than holistic. I think it is quite natural that a person thinks and acts based on his own interests. The only rational way to cause a person to think holistically is to make a convincing argument that synergy does work, in other words the success of the whole would contribute much more to the person than whatever he can achieve by himself.
Theoretically there is a way to create such a clear win-win structure that the interests of every player are exactly the same as the holistic ones. I understand the theory, but I admit I have not been able to construct such a network of win-wins in reality. Still, the intuitive recognition that synergy exists in a big way could help in aligning different parts into a holistic system.
Very large organizations use their natural synergy to gain much more value. We can recognize some of the causes of such synergy, and by that reduce its ‘mysterious’ impact. When some of the products/services of a giant company get excellent recognition the other services gain recognition as well. The stability and security radiated by large organizations is a synergy asset and its cause is pretty clear.
However, many other causes for synergy are not all that clear, but this does not mean they do not exist. A strange way of speech calls ‘chemistry’ the effect where two players play with great understanding of each other and thus generate synergy. It is funny, on my side, to call a ‘scientific’ name something that is hard to map the cause and effect of. Still, in reality we see how some product-mix have more impact than others. One needs to look for the overall characteristics of a ‘package’ to understand the advantage of one supplier on another rather than go to the details of every product. It is exactly as recognizing a forest rather than trees.
Project-portfolio is a managerial topic that calls for assessment of its synergy. It means that when we consider a new project there is a need to assess the somewhat vague impact of adding this project to the portfolio and predict the total impact of the whole portfolio on the organization.
As such assessment is mainly intuitive we need to recognize it as ‘partial information’ or basically uncertain information. We should NOT ignore the synergy impact just because we are unable to predict its exact impact. While we recognize “never say I know” we should not take the position of “we don’t know”, because we do know something. We are able to carefully assess the impact of synergy as a reasonable range and thus take the range as part of the decision making process.
Any good Strategy planning has to strive to gain synergy from all the initiatives that are integrated into one effective decisive-competitive-edge. Synergy is a critical part in the creation of ever-flourishing organization and it requires a holistic view and good tolerance of using ‘partial information’ to guide our decisions.
Have a quick look at the small cause and effect branch. Is the logic sound?
Can it be that in reality effects 1-3 are valid, but effect 4 is not?
We can come up with various explanations of insufficiency in the above logic. For instance, if the clients are not free to make their own decisions, like in totalitarian countries, then could be that the regime prefers something else. Another explanation might be that the brand name of Product P1 is much less known.
The generic point is: the vast majority of the practical cause and effect connections are not 100% valid.
In other words, most good logical branches are valid only statistically, because they might be impacted by uncertain additional effects that distort the main cause-and-effect. Actually the uncertainty represents insufficiencies we are not aware of, or we know about them but we cannot confirm whether they exist or not in our reality. For all practical purposes there is no difference between uncertainty and information we are not able to get.
This recognition has ramifications. Suppose we have a series of logical arrows:
eff1 –> eff2 –> eff3 –> eff4 –> eff5
If every arrow is 90% valid (it is true in 90% of the cases) then the long arrow from eff1 to eff5 is only 60% valid.
The point is that while we should use cause-and-effect because it is much better than to ignore it, we can never be sure we know! The real negative branch of using the TP to outline various potential impacts is that frustrated people could blame the TP and its logic and refrain from using it in the future. This false logic says: if ([I behave according to the TP branch] à [Sometimes I do not get the expected effect]) then [I stop using the TP].
The way to deal with this serious and damaging negative branch is to institute the role of uncertainty in our life and the idea that partial information is still better than no information – provided we take the limitations of being partial seriously. We can never be sure that whatever we do will bring benefits. However, when we use good logic then most-of-the-time we’ll get much better benefits than the total damage.
It’d be even better to consider the possibility of something going wrong in every step we do. This would guide us to check the results and re-check the logic when the result is different than what we have expected. It is always possible that there is a flaw in our logic and in such a case we better fix the flawed part and gain better logical understanding of the cause-and-effect. When we do not see any flaw in our logic – there is still room for certain crazy insufficiency to mess our life and this is the price we pay for living with uncertainty.
The Non-Linear Behavior of the Cost of Capacity
And its impact on decision making
Part 1 of a series on using T, I and OE for key decision making
Challenging widely accepted paradigms creates new opportunities
The terminology in Physics does not use words with dramatic intensity. However a certain incident in the late 19th century was so embarrassing that it was called “The Catastrophe in the ultraviolet” and by that caught my imagination. The story is about radiation emitted from a black box and the mathematical equations, according to the knowledge of that time, showed that the radiation should be infinite. Well, it was easy to see that this is NOT the case. What eventually solved the riddle was the discovery, understood through Quantum Theory, that the frequency of the emitted radiation is not continuous but discrete. As it turns out discrete functions behave very differently from continuous functions.
There is a tendency in the social science circles to assume that the main functions, describing the behavior of key variables, like capacity or the cost of capacity, are continuous.
I claim that all cost functions in reality are discrete. This is most certainly true when we speak about the cost of capacity.
All organizations spend their overhead expenses on providing enough capacity that is required for the business. The usual way is to purchase a certain fixed amount of capacity, like space for storage or offices, a machine capable of processing a certain quantity per hour and employees who agree to work N hours every week.
The cost of providing that capacity is fixed whether you actually use all that capacity or only part of it.
This means that using 25% of the available fixed amount of capacity, or using 85% of that quantity costs exactly the same! This is a basic non-linear behavior and its impact on the decision what to do with the capacity at hand is HUGE.
Once all the available capacity is used then new options of using additional capacity open.
But, the principle of being able to purchase capacity only in certain fix sizes is still on.
An employee might agree to work another hour, but usually not a part of an hour. So, if you need just 34 minutes of overtime the cost is one hour of overtime, which is also considerably more expensive than the relative cost of a regular hour.
So, when we look on the behavior of the cost of capacity we realize the following behavior:
The initial cost is HIGH. Then it becomes zero (0) until a certain load is reached. Then the cost jumps by another fixed amount. Using more capacity the cost is zero until the next fixed point.
This actual behavior is quite different from the current practice of associating the average cost to any use of capacity.
This is the kernel of the TOC challenge at cost accounting!
So, the simple principle of cost accounting is invalid in our reality. This use of the average cost of capacity has led all the way to the fiction of cost-per-unit.
Do we really need “per unit” measures to support sales decisions?
We still believe in simplicity, but reject the wrong simplicity. What could be simpler than have a way to measure the direct impact of a decision on the bottom-line?
Let’s now look on another realization:
There is no hope in hell to use all the available capacity!
This is certainly in direct clash with the common paradigms.
There are three causes for being unable to use all the available capacity to generate value:
- TOC has demonstrated the need for protective capacity to provide good and reliable delivery performance.
- The market demand fluctuates in a faster pace than our ability to adjust the available capacity.
- Capacity is purchased only by certain sizes. This is similar to what has been already stated above.
What are the ramifications for decision making?
When a new market opportunity pops-up we need to consider the state of the capacity usage of every resource. When there is enough excess capacity the usage is FREE! When the additional load penetrates into the protective capacity then there is need to carefully check the cost of Additional capacity or the ramifications of giving up some existing sales.
This is very different generic approach than the existing management accounting tools!
Next post would explain more on how to calculate the impact of an opportunity on the bottom-line, without using any “per-unit” kind of measure that would force us to use averages and get a distorted answer.