The Myth of Business Efficiency

By Gordon Rugg

There’s a widespread belief that the public sector has much to learn from business, in terms of efficiency. There’s also a widespread belief that Bigfoot exists. One of these beliefs has some correspondence with reality, and has a fair chance of making the world a better place; it’s not the one about business efficiency…

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Images from Wikipedia; full credits at the end of this article.

Survival skills in a competitive world

Businesses exist in a competitive world; this might be taken to imply that they know a lot about survival.

When you look at the numbers, though, businesses look like raw amateurs in the survival game. For starters, only about 50% of businesses survive their first few years. That doesn’t inspire confidence.

A plausible counter-argument is that the high attrition rate among new start-ups just reflects amateurs being weeded out, and that real businesses survive much better, once they’re past the critical first few years. That’s plausible, but how does it match up to reality?

If you look at a list of the oldest businesses in the world, it looks pretty impressive at first sight. There are about sixty businesses that date back to before 1300. However, when you examine that figure more closely, it looks much less impressive. The vast majority of those businesses are small family firms, and are inns, hotels, breweries, vineyards, and/or specialist suppliers of religious goods, such as makers of temple bells. There are just a handful that are decent-sized commercial operations.

A counter-argument is that surviving from before 1300 is pretty impressive regardless. Again, though, when you look at the broader context, that argument doesn’t stand up for long. There are about a dozen universities that have been continually in operation since before 1300, and there are schools in the UK that have been operating continuously since the seventh century; the King’s School at Canterbury has been open since 597. When it comes to long-term survival, academia knows a thing or two.

The same is true of local government. For instance, if you’ve ever wondered why a lot of English towns have the word “market” in their name, it’s because of 13th century government policies, which regulated official markets. Some examples: Market Drayton received a royal charter in 1295, authorising it to hold a market each Wednesday. It still holds a market every Wednesday. Market Deeping has had a regular market since at least 1220. Market Harborough has had a market every Tuesday since 1221.

That’s just the official markets. The towns themselves have been around for much longer. The vast majority of the towns listed in the Domesday Book of 1077 are still in existence, and were long established at the time of Domesday, with many of them going back well into Saxon times. Each of those towns would have a continuous management system of mayors, councils, etc, that also went back to Saxon times. So, local government has a pretty impressive track record in terms of survival skills, both in terms of survival rates and in terms of longevity.

Overall, then, businesses don’t have an especially impressive record in terms of long-term survival skills. Perhaps, though, they’re more impressive in other ways?

Nature red in tooth and claw

A common belief is that the business environment is driven by the survival of the fittest. This is a phrase that tends to drive evolutionary ecologists, who know about competition in nature, to rage or melancholy.

In 19th century English, the phrase “survival of the fittest” was ambiguous. It could mean either “survival of the best fitting” (i.e. best fitting to the environment) or “survival of the most physically fit”. The first meaning more closely reflects how evolution actually works. Unfortunately, the second interpretation, which is a mangled half-truth, has become very widespread. That’s understandable; it’s much more flattering for a chief executive to imagine themselves as a strong, athletic top predator than just as someone who happened to fit well with the environment.

Again, if you look at the numbers, you soon find that the popular image of “survival of the most physically fit” doesn’t hold up very well to the evidence.

For instance, cheetahs are the fastest land animal, and are often cited as examples of nature producing perfection.

In reality, though, cheetahs haven’t done too well in evolutionary terms. The surviving species went through a population bottleneck a few thousand years ago, with just a tiny number managing to survive; this has left them with very little genetic diversity. The American cheetahs became extinct around the same time.

Being a fast, athletic predator isn’t a guarantee of evolutionary success; slow, unathletic, inoffensive species such as the brown-throated sloth and the nine-banded armadillo are doing a lot better than cheetahs. If you’re looking at widespread, long-term survival as an indicator of evolutionary success, then the real success stories are much less glamorous; for instance, cockroaches have been around since the time of the dinosaurs, and barnacles have been doing very nicely for themselves since about 500 million years ago.

Overall, then, the idea that competition leads to the selection of lean, muscular, physically fit champions is a long way from reality.

Organisational efficiency

So, business can’t teach a lot about how to survive in the long term, and the “competition leads to fitness” claim is seriously misleading. It can be argued that these are both missing the point of what business is really about, namely organisational efficiency.

Unfortunately, this argument also falls apart fairly swiftly.

Within every organisation there are roles and people; within the overall system of the organisation, these roles and people are subsystems. It would be nice to think that what’s good for the subsystems is also good for the system, and vice versa. However, that’s not actually the case.

Often, what’s good for the individual within an organisation is often bad for the organisation, and vice versa. A classic example is economic crashes caused by personal bonus systems that encourage individual staff members to engage in behaviour that rewards them well, but that is disastrous for the bank or finance company that they work for. Often, there’s no long-term cost to those staff members when the organisation collapses; by that point, many of them will have made enough money to live comfortably for the rest of their lives.

Even when a business is demonstrably efficient in terms of its internal processes, this often comes at a cost to someone else. These often take the form of externalities, i.e. costs such as pollution costs that are borne by other parts of society.

Another form of broader cost comes from business monopolies, which are efficient from the viewpoint of the monopoly holder, but are bad news for everyone else if the monopoly holder uses that power to inflate prices.

A third form of broader cost from efficient businesses is gaps in coverage. A classic example is “orphan diseases”. These are diseases which don’t affect enough people to create a financially viable market for a pharmaceutical company. This may make financial sense for a business, but it’s not much of a prospect for the people suffering from those diseases.

If you’re a business, you usually have the option of deciding on your market. If you’re in the public sector, you don’t have that luxury. Local government has to provide services for everyone; public healthcare has to provide treatment for everyone. This means having to deal with a significant proportion of difficult cases that require a lot of time and resource, and this often means creating processes and procedures specifically to handle those difficult cases.

From the outside, those processes and provisions can look like bureaucratic inefficiency; from the viewpoint of the people on the inside, they look a lot more like having a sensible, thought-through set of strategies in place, so that the system can get the job done when the rare cases come along.

Closing thoughts

One piece of advice that I give my students about efficiency is this: If you ever find yourself in an organisation that prides itself on its efficiency, then start looking for a job somewhere else as soon as possible.

The reason is that “efficiency” is a much misused word. Efficiency is usually viewed as a self-evidently good thing. That isn’t always the case.

With organisations that pride themselves on their efficiency, for instance, “efficiency” often takes the form of not having any superfluous staff. That’s fine while everything is going well, but what happens when winter flu does its rounds, and staff call in sick? What happens is that there’s nobody who can cover for them, because everyone’s already fully occupied with their own work.

This is why sensible organisations that want to stay in existence for a reasonable length of time will have some slack in their system, either by deliberate design, or by letting entropy and human creative laziness take their toll. In the short term this slack is inefficient; in the long term, it’s vital.

So, “efficiency” is a concept to be treated with caution. As a rough rule of thumb, if you can’t explain the difference between system optimisation and subsystem optimisation, you should be wary of the term “efficiency”.

Where does this leave us in terms of the original idea about the public sector having much to learn from business? In brief, it’s an idea that’s fractally wrong; the more you examine it at multiple levels, the more you find wrong with it. However, it sounds good, and it sounds truthy, and it flatters the egos of rich people in industry who make donations to political parties, so it’s currently fashionable.

That’s not the most encouraging of notes on which to end, so here’s a nice, comforting picture of two sea otters holding hands, so they don’t drift apart in their sleep. Sometimes the survival of the fittest produces outcomes that leave you with a good feeling…

sea otters

Images from Wikipedia; full credits at the end of this article.

Notes and links

Bigfoot:

No, I don’t think that Bigfoot exists, but I do think that a large wild bipedal non-human ape is ecologically plausible, and that some of the footprint evidence initially looked plausible. The debate about Bigfoot has also got at least some people thinking about how we should treat non-human primates, which I count as a good thing.

Picture credits:

“Cheetah Kruger” by Mukul2u – Own work. Licensed under CC BY 3.0 via Commons – https://commons.wikimedia.org/wiki/File:Cheetah_Kruger.jpg#/media/File:Cheetah_Kruger.jpg

“Bradypus variegatus” by Christian Mehlführer, User:Chmehl – Own work. Licensed under CC BY 2.5 via Commons – https://commons.wikimedia.org/wiki/File:Bradypus_variegatus.jpg#/media/File:Bradypus_variegatus.jpg

“Sea otters holding hands, cropped” by Joe Robertson from Austin, Texas, USA; cropped version by Penyulap. – Cropped from File:Sea otters holding hands.jpg.. Licensed under CC BY 2.0 via Commons – https://commons.wikimedia.org/wiki/File:Sea_otters_holding_hands,_cropped.jpg#/media/File:Sea_otters_holding_hands,_cropped.jpg

Background context:

There’s more about the theory behind this article in my latest book:

Blind Spot, by Gordon Rugg with Joseph D’Agnese

http://www.amazon.co.uk/Blind-Spot-Gordon-Rugg/dp/0062097903

Overviews of the articles on this blog:

https://hydeandrugg.wordpress.com/2015/01/12/the-knowledge-modelling-book/

https://hydeandrugg.wordpress.com/2014/09/19/150-posts-and-counting/

https://hydeandrugg.wordpress.com/2014/04/28/one-hundred-hyde-rugg-articles-and-the-verifier-framework/

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