Efficiency is a key facet of operations management, but it can be a double-edged sword. Here’s why, as leaders, we should all cut ourselves a little slack.
In 1913, Henry Ford installed the first moving assembly line for the mass production of cars, reducing the time it took to build an entire vehicle from more than 12 hours to just 93 minutes.
In 2013, Caravana, the fastest-growing used car dealer in the US, launched its own time-saving initiative for the industry, introducing fully automated, coin-operated car-vending machines in a bid to make the buying process faster, easier and less painful than the traditional dealership process (and to attract millennial customers).
Both are examples of efficiency in action – which is all about reducing wastage of labour and materials and increasing output. It’s hard to imagine an organisation that doesn’t want to make the best possible use of its resources.
Efficiency, after all, lies at the heart of operations management, which is concerned with converting materials and resources (including people) into goods and services to maximise profit, balancing costs, revenue and customer needs. It clearly makes sense to seek out continuous improvements – as long as these do not impinge too heavily on quality or morale.
The quest for efficiency is both strategic and tactical, requiring us to plan, forecast and adjust as things change and have an eye on robust day-to-day processes and cost management – all the while maintaining the highest quality standards and looking for those improvements.
It’s about a whole range of functions from managing inventory to product design; from logistics and supply chains to facilities management and capacity planning. For example, we may examine and negotiate all bills and look to reduce office overheads – such as physical office space in the move towards remote working. Or we could interrogate and map key processes to review and improve them.
We may look at our talent solutions more holistically, engaging gig workers rather than permanent staff in order to scale up and down at speed. And we may automate simple processes to make better use of human skills, while removing predictable workflow interruptions, making meetings more productive and improving prioritisation and delegation.
Increasingly, organisations are also aiming for eco-efficiency (a term coined by the World Business Council for Sustainable Development in its 1992 publication Changing Course).
This involves reducing ecological damage to a minimum while maximising efficiency; for instance, eco-efficient companies use less water, material and energy while recycling more.
When looking for efficiencies in any area of the business, there are, however, some golden rules to follow. First, we must ensure we truly understand where time, money (and energy) are being spent, so that we know what to cut or change and how this will add value for money. We must also differentiate between ‘good’ and ‘bad’ costs and predict the potential consequences of efficiency interventions.
This, however, is riskier than you’d think since the idea of ‘waste’ can be subjective. ‘Good costs’ are generally defined as those expenses that contribute directly to the business’ value proposition, while ‘bad costs’ do not add tangible value and may be incurred as a result of waste. In truth, though, some costs that seem unnecessary at first glance (such as an annual Christmas party or retained office space) may have a great deal of hidden value – and cutting them could do more harm than good.
It makes sense to ask frontline employees where efficiencies can be made as they are often better placed than senior management to note genuine waste in the system and to understand unintended consequences of removing slack. This is also empowering for staff and helps to embed behavioural change.
Last (but not least), we must always align efficiencies with our organisation’s strategy, mission and purpose – or risk undermining everything our people (and customers) believe in. For example, it’s all very well putting work-life balance at the core of our values, but if we cut staffing levels to the bare bones, this does not feel authentic; similarly, marketing ourselves as an ethical organisation may backfire if we use cheap foreign labour or unscrupulous suppliers.
Even when we face pressures or crises, efficiencies must hold true to our guiding principles – or we face reputational repercussions.
The search for efficiency in business is, of course, nothing new. Important contributors to this mission include 18th-century economist Adam Smith, who popularised the concept of the division of labour – where dividing the production process into different stages enables workers to focus on specific tasks, increasing overall efficiency.
In the early 20th century, scientific principles were applied to management by engineer Frederick Winslow Taylor. Dubbed the ‘father of scientific management’, he investigated the time it takes to do tasks, the amount of recovery time needed between them, and how to break down tasks into simpler components that could be delegated.
Henry Ford built on these principles with his moving assembly line, and in the 1950s, the Toyota Production System (TPS) revolutionised manufacturing, introducing a ‘lean’ and customer-focused philosophy of continuous improvement (Kaizen). This maximised production efficiency through the elimination of waste, using a ‘just-in-time’ concept of making “only what is needed, when it is needed, and in the amount needed”.
Slipping its manufacturing origins, TPS came to underpin Lean project management methodologies – described by researchers James Womack and Daniel Jones as “...a way to do more and more with less and less – less human effort, less equipment, less time, and less space – while coming closer and closer to providing customers exactly what they want”.
While Lean is primarily concerned with reducing wastage, Motorola’s data-driven Six Sigma methodology, developed in the 1980s, roots out variance and solves problems, creating processes that can replicate the same results over and again. Combining these ideologies creates the hybrid Lean Six Sigma, offering a framework for waste and variant reduction in a cycle of continuous improvement.
Also adding to the efficiency toolkit is Agile project management, designed for software development teams as a time-focused, iterative way of achieving continuous value delivery.
Its efficiency comes through speedy insights and learnings.
While the traditional process of developing a new product or service is lengthy and highly sequential, Agile creates efficiency through ‘sprints’ – each of which is a source of rapid learning and discovery, urging us to make a decision about what to build on, refine or remove. Its ‘fail fast’ mantra can improve the quality of product design and speed to market – while encouraging cross-functional team collaboration.
Lean and Agile can actually be combined, according to McKinsey & Company; when we drill down to its foundations, many of Agile’s guiding principles resemble those of TPS, including Kaizen, Kanban (the visualisation of workflows) and the focus on maximising customer value. McKinsey outlines a ‘best-of-breed’ model which is being used by a growing number of companies to generate even greater efficiencies and cross-functional improvements.
However, while efficiency was once considered an unmitigated virtue, there is growing realisation that taking all the slack (and people) out of our systems leads to reduced engagement, resilience and innovation.
When it comes to efficiency, then, it is quite possible to have too much of a good thing. According to Aristotle, legend held that King Midas died of starvation due to his “vain prayer” that everything he touch turn to gold. This rather undermines the popular claim that you can never be too rich or indeed too thin. And so it is with efficiency.
While doing things as efficiently as possible might be a good thing in certain contexts, we pursue it relentlessly at our peril. Organisations are more than their bottom line – and efficiency doesn’t always mean effectiveness.
For Margaret Heffernan, former CEO and professor of practice at the University of Bath School of Management, the belief that efficiency makes everything better is a dangerous myth.
Using air travel as an analogy, she notes that while the process of checking in passengers, keeping them fed and watered at the airport and loading their bags is complicated (and rightfully enhanced by shrewd efficiencies), it is not nearly as complex as what happens – or may happen – when then their plane leaves the ground. In the air, there are far fewer guarantees (and a lot more geese).
Because of this, as Heffernan points out, aircraft are designed with more engines and technology than they actually need – just in case something fails: “Robustness, not efficiency, is their protection against the unpredictable.”
As individuals, we need to build our personal resilience in the face of uncertainty and unpredictability – and so do our organisations.
To survive and thrive as leaders, we also need the ability to determine what is merely complicated (and could benefit from judicious cuts or automation) and what is complex, requiring human judgement and creativity. That requires us to balance a drive for efficiency (in the right places) with sufficient robustness or resilience to deal with the unforeseen and to anticipate the future: to understand when efficiency makes sense and when it doesn’t.
Fail here, and we too could take a perilous nosedive.
In his article In Praise of Inefficiency, Shaun Tan, founder and editor of e-magazine Rabbit Hole, highlights the dangers of wielding the cost-cutting scalpel with too much vigour. He references former US president Donald Trump’s 2018 decision to fire the country's entire pandemic response chain of command. After all, how likely was it that a pandemic would come down the line?
“Some of the people we’ve cut, they haven’t been used for many, many years,” said Trump at the time. “I’m a businessperson, I don’t like having thousands of people around when you don’t need them.”
While his decision almost certainly had a negative impact on the US federal government’s response to COVID-19, many business leaders similarly pride themselves on their ability to reduce spending by cutting ‘non-essential’ departments or personnel. Such is their determination, says Tan, to “squeeze every ounce of productivity from the system”.
But this is not always a wise move.
Just as aircraft manufacturers must prepare for geese in the engine, we – as leaders – must maintain a constant preparedness for potential ‘black swans’ – a term coined by Nassim Nicholas Taleb for the improbable but highly consequential events that will probably never happen… but absolutely could.
Think of a tornado passing through our organisation’s main manufacturing unit. Or, yes, a deadly virus. In such an event, it’s that resilience that counts. Yet this can be compromised by decisions based on a zero-waste culture and just-in-time efficiency.
Cardiff University’s Paul Nieuwenhuis reminds us what humans can learn from nature’s resilience. He notes how a shift in environmental conditions – for example, a change in temperature or the availability of food – can place a previously marginal species in the perfect position to become more dominant. Nature adapts because it is so diverse; a quality we might read as ‘wasteful’ in other contexts.
Similarly, nature reminds us that some ‘wrong’ things are actually ‘right’, even though they are hard to justify. Take the peacock’s tail. Would we really want to be without such stunning inefficiency?
In business, it is similarly advisable to retain a broad portfolio to protect (or indeed profit) from changes in our own environment. As Nieuwenhuis explains, this gives us “the flexibility to shift focus and downgrade core activities to a more marginal role, and vice versa”. He cites the example of Peugeot, a company founded more than 200 years ago – when there were no cars.
The company started life as a steel foundry, with an expertise in making and processing thin steel, initially for hand tools and watch springs, and then for bicycles and cars. “At each stage, the firm had a range of core products, and added more marginal activities, often in response to changes in taste and fashion,” says Nieuwenhuis.
By contrast, Toyota – which understandably tends to be presented as a prime example of efficiency due to its Lean production systems – was badly affected by the Tohoku earthquake and tsunami in 2011, which exposed vulnerabilities in its supply chain. Only then did the company take steps to build resilience; for example, by moving towards greater commonality of components across models and encouraging suppliers to produce those components in multiple locations.
Author Roger Martin also argues for a greater emphasis on organisational resilience. In The High Price of Efficiency, he cites the example of California’s Central Valley, which – due the perfect growing conditions – now produces more than 80% of the world’s almonds.
While it’s unlikely that a ‘black swan’ event will occur (such as a period of extreme weather or an almond-eating swarm of insects) it’s not impossible. Then, hey presto!, it’s goodbye to the majority of the world’s almond supply.
Martin also draws the distinction between being optimally adapted to an existing environment (which is what efficiency delivers) and being adaptable to changes in the environment (which is what resilience delivers): “Resilient systems are typically characterized by the very features – diversity and redundancy, or slack – that efficiency seeks to destroy.”
There are a number of things that policymakers can do to foster resilience. For example, tightening up the enforcement of anti-trust policy to avoid market domination by a single behemoth. This might prevent a company (such as Meta) using deep pockets to fund its own subsidiary (Instagram) to the detriment of a rival (such as Snapchat).
Martin also calls on policymakers to inject a measure of “positive friction” – perhaps by deploying barriers to international trade, so that organisations can develop a healthy “immune system” by being nudged out of their comfort zone.
Such actions may help to curb efficiency creep, but as leaders, we must also build resilience within and for our own organisations. For example, when looking at efficiencies to help maximise shareholder value, we need to look at that value in the long term and in the round – and ensure our metrics reflect this.
Building resilience is also about more than just watching out for ‘negative black swans’. It also means keeping our eyes peeled for the opportunities offered by ‘positive black swans’ – the creative breakthroughs that can emerge when we not only look to maximise returns in the short term, but have the courage to invest in experimentation and creativity.
It might take a certain amount of bravery to keep funding the excess capacity represented by a research and development department, precisely because returns are so uncertain. And this is especially true if our shareholders are focused solely on achieving the maximum return on their capital, ideally this quarter.
Still, where would we be if former UK prime minister Winston Churchill hadn’t invested in the longest of all long shots, Alan Turing’s proto computer, which not only broke the Enigma code during the Second World War but also laid the groundwork for modern computing. Hindsight may play a role in why we favour Churchill’s decision-making over Trump’s. But the point remains: striving too hard for efficiency could be our swan song.
In his book Obliquity, top economist John Kay makes the case that goals are often best achieved when we approach them indirectly or unintentionally – in other words, obliquely.
Kay cites the example of Nobel Prize-winning chemist Sir James Black, who – after helping to build ICI’s pharmaceutical business – left to join another company (first SmithKline and then Glaxo) because he was more interested in furthering his research than in marketing his existing discoveries.
Those who enabled Black to pursue his passion also helped him to create “more shareholder value than any other man in post-war British business”. However, it was chemistry that motivated him – just as it’s a love of computing that drives Bill Gates.
Built to Last authors Jim Collins and Jerry Porras add weight to this argument, noting that visionary companies – those fuelled by core values and a sense of purpose – make more money than those driven purely by profit.
Even Wall Street darling Jack Welch (whose tenure as CEO of General Electric saw the greatest creation of shareholder value ever for the company), said after his retirement that “shareholder value is the dumbest idea in the world”.
“The job of a leader,” he said, “is to deliver to commitments in the short term while investing in the long-term health of the business”. This is because employees who benefit from job security and better rewards create better products and services; customers who enjoy better products and services are more likely to return. And it’s this (oblique) route that secures business success and thus most benefits shareholders.
Conversely, a corporate culture that extols greed is, Kay believes, “unable to protect itself from its own employees”. For example, in 2008, when Lehman Brothers fell victim to relentless profit seeking, rival Goldman Sachs survived – in part because its culture valued the practice of banking as well as the profits generated.
The quest for efficiency can also be damaging both to individuals and to our wider society.
In his 2019 film Sorry We Missed You, director Ken Loach lays bare the miseries of the “money-saving” gig-economy through the experiences of one hard-up family trapped in a vicious circle of modern-day labour exploitation.
The promised flexibility and work-life balance of the freelancer does not extend to dad Ricky (who struggles to make ends meet, despite working 14-hour shifts as a delivery driver), nor to son Seb, who can see no point in going to university when all that lies ahead is a future of fixed-term contracts and ever-present student debt.
In his call for a greater emphasis on resilience, Roger Martin also argues that the ruthless pursuit of efficiency inevitably leads to fewer companies – each with a higher market share. Fewer companies mean less competition, which in turn drives higher consumer prices and increased profit margins.
In this scenario, value is accrued by the dominant players rather than by society as a whole – just as by attracting ‘likes’ on Instagram, US celebrity Kim Kardashian increases her visibility, which in turn attracts more ‘likes’ on Instagram.
In this culture, routine labour is seen as an expense to be minimised. “Companies underinvest in training and skill development, use temporary and part-time workers, tightly schedule to avoid ‘excess hours’, and design jobs to require few skills so that they can be exceedingly low paid,” says Martin. “This ignores the fact that labour is not just a cost; it is a resource that can be productive.”
There is often a human cost that comes with ‘doing the same for less’ – or as management consultant Michael Mankins puts it “shrinking the denominator (inputs)” in the quest for efficiency. Instead, Mankins advocates productivity: “Doing more with the same” or expanding the numerator (outputs).
Mankins’ research shows that organisations can improve productivity by:
removing ‘organisational drag’ – the bureaucratic structures and processes that consume time and stop people getting things done; a place where efficiencies might make sense.
deploying talent strategically inspiring a larger percentage of the workforce.
It’s all about people. Squeezing people as hard as possible is no way to get the most out of them. And not getting the most out of our people is rarely a route to long-term business success. Little wonder that the call for a stakeholder capitalism that takes into account the interests of a wider range of stakeholders – including employees – rather than just an organisation’s funders or shareholders is gaining traction.
In The Good Jobs Strategy, MIT’s Zeynep Ton describes how some discount retailers have made a conscious effort to recruit more engaged and knowledgeable workers – people who are better able to deliver a high standard of customer service. A key element of this strategy is to build in slack so that these employees have the time to serve customers in unanticipated-yet-valuable ways.
While the term ‘slacker’ gained currency in the 1990s as a way of describing young people caught up in a sub-culture characterised by apathy and aimlessness, the idea of ‘slack’ can actually be highly productive.
Psychologists posit that creative insights are much more likely to occur after a period of ‘incubation’ in which we focus on something entirely different to the job at hand. When faced with a problem, taking time out to go for a walk or listen to sea shanties on TikTok might actually help ‘distract’ us into solving it. Theory has it that our unconscious mind continues to look for solutions even when we are no longer consciously focused on the task at hand.
Mind you, as the famous French chemist Louis Pasteur observed, “Fortune favours the prepared mind”. So, if we are to go from sea shanty to solution, even our unconscious needs a good brain to pick. Plus there is such a thing as too much distraction – as well as too little.
In a recent study, US management professors Jihae Shin and Adam Grant asked participants to brainstorm the best ways for a student entrepreneur to spend $10,000 to start a new company, comparing the amount of time participants procrastinated (by watching funny YouTube videos) with the originality of their proposals. They concluded that people who took a few short breaks tended to come up with far more creative ideas than both the low- and high-procrastinators.
As leaders, then, we should encourage our people to take time out in moderation rather than admonishing them for it.
Apple Park, the company’s circular headquarters in Cupertino, California, has been designed partly with this in mind. With a circumference of a mile and a diameter of 461m, it encompasses a 30-acre landscaped park where employees can wander and have serendipitous encounters and conversations with colleagues. Meanwhile, Google’s offices have nap pods, as there is evidence that short periods of sleep can boost creativity. And who’s to say that dreams don’t matter?
In conclusion, then, even as we pursue efficiency to make the most of our resources and operations, we need – as leaders – to be mindful not to trim all slack from the system. If we do, we run the risk of cutting corners, stifling creativity, fuelling disengagement among our people, and undermining the long-term resilience of our organisation.
John Kay reminds us that the likes of Henry Ford, Walt Disney and Steve Jobs built hugely profitable organisations not by chasing profits, or by being more efficient than those around them, but by developing products we had not yet imagined and solving problems we did not even know we had. (Hello, iPod and iPad.)
Efficiency has its place and its value – but not at the expense of resilience, morale, creativity and innovation.
Describe what efficiency means in a business context.
Outline three ways in which efficiency has drawbacks and limitations.
Consider where there is slack within your department or organisation and discuss potential efficiencies with your team.
Imagine some of the potential positive and unintended negative consequences of implementing these efficiencies.