Nutshell: The perils of efficiency: why the best way to profit may not be a straight line

Efficiency can be a double edged-sword. Here’s why, as leaders, we should all cut ourselves a little slack.

Efficiency is often seen as key to all sorts of essential business practices, and it’s easy to see why. Modern management theory is awash with concepts like just-in-time or lean manufacturing that have transformed operations and boosted profitability. Doing something faster or with less waste, optimising processes and marshalling resources as tightly as possible has become something of a holy grail for leaders, whether they’re running a leading car company or a government department.

The case for efficiency in organisations has been well made. But might it also be 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 immediately 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.

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 to be duped by a myth as dangerous as King Midas’ cautionary tale.

Citing the analogy of air travel, Heffernan 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 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). So, 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’.

Just as we individuals need to build our personal resilience in the face of uncertainty and unpredictability, so do organisations.

To survive and thrive as leaders, we also need the ability to determine what is merely complicated (and could benefit, for example 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 enough 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.

Creativity trumps efficiency

In his article In Praise of Inefficiency, founder and editor of emagazine, the Rabbit Hole, Shaun Tan, highlights the dangers of wielding the cost-cutting scalpel with too much vigour.

He references Donald Trump’s 2018 decision to fire America’s entire pandemic response chain of command. After all, how likely was it that a global pandemic would come down the line?

‘Some of the people we’ve cut, they haven’t been used for many, many years’ said Trump (quite rightly. But also wrongly…), adding ‘I’m a businessperson, I don’t like having thousands of people around when you don’t need them’.

While Trump’s 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.

Considering the bird in hand

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 previously marginal species in the perfect situation 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 for example. Would we really want to be without such stunning inefficiency?

Adapt and survive

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 over 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 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 – often 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.

Resilience is more than nuts

Author Roger Martin also argues for a greater emphasis on organisational resilience.

In his Harvard Business Review article, 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 characterised 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 antitrust policy to avoid market domination by a single behemoth. This might prevent a company (like Facebook) using deep pockets to fund its own subsidiary (like Instagram) to the detriment of a rival (like Snapchat). Martin also calls on policymakers to inject a measure of “positive friction”, for example, by deploying barriers to international trade, so that organisations can develop a healthy “immune system” by being jogged 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 for the future

Building resilience is also about more than just watching out for negative black swans. It also means keeping our eyes open to the opportunities offered by positive black swans; the creative breakthroughs that can emerge when we look not only to maximise returns in the short term, but also 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 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.

The profit motive versus the pleasure principle

In his book, Obliquity, top economist John Kay makes the case that goals are often best achieved when we approach them indirectly or without intending them – i.e. 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 (probably) “more shareholder value than any other man in post-war British business”.

But it was chemistry that drove 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 driven 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 product 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 Bros fell victim to relentless profit seeking, rival Goldman Sachs survived, in part because their culture valued the practice of banking as well as the profits.

The true cost of human capital

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. Or for 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 society as a whole – just as by attracting likes on Instagram, 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, with “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 in three important ways:

• 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;
  
  
• by deploying talent strategically;
  
  
• and by inspiring a larger percentage of their workforce.

It’s all about people. Squeezing them 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 praise of procrastination

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 subculture 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 from the job at hand. So, when faced with a problem, taking time out to watch sea shanties on TikTok might actually help “distract” us into solving it. Because – the theory has it – our unconscious mind continues to look for solutions even when we are no longer consciously focussed on the task at hand.

Of course, 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, American 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 therefore 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 partly been designed 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 stifling creativity, fuelling disengagement among our people, and undermining the long-term resilience of our organisation.

As John Kay reminds us, 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.)

As Aristotle would agree, any modern-day King Midas would do well to take a (gold) leaf out of their book.

Test your understanding

• Outline two reasons why an over-emphasis on efficiency might not lead to long-term business success.
• Explain John Kay’s “oblique” approach to meeting business goals.

What does it mean for you?

• Reflect on your own approach to efficiency at work. Are you balancing the need to deploy resources effectively with resilience-building capacity and slack? What more could you do to improve that balance?