The Crusade Against Efficiency - Part 2

Let me be clear - efficiency in and of itself is not bad. But, a leader’s success lies in understanding the trade-offs and nuances… Take the example of buying a home - of course, I’d love my home to be energy efficient. But, people don’t buy a home for its energy efficiency.

As a leader in a corporation, have you thought about the type of goals that drive your people’s actions? What exactly are they chasing and why? What are its second-order and long-term consequences?

Let’s discuss…

Table of Contents

• Neutron Jack

• The Inefficient Corporate Leader

  • Real-world example: Tech

  • Real-world example: Brick and Mortar

• Performance Management

  • Real-world example: Netflix

• Real-world example: Procurement

• Real-world example: Cybersecurity

Neutron Jack

When times are tough, the “expectations” from the “street” push many corporate leaders to focus on improving efficiency. But, this blind focus on efficiency (Evil metric #1: Quarterly Earnings) may become extremely detrimental to the long-term viability of the corporation. Cause and effect are separated by space and time.

A good example is Jack Welch who headed up the General Electric Company from 1981 and 2001 and is often thought of as the first celebrity CEO. His face graced magazine covers constantly, embodying the archetype of the imperial executive and cementing a culture of CEO adulation that persists today.

In the book, "The Man Who Broke Capitalism," David Gelles articulates how Welch's relentless cost-cutting and obsession with quarterly earnings ultimately damaged both GE and American capitalism. Dubbed "Neutron Jack," Welch implemented a brutal policy of ranking employees and annually firing the bottom 10 percent, leading to over 100,000 layoffs and factory closures in his early years.

This marked a shift from the era when jobs at companies like GE or IBM were seen as life-long. Welch's cuts often meant outsourcing jobs overseas, initiating a wave of labor migration that severely impacted America's manufacturing base. This trend persisted over time, and its consequences are increasingly evident following the pandemic's supply chain disruptions and rising tensions between the USA and China. In order to have an edge and make a profit, you must first survive. The latter is a prerequisite for the former - efficiency not at the cost of resilience.

Welch's aggressive strategies, including the acquisition of NBC in 1986, initially boosted GE's stock price, making it the most valuable company on the market by September 1993. However, his leadership failed to deliver sustainable profits. He promoted risky financial ventures and acquisitions, a trend his successor continued. GE's focus on subprime mortgages and short-term lending proved disastrous during the 2008 financial crisis.

By 2021, GE's leadership announced a breakup into three standalone companies: one for jet engines, one for medical devices, and one for power equipment. This, Gelles asserts, is the true legacy of Jack Welch. Once a global conglomerate, GE is now removed from the Dow Jones Industrial Average, reduced to three distinct entities, marking the end of an era.

The Inefficient Corporate Leader

What’s interesting about the inefficiency of the bees from my previous post is that the bees actually become more inefficient when the uncertainty of their environment increases. More bees begin to break the waggle dance code and start exploring new sources of honey instead of exploiting known sources.

Even if 99.9% of the random bee journeys don't have any ‘Return on Investment’ (ROI), that’s OK! The hive will be compensated if just one bee stumbles upon a massive sunflower field. That's the evolutionary lesson that bees have learned about surviving in complex systems over long periods of time.

It is important to see rationality as something than increases your odds of survival - not just something that makes sense on a spreadsheet. But, today’s corporate leaders simply assume that improving efficiency is the same as improving effectiveness. This is wrong!

Don’t believe me? Go and check the goals of your ‘Developer Productivity’ organization. Many will be about chasing efficiency - e.g. standardizing and centralizing, improving the speed of software builds & deployments, etc. Sometimes they’ll pour millions of dollars to improve mere minutes or seconds of a software build or a security scan.

If only they paused and thought… Is this the worst thing that actually impedes our developers from being productive? How about those manual compliance reviews and approvals? What about those frequent prioritization conflicts and escalations - why do they happen? What happens when so many teams in the corporation wait to make decisions through hierarchy?

Corporations with established business lines typically stay in ‘exploit’ mode and all their leaders do is to try and squeeze as much efficiency as possible from those businesses. They don't ‘explore/experiment’ much.

Why? That’s because most experiments fail. Today’s management paradigms don’t have any room for this type of tinkering and failures… This is how too much focus on efficiency becomes extremely detrimental to the long-term viability of the corporation.

All corporations are just one rapid change in the environment away from ruin if the slow march to irrelevance doesn’t kill them eventually! We are currently over-indexing on regulations and network effects to keep a company afloat for long periods of time, to our own detriment.

Real-world example: Tech

Well, are there any companies that have played this game of ‘exploit vs. explore’ well?

Apple and Amazon come to mind. Steve Jobs and Jeff Bezos never allowed their companies to be stuck in “exploit” mode and continued to explore new product ideas and categories. As Bezos put it,

Amazon Web Services (AWS) turned out to be one such might oak for Amazon. But, this type of exploration sometimes cannibalizes their own existing products. For example, the iPhone cannibalized the iPod. But, Jobs never allowed Profit & Loss (P&L) to be calculated at each department level or product-line level at Apple. Apple had only one P&L - for the entire company. There are no cost center games to be played by the department heads.

Innovation requires slack in the system - but, efficiency eliminates it. Increasing inefficiency during tough times might sound counter-intuitive or risky, but think about it - the best way to come out of a recession is via innovation.

Real-world example: Brick and Mortar

The traditional MBA way of managing a corporation is by breaking it apart into different parts (departments) and trying to improve each part separately. But, there are some good examples of deliberate inefficiencies from ‘Brick and Mortar’ businesses too.

For example, the Costco hot dog combo was introduced to its food courts in 1984 and the price was set at $1.50 at its introduction, and has remained at $1.50 ever since despite all the inflation over the decades.

Costco’s Hot Dog department is deliberately kept inefficient and unprofitable. The management knows how important this is for the long-term viability of the corporation and have time and again reiterated their position to the “street”.

Local efficiency doesn't necessarily guarantee global effectiveness. But, great businesses know how local inefficiencies can lead to global effectiveness.

Performance Management

Let's now see how "performance management" is a mindless efficiency game played by most corporations. But, first let’s see what the bees do instead.

The bees that go off on random directions instead of obeying the waggle dance come back empty handed 99% of the time. But, millions of years of evolution has not resulted in the creation of a "Chief Honey Officer" who sets the company hive-wide quarterly honey collection OKRs and mandates that all the worker bees stop wasting bee journeys. The individual failures of those bees are actually well-tolerated by the hive.

You see, you can’t just study a single bee by itself. You must, de facto, study it in the context of the colony, where the parts and the whole differ because of the interactions between the parts (called the 'emergent' property of the whole). 

But today’s corporations have become too risk averse at the level of the individuals and teams in our corporations. We do “blameless postmortems” for production incidents while ironically not applying the same rationale for project/product failures.

As part of the "performance management" process, a bottom 5% or 10% of employees get picked and they are put on a 'Performance Improvement Plan' (aka PIP - most people take that as a signal to start looking for another job) and eventually get laid off.

On the other hand, many corporations dangle more money as the motivator for humans - most employees have a "performance-based bonus" as part of their compensation package and specific departments like ‘Sales’ also have a performance-based pay that is usually much higher than their base pay.

Let's ask ourself this hypothetical question: If a sales person (working in such a compensation system) figures out a new and innovative way to position and sell a product, is there a systemic incentive in place for him/her to share that unique piece of knowledge with all the other sales folks or instead hold it close to their chest so that he/she can 10x their bonus for that year?

What do the bees do in this scenario? The bee that hits the jackpot comes back to the colony immediately and does its waggle dance to share this new found piece of information with all the other bees in the colony. As it turns out, the duration of the dance is directly proportional to the how big the source is - its hormones keep it continuously dancing in a bliss. Given the longer duration of the dance, more bees in the colony get to see this signal and more bees fly to the new source.

The bee colonies that exhibited this type of collective behavior are the ones that are still around after millions of years! The long-term viability of the hive is prioritized over the success or failure of any single bee.

Are your employees dancing in bliss about what new they’ve learned at work or do their survival depends on subjective job assessments by someone of higher rank in the corporation? Do they have more interest in the company compared to the self-interest of keeping his/her job?

Real-world example: Netflix

A well-known example of a company that does not do "performance ratings" of its people is Toyota, which no wonder, is also known for its Systems Thinking practices. Netflix is another corporation that doesn't do performance ratings - everyone at Netflix is treated as “A” players and paid as such.

Leaders have to consciously decide what they truly want from their hiring process. If you choose to make “Mean Time to Hire” as your key metric, that is merely chasing efficiency (how quickly can we fill our open positions?).

Let’s see what Netflix does. Netflix's Co-CEO Reed Hastings talks about the importance of Talent Density and many other aspects in his book, ‘No Rules Rules’. He actually sets an extremely high bar in the Netflix Culture document which says,

The core issue is clear: Should we strive to consistently enhance the talent density within our company over time, or are we content to maintain "top performers" at a static 20% level (or as dictated by the “budget”)?

Why not rate people? For the simple reason that people are the WRONG target for performance improvement programs. Peter Scholtes explains this elegantly in his book, 'The Leader's Handbook':

When we force people to not fail (by penalizing them via performance management practices), we severely impede their creativity. More importantly, we simply don't understand the edge that 'trial and error' (experimentation) has over "knowledge" when it comes to performance in complex systems.

For the premium-tier customers, I’ll now discuss application of these ideas with examples from the real-world on two different topics - procurement and cybersecurity.

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