by Aaron Dignan
Technological progress has merely provided us with more efficient means for going backwards.
—Aldous Huxley
Although he was well known in certain circles, Taylor didn’t truly go mainstream until 1910. During a very public legal battle between the railroads and the Interstate Commerce Commission, future Supreme Court justice Louis D. Brandeis argued vigorously that the railroads could save more money by implementing the remarkable methods of “Scientific Management” (a term he coined to describe Taylor’s work) than by winning their case. Suddenly, efficiency was on everyone’s mind.
On the heels of this newfound celebrity, Taylor published Principles of Scientific Management, which would become one of the bestselling business books of the decade. In it he offered four principles that would become the duties of a new class of managers:
First. They develop a science for each element of a man’s work, which replaces the old rule-of-thumb method.
Second. They scientifically select and then train, teach, and develop the workman, whereas in the past he chose his own work and trained himself as best he could.
Third. They heartily cooperate with the men so as to insure all of the work being done in accordance with the principles of the science which has been developed.
Fourth. There is an almost equal division of the work and the responsibility between the management and the workmen. The management take over all work for which they are better fitted than the workmen, while in the past almost all of the work and the greater part of the responsibility were thrown upon the men.
Implicit in these principles was the idea that the thinking (the work for which management was “better fitted”) and the doing (the hard labor) were to be separated once and for all. This is perhaps the most pronounced aspect of Taylor’s legacy. Legions of MBAs followed in his footsteps, carrying with them the sacred duty of thinking for everyone else.
Following the publication of Principles in 1911, the world began to adopt Taylor’s methods at an almost breakneck pace. And like any guru, he was not without disciples and contemporaries. By this point in our story, a whole movement to tame the unruly world of work was under way.
Henri Fayol, a French mining executive, published Administration Industrielle et Générale, a theory of management that would come to be known as Fayolism. It contained principles such as unity of direction, suggesting that activities with the same objective should be directed by one manager using one plan for one common goal. And the scalar chain, which proposed that authority and communications should flow in a straight line from the top to the bottom of the organization. The boxes and lines of our modern org charts are the living embodiment of his principles.
Henry Gantt gave us the chart that bears his name—used to this day to illustrate dependencies within complicated projects and processes. But Gantt baked in a dangerous assumption: that the world can be predicted. In Gantt’s repetitive world of manufacturing, this was tolerable, even helpful. But as his practices fanned out into knowledge work, they became a dangerous addiction. Instead of a means to an end, hitting the plan became an end unto itself.
And let’s not forget James McKinsey, founder of consulting juggernaut McKinsey & Company, who completely upended the accounting paradigm while everyone else obsessed over productivity. In his view, budgeting was to be an expression of policy and strategy, flowing directly from the business plan. The budget should be used to evaluate performance, to see who beat their plan and who didn’t. It would become another instrument of control. Like Taylor, McKinsey believed that great managers thought deeply about their processes and plans. He would often remark on this, in his trademark confrontational yet seductive tone. “Usually, I find that the executive who says he does not believe in an organization chart does not want to prepare one because he does not wish other people to know that he had not yet thought through his organization properly. For the same reason, many men are opposed to budgets. They are unwilling for anyone to see how little they have thought about what they are going to do in future periods.” See what he did there? If you disagree, it’s because you haven’t done the work.
These and so many more men and women made their mark. Frank and Lillian Gilbreth introduced time and motion studies, the precursor to ergonomics. Harrington Emerson fueled our fascination with efficiency. Hugo Münsterberg popularized the notion of vocational fit. Lyndall Urwick limited the span of control—how many people one leader can manage. Max Weber highlighted the value of rational-legal authority structures—the idea that positions and laws (not people) hold power. And of course, Henry Ford gave us his assembly line and the mass consumption that followed. Only Mary Parker Follett, the unsung mother of modern management, offered a more humanist opinion about how to realize our potential. Her ideas about reciprocal relationships (win-win) and noncoercive power (influence) were ahead of their time. Unfortunately, pieces of her work inadvertently led to the tangled matrix organizations we know and “love” today.
It would be unfair to paint these individuals as malicious in their intent. Each of them believed they were serving society by improving productivity and performance at a time when that was desperately needed. In so many ways they succeeded. It’s quite safe to say our modern way of life wouldn’t exist without them. And if we appreciate the reliability, accessibility, and convenience we now enjoy, we have them to thank, even as we struggle to transcend what they wrought.
The thinking separated from the doing. An addiction to prediction. A chain of command. And the convergence of it all in the form of an ironclad budget. Among the theories and contributions of these industrious few we can construct much of the tapestry of modern work. It’s hard to argue their core tenets aren’t still with us. We still tell people what to do (and how to think). We still demand detailed plans before every initiative. We still focus on efficiency at the expense of effectiveness. We still use the budget as a weapon. You see, we can have all the foosball tables, fancy chairs, and free snack stations we want; we’re still living in their world.
THE COST OF BUREAUCRACY
If Taylor worked at a multinational company today, he’d be flummoxed to find his principles metastasized into something truly inefficient. According to an employee at one federally owned corporation, toiletries have a six-month lead time. To get them, you must make a service request and get a Problem Evaluation Report. Then you need to get a work order, and a purchase order must be processed by the Procurement Engineering Group, who will then contact the vendor to ensure no changes have been made and the products meet regulatory requirements. And 180 days later, if you’re lucky, you’ll get your toilet paper.
We have a name for this phenomenon: bureaucracy. For most people, the term evokes a feeling of soul-crushing inefficiency and boredom. In contrast to Scientific Management’s “one best way,” it would seem that the aim of bureaucracy is to find the one worst way—that which wastes the most time and involves the most people and steps. The origin of the word itself is the unlikely pairing of bureau (French for desk) and -kratia (Greek for power or rule). So, in a very real sense, it means management by desk, which sounds about right.
London Business School professor Gary Hamel has taken up a crusade against bureaucracy by trying to put a value on our lost time and energy. After a broad workforce analysis, Hamel and his coauthor, Michele Zanini, claim that roughly half of the 23.8 million management roles in the United States are unnecessary. They found that a new wave of companies (including many featured in this book) have managed to cut their manager-to-employee ratio in half while keeping performance up. It follows that if the market could leverage the methods of these pioneers, 12.5 million managers would be free to do something more productive.
Beyond the waste of management, U.S. workers spend a staggering 710 million hours per week on internal compliance activities such as budgeting and planning. That’s 16 percent of our working lives. Yet, by some estimates, roughly half of all com
pliance activity isn’t adding value. What equates to the work of 9 million people is being wasted each year on bureaucratic theater, and this show has no intermission.
Combined, we’re talking about 21.5 million employees who aren’t even scratching the surface of their potential. If they were doing value-added work at an adjusted average GDP per worker of $141,000, they’d conservatively add $3 trillion to the U.S. economy. Let’s write that out and show it the respect it deserves: $3,000,000,000,000. And for those thinking globally, the research suggests there’s another $5.4 trillion abroad. That’s the cost of bureaucracy. It’s a hidden debt—an organizational debt—that we pay interest on every day.
ORGANIZATIONAL DEBT
If your organization owes money, you know it. Financial debt is serious business. Fail to service it, and you’ll find yourself bankrupt. If you develop software, you may also struggle with technical debt, the price you pay for taking shortcuts while coding. But there is another kind of debt that gets far less consideration, though it has the capacity to completely destroy your culture. It’s called organizational debt.
Steve Blank, one of the pioneers of the lean startup movement, initially defined it as “all the people/culture compromises made to ‘just get it done’ in the early stages of a startup.” Due to a lack of time, resources, or willingness to do the hard things, founders will put off developing fundamental programs such as employee onboarding or training. Or they’ll keep someone in a role long after they know it’s not a fit. But org debt is so much bigger than that. It exists well beyond the domain of startups. In fact, I think it’s highly correlated with organizational maturity and scale. I define organizational debt as any structure or policy that no longer serves an organization. Within that definition, we see it manifest in many different ways at many different times.
One of the most common sources of org debt is the knee-jerk reaction. Every time something goes wrong, we immediately jump to create a constraint that will prevent future mistakes. So we institute a new role, rule, or process. As a result, over the course of a decade or two, a one-step process becomes twenty steps. Or five different processes become entangled. Or ten different roles become approvers for a simple decision. And so it goes, on and on. This increase in complication creates more risk, so we create derivative roles and rules to manage it (they’re called project management offices, or PMOs). Under the guise of creating order, we drift toward the disorder of a thousand stupid rules, leaving no ability to respond to the world as it unfolds.
Another source of org debt is change. In the world we live in, our roles, rules, and processes are at risk of becoming obsolete at any time. Some of them, while they may have been perfect for the context in which they were created, are now actively holding us back. And since we change jobs with increasing frequency, few among us were even here when they were cooked up in the first place. The ever-growing invite list for the monthly meeting that nobody likes? That’s debt. Using last year’s budget as a baseline for this year’s budget? That’s debt. A policy prohibiting employees from writing or speaking about their work on social media? That’s debt. The question that must be asked is “What would we do if we were starting with a blank sheet of paper?” If the answer is anything other than what we’ve got, we have work to do.
The point is this: to avoid the pitfalls of organizational debt, we need constant and vigilant simplification. We need to create roles, rules, and processes that are inherently agile—built to learn and change. Unfortunately, the very bureaucracy that created our org debt also stands in the way of addressing it. Org debt creates bureaucracy, and bureaucracy protects org debt. It’s a tragic love affair.
GRACEFUL DEGRADATION
In spite of—and in part because of—bureaucracy, the world is doing better than ever. Since the publication of Taylor’s Principles in 1911, the percentage of people living in extreme poverty has gone from 82.4 percent to just 9.6 percent. The number of people with a basic education has jumped to nearly nine in ten. Child mortality is one-eighth what it was. Democracy has become the dominant form of government on Earth. And the average global citizen has experienced a sixfold increase in prosperity. In so many ways we have been remarkably successful.
But under the surface something’s not right. We can’t quite put our finger on it, but work is harder than it used to be. Hours are long. Cycles are short. Wages are stagnant. Meaning is missing. The thrill is gone. Somehow, amid all our achievements, work has been failing us in a measurable way, but only a handful of people are seeing behind the curtain.
Among them are Richard Foster and Innosight, who have been studying corporate longevity within the S&P 500—a curated list of publicly traded companies that represents the U.S. stock market. Their research shows that in 1958, the average tenure of a company on that list was sixty-one years. But by 2016 that number had been reduced to twenty-four years. The data suggests this pattern will continue. At the current rate of churn, about half the list will be replaced in the next decade. And by 2027 the average tenure will shrink to just twelve years. This fits with broader research recently completed by the Santa Fe Institute in New Mexico. In its analysis of more than 25,000 companies, it found that the half-life of all firms was roughly 10.5 years. Big business, small business, it doesn’t matter. Our days are numbered. Organizations are under siege. If we can’t learn to adapt, we may never see another century-old company.
Average Company Lifespan on S&P 500 Index (in Years)
DATA: INNOSIGHT/RICHARD N. FOSTER/STANDARD & POOR’S
*Note: This graph combines the data from two separate reports.
While corporate longevity has plummeted, the average holding time for a stock has gone from eight years to five days. What does someone who holds a stock for five days care about? You guessed it—quick returns. And given that 50–90 percent of all trading is now algorithmic (and often high frequency), returns depend on volatility. If stocks are steady, nobody makes any money. So the funds, investment banks, media, and exchanges keep the stocks in motion. Economist Benjamin Graham, the father of value investing, once said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” It appears that the voting machine is winning.
Corporations want share prices to move too, just exclusively up and to the right. Executives are increasingly compensated in stock (in order to align their interests with those of shareholders), and so they all fall victim to a kind of collective quarterly myopia. They need to move the needle now, and that means revenue or earnings growth (preferably both). But investments in organic growth won’t mature fast enough to meet their needs. And this is exacerbated by the fact that companies are getting worse and worse at generating profits using the assets they already have.
Corporate return on assets—the ratio of a company’s profits to what it owns and owes—is one of the best holistic measures of performance. While return on equity or returns to shareholders are more common, they are too vulnerable to financial engineering. Assets are harder to game. Unfortunately for U.S. firms, economy-wide ROA has been trending downward for decades. It is now roughly one-quarter of what it was fifty years ago. Even the top quartile of companies have seen ROA decline from 12.9 percent in 1965 to 8.3 percent in 2015. Corporations might be getting bigger, but they’re not getting better at generating value from their assets.
Economy-wide Return on Assets (ROA)
SOURCE: Compustat; Deloitte Analysis, Deloitte University
So what do they do when investors come calling? They cannibalize themselves. They cut costs in research and development. They centralize functions. They conduct layoff after layoff. They outsource anything that can be done for less outside the firm, often at the expense of quality or service. They impose strict controls, including desperate measures such as travel and hiring freezes during which none of their employees are trusted to make decisions in the company’s best interest.
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sp; They do all this to hit their numbers. And they do. Miraculously they do. Income goes up. Cash goes up. And generating ROA gets just a little bit harder, because what’s left behind is hollowed out. But the investors and analysts got what they asked for. Are they ecstatic? No. Actually, they have a question: how is next quarter looking? So imagine being long on cash and short on ideas. What do you do? That’s right, you go shopping, for someone to buy . . . or someone to buy you.
There’s just one problem: mergers and acquisitions don’t work, or at least not the way we’ve been led to believe. According to one McKinsey study, almost 70 percent of mergers fail to provide the revenue synergies they promise. A similar study by KPMG found that while 82 percent of M&A participants believed their deal was a success a year after closing, only 45 percent had done a formal postdeal review to be sure. When the researchers imposed a strict objective benchmark for success, it turned out 83 percent of the deals had actually failed.
M&A may not always add up, but it does create megafirms with a greater ability to control markets and prices. Just look at the airline industry in the U.S., where a string of mergers and acquisitions has resulted in four dominant carriers that have more than 80 percent of domestic capacity. There are now just four big banks. Five major health insurance companies. And in technology it’s even worse. Two mobile platforms. One big search engine. One dominant social network. And one “everything store” that recently bought a $13.7 billion organic grocery chain with share price gains from the mere announcement of the deal. “Too big to fail” and “too few to choose” are the new normal.
