Degrees of Freedom

Modelling complexity is remarkably similar to modelling dynamics.

The more I learn about fractals and their uses in modelling complexity the more parallels I see with the dynamics of movement and processes. So far, so good, the hypothesis is checking out nicely as I test it against various scenarios. I will keep you posted.

I tried to explain this to a couple of my recent audiences, suggesting that the principles we use to regulate movement could be used to regulate complexity. This got me to thinking, and I’m sure you’ve experienced the moment when you are presenting and you have an epiphany: ‘that’s right’, the audience just thinks you are pausing, but you are really having an experience as a lightbulb goes off. I’m all about high risk when presenting, so I tried the inspiration on the audience and it seemed to hit home.

Here’s the epiphany:

If the concepts of process control can be applied to complex situations can we apply the law of degrees of freedom? An object cannot move if all the planes of movement are constrained. If we consider safety, quality, reliability, efficiency, profit and compliance as outcomes of a well run enterprise, we shouldn’t attempt to control them all.

By attempting to manage every outcome the organisation has no degrees of freedom. It becomes overly constrained as it deals with the complications of day to day business creating competition for resource, conflicts, and hence the very complexity that its people cannot resolve.

The answer is in the clarity provided by leadership. A clear purpose, clear process and empowered people, focussed on performance not compliance. You will comply if you empower people to perform. Set goals not constraints, provide education (not training) and let people learn how to best hit the goals.


Avoiding the Kodak Moment

When Sir Bob Geldof toured Australia in 2015, the Irish rocker and social activist spoke about how global “flashpoints” of conflict were ultimately caused by great change and poverty, and he spoke about the rise of internet mega giants Facebook and Google and the distractions of the 24-hour news cycle for political leaders.

In doing so he made a connection between the industrial revolution and the technology and information revolution we are experiencing and the resulting disruption of the status quo that is already underway.

It is estimated that 40% of the current jobs will disappear, traditional employment models will slowly be eroded and people will be paid on the basis of the value they deliver, rather than the hours worked.

Harnessing disruption and creating value

Rachel Botsman, a global authority on the power of collaboration and sharing to change the way we live, work, bank and consume, states that this is not a technology trend, but is rather a transformational lens.

Rachel describes three reactions to the disruption of the collaborative economy:

  • Ostrich – hope it will all go away (head in the sand)
  • Fight – (Try to bring new idea down with legal action)
  • Pioneer – or you can embrace change as an opportunity and pioneer.

Now you might be thinking this is about consumer goods and services, it doesn’t apply to my industry. This is the Ostrich reaction.

Eastman Kodak experienced the consequence of behaving like an Ostrich. Perversely they were the company that developed much of the digital technology that today’s digital cameras are based on, but feared the technology would damage their film manufacturing business and delayed developing products. When it became obvious a digital world was developing (great pun), they began to divest the traditional chemical industry aspects of their business to concentrate on their digital technology only to find they could not compete as technology hardware manufacturers.

At TAM we have coined the term ‘Contagion of Complexity’ to describe the complexity resulting from unthinking pursuit of growth above the organic, the consequent cyclical growth in management and IT, and the subsequent cyclical battle with the law of diminishing returns.

diagram_complexity contagion_v3

There is a point of inflexion where the pursuit of scale is limited by the law of diminishing returns. Entire societies have collapsed this way, let alone major companies.

At TAM we see this downward cyclical trend as the opposite of our upward spiral of excellence. In other words, our collaboration is focussed around ensuring growth results in improved productivity through the intelligent application of technology, business process, technical excellence and people development.

Can the transformational lens of collaboration be applied across all industry sectors to understand the opportunities to become leaner and more efficient? Boom and bust may be a reality, but nothing stops us taking the opportunity to position for boom whilst gaining efficiency in a bust.

In fact it seems to us that the macro economic cycles are driven by the changes that if embraced allow us to profit during bust and grow during boom. Technology driving changes in oil prices would be a classic.

You only have to look to collaborative companies such as Uber and Airbnb to understand that reimagining your business model can unlock a hidden wealth of productivity, capacity, innovation and value.

This is what we have done at TAM. We have chosen to apply the sharing economy model to professional services. The same drivers for the establishment of cooperatives during the industrial revolution are just as valid in the technology revolution of today. The technology enables specialisation, creating the opportunity for knowledge workers to deliver value as individuals rather than employees.

Rewarding individuals in proportion to the value delivered means people work fewer hours. This creates a constructive culture more suited to today’s age of automation and achieves a better work life balance for the individual.

By cooperating, exchanging combined knowledge for value and embracing disruptive technologies industry as a whole has an opportunity to achieve a step change in efficiency, capacity, performance and innovation.

Future Asset Management

Why would you own a Ferrari when you can rent one on the few occasions you would get to fulfil its potential?

The only answer is status. Driving it as your daily transport is not what the car was designed for, and you now have a very expensive maintenance bill. High cost assets such as luxury cars and boats require a lot of maintenance, but you only access the value they provide for a fraction of the time.

Ownership only makes sense when you need the value for a high percentage of the time. Even then you want to minimise the operating costs. So even if you own the car nobody employs a mechanic, you outsource the maintenance.

How will we keep the costs down in the future? Peter Drucker suggested the low operating cost asset of the future would have one man and a dog, the man to feed the dog and the dog to keep the man away from the machinery. In other words maintenance and operation will be automated where possible.

In truth we don’t really want assets at all, we want the value the assets produce, and the asset is nothing more than a means to the end. We don’t have to own an asset to gain value from it. We drive the car to get somewhere, or for the thrill of performance, but it is the end we want and we can hire the car.

Whatever approach you take to gather value from an asset; all of the process should be described in a comprehensive asset management strategy. Again, for emphasis, just because you are managing something you don’t have to own it.

Where possible we obviously want to minimise the cost of the value production process (in all senses of the word cost, safety, finance, environment), and hence Drucker is right, if we could automate the whole thing we should, but we aren’t always there yet, so what else is needed to produce the value apart from a strategy? The answer is competent people to carry out the functions that can’t be automated.

There is no getting away from it talented people create value and deliver value where machines haven’t reached. No matter the quality of the asset you own people will always be needed to improve it. As we discussed in our article ‘Right People Right Time’ at different points in the life of a value-generating proposition, different competent people are needed, but not everyone is needed throughout the lifecycle.

Hence, as part of our strategy the only permanent employees should be the competent people needed during the repetition of the value production process to perform functions that can’t be automated. Other periodic functions that require personnel should be outsourced and outsourced to the most efficient provider of the required services: Efficiency being defined as producing the highest quality with the least input.

This applies especially to knowledge work and skilled work. You only need knowledge and skills occasionally. The temptation is to employ knowledge and skill workers full time to ensure availability of expertise, but the problem is if you keep us around we inadvertently add complexity. We seek to be creative but is that our function within the relevant business process? How does that align with the asset management strategy? If there is no alignment we are adding complexity.

Hence, outsourcing to a provider intent on adding value is a good value proposition in an asset management strategy. Yet a lot of service companies are providing bodies rather than value creating a dependency we don’t want. Differentiating between commodity (routine) services and premium (value adding) services is therefore essential.

If you’re going to pay a premium for services you need to be able to spot a winner. It makes no sense to procure premium services in the same way you procure commodity services. One is all about the return on the investment the other is all about minimizing the expense.

So the asset management strategy of the future becomes clear. Rent, if you can generate a return in excess of ownership. Automate if you have to own. Only employ the minimum of people needed for what can’t be automated. Outsource all occasional services and learn to tell the difference between premium (value add) services and commodity services.