What Does Efficiency Really Cost?
Efficiency is generally considered a much desired thing. How many times have you heard a leader in your organization talk about striving to be more efficient? How about “doing more with less”? It is sort of a holy grail of management.
Certainly there are obstacles to efficiency that make sense for us to address and eliminate - things like dependencies with other teams, unnecessary handoffs, and the build up of inventory (think unfinished, in-progress work). There is little to no downside in addressing these items. In these instances, we should work on being more efficient.
However, there are several ways in which seeking greater efficiency has a tangible and significant cost. In these cases, driving greater efficiency is not a no-brainer and may not result in better business and customer outcomes.
Efficiency is all about doing something faster or with fewer resources than before. However, what if we are going in the wrong direction, in essence working on something that does not contribute value to our customers or our company? In this case, we are more efficiently doing something that does not contribute value. All the focus, time, and energy we have put on efficiency in this case could have been used to figure out how we can provide value to our customers and company. Doing the right things (that provide value) is more important than doing things efficiently. Once we are doing the right things, we can focus on doing them efficiently. An anti-pattern of efficiency is mistaking activity for value. Activity isn’t inherently valuable and therefore measuring and optimizing for greater activity isn’t desirable or ideal. Don’t take my word for it. Check out Harvard Business Review’s take on busyness.
Another way to look at efficiency efforts is to view it through the lens of local optimization. When we look to make something more efficient, we are usually looking for ways to incrementally improve an existing process. If you visualize this as one of those optimization problems you might have worked on in calculus class with graphs, finding the high point on specific sections of the graph, we are trying to arrive at a nearby maximum by tweaking something and seeing if this results in lower or higher value. By continuing to tweak in the direction that leads to incrementally higher value, we arrive in a place where there is no more tweaking left that will make the existing process more efficient. You may have heard this described as a hill climbing algorithm because we are incrementally climbing up that section of the graph. This is a useful technique for achieving incremental gains in value where we exploit our current solution and success to optimize our current process. However, in reality, the solution space of possible ways we can generate value is quite large, and by relying only on incremental efficiency improvements, we miss out on lots of other solutions out there that might bring us exponentially more value. What is missing is experimentation and serendipity to expose us to radically different ways of doing things (in other words, distant parts of the solution space). With experimentation and serendipity comes innovation, new ideas, and emerging opportunities. This is the opportunity cost of efficiency - we close ourselves off from innovation and new opportunities. This is quite an expensive opportunity cost, but one that is frequently dismissed in the operating metrics commonly used to run our businesses. Efficiency has a place in our toolkit, but it must be balanced with exploration that leads us to innovation and new opportunity. For a deeper dive into these type of opportunity costs, check out Tom DeMarco’s book, Slack.
Another characteristic of efforts at efficiency is that we look to remove redundancy, whether that be multiple people with a specific skill or a resource, such as office space or a supply chain, to reduce costs and minimize waste. There is certainly benefit in reducing costs and being as efficient as possible, but there is also another hidden cost. When we have removed all excess capacity out of our organization, we have no margin for any failure or unexpected event. Should something happen to any of our people or our vendors or our facilities, we put ourselves at serious risk of no longer being able to meet our commitments to our customers. Given the world that we live in, this is not just a thought experiment. We know that we will face unexpected events as part of our operational environment. We have made ourselves less resilient which can put us in a position of diminished performance and even create an existential event for our organization. Note that resiliency is not just about responding and recovering from adverse effects. Resiliency is also about the ability to take advantage of emerging opportunities as they arise in our markets and operating environments. Clearly, there needs to be a balance between efficiency and resiliency. When we lean more toward efficiency, we face a significant cost in the loss of resiliency.
One other thing to consider when we look to make things more efficient. Most of our value streams consist of multiple, dependent processes which together produce something of value at the end of the stream. If we focus on efficiency of any specific process in the value stream, it may or may not result in better overall flow and lower cycle time for the stream as a whole. Whether this improves the overall value stream depends on whether the process we have made more efficient was the bottleneck in the overall system. If we are not improving the efficiency of the bottleneck, we won’t realize any improvement in overall cycle time or throughput on the system as a whole. In fact, we may even make the overall system worse as we create more queueing waiting on the bottleneck process. This just results in more work in progress (WIP), more waiting, and more delay. Think of increasing the number of cars entering a highway that already has a traffic jam a couple of miles ahead. The only thing we are doing is creating a bigger traffic jam and longer waiting times for those stuck in the traffic jam. This is basic theory of constraints. In this case, the cost of efficiency is both the time spent optimizing a non-critical path process and in many cases the increased delay we have introduced into the full system.
To summarize, seeking greater efficiency is sometimes a very good thing to do, helping us to reduce costs and delays, but it often comes with costs, many of which are not obvious at first glance. Before you jump into your next efficiency improvement project, first make sure that you consider the following:
Is the process that you are looking at in fact contributing value to your customers and organization?
Will focusing on efficiency reduce or eliminate your ability to innovate or consider emerging opportunities?
Would improving efficiency put the organization at risk for being unable to meet its commitments if something unexpected happeneed?
Is the process that you are looking at the bottleneck in its value stream?
If you’d like to discuss how to balance the benefits and cost of your efficiency efforts or any other topic related to delivering value across your business processes, please sign up for a free consultation on our website.