Silos and Silage

 As I observed in my February 15, 2010 post to this blog, the current panacea for all of our problems is said to be more regulation, to stop the bad guys from doing bad things. That’s  fine as far as it goes – and if it works – but there is little discussion of the costs these regulations impose on all of us. The exception is Sarbanes-Oxley, where the unpredicted costs of compliance have become a serious burden on small and medium sized businesses.

Paul London provides us with a different perspective on this issue. (The Competition Solution: The Bipartisan Secret Behind American Prosperity by Paul A. London, 2005, (ISBN 0-8447-4204-X). He chronicles what happened in the United States as we deregulated major segments of our economy. The effects of deregulation are substantially the opposite of the effects of regulation, so if we look at the effects of deregulation, we can get a good idea of what the relevant regulations have cost us and how they have benefited us.

 Mr. London examines the causes and effects of deregulation in the auto industry, the steel industry, telecommunications, air travel, freight carriage, and finance, among others. He points out that in every case, deregulation was the result of complimentary activities of entrepreneurs and politicians. The vision of the entrepreneurs was of new products and new processes displacing the old; the vision of the politicians was of a better life for their constituents, the consumers. Both groups saw increased competition as the vehicle for success. And they were right.

 Consider your own experiences with the deregulation of telecommunications. Ordering an additional telephone for your home or business used to require a call to the carrier to place the order, and one decision: what color. Now, your choices – and your tasks and decisions – have increased almost beyond belief: not only color and other features of the instrument but also what services you will get from your carrier (caller ID, etc,)  And by the way, what carrier you will use. But overall, your costs are less and you have a much wider range of capabilities to use to enhance your business or your life.

Or think about air travel. In place of the old single price on one or two carriers, you now have a variety of prices on each carrier as well as a much wider choice of carriers. So you must now either search the Web for the best deal or hire an intermediary (Orbitz or Travelocity) to search and negotiate on your behalf.  But the prices are dramatically less.

 In every case the results of deregulation and/or de-monopolization have been the same: short term chaos in the market place as new products were introduced, new opportunities for consumers, new requirements on consumers to understand and take advantage of the changes, lower prices made possible by lower costs of producers,

 This, then, is what regulation costs. Higher prices, fewer service options, less innovation. Is it worth it to (try to) stop the bad guys from doing bad things? Perhaps, but let’s not rush into regulation without taking account of these very real costs.

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The Obama administration came into office chanting a mantra of change, change, change. It is working very hard to create major changes in the way our country is governed. Most of the changes being proposed are accompanied by new laws, new regulations and even entirely new regulatory bodies – the Treasury’s pay czar and the proposed Consumer Financial Protection Agency come to mind.

Here’s the problem. Change plus more regulation prevents further change. By their very nature, regulations are almost always backward looking. Regulators, like generals, plan for the last war. The result is often an  immediate change in how things are done, but the new methods are then frozen in place, stifling further innovation for a long time to come.

 The proposals to change the way that health care is delivered in the United States are based on the attractive – but false – assumption that the federal bureaucrats can create a viable long term plan for this complex system. They can’t. No one can.

 All of our history and all of our experiences say that this cannot be done. The Soviet Union’s Five Year Plans under Lenin and Stalin became an international joke (although they were not funny to those who had to live under them.)  We have all watched corporate strategic plans gather dust on the shelf, their recommendations never to see the light of day.

 The federal government as a whole is no better off: witness the continual meddling of the Congress in the executive activities of the government. My point is not that Congress shouldn’t intervene when necessary. It is that intervention will always be necessary because the future is unpredictable. Helmut von Moelke, Chief of Staff (and hence chief planner) to Otto von Bismarck observed that, “No strategy survives the start of battle. Dwight Eisenhower said, “Strategic plans are worthless, but the strategic planning process is essential.”

 If planning cannot create meaningful change, what can? The answer seems to be “non-planning”, by which I mean having unallocated resources available to find and exploit unexpected opportunities. This is a three part process: find the opportunities, exploit them and keep the corporate bureaucrats from interfering. 

 Genentech encourages each of its scientists to spend one day a week on projects of the scientist’s own choosing, requiring only that the project be in an area that might be of interest to the company. Microsoft and other technology companies have similar programs.

 The most spectacular early success of this process was the ‘skunk works’ created by Lockheed to build the U2 reconnaissance plane. Kelly Johnson, the program manager, moved the entire operation out of existing facilities to a place remote from the company’s main operations and worked actively to insulate the development team from corporate constraints and detailed oversight. The first plane was completed in 80days!

 If we are to have meaningful, productive changes in our health care delivery system, we need some of our best and brightest people working on what they think is important, not what the federal establishment thinks is important. I’ll discuss some ideas on how to do this in subsequent posts. Meanwhile, the important thing to remember is do not suffocate health care change within an inflexible plan or strangle it with regulation.

 Gerry Hoffman

“The United States is spending 13% (or 18% or whatever other percentage is handy) of its GDP on health care, and the percentage is increasing, with no end in sight.” Gloom and doom! Our country/our economy/our way of life will be destroyed.

 Nonsense! Percentage of GDP is the wrong metric (benchmark). Let me show you why.

 Recall the advent in corporate America of the Chief Information Officer. One of the driving forces behind the creation of this job was a prevalent feeling in the executive suite that companies were spending too much money on IT, and some adult supervision was in order. And even cases where a CIO was not initially tasked with controlling overall IT expenditures, he or she soon realized that this was a very hot topic, one that had to be addressed.

 But as popular as this topic was in the board room, it made no sense to the people running the business. A business manager needs the ability to apply his resources (money, people) to whatever facet of the business will yield the greatest returns. Build a new system to track sales operations,  or, spend the money on product rebates – whatever works best. The fact that doing these things shifts certain expenses from one line item in the budget to another should have no influence on the decision.

 To see  just how silly this metric is, try this thought experiment. Suppose all elements that make up the GDP were held constant at their current levels and suppose that health care consumed 13% of the GDP. Next assume that one and only one element of the GDP changed – say defense expenditures fell by one third., What would happen to health care expenditure as a percentage of GDP? It would go UP, although no one would be getting any more health care! Percentage of GDP is an attractive thing to measure because it can be measured. But it really does not mean a thing.

 What is left out of this discussion is any consideration of patient wants and needs. The patient may prefer a dietetic consultation or an unusually detailed annual physical exam (health care expenditures) to a Caribbean vacation or a new car (different line items in his budget.) Every person should have the right to re-allocate his resources to or from health care without regard to some arbitrary politically imposed limit.

 Over the years, we have learned in the IT world that the only thing that makes sense is to supply to the user those capabilities that the user specifies, because the user knows much more about what is important than any bureaucrat (like the CIO.) Why is it so hard to acknowledge the need for patient (user)  primacy in health care decisions?

 Gerry Hoffman

As we stumble from crisis to crisis, from D. C,  to Dubai to Davos, a common theme is emerging about what to do about all these problems. The answer is always seen as more regulation, both intensive (require financial derivatives to be traded on public exchanges and settled through a central clearing house), and extensive (the recent appeal by the head of the IMF for individual countries to NOT issue and enforce their own financial regulations, but rather to cooperate with one another to create a single world-wide regulatory scheme.)

 Seeking global solutions to these problems is a genuinely rotten idea. In the case of financial regulation, it is promoted by politicians and bureaucrats who are either under the delusion that creating a “more orderly” financial system would be in the best interests of people everywhere, or to aggrandize themselves, or both.

 There is a certain prima fascia  attractiveness of having a single world-wide financial regulatory regime, just as there is prima fascia  attractiveness to the idea of a single world government such as that envisioned by some of the proponents of the United Nations or the League of Nations. It would make life easier for tourists, treasurers of multinational corporations and stock market analysts. 

 But rather than encouraging improvements in the human condition,  a world-wide financial regulatory regime would freeze our financial practices and institutions as they are now or as the authors of the regime think is appropriate, with little possibility of further evolution. Its long range success would depend on the ability of the planners to predict the nature of financial needs decades into the future, a skill they demonstrably lack.

 This regime, if ever established, would never change because its managers and administrators – like all bureaucrats – would prize stability above all else. There would be no way  to expand and modify goals and expectations; to test new ideas against the old; to seek new products and processes; to improve effectiveness and promote efficiency. 

 But we in the United States have long had the means to create just these sorts of improvements in our lives. It is called competition, and it works just fine. The venture capitalists in Silicon Valley worked out ways of motivating entrepreneurs, testing ideas in the marketplace, monetizing the successes and terminating the failures. And they did it without any help from the Worldwide Financial Authority.

 So, why not let financial institutions choose their regulators, so long as each regulator is controlled appropriately? Why not let multinational corporations establish their headquarters in countries with the most pro-business laws and institutions? That is what our multi-state corporations have been doing in the United States for 200 years, and it has worked pretty well for us.

 Gerry Hoffman

I have spent about half of my professional life in information technology management and the other half in general management, both in  large bureaucracies and in small entrepreneurial ventures. Over these years I have seen many cases where one part of an organization has developed a cost-effective method for dealing with an operational problem while another department is using a dysfunctional approach to the same business issue. Here are a couple of examples.

The marketing department of a multi-billion dollar multinational manufacturing company has a sophisticated customer management system that consolidates worldwide sales and profitability data for each customer; it uses the outputs of this system to drive sales efforts and product modifications. Meanwhile, the purchasing department of that same company has no effective way consolidate raw material and parts purchases by the manufacturing locations, missing opportunities for bulk discounts and other benefits that normally accrue to large purchasers. Why doesn’t the marketing department talk to the purchasing department? Why doesn’t the purchasing department listen?

A software service provider modified its privacy policies and was surprised when it customers complained. This same company has a highly effective system for responding to customer requests for system changes, which has contributed greatly to the company’s success. Why didn’t it use the same methods for evaluating the privacy issue that it uses for evaluating product modification ideas?

The naïve answers to these rhetorical questions are “Things are not quite the same in purchasing as in marketing.” And “Privacy is in the hands of the lawyers and they always do things in their own way.”  Probably true, but irrelevant to the real issue – how to make our organizations work better.

 In this blog, I’ll develop these ideas in some detail. We will talk about organization structures (silos) and what organizations do with those structures (silage), This will lead us into many unexpected places, including health care, corporate planning and multinational organizations.

 I invite your comments whether you agree with me or not. Perhaps we can all learn something from the interactions.

Gerry Hoffman