Digitization and Industry 4.0 is on everyone’s lips and there is hardly a sector that is not at least partially affected by it or in whose boardroom it is not discussed.
In many places, many see the challenges as merely in the technical conversion from “analogue” to “digital”. The real challenge, however, is much deeper, since digitisation is not a conversion of something existing, but a (radical) shift towards something completely new! Why digitisation is difficult is due to the organisational structure of these companies. Successful digitisation is nothing more than a successful change in the organisation itself.
But why this is not easy for companies in the course of digitalization is due to their genetic code, their most basic structural orientation on which almost everything is based: their efficiency!
You wonder why that is? A look at the “career” of a company will bring more clarity.
The ineffective startup
To understand why a company’s efficiency is one of the biggest threats to digital change, it is helpful to look at the often cited and feared garage start-ups.
It’s frightening, but these are anything but efficient companies. They are even inefficient to a great extent! Obviously, they can be identified by their sometimes immense cash burn rates with negative cash flow. No wonder, every 2 out of 3 start-ups does not survive the first three years of operation and goes bankrupt. Efficiency is different!
Why are startups so inefficient? First of all: No, it is not because they are founded only by inexperienced students. The obvious is all too often overlooked: Startups are not efficient because they are not yet effective!
Effectiveness and efficiency explained. According to Wikipedia this means: “To work effectively means to work in a way that achieves the desired result. To work efficiently means to work in such a way that the results achieved and the means used are in the best possible cost-benefit ratio and the benefits are greater than the costs” (Definition of effectiveness)
For a start-up (or a company in general), the “desired result” is nothing more than a functioning product that is sufficiently accepted by the market. Ideally, startups start with an MVP (Minimal Viable Product) and are increasingly approaching a Product Market Fit. If this way is successful, i.e. a product is found, a market is potent enough for it and the financing is sufficient until then, most of them are out of the woods. The startup has become an effective company!
The inefficient startup
But what happens now in almost all companies would probably be one of the most remarkable metamorphoses in the animal world! The company has found its functioning product, has placed it on a sufficiently large market and thus generates sufficient sales; so to put it in a nutshell it has finally become effective and then this: it does everything to increase its efficiency!
Because after drinking the champagne of the first success, interesting things happen in the company. While one server instance was previously sufficient for the web application, now considerably more computing power is required for the increased number of requests. If the founder had taken care of the user support himself in the beginning, he would now come to nothing more than write customers mails. And if only a few months ago it was enough to produce a few dozen of his articles once a quarter, you run the risk of no longer being able to meet the demand! You simply can’t keep up any longer!
“There is so much to do! We have to become more efficient!” The motto of our founder at the next Townhall-Meeting. And he is not that wrong! Because now it is a matter of stabilizing success, ideally expanding and scaling it. Congratulations we are on the way to an efficient company!
Efficiency in companies
A startup cannot be effective or efficient at the beginning, it should not be. But how do effectiveness and efficiency behave in large companies and corporates?
One of my favourite examples of maximum efficiency in companies is “just-in-time” delivery of production parts in car production, also known as “rolling storage”. In order to keep costs for their production warehouses as low as possible, automotive manufacturers outsourced the production of many parts to external suppliers, while at the same time delivering just enough of these parts at exactly the right time for assembly. A single part is already installed in the future car a few minutes after it has been unloaded by the supplier truck. There are almost no more warehouses in the factory and therefore only low storage costs.
In order to make this supply chain as efficient as possible, all conceivable factors are taken into account: Weather, time of day and season, congestion situation up to switching phases of the traffic lights to be passed. Everything runs so efficiently that the arrival of the truck with individual parts is scheduled with a few minutes deviation. Over longer distances, several times a day, 365 days a year! Actually really fascinatingly efficient!
But why does it have to be so efficient? The answer is also frighteningly simple: large companies and corporations have found their product sufficiently. They have already achieved their Product Market Fit and both probably already many years or decades ago and for car manufacturers actually more than 100 years ago!
This means that the founder’s townhall speech about “increasing efficiency” is a long time ago (as are those of their competitors). Thus, these companies have been effective for a long time, and have been busy increasing their efficiency for a long time. Again, efficiency improvement (see definition above) is nothing more than achieving lower costs, means higher profits and means price differentiation from competitors!
In simple terms, efficiency in a company is nothing more than keeping a product on the market with low costs.
Once this path has been taken, it often means that the entire organization has to move away from effectiveness and towards efficiency.
Automation, standardization and specialization are now finding their way into companies! The toolbox of efficiency (not effectiveness).
Gottlieb Daimler certainly did everything from the development and construction to the sale of the first car himself. Today, hundreds or rather thousands of individual activities, professions and roles have been defined. Each one is super-trained for its purpose, each highly specialized. Other enterprises in other industries are positioned in the same way.
Added value for the company: Each individual work step is highly efficient.
Specialization requires standardization, individual roles must work together as optimally as possible. Processes are defined and documented, each work step receives its own box in which it now functions optimally. Every employee knows what he has to do and where, when and how. The large, perfectly coordinated (literally) gear train has been created!
Added value for the company: Despite increasing specialisation and thus the number of employees, the quality remains the same or even increases.
If only specialists work in their respective fields, connected by standards and processes, it is a matter of eliminating inefficiencies in the next step by technology. Robots are used in production or workpieces are no longer produced individually but x times simultaneously. Administrative activities increase their efficiency through the use of various computer programs (where does Excel come from?). Everything that can be done manually is subjected to an automation check and… rationalized, exactly!
Added value for the company: Less (costly) manpower, in case of doubt shorter processing times.
It is extremely difficult to identify the original startup from which it emerged in a corporate group. An atomized specialization in combination with automation and standardization from the outside only reflects an organization that is no longer comprehensibly complex. If, however, everything is reduced to the original MVP of the company, the founder can still be seen today working on his product. Go to an automobile museum! You will be amazed how much of it you recognize.
Theoretically it might even be possible that Karl Benz – if he were alive today – could build a car on his own. Only it’s incredibly inefficient! Very long production times with very high costs, just inefficient!
Stop being efficient!
Efficiency is wonderful if only there weren’t this digitization. Digitization, as mentioned, is not a conversion from “analogue” to “digital”. It is replacement, renunciation and separation from the existing!
If it were only a conversion, then companies could simply continue what they did before (their analog product) into digital now. Only the way would have to be adapted. It would be a process adjustment, like one of many adjustments made before. Corporations are absolute top professionals when it comes to adapting their processes: they have been doing it for decades to continuously increase efficiency!
However, we have something new here: it is a replacement, renunciation and a separation! And this does not mean the processes, but the replacement of your previous product!
A few examples:
- A smartphone is not a converted (mobile) phone. It is the linchpin of all communication, information and administration in just about every area of our modern lives. Camera, video camera, game console and diary all in one!
- A provider like Amazon is not an online department store. It’s my personal buying advisor who supplies me at any time, in any place, with all the desirable items that fit my customer profile exactly and that goes from books to potting soil for the garden.
- A car will soon no longer be just a means of transportation, it will become a freely configurable transport platform that uses my data to provide me with optimal entertainment to my destination. Driving will probably become a minor matter!
- A music streaming service is not a digitized CD collection. He is a personal DJ, who accesses the complete music universe and from which he plays at any time in any place the songs that fit for exactly this moment and this mood.
Disruptive innovation describes nothing other than radical rethinking, detachment, renunciation and separation from the old! But it also means losing its effectiveness and finding it in a new product (like a startup).
Therefore: Just as a startup is first neither effective nor efficient, then becomes effective and sets off on its way to high efficiency, in digitalization it is necessary to go the other way round. So I propose that we do this: Stop being efficient!
Digitisation means learning again how to be neither effective nor efficient (at least partially).
5 ways out of the efficiency trap
1. no time recording or strict working time regulation
Time recording and reporting was introduced in the course of industrialization (and made sense there). Workers were paid for the physical work they actually did. Time was a representative of work done. But factory workers did not have to be creative or innovative, not effective!
Creativity and innovation cannot be forced and both need an essential basic element: Freedom! Start giving your employees freedom by doing without time recording, hour accounts and work reports! Time is no longer an equivalent of work.
2. use of OKR for roadmap planning
If you and your company want to concentrate on the “what” and not the “how” and thus focus on effectiveness again, I recommend the use of the “Objective – Key Results” model.
OKR force them to a radical shortage and focus and ask questions about the most important (content) what their company should do. OKR also focus on “shoot-for-the-moon” goals and encourage companies to act as startups do at the beginning of their journey.
3. artificial shortage due to “Metered Funding
The normal budgeting process in companies is based on the principle of resource allocation (team member, money) after estimation. This means that it must be defined & estimated beforehand what is to be developed, the allocated budget is based on the estimate.
Very few startups have the luxury to get as much money as they need. Most go from investment round to investment round and have to show that their idea or product really works. And that’s exactly what “Metered Funding” does.
It works like the financing process of a start-up. Ideas that are to be promoted are presented to the decision-makers who allocate the funds through a series of investment rounds. Financing is based on measurable goals. If these are achieved, there is more money. This creates (almost) something like a start-up in your company by always asking the question “What? What is our valuable product!”
4. outcome does not measure output
Output (i.e. throughput) can, for example, describe the number of workpieces produced by a machine. Outcome, on the other hand, measures the actual result or effect on something.
If they attach importance to the effectiveness of their product development, then they measure the added value of their product with the customer. Use product-related indicators such as conversion or churn rate, size of the shopping basket or use the Net Promoter Score. Measuring the output of your teams is a pure efficiency indicator, added value is effectiveness!
5. business value prioritization
A prioritization of their product roadmap based mainly on implementation costs or urgency will soon make them look directly or indirectly at the issue of “efficiency”. Do you want to produce cheaper and faster, but are you still doing the right thing? It is very likely that with this prioritisation they are not looking at “what”, i.e. effectiveness, and its added value.
With prioritization techniques like WSJF (Weighted shortest Job First), the Kano Model, the MoSCoW prioritization or the Pirate-Metrics (AARRR!) they force themselves to prioritize their projects according to their business value (the value for their customers and thus for their company). The discussions revolve around the “what” and force them to think about its added value.
Companies change (almost automatically) in their life cycle from an ineffective startup, which has yet to find its functioning product, to a company whose main or greatest attention is to increase its own efficiency! The path from one to the other is automatic, unnoticed and very fast and penetrates everything!
In this way, many of these companies continuously and consistently forget to ask themselves about “what”, i.e. new / value-generating / innovative products. They focus more and more on being able to offer the existing, functioning product better and more efficiently.
To leave this way successfully succeeds with consequent shortage and a “what”-focussing (OKR employment, Metered Funding), radical prioritization based on Business Value and an organization which is liberated from outdated working models.
If you need assistance with your effectiveness or the digitalization of your business, let us talk about these and other suggestions.