The Efficiency Trap

The Efficiency Trap

By John Muldoon

There’s a man in Holland. Calls himself “The Grumpy Innovator.” He says efficiency is the enemy of innovation.
There’s a man in Ireland. An entrepreneur — and he’s counting on it.

In his book, Thoughts From A Grumpy Innovator, Costas Papaikonomou warns of the dangers of operational efficiency. “The expertise required for operational excellence and the attitude required to successfully improvise are mutually exclusive,” he writes.

There’s no doubting that operational efficiency works. Look at Dell. Its ruthlessly efficient operations drove down PC prices in the 1990s, delighted consumers and terrified competitors. Founded in 1984 by a college kid, it had beaten older rivals such as HP, Compaq and IBM to become number one PC seller in the US by 1999.

Its innovative business model, eliminated middle men, gave the customer greater control yet tamed the inventory monster.

But is a company’s operational effectiveness the enemy of innovation? Do those companies that relentlessly iron out slack from their systems fall in to an efficiency trap?
One of the last papers I wrote for my MBA was on technology S-Curves. As it was near the end of the course, I decided to have a little fun and map out, however imperfectly, technology developments in recorded music since the 1870s.

Operational efficiency does work. It can even lead to incremental innovation. Left to run its course, it can do great things. And it’s something large corporations with talented managers excel at.

But when you stand back and look at changes in recording and technology, you start to wonder. “Who knows?” you ask yourself. “If the efficiency experts were given a shot, maybe phonographs would now be portable and less than half the size of my typewriter!”

But standing back is a luxury an operational guru is unlikely to like. And that makes them the least likely to spot technology or customer shifts that lead to things like records, cassette tapes or MP3s.

The second problem is that the drive for efficiency tries to drive out uncertainties. That’s great for getting widgets out the door. But it leads to inflexibility. The only problem is that life is unpredictable.

Dell stumbled with laptops. But it really had nothing in the pipeline when competitors began to copy its business model.

The third and worst problem is that blinkered thinking on efficiency feeds naturally in to focus on numbers. It happened to Dell. As with the vast majority of publicly traded companies, its focus became quarterly.

Once that happens, long-term sustainability becomes nothing more than an unwelcome expense.

So, what can companies do? The key is to counterbalance operational efficiency with time and autonomy.

  • The Grumpy Innovator suggests an “ancient planning truth.” Plan with 80% “rigor and cunning, then leave 20% flexible for the unpredictable.”
  • Google has its famous 20% time where engineers work on projects of their choosing. Some well-known examples there are Gmail and Google News.
  • A less famous example is Australian software company Atlassian. A self-described group of “400 geeks, beer drinkers, nerf herders, fraggers, and Wolverine-wannabes,” this company has a quarterly day when normal operations go on hold. Developers are told they can work on whatever they want for the next 24 hours. All they have to do is show it to the company. And all management does is get out of the way.

And what of the entrepreneur in Ireland? He has built property management software and found his first customers. He is looking for investment and knows investors will want a return in three to five years. That means selling to a large established competitor.

But they have gone down the entrepreneurial route. They hired managers and became efficient. Now bereft of ideas and the means to implement them, they seek to acquire small fry to replenish the innovation store.

As the Grumpy Innovator says, if new ideas required processes, JFK would have said, “Before the end of the decade we will have NASA” instead of “a man on the moon.”

If you have any questions or would like to know if we can help your business with its innovation challenges, please contact us here or email us at solutions@prescouter.com.

More of Our Insights & Work