The consequences of Lean at BP

In his new book on BP, Tom Bergin blames lean management principles for the Deepwater Horizon disaster. Here is a summary of Bergin's argument, taken from a review by Mattathias Schwartz, LRB 6 October 2011.

The beginnings of the Deepwater Horizon disaster, Bergin argues, can be found in the reorganisation Browne undertook, applying to BP the leaner management principles he learned at Stanford. The company was divided into ‘strategic business units’, independent companies within the company, each of which could allocate its capital and manage projects as it saw fit. Managers were held to short-term ‘performance contracts’ focusing on high production and low cost. Those who could extract the most oil while spending the least money were rewarded with promotions and bonuses. Promising junior executives were shuffled between posts all over the world, rarely staying anywhere long enough to bother replacing outdated equipment or rusting pipelines. ‘Go to the limit,’ Browne told his managers. ‘If we go too far, we can always pull back later.’

Bergin argues persuasively that such practices amounted to ‘moral hazard’, with BP not quite consciously rewarding the senior employees who engaged in the riskiest behaviour. The cost-cutting continued under Hayward, who trimmed BP of drillers, geologists and other specialists, outsourcing technical tasks to contractors and filling the company’s top ranks with traders who knew how to allocate capital and whip subordinates into meeting the next quarter’s targets. The demands for rapid production and low cost grew even more intense as Hayward instituted ‘stretch targets’ whereby the results achieved by one outperforming business unit were touted as company-wide goals.

Much the same sort of thing has been going on elsewhere, in manufacturing and retail in particular, since the late 1990s, when a new wave of Taylorism swept through management theory. Under the banner of euphemisms like ‘accountability’, workers’ earnings and job security were linked to ever rising performance goals. For a retailer like Wal-Mart, there were few upper limits on efficiency targets – impossible goals could be passed down the chain of command until ambitious managers felt compelled to lock their minimum-wage employees in stores overnight. But oil and gas extraction were a special case. At the bottom of the production chain were the implacable realities of geology, whose limits could not safely be breached. ‘Thus began a continuous effort to go beyond what BP’s own engineers considered physically possible,’ Bergin says of the stretch targets. One of the most important measurements was raw speed – how fast project leaders could get a hole drilled – calculated in ‘days per 10,000 feet of drilling’. It was as though BP’s senior executives in London had sent their workers into a room full of flammable gasoline vapours with a box of matches and a live chicken, offered prizes to whoever could produce a cooked chicken fastest, then handed the workers safety manuals, closed the door and turned their backs.

Mattathias Schwartz, LRB 6 October 2011 
reviewing

• Spills and Spin: The Inside Story of BP by Tom Bergin 
• A Hole at the Bottom of the Sea: The Race to Kill the BP Oil Gusher by Joel Achenbach

See also my post Black Swans and Complex System Failure.

Philosophy and Entrepreneurship

Richard Price is a web entrepreneur, the founder and CEO of academia.edu. He is also an academic philosopher, with a fellowship at All Souls College Oxford, and is accustomed to being asked about the connections between philosophy and entrepreneurship. In an article in the latest edition of Oxford Philosophy Magazine (pdf), he offers the following hypothesis.

Some people ask me whether there are any connections between philosophy and entrepreneurship. I think there is at least one connection, which is about attitudes towards problem-finding. Problem-finding comes before problem-solving: you have to find and clearly articulate the problem before you can set about trying to solve it. In everyday life, we often zoom along through logical transitions at such speed that we don’t notice minor glitches in those transitions. I think one thing that philosophers do is try to slow those transitions down, so that we are more sensitive to glitches that may occur. After experiencing a glitch, something that doesn’t feel quite right, instead of marching ahead, philosophers will magnify that sensation of something not feeling quite right, in order to see whether there is an underlying problem in the rational transition.

When looking for business ideas, the analogue is that we often zoom around in life having adapted our behavior so successfully that we don’t often notice the constraints that we are skilfully navigating around. When hunting for business ideas, one has to slow down when one feels that one is navigating around some constraint, and then examine that constraint to see whether it can be removed. This is one of the similarities between philosophy and entrepreneurship for me: in the case of philosophy, one is on the lookout for logical problems with a train of thought, and in the case of entrepreneurship, one is on the lookout for practical problems in a train of activity.

I think this answer implies something about the ability to switch logical levels - to think practically about a business problem, but also to think about how one is thinking about the business problem. Reflexive thinking, we might call it.

Innovation often depends on people finding new answers to questions that most people thought weren't worth asking. For example, when Bill Gates asks "What is a network?", this could either be interpreted to mean that Bill Gates is stupid or alternatively that he is very clever. (Smart money goes with the second of these two possibilities.) See my post What's the difference between judges and geeks?

Apprenticeship

The BBC programme "The Apprentice" gives a highly distorted picture of business and apprenticeship, for the sake of popular entertainment. The programme shows a group of good-looking and confident young men and women being given a series of short tasks by a rather brusque businessman. One candidate is eliminated each week, and the survivor is promised a well-paid but unspecified job by the said businessman. In the BBC version screened in the UK, the role of brusque businessman is played by Lord Sugar, who made a fortune from Amstrad computers and other electronics.

The programme provides a fly-on-the-wall view of the candidates as they tackle the week's tasks, occasionally intercut with wry comments and face-pulling from the consultants who are employed to supervise them. Viewers imagine that they are getting a rounded and authentic picture of the strengths and weaknesses of each candidate, although we tend to see more of the flashes of idiocy and spite, than the solid and intelligent graft that produces real success. When Lord Sugar announces which candidate is to be fired each week, the viewer may then jump to conclusions about the relative importance of the different strengths and weaknesses as seen, not just in Lord Sugar's mind, but in the mind of any equally successful businessman, and this gives an extremely distorted impression of the characteristics that might be valued more generally in the business world.

I saw one programme in which the candidates were sent out to sell cheese, and the game was to see which team sold the most cheese in one day. In the real world, that would be a ridiculous way of assessing a person's business ability. If I were in Lord Sugar's position, the candidate I should want to hire would be the one who didn't necessarily sell much cheese on the first day, but went back and sold more cheese the second day, and continued to improve. Surely persistence and determination are far more important than beginners' luck?

In the present economic climate, there are many bright and ambitious but inexperienced young men and women, who are unable to find jobs that match their abilities and potential. This is a cruel waste. There are also many sectors (fashion, journalism, media, politics) where it seems the only route to a glamorous and well-paid job is to work as an unpaid intern for an extended period. This is unfair (because it tends to favour candidates from affluent families) and open to exploitation (because the interns are donating their labour to already profitable companies with no guarantee of getting anything in return).

The kind of arrangement I'd prefer is something between apprenticeship and internship, where young people can earn something and learn something and add value for themselves and their employers. Let's imagine a dairy businessman who really wants to find new outlets for his cheese. Let's suppose he employs a couple of inexperienced sales representatives, paying them reasonable commission and expenses, and giving them a fair amount of coaching, mentoring and support. This might be a full-time job, or more likely something that occupies the young person several hours a week alongside other less challenging jobs. Alternatively the coaching and mentoring are provided by retired business people on a voluntary basis.

Of course there are already some schemes of this kind, but there should be a lot more. I believe many successful small businesses would be willing and able to support such a scheme, and many young people would be eager to participate in such a scheme, which would undoubtedly enhance not only their CVs but their actual business experience. In a few years time, these young people will then form the backbone of the next generation of entrepreneurs. Lord Sugar cut his own business teeth selling cooked beetroot on a market stall. Where is the 21st century equivalent of this kind of experience?

Psychodynamics of leadership at Microsoft

This week's news that Ray Ozzie is leaving his role as Chief Software Architect at Microsoft is being interpreted as a personal failure either for Ozzie himself or for the Microsoft CEO Steve Ballmer. Some commentators are saying that Ozzie had not been a satisfactory replacement for Bill Gates (for example suggesting that he couldn't match Gates' ability to bridge business and technology), while others are suggesting that Ballmer is using Ozzie as scapegoat for his own mistakes.

From a systems perspective, we might ask whether any two men or women, however brilliant, could have satisfactorily performed this divided leadership for an extended period. We might recall that Bill Gates performed both roles himself until 2000, so Ballmer and Ozzie were each being asked to replace one half of Gates. (Stepping into Bill's shoes, getting one shoe each.) We might also note that the Microsoft's share price has been relatively flat since 2000, although it would be wrong to draw simplistic conclusions from this. (For what it's worth, Microsoft's share price fell after the announcement of Ozzie's departure.)

Where there are two strong figures at the top of an organization, this can produce certain psychodynamic patterns, both functional and dysfunctional. That doesn't mean that shared leadership can never work, but that it doesn't work in quite the same way that sole leadership works.

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Sources

Ballmer email to employees
Microsoft blog @ seattlepi
Joe Wilcox, It's a shame about Ray Ozzie
Roger Strukhoff, Ray Ozzie, Steve Ballmer, Steve Jobs & The Cloud

Experience Curve

@RogerBohn complains that The Economist praises a dangerous and obsolete management concept - namely the experience curve or learning curve.

The theory of learning-by-doing was introduced by economists to explain the macroeconomic observation that productivity typically increased during an extended period in which the production processes and technologies remained the same. The theory suggests that these productivity improvements can be related to cumulative production volumes. Economists use the theory to predict that aggregate productivity levels will increase under certain circumstances. However, management consultants have generally used the theory at a microeconomic level, apparently believing that it predicts productivity improvements in specific production units, and that (as Bohn complains) "improvement is inevitable and the same for everyone in an industry".

Bohn points out how productivity in the car manufacturing appears to run entirely counter to the microeconomic interpretation of learning-by-doing. Productivity at Toyota improved far faster than at General Motors, even at a time when it produced (and had cumulatively produced) far fewer cars than GM.

Now here's the twist that may save the theory. Toyota's competitive advantage was in JIT and “The Toyota Production Process,” which Bohn describes as "a system for making more rapid improvement". So Toyota core process wasn't manufacturing-cars, it was improving-manufacturing-cars. Toyota was making improvements at a staggering rate, which left its competitors standing. It's more difficult to count improvements than to count cars (because improvements can be understood in different ways), but it is not hard to believe that Toyota's cumulative number of improvements has been higher than that of GM for a long time now. If we reframe the production system in this way, perhaps the theory of learning-by-doing could apply to this example after all.

But this interpretation of the theory of learning-by-doing is quite different from the conventional interpretation, and would make its use as a predictive tool or as a consultancy tool much more problematic.

Whole Foods

Two contrasting descriptions of the same organization crossed my desktop today.

• Leah describing WholeFoods as an anarchist organization (The Business Anarchist Is The New Entrepreneur via Tom Graves).

• Bruce Schneier describing WholeFoods as a petty-minded legalistic organization (Perverse Security Incentives).

Can these two apparently conflicting descriptions be reconciled? What other descriptions can you find? Do these apparent contradictions represent superficial differences or deep divisions?

From Espresso to Instant

Starbucks is changing its business model. Or as CEO Howard Schultz tells the Huffington Post, Staying Real in an Instant. Starbucks will be selling shots of instant coffee, for under a dollar a cup. The UK price is said to be around 60p.

Some people may have thought that "espresso" was the Italian word word for speed. (It isn't - it means "pressed".) So what could be faster than express coffee? Instant coffee!

Of course the word "instant" isn't about getting the coffee more quickly either, it is about doing away with all that fancy machinery, in whose use Starbucks makes such a charade of training its baristas. (A year ago, Schultz ordered all US stores to close for a three-hour training session "as part of an effort to improve coffee quality and revive the chain's flagging fortunes" [Guardian, 26 Feb 2008].)

Shultz now claims to be responding to the increasing mobility of consumers. "Imagine a cup of Starbucks VIA Ready Brew on a mountaintop" he says, as if willing us to imagine millions of Starbucks customers on some remote and implausible trek.

But clearly his real interest is selling mass market coffee. He hopes that the Starbucks instant coffee will be not only better-tasting but also "paradigm-changing" (whatever that means), and hopes "to turn on a whole new set of coffee drinkers to the Starbucks brand". But the obvious risk is that the old set will be turned off. He acknowledges that this move is a gamble (he calls it "a considered bet"), and expects "to learn a lot ... over the coming weeks". You bet.

In what sense does this count as a new business model? Starbucks already sells ground coffee and coffee beans in supermarkets across the USA. Many rival coffee purveyors have already shifted to the Gillette model, in which the coffee machines are sold cheap or practically given away, and you make your money selling overpriced pods of coffee.

The challenge faced by Starbucks is not choosing one business model, but attempting to combine two or three different (and possibly incompatible) business models at the same time. Such composition faces questions of cross-subsidy, brand dilution or erosion. Are there any reliable rules or patterns governing the interoperability (compatibility and composition) of business models?

See also

• Starbucks to Combat Brand Erosion with Loyalty Program (Marketing Vox, March 2008)
• Starbucks: How Growth Destroyed Brand Value (Business Week, July 2008)

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cross-posted to SOA blog