A CPA from the city is walking down a country road past a farm when he sees a farmer feeding pigs in a highly unusual manner. The farmer is standing under an apple tree, holding up an enormous pig so that the pig can eat as many apples as it wants. The farmer moves the pig from one apple to another until the pig is satisfied, then the farmer starts again with another pig.
The CPA watches the farmer feed his pigs in this way for some time. Finally, he can’t resist asking the farmer, “Excuse me. I can’t help notice how hard it is for you to lift and carry and feed these pigs one by one at the apple tree. Wouldn’t it save time if you just shook the tree and let the pigs eat what falls on the ground?”
The farmer looks at the CPA with a puzzled expression and asks, “But what’s time to a pig?”
(Adapted from The Time Paradox, pg. 7.
We read and hear it repeated everywhere: productivity needs to be improved in Professional Knowledge Firms (PKF). But nowhere is this term defined. What, exactly, does it mean to say that efficiency needs to be increased in a PKF? (I will use the two words––productivity and efficiency––interchangeably throughout this post).
What, Exactly, Is Productivity?
Productivity is always a ratio, expressed as the amount of output per unit of input. Mathematically, it seems straightforward, as if there was one widely agreed upon definition of the components of the numerator and denominator. In an intellectual capital economy, however, it is a conundrum.
Take the denominator in the ratio. Which inputs should be included? If we are dealing with wine, we could count the costs of the grapes, the bottles, corks, etc., none of which would help us define––let alone value––the final product. As they say, it is much easier to count the bottles than describe the wine.
If we were dealing with Rembrandt’s productivity, we could sum up the cost of paint, canvas, brushes, and even the amount of labor hours spent plying his craft. Would there be any relationship to the final value of the output? Would counting the number of paintings produced over a given time period help?
We can calculate how many surgeries the cardiologist performs in a given number of hours, but it doesn’t tell us anything about the quality of life for the patient.
Was Einstein efficient? How would you know? Who cares?
Firms have learned costs are easier to compute than benefits, so they cut the costs in the denominator to improve the efficiency. This is the equivalent of Walt Disney cutting out three of the dwarfs in Snow White and the Seven Dwarfs in order to reduce the inputs, making the resulting ratio look better. Efficient, yes; effective, hardly.
The fact of the matter is, we do not know how to measure the productivity of a knowledge worker. And this is true for a very fundamental reason.
There’s No Such Thing As Generic “Efficiency”
Efficiency cannot be meaningfully defined without regards to your purpose, desires, and preferences. It cannot simply be reduced to output per man-hour. It is inextricably linked to what people want––and at what cost people are willing to pay.
Consider the example of a hammer in a poor country. It’s likely to drive more nails per year, since it’s most likely shared among more people and sits idles less of the time. But that does not make the poor country more efficient; it just proves that capital tends to be scarcer and more expensive in those countries.
During the Cold War, the old Soviet Union used to boast that the average Soviet box car moved more freight per year than the average American box car. Yet this didn’t prove they were more efficient. On the contrary, it proved that Soviet railroads lacked the abundant capital of the American industry and that Soviet labor had less valuable alternatives to engage in than their American counterparts (I am indebted to Thomas Sowell, and his masterful book, Basic Economics, for these two examples).
A Thought Experiment
Princeton economist William J. Baumol asks this thought-provoking question: How would you go about increasing the productivity of a string quartet playing Beethoven? Would you drop the second violin or ask the musicians to play the piece twice as fast?
Adam Smith explained how the specialization and division of labor were the major causes of productivity increases and the creation of wealth. However, even some of Smith’s insights are not effective in a knowledge environment. Shakespeare could not specialize in writing the verbs while a colleague wrote the nouns of his many works, even though this would, no doubt, increase generic “productivity,” at least given the way PKFs currently measure that statistic.
So, Why All the Fuss About Productivity?
Most likely, because it can be easily measured. But that in no way means we can manage it, let alone change it, especially when you’re talking about knowledge workers. One does not change one’s weight by having a more accurate scale, or by weighing yourself more frequently.
Your automobile is not 100% efficient, since it’s idle a majority of the time. So what? When you want to go somewhere, it is incredibly efficient, since it meets your purposes.
What would you conclude regarding the efficiency––that is, output divided by input––of a particular laser beam that wasted 60 to 90 percent of the electric power received at its back end before projecting an intense, blinding beam out the front?
It doesn’t sound very efficient does it? Yet that is exactly the productivity of the laser beam used for cataract surgery to restore eyesight. It is not at all efficient. So what? It is, however, highly effective. In this case, the waste of energy is clearly a virtue, not a vice. You would never draw this conclusion studying the ratio of output to input, as the math misses the miracle of restoring the joy of human sight. If you were the patient, inefficiency is clearly superior to ineffectiveness.
None of this is meant to suggest that firms ignore productivity tools, such as document management, faster computers, software, printers, dual monitors, PDA devices, etc. We are not Luddites. No one is suggesting we return to typewriters and carbon paper, though the logic of the billable hour would reward that very behavior.
I am making a very different argument. That efficiency in a PKF, in and of itself, is not a competitive advantage. It’s the equivalent of having restrooms. If your firm isn’t using the latest technological tools that is incredibly inefficient; but if it is, so what?, since all of your competitors are too.
The differences in firm revenue and profit cannot be explained by efficiency, only effectiveness in customer service, as well as the ability to create, communicate and capture value. Efficiency is a table stake—the minimum you need to be in the game.
Competitive advantage is built on effectiveness, not efficiency.
What is the Purpose of a PKF?
What are firms trying to accomplish? What is the goal? Is it simply to crank out more work per labor hour?
If that’s the case, then under the hourly billing model their revenue actually decreases. That seems ludicrous.
Is it to crank out more work per labor hour to increase firm capacity? For what purpose? To add more “F” customers? That, too, doesn’t make much sense.
And since becoming more efficient is a zero sum game over time, we have been left with working more hours to earn more. The historical business paradigm of our profession found itself on a collision course with our commitment to the well being of our people.
Simply stating that a firm wants to be more productive is meaningless. They need to define what they are trying to accomplish long before they can begin to consider the best way to achieve their objectives.
Purpose and strategy are not driven by operational efficiency. You could run the most efficient buggy whip manufacturer in the world. Again, so what? Being efficient at doing the wrong thing is a colossal waste of resources.
Walt Disney didn’t build his empire based on efficiency. Your kids are not watching The Two Little Pigs, even though this would have been one-third more efficient to produce.
This ruthless quest for increased productivity contains within it a grave moral hazard. It’s encouraging behavior from firm leaders that is driving out creativity, innovation, dynamism, customer service, as well as talent from the professions.
Doing the Right Thing, not Doing Things Right
Forget about productivity. Worry about effectiveness. Better still, focus on efficaciousness; meaning having the power to produce a desired effect. This term is used to describe the miraculous power of many drugs since it suggests possession of a special quality or virtue that makes it possible to achieve a result––exactly what we are trying to accomplish in PKFs for customers.
In an intellectual capital economy, and within PKFs, where wealth is created using the power of the mind––as opposed to the brawn of the body––these characteristics better explain the value created by knowledge workers.
Yet all of the so-called “efficiency” metrics that are used were developed in the late 1800s for manual laborers in factories, not knowledge workers who don’t work to the rhythms and cadences of an assembly line.
Firm leaders need to stop looking at output-input tables based on labor hours. Rather, they should define what their purpose and strategy is so to be different than the competition in order to command premium prices.
You’re only going to be able to achieve that by hoisting up some pigs and stop worrying about efficiency.
After all, what’s time to a knowledge worker?