Carnival of the Capitalists - Feb. 27th

The latest Carnival of the Capitalists is up over at Ideologic LLC.
Hours of great reading if you want to take all the submissions in.
When Bad Things Happen To Good Concepts is one of them,
down near the bottom, in the Miscellaneous category, where it belongs.

Thanks for the link, Harish. And welcome to all CoTC visitors!

When Bad Things Happen to Good Concepts - Part Two

In Part One, you saw how good concepts can be turned into great applications through definition of proper context, and how those same good concepts could be horribly disfigured by confusing concept with context. In particular, the problem of taking other people's context to be part of the core concept and preserved at all cost is the one that dooms more initiatives than any other. Most of the failed TQM initiatives of the 80's followed just this pattern.

I contend that most great concepts can be explained in a single well-written page (or like the old crib sheets we were allowed to bring into college finals - tinily written). Or a few pages at most. Of course, most book publishers want a bit more than that, so authors add filler to create a viable product.
Some, like Taiichi Ohno, write a slim volume outlining the concept and its applications in specific situations. At only 163 pages, it's a fast read, and when you're done you truly understand the concepts behind the Toyota Production System. It's not designed as a paint-by-numbers guide to implementing lean manufacturing, but you could do a successful implementation reading only this book. You'd just have to create all the contextual information yourself. Of course, if you're looking to apply the concept in another domain (for example, creating lean production in legal services), this is exactly what you want. All the specifics of various manufacturing practices only get in the way of understanding the concept of lean processes.

Less frequently, the author will embed the new concept in a novel. The best-known of these is Eli Goldratt's The Goal, in which he introduces the Theory of Constraints in the gripping tale of Alex Rogo and his mentor Eli Jonah. At 384 pages, it's not as succinct as Ohno's book, but it's not a bad read. Nevertheless, the very powerful concept of the book is simple and straightforward.

According to Goldratt, in a system with any sort of complexity, there is a very small number (usually one) of real constraints of the throughput of the system as a whole. This could be an actual physical constraint (the machine named 'Herbie' in the book), a policy constraint, or a market constraint. The process for improving the throughput of the overall process is as follows:

1. Identify the system's constraint
2. Decide how to exploit the system's constraint (since updated to include eliminating the constraint completely if it doesn't require a huge investment, such as with policy constraints)
3. Subordinate everything else to the above decisions
4. Elevate the system's constraint
5. Go back to step one and see if there is now a new constraint. Don't succumb to inertia. Repeat until the constraints are appropriate.

Yes, I know there is a lot more to TOC, but at the time of the book's publication, that was it. You'll have to wait for a different post to discuss the wonders of the Thinking Processes and Critical Chain, because today's discussion is about mangling concepts, and we have enough with those 5 steps and 3 types of constraints.

One key aspect of any good concept is that it has been refined so that all of its parts are necessary, and they constitute a sufficient set to be effective. In other words, it is fairly atomic. If you take anything away, you lose the power of the concept. In our pencil sharpener example, the Bowie knife is an example of omitting one of the key facets of the concept (a guide for the pencil). In the hands of an expert the knife can achieve the same results as a real pencil sharpener, but you wouldn't mount one in the corner of a kindergarten class and expect good results.

A short while ago, Matt posted about Constraints for Lawyers, which pointed at this post which said the concept of the Theory of Constraints was:

“In any complex system at any point in time, there is most often only one aspect of that system that is limiting its ability to achieve more of its goal. For that system to attain any significant improvement, that constraint must be identified and the whole system must be managed with it in mind.”

The post then went on to say that in service-based businesses the lack of constraints is the real problem, and advocates imposing artificial constraints to improve productivity.


I'm not sure it's that bad, but I was initially dumbstruck by the notion that the problem for service-based businesses is a lack of constraints. In every service-based business I've ever worked in, from IBM to a two-man start-up, there were always constraints. Sometimes they were physical constraints - "We could get that new project if only we could clone Bob or get him on a polyphasic sleep schedule"; sometimes they were market constraints - "Remember 2003? Yes, and now I'm going to have nightmares about it."

I think the post's author failed to identify the system they were trying improve using TOC principles. Was it a project team? An entire service group? Without defining the system, you can't really identify the constraints.

In the case of a law firm, each practice group might be the appropriate system. If there are synergies between practices, then a group of them may be the right system definition. When in doubt, focus on your customer. How can you maximize the throughput of value to them from your "system"? Not sure? Then you've probably got a market constraint. Get out and find out what you can do! Are you in a firm that doesn't believe in "marketing" and market research? Then you've got a policy constraint, and you need to convince some level of management to let you do it.

Service-based businesses will occasionally have physical constraints, but physical constraints generally involve large capital expenditures. Sure, there are times when filling slots in the "white hot technical skill du jour" category took major capital investment-type dollars, but professional service practice constraints are more often market or policy constraints. In the case of the white hot skill, what looks like a physical constraint is really policy constraint. If you really can't find enough people with that skill set, are you valuing and pricing it appropriately? Many a service-based business has learned the odd lesson of raising prices, doing less work, and making more money all at the same time. Like the Great Zucchini.

Defining the system in question also allows you to correctly identify the real constraints. You can then take the appropriate steps as listed by Goldratt. He doesn't say "manage the whole system with the constraint in mind". He says "Decide how to exploit the constraint if you can't practically eliminate it. Then subordinate everything else to the constraint. Elevate the constraint. Once you've done that, go back and see what the constraint is now." The former is not nearly as specific as the latter, and thus it loses the power of the concept.

This watering down of the concept leads the author to suggest several artificial constraints that might be appropriate for service-based teams, such as artificial deadlines with teeth and limiting design freedom. Of course, these have spotty results, as the author notes at the end of the piece. I am once again reminded of the drunk-looking-for-keys-under-street-lamps joke. Artificial constraints are like the street lamps. Sometimes the lamp happens to be right over the drunk's car, but more often than not, it isn't.

The guys from Juice Analytics are experts in their
domain. But they fell into the trap of not understanding the full concept of TOC before thinking about implementation. While not as bad as confusing context and application with concept, the results can be just as disappointing.


Final note: your staff's imagination is VERY SELDOM the appropriate constraint.

When The Smart Money Starts To Sell...

"I'd much rather play the ponies than the stock market. At least at the track you're not betting against the house."

Anonymous Punter

Barry over at The Big Picture posts about an ominous article he spotted in the Personal section of the Wall Street Journal titled "Individual Investors Shift Assets to Stocks". He quotes the article on the massive inflows of money to discount brokers and retail mutual funds, and then asks the money question:

"Are retail investors more likely to "pile into" equities at the very beginning of a Bull Market, or at the tail end of a Bull Market?"

The answer historically has been that retail investors jump into the market right as it is about to tank. Barry's post has plenty of data showing how retail investors take over the market just before it reverses (on both the up and down trend). Add this information to Paul Desmond's technical discussion mentioned in previous posts, and it makes the likelihood of an imminent bear market rise dramatically. Somebody's got to be on the selling end of all those retail stock purchases; who do you suppose it is?

I was in New York City on Black Monday in 1987. On the evening news a camera crew went into a tavern frequented by Wall Streeters to get their reactions. Most of them shook their heads sadly and lamented about what a tragedy it was. But one extremely inebriated fellow opined: "Win lose or draw, Filch, Pilfer and Snatch [not real firm name] always gets a commission." I hoped for his sake that his boss wasn't watching.

Anybody seen the Daily Racing Form?

When Bad Things Happen to Good Concepts

Most fatal management fads begin innocently enough, just as most hurricanes begin as the flap of a butterfly's wing in some dank, impenetrable jungle pristine rain forest.

Take, for example, the pencil sharpener. In concept the pencil sharpener is very simple:


1) A cutting surface (blade) fixed at an angle to the shaft of the pencil
2) A guide for the pencil shaft to meet the blade


That's it!



But concepts alone aren't very useful. They also need context in order to be turned into valuable applications. Context contains two things critical to successful application of the concept:

• Goals
• Assumptions

The picture of the yellow pencil sharpener is one applications of the pencil sharpener concept, with the following goals and assumptions:
Goals:

• Cheap
• Simple

Assumptions:

• #2 Lead Pencil
• standard writing use

A different context leads to a different application:



Goals:

• Easy Grip
• Looks good with grapes

Assumptions:

• eyebrow enhancement use

Same concept, different context, different result. The great thing about a good concept is that it can be successfully applied in many contexts.







For instance, here's an application that adds greater efficiency of alignment and speed of turning for finer points. [Click picture for larger version]









Refinements continue...









...but eventually, consultants get involved, and you end up with...


Which wouldn't be so bad, except the consultants insist that the color of the boot is a key system parameter, and that you need to hire a group of experts in rabbit husbandry to define and monitor key metrics such as RPPPS (Rabbit Pellets Per Pencil Sharpened).

How can such bad things happen to good concepts?

Simple. The executive who read about the new concept in Harvard Business Review doesn't really want to apply the concept. No, he wants an instant application that gives him the same results as the HBR case study! And he wants it in time to effect this year's earnings!! There's no time for a complete definition of context, and besides, we're mostly similar to those other companies anyway, so let's bring in a complete application, tweak it for the most important unique characteristics of our company, and get a quick win!

But since we don't know anything about the new concept - and because we're in a hurry - we don't realize that the color of the boot was only relevant because the last application the consultant built was at a bullfighting establishment in Matamoros. Dios Mio!

The overly complicated solution isn't the only enemy of the concept. There is also danger in the overly simple solution; an application that disregards part of the original concept as unnecessary because good results can be achieved in certain contexts without it.

Thus, this perfectly good pencil sharpener:


Of course, a comprehensive training program IS a critical success factor in your implementation program.

Lest you think I exaggerate, let me disabuse you of that notion with more practical examples.

We begin in a supermarket somewhere in Detroit circa 1956. An oriental man watches a woman grab a box of Post Toasties from a shelf. A minute later a stockboy replaces the box with another from the stockroom. Suddenly the man has a Eureka! moment that would rival the original!

That oriental man, Taiichi Ohno, marveled at how the stockboys only replenished what customers had already ordered, and wondered if it would be possible to build a system where his employer, Toyota, could efficiently build and deliver cars that way. He decided to try, and when he went back to Japan, he set about creating the first Just In Time production system. It took years, but eventually he turned the auto industry upside down with a simple concept: constantly strive to eliminate muda, or waste, in 7 areas:

• overproduction
• transportation
• motion
• waiting
• processing
• inventory
• defects

During his career, he developed numerous tools and techniques in the context of the Toyota workplace. But in each case two of his key principles were "Misconceptions create waste", and "go beyond common sense". I think he'd proudly wear the Clueless badge of honor, don't you?

Of course, when U.S. auto makers finally succumbed to Toyota's application of Ohno's Lean Production system, they scrambled to catch up. Can you guess what they did?

Yep. They brought in all the tools Toyota used, such as the vaunted Kanban (Japanese for "card") system. They obsessed over the form of the Kanban (special golf balls? magic plastic squares?), even though the form of the signal didn't matter at all. And they got everyone organized into quality circles even though those were originally created to deal with the unique context of Japanese culture! Can't you just see that original stockboy, now a seasoned production worker in Detroit...




And the moral of the story is?


Never confuse ________ and ________ with ________!


Can't fill in the blanks? Another reading should do the trick. If you know the answers, then you're ready for the next installment. In part two we'll look at a real-life example of the Bowie knife pencil sharpener problem using Eli Goldratt's Theory of Contraints.

Cause and Effect in U.S. Mid-term Elections?

One of the most interesting findings mentioned in the Paul Desmond Q&A referenced in the last post was this:

"Investors simply have to go back through history and realize there is a very consistent pattern of market bottoms about every four years. You can go back and see, for example, there was a major bottom in '49, '53, '57, '62, '66, '70, '74, '78, '82, '87...Then '90, '94, '98, 2002 and that would lead us four years later to another major bottom in 2006."

I noticed that these years (after '57 and excepting '87) all landed on the year of U.S. mid-term elections. The conventional wisdom on mid-term elections has been that they have favored the party out-of-power. Desmond also notes in the interview:

"...historically, more bottoms occur in the September-October period than at any other time."

Hmm...a major market bottom directly preceding mid-term elections in which the party in power usually loses ground. Is there a cause and effect relationship here? You know that we'll be hearing about this incessantly as the election nears and the stock market tanks, with every possible spin from media outlets, politicians, and market analysts. So many experts, so many conflicting opinions. Who to believe?

Take the clueless approach! Disregard what the experts say they "know" for a minute and look at what the data says. [Note: I'm stipulating for the sake of analysis that Paul Desmond's assertions are accurate. I don't have the money to recreate the data independently. If you have facts contradictory to his findings, stop reading now and leave a pointed comment!] According to Desmond, the pattern that leads to market tops is that investors put in all the money they have to invest long before a top is reached.

"The major emotion that's present at a top is one of complacency, where people are fully invested in stocks, or are invested as far as they are going to get, but they are convinced that prices are going to keep going forever, and therefore they are willing to ignore the initial market declines that come along from time to time. As they say, they are 'in for the long term.'

At market bottoms, you have a completely different pattern in which the dominate emotion is fear and panic. And what we found at market bottoms, for example, was that in a typical major market bottom, you see a series of 90% downside days, 90% of all the volume, 90% of all the price changes are on the downside."

The recurring pattern over 50+ years is one in which buying continues until there's no more money, followed by people sitting on crossed fingers, followed by increased selling pressure, followed by raw panic selling until all the panickers have sold. But is the cycle driven by the elections?

Because the '49, '53, and '57 crashes occurred more than a year before the election, the data wouldn't seem to suggest a direct correlation. In fact, in '50, '54, and '58 stocks would have been a year into recovery by the election, but the 1958 election was one of the worst for the party in power during the latter half of the 20th century. Conversely, the market bottoms showed up right on time in '98 and '02, yet the party in power gained seats in each of those elections. My vote: no cause-effect relationship of mid-term election results on the stock market.

What about the other direction? Is there a cause-effect relationship between stock market bottoms and mid-term election results? And if you say 'yes', be prepared to explain the results of '87 (stocks flying high prior to the '86 election), '98 and '02. I think there are enough exceptions to rule out a strong cause-effect relationship. Influence due to general voter sentiment, yes, but the 2002 results in particular show that other factors can have equal or stronger influence on mid-term elections.

So as the cacophany of "expert analysis" rises between now and November 7th, give it the "clueless" scrutiny it deserves before believing any of it. If nothing else, it will turn some of the annoyance factor into amusement!

Note: source for election results is available in post title link

Doing the Impossible

"where ignorance is bliss, 'Tis folly to be wise" Thomas Gray

Kathy gets the week rolling with The Clueless Manifesto, a post extolling the virtues of approaching problems with a beginner's mind and of not accepting the conventional wisdom of what's not possible. I agree wholeheartedly with the manifesto, and have made career-limiting moves based on that conviction (it took me a while to learn that certain executives don't like employees to solve problems that the boss's consultant cronies couldn't). Then again, my greatest achievements - most notably convincing my wife to marry me - have come from this very mindset.

In the Clueless Manifesto, Kathy recalls the story of Roger Bannister, the first person to break the 4 minute barrier in the mile. Everyone knows the story at a superficial level: Before Bannister clocked his 3:59 time in 1954, many people believed that it was physically impossible for a human being to run that fast. Reading this biography, you see that Sports Illustrated proclaimed "The perfect runner, the perfect race", yet a month later his record was broken by John Landy, who Bannister beat in that year's British Empire Games in a race where they both broke the four minute mark. But the story gets better: Because he was a full-time medical student, Bannister could only practice forty-five minutes a day! But he believed in himself more than he believed in the "experts".

Stuff like this happens all the time. Recently Steve Pavlina decided to adopt a polyphasic sleep pattern, in which he naps for ~20 minutes six times in every 24 hours, for a net sleep time of 3 hours per day. It's a good thing he didn't read this article saying it was impossible! The article is almost prototypical of something written by a self-annointed authoritarian nay-sayer:

Whoever claims to be on a perpetual polyphasic schedule must be either suffering from a sleep disorder, or be a liar, a mutant, or a person with a mulishly stubborn iron-will that lets him plod through the daily torture of sleep deprivation.

Steve decided that mutant was the only option that might apply to him, but I e-mailed him and told him that he wasn't a mutant; he was the Roger Bannister of polyphasic sleep. I guess SI was right when they labeled his 3:59.4 "A Feat That Will Never Be Forgotten".

Doing the impossible isn't limited to the realms of physical and mental stamina. Anyone who has invested money in equity markets has heard that it is impossible to spot the exact tops and bottoms of bull and bear markets. In fact, it's become sort of a Holy Grail of investing. Many have quested, but none have succeeded, or so I thought. Then I read this interview (in two parts) of Paul Desmond by Barry Ritholtz. Desmond did exhaustive research of market tops and bottoms since 1900, and thinks the data shows clear indicators of both tops and bottoms. His arguments are quite persuasive.
[Note: do not read this directly after eating if you have a weak constitution. He's predicting a rough 2006, bottoming out sometime in September-October. Again, his arguments are very persuasive.]


In the bustle of everyday life, the noise from "experts" can shackle us without our even noticing. What problem do you currently face that could benefit from the Clueless perspective? In what areas can you be your own Roger Bannister or Paul Desmond?

Building the Firm of the Future

I'm a big fan of Matt Homann's the [non]billable hour. If you're not familiar with Matt, he is one of those rare professionals who spends as much time working ON his practice as he does working IN his practice. As a lawyer, he knew that the traditional system of billing clients by the tenth of an hour spent "working" on their matters was outdated and explored alternatives. He explored and blogged about these alternatives, and the information was applicable across many professions. Eventually he wised up and got the hell out of the legal profession decided to focus his prodigious talents on "thinking big thoughts" to help "people and organizations develop breakthrough, business changing ideas" in many professions.

Over the past couple of weeks he's had a guest blogger, Ron Baker, a fellow visionary of professional service firms. Ron came from the accounting profession, but his thoughts on the pricing and nature of knowledge work are useful to lawyers and technology consultants as well. He covers the basics of professional service firm business models in The Firm of the Past and The Firm of the Future. Having spent the early 90's in a technology consulting firm that focused on the legal industry, I can say his posts are spot on. What I did find amusing is that people were saying exactly the same things back then, but a great deal of professional services work is still done according to the old model to this day. I'm not sure if it is a majority, but I would bet it is. Which begs the question: why don't two professions filled with really bright minds adopt the Firm of the Future model?

Volumes have been written on this topic by minds much brighter than mine, including Ron's and David Maister's. But I think that the biggest reason for the lack of adoption is one of mindset. Professionals generally highly prefer working IN the practice. We're highly trained and expert in our practices, and derive great satisfaction in that expertise. In the realm of pricing and marketing we're relative dolts, and don't like the feeling of knowing that we are. It's like the old joke about the drunk searching for his keys under the street lamp instead of where he dropped them because the light is better. As long as clients will pay us under the old system, we'd prefer to focus on what we do best.

Even back in the early 90's a number of large clients were beginning to rebel against this system. My favorite was a Fortune 500 company that had gone through a company-wide Total Quality transformation, which meant that even the legal department had to apply the principles this company had learned from their successful partnership with Toyota. One of the first principles they applied was reducing the number of suppliers (external firms) they used. The contacted their primary outside council and made them an interesting offer: We'll give you all of our business in a certain area if you agree to 1) open up your books to us, and 2) work with us to constantly improve the quality of the work we get and constantly reduce the unit price of that work. In addition to the benefit of our business, we'll train you in TQ methods and you can leverage this knowledge capital in the rest of your practice. Some firms passed, but other swallowed hard and entered the partnership to significant mutual benefit. This situation was rather unique. Most customers seemed to adopt the attitude expressed by one GM executive who said that there were three kinds of legal work: the bet-the-company litigation for which they paid whatever the brightest minds asked, the semi-automatable clerical-type work that could be brought in house (now BPO outsourced, most likely), and the mid-ground legal work which they could reverse auction to 50 firms, all of whom provided similar quality legal work. Which is fine, except if you're a partner in one of those 50 firms, facing eroding margins ad infinitum. What could those firms due to improve their prospects?

Focus on working with customers like the first F500 company I mentioned. Ron talks about an interesting airline analogy in Baker's Law: Bad Customers Drive Out Good Customers, which discusses optimum vs maximum capacity. This is an excellent read on the subject of yield management. Of course, the idea of firing customers isn't unique to professional services firms. Plenty has been written about consumer product manufactures who said NO to Walmart and thrived without them.

But how do you get started on doing that? First, read my post on Cause and Effect in Professional Services [What, a guy can't plug his own work?]. If that doesn't make the path completely obvious, you might check out more of Ron's work, and by all means, subscribe to the [non]billable hour.

Brrreeeport

Via Todd over at A Penny For...

Scoble is trying a little game. He is telling everyone to put "brrreeeport" into their blogs. It is partial a test to see how long it takes for the search engines to notice. It is also your way to get listed with all the A-listers and break down the gates.

I thought I would play along. You can follow the brrreeeport progress over on Technorati.

Me, too. Care to play along?

And yes, I realize this is not actual content. I'll be back bloviating later in the week.

Wrath of the Football Fans

At first, I thought this was satire...

Seething Midwest Explodes Over Lombardi Cartoons

...but with details such as:

Some of the most dramatic skirmishes were centered around Kenosha, where a mob of masked snowmobilers invaded the Texas Roadhouse on I-94, briefly holding the margarita machine hostage. They were later seen storming the beverage department at Woodman's, where they purchased several cases of Point and a pack of Merit menthols, and later at the Brat Stop classic rock/sausage outlet, where they were reported angrily "boogie-ing out" on air guitar to featured entertainment Molly Hatchett.

...I'm thinking maybe it's a legitimate story. The details of places, people, and events are too realistic to be made up. That or Iowahawk has spent a lot of time doing anthropological research in Wisconsin. If you think I'm kidding, read this story about letters written by Green Bay school children to Coach Lombardi in 1960. Excerpt:

“In our fifth and sixth grade room in school we have a shrine of the Blessed Mother with all the Packers and you’re right in front of mother,” wrote 11-year-old Robert Bourdeau.

I grew up in Green Bay. This was the norm, not the exception. You can see why I was originally confused by the Iowahawk story. If anyone on the editorial staff of the Milwaukee Journal-Sentinel had a sense of humor, they'd run this piece on the front page "War of the Worlds" style - but they won't for fear of causing additional rioting!