Wednesday, October 20, 2004

Relationships: A change for the better?

I have often used the term "sub-optimization" to explain why organizations or systems don't work as planned. It's really a simple concept:

This concept from systems theory refers to the extent to which attempts to improve the performance of a sub-system by its own criteria may act to the detriment of the total system which includes that sub-system, and even to the defeat of its objectives.
The word "system" refers broadly to anything that exists or functions as:
1 : a group of units so combined as to form a whole and to operate in unison 2 : the body as a functioning whole; also : a group of bodily organs (as the nervous system) that together carry on some vital function
(c)2000 Zane Publishing, Inc. and Merriam-Webster, Incorporated. All rights reserved
A human being, a tree, a city, a business, a university... disparate, but all systems... and all capable of being sub-optimized. The athlete who takes steroids to increase muscle bulk and damages his overall health, the tree that is bred from too much of the same stock and becomes vulnerable to pests and disease, the business that places too much emphasis on cost control and too little on product development, the university that focuses too much on research and too little on student education... all sub-optimized... all performing below design for the entire system.

One of my sons recently began work as a contract employee (temporary) for a large corporation. This corporation had spent years trying to instill a "process-based" culture so that all aspects of the business ran on a methodical and interactive approach. Projects were developed through a process. Ideas were screened through a process. Work was scheduled through a process. Money was appropriated through a process. And yet it seemed to my son that nothing was being accomplished. The most minute efforts required a "process review". And worst of all, after all of the process reviews, when the work was finally done, it was substandard.

Why? How could such a "process-driven" business fail to be anything but the best?

The answer was simple: so much emphasis was placed on the process aspect, that the people aspect was sub-optimized. It was believed that as long as the processes were sound, it wasn't necessary to have the best qualified people in charge of the operations or completing the actual work. Now, don't get me wrong, they believed that they have good people and they spend a lot of time and money "training" these people. But the truth of the matter is that they don't necessarily seek the best people.

The example I use is that the company would rather pay 5 somewhat qualified people $60,000 per year than 1 absolutely the best person $300,000 per year for purely "technical" work. They are content with a lot of mediocrity rather than a small amount of genius. That's a "process-based", "cost conscious" company. So computer system development takes months... for the smallest effort. Top engineers must either become managers or not advance... so they leave if they are really good and want to be "hands on". Product design now becomes the purview of suppliers... who want to sell the components they have already designed.

And so my son comes home and says he needs to find someplace where he can really use his talents. He talks about improvements that he could have completed in a week that would have been vastly superior to what exists now, but after two months nothing has been done because all of the "process review" hasn't been completed. He talks about how one area within the company will charge another $10,000 for a job that will take 3 months when he could contract out the same work for less than $100 and have it done in less than an hour... and he knows that because he has done that.

So what's the point?

Sub-optimization is the norm not the exception. Why? Because it is easier to sub-optimize than optimize. It is easier for a department to justify 5 engineers at $80,000 for a large project than one super engineer for $300,000 to the personnel department. It is easier to say that anyone can be trained in the processes, so you do not have to hire the best qualified person.

But the reason that sub-optimization is the norm is that systems are designed to allow for the root cause of sub-optimization... it is known as change. Change in goals, wants, needs, resources, purpose... whatever the cause... need to be addressed by existing systems... and it can't always be done in a way that maintains the system's optimization.

And most systems... most of us... do not know how to stay optimized during times of change. So we try things that may or may not be effective to react to the change. Sometimes we are able to re-optimize the system and sometimes we sub-optimize it permanently.

When the airplanes hit the World Trade Center towers, the U.S. was no longer insulated from enemies attacking within its boundaries. The system that is the U.S. and all of its subsystems are trying to come to a new optimization after that change. And for awhile, we will make mistakes. We will optimize sub-systems and sub-optimize the system. Eventually, if we are fortunate, we will bring the system closer to optimization.

Meanwhile, be concerned about those who claim they now can optimize the U.S. because they see sub-optimization. Our world is still changing.

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There is always an easy solution to every human problem—neat, plausible, and wrong.
Henry Louis Mencken (1880–1956)
“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
... and one could add "not all human problems really are."
It was beautiful and simple, as truly great swindles are.
- O. Henry
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Tracking Interest Rates

Tracking Interest Rates


SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006
Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."

December 11, 2007 Somehow the Fed misses the obvious.
[Image from:]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)