Business managers who don’t understand the point of diminishing returns quickly become former business managers, discredited by their failure to recognize when its time to stop throwing good money after good.
The point of diminishing returns, also known as the 80/20 rule and, in this space, as the exalted state of good enough, is backed by a significant body of theory built around Vilfredo Federico Damaso Pareto’s century-old insight that many cost/benefit curves are asymptotic, not linear.
Pareto’s critical insight: Just because some of something is good, that doesn’t mean more of it is better.
But sometimes, Pareto’s law turns out to be horribly optimistic. Many cases are like vitamin A, where some is good, but more is highly toxic.
It’s the sweet spot, less-explored but probably more important than Pareto analysis. It’s where the point of diminishing returns turns into the point of impending deterioration. Where Pareto’s investment/benefit curve is asymptotic, the sweet spot sits atop a bell-shaped curve, where stability is to be found at the two extremes but the best results are delivered from the midpoint.
The poster child for sweet spot violation was Neutron Jack Welch’s policy of terminating the bottom 10% of General Electric’s workforce every year.
For the first few years this policy made sense. GE was complacent, and many employees had “retired in place.”
But if we also assume GE did a good job of deciding who its worst performers were, it’s a statistical certainty that after a few years GE’s recruiters found it nearly impossible to track down replacements in sufficient numbers who were (1) as good or better than the employees remaining in GE’s workforce; and (2) willing to work in such a chilling atmosphere.
Second example: process management. Take a cowboy organization — one in which fierce independence reigns and each employee figures out the best way of handling things each and every time situations arise, no matter how common the situations are.
There’s little doubt that figuring out how to handle a situation once and then perfecting how the organization handles it over time will lead to better results than constantly starting from scratch. Which is to say, standardizing the processes and procedures used to deal with common situations generally makes sense.
When starting with chaos, a focus on process leads to performance improvements.
Some organizations, seeing these improvements, figure investing even more in process will deliver even more improvement.
And so they do, but what they end up with instead is a stifling choking bureaucracy in which employees, terrified of the consequences of failing to follow standard operating procedure (SOP), use what little initiative they have left to find the SOP that’s close enough to get by. Does it, or any of the other documented SOPs make even a tiny bit of sense for the situation at hand?
Asking this question is a mode of thinking that’s been excised from the corporate culture. And so, customers, frustrated by such evident unwillingness to do what makes obvious sense, depart for friendlier competitors.
Eventually, sadder but wiser, these organizations will sometimes bring in “bureaucracy busters” to restore at least a semblance of life to things. But sadly, while sadder but wiser, they don’t reach wise enough: They overshoot the sweet spot in the opposite direction, returning to the state of chaos from whence they came. (If you’re interested, see “A matter of gravity,” 4/16/2007 for a more complete account.)
Want another example? Of course you do. Good things come in threes, after all.
Oh, wait. We already explored our third example last week (see “In praise of slack,” KJR, 4/24/2017). It’s the importance of not trying to achieve 100% staff utilization, instead building slack into the company’s project master schedule so that minor delays in completing one project don’t throw the entire schedule into chaos.
The moral of this story goes beyond the importance of recognizing when you’ve reached the point of diminishing returns or a sweet spot, and what to do when you have: for Pareto situations, stop pushing; for a sweet spot, start nudging in the opposite direction.
Most important: When it comes to identifying things to improve and figuring out ways to improve them, have a bag of tricks to draw on, not just a single technique you’ve perfected.
That’s because those whose bag only contains one trick will keep repeating the one trick they have, because of what the cliché doesn’t say but should:
When all you have are thumbs, every hammer looks like a problem.