Is Declining Enterprise Productivity Hackable?

 

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I work pretty hard at trying to manage my signal-to-noise ratio when it comes to social media. So I follow very few people and almost never check FB. But thanks to following Vinod Khosla on Twitter, I followed his link to a NY Times Magazine article about Physicist Geoffrey West and his quest to explain cities, and in particular urban population growth, with mathematical formulas. It's a great read.

What interested me most was that West and his collaborator Luis Bettencourt have started to turn their mathematical modeling toward companies as well:

"But it turns out that cities and companies differ in a very fundamental regard: cities almost never die, while companies are extremely ephemeral. As West notes, Hurricane Katrina couldn't wipe out New Orleans, and a nuclear bomb did not erase Hiroshima from the map. In contrast, where are Pan Am and Enron today? The modern corporation has an average life span of 40 to 50 years.

This raises the obvious question: Why are corporations so fleeting? After buying data on more than 23,000 publicly traded companies, Bettencourt and West discovered that corporate productivity, unlike urban productivity, was entirely sublinear. As the number of employees grows, the amount of profit per employee shrinks. West gets giddy when he shows me the linear regression charts. "Look at this bloody plot," he says. "It's ridiculous how well the points line up." The graph reflects the bleak reality of corporate growth, in which efficiencies of scale are almost always outweighed by the burdens of bureaucracy. "When a company starts out, it's all about the new idea," West says. "And then, if the company gets lucky, the idea takes off. Everybody is happy and rich. But then management starts worrying about the bottom line, and so all these people are hired to keep track of the paper clips. This is the beginning of the end."

The danger, West says, is that the inevitable decline in profit per employee makes large companies increasingly vulnerable to market volatility. Since the company now has to support an expensive staff -- overhead costs increase with size -- even a minor disturbance can lead to significant losses. As West puts it, "Companies are killed by their need to keep on getting bigger."

For West, the impermanence of the corporation illuminates the real strength of the metropolis. Unlike companies, which are managed in a top-down fashion by a team of highly paid executives, cities are unruly places, largely immune to the desires of politicians and planners. "Think about how powerless a mayor is," West says. "They can't tell people where to live or what to do or who to talk to. Cities can't be managed, and that's what keeps them so vibrant. They're just these insane masses of people, bumping into each other and maybe sharing an idea or two. It's the freedom of the city that keeps it alive."

This got me thinking two things.

Firstly, is profit per employee the only factor that should be used in this scenario? Perhaps, since we're looking at the long-term viability of these enterprises. It may be a good proxy for an enterprises' health, but it is pretty one-dimensional when considering the kind of impact good organization's can make on society.

Secondly, I wondered how interesting it would be to see if enterprises using Evidence-based Management practices fared as a subset of this group? That is, enterprises lead and managed using well-known, evidence-based high-performance practices rather than managing by intuition, anecdote and myth.

Is it possible to hack the sublinear productivity returns as companies grow by applying Evidence-based Management practices? That would be a very interesting experiment. Something to do in our spare time perhaps.

 

 

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