Evolving Excellence

A Failure of Markets and Other Observations from Asia

By Kevin Meyer

I’m currently winging my way back home after two weeks in Thailand and Laos.  Sort of a last minute vacation for my wife and I to recenter and reconnect after a very difficult September that ultimately resulted in the unexpected passing of my mother in-law.  I’ve been to Asia, including Thailand, many times, but this was a first for Laos.  I’m very glad we got to see the remarkable city of Luang Prabang before it becomes overrun and changed by tourists – being called the #1 tourist destination in the world by The New York Times can cause that.

Technology is sometimes far more visible in Asia than in the western world.  Everyone, including tuk-tuk drivers working for a few bucks a day, are on cell phones.  Even monks, including this one in a remote Laos village only accessible via the Mekong River.  That village happens to be known for its whiskey distillery.  Yes, good people with good monks.  I’ll admit I am sort of proud of the [entirely accidental] composition of this photo.

What really strikes me with each visit to Asia, especially the more remote areas, are the markets.  These daily markets have stalls for everything, from clothes to hardware to raw meat.  Refrigeration is obviously overrated and perhaps even a waste.

But it’s not the market itself – that’s beautiful capitalism in action, the value of efficiently distributing goods to where they are needed in exchange for some profit – even in communist countries like the People’s Supposedly Democratic Republic of Laos.  It’s that there are multiple stalls selling the exact same thing, in the exact same part of the market, that drives the business guy in me nuts. 

How does that work?  What is the differentiator that causes someone to purchase from one stall vs. the identical one next to it… or any of the other 30 for that matter?  For local foodstuffs there’s probably a trust and quality component.  Perhaps one stall is known for having fewer flies in the cow parts.  That makes sense.  I bet someone could make a mint putting a cow parts stall next to a veggie stall so shoppers didn’t have to walk as far.

But what about at the touristy nick nack side of things?  The night markets of Luang Prabang, Chiang Mai, or even Bangkok?  Stall after stall selling the exact same (and I mean EXACT) figurines, silk scarves, or paintings.  A 200-stall market could truly be reduced to about five and you’d have the exact same selection.    Is a stall near the edge of the market an advantage because it’s the first one a tourist sees?  Or is one near the middle best as the tourist is thinking “boy I’ve seen fifty of this cheesy t-shirt – maybe I should buy one?”  I don’t get it.

Of course my wife and I don’t buy that kind of crap – or any crap for that matter – so perhaps we simply don’t understand.  I know one potential differentiator is whether or not the person in the stall is sleeping.  We saw that several times, and I’m guessing it has an impact on sales.  Apparently when selling one rinky-dink potential Christmas tree ornament can create a day’s wages, pushing the sale isn’t a high priority.

Observing how capitalism is thriving in supposedly communist countries is interesting.  China is an easy example, and many argue that capitalism is now more vibrant in China than in the U.S..  I thought Laos would be different, but it’s not.  Markets thrive (even when shopkeepers are asleep) and entrepreneurial folks are setting up new shops and services to get tourists to part with their dough. 

Even in the boonies there are stories.  Such as the tiny Hmong village downriver from Luang Prabang.  A collection of thatched one-room huts with dirt floors… each with a TV.  TV?  Power?  The government didn’t bring power to the outlying villages.  An entrepreneur came up with a way to pay for the infrastructure, deliver power to people with no money but with rice to barter, and make a profit.  The “people’s” government frowns but tolerates it.  Now those happy folks in one room huts get to learn about the unhappy Real Housewives of Beverly Hills in their mansions.  I bet they're still happy after watching it, too.

The people of both Thailand and Laos are remarkably knowledgeable about the political process in the U.S., and I had several interesting conversations with waiters, tuk-tuk drivers, tour guides, and $5/hour masseuses.  Even a monk I sat next to on a park bench while patiently waiting for the wife to closely examine fifty shops selling the exact same thing.

As a common theme they were wondering why Americans were allowing their government to dismantle the greatest economic engine the world has ever seen – just as they were opening the wealth-creating floodgates in their own economies.  At the same time they were surprised that Americans were slowing and in some cases reversing trends toward social liberalization – again just as they were becoming more liberal themselves by accepting, embracing, and even relishing their differences.  Yes in that regard Asia is a bit different than the Mideast.

I couldn’t really argue – it’s the quandary that many of us in the sociopolitical center experience every day.  And perhaps a reason why, once again, in this election I don’t think I can even hold my nose and vote for either major party candidate.  On one hand we have a guy so obviously in over his head it’s mindboggling and scary what he’s doing to the global competitive ability of U.S..  You would have thought that the recent China threat to dump Japan’s bonds, effectively economic warfare, would have woken us up to the perils of going more into debt to a country like that.  As an alternative we have a guy beholden to conservative social extremes that in my opinion cross the line into the realm of hate.  Sharia law, American style?  Well, maybe an extreme.  Barely.  One party wants the government involved in everything… except women’s bodies and bedroom behavior.  The other wants government out of everything… except women’s bodies and bedroom behavior.  Ridiculous hypocrisy on both sides.

Ce la vie.  Maybe the emerging economies of Asia are the place to be.  Nah... we can still work it out.  I hope.  Although I did take a liking to pad thai and tom yum soup.  If they only had good wine…

The Online Education Tsunami

By Kevin Meyer

As one of the partners in Gemba Academy, online education is something I'm a bit interested in.  Of course the 230+ lean training videos we offer are more "training" than "education" - but I'll get to that topic in a bit.  I'd like to think we're doing something right if over 1,000 companies are now using our products, and especially since one of those companies is none other than Toyota.  Yes, really.

Columnist David Brooks penned a piece over the weekend titled "Online Education: A Tsunami is Coming."  It's interesting on a couple of different levels.  First the legitimacy quotient for online ed has increased dramatically in the last few years, although maybe it's just my age but I still have a hard time seeing University of Phoenix on a resume.  Yes I know it's actually pretty good, and I even happen to be related to the guy that developed their doctorate programs (yes, they have them), but still.

As Brooks points out, top tier schools are getting into the market.  Harvard, MIT, Yale, Carnegie-Mellon, Stanford - you name it.  I know USC is as well, as my wife is taking graduate level classes from that school via an incredibly slick online portal.  Live classes, direct interaction, the ability to go into random groups.  Pretty incredible. 

So how will other lower level schools compete?  On price?  That's hard to do when the likes of Harvard and MIT are offering their classes for free.  The kicker?  If you want that little piece of paper called a diploma you have to kick in for a big chunk 'o change plus actually do some things in person.  Here we go again with a question many folks in our world, especially on the six sigma side of things, wrestle with.  Diplomas, certifications, a rainbow of belts.  Are they worth it?  What do they mean?

In the lean world, perhaps with the marginal exception of the AME/SME/Shingo version, certifications mean basically squat.  There are no real standards, and even the definition of "lean" has many different flavors.  I personally believe the "respect for people" aspects are far more important than the rote tools, yet how many so-called certifications measure proficiency in that area. Zip.  Six sigma is considerably better, with a fairly-defined body of knowledge that is more scientific in nature, hence more measurable in its own right.  And the belt requirements are also fairly standardized, although the execution and review can vary significantly.  A GE black belt is worth a tad more than a black belt from the corner consultant.

If I seen a lean certification on a resume I quietly laugh and it actually reduces my opinion of their lean competence, if I see a black belt on a resume I'm more impressed - but will then allow my lean vs. six sigma bias to take over some of the questioning in an interview.

So what would happen if you saw "completed entire Harvard economics curriculum" on a resume, but not "BA, Economics, Harvard"?  Ok, economics is a bad example - an econ degree from Harvard would disqualify folks in many of our books.  How about "completed entire MIT chemical engineering curriculum" but not "BS, Chemical Engineering, MIT"?  I'm guess you'd raise an eyebrow, and in my opinion you should.

That's the difference between "education" and "training."  As Brooks points out, online ed does pretty well at step 1 of the education process - the knowledge dump.  But to really learn, to have a real education, you also need to reflect on the information, think about it, apply it, scramble it, etc.  A formal degree from an accredited institution does that - and since the University of Phoenix is accredited I guess I have to lump it into that category.  Simply saying you've completed a curriculum doesn't.

But perhaps that's being a bit unfair, especially in the future.  The top tier schools will presumably develop methods and technologies to enable real distance learning.  That will turn the typical university experience on its head.  The ability to think outside the traditional "degree" and "program" via the mass customization ability of the online world will be interesting.  The lower tier will probably continue to be the lower end of the spectrum.  And the middle?  With top tier professors able to reach millions around the globe, it may become hard for middle tier schools to compete.  At the same time the barrier to entry for the low end is minimal so competition for effective diploma mills - or "I completed some type of curriculum" mills - will be fierce in itself.  "Completed MIT curriculum" may actually be worth more than "BA, No Name University."  And it will be free.

I'm guessing at the lower tiers we'll see a bit of a convergence between "education" and "training" as "education" becomes more "knowledge dump" and "training" actually adds some minimal learning methods.  A good step up for many people in many countries.  And the top tier will become global exporters of both knowledge and real learning - an opportunity for several U.S. universities - and the real degree, even if online, will still have value.

When Your Customers Flee Complexity

By Kevin Meyer

So it's that time of the year again, and I'm sitting down to write a nice big check to the IRS.  For the most part I'm ok with that.  Writing a check means that I haven't given the government an interest free loan and it means I made some decent money last year.  I don't mind paying to enjoy the benefits of living here, paying a little more because I'm a little more successful, even paying for some programs and policies I disagree with - that's a consequence, and benefit, of democracy.

Of course I do care a bit when my hard-earned tax dollars are paying for extravagant GSA parties, entertainment for the Secret Service, and $205,000 to move a $15 shrub.  But I bet some will still have the gall to say taxes are too low and should be raised to cover [growing] "necessary" services.  Or maybe I should put "services" in quotes?

But that's not my point.  And, perhaps surprisingly to some, neither is the subject of tax rates themselves and the like.  No, this time it's tax complexity.  And usually when I talk about tax complexity I mean the 40,000 pages of regulations that are such a social engineering patchwork that it allows loopholes and abuse, not to mention bazillions of hours to comply and enforce.  Not this time.

This time an article on Reuters showed me a different, and perhaps more disturbing angle of the problem.

On April 7, 2011, Peter Dunn raised his right hand before a U.S. consular officer in Toronto and swore that he understood the consequences of giving up his U.S. citizenship. Dunn, a dual U.S.-Canadian citizen who has lived outside the United States since 1986, says he renounced because he felt American citizenship had become more of a liability than a privilege.

Dunn, who blogs about expatriation, takes issue with being characterized as a tax evader. He says the taxes he pays in Canada are higher than what he would pay in the United States, and he says he had always complied with the IRS before renouncing. But, Dunn says, the IRS approach to enforcing compliance is misguided. "It's making life difficult for a lot of people," he says. "It's driving us away."

He's not dumping his U.S. citizenship to avoid taxes - in fact he will be paying higher taxes.  He's switching because of complexity and intrusion.  He's not the only one.

Last year, almost 1,800 people followed Superman's [long story - read the article] lead, renouncing their U.S. citizenship or handing in their Green Cards. That's a record number since the Internal Revenue Service began publishing a list of those who renounced in 1998. It's also almost eight times more than the number of citizens who renounced in 2008, and more than the total for 2007, 2008 and 2009 combined.  Many say they parted ways with America for tax reasons.

That's similar to the huge numbers of folks that are fleeing California for Nevada and Texas, or New Jersey and New York for Florida.  Wealth and income shift, and tax revenues go down.  Funny how that happens - across state lines and increasingly between countries and continents.

But again, in this story it's not because of high taxes, but because of complexity.

The United States is one of the only countries to tax its citizens on income earned while they're living abroad. The National Taxpayer Advocate's Office, part of the IRS, released a report in December that details the difficulties of filing taxes from overseas. It cites heavy paperwork, a lack of online filing options and a dearth of local and foreign-language resources.

And since it's not just about high taxes, those fleeing aren't just the rich.

During the last 25 years, a number of millionaires and billionaires have renounced their citizenship. Among them: Ted Arison, the late founder of Carnival Cruises, and Michael Dingman, a former Ford Motor Co. director. But those of more modest means renounce, too. They say leaving America is about more than money; it's about privacy and red tape.

What are some of the problems?  Complexity, ongoing changes that create significant liability if not monitored, and intrusion.

As an American, Dunn had to file tax returns and report all of his bank accounts - even joint accounts and his Canadian retirement fund. If he didn't, he would be breaking U.S. law and could face penalties of up to $100,000 or 50 percent of his undeclared accounts, whichever is larger. Dunn says he was tired of tracking IRS policy changes.  "Disclosing joint accounts I hold with my wife and anyone I ever want to do business with - that's just too much. My wife's account is none of their business."

And...

Marylouise Serrato, head of American Citizens Abroad, a nonprofit organization based in Geneva, says that many members feel scared about reporting requirements they did not know existed. "Americans abroad are terrified. We've had people pay tens of thousands of dollars in fines. We've had people … pay huge amounts of back taxes," she says.

And...

Francisca N. Mordi, vice president and senior tax counsel at the American Bankers Association, says she has received a number of calls from Americans in Europe complaining about banks closing their accounts. "They're going to drop Americans like hot potatoes," Mordi says. "The foreign banks are upset enough about the regulations that they're saying they just won't keep American customers, and it's giving (Americans living abroad) a lot of sleepless nights."

And...

In Europe, American women say they feel pressure to renounce even from their husbands. "American women married to non-Americans are only just now finding out that they have to disclose years and years of income and accounts," says Lucy Stensland Laederich, a leader of the women's club who lives in Bordeaux, France. Genette Eysselinck, a friend of Laederich's, renounced early this year. Her husband, a European Union civil servant, saw no good reason to share his account information with the IRS, she says. And after considering all her options, Eysselinck decided that renouncing was the best path. "It created a lot of tensions around here," she says. "Divorce seemed a little extreme, so I asked myself, 'What am I gaining as an American?' And the cons outweighed the pros."

How sad is that?  The cons outweighed the pros, of being an American no less.

As a head of any organization, what would you think if you had customers that would pay real money to leave you because you were such a pain in the buttocks to deal with?  Hopefully it would give you pause.  Perhaps it should.

Results-Based Policies and Procedures

By Kevin Meyer

Don't worry folks, although the article I reference here is on regulation, my point is aimed at corporate policies and procedures as in this case they generally have the same problem.  Let's see if I can tip-toe around the central theme of the article so I can make that point.

Organizational policies and procedures, and regulations, in the U.S. generally start from a perspective that every little nuance must be specified.

Government oversight of day care seems like a good idea—you wouldn't want children cooped up in an airless basement—but this proposal went far beyond basic health and safety.

The new rules would dictate exactly how to do just about everything: how many block sets ("at least two (2) ... with a minimum of ten (10) blocks per set"), where the children can play with the blocks (on "a flat building surface" that is "not in the main traffic area") and when caregivers must wash their hands (before "eating food," "after wiping a child's nose," etc.).

This is the way regulation works in America: Regulators try to imagine every possible mistake and then dictate a solution. The complexity is astounding.

And we all know the behaviors that are thereby created.  The folks being regulated... or "managed"... by such procedures then set out to identify the most narrow possible opening in the wall of excruciating detail, and then pry that opening apart to create a new opportunity.  Then armies of lawyers... err... executives... jump into the fray to determine and litigate whether that opening was legit, and if it was, then the regulators... err... managers... then add another few thousand words to close the latest loophole. 

Under a recent federal directive, the number of health-care reimbursement categories will soon increase from 18,000 to 140,000, including 21 separate categories for "spacecraft accidents" and 12 for bee stings. There are over 140 million words of binding federal statutes and regulations, and states and municipalities add several billion more.

We see it in the financial industry, we see it at a different level inside our own organizations.  Take a look at your company policies and even assembly and operating procedures and work instructions.  Yep, you know what I mean.

Regulation is deliberately designed to avoid human discretion—to create a regulatory code that is self-executing. By making rules as precise as possible, we hope to avoid bad judgment. The unfortunate side effect has been to preclude good judgment. Modern regulation doesn't just control undesirable practices—it indiscriminately controls all the work of regulated entities.

Taking responsibility is basically illegal in the modern regulatory state. A teacher can't maintain order in the classroom without filling out forms and facing a potential legal hearing. Judges sit on their hands, letting people sue for almost anything. An inspector feels that he has no choice but to shut down an unauthorized neighborhood lemonade stand—a rule is a rule.

As a side note, how many of you still throw new hires into a small windowless room with a five foot stack of documentation to read, and then after a day of speed reading consider the poor soul to be "trained"?

There is another way.  Instead of regulations... procedures... that attempt to identify and control every option, how about results-based regulations and procedures that attempt to describe the desired outcome?  Could this even be analogous to push- vs pull-based procedures?

In place of today's regulatory micromanagement, what we need is results-based regulation, with simpler rules tied to the outcomes they produce. What would such a regulatory system look like? In the first place, it would be radically simpler. Most bureaucratic detail could be scrapped, and law would become understandable again. The focus would shift from complicated rules to desired results: clean air, safe food, honest business.

Are any of you lean folks experienced in the results-based focus of TWI starting to get a twinge of understanding?  Ya, me too - that's what prompted me to write this.  How about a couple examples, the first from our friends across the pond that already use this method.

In Britain, financial institutions have to answer to such principles as "A firm must conduct its business with integrity" and "treat [customers] fairly." Applying those principles to Wall Street would provide ample authority for regulators to stop the next bubble without smothering credit transactions under thousands of pages of new rules.

I can already see some people getting squeamish about definitions.  You've been living in a world of over-specification for too long.  Change your perspective.  Ok, I'll admit it shakes me a bit as well - how do you prevent abuse from the regulated as well as the regulator... the team member as well as the manager?  The article continues with several suggestions along those lines, but the bottom line remains the same:

Specify what the desired result looks like, not every aspect that could contribute to the result.  Then provide boundaries and specifics only on key contributors in the process - the "key points" in TWI parlance.  Promote understanding of the process and result, not the creation of mindless automatons following a narrow, winding process path.  Again, many similarities to TWI, which my company has found to be one the most powerful drivers of lean transformation and even a foundation for kaizen.

Give Back... More?

By Kevin Meyer

At the risk of creating another firestorm from the paranoid lemmings who blindly equate asking a question with being in denial, I came across another article that those of us with wider, thinking minds might consider.  Thankfully on a different subject.

We hear a lot these days that those with more - or too much in the opinion of some - should "give back."  Of course they are thinking purely in financial terms without understanding the larger picture.  And I should add that there are many circumstances where my opinion does not align with the premise of the article.  More on that later.  The relation to lean and manufacturing?  The dramatic improvement in productivity.  Well, sort of.  Maybe I'm simply interested in the subject.

Andy Kessler has a great column diving into how many people, and companies, have already given back - before they've been asked to give back more.  Read it, then reconsider the so-called evil of wealth.

Wilson Greatbatch, 92, died this week a wealthy man. Investing $2,000 of his own money way back in 1958 and tending a garden to feed his family, Greatbatch invented the pacemaker. He licensed it to Medtronic, a company now valued at $36 billion that sells and continues to improve pacemakers and defibrillators. Greatbatch did his part to improve society, create wealth and increase, quite literally, our standard of living. But apparently that's not enough.

I'm directly involved in the pacemaker and overall medical device manufacturing industry, so Mr. Greatbatch creates a bit of a personal connection.

Steve Jobs gets taken to task for his lack of visible charitable giving—"no hospital wing or an academic building with his name on it," wrote the New York Times's Andrew Ross Sorkin recently. Never mind how much more productive and wealthy we all are because of Apple. Jeez. The old "I already gave at the office" has never rung truer.

Google founders Larry Page and Sergei Brin have saved all of us hundreds of billions of hours of research and driving around, far more value than their $20 billion each in wealth. They can give to whatever alternate energy project they want and it won't match the wealth they have already created for me and you.

Of course some would argue that those nouveau rich dudes that created Angry Birds pretty much destroyed that Google-inspired productivity gain.  I'm convinced that game is a drug, which is why I went cold turkey and took it off the iPad.

Yes these guys are ridiculously wealthy.  Far more than they could ever spend.  Sure flyng around on private 767s looks a bit austentatious.  But look what they gave us.  Shouldn't that be rewarded?

I'm all for charity. I give, but those who collect it and spend it need to appreciate both where the money comes from in the first place and that they can never match the power of free enterprise to improve lives. Never.

Sorry, but the egg comes first. The welfare state doesn't exist without productive businesses and workers to pay for it. Yes, we need bridge builders, park rangers and even a few postal workers, but our economic policies need to encourage wealth-creating productive industries, not crush them with the burden of an unproductive state.

Bingo.  I know several very wealthy people.  They put everything on the line, sometimes multiple times intersperced with incredible failures, to create their wealth.  They gave up decades of even comfortable living to take a wild chance on creating something new.  That's why I don't begrudge them their wealth in the slightest.  Instead I admire their perseverance and guts.

This is also where I beg to differ a bit from the article.  There are those that created incredible products that have enriched our lives... and thereby driven more dollars into the tax coffers to spend on programs that enrich lives in different ways.  But perhaps along the lines of the creators of Angry Birds, although that's a bit unfair, there are those that have become enriched without creating.  The offspring of wealth-creators who simply rest on their wealth without creating.  The CEOs that destroy rather than build... sometimes over and over again... and still get hefty severance packages.  Those financial middlemen who siphon off capital in exchange for... I'm not sure what.  We could come up with a decent list of those less scrupulous types.

Two groups.  One deserves the wealth, the other, quite frankly, doesn't.  One adds value, the other simply sucks potential value-creating capital out of society. 

So how do we change the discussion from "give back more... and more..." to "let's reward improvement and creation"?  Wealth itself is not evil - but it can be. 

Just as we chastise those that simply live off of entitlements and handouts, we should find fault with those that don't leverage capital resources for social good.  And just as we should applaud and reward success with worthy endeavors instead of asking them to "give back more," we should support and promote those at the other end of the wealth spectrum that are trying to improve themselves and others in their own way.

It's not as simple as just saying "give back more" or "we've given enough."

Thou Shalt Not Question

By Kevin Meyer

The climate change world is in a bit of a tizzy this week over the resignation of Dr. Ivar Giaever, a nobel laureate physicist currently teaching at my alma mater, from the American Physical Society.  What is his beef?

Being told, by a scientific society no less, that questioning is no longer acceptable.  I thought that's what science is all about.

Well, Mr. Vice President [Al Gore], meet Ivar Giaever, a 1973 physics Nobel Laureate who resigned last week from the American Physical Society in protest over the group's insistence that evidence of man-made global warming is "incontrovertible."

In an email to the society, Mr. Giaever—who works at Rensselaer Polytechnic Institute—wrote that "The claim (how can you measure the average temperature of the whole earth for a whole year?) is that the temperature has changed from ~288.0 to ~288.8 degree Kelvin in about 150 years, which (if true) means to me . . . that the temperature has been amazingly stable, and both human health and happiness have definitely improved in this 'warming' period."

Mr. Giaever was an American Physical Society fellow, an honor bestowed on "only half of one percent" of the members, according to a spokesman.

Pretty smart guy.  He's not the only one.

He follows in the footsteps of University of California at Santa Barbara Emeritus Professor of Physics Harold Lewis, a former APS fellow who resigned in 2010, calling global warming "the greatest and most successful pseudoscientific fraud I have seen in my long life as a physicist."

Other dissenters include Stanford University physicist and Nobelist Robert B. Laughlin, deceased green revolution icon and Nobelist Norman Borlaug, Princeton physicist William Happer and World Federation of Scientists President Antonino Zichichi. Our point is not that all of these men agree on climate change, much less mankind's contribution to it, only that to one degree or another they maintain an open mind about warming or what to do about it.

That last statement is the critical part.  Whether or not climate change, especially human-triggered climate change, is a reality is not the point.  Regardless of whether it is or not most of us probably agree that it is good policy to do what we can to lessen the environmental impact of human activity.

One of the least savory traits of climate-change advocates is how they've tried to bully anyone who keeps an open mind. This is true of many political projects, but it is or ought to be anathema to the scientific method.

The point is that we should never stop questioning - or try to prevent questioning - even when a large majority of very smart people believe a concept should be considered fact.  Examples?

• The Earth is flat.
• The Earth is at the center of the universe.
• You must have an MRP system to adequately manage manufacturing operations.
• U.S. companies cannot compete with low labor cost countries like China.

In most cases the opinion of a group of smart people probably is fact.  Luckily in some cases there were some strong-willed individuals, equally ostracized, who continued to question presumed fact.

Never stop questioning.

Forms and More Forms

By Kevin Meyer

It's been a busy week - both Bill and I presented at the Lean Accounting Summit.  Believe it or not it's the one time a year when we spend a few minutes comparing notes, plans, and who is threatening to sue us for some of our blog posts.  Some good laughs all around.

An article in the Wall Street Journal yesterday told us about something most of us have long felt - we are spending more time on paperwork.  Useless?  Perhaps.  But more on that in a minute.

The effort needed to comply with federal bureaucracy now has a number. According to new government estimates released this week, Americans spent 8.8 billion hours filling out government forms in fiscal 2010.

The good news? That's lower than the 9.8 billion hours logged the previous year. The bad news? The drop is mostly due to a change in how federal agencies estimate how long it takes to complete their paperwork.

In all, the paperwork burden has increased by around 19% over the past decade, up from 7.4 billion hours in fiscal 2000, the White House Office of Management and Budget said.

It's not really an issue of political party - but government in general.  Both sides are responsible.

Between 2002 and 2005, federal agencies reported significant increases in paperwork demands. Republicans controlled Congress and the White House for almost all that period. In 2005, laws including the Bush administration's Medicare prescription-drug overhaul, created what is now estimated to be an extra 250 million paperwork hours.

At the same time, the biggest single-year jump in the past decade came in 2010, when individuals and businesses spent an extra 352 million hours responding to paperwork requests from agencies prompted by new statutory requirements. Last year, employers needed almost 70 million additional hours to claim a new credit for hiring more workers, and restaurants spent 14.5 million hours to display calorie counts for their menus, according to figures submitted to OMB by the departments of the Treasury and Health and Human Services. In fact, the Treasury was the source of most of the paperwork burden in 2010, hitting 6.4 billion hours, or 73%.

Unbelievable.  The article points out that if you value an hour at $20, which is far below what most organizations value an hour after adding burden for employer-side taxes, benefits, and support infrastructure like the building they work in, then the cost is $171 billion.

That's the cost to fill out the forms.  But here's my real question: what is done with the forms?  Is everything on a form really necessary?  There is a cost to store them, and almost hopefully there's a cost to actually analyze and do something with the data.  Or do they just sit in a file cabinet or computer memory somewhere?

What is the point of a form if it is not used?  $171 billion to fill them out... how many billion to scan and store them... and perhaps, just perhaps, analyze and do something with the data?

And we wonder where we can find some money to cut out of the budget.  And don't smirk too much - take a look around you at your own organizations.  I bet you're doing the same thing to your employees.

A Few Thoughts on China, Consistency, and Standardization

By Kevin Meyer

I just returned from my annual trip to visit some customers and attend a trade show in Shanghai, China.  Always an interesting experience and I personally love Asia, although I prefer the respectful humility of the Japanese and the constant happiness of the Thai and Cambodians.  The latter always seem to be full of joy even though an entire generation of men was wiped out only a few years ago – and we think we have problems.

My thoughts on China change with each trip – perhaps just as the country is changing rapidly.  You can’t help but wonder about the true meaning of communism when you get off the plane and are hit with a barrage of ads on the jet way for various luxury items.  Today’s state-sanctioned Shanghai Daily even had a feature article discussing how many Chinese were on the list of the wealthiest in the world.  Unlike in the U.S. the article, and by extension the government, praised their success.  Go figure.

On my last trip I was amazed with the accelerating improvements in this potentially monster economy.  I visited medical device companies that had technology on par with the best in the U.S. and who were investing in their future growth by creating 10,000-student engineering universities of their own.  I noticed how discussions with trade show attendees had changed from “here’s a sample of a product from our competitor in America – can you back-engineer and build me a million” to “here’s exactly how we’d like to improve on our competitor’s product”.  Society had become, for better or worse, very westernized with teenagers wearing the latest fashions to a Starbucks on every block.

This time I’m not as optimistic.  I talked to a lot of customers as well as several expats running the local operations for foreign companies.  Times are changing, and not necessarily for the better.  Wage inflation is accelerating, restrictions on foreign control of local outsourced manufacturing operations are increasing faster than the ability of local Chinese to manage such complex operations, and the disparity between the upper and lower class is growing. 

Basic services are becoming very strained by growth, and one expat living in Shanghai told me that healthcare quality had significantly declined just in the past year – to the point that she now goes to Hong Kong or back to the U.S. for even basic care.  Technology does not create great service – knowledge and experience using the technology does.  The human factor, once again.   I fear significant social upheaval in China’s future, and the impact that will have on the world.

Local governments have monstrous infrastructure loans that are becoming a problem.  In the past they would seize property by eminent domain, sell it to companies to develop into infrastructure, and use the funds to seize more property.  Lots of homes and businesses seized with as little as 90 days notice, which is why a primary consideration for multinational companies building factories is to develop in an area where seizure isn't likely - i.e. not on a straight (potential rail) line between two cities.  The problem is that the amount of property that can be seized has dried up, thereby drying up the ability of local governments to repay loans.  Oops.

But what has really struck me on this trip is the lack of consistency and adherence to standards.  It is pervasive and makes me wonder if this is the goal, and then the hurdle, of great civilizations.  How’s that for a deep thought?

I don’t necessarily mean regulation-enforced standards, but simply an inherent desire to do things right, the same way, and an inner knowledge that consistency is efficient and practical.  It is also an awareness that something is wrong and needs to be changed.

A few examples to illustrate what I mean, beginning with the very basic.  In our hotel, a five star by local standards, light bulbs are inconsistent in the same type and application.  Overhead lighting cans may have incandescent, compact fluorescent, etc.   At the breakfast bar the coffee is in a different location each morning.  Sometimes there’s low fat milk, sometimes not.

Trivial?  Perhaps – it didn’t strike me as all that unusual or systemic until I came across or heard about the following other examples.

An expat I talked to who is running the local operations for a large U.S. multinational told me of her frustration mentoring her Chinese leadership team – and why she believes it will be a long time before the company entrusts the operations to them without an expat chief.  One example she gave was how on her gemba walks she noticed trash on the floor, every day.  Her management team simply doesn’t see it, let alone take action to improve it.  She then connects it to understanding the financial statements and data required to run the operations – if they can’t see trash on the floor, can they see the minor and what may appear on the surface to be trivial, but still potentially important, issues in metrics and data? Let alone do something to correct it?

Recognizing, digging into, asking why, then improving is a fundamental requirement for solid autonomous leadership.  In her opinion it’s not there yet.

A third and final example, one that will scare most people flying in and out of Shanghai’s Pudong airport.  A different expat was telling me about the amount of news that really is censored, especially including safety issues.  The world witnessed some of this recently with the derailment of a high-speed train in China and how it was initially covered up to the point even having train cars buried before an investigation could take place.  

According to a good friend of hers, a commercial pilot, the actions of planes around Pudong are scarily similar to the cars and buses on local streets – effectively a free for all.  Instead of the highly-ordered sequencing, positioning, and following commands of traffic controllers that you see at U.S. and European airports, in China commands are often ignored.  Just last week a Qatar jet had declared a fuel emergency and was given a direct approach into Pudong.  Still, on final approach, two local airliners dove in in front of the Qatar jet to land sooner.  Disaster was narrowly averted.  Perhaps this is why United turns off Channel 9 when landing in China?

Understanding the value of consistency and standards, regulation-enforced but more importantly an inner knowledge and understanding of the value of consistency and adhering to standards, appears to be a key to an efficient society.

Similar to that, understanding that standards can and should be changed and improved upon with appropriate review is also key.  Otherwise stagnation occurs.  I see the U.S. as having a high level of standards and consistency, but struggling with creating the ability to improve and move forward.

Creating and adhering to standards and standardization are both a critical goal, and a critical hurdle.  For both societies and organizations.

Counterintuitive Value of Mergers

By Kevin Meyer

Conventional thinking has it that when two similar organizations merge the sum is more efficient than the parts.  That's the thought behind mergers of companies, government entities, and the like.  But is it really true?  Perhaps not - at least on the government side of things - and that can give us some lessons for the mergers of other types of organizations.

Governors and lawmakers across the U.S., looking to trim the costs of local government, are prodding school districts, townships and other entities to combine into bigger jurisdictions. But a number of studies—and evidence from past consolidations—suggest such mergers rarely save money, and in many cases, they end up raising costs.

There are several reasons for this.

The logic often cited behind consolidations is saving money by shedding layers of management or having departments share equipment such as snowplows. But managers and equipment account for far less than half of local governments' expenses—most of their cost is rank-and-file labor.

Another reason: When small governments merge, they often "harmonize" services and employee benefits to the highest level among the combining units. In other words, the consolidated city finds it politically expedient to take on the more-expensive version of everything.

But since it is counterintuitive, our legislators are trying to incent the practice.

Still, when it comes to controlling local government's largest cost—labor—smaller governments generally do better. Take Illinois, where budget troubles and pension obligations have eroded the state's credit rating. There, state Sen. Terry Link proposed a bill that would lead to local governments being combined or dissolved in a bid to save money. "There are a lot of these units of local government that aren't necessary anymore," said Mr. Link, a Democrat. {wow - a Democrat saying parts of government aren't necessary?  -ed]

But a study this year for a group representing most of Illinois's 1,433 townships used state data to show that tiny townships are the state's most austere government operations. Spending by the state's townships grew 17% from 1992 to 2007, adjusted for inflation, according to the study. State expenditures over that same period grew 51%, while spending by larger municipalities grew 50%; school districts' spending rose 74%.

Now the real question is what can be extrapolated from this information.  If local government is more efficient than state government, is state government more efficient that the federal government?  Can two small companies be more efficient than one larger company?  We've actually seen that in many industries.

Agility, customized service vs. a one-size-fits-all approach, optimization of resource conversion and delivery vs. bureaucracy.

"In government, the whole idea of economies of scale is turned on its head," said Wendell Cox, who produced the report for Township Officials of Illinois, an umbrella group for the state's townships.

A few years ago Bill had a two-part series on the problems with economies of scale in manufacturing.  It's still true - and not just in manufacturing.

Non-Manufacturing in America - Kindle, iPhone, and Software

By Kevin Meyer

This past week has seen a trio of articles explicitly lay out the crisis, misperception, and opportunity of manufacturing in America.  Two great articles by Steve Denning sandwiching a piece by software venture capitalist Marc Andreesen.  If you get a chance I'd suggest you read them in this order, but I'll do my best to summarize below.

1. Why Amazon Can't Make a Kindle in the USA (Steve Denning, Forbes)
2. Why Software is Eating the World (Mark Andreesen, WSJ)
3. Does it Really Matter that Amazon Can't Make a Kindle in the USA? (Steve Denning, Forbes)

So to kick it off, let's tackle the first article.  Steve Denning bluntly lays out the problem, building on a previous article of his on How Do You Explain Radical Management to a CFO.

Decades of outsourcing manufacturing have left US industry without the means to invent the next generation of high-tech products that are key to rebuilding its economy, as noted by Garry Pisano and Willy Shih in a classic article Thus in “Restoring American Competitiveness”. The US has lost or is on the verge of losing its ability to develop and manufacture a slew of high-tech products. Amazon’s Kindle 2 couldn’t be made in the US, even if Amazon wanted to.

- The flex circuit connectors are made in China because the US supplier base migrated to Asia.

- [article goes on to detail five additional key components]

Pisano and Shih continue:

“So the decline of manufacturing in a region sets of a chain reaction. Once manufacturing is outsourced, process-engineering expertise can’t be maintained, since it depends on daily interactions with manufacturing. Without process-engineering capabilities, companies find it increasingly difficult to conduct advanced research on next-generation process technologies. Without the ability to develop such new processes, they find they can no longer develop new products. In the long term, then, an economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate.”

In the same way that cost accounting and short-term corporate profits don’t reflect the true health of corporations, the economists’ reckoning of the impact of outsourcing production overseas misses the point. Americans are left with shipping the goods, selling the goods, marketing the goods. But the country is no longer to compete in the key task of actually making the goods.

Denning goes on to list a host of industries that have already been lost - too lengthy to appropriately duplicate here.  He then details what various types of leaders and functions need to do.  Here are just a couple:

Accountants: Accountants need to get beyond the mental prison of cost accounting and embrace the thinking in throughput accounting that puts the emphasis on how companies can add new value, rather than just cutting costs.

Economists: Economists need to realize that merely adding up the numbers is not enough. They have to look at the meaning behind the numbers. When they trumpet their finding that “Chinese goods are only 1% of the U.S. economy”, it’s akin to saying “we kept the house but gave away the keys.”

Next, Marc Andreesen tries to convince us that all of this doesn't matter.  Software innovation will save the day, as software is supposedly the linchpin of everything in life.

This week, Hewlett-Packard (where I am on the board) announced that it is exploring jettisoning its struggling PC business in favor of investing more heavily in software, where it sees better potential for growth. Meanwhile, Google plans to buy up the cellphone handset maker Motorola Mobility. Both moves surprised the tech world. But both moves are also in line with a trend I've observed, one that makes me optimistic about the future growth of the American and world economies, despite the recent turmoil in the stock market.

In short, software is eating the world.  My own theory is that we are in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy.

Ok... anyone else have visions of SkyNet?

Six decades into the computer revolution, four decades since the invention of the microprocessor, and two decades into the rise of the modern Internet, all of the technology required to transform industries through software finally works and can be widely delivered at global scale.

He goes on to describe how every major industry - from book selling to music to health care to defense to even oil production - now has software as the supposed key component.

Instead of constantly questioning their valuations, let's seek to understand how the new generation of technology companies are doing what they do, what the broader consequences are for businesses and the economy and what we can collectively do to expand the number of innovative new software companies created in the U.S. and around the world.

That's the big opportunity. I know where I'm putting my money.

It's all about the software, stupid! But keep in mind Steve Denning's original article on how the receptacle of the miraculous software can't be built in the USA.  Which is why he quickly followed up his article.

Marc Andreessen’s article in the Wall Street Journal is certainly right to point out that software development is a huge part of both the present and the future economy.

But software per se is not the solution. Saying that “software is the solution” is like saying that the winning firms of the early 20^th Century were successful because of electricity. The difference wasn’t electricity. The difference was more imaginative management that took advantage of the opportunities that electricity presented.

In any event, the idea that software development is immune from the experience of being undermined by disruptive innovation from low cost producers is a comforting but dangerous illusion, particularly in fields where software and hardware development is intimately intertwined.

Similarly, the idea that the USA has a perpetual lock on software development is as solid as the idea that Detroit owns auto manufacture or that the IBM [IBM] owns the PC.

Bingo.  So what's the solution?

I agree that the idea that there is a lot of outsourcing going on is hardly news. The idea that it is irreversible and destructive of the economy’s ability to grow is less well known. Even so, it’s not exactly new news: the HBR article that I cite is two years old.

What is really new news is that (1) these fairly obvious truths haven’t yet dawned on economists at the Federal Reserve Bank of San Francisco, CEOs, accountants, politicians, among others and (2) the way to manage in a radically different way to deal with these issues is now more fully articulated than it has been before.

The issue is not hardware or software. The issue is how the firm is managed. Traditional management is killing both the firm and the economy. The statistics of the decline are well-documented.

Good work Steve.  There are a bunch of Evolving Excellence readers equally convinced that this situation needs to change - and can change.