Body of Knowledge

Effectual vs. Efficiency

Many people are positive about chasing out waste and reaping the benefits it would bring. However, this can be a cause for worry.  Even though many people remember damage caused by previous cost cutting campaigns, they still see cutting waste as a technique to increase efficiency.

So why would people doing great work in chasing out waste worry me? It worries me because I see people around the globe using efficiency to try and rescue/recover/grow their organizations. The danger is that we are using the same mindset that first created the problem of waste to solve it. Something which Einstein warned us against when he said, “We can’t solve problems by using the same kind of thinking we used when we created them.”

So let’s start by taking a look at some dictionary definitions. As we can see at first glance, the differential between the terms efficiency and effectiveness is not as clear cut as in other areas we have considered.

 ef·fi·cien·cy

a)  the quality or degree of being efficient

b)  efficient operation

c)  effective operation as measured by a comparison of production with cost (as in energy, time and money)

d)  the ratio of the useful energy delivered by a dynamic system to the energy supplied to it

ef·fec·tive

a)  producing a decided, decisive, or desired effect <an effective policy>

b)  impressive, striking

c)  ready for service or action <effective manpower>

d)  actual <the need to increase effective demand for goods>

e)  being in effect; operative <the tax becomes effective next year>

Again, I am using the Merriam-Webster online dictionary as the reference point. Further reading of the definition of “effective” produces, to my mind at least, the bigger clues to the differential. From the reading of the synonyms we can see that efficient is all about “avoiding” loss, waste, energy, money, etc. Effectual is about actually “accomplishing” desired results.

Synonyms: effective, effectual, efficient.

1. Effective stresses the actual production of or the power to produce an effect <an effective rebuttal>.

2. Effectual suggests the accomplishment of a desired result especially as viewed after the fact <the measures to stop the pilfering proved effectual>.

3. Efficient suggests an acting or a potential for action or use in such a way as to avoid loss or waste of energy in effecting, producing, or functioning <an efficient small car>.

Now, do we need to be efficient, well of course we do! But, what if we are efficient without being effective? One of my favored examples here is the auto industry. Whether we consider the ailing US firms or the almost totally non-extant UK firm is of no consequence. In both cases, in response to pressure from Asian car companies, the US/UK manufacturers seemed to chase two things in particular: quality. They woke up to the fact that they needed to drastically improve their quality and efficiency; they tried (and are still trying) to become more efficient, producing their cars at lower costs. They have all to a greater or lesser degree made some major strides in both of these areas.

However, notwithstanding the current financial crisis, as Barack Obama says, they have still not made the changes they need in order to give themselves a real shot at long term survival. In my mind, unlike their Asian counterparts, they were too focused on efficiency and not enough on being effectual. If we look at the world market for auto’s over the past 10-15 years we see that it is Japanese companies who have consistently delivered the products that customers wanted, not merely trying to find innovative ways of getting customers to buy what the manufacturers wanted to make!

Another way of looking at the difference between the two is that efficiency tends to be aninside-out perspective – what can we do to be more efficient (improve OUR processes, cut OUR costs, remove waste from OUR system). On the other hand, effectual is an outside-inperspective – it does not matter what we want to do. What does the customer want from us and how can we deliver it to them to the quality they seek at a price they are willing to pay? This causes companies to only do the steps needed and therefore, eliminates unnecessary work and doing things that customers won’t pay for.

Anyone who has spent time on process analysis will have countless stories to tell of when looking at a process from the outside-in, the waste becomes obvious. Going further, when the process is looked at properly from end-to-end, the amount of “craziness” that exists in organizations is sad.

Truly successful organizations in every sector have proven that understanding what the customer wants and will pay for is critical. To operate processes that deliver to these criteria makes sense. To then identify ways of ensuring that the required activities are executed efficiently is obvious. It is these things when taken together that means we are and can be effective and makes our processes effectual. To do anything less is to waste time, money and other resources and to risk the entire health of the enterprise.

By way of an example of how “efficiency” by itself can be misleading, consider the following quote:

“RBS was a slightly odd organization in those days. In many ways, it appeared remarkably successful. Having acquired NatWest and expanded massively in the US, it was one of the world’s biggest and most profitable banks. But it was always rather secretive and surprisingly defensive: I’m struggling to remember a single on-the-record interview given by Goodwin to a broadcaster or newspaper. It was more inward looking than most huge international companies, and was very prickly about even mild criticism. That said, many in the City, and many journalists, admired the bank for its efficiency and Goodwin for his “Fred-the-shred” moniker – his reputation as perhaps the most fearsome and effective cost-cutter in UKcorporate life. So it’s striking that the new chief executive, Stephen Hester, has identified some ٟ.5bn to ٠bn of cost savings at the bank, which are apparently above and beyond what has already been disclosed. And Hester will announce as much this Thursday”

Robert Peston, BBC Business Editor in Feb 2009

Peston is talking about a company that was seen as successful as measured by its industry peers and its apparent efficiency. The key points being that it was defensive, unwilling to accept criticism and inwardly focused. How many organizations can we think of that these terms could apply to?

Had they been more focused on being “effectual” I suggest that they would have been better able to find the learning from criticism, they would have been more open about their failures and they would have been thinking about their business from the outside-in. Now, given the problems in the whole financial sector, it would be naive to suggest that these things alone would have prevented failure. However, I strongly believe that they would have a) made even more profit on the good days; b) reduced some of the bad lending; c) won even more customers as a result of being easy to do business with; d) had a more understanding ear from governments, shareholders and customers when things went wrong.

As a footnote to the story, it is also interesting to note that even one of the most apparently efficient organizations in their industry can mysteriously find such amazing amounts of additional savings when push comes to shove.

I suggest the questions we need to pose of our organizations, as well as each of us as individuals, is:

1. Are we willing to take and learn from criticism? If not, what can we change now so we can learn from it?

2. What is it that customers really need? What do we need to do in order to ensure that we only conduct operations that do just that?

3. How can we be more open with our customers, staff and other stakeholders?

If we start to approach business in this way, then we will start to be more effectual. It will also cause us to change the way we think about business and avoid the perils as suggested by Einstein above.

On the flip side, if we don’t approach business this way, then we will enter a death spiral of Legislation which will increase business costs. Increased business costs will cause price increases. Increased prices will mean losing customers. Losing customers will result in decreased profits. Decreasing profits will reduce investment. Reduced investment will stifle innovation. Lack of innovation will cause stagnation – all of which will cause governments to think passing legislation! Hardly what we could call evolution or progress; methinks Charles Darwin would be turning in his grave!

Finally, as a reminder to those who are looking at saving struggling businesses by removing waste (cost if they prefer), it is probably already too late. Companies (such as GE, Toyota, South West, etc.) never stop removing waste and they know that the time to keep your foot on the gas is while business is booming and you still have the resources you need to restructure and make changes. Sure these companies will struggle too, but I would bet on them coming out stronger in the upturn. Of course, in the process community this is not news, in fact it is history repeating itself. The same could be said for many of those who came late or not at all to the Business Process Reengineering (BPR) party in the early 90’s.

Mark McGregor speaks, writes and coaches all over the world. In the past two years alone, he has presented to over 5,000 people in more than 20 countries. Mark has authored several books, “Thrive! How to Succeed in the Age of the Customer”, Winning With Enterprise Process Management”, “In Search of BPM Excellence”. His latest book “People Centric Process Management” was released on the 1st of March 2010. In addition, he has published hundreds of articles on Business Improvement, Business Process and Enterprise Architecture. Using his own unique style and blend of skills he gets people to “Think Differently” about how they do and perceive business, this leads clients to a better understanding of the needs of their customers and designing processes that deliver excellence in performanceStaff involved in Sales, Marketing and IT have all benefited from Mark’s seminars and workshops.

Contact him at mark@markmcgregor.com

View Books at http://www.markmcgregor.com/index.html

 

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