Systems, People & Chaos Theory

Welcome to the 68th edition of the newsletter. This edition is longer in terms of content than usual. For context, I recently had a terrible gig. I failed my audience badly and while there was a few reasons for this, I felt terrible for not delivering what I should have. So, this is an article I'd been thinking about for a while that I hope you will enjoy. As always, I'd love your comments and thoughts. Enjoy!

“So how does Elon Musk do it?”

I was invited to speak with a group of CEOs. The facilitator had asked me to deliver my session on Managing Pirates, Passengers and Giving Hard Feedback. This is usually a very popular session that unpacks the challenges of underperformance, the importance of kind feedback and the steps to give it more effectively.?

It became clear during the discussion that some members of the group didn't see the concepts as meeting their specific needs. I was talking about the need to give feedback and some felt these concepts were more suited for their managers and not them. While some of the conversation was interesting, one of the questions that arose really stuck with me: How do you scale feedback and performance management?

They wanted to know how to grow fast. Scaling businesses is an objective for many. How do you go from idea and small team to unicorn taking over the world? We see people like Musk and Branson doing it globally. Companies like Canva and Atlassian demonstrate that it can be done from here, so how do we replicate this?

Of course having an amazing product, with strong margins and limited competition is pretty useful, but even with these in place, many great startups and maturing companies hit points in their growth where they struggle to maintain their sharp upwards trajectory. While the organisation is small, the entrepreneur can generally keep across all the moving pieces and manage any issues that emerge. Once the business grows, this becomes impossible and the frustration that grows in the entrepreneur can be debilitating.

The general antidote to manage at scale is to implement clear systems that can be replicated across the growing organisation to create consistency, certainty and reliability. Systems are designed, documented and optimised. They are implemented widely and followed closely, sometimes ruthlessly, by managers across the organisation. The incredible success of McDonald's is rooted in systems. Cooking fries in New York, New Delhi or New Zealand are pretty much the same.?

This often creates a powerful platform for growth. The systems are followed, the metrics are monitored and managers are tasked with driving compliance. These systems produce results, data is captured and performance is determined through dashboards and scorecards. In some ways, it seems pretty straightforward, just design good systems, hire workers with the relevant skills to complete the tasks and hire managers to ensure systems are followed and the targets are hit. Just add capital and watch it grow!

So why don't all businesses simply scale in this way? There are many reasons and most are caused by our oversimplification in our understanding of complex systems. Many factors can impact systems without our consideration or understanding. External and environmental factors create uncertainty that can disrupt the system. Issues seen as small create flow on effects that are much larger than predicted. Reinforcing feedback loops create unintended consequences. While the best organisations anticipate these risks and mitigate their impacts through strategy and planning, the bigger the system and longer the feedback loops, the more prone they are to issues.

The question above actually highlights one of the biggest complexities facing any growing organisation. How do you ensure the people continue to deliver consistent performance? Most machinery produces predictable results. Input fuel into an engine, output power. Input raw material, output product. Results are mostly impacted by factors that can be monitored and controlled. Sure there is wear and tear, breakdowns and replacements, but they don't just have “off days”.

This is why managing people for performance is so important and challenging. Having an off day is not only possible but almost a certainty. The factors that cause engines to underperform are fairly predictable. The factors that cause Jeff to underperform today might change tomorrow and be the same or completely different to Sarah, Lee or Diego.?

There are some critical human resource systems that are often deployed that are both relatively scalable and incredibly common in larger organisations. Recruitment processes, employee onboarding, performance reviews and remuneration standards to name a few. In an effort to scale organisations, we look to implement HR systems that are fair and equitable, how hard can that be? The challenge when trying to implement systems like these when there are people involved is the levels of nuance, complexity and chaos that is almost inevitable. Remember from your history lessons the group of humans that banded together and never had any disagreement over their customs, laws or leadership? No, me neither. Possibly it would have been a tribe not of homo sapiens but of Vilfredo Pareto’s, homo economicus. Sadly, they are not like us.

Whether we like it or not, we modern humans are weird and complex creatures. We are incredible in our abilities of logic and reason yet equally skilled at cutting off our noses to spite our face. This is why scaling a business that requires people is so hard. When you add an extra person, the possibilities explode, both potential for the incredible and disaster.?

A human workforce is necessarily a dynamic, chaotic system, constantly adapting to internal and external forces. A systems view is precisely what is required to develop more engaged, productive and creative workforces, however understanding systems, particularly chaotic systems made up of humans, are much more complex than you might expect. In her wonderful book Thinking in Systems, the late Donella Meadows provides great insights and examples into the traps and leverage points we must consider when working with complex systems and I believe these may hold much of the help the group needed to understand why becoming the next Elon Musk isn’t as simple as setting up operational processes and scaling.

3 Common System Traps

Here are just 3 of the 7 system traps Meadows describes that I’m sure you will see resonate with the complexities of a human workforce system

1. Policy Resistance: People hate uncertainty. While we might know that a particular policy, process or way of working is not perfect, many people rather the devil they know. Resistance to change is one of the most common challenges in organisations and when complexity in the external environment requires constant adaptation, policy resistance can bring great new ideas to a screaming halt. During the rise of Netflix, executives at Blockbuster resisted moving away from their expensive bricks-and-mortar store model to a streaming service. They knew how to run stores and decided to place their bets on this model surviving. They were wrong.?
2. Seeking Wrong Goals: Wells Fargo wanted to grow the depth of relationships they had with customers by servicing more of their financial needs. To do this, they set targets for cross selling additional products to existing customers. At the time, a senior executive coined the phrase “9 is great” insisting that each customer should have 8 products with the bank. These targets were rolled out across their huge workforce with aggressive targets leading to unethical practices by heavily pressured employees. Eventually the widespread fraud and the creation of millions of unauthorised accounts was unearthed, leading to more than $3 billion in fines and penalties.
3. Tragedy of the Commons: If you have worked in any large organisation, you will know that the process for building future budgets can be an interesting time. I’ve often heard people use phrases like:?

• “Let’s put a little extra in here so we have some padding”
• “Everyone else is asking for more, we should too”
• “That goes in their budget so we should ask for more”
• "If we don’t spend it now, we’ll never get it again"

These are so commonly used in companies, I’m sure many people don’t even realise the implications. For a company, the total operating costs are a common resource. From a macro perspective, it is easy to see that this resource is scarce and should be deployed carefully to ensure it is maximised to support the common goals. But these attitudes and practices highlight that at a lower level, the micro decisions are far from optimal. Resources are wasted by the individual areas at the expense of the whole.

3 Types of Leverage Points?

As the simple examples above highlight, good intentions are not enough. Strong policies and processes are great when they are perfectly aligned to the overall goals and people adhere to them strictly, it just turns out that even if you have this alignment right now, it is unlikely to last for long in a chaotic system of humans. You will need to constantly monitor and adjust the system as factors inside and outside the organisation change.

What becomes important to understand is not if we need to change the system, but what types will have the impact we need. Far too often, change is too little and too late. The system is spiralling towards disaster while management simply tinker around the edges. Here are 4 categories of leverage points Meadows’ suggest exploring with their increasing impact.

Physical Events

The first action many organisations take is to make changes to physical attributes such as budget constraints, changing resourcing buffers or stocks. We see this all too often when external headwinds appear. Companies look to tighten their belts and run a bit leaner in terms of resourcing. This is a useful adjustment if the external conditions are only mild and temporary. If there is a short-term reduction in market demand, it might be sensible to alter targets and reduce projected expenses accordingly.?

We should also know that this approach has the most limited impact in terms of changing the system. I’ve seen many companies cut their budgets only to find the desired impact is so limited that they need to do it again, and again. Restructures are announced but they are mainly attempts to reduce the number of people rather than systemic change. Work is moved around and often gives more work to less resources already concerned with the constant change. This type of approach often has a damaging impact on people. They fear their own job security and lose sight of the broader organisational objectives. Resistance can become strong and defensive behaviours to “protect our patch” increasingly undermine the cost cutting attempts.

While budgets fall, productivity often falls faster, exacerbating the original issues. If market conditions improve, organisations find themselves weakened and struggle to remain competitive. If they don’t improve, this approach can be fatal.

Feedback Loops

A second way to institute broader change is through altering the information flows, feedback loop and therefore, patterns of behaviour within the organisation. Systems can get into poor habits when feedback is not flowing through an organisation effectively. When I worked for an insurance company many years ago, we had an old, green-screen systems interface used by frontline staff to give customers insurance quotes. The last two fields the customer service staff completed for each quote were just coded fields, there was no description as to what they meant.?

I watched many people use this and each time, they would complete these final two fields with an ‘X’ in the first and a ‘Y’ in the second. I asked the customer service representatives what these fields meant, but no one knew. They simply were told to put in an X and a Y. I continued to search, asking team leaders, senior managers and IT staff but it seemed nobody knew.

Finally, I found someone who knew the code in the background and they were able to tell me that the first field was to capture if this was a new or existing customer; X meant existing customer. The second field was to capture which marketing channel the customer had come thorough; Y stood for Yellow Pages. Both fields had a purpose: to feed information from the front line back to other parts of the organisation to make future decisions. However this information was completely useless.

While system feedback loops are important. Behavioural feedback loops might be even more impactful when scaling an organisation. In most mechanical systems, feedback is sent from the external parts of the system to the centre where decisions are made. In our bodies, this is the case. Our senses provide information to the brain to alter the way our physiological system is interacting with the world around us. Feedback comes in feedback loops back in the form of decisions. In well functioning organisational systems, production and consumer data is captured at the extremities and channelled back to a centre to make decisions on future strategic decisions. Feedback in, feedback out.

However, in human workforce systems, too often the flow is either unidirectional at best or silent at worst. A manager thinks they are doing their job when they give feedback to people on their performance, but what about the feedback upwards? Do managers seek feedback on how they can better support their people to be more productive. Are people able to express their challenges, frustrations, ideas and innovations back to their manager? Is there a relative flow or is it too heavily weighted down? In the most at-risk organisations, feedback stops flowing altogether. People are given instructions on tasks and targets, behaviours become more defensive and the focus on self-preservation leads to destruction.

Increasing the flow of information about the patterns of work is a much stronger leverage point for organisational change. This feedback should be on both on the technical elements of performance such as productivity, input costs and other leading indicators, and on the behavioural elements such as personal accountability, leadership capabilities and communication skills. This is where having increased feedback capabilities across an organisation becomes so critical. Giving your people leaders these skills is useful, but ensuring everyone across the organisation has them is even better. Implementing regular feedback loops such as pulse surveys, employee round tables and 360 feedback processes can be powerful additional systems to help sustain change.???

Paradigm Shifts

The final point of leverage to consider is the most powerful, but also often the hardest of all to implement effectively. This involves changing how people think. Paradigm shifts represent deep changes in the ideas, beliefs and assumptions people within the organisation hold that can influence how they approach their roles and actions within the workplace. For some leaders, this will seem a bit too intangible. Why take on a ‘woo-woo’ mindset approach when all you need to do is implement hard targets and enforce the rules. The reality is, humans are highly skilled at both overcoming barriers when they truly believe in a cause but can also be deeply apathetic and even hostile when they are asked to do things they don’t believe in.

I found this to be true when working on a major cost reduction project for an international bank some years ago. I was sent to lead the project within one of the four major banks in New Zealand. At the time, I was working for their parent company in Australia and my brief for the project was very simple: Go over there and cut $130 million from their budget.

A number of my peers thought the project was going to be a disaster. How will the proud Kiwi’s react to an Aussie flying over from head office to slash their budgets? Some thought I’d be thrown out, others thought I’d be torn to shreds and no one thought it would be a success. But this is where a degree in mathematics and an understanding of systems theory and leverage points turned out to be very useful.

Rather than the usual cost cutting approach of simply issuing new budgetary targets, I started by focusing on the people involved. I interviewed all the senior executives with each assuring me they were glad I had come across and that the cost cutting was sorely needed. Interestingly, each also assured me that they had just cleaned out their own areas but that the rest of the divisions were in desperate need of help. It became clear that we needed to shift the way people saw this change otherwise politics and defensiveness would render the change impossible.

My focus for the program was to appeal not to targets and rules, but to the values and beliefs people held. We developed a set of powerful graphs that highlighted the growth in expenses of the bank compared to its peers in the market and extrapolated the incredible risks sustaining this cost growth could have. We changed the narrative from this being a program head office was doing to them, and instead made it a program led by the people within the bank. We instituted a set of guiding principles to help make decisions on what to cull and where to scale back. These were ideas such as:

• Don’t kill things customers love
• Don’t get rid of people until you get rid of the work they do

These helped to shape in the minds of the employees that we weren’t swinging an axe, we were looking to make sensible decisions that helped the business improve. Everyone was asked to submit ideas to remove waste and improve efficiency. All ideas were welcome, big or small, and when we showed that we genuinely investigated, validated and implemented their ideas, the trickle of suggestions became a flood. We empowered people to not hide in defensiveness, but to step forward and drive the change.

One suggestion we got highlighted to me the shift we needed. An employee had suggested that the bank stop purchasing leather bound, paper diaries. With the bank's insignia embossed on the front, these had previously been given as a gift to high-value customers for many years. The employee suggested they might be outdated and I certainly agreed. After some quick investigation, we discovered the bank spent over $150,000 on the diaries and I suspected this would be a quick win initiative that we could add to our tally without much resistance.

I was wrong. When I took this suggestion to the Manager responsible for the diaries, I was quite sternly told that the diaries were important and shouldn’t be cut. At this point, I thought through the different leverage points at my disposal. I could have implemented a rule to reduce the budget line for diaries. I could have completed a survey to get feedback from customers on the relative importance of the diaries. I could have gone over his head and asked the CEO to make the decision. But the diaries weren’t the issue, it was the way this Manager was seeing the scenario. He saw this as a power struggle, a tug-of-war where I was trying to impose cuts upon his turf. He wanted to have power and saw the diaries as a decent battle to fight. I needed to change his paradigm.

In one of my less subtle corporate moments, I told him he could keep the diaries. But at the same time I slid a piece of paper across the desk toward him and asked: “You can keep the diaries, but you’ll need to give me three names. These will be the people who we will need to fire so you can keep the diaries. See the task here is not to see IF we can save the money, it is to find WHERE we will save the money.” I followed this by expressing my own belief that we can likely create more value out of three people than the diaries, but ultimately this was his decision.

The diaries were cut. The money was saved along with many jobs that people had assumed we would have removed. It wasn’t pleasant nor easy, but by changing the paradigms and beliefs people held, employee engagement rose through the cost cutting process and the bank was named the best in NZ for four of the next five years. Not only that, but a decade later, the program I had initiated still continues as a focus on continuous improvement, waste reduction and efficiency across the organisation. We didn’t just cut the budgets, we changed the paradigms within the minds of the employees and created much greater change.

If we look to history to understand the groups who have been most successful at scaling, we shouldn’t look at the Amazon’s, Tesla’s or Microsoft’s. They are of tiny scale compared to the belief driven movements seen in countries like the United States of America, China and India. Each has very different but similarly deeply held beliefs and identities cherished by their people. Religions such as Christianity, Islam and Buddhism have populations spread across the world and influence billions of lives through the paradigms they have embedded. While I’m not suggesting that building your company should be a religious endeavour, if you want to really shape the human workforce to be able to scale, you will need to influence not just what they do and what they get out of it, you need to influence what they believe.?

Masterclass Final Call

High-Performance Team Commitments - 22 November

Giving Hard Feedback - 28 November

With empathy

Daniel