Back to that ‘Profit Sharing’ Nirvana

cakeMy last post set out why profit sharing beats incentives by a country mile but I also laid out a note of caution on one aspect, short-termism:

I wrote that “A key consideration for anyone designing a profit share method is to avoid short-termism. Alternative thinking on how to achieve this might be to consider payment in shares that can’t be sold for a certain period, or payments into a person’s pension scheme, or [some other way of thinking outside the box]”

I have been keeping my eye open for a ‘for profit’ organisation out there that has been demonstrably successful in operating a profit sharing method that fits, and doing so for a reasonable (i.e. proven) period of time…and I believe that I have found such a thing! A Swedish bank called Handelsbanken.

Here’s the story:

At the end of the 1960s Handelsbanken was in crisis so it searched around for a radical thinker to lead them. They found Jan Wallander – an economist who had metaphorically ‘put his money where his mouth is’ by leaving academia and becoming a director of a rival Swedish Bank…and he was doing rather well whilst challenging conventional wisdom.

WallanderHe took on the role of Handelsbanken’s CEO in 1970 and got stuck in to doing things quite differently! As an example, he was particularly scathing about budgets:

“either a budget will prove roughly right and then it will be trite, or it will be disastrously wrong and in that case it will be dangerous. My conclusion is thus: Scrap it!”

As a result of this, Handelsbanken have now been operating very successfully without budgets for over forty years! (There’s an important ‘Beyond Budgeting’ post coming soon)

….but getting back to the profit-sharing subject:

Jan Wallander believed in a profit-sharing system that:

  • is intended as a reward for everyone’s collective efforts and competitive success (i.e. as against other banks); and conversely
  • should not be an incentive for individuals to pursue financial targets.

“beating the competition…is a far more powerful weapon than financial incentives. Why do people need cash incentives to fulfill their work obligations to colleagues and customers? It is recognition of effort that is important. Managers will only strive to achieve ambitious goals if they know that their ‘best efforts’ will be recognised and not punished if they fail to get all the way.”

Wallander set out an overall goal for the organisation (within its banking purpose): attaining a better return on equity than its (listed) banking competitors. This is rather interesting:

  • it doesn’t tolerate for any ‘resting on their laurels’ in easy market conditions; and conversely
  • it reasonably accommodates what might seem disappointing results (in absolute terms) when the market is tough.

Starting in 1973, the bank has allocated part of its profits to a profit-sharing scheme for employees. The main condition for an allocation to be made is that the ‘return on equity being better than the competition’ goal is achieved for that year.

The funds are paid to a profit-sharing foundation called Oktogonen (which was set up by the bank’s trade union club). In turn, the Oktogonen Foundation places 90% of these funds in Handelsbanken shares, thus giving the employees owner representation on the bank’s board.

The Oktogonen Foundation has become the bank’s largest shareholder, with over 10% of voting power.

Okay, so there’s a big fat fund of money…but how do the employees get at it?

This is the long-term bit, mixed with a healthy dose of equality.

Every year that the bank makes a profit allocation into the foundation (which, as it happens, has been achieved every year since its inception) then each current employee is allocated an equal share of units (i.e. salary level is not relevant to this allocation).

The value of each unit then goes up and down with the value of the foundation’s investments i.e. mainly the price of Handelsbanken’s shares.

Current and past employees can cash up their units from the age of 60 i.e. they cannot access any money until this point. This gives the Oktogonen Foundation the character of a pension fund.

This 2013 financial report shows that, if an employee had worked full time at the bank since the start of the scheme in 1973 (i.e. a 40 year working life), their fund units would be worth SKr 14,000,000…which is US$1.7 million at today’s exchange rate!!!! …that would be my pension pot sorted.

Some thoughts on this:

  • you can see that everyone working for the bank is ‘joined together’ (working as a system), aiming in the exact same direction over the long term…yet they also need to do so with speed so as to release the yearly profit allocations. This harnesses together the desires for efficiency and effectiveness;
  • it removes the need for the whole ‘setting personal objectives – arbitrary targets – judgemental scoring – giving of contingent rewards’ commotion….and the people can use this huge amount of freed-up time and wasted energy to work towards purpose. A bye-product is that people can now ‘get on’ as adults rather than as Parent – child;
  • it removes the batch behaviours associated with annual bonus payments:
    • there isn’t a period before year end where some people ‘hang on’ to get their payment when they’ve already checked out for something/ somewhere else; and
    • there isn’t an exodus of people out the door in the months after the bonus cheque has been cashed…causing a renewed batch of recruitment.

… people leave as and when they want to, which makes for transparency and a clear flow, making the balancing of capacity much easier;

  • it binds the employees and the shareholders together. They now have the same long term interest of building and sustaining a business for the future. Conversely, it will likely dissuade short term investors attracted merely by share price volatility…which isn’t in the best interest of organisational success.

What about some likely criticisms?

Here are four likely retorts to the idea of long-term profit sharing instead of short-term incentives:

1. “But what about ‘poor performers’?”

This is usually the first criticism of the profit-sharing method and rests on the belief* that some people will always ‘work harder’** than others and why should ‘slackers’ benefit at the expense of ‘grafters’.

* it is interesting that most people working in a command-and-control environment appear to have this belief about themselves as compared to others. A bit like everyone thinking that they are a ‘better-than-average’ driver 🙂

** I am only covering the ‘effort’ question here. The ability/ scarcity of resource question is covered within the differing levels of salary that people receive.

Incentive schemes are not the answer to supposed ‘poor performance’ – they are frequently used as a substitute for good management and, as such, are an abdication of management’s responsibilities.

Alfie Kohn writes that “In order to solve problems in the workplace, we must know what caused them….holding out a carrot – ‘Do better and here’s what you’ll get’ – is a pseudo solution; it fails to address the issues that are actually responsible for holding back the organisations and the people who work there.

Incentive schemes are frequently used as a substitute for giving workers what they need to do a good job…much less effort is required to dangle a bonus in front of employees and wait for the results…[however] there is evidence that pay-for-performance plans tend to displace careful management…a compensation system is no substitute for careful management.”

But it’s not just management, it’s also about peers! Here’s Handelsbanken’s response to the ‘poor performers’ fear:

“In a team based organisation driven by peer pressure, free riders are exposed very quickly and replaced by people more willing to commit themselves to real performance challenges.” (Source Book: ‘Beyond Budgeting’)

i.e. rather than gifting ‘free riders’ with easy money, the profit sharing method exposes and deals with them!

On advocating the removal of the ‘incentive-performance management’ system, Deming was once asked by a member of his audience “but what will we do instead?” His response was “Try leadership”.

…it has clearly worked rather well for Handelsbanken!

2. “How do we get people to leave? Won’t people hang around forever?!”

This view fits alongside the concern about ‘poor performers’. Consider though that the supposed ‘poor performance’ may very well evaporate…and we now have hugely experienced AND motivated people.

‘But they will be dinosaurs, unable to change’ I might hear someone reply. Really? Do you think that you couldn’t change even if you wanted to? Consider that “People don’t resist change, they resist being changed” (Scholtes). It’s back to that environment again!

Perhaps those ‘resistant to change’ are suffering from ‘change fatigue’: namely, being tired of their huge knowledge being ignored as the next overly simplistic ‘silver bullet’ change programme is done to them.

An organisation with high employee turn-over allows (and often forces) years of highly skilled knowledge to regularly ‘walk out the door’, only for the learning to start again, almost from scratch by the ‘next batch’. If the experienced workers stay, just think of where they could ‘kick on’ to if they so desired.

…but don’t worry, we haven’t engineered a prison! People can and will leave as they wish…and retain the profit-sharing units already assigned to them.

3. “People like getting a lump sum each year to pay for, say, their holidays”

Yes, I can see this (I do too)…but I would happily trade in the pain of the annual performance process (including the dysfunctional behaviours it causes) and the resultant lump sum payment if it meant that I got a real kick out of work because of the amazing environment that I worked in, with people who are equally energised, and who are ‘all running in the same direction’ and helping each other do so.

This brings to mind the quote “Pay people well and fairly…then put money out of their minds.” (Alfie Kohn)…though I might fondly look ahead every once in a while to that pension pot!

4. “What happens if the organisation goes bust?!”

Yep, you’d lose your investment (or at least be at the back of the creditors’ line)…so you would be very keen to constantly:

  • stay alert: look ahead to see external change coming (rather than ‘sit back and wait’);
  • know what’s happening: keep close to your customers and how their needs are changing…and be sure to deliver value to them;
  • innovate: think differently, look at what others are doing, try things out (experiment), pivot in new directions;
  • collaborate and roll-in meaningful change that demonstrably works for the whole system;
  • seek out, recognise, and directly attend to obvious waste and failure demand.

i.e. constantly improve your capability of meeting your customer’s purpose….just what your shareholders and profit-share foundation unit holders (incl. past employees) would want of you!

…and finally, that’s not the whole story:

Cleary, it wasn’t just a superb profit-sharing scheme that has led to Handelsbanken’s success…but it is seen as an enabler and a foundation for the necessary environment to stimulate and secure long term success. Jan Wallander did lots of things differently – probably the greatest being that he was also a firm believer in empowering people through decentralisation.

There is a clear relationship between decentralisation2 – empowerment – intrinsic motivation – purpose – systemic collaboration – continuous improvement – profit sharing.


1. Handelsbanken reference material: The history of Handelsbanken

2. On Decentralization: “What is commonly understood by decentralization originates in the conventional command-and-control paradigm, defined as Decentralization 1.0.

To cope with the world’s exploding complexity, some vanguard companies have evolved to a higher level of organization by adopting a new kind of decentralization originating in the enabling-and-autonomy paradigm – hence the term Decentralization 2.0. This refers to organizations consisting of autonomous groups facilitated by an enabling support organization. To keep these high-trust, spirit-driven organizations together, a new kind of deep leadership is practiced by them.” (Decentralization 2.0)

3. The Oktogonen Foundation: For a very clear explanation, scroll right down to Appendix A at the bottom of the ‘Written evidence from Handelsbanken to the UK Parliamentary Commission on Banking Standards’. (Parliament UK)


“So, tell me about yourself”

InterviewA good friend of mine got talking to me about interview questions the other day.

She was having a laugh at the ‘creative’ questions that many interviewers can dream up such as “tell me what makes you special!”

I replied that I think the worst interview question is the “what are your greatest weaknesses”…and then I got thinking about why this is so.

Now, an interviewer can dream up all sorts of weird and wonderful questions that will allow you the space to sell yourself (if you are willing and able to) but this ‘weakness question’ is different. I suspect that it makes us all squirm because it causes a huge moral dilemma:

  • you want to be yourself, to be genuine, to be open and honest….


  • you also want the job!

So you’ve been put in a rather tight spot!

I’ve read all sorts of ‘clever’ (cheesy) responses. There’s plenty of advice on the web to answer this tricky conundrum, but they all try to do the same thing: get around the question rather than being brutally honest.

So, why am I bringing up this dastardly interview ‘weakness’ question?

Well, because I realised that this is an excellent parallel to the (ir)regular performance management meeting.

How so?

If you are part of a ‘set personal objectives – rate performance against – provide contingent reward’ Performance Management system then you too are in a rather tight spot.

Let’s imagine that you are in your annual performance review meeting:

  • on the one hand, you have a manager before you who has the job of developing you and, to do this, needs to truly know about how things are for you. They need genuine, open and honest ‘warts and all’ feedback;
  • on the other hand, this same manager has to judge you, which requires an interrogation of the available evidence and the scoring of it, as compared to your peers. You need to sell yourself.

What’s wrong with this?

These two ‘management’ roles are diametrically opposed. A manager cannot be judge and counsellor/coach at the same time.

If you were to lie down in a psychiatrist’s chair, you can expect that he/she will go to great lengths to put you at your ease, make clear that everything spoken is private and that no judgement of you will take place….and even then I suspect that it would take multiple visits before you truly opened yourself up….and in so doing, you provide the knowledge and insights required for you to develop.

Now, I know you won’t lie on a reclining chair in a performance review meeting (at least I don’t) but a similar environment of trust is required for a manager to truly help you (and, by extension, the organisation).

“When the person to whom you report decides how much money you will make (or what other goodies will be awarded to you) you have a temptation to conceal any problems you might be having. Rather than asking for help, which is a pre-requisite for optimal performance, you will be apt to spend your energies trying to flatter that person and convince him [or her] that you have everything under control. Moreover…you will be less likely to challenge poor decisions and engage in the kind of conflict that is beneficial for the organisation if you are concerned about losing out on a reward. Very few things are as dangerous as a bunch of incentive-driven individuals trying to play it safe.” (Alfie Kohn)

If you know that you are being judged (with a carrot or stick at the end of this) then you are going to be extremely careful (and selective) about what you do and say. You will likely:

  • seek, sift through and provide only positive evidence (choosing feedback wisely and carefully omitting what doesn’t fit your wishes);
  • talk up what has occurred, and you role within (it was all ‘because of me’!);
  • defend your position when it is challenged (presenting a strong case as to why something or someone else was to blame);
  • keep quiet about areas you have struggled with;
  • …[and so on – no doubt you can expand]

None of this is to call you a ‘bad person’…you would be merely playing your part in the game of survival that has been put before you.

You might get your carrot, but your organisation will miss out on what it really needed to know…and the game will continue on to its next round.

A better way

Wouldn’t it be just fantastic if you were willing to ‘share it all’ with your manager, and to do so without any salesperson’s spin. How about: where you got it wrong; where you didn’t understand; where you don’t agree, where you feel weak and exposed, where you’d really like some help… where it was actually a joint team effort (not just ‘me’)…basically what is really going on!

Even better, how about being willing to have these conversations as and when the need arises (and not, say, 6 months later in some staged meeting).

This is possible….but only with a different way of thinking.

Here’s where I repeat Alfie Kohn’s 3-step approach that I have already shared in an earlier post (The Chasm):

  1. abolish incentives: remove extrinsic motivators (incentives, competitive awards….);

“pay people well and fairly…then put money out of their minds.” (Kohn)

  1. then re-evaluate ‘evaluations’: move from formal time-batched judgement events to continual 2-way conversations divorced from the issue of compensation;
  1. then create the conditions for authentic motivation:
    • Collaboration: across the horizontal value stream
    • Work content: make it interesting
    • Choice: allow people to experiment and learn

There’s a reason for the order of these steps: True organisational success is unleashed by point 3…but, most importantly, is held back (even quashed) without first attending to point’s 1 and 2.


There are some people who are willing and able to say exactly what they think in a performance management review*, which they do because they have a desire to make their organisation a better place to work (for them, and everyone else)….and then risk the consequences of low(er) ratings and a poor ‘reputation’ with their manager (as in “s/he’s a trouble maker that one!”)…which may even then go on to be ‘shared’ with others in the hierarchy.

This is ironic madness. I favour any management system that encourages and supports open-ness and honesty that is devoid of personal agendas.

* I’m not suggesting that there is anything particularly great about such people. Such willingness and ability may come down to personality and economic circumstance allowing…which is not so for most.


Getting Away from Pyramid Selling

Mgmt pyramidSo I wrote my recent ‘Farmers and Facilitation’ post on who should be promoted and why…but that wasn’t the end of it. Here’s ‘Part 2’:

Rethinking the ‘Promotion’ idea

Not everyone can ‘get to the top’. In fact hardly anyone can! Yet many (most?) of us spend our working lives striving to reach the next rung of the ladder…and then find ourselves eyeing the next one. It’s a bit like a pyramid selling scam!

As ever, Alfie Kohn has some interesting things to say:

“In thinking about promotion, we take for granted that an organisation must be shaped like a pyramid, with many people clamouring for a very few desirable and lucrative jobs at the top, as if this arrangement had been decreed by God. In fact, both how many such positions are available and how many people want them are the result of institutional decisions.

We create a climate in which employees are made to feel like failures if they are not upwardly mobile, and we arrange the majority of jobs so that those who hold them are given very little money and responsibility. Were these things to change, the competitive scramble for promotions might be eased and we would be obliged to rethink the whole issue of who does what in an organisation.”

Kohn is challenging us to think differently…so let’s have a go at this by winding back to what’s happening in our brains:

‘Threat and Reward’ response

One of the core areas of research on the brain has understandably been about threat vs. reward. The Neuroscientist Evian Gordon refers to this “minimise danger, maximise reward response” as “the fundamental organising principle of the brain.”

The ‘Neuro-Leadership’ scientist David Rock explains that the threat response “is mentally taxing and deadly to the productivity of a person…[the threat response] impairs analytical thinking, creative insight and problem solving.” …and so it would be a very good idea to understand and avoid triggering our threat response1..

Rock explains a set of five social qualities that enable employees and executives alike to minimise the threat response and instead enable the [intrinsic] reward response.

These five qualities are: status, certainty, autonomy, relatedness, and fairness. I expect you will understand, and concur with these basic human desires.


For the purposes of this post, I’m looking at the status social quality:

“As humans, we are constantly assessing how social encounters either enhance or diminish our status. Research shows that when people realise that they might compare unfavourably to someone else, the threat response kicks in…we are biologically programmed to care about status because it favours our survival.”

David Rock goes on to observe that “organisations often assume that the only way to raise an employee’s status is to award a promotion.”

Here’s the punch line: it isn’t that we want promotion as such – we want what we think promotion implies – we want a feeling of status.

Personally, I couldn’t care less what title you give me* or how many people ‘report to me’ or how long I’ve been in my current position…but I understand and accept that (as a human being) I care about status just like the next person.

(* as long as it is logical and isn’t derogatory!)

So, if the number of management positions is (and always will be) limited AND it isn’t actually about promotion…then what can we do/ how can we act to look after everyone’s feeling of status?

I don’t (and shouldn’t) have a perfect answer for this…but some starters for ten are that our perceptions of status increase when:

  • We have meaningful work to perform (because it aligns to a purpose that we care about2.);
  • The organisation demonstrably values the role we play (which implies that the work we are doing is fully understood and that we feel valued, included and listened to by those put in place to manage us);
  • We constantly master new skills3. (where we have a degree of freedom as to what these might be, and where they take us)
  • …and these new skills are then used in yet more meaningful work….and back round the virtuous circle.

If I am doing meaningful work (to me and the organisation), I am constantly growing as a person and I am being suitably valued then I’ll be fully engaged and pretty damn happy with things.

This now links nicely back to ‘part 1’ : If I am able to self-develop then perhaps I have achieved the first step of eligibility for promotion.

Some final comments from David Rock to close:

Value has a strong impact on status. An organisation that appears to value money and rank more than a basic sense of respect for all employees will stimulate threat responses among employees who aren’t at the top of the heap.

Similarly, organisations that try to pit people against one another on the theory that it will make them work harder reinforce the idea that there are only winners and losers, which undermines the standing of people below the top 10 percent.”

In short: The practises of judging people and making them compete with each other aren’t going to help!

To conclude:

If ‘status’ in an organisation is all about your position within a hierarchy then this creates a limited and circular line of thinking, within management and employees, whereby promotion is the aim (rather than a responsibility).

Rather than spending our time talking to everyone about transparent promotion paths and career development “so you too can get to the top”, let’s spend it ensuring that everyone has a feeling of status.

A healthy feeling of status should be attainable by everybody in every position. Whether this is the case will depend upon the management system in place, and the resultant environment that it produces.

“Um, okay Steve…but I still want promotion to look good’

A personal thought: For those of you comparing yourself to those around you (at work, family, friends, and connections), here are a few lines from one of my favourite song lyrics:

“Sometimes you’re ahead, sometimes you’re behind
The race is long and in the end, it’s only with yourself”

(Baz Luhrmann – Sunscreen)


  1. It is worth noting that ‘Performance reviews’ provoke the threat response because the person ‘passing judgement over us’ puts us on the defensive and appears, to us, to be claiming superiority over us. We find ourselves fighting for survival.
  2. I suspect that a really good ‘test’ of the meaningfulness of work to you is how you feel when someone outside of your working life (say your partner, children, family or friends) asks you what you do. Is it painful or easy to respond?!
  3. David Rock notes that “paying employees for the skills they have acquired, rather than for their seniority, is a status booster in itself. This is a very different logic to ‘incentive pay’.

False Economies

chasing moneySo I expect we have all heard the phrase ‘Economies of Scale’ and have a view on what is meant.

The phrase is probably covered within the first pages of ‘Economics 101’ and every ‘Beginner’s book of management’. I think the idea has even leaked out of these domains and is used in every-day parlance. It is seen merely as ‘common sense’*.

(* please read and reflect upon a hugely important quote on ‘common sense’ when you get to the end of this post)

So what is the thinking behind ‘Economies of Scale’?

Let’s start at the beginning: Why is it said that we benefit from ‘economies’ as an organisation grows larger?

The idea in a nutshell: To run a business you need resources. As you grow, you don’t necessarily need a linear increase in those resources.

Basic example: A 1-man business premises needs a toilet (if he needs to go, well he needs to go). But when the next person joins the growing company he doesn’t get his own personal toilet written into his ‘remuneration package’. No, he has to share the existing toilet with his fellow employee. You can see this logic for lots of different things (one building, one IT system, one HR manager….), but I reckon a toilet is about as basic as it gets.

The theory goes that as the volume of output goes up* then unit costs come down (where unit cost = total cost/ units of output).

(* I’m writing generally now…I’ve moved on from toilet humour 🙂 )

It should be noted that the classical economists that came up with the theory did accept the idea of ‘diseconomies of scale’: that of costs rising as growing organisations become more complex, more bureaucratic…basically harder to manage.

You’ll likely see all this expressed in economics text books with a very simple diagram (below) and, voila, it is surely so!

economies of scale

Getting into more specifics about the phenomenon, three distinct reasons are given for those scale economies:

  • Indivisibility: Some resources aren’t divisible – you can’t (easily) have half a toilet, a quarter of a receptionist, 1/8th of a manager and so on.
  • Specialisation along with Standardisation: this reason goes way back to the writings of Adam Smith and his famous book called ‘The Wealth of Nations’ (1776). In it, he used the example of a pin factory to explain the concept of ‘the division of labour’. He explained that one person performing all the steps necessary to making a pin could perhaps make only 20 pins a day but if the pin-making process were broken up into a series of limited and standardised operations, with separate people performing them in a joined-up line, productivity could rise to thousands of pins per day per worker.
  • Machinery: Investing in ever larger machines mean that they can turn out more and at a faster rate…and our beloved unit costs come down. In service organisations the equivalent could be a ‘bigger, better’ telephone system, IT system,…etc.

Sounds like a water tight case to me – ‘Economies of scale’ proven, case dismissed!

Not so fast…a few dissenting voices:

“All the above seems to be about managing our costs? We are concerned about where this might lead – shouldn’t we be first and foremost focused on delivering value to our customers?”

“We’ve got really low unit costs at lots of our activities…and we keep on making ‘economies of scale’ changes to get them even lower…but this doesn’t seem to be reducing our total costs (they remain annoyingly high)…are we missing something?”

“Gosh, that ‘economies of scale’ average cost curve looks so simple…so all we need to know is when we are at the optimum size (Q) and stop growing. Easy! Can someone tell us when we reach that point? How about a nice warning signal when we are getting close? What do you mean it’s just ‘theoretical’ and no-one actually knows?!”

“I’ve heard that ‘behavioural economics’ is debunking a central assumption within Adam Smith’s classical economic ideas. Apparently we are all human beings (with our own unique purposes), not rational robots!” (Nice link: Who cooked Adam Smith’s dinner?)

“We don’t make pins. We are a service organisation. We have much variety in demand and our customers are ‘co-producers’ within our process…specialisation and standardisation can do much harm to them, and therefore us!”

Meanwhile, on another planet…

Taiichi Ohno developed the Toyota Production System (TPS). In so doing, he used totally different thinking, with profound results.

(Note: Historians have identified a core reason for this difference in thinking as the heavily resource-constrained context that Japan found itself in after the 2nd world war. This was in complete contrast to 1950s America that had an abundance of resources and booming customer demand. In short, Ohno had to think differently to succeed.)

The big difference – Flow, not scale, as the objective: Ohno concentrated on total cost, not unit costs. He realised that, first and foremost, what matters is how smoothly and economically a unit of demand is satisfied, from initial need through to its completion (in the eyes of the customer).

The flow is everything that happens between these points and, as well as all the value-adding steps, this includes:

  • all the time that nothing is happening (a huge proportion of a traditional process)
  • all the steps that occur but shouldn’t really need to (i.e. they are non-value adding);
  • all the repeat and/or additional steps needed because something wasn’t done right; and (the worst of all)
  • everything needed to be done when the customer returns with the good or service as not being acceptable (where this could be days, weeks or even months later)

There’s no point in a particular activity being made ‘efficient’ if this is detrimental to the flow.

‘Economies of scale’ thinkers (and their management accountants) are obsessed with how much each activity costs and then targeting reductions. Their belief is that, by reducing the costs of each activity, these aggregated savings will come off the bottom line. Such thinking has led to:

  • ‘large machine thinking’ (which also relates to centralisation/ shared services);
  • ‘batch thinking’ to make these resources work (allegedly) more efficiently;
  • ‘push thinking’ to keep these resources always working – high utilisation rates are king; and
  • inflexibility due to highly specified roles and tasks

…which cause a huge amount of waste and failure demand.

Ackoff made incredibly clear in his systems TED talk (using the automobile as his example) that trying to optimise the components of a system will not optimise the system as a whole. In fact, the reverse will be true and we can expect total costs to rise.

Rather than trying to get the cost of a specific activity down, Toyota (and other system thinkers) focus on the end-to-end horizontal flow (what the customer feels). This is a different (systemic) way of thinking and delivers far better outcomes.

It is no coincidence that Ohno is also credited with much of the thinking around waste. It is only by thinking in terms of flow that waste becomes visible, its sources understandable, and therefore its reduction and removal possible.

In short, Cost is in flow, not activity.

Flow thinking has led the design of systems to:

  • ‘right-size thinking’ and ‘close to customer thinking’;
  • ‘single-piece flow thinking’;
  • ‘pull thinking’; and
  • handling variety ‘in the line’ thinking (Note to self: a future post to be written)

These all seem counter-intuitive to an ‘economies of scale’ mindset, yet deliver far better outcomes.

(How) does this apply to service?

Okay, so Ohno made cars. You might therefore question whether the above is relevant to service organisations. Here are examples of what the ‘Economies of scale’ mantra has given us in service, broken down into comments on each of specialisation, standardisation, centralisation and automation:

Specialised resources: Splitting roles into front, (middle) and back offices; into demand takers (and ‘failure’ placators), transactional processors, back room expert support teams and senior ‘authorisers’…meaning that:

  • we don’t deal with the customer when/ where they want;
    • causing delay, creating frustration – which needs handling;
    • incorrect setting of customer expectations;
    • unclear ownership, leading to the customer having to look out for themselves
  • we have multiple hand-offs;
    • causing batching, transportation, misunderstandings, re-work (re-reading, re-entering, repeating, revising);
    • we break a unit of value demand into separate ‘work objects’ which we (hope to) assign out, track separately, synchronise and bring back together again (…requiring technology);
  • we collect information to ‘pass on’ (…requiring technology)
    • often passing on incomplete and/ incorrect information (or in Seddon’s words “dirty data”), which escalates to the waste of dealing with the defects as the unit progresses down the wrong path;
  • we categorise, prioritise, allocate and schedule work around all these roles (…requiring technology)
  • …all of the above lengthens the time to deliver a service and compromises the quality of the outcome, thus generating much failure demand (which we then have to deal with)

Standardised activities: Trying to achieve a standard time (such as Average Handling Times) to perform a standard task (using standard templates/ scripts) that appears to best fit with the category that ‘we’ (the organisation) jammed the customer into

  • rather than listening to the customer’s need and attempting to deliver against it (i.e. understanding and absorbing customer variety);

Centralisation: Seeing ‘shared services’ as the answer using the “there must be one good way to do everything” mantra.

  • creating competition for shared service resource between business units and the need for SLAs and performance reporting;
  • requiring some ‘super’ IT application that can do it all (“well, that’s what the software vendor said!”);
  • ‘dumbing down’ the differences between services (and thus losing the so-called ‘value proposition’)
  • loosening the link between the customer and the (now distant) service.

Automation: Continually throwing Technology at ‘the problem’ (usually trying to standardise with an ‘out of the box’ configuration because that will be so much more efficient won’t it) and, in so doing, creating an ever-increasing and costly IT footprint.

Whilst technology is amazing (and can be very useful), computers are brilliant at performing algorithms (e.g. calculations and repetition) but they are rubbish at absorbing variety, and our attempts at making them do so will continually create failure demand and waste.

In summary: ‘Economies of scale’ thinking is more damaging in service because of the greater variety in demand and the nature of the required outcomes.

To close:

This post isn’t saying that scale is wrong. It is arguing that this isn’t the objective. Much harm is, and has been, done by blindly following an activity focused logic (and the resultant ‘specialise, standardise, centralise, automate’ mantra)

Further, I get that some of you might say “you’ve misunderstood Steve…we aren’t all running around saying we must be big(ger)!”…but I’d counter that the ‘economies of scale’ conventional wisdom is implied in a relentless activity cost focus.

Put simply, “Economy comes from flow, NOT scale” (Seddon)

End notes

Beware ‘Common sense’:

“There is a time to admire the grace and persuasive power of an influential idea, and there is a time to fear its hold over us.

The time to worry is when the idea is so widely shared that we no longer even notice it, when it is so deeply rooted that it feels to us like plain common sense.

At the point when objections are not answered anymore because they are no longer even raised, we are not in control: we do not have the idea; it has us.” (Alfie Kohn)

Credit: The ‘Economies of scale’ explanation comes from reading a John Seddon paper.

Being fair to Adam Smith: He understood that the specialisation of tasks can lead to “the almost entire corruption and degeneracy of the great body of the people [the workers]. … unless government takes some pains to prevent it.” i.e. it might be great for the factory owners…but their workers are people, not machines.

Rolling, rolling, rolling…

cheese-rolling1So let’s suppose that we (‘Management’) have come up with (what we think) is a great idea to improve a process. We’ve tried it out in one place (such as a branch/ outlet or a team/ shift or a channel/ brand) and we now want everyone else to change to our new brilliant way.

i.e. let’s do a roll out!

Excellent, so let’s ‘grease those wheels’ by bringing in a ‘change manager’1 who can work out sensible things to make this roll out happen:

  • Let’s ‘big it up’: We’ll prepare fancy presentations (and perhaps some posters for around the office) that explain the change in an up-beat and positive way that makes it sound just great!
  • Let’s deal with the worries: We’ll have a period of consultation, prepare a set of FAQ’s in response, and make small changes to show that we have taken these worries on board;
  • Let’s ‘motivate them’ to want it: We’ll adjust everyone’s balanced scorecard and related objectives, targets and incentives so as to make it ‘front and centre of stage’;
  • Let’s create a launch: We’ll design a competition2 where ‘demonstrated compliance’ with the new way wins prizes for an initial period of time.

…does any (all!) of the above look familiar?

Now to reverse this logic:

Imagine that every team:

  • Understands its capability (against a system’s purpose) and works in an environment that wants to continually improve;
  • …so wants to experiment (for themselves) with new ways of working;
  • …so, as well as coming up with their own ideas (which their environment encourages), is really interested in going to see what other teams are doing;
  • …so brings back new ideas to adjust, try, consider and conclude upon (using the Plan-Do-Study-Act cycle);
  • …so is intrinsically motivated to rolling in new ways of working that they believe in.

John Seddon came up with the label ‘Roll in’ to explain this point. Here are his definitions:

Roll-out: Method that involves developing an improved process, standardising it and applying it to other areas*. This tends to create two problems:

  1. The solution is not optimised for each specific context so it is not a good fit;
  2. The staff in the other units have not been through the same learning and therefore feel little sense of ownership. They may also feel a loss of control and resist change.

(*I note that the much used ‘achieving buy-in’ phrase is synonymous with the ‘rolling out’ phrase i.e. it is actually about someone trying to sell something)

Roll-in: A method to scale up a change to the whole organisation that was successful in one unit. Change is not imposed. Instead each area needs to learn how to do the analysis of waste for themselves and devise their own solutions. This approach engages the workforce and produces better, more sustainable solutions.”

…meanwhile back at Toyota:

You might have heard that a big part of the hugely successful Toyota Production System (TPS) is standardisation3. and you might then make the mental leap to assume that every shift in every comparative production line in every Toyota plant across the world conform to the one ‘standard’ (i.e. the exact same methods). Yet such an assumption would be incorrect.

Liker’s decades of Toyota research makes clear that change is most definitely NOT imposed on the people and their processes. Instead, each unit (at all levels) is set a clear challenge (a target condition ) that aligns with purpose and is then coached through experiments to achieve it. And, once achieved, the cycle starts again.

So a given team on a given line in a given plant will want a standard way of working so that they are very clear on how to (currently) perform a task but this standard may be quite different to another team/ line/ plant.

Key points in this Toyota way of thinking:

  • The challenge that is set isn’t about rolling out some pre-defined solution. The solution is not known. It is up to each team to work out how to get there for themselves (see ‘how to have a successful journey’);
  • Each challenge is specific to each team, taking account of their current condition;
    • A mature plant in Japan would have very different challenges set to a much newer plant in, say, America, even though they might be making the same car model;
  • It is perfectly acceptable for one plant (say) to arrive at a different method of working to another. This is in fact considered a good thing because it keeps people thinking, broadens ideas and sets off yet deeper studying and understanding…fuelling yet more improvements;
  • It creates a desire for collaboration between plants: they are very interested in what others are doing (going to each others ‘Gemba’* ). This is the total opposite to the competitive (and myopic) mentality of ‘Our team’s way is the best way…it must be – we won a prize!‘;
    • In fact, a mature Japanese plant wants to go and see what a newer American plant has come up with because they understand that the ‘newbies’ may have come up with completely different (and potentially step-change) ways of thinking.
  • If a team from plant B do a Gemba walk at sister plant A and sees something of interest, they don’t just go home and implement it! They can’t – because that would just be the ‘plant visit’ team dictating to their colleagues back home. No, instead, they will explain what they saw, experiment, decide whether it is of use to them and, if so, adapt so that it fits for their needs;
    • The original plant A is highly likely to do a ‘reverse’ Gemba walk to see what plant B has done with their ideas…and then rush back home to experiment again….and, hey presto, what a healthy innovation cycle we have!

(* Reminder: Gemba roughly translates as ‘the place where the work happens’)

In short: Seddon didn’t invent the ‘roll in’ idea (Toyota, as an excellent example, have worked this way for decades) but he is very good at putting it into words, giving it a name and passionately championing it.

Looking back, it seems pretty obvious that if people find out about and learn things for themselves then this will be fulfilling and lead to real and sustained successes….which will create a virtuous circle. No such worthy circle exists from ‘stuff being done to you’.

But what about that Iceberg?

Many of you will have been introduced to, and likely read, John Kotter’s well written business story book called ‘My Iceberg is melting’. If you haven’t then it’s about a colony of penguins having to deal with a change being imposed upon them (the clue to that change is in the name of the book!).

Now, if you are having a change imposed upon you, then Kotter’s logic might be very useful to you….but, wow, wouldn’t it be sooo much better if you decided on your own changes!

I think one quote sums much of this post up nicely:

“People don’t resist change, they resist being changed.” (Scholtes)

Be realistic!

“Oh come on Steve, sometimes change is imposed and you’ve just got to deal with this!”

Yes, this is most definitely so. But here’s some counters to this critique:

  • Such a change should be coming externally (such as a legislative, societal or environmental change)…not from within the organisation;
  • Even if such change occurs, it is still better for the organisation to deal with it by setting its people suitable challenges (rather than dictated solutions) and leading them through rolling in changes for themselves;
  • If your people are used to the ‘roll in’ change paradigm then you will have a whole bunch of people who are skilled, creative and motivated problem solvers …just imagine how fantastic that capability would be for an organisation every time the challenge of an external change has to be handled!

…and finally:

Here’s an Ackoff ‘f-Law’ that might resonate with you as a true-ism:

“The only thing more difficult than starting something new in an organization is stopping something old.”

I think we all recognise that the ‘roll out’ problem doesn’t stop with merely getting someone to do something new…

Consider that, in contrast, by using ‘roll in’ the people are choosing for themselves to stop doing the old (whatever that is for them).


Addendum: I always ask someone (relevant to the subject) to act as editor before I publish. My editors always add great value Here are a few improvements:

  • Whilst Toyota may not enforce the same standard way of working across everywhere, it could be argued that they do have a cross-organisational standard way of thinking and acting (i.e. their management system, which has been termed ‘The Toyota Way’)…but, just like rolling in, this wasn’t copied from elsewhere and dictated to them – it came about through years of humility and experimentation;
  • If you want everyone rolling in the same direction then you still need a very clear (and meaningful) purpose, and systems thinking, such that all challenges being set lead to the same point on the horizon;
  • The ‘corporate form’ (e.g. a public body, private enterprise, large publicly quoted company,…) will likely have a huge impact on where you are now, and where you can get to;
  • You might like the idea of rolling in (as compared to rolling out) and say “yeah, great…how do we get there from here?” This is a BIG question, and just happens to relate to a future post which the ink is drying on….so, with that segue, please tune in again then.


  1. Change management within command and control organisations is usually about senior leaders getting people to do what they want them to. Their employment of a skilled ‘change manager’ (of which there are many) may substantially improve the roll out outcomes…but it is still a roll out, with all its associated limitations.
  2. Competitions: Please don’t run ‘change’ competitions like this…or, if you do, know the harm that they cause. Research* shows that: Providing a reward for doing something seriously devalues that thing; and people think even worse of that thing once the reward period has finished, thus likely slipping back to how it was before and then making it that much harder to ‘get them to change’ (* see Alfie Kohn’s book ‘Punished by Rewards’).
  3. Standardisation: Don’t make the assumption that this standardisation principle is exactly the same for service organisations – it isn’t. I use it in this post merely to explain and demonstrate the roll-in principle.

A breakthrough!…but is it all that it seems?

The word Breakthrough breaking through glass to symbolize discovSo, over the last few days a number of people have sent me links to this recent business article on Stuff: Accenture ditches annual performance reviews. Thanks for that, you know who you are 🙂

In summary:

  • Accenture, one of the largest professional services organisations in the world has decided to radically change its people processes: getting rid of the annual performance review
  • They aren’t the first ‘big beast’ to do something like this:
    • Deloitte (THE biggest professional services organisation in the world) went public in a similar vein last March. An April 2015 HBR article called Reinventing performance management explains where they are going;
    • I understand that the likes of Microsoft, Expedia and Adobe dropped most or all of the performance review process a couple of years ago;
    • Our very own NZ organisation, Telecom (or is that Spark?!), appeared to be heading down a similar path back in 2013 , though this would appear to me to have been driven by cost rather than the science of psychology:

Telecom [will] stop using online forms to appraise staff performance, reverting to a “far lighter” system of one-on-ones and “adult-to-adult conversations” on regular four-to-eight week cycles, he [Simon Moutter, CEO] said.

The “forms and processes” associated with performance appraisal had impeded Telecom, he said.”When we hit ‘appraisal season’, the company nearly grinds to a halt with the bureaucracy.”

Caveat: Looking at this 2015 Spark site, I’m not sure whether they successfully ‘broke away’ from the past…the picture at the bottom looks remarkably familiar!

A reminder: I have written quite a bit on the subject of performance review. In particular see An exercise in futility.


What I find highly ironic about professional services firms eulogising about their new found wisdom is that they have large ‘human capital’ consulting arms that have been selling their wares for decades (I know, I used to work alongside them)…and what have they been earning millions of $ on? Yep, advising on implementing supposedly highly researched incentives schemes and performance review programmes….you know, the ones that they have now decided aren’t so great.

Taking a look, for example, at Deloitte’s website, I can deduce that they see a huge opportunity in presenting themselves as (what professional service organisations love to call themselves) ‘thought leaders’ to sell their new-found performance management brilliance (the next Silver Bullet) to all the other organisations out there.

A Fudge?

I have read the Deloitte HBR article (referenced above) and I see their ‘answer’ as a likely fudge.

They talk a lot about the wasteful time and effort expended in the current annual appraisal system. They talk about it not actually deriving valid results (being hugely biased by who is making the judgement). Yet their answer (when boiled down to its essence) is to merely make it simpler – a sort of ‘reboot’. It would appear that they are still asking questions about a person to rate them, which will determine a reward.

You could point to their strap line of “Replace ‘rank and yank’ with coaching and development” and, yes, I can get behind that BUT:

  • they haven’t once talked about the system and its monumental effect on what a person can (or cannot) achieve; and
  • they appear to be clinging to the idea of motivating an individual’s performance through contingent rewards, and judging them accordingly.

I can see that the games people understandably play will simply mutate, yet remain.

“Tell me how you will measure me and I will [show] you how I will behave” (Goldratt).

Going back to Alfie Kohn’s work:

  • First you need to remove contingent rewards;
  • Second, you need to re-evaluate the performance review process (change from judgement to feedback);and
  • Then you can create the conditions for authentic motivation.

A reminder of why judgement and rewards do not belong anywhere near helping people develop:

“If your parent or teacher or manager is sitting in judgement of what you do, and if that judgement will determine whether good things or bad things happen to you, this cannot help but warp your relationship with that person.

You will not be working collaboratively in order to learn or grow; you will be trying to get him or her to approve of what you are doing so that you can get the goodies.

A powerful inducement has been created to conceal problems, to present yourself as infinitely competent, and to spend your energies trying to impress (or flatter) the person with power.” (Kohn)

“Mind the gap”

Many an organisation might read about* what the likes of Accenture are doing and conclude that, clearly, they need to copy them.

But a reminder of the dangers of copying: Yes, look at what others are doing and, yes, be curious as to why…BUT you need to work it out for yourselves – you need to ‘get’ why it is the right thing to do and then adapt it accordingly. Otherwise you can expect one great big mess.

(* A particular quote from the Accenture article which I found of interest: “Employees that do best in performance management systems tend to be the employees that are the most narcissistic and self-promoting” We should be seriously questioning if this is actually what we want.)

“Nothing to see here”

Whilst a part of me is very pleased to see the big beasts ‘coming out’ (more or less) against the performance review process:

  • I’m unmoved (being polite) by their commissioning/ invoking of seemingly new and brilliant research that arrived at their ‘new insights’.

Why? Well, there’s nothing new here. Go back to Alfie Kohn’s brilliant book ‘Punished by Rewards’ to see the body of research from many decades ago. Go back to Deming’s 4 day lectures that he gave to thousands between 1981 and 1993 (that’s more than 30 years ago!!):

Deming’s Deadly disease number 3: Evaluation of performance, merit rating, or annual review

“In practise, annual ratings are a disease, annihilating long term planning, demolishing teamwork, nourishing rivalry and politics, leaving people bitter, crushed, bruised, battered, desolate, despondent, unfit for work for weeks after receipt of rating, unable to comprehend why they are inferior…sending companies down the tube.”

…go back even further to what Deming and the Japanese were doing from the 1950s.

During this time, the majority of large corporations have been pushing in, and constantly justifying, the exact opposite of where they have arrived at now.

Now, to be clear, I think it is really great that there appears to be a movement against the ridiculous performance review process BUT:

  • I’m not convinced that they fully ‘get it’ in respect of human psychology; and
  • I think it is disingenuous, arrogant (or maybe ignorant) of any organisation that does not (outwardly) recognise that what they have just ‘discovered’ has been there, loud and clear, in front of their eyes all the time.

People and relationships

!cid_image003_png@01D0AE76Relax, don’t worry about the title: I will be limiting this post to ‘work relationships’…and I don’t mean ‘relationships at work’.

Peter Scholtes wrote that, to understand people, we need to understand relationships. In particular, leading people requires the establishment and nurturing of personal relationships on a daily basis and the encouragement of others to do the same.

He sets out some characteristics of what he calls a good, old-fashioned one-to-one, face-to-face, first name to first name personal relationship”:

  • You listen to each other. You are able to talk to each other;
  • Each respects the other and knows how to show this respect; and
  • Each knows the other well enough to know their vulnerabilities and cares enough to avoid them.

Now, relationships are hugely important between manager and employee. Unfortunately, these relationships in most organisations are patronising and paternalistic.

The psychiatrist Dr Eric Berne (1910 – 1970) set out three ‘ego states’ – postures that we assume in relation to each other. These are:

  • Parent: from nurturing and supportive through to judgmental and controlling;
  • Adult: from realistic, logical, rationale through to affectless; and
  • Child: from playful and creative through to rebellious and spiteful.

Command and Control management systems necessitate ‘management’ to assume a parent ego state, which often ends up causing the employee to adopt a child-like ego state in reaction. The words ‘boss’ and ‘subordinate’ (both of which I dislike) fit this parent – child relationship narrative.

In reality, we are all adults at work. It just happens that we are employed to play different roles – from helping customers through to running a business division.

It is each leader’s choice as to the ego state they adopt…and therefore the likely ego state that their employees will take in response.

As an example: I find it odd when a manager verbalises to ‘their’ employee that what they are about to say to them is a ‘coaching moment’ (i.e. “…so listen up and take note!”) – how much closer could you get to a parent – child presumption by the manager? It’s akin to what my youngest son refers to as “getting a lecture” from me.

To be clear, I am most certainly NOT saying that I can’t be coached (I clearly can)….but:

  • A coachee needs to a) have a personal goal and b) a desire to be coached towards it. You can’t ‘coach’ without these two requisites;
  • A leader can equally (and often) be coached by employees, but only if they have their mind opened to be so; and
  • Pointing out to someone that ‘this is a coaching moment’ is patronising and presumptuous and demonstrates an (often sub-conscious) intent to enforce a superior (‘alpha’)/ inferior relationship signal…and it generally breaks point 1, so it isn’t actually coaching.

Right, coaching rant over, back to it….

Leaders need to recognise that we are all people (organistic systems), with our own separate purposes (just like them). The need is to establish adult-adult relationships, in which no one sets themselves out as being ‘above’ or ‘better’ than anyone else. If an organisation’s leaders succeed in this then they will have created a hugely powerful environment.

So, moving on to trust:

Healthy relationships require trust. Here’s an interesting figure from Scholtes showing the two converging beliefs that need to coexist for one person to trust another:


I find this figure illuminating. It makes me see that (and understand why) I have had some managers that I have respected and some that I have had (professional) affection for…but trust is much rarer.

Scholtes writes that “When I believe you are competent and that you care about me, I will trust you. Competency alone or caring by itself will not engender trust. Both are necessary.”

A couple of comments on trust:

  • I doubt it can be over emphasised that trust is in the eye of the beholder! ‘You’ can say that you care about me and that you know what you are doing but only ‘I’ decide whether I believe this…and I will be looking closely (and constantly) at your actions, not taking your word for it;
  • Some command and control managers have the view that employees need to earn their trust…this is the wrong way round! If someone wants to lead, they have to earn the trust of those that they would like to follow them.

KITA management (aka the picture at the top):

Now, onto the idea of KITA management: the term ‘KITA’ was coined by the psychologist and Professor of management, Frederick Herzberg (1923 – 2000)*. It stands for Kick-in-the-(pants)…he was too polite to write what the A actually stood for.

Herzberg wrote about positive KITA (carrots) and negative KITA (sticks)…and here’s why it isn’t motivation:

“If I kick my dog (from the front or the back), he will move. And when I want him to move again, what must I do? I must kick him again…” (Herzberg)

The related problem with KITA thinking is that it locks manager and employee in a highly unhealthy parent-child relationship. Further, when rewards are competitive (which they usually are in some way) KITA thinking creates winners and losers and adversarial relationships among those who should be colleagues.

* Note: Herzberg wrote the classic 1968 article “One More Time, How Do You Motivate Employees?” This is one of the most requested HBR articles of all time and has sold well over 1 million copies.

…and finally:

I’d like to share with you some wise words written by Alfie Kohn under the self-explanatory title ‘Rewards rupture relationships’

“We need to understand what the process of rewarding does to the interaction between the giver and receiver:

If your parent or teacher or manager is sitting in judgement of what you do, and if that judgement will determine whether good things or bad things happen to you, this cannot help but warp your relationship with that person.

You will not be working collaboratively in order to learn or grow; you will be trying to get him or her to approve of what you are doing so that you can get the goodies.

A powerful inducement has been created [through the regular judgement and resulting outcomes] to conceal problems, to present yourself as infinitely competent, and to spend your energies trying to impress (or flatter) the person with power….

… people are less likely to ask for help when the person to whom they would normally turn wields carrots and sticks. Needless to say, if people do not ask for help when they need it, performance suffers on virtually any kind of task.”

…and, in so writing, Alfie eloquently uncovers the damage caused by rewards and the stunting effect they have on the ability of an organisation, and its people, to improve.

The positive bit: It would be great if all of us worked really hard to attain an adult-adult relationship footing…realised when this had been broken by our words and deeds …and, through humility and dialogue, worked even harder to bring it back again.

An apology: I have a rule that a post should only cover one thing…and this one doesn’t appear to! It’s a bit of a journey from relationships, through leadership, coaching, trust, motivation and ending at rewards, which brings it full circle back to what rewards do to relationships.

In fact the topics in this journey do all belong together, under the competency of ‘Understanding people and why they behave as they do’. My intent was to show how they are all so tied up together so I hope you don’t mind me bending my rules 🙂