The limits of economies of scale
Stephen Bounds — Wed, 02/02/2011 - 22:59
If you are interested in systems thinking but don't read the Vanguard Newsletter penned by John Seddon, you should really start.
Vanguard is a UK-based consultancy that teaches companies how to switch from command and control structures to taking a systems approach to management. Recently I came across a nice summary of one of the key concepts expounded -- the need to aim for efficiency of flow rather than efficiency of scale:
[Economies] of scale [aim for] efficiency through industrialisation ... from specialisation and standardisation ...
The typical method is to simplify, standardise and then centralise, using an IT ‘solution' as the means ... but lower transaction costs ... mask the increase in the volumes of transactions. Economy of scale is a myth. (October 2010 newsletter)
The "flow" approach is best paraphrased from a separate article by John Seddon published in Small State, Big Society:
[Services] are best delivered by putting the right expertise at the first point of transaction with the [customer]. Transaction costs go up ... but total costs fall, because appropriately skilled people have the ability to absorb the variety [encountered], so that problems are solved quickly and without fuss.
To provide a concrete example, there is no point in setting up a call centre which takes 60% of the time to handle calls, if the resulting "run-around" experienced by clients leads to, on average, twice as many phone calls (do the math!)
Yet ironically, in most companies this result will be seen as a resounding success because they have "handled a surge in demand" while keeping costs under control. It is never recognised that the act of implementing a scale-based system caused the surge in demand by increasing the number of failed transactions customers undertake.
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