Essays on Management: Measurement, systemisation and avoiding transaction costs

What you need to manage you should try to measure.  This measurement can be anything from consumption of photocopy paper, personnel costs as a percentage of total costs, economic added value, right through to higher level outcomes.  Measures should focus on the cost of inputs as well as what delivers outcomes.  However many things that matter such as creativity, innovation, wisdom and prudence cannot be measured and some things measurable may not matter.  Much important information cannot be codified in ways that lend themselves to quantification – they are akin to Marshal’s “secrets in the air.”  For some products, it is unmeasured through-life costs and life cycle analysis that are more important than a product’s nature or functionality.

Commonly managers set targets and organisational performance is measured against them.  There are risks in “hitting the target and missing the point.”  Goodhart’s law argues that when a measure becomes a target, it ceases to be a good measure.  The police and justice system may focus on high salient crime rate figures and pay less attention to other crimes more damaging to individuals and societies.  Hospitals can lose their way and focus on bureaucratic targets and ignore the patients.  Their managers must listen to the doctor or nurse who cuts through the bureaucracy and asks “what is in the patients’ interests?”

Knowledge only becomes productivity if it is applied and turned into habits and standard operating practices.  Often this involves turning messiness into routines; routines that economise on people’s energies since they don’t have to continually reinvent things.  Order and routine is a way of retaining past high cost learning and turning it into automacity, which in turn frees up intellectual energy and innovation for tomorrow.  Routines can stifle people’s creativity but can also bolster people’s self-regulation and make it easier for them to exercise self-control.  For these reasons, young people and others may favour a relatively routinized environment and this may get the best out of them.

Systematisation can help address fundamental economic losses generated by transactional costs that create deadweight losses and make the average person worse off in real terms.

Systematisation is also important in one-off or infrequent task assignments.  One of many useful task assignment tools is the CPORT model – Context, Purpose, Output, Resources, Timing.  Context explains why something needs to be done and influences how it will be done.  Purpose allows people to see the point in a task and . relate it to external results.  The output sets out what has to be delivered.  The resources are who and what are available to deliver the output.  Timing and deadlines are needed to ensure work is completed rather than played with.

Effectiveness in an entrepreneur, manager or organisation requires a systematic approach.  Great innovators such as Edison, Rothschild, Siemens and (on a more modest scale our own Ray Avery and Angus Tait) all had a systematic and orderly approach, and translated this into standard operating practices.  McDonalds succeeded not because it produced a better product but because it made fast food a precision operation, while supporting local innovation and product customisation within its standardised system.

A systematic approach varies across organisations, tasks, technologies and capabilities.  What it always aims to do is to turn disorganised and unfocused energy into purposeful and effective endeavour.

Systematisation aims to turn disorder into order.  It has several critical aspects.  It aims to identify and focus on what needs to be done.  It must find efficient and effective ways of doing it.  Systematisation ensures consistency because it codifies how to do things and therefore eliminates human error. Systemisation can be reflected in software algorithms, in manuals and in standard operating practice.  It may be referenced against regulated or professional standards.

Better nutrition, housing and consumer goods, better social interactions, more leisure time and environmental quality are often proxied by GDP and its distribution as per capita income.  However much economic activity showing up in GDP or productivity figures is transactional, frictional or overhead costs.  It can simply redistribute income in a zero or negative sum game without delivering any new functionality or end outcome.  This occurs at an economy–wide level and within organisations.

Systematisation and its close relative simplification can be used to reduce transaction costs that are akin to frictional energy losses within an economy and which can also distort decision making by making it more difficult for people to access, construe and act on quality information.

Deeply embedded in New Zealand society is a complex web of professional regulation and hard and soft barriers to competitive entry.  The social, economic and legal rules are to a great extent designed to clip tickets, funnel people into hoops and charge them for jumping through them.  Banks and finance companies dislike fixed bonds and term deposits because they want to maximise trades and to profit from frictional transactions.  Financial managers who actively invest and trade often fail to generate superior returns and yet are adept at convincing people otherwise.   Finance industry advocates for compulsory savings schemes have in mind the business these can generate rather than the wider benefits to the economy or households.

Businesses list to obtain capital and use market trades to value the business.  Listing allows free entry and exit for shareholders.  It also imposes transactional costs.  It creates an industry of those who promote trades which are so volatile they give no clear signals about asset values or investment choices.  More stable forms of investment such as private or public unlisted structures, sovereign funds, partial or full state ownership, the better performing iwi and Maori trust investments and cooperative ownership can provide more stable capital and therefore an ability to take a longer-term view.

Unnecessary transactional and frictional costs can create deadweight loss within organisations.  Management and process overhead often comes from poor design and job specification and a lack of simplifying systematisation.  This creates overhead, frictional and transactional costs which in turn create further costs to ameliorate.  In the public service it is quite possible to spend an entire career inventing new processes or inserting oneself into existing ones.  Some unnecessary staff positions within an organisation result from poor organisational structure or process design.  They can also result from some unproductive staff members’ presence in an organisation which effectively creates frictional or transactional costs that lead to permanent roles for themselves.

Excessive transactional costs hit consumers and the authentic producers who deliver to them.  Business results are often proportional to revenue while costs are proportional to transactions.  To get a $1 million order does not cost a thousand times more than getting a thousand dollar order.  The benefits often flow to ticket clippers, whether lawyers, financiers, bureaucrats and the politicians captured by them.

Strikingly, what often survives in a business over time is its ability to minimise transaction costs, even more so than its ability to maintain its core competencies.  An example is Wal-Mart, which deals directly with producers and not with middlemen or agents.  The productivity gains it has generated had an economy-wide impact in the US.  Tata Group’s key strength is minimising the transaction costs associated with India’s regulatory system.

The above are economy-wide as well as organisational issues and challenges. Financial and regulatory systems that have high turnover and transactional intensity are associated with higher levels of consumption and lower investment in an economy.  The opportunity for New Zealand may be to eliminate unnecessary frictional and transactional costs not just in organisations but in financial and legal services and tax and regulatory simplification.  Such regulatory and institutional reform could be transformative in productivity and socio-economic outcome; the challenge is one not of cost or complexity but of intellectual clarity and political courage.


About Peter Winsley

I’ve worked in policy and economics-related fields in New Zealand for many years. With qualifications and publications in economics, management and literature, I take a multidisciplinary perspective to how people’s lives can be enhanced. I love nature, literature, music, tramping, boating and my family.
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4 Responses to Essays on Management: Measurement, systemisation and avoiding transaction costs

  1. Susan Thorn says:

    Brilliant post! Gets right to the heart, head, and soul of improvement.

  2. Susan Thorn says:

    Reblogged this on Live Love Laugh Lead and commented:
    If you can’t measure it, it doesn’t matter. I can’t tell you how often work and in life I hear people complain about what always happens or never happens without any hard data to measure whether or not it really does. I guarantee you, half of what people complain about never happening, usually does, and half of what people say always happens occurs rarely. If you want to start doing better, you must measure better. Once you are able to measure it, you can change it.

  3. ashokbhatia says:

    Many a time, the analytical managers end up suffering from ‘analysis paralysis’. Going as per one’s gut feel is pretty useful, unless our data crucnhers tell us exactly the opposite. Supply creates its own demand, and to be able to measure and project the demand correctly is not always possible. I propose that measurements are merely the means and surely not the end.

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