Wednesday, 26 May 2010

Systemic and Cybernetic Views of the Euro

At the time when Europe was debating adopting a single currency one of my Swiss colleagues asked me about the Euro’s likely success in the longer run. My answer was not an optimistic one. Now, when Europe’s concerns about its currency are increasing by the day, we hear more and more about better fiscal checks and more penalties for those countries that do not comply with the requirements of prudence. Furthermore, some see in the recent decisions to prompt the Euro a whiff of political integration. Let’s reflect upon these concerns and decisions in systemic and cybernetic terms.

It is becoming increasingly apparent that the European Union (EU) is facing a systemic problem; either it accepts that some individual countries, unable to pay their debt, abandon the Euro and take their own decisions or accepts that there is a systemic bond among its members and is prepared to support each of them as they face the relentless and unforgiving forces of the financial markets.  In my view the problem is to go ahead with this second option -apparently the preferred one- without proper acknowledgment that it implies far more than setting stronger controls over the fiscal behaviour. This is a crucial moment for the European project; is it about a European union, as some want, or is it about economic collaboration as some others want? I discuss below the cybernetics of these options.

Are European countries accepting to use a single currency unaware of the operational implications of this acceptance? Is it not that the European Union appears blind to the costly longer term consequences of this acceptance? Let’s discuss the cybernetic argument.

To visualise the argument let’s think about the old Deutschmark at the time of the unification of West and East Germany. At that time Germany made apparent that it was prepared to accept the cost of unification. There we had two countries with significant institutional and economic differences; however the political will to bring them together was unequivocal. West Germany was prepared to allocate the resources, take the time and move relentlessly in the direction of an integrated democratic German state. Over time two states with different degrees of development were prepared to accept the pains of achieving a shared institutional framework, symbolised by the Deutschmark. For the Euro the situation is indeed different. EU countries not only have larger historical, institutional and economic differences but furthermore don’t have the will of an effective integration. Simply, reducing the problem to financial policies supported by strong checks and gruesome penalties is not going to make the trick. The complexity of the situation is far greater; balancing historic, cultural and institutional difference does not happen simply by an institution such as the European Central Bank (ECB) imposing common rules to all member countries. Different institutions in the participant countries imply different meanings for the same rules; some of these institutions may not have the operational depth to produce necessary distinctions nor the practices to achieve expected performance. Even if politicians and economists in these countries shared a similar grasp of these rules the likelihood is that the moment-to-moment actions of millions of citizens in each of these countries will not be aligned. In practice this implies different degrees of compliance with the ECB’s rules and norms. This situation would be very different if countries joining the Euro were ready to leave it as operational stresses suggested that it was better for them, and for the rest of the European Union, to face the situation individually. They would have a larger repertoire of responses; for instance they could devalue their currency, apply local idiosyncratic fiscal policies and even accept a carefully managed default (see Crisis watch by Simon Johnson and Peter Boone, in Prospect, April 2010).

The issue is the degree of cohesion that is expected between the countries belonging to the Euro. The Euro is an institutional mechanism that coordinates operational transactions throughout the countries that accept it as their currency. However, in the end it has to reflect an operational coherence among these countries. If the productivity of some of them is lower than that of others, sooner or later this will be reflected by imbalances in the operational domain. Some countries will succeed exporting their goods and services at the expense of the relative failure of the others. For sometime this imbalance may be absorbed by exports to third countries, however in the end a chronic relative low level of productivity within some countries in the Euro zone will be reflected in financial imbalances. But, the mechanism of devaluation to balance differences in productivity will not be available. Whether or not the financial markets understand the cybernetic underpinning of these imbalances they will taste blood, smell profits and act accordingly.

Audits and checks of the countries’ financial behaviors will not be enough to produce the required balance. Audits may be useful in the informational domain but, unless they are supported by investment and institutional changes the necessary operational adjustments between the member countries will not happen. The loose political arrangements of the Euro zone seem to be a long way from the unification experience of the two Germanys. Operational imbalances are being exacerbated by the recent expansion of the European Union, as well as by the relatively slower economic development of some of the old members. Resources that had supported the development of some of the Mediterranean countries are now flowing to Eastern Europe. The wealth of the union is being spread too thinly and the longer term implications of these policies are glaringly clear; the necessary operational coherence for a shared currency is further and further away.

In summary, in my view, now that the European Union includes 27 countries (and 3 in prospect) of significantly different institutional and economic development, the goal of a unified currency is more and more remote. The cybernetics of this situation supports a looser currency arrangement, where some of the current members of the Euro should be ready to abandon it and where the acceptance of new members into this Club should only happen after passing successfully significant operational and financial tests.

Thursday, 29 April 2010

Centralization and Decentralization

My last posting reflected upon “What’s System Thinking” and referred to the issue of centralization and decentralization in organizations. Is it always desirable to make decisions locally? When are local decisions more advantageous than global decisions and vice-versa? Indeed there are multiple factors impinging on these choices. In particular new communication and information technologies are changing the balance in both directions for different issues. The cost of communications has been falling dramatically in recent years. Today more people than ever before can be involved in local decisions. Equally, today more people than ever before can contribute with local knowledge to global decisions.

Structurally, it is desirable to have relatively small teams responsible for the full value chain of a business process. They can operate from inputs to outputs through a transformation process that is theirs. These teams absorb most of the customers’ variety locally. This approach allows these customers to recognise the ‘faces’ of those responsible for the products and services they consume. For instance citizens in need of housing services would be able to interact with the unit responsible for assessing their needs as well as for delivering the services. This avoids fragmenting service delivery; proximity allows for the right hand to know what the left is doing. However, the increasing complexity of people’s demands and the constraints imposed by culture and resources tend to force some degree of centralization as organizations look for synergies and economies of scale. People are distributed in varied geographic areas, require different types of services, have different urgency and so forth. These are complexity drivers guiding the structuring of housing services and if this structuring is not thought through the chances are that poor service delivery will dominate their interactions with citizens.

Most significantly, local teams need global information to close effectively local loops. Among others, policy priorities are decided globally, specialised knowledge and resources are often pooled together beyond local teams and the economies of scale offered by available technologies may tempt centralisation. But, centralization increases the chances of functionalism at the expense of holism. Service delivery teams risk becoming customer service units with limited appreciation of, and responsibility for, the total service they offer.
Beyond managing the value chain, those providing services at the local level need to have flexibility to define their own policies. This is necessary to respond to local needs and avoid the uniformity of ‘faceless’ bureaucrats following the dictate of global policies. Distributing the activities of the value chain at different structural levels, beyond the flexible response of autonomous local teams, increase the chances of reducing local officials to the role of post boxes distributing to other groups the responsibilities to deal with customers’ requirements. As they do this officials lose contact with the very people that they are supposed to service. This is why local services for large markets require creating local policies within the framework of a global policy. They also require negotiating and accepting specific programme requirements, including the use of scarce resources. To avoid fragmentation it is necessary truly systemic, synergistic, organizations that succeed balancing local responsiveness with global coordination of policies. Organizational systems need cohesion and adaptation to manage the complexity of their tasks.

In this effort for holism the cost of communications is changing the balance between centralization and decentralization. Today’s decreasing cost of communications makes possible creating virtual teams that facilitate decentralisation. Members of centralised groups with specialised knowledge can be effective contributors for the creation and implementation of local policies. People responsible for the use of expensive centralized resources can be made (virtually) part of local teams and thus accountable to the team. These are cases of resource centralization and functional decentralization. Equally, those working in these groups, with local knowledge of stakeholders can influence more effectively global policies by communicating to policy-makers local responses to exiting policies.

From the perspective of organizational design the challenge is fostering a cascading of self-contained product/service teams which make possible the progressive integration of functions into larger self-contained groups that match customers’ needs at different performance requirements. For instance, for housing services, local teams focused on providing particular types of services can be embedded in regional units with functional capacity for the deployment of building and maintenance resources according to local needs. What is particular to this proposition is that building and maintenance resources provide a more global performance requirement, namely building and maintenance capabilities, at the same time that they are contributors and accountable to local teams for local services. As the cost of communications is reduced the allocation of resources can be reconfigured transforming the organization’s capabilities. Constituting effective local teams and coordinating these multiple teams in a global context becomes increasingly challenging but also, with the support of new information and communication technologies, manageable and potentially more effective.

Wednesday, 14 April 2010

What is Systems Thinking?

I have just finished reading the book “Systems Thinking in the Public Sector; the failure of the reform regime and a manifesto for a better way” (2008) by John Seddon, Triarchy Press, Axminster, UK. This book has received good reviews from politicians, seniors civil servants and specialised journalists. And, indeed, Seddon's understanding of systems thinking is compelling; it makes apparent through many examples in the public sector the always present tendency to fragment policy implementation. In particular his focus is on the current tendency to fragment services between the front end work and the back room support. He illustrates abundantly how front end civil servants take off their sight from customers’ request by passing them to back end workers. No one person or team deals from the beginning to the end with the particular customer, fragmenting the service and leaving in no one’s land responsibility for its performance. The voids in between the end-to-end time for the service grow and grow, transforming a service that could have taken days in one that takes months. This kind of performance is a consequence of the targets imposed to local providers by central government (the regime in his words); these targets are focused on performing activities rather than on the purposes of the service. An activity can be the number of customer calls that are discharged within a certain time, regardless of whether this discharging meant satisfying the client’s needs or not. Following Deming's work Seddon argues for a statistical measurement of the system's capabilities to work out what the current configuration of resources permits the system to do for its customers rather than for the civil servants in central government.

He makes the very useful distinction between failure and value demand. The statistics he gives are frightening; most of the activity of civil servants is responding to failure and not adding value to the client's needs. Seddon's argument, following Toyota's experience, is that a focus on the value adding flow of the service is the essence of systemic thinking. For this he argues it is necessary to understand the customer's needs. For public services, perhaps differently to manufacturing activities, the variety of these needs is very large indeed and it is necessary to design a service that absorbs this variety rather than trying to constrain it through predefined processes. People suffer as a consequence of this predetermination; the service delivery takes too long, costs are too high and the available resources are squandered to the detriment of better services. The purpose should be offering services that match the customers' variety. It is essential to understand in depth these needs and organize the activities' flow in such a way that they match these requirements. And, in his view, the use of IT for these purposes has been counterproductive in recent time. Usually this technology has reinforced the operation of badly designed processes.

He is aware that changing the regime is almost impossible; the only option is dismantling it. The rules and legislation in place make it very difficult to alter the service delivery procedures in place. Service providers are torn between satisfying counterproductive targets and being assessed poorly by contrived inspections. The whole machinery for service provision is inadequate and squanders a huge amount of resources. In spite of these views he ends up the book offering a list of situations where the use of systemic thinking has produced significant improvements.

Though my overall assessment of the book is positive I think that it offers a superficial view of systems thinking and little methodological guidance to use it. This is paradoxical since throughout the book Seddon insists that the problem with the regime is that for policy implementation offers no methods beyond the dogmatic delusion of what he calls deliverology. For those being initiated in this way of thinking the book is useful but there are some issues that need further reflection:

-Centralisation-decentralisation; which structures make beneficial the sharing of resources? No doubt fragmentation is a risk when a service process is divided between front end and back end activities, but the issue is how to overcome this fragmentation at the same time of making possible the sharing of scarce and expert resources.

-How to absorb front end variety? Accepting variety face value is likely to overwhelm service providers. Service providers must find ways of limiting this variety without hindering the main purpose of the service. In the end there must be a trade off between accepting customers' unconstrained variety and restricting it with ingenuity to avoid being overwhelmed by its proliferation. Variety engineering is a key issue in service provision that should take into account purpose, resources and acceptable performance.

-relevance of IT in service delivery; no doubt there are multiple examples of a counterproductive use of ITs. However Seddon's advice to turn off IT changes to understand and design work as a system and to 'pull' the necessary IT when the new design is stable, makes apparent a lack of appreciation of the co-evolution of service processes and technology. Ingenuity in the design of services is deeply related to technological changes and new processes should take into account these new technologies. Politicians, experts and civil servant need this ingenuity badly in their own spaces of action.