By Leonard Bertain, Ph.D.
I have been teaching client employees to solve problems over the last 35 years. Mind you, over those years, I helped client companies address over 10,000 ideas and helped them generate over $2 Billion of first year profits from their solutions. But I have continually asked myself, why only about 20% of my clients were able to sustain their effort of continually solving problems. Employees worked hard in the interest of their companies to generate those results. In fact, I delivered a TEDx talk on the subject of the question, “Why did I get the high ROI (one year profit contribution/cost of the solution) results that I did?” And I thought I gave a pretty good argument about that. But the question that I want to address here is: why couldn’t I get 100% of my clients to sustain the effort because the CEOs saw the high ROI solutions that I helped their employees achieve.
2. Adam Smith’s Mistake
I was down in my basement the other day and was looking through a bookshelf of some of my old business books that I had read at one time or another. I picked up a book that I had read 27 years ago entitled: Adam Smith’’s Mistake: How a Moral Philosopher Invented Economics and Ended Morality by Ken Lux. I was fond of the book as it reviews the details of Adam Smith’s book The Wealth of Nations which I had read in college. Lux spends a good deal of the book explaining the meaning of a few key concepts that Adam Smith developed and his thesis guided me to another idea that I want to share.
One of these concepts was “Self Interest” which was a key observation that Smith made about why the “Butcher and the Baker” help put food on your table. They don’t do so because they like to make bread or cut up animals for you to buy. Instead, they do it because it is in their self-interest to do so. They make money selling both the bread and the meat cuts to sell you. And then he discusses why the butcher or baker don’t cheat you in their sales transaction. There is nothing that requires them to be honest or fair or just or benevolent. So Adam Smith introduces his “magic hand” that looks over that transaction to insure that it is somehow an “honest” transaction. I don’t want to reconstruct Smith’s and Lux’s arguments here because Lux does a better job.
I wanted to discuss the logic behind Lux’s rationale to “Adam Smith’s Mistake” because that sets up the main theme of this paper. I am going to get into the foundation for a new Economic Theory for managing American businesses.
Before I do so I would like to provide some insight as to why I feel that there is grounds for a discussion of this issue. I believe that it could be the basis of a rational approach to substantial and continuous profit making using the main untapped asset of any company: their people.
3. Some Background
As I noted earlier, I had some very good success with my approach to business improvement. I used a variation of the Toyota Production System (TPS) as a problem solving foundation. The key part of that system is recognizing that non-value-added activities keep companies from making money. In the words of Henry Ford, “Anything that is not value-added is waste.” Waste or muda (Japanese) is key to understanding TPS Problem Solving. For example, moving things doesn’t add value (unless moving is a value-added function for your business – like FedEx), storing things doesn’t add value or; fixing bugs in software doesn’t add value. We had about 12 different categories of Waste to guide the problem solvers. So the first 2 steps of our problem solving process were identifying a waste and then finding its root cause. Finding the root cause was always fun because that exercise often alerted the problem solving team that they were working on a symptom and not the root cause.
One of the concepts of the concepts of TPS was the idea of Kaizen or continuous improvement. This was an idea based upon the Zen principle of the search for perfection in our lives. When I started up my program 35 years ago, I got so much push back from CEOs with that idea that I eased off. Their common retort was: “who cares if we are getting better, are we making money?” So I used a fast and high Return on Investment (ROI) as a way to get the CEO and his Management Team’s buy in. If you could keep the ROI high, management stayed excited for a while. But my question about that was, “why couldn’t American managers stay excited about giving their employees an opportunity to keep solving problems with a high ROI?” That’s what we are going to try to answer.
To help teams get through these first two steps, we trademarked No Blame so that they could get past the guardians of change that every company has. And boy can they be mean. Hence, the need for No Blame. Change without reprisal.
So we progressed through the rest of the Problem Solving approach. The next step guided through the analysis of how big the waste really was in terms of annual cost to the company. We started with a goal of 20 to 1 ($100,000 of waste with a solution cost of less than $5,000) for our first projects. We then upped the ante by trying to achieve solutions with a 50 to 1 ROI. Today we target 100 to 1 for our larger clients. Any one of these objectives is pretty good and we have not really had much time linking a $100,000 problem to a $2,000 solution. In the Fortune 2000 companies, the problems really are plentiful at 100 to 1. Believe me, you try this and you will be a believer.
So, we go through 4 more steps after the first 2: sizing the waste, costing its solution, presenting the idea to management and, finally, implementing and measuring the results over a year.
I have to admit that I was less than thorough in my measurement of the annual benefit over the next year after implementation. We initially estimated the size of the problem using less than precise analysis. And we told the accountants to chill out during the proposal stage. But afterward, after we had implemented the solution, we needed the accountants to help. After the initial pushback from the accounting folks, the people implementing the idea just backed off and agreed that they were seeing the proposed benefits and nobody complained.
But we have since developed an on-line tracking tool that we sell to the CEO before we get started. And we do all of our Problem Solving on-line using Zoom and other tools to manage our projects. But now, the CEOs want to see the ROI in detail and so the Accountants have to get on board. It takes a couple of months of data collection to get the numbers needed for the hard proof. Once the first month’s data is collected it becomes routine after that and the Problem Solving team can manage the data input process. As it should be.
So you ask yourself, why wouldn’t a company keep doing this if they could keep getting ideas implemented with a 100 to 1 ROI?.
And that is what brings me back to Adam Smith’s MIstake.
4. Adam Smith’s Mistake
The thesis of Adam Smith’s Mistake is that Adam Smith made a mistake when the concept of Self Interest was originally suggested. He had stated his thesis as this: “…we address ourselves not to their humanity but to their self-love.” to Smith, Self-Interest was not a bad thing. It was a good thing, a benefit to society. Self-interest trumped (sic!) benevolence. And this was a shock to all the economic actors at the time.
And it took hold as a founding principle of Capitalist Economics that currently drives our economy.
Smith provides a simple argument why benevolence is not the primary driving factor of any economic system. If it was the butcher and the baker would give away their goods and the beneficiary would be the beggar who had no means to pay. So right away, Smith makes his point that self-interest is the primary driving force of the economy. Furthermore, honesty has no role in Smith’s economic world. There is nothing that prohibits someone from cheating a client. Just don’t get caught. “Honesty is the best policy” is not an economic doctrine. He firmly believed that self interest was the sole principle for achieving the public good with the saving grace being the Invisible Hand of competition. Competition would keep the “expensive vanities of the merchants, dealers and landlords in check.” He would hardly have been surprised by Rockefeller’s motives but he certainly would have marvelled at his success.
So Lux squares away Smith’s thesis by adding the word “only” as follows: “It is not only from the benevolence of the butcher, the brewers, or the baker that we expect our dinner, but from their regard to their own interest.”
5. A Modest Proposal
My problem still remains. Why didn’t all of the CEOs opt to go forward with the High ROI Problem Solving program. So I turned to Adam Smith as he has such an influence on how our market Economy functions. So I looked at American Capitalism and asked myself, when has any corporation acted with self-interest and benevolence, as a ruling principle. There are always exceptions to this but as a rule, Self-Interest stands alone. But I was interested in Adam Smith’s thinking as it relates to my Problem Solving concept.
Could I somehow link my problem with client CEOs, the lack of on-going Problem Solving activity, and the Self-Interest philosophy of Economics. If I could, I would be able to understand why my successful High ROI Problem Solving Program did not continue long after we discontinued our engagement.
So here is what I concluded.
Adam Smith was clear that Self Interest guided market transactions. Ken Lux argued that it was not only Self Interest that guided that transaction but required a guiding hand in the form of a benevolence consideration. We know that most CEOs follow the market and make decisions with the subtle understanding that they are guiding their decision with Self-Interest.
I made all of my clients lots of money with High Roi Problem Solving. So why didn’t 80% of these CEOs continue doing the Problem Solving?
My thesis is this. The concept of Self-Interest is so indoctrinated into the national mindset of our free market system such that all CEOs, small or large businesses, are brainwashed into that idea. So current CEOs, regardless of where trained, all buy into the Self-Interest Doctrine.
But is that alone enough for them to reject on-going, High ROI Problem Solving Ideas.
I often wondered if my pushy presence to get ideas thought out and implemented might be an issue. When asked about this, some of the CEOs said that I was a lot of work to deal with. When I walked in the door of the company, I pushed to get things done. And I was relentless because I had a clear responsibility to help get ideas in play implemented. So maybe I was the problem. But most of the CEO clients said that maybe the process was flawed in some way.
So I looked at that.
One of the main issues noted by the smaller clients was that I was all over their facilities listening and helping to implement improvement ideas that were suggested. It revolved around me too much. (I will explore in Part 2 what we found out was the real reason for my dilemma.)
(END OF PART 1 OF 2) Second part to be published next week. ,.. .