The Transformation Debate

Who is more American?  Is it the Kenyan or the Mormon?  Who created or destroyed more jobs?  Is it the community organizer or the private equity economizer? The candidates are focused on attacking personalities and circumstances rather than reality.

But, what really happened to blue collar jobs?  This answer is straightforward. Our blue-collar laborers became too expensive due to union agreements and healthcare costs while other countries’ laborers were less expensive and better educated.  They are more likely to have the knowledge and skills needed for hi-tech manufacturing.

It is not really just about wages, however. Germany has higher wages than the U.S.  Germany also has much higher social costs than the U.S.  Yet, their manufacturing sector is thriving — the envy of Europe.  This is due to the fact that they systematically and substantially invest in technical training for those not headed to the university.

Why would Germany make such investments?  My conclusion is that they see a healthy, educated and productive workforce as a “public good.” In other words, all Germans are better off if every German is healthy, educated and productive. This was once part of the belief system of America, but such beliefs have faded. Healthcare and education are now “private goods.”

In other words, if one wants healthcare and education, one should pay for it just like you pay for cell phones, televisions, and automobiles. No one else benefits from your being healthy and educated. If you are unhealthy and uneducated, that is your problem.  It is your problem as well if you cannot find a job and cannot afford to take care of your children.

But is that really the case?  Are unhealthy, uneducated and unemployed people of no cost to society?  Use of hospital emergency rooms for non-urgent care by uninsured people costs the average American well over $1,000 per year.  Costs of unemployment benefits add over $1,000 to the average American tax bill. Add the two items together and we are coming close to 10% of the average American’s after-tax income.

Bottom line — we are spending more per capita on compensating for uneducated, unhealthy and unemployed people than we are saving for our future.  It is very expensive — for all of us — to have large numbers of unhealthy, uneducated and unemployed people wandering around, trying to find something to eat. We need to reinvent the concept of public goods and invest prudently in health and education in ways that will yield enormous returns for all of us.

It’s Really Tough

You are leading a very successful enterprise in airplanes, automobiles, mobile devices, healthcare — or perhaps higher education. The business model that got you to where you are — successful, profitable — seems to be faltering.  The growth of revenue is diminishing while costs are escalating.  The costs of infrastructure — physical, financial and human — are inexorably growing. Customers seem to be sticking with you, but they are not happy. Cynical jokes are pervasive.

What should you do?  How about sticking to the knitting?  Just keep doing what you have always done, perhaps a little bit better and a lot cheaper. If you need to sell airline seats as cheaply as possible, charge people for everything else — baggage, food, entertainment, bathrooms, and seat belts. If revenue comes from students in seats, put hundreds of students in each classroom.  Let the students sit in the aisles unless the fire marshal protests.

Perhaps you should lead the enterprise towards a new business model. Rethink the whole transportation or education experience. But, this requires a lot of courage because most if not all of the key stakeholders are clinging to the status quo.  Embracing change means creating enemies — people whose rice bowls are threatened by change.  Leading change requires strong self-confidence and abilities to absorb enormous criticism. You will be challenging many people’s comfort zones.

What about your comfort zone?  Do you need everyone to be happy?  Do you need everyone to like you?  What if your vision of an alternative future is wrong?  What if the faltering status quo is as good as it gets?  The key question is whether you are willing and able to lead in times of change.  It’s really tough because you cannot be sure of what will happen and whether you will succeed. However, you can be sure that your willingness and abilities are exactly why they gave you the job in the first place.

One Journey to Engineering Systems

The organizers of the 3rd International Symposium on Engineering Systems asked me to provide a brief story of my journey to engineering systems — how I came to be at this Symposium on this June evening in Delft.   The idea is to stimulate your thinking and perhaps motivate you to share your stories during dinner this evening.

I have always been a planner, so the story of how I came to be at this meeting begins in 1961. I was 14 years old when I bought my first car.  My intention was to teach myself to drive, but it turned out that I was also to teach myself some engineering.  The object in Picture 1 prompted the need for this.

1952 Plymouth Carburetor

Picture 1. Carburetor

This picture shows the carburetor of the car I bought — the 1952 Plymouth in Picture 2.  This is the same model and colors of the car I bought.  However, for $35 the car did not exactly look like this one.  In fact, as I repaired body dents and rust, red primer slowly replaced much of the blue and white.

Being too young to get a driver’s permit, I decided to learn by driving through the fields in this small, island town of Portsmouth, Rhode Island — the smallest state in the United States.  Picture 3 shows my training track, which was captured during an aerial survey of the town prior to building a new road.  The track started out very bumpy but over time the Plymouth smoothed it out.

1952 Plymouth Cranbrook No. 1

Picture 2. 1952 Plymouth

Driving endlessly on this track, I became very good at left-hand turns, and right-hand turns, in second gear but could never get going fast enough to get into third gear.  I also could make it to the center of town, with its 3-4 stores, without going on a public road. This meant driving through fields normally populated by cows or potatoes. Again, it was very bumpy.  The carburetor did not like this. It failed often.  Pieces bent or disappeared.

Driver Training 1962

Picture 3. Training Track

I got to know the carburetor very well.  I constantly had to figure out how to get it functioning again.  I did not have the money to buy replacement parts.  I resolved this quandary with my Erector Set, shown in Picture 4. I used the linkages and sliders from this set to restore the carburetor’s function, although not quite in the way originally intended. The result was a Rube Goldberg version of a carburetor.

Erector Set

Picture 4. Erector Set

The Erector Set could not compensate for my lack of knowledge that cars had oil filters. Eventually the Plymouth’s engine succumbed to a lack of oil — plenty in the reservoir but little making it to the engine.  Next came a 1949 Chevrolet, again for $35.  This car’s specialty was leaks. During heavy rains, the floor wells in the front seat would fill up.  I learned that water would always have its way.

Each subsequent car provided its own lessons.  There were many lessons. We managed to successfully implant a Ford V-8 in a Jeep.  However, a Renault’s frame could not support a Thunderbird V-8, providing a lesson in mechanics of materials.  We also learned that people were happy to get rid of old cars in their backyards and we could try all sorts of things, while selling parts salvaged from these cars.

By the time I was 20, I landed a job as an assistant engineer at Raytheon, a large defense contractor in Portsmouth.  I was involved with the AN/BQS-13 sonar system, which looked much like Picture 5.  During my two years at Raytheon, before heading to graduate school at MIT, I worked in mechanical, electrical, and systems engineering. It was a wonderful immersive experience.

My ultimate task was to figure out how many spare parts to bring on a submarine, given the different reliability and maintainability characteristics of the subsystems, assemblies and components and, of course, the limited space for spare parts.  I also was able to participate in some of the discussions of the human operators of these systems in terms of the information and interface needed to support their tasks.

Sonar Room

Picture 5. Sonar Room

Picture 6 shows my current involvement.  In some ways, the hospital operating room is like the sonar control room. However, there are critical distinctions.  The information systems and the incentive systems in healthcare are much more poorly aligned with human behavior and performance requirements.  Inadequate information and poorly aligned incentives are issues that must be addressed in a broader context than depicted by Picture 6.

Operating Room

Picture 6. Operating Room

This observation reflects a life-long penchant to question external constraints — to wonder why “givens” are given. The “best” solution to a problem is almost always only best within a given set of assumptions. These assumptions often reflect constraints that, when viewed broadly, can be seen as totally arbitrary.  In this way, problem solutions are often limited by problem definitions.  I am always energized by the question of what is the real problem.

So, what have I learned?  Three lessons seem like a good number.  First, no matter at what level you address a complex system, there is always a broader context that impacts the system.  Simply externalizing the context is not a good idea; this assumption will plague you later by hindering successful operation and maintenance of the system.  For example, better design of hospital operating rooms will not, in itself, remediate the information and incentives problems of healthcare delivery.

Second, complex systems cannot be addressed successfully by a single, traditional discipline.  Appropriate consideration of interactions at different levels of abstraction and aggregation require a mix of knowledge and skills. Consequently, one professor and one PhD student cannot single-handedly address complexity successfully. Interdisciplinary approaches are needed to transform complex systems.

Third, the engineering of complex systems requires a professional community that embraces the first two lessons. For me, the Council of Engineering Systems Universities and the International Symposium on Engineering Systems is that community.  I am indeed fortunate that the 1952 Plymouth carburetor headed me in this direction five decades ago. I expect CESUN and the Symposium to be central to transforming complex systems for many years to come.

Technology-Driven Change

Change tends to be very difficult, but it does happen.  Technology is one of the key drivers of change.  Technologies enable new possibilities, such as typing this post on my iPad early Sunday morning, sipping coffee and listening to the rain. The iPad means that I can be productive any time, any place. This capability has become very popular and Apple’s share price has soared.

Why does this constitute change?  The immediate impact is that my laptop seldom leaves my office at the university. I have not had a home computer for several years. I am questioning whether I really need a smart phone any longer since Wi-Fi is becoming ubiquitous. I read many books and 90% of them I download to the iPad.  I read newspapers this way as well.

So, one device has eliminated my previous inclinations to buy a home computer, a smart phone, most books, and all newspapers.  I imagine the companies who sell these things are quite aware of such changes of buying habits. Employees, or former employees, of these companies are also, I am sure, very aware of these changes. Decreasing demand for products and services means that fewer people are employed to provide these products and services.

This pattern has repeated throughout history, ranging from steamboats to railroads to electricity to automobiles to airplanes and computers. It often takes quite some time for patterns to play out. The transistor was invented and refined in the late 1940s. More than six decades later, the iPad is having the impacts noted above. Of course, there were many steps along the way, and many other technologies were needed in addition to semiconductors.

One cannot help but wonder what is next. Many think that technologies associated with the life sciences and health will be the next drivers of change. Personalized medicine is the current Holy Grail. It is imagined that this will replace mass produced medicine.  Treatments and drugs will be tailored to each individual’s genetic makeup. This means much smaller markets for each type of treatment and drug. This threatens pharmaceutical companies’ penchant for blockbuster, high volume offerings.

Changes on a personal level are likely to be much more profound. Once you are aware of your genetic predispositions, what range of interventions do you entertain?  What increased probability of a health problem will justify intervening?  How will you or your employer or the government pay for these interventions? How will your employer or the government limit the allowable interventions? There are many possible answers to these questions; most of them portend substantial changes to how we live.

Report From the Front

Over the past two semesters, I have been helping Georgia Tech undergraduate teams to contribute to transforming healthcare delivery.  Their senior “capstone” projects have focused on patient in-flow (Emergency Department), in-patient operations (Operating Rooms) and patient out-flow (Discharge and Bed Turnover).  Three eight-person teams addressed each of these areas of hospital operations.

The problems these students faced were excessive waiting time in the Emergency Department, low utilization of Operating Rooms, and delayed Discharge and Bed Turnover.  All three of these problems resulted in inefficient use of capacities, decreased revenues, and excess staffing costs. The students’ solutions focused on improving use of capacities to increase revenues and decrease costs, resulting in net gains in the millions.

In all three instances, the hospitals had many ideas for how to improve operations. However, they did not understand the economic implications of the alternatives. The students used their engineering models; sleuthed down the data they needed; and projected the benefits and costs of alternative courses of action. They presented their results and implications in clearly actionable recommendations.

Perhaps not surprisingly, these projects depended on each other. Most significantly, increased use of the Operating Room capacity depends on improved Discharge and Bed Turnover. Otherwise, where do you put the increased number of patients emerging from surgery? In this way, inefficiencies in one functional area can impose inefficiencies in another area.

These three projects show how highly motivated, well-intended healthcare professionals can promote inefficient solutions due to having to operate within the significant constraints imposed by the rest of the organization.  We have the methods and tools to overcome these limitations. We just need the courage to approach healthcare delivery problems systemically.

Why Transformation Is So Difficult

It is fairly common for the perceived benefits of current market offerings to fade and new value propositions to displace older offerings.  As noted in earlier posts, Schumpeter called this process “creative destruction.”  Steel ships replaced iron ships, which replaced wooden ships.  Microprocessors subsumed transistors, which replaced vacuum tubes. Change happens and creative destruction causes obsolete offerings to be replaced by new innovations.

This process of fundamental change sounds much smoother than it actually is.  The stewards of the “as is” enterprise — in other words, the stewards of the status quo — usually do their best to thwart the emergence of the “to be” enterprise.  In fact, they are likely to do their utmost to undermine the very thought that a new paradigm may emerge and be successful.

Last week, I spent a night in Bethlehem, Pennsylvania.  The carcass of the Bethlehem Steel Plant dominates the town.  This sprawling facility has been deserted for three decades.  This was once the “as is” enterprise.  There were thousands of people who did their utmost to steward this “as is” enterprise.  I expect that they simply did not believe that a different future was emerging.

This is not at all surprising.  The builders of wooden ships were not intrigued by the capitally intensive emergence of iron and steel ships.  The vendors of oil and gas lamps were not very enthusiastic about the possibility of electric lights.  The owners, managers, and employees at the Bethlehem Steel Plant were not big fans of high-efficiency continuous casting, not to mention low-wage foreign steel production.

Transformation is, to a great extent, very difficult because an enormous number of people are depending on change not happening. They expect the jobs at the steel plant or automobile plant to continue forever, generation after generation. A few members of each generation break out, perhaps becoming engineers after one generation, and lawyers or doctors after two.  However, the ranks of those seeking the factory jobs grow much faster than of those seeking to leave.

Of course, this phenomenon is not limited to factory work.  Teachers and doctors, for instance, argue against new processes and technologies that they perceive will undermine the value of the knowledge and skills they have long invested in gaining and refining. Thus, online education is impugned for not embodying the human skills of the physically present teacher.  Yet, the current generation of young people has mastered Internet-based interactions with people in far-flung other locations.  The trend in this arena is clear.

Transformation would be much easier if everyone were more adaptable in the sense that they would willingly gain new knowledge and skills whenever necessary.  Factory works would quickly become computer programmers.  Teachers would give up lecturing and rapidly refine facilitation skills for guiding students in online education.  Everyone would happily discard skills that are becoming obsolete and eagerly gain newly valuable skills.

Beyond the problem of motivating everyone to act in this manner, there is a more fundamental limit to this idea.  It takes a long time to become really good at something.  As Malcolm Gladwell popularized in Outliers, research has shown that it takes around 10,000 hours to become an expert.  This is five years if done full-time, perhaps ten years if work involves other activities than just focusing on gaining the targeted expertise.

So, it takes the factory worker 5-10 years to become a skilled computer programmer and the teacher 5-10 years to become an expert “guide on the side” rather than a “sage on the stage”.  I may be overestimating the time required, since the teacher, for example, would not be starting with no facilitation skills.  However, the point is that there is a limit to how fast people can adapt, even if they are willing.

A counter argument is that people do not need to be experts to be productive. But, would you want the flight management software on the plane you are flying in to have been programmed by a less than expert programmer?  Would you want to undergo surgery with a surgeon that just a few years ago was in a completely unrelated profession?  Clearly, high levels of expertise and the resulting high levels of performance are often very important.

Dynamic, innovative economies lead to high levels of creative destruction.  This results in needs for frequent and significant transformation of enterprises.  Often people do not want to make the changes transformation requires.  They may be unwilling, but more fundamentally, they are unlikely to be able to change fast enough to maintain their positions — and incomes — in the transformed enterprise. That is one of the basic reasons why transformation is so difficult.

Worst Practices

I have recently been involved with an enterprise that has somehow managed to embrace just about the worst transformation practices possible.  It all started with the vocabulary the leaders chose to employ.  They managed to paint a transformation picture that they apparently had no intention of pursuing.  While they portrayed fundamental change, their actions totally represented those of stewards of the status quo.

They did not “walk the talk” in several ways.  While cutting production staff and freezing salaries, they relentlessly increased the size and payroll of the management staff.  This included changing elements of the leadership team without communicating to those reporting to these leaders.  New bosses just showed up and took over.  It did not seem to matter to the senior leadership that the subordinates involved were totally confused.

They also rolled out policy changes that fundamentally affected people without informing them.  For example, they moved accounts and responsibilities without announcing the policy changes, leaving managers unable to find accounts and manage them.  The resulting confusion among program managers was apparently of no concern to senior leadership.  It did not matter that financial management was now impossible — the issue was power and control, not performance.

It would seem that only the most wooden-headed leadership would expect that these practices could succeed.  Middle management has had endless debates over whether senior leaders are inept or simply do not care.  No one seems to know what the leaders have been thinking.  However, most employees feel that the leadership was simply assuming that employees are lucky to be employed and should put up with anything.  The stewards of the status quo could not imagine that people would do anything other than what they were supposed to do, even when what they supposed to do was never communicated.

I asked several senior mid-level executives how they felt about events of the past year or two.  One of them put it best, “It is like being pecked to death by ducks.”  All sorts of irritating little changes happen, things that might have been acceptable if communicated and discussed. However, these changes – most small but some big – were simply implemented without explanation.  With supervisors unable to explain the source or intent of these changes, staff morale is steadily slipping..

So, what happens next?  Does this organization spiral to oblivion?  The problem is that such incompetency can be embraced for an amazingly long time.  Bloated work processes that provide little value can be sustained and expanded with little scrutiny. Investments can be made in competencies that are no longer needed, or were never needed.  The realization of irrelevance comes much too late.  The leadership is completely at odds with the future, which they consciously ignore seeing.  The message, strategy, and plan are totally at odds with reality.  The severance packages may be much too generous, but the sooner such leaders are gone, the sooner the wonders of creative destruction can commence.

So Who Are the Creators?

So, the game plan, according to me, is to create the future.  Who is on the team?  You might think, based on my last post, that the team is all engineers and scientists.  But, that is not how it has worked in the past.

Regardless of the technology — steamboats to automobiles to computers — the players in the innovation game have included many artisans beyond those with formal educations.  Players have also included many entrepreneurs, investors and, of course, many “high tech” workers where the definitions of “high” and “tech” were and are completely context dependent.

This immediately begs the question of whether we have a large cadre of such people now.  Where are the mechanical (1800s), electrical (1900s), or computer (2000s) artisans for the future?  In the past, we out-paced English workers because our workforce was better educated and ready to contribute to the processes of invention and innovation.  It does not seem that we are ready to out-pace Chinese workers in the same way.

We need artisans in IT, biotech, and energy.  In the past, such folks would have been cultivated in high school classes and labs in computing, biology and chemistry. People who flourished in these labs, but perhaps floundered with theory exams, may have gone to college for a year or two, or skipped college completely, and immersed themselves in creating the future.  Bill Gates, Steve Jobs and Chris Klaus are recent, but by no means unique, examples.

In my case, high school included woodworking, metalworking and foundry.  While math and physics led me to an engineering degree, these labs led me to hands-on experience and a feel for whether something could be manufactured and how to make it.  My understanding is that those days are gone.  Now, it is all about test scores.  SATs predominate, and welding skills are irrelevant.  Math skills completely trump abilities to use a lathe.

Perhaps abilities to deal with abstractions are all that now matter.  The physical world is no longer where things happen.  That’s what other people do — in China, India and Singapore.  But, then what do we do?  We manage things, count things, borrow money and account for returns.  This sounds a lot like England when we were soon to displace them in innovation and economic growth.  All because we are unable — or perhaps unwilling — to create the artisans who can contribute to the processes of invention and innovation.

Creating the Future

I am a student of history, particularly economic history.  Lately, I have been immersed in reading about technological innovation in the late 19th and early 20th centuries.  Transportation was transformed from stagecoaches and steamboats to railroads, automobiles and airplanes.  Electricity transformed communications from mail, telegraph and telephone to radio, television and now Internet.

In the process, there was much creative destruction.  Industries morphed or disappeared, and jobs changed or disappeared.  The stewards of the status quo did their best to stymie these changes, but they inevitably failed and change happened. We are now seeing fundamental change in healthcare delivery, and will sooner or later see fundamental change in higher education — the former being the incumbent poster child for runaway costs, and the latter soon to become the reigning poster child for costs that far exceed the value provided.

While the stewards of the status quo work to thwart change via endless team meetings and glossy strategies and plans, what should the rest of us do?  We could go to these meetings, check our emails or search the web during the interminable discussions, and help wordsmith the slides and brochures.  We could embrace business as usual, hoping the rules of the game are not changed during our watch.

On the other hand, we could embrace the ambiguous, uncertain future.  How?  Well, I am not a fan of crystal balls or dice.  There is another choice.  We could focus on creating the future.  We could imagine a different future and work to make it happen.  We could create products and services that might transform people’s lives. How about teleportation or mind reading?  Too much?  How about cars that cannot run into things, due to sensing and control technologies, and hence can weigh 70-80% less than current cars?  How about natural chemical agents that can track down cancer cells and convince them to die?

Much of what we take for granted — for example, this iPad on which I am typing — would be seen as pure magic by people of 50 to 100 years ago.  We have created a future most could not have imagined.  Now, we should imagine a future that no one believes is possible — and then go make it happen.  Creating the future is much more productive and satisfying than waiting for the future.  It is much more fun than being a steward of the status quo.

Market Forces

Change happens when it is forced.  The force can be an opportunity or a threat, perhaps embodied in a crisis.  In many domains, the forces for change are manifested as market forces.  Competitors, large or small, recognized or unrecognized, are the sources of market forces.  Thus, change happens when there is competition to meet market needs with better performance, quality, service and/or prices.

Change is much less likely to happen when there is little or no competition.  The stewards of the status quo can then argue that everything is great — as good as it can be within the prevailing constraints.  If competitors are not offering viable alternatives, it is difficult to convincingly argue that the stewards of the status quo are wrong.  Consequently, all investments are focused on preserving the status quo.

Healthcare is currently in crisis.  New alternatives are being driven by information and incentives.  Information will improve overall efficiency, but also enable health consumers to know the best providers, the best treatments, and the best pricing. Changing incentives focused on pay for outcomes will cause providers to focus on procedures that improve outcomes because those are the only ones for which they will be paid.

Higher education is a crisis in waiting.  Costs of administration (per student) have soared while expenditures on education and research (per student) have steadily declined.  At the same time, the merits of the old argument that a college education is always worth it have faded.  Unfortunately, there is a dearth of viable alternatives.  Online education has some benefits, but campus-based education provides a much richer growth experience.

What we need is an alternative that retains the benefits of campus-based education with much less overhead.  How about a university with a president, provost, deans and department heads, with NO vice presidents, vice provosts, associate vice presidents, associate vice provosts, etc.?  How about a university where the faculty members are the majority of employees?  Those two rules alone would constitute a dramatic change.

No mainstream university would agree to these rules.  There are far too many stewards of the status quo to allow this to happen.  But, there could be new universities, perhaps populated by faculty disaffected with the mainstream, which could operate this way.  The result might be a first-rate education for less than $10,000 per year — no fees added, no hidden charges.

This type of alternative would force change.  The best students would opt for this new alternative.  The mainstream universities, with increasingly bloated costs, would attract mediocre students from financially well-off families.  These students and their families would be more attracted to suites at the football stadium than science labs.  This would enable mainstream universities to cut back expenditures on the more academic side of things to focus on campus amenities and intramural enrichments.

How would we convince students — and their parents — that the degree from Alternative U is as valuable, or more valuable, than a degree from Mainstream U?  There are two key elements of making this case.  First, the quality of the faculty could be superb due to the enormous savings from salaries of non-faculty. Faculty members could be paid quite well since the typical five university staff members per faculty member would not exist.

Second, close alliances with industry and, to an extent, government would create great opportunities for internships and virtually guaranteed employment upon graduation.  There would be no graduates from Alternative U with marginal work knowledge and skills.  Everyone would be really good at something, ranging from design and engineering to journalism, theatre and media.  The graduates of Alternative U would run the world, and the students at Alternative U would know this.

Mainstream U could pursue the Alternative U mission, actually much easier than those who would have to start from scratch.  But, Mainstream U will not pursue this opportunity to innovate — they are much too busy.  There are hundreds of faculty members to manage and thousands of staff members to pay and promote.  The administrative assistant to the Deputy Associate Vice Provost has filed a complaint requesting the title of Assistant Deputy Associate Vice Provost and the university’s legal counsel has advised that this be settled out of court.