The mismeasurement virus: Have we over-reacted to Covid-19 numbers? Ted Black

If you are old enough to remember Y2K, the turn of the century that was going to spark computer mayhem, then you are attuned to experts getting things very wrong. The computer boffs blinded the world with predictions that computer clocks would misinterpret the date change to 1900 instead of 2000, sparking widespread chaos. Laws were passed to encourage companies to share information and, as Britannica notes, an estimated $300bn was spent (almost half in the United States) to upgrade computers and application programs to be Y2K-compliant. But nothing happened to computers when midnight passed, leaving many with the distinct impression that Y2K was a bit of a scam. We all fell for it because computers are complicated beasts and we couldn't decipher the language of tech specialists – and failed to ask them to demystify the details. As Covid-19 statistics are bandied about, number cruncher Ted Black – South Africa's Return on Assets Managed specialist – ponders whether most of the world's governments are over-reacting to the Covid-19 numbers. He draws on his expertise in business reports to illustrate how easy it is to mismanage when the measurements aren't quite right. – Jackie Cameron.The deadly virus of mismeasurement.By Ted Black*.The importance of right measurements has emerged with the Covid-19 outbreak. We know that what gets measured gets managed. It's also true that what's mismeasured gets mismanaged..___STEADY_PAYWALL___.Because of a lack of information and varied statistical models, we have conflicting reports and opinions on how the virus tsunami should be tackled. Only after it has petered out shall we understand the full extent of the wreckage left behind and be able to judge the management of it. The crisis may even cause us to change the way we measure and manage..In business we do it by the numbers – especially the financial ones. However, by using them without the right aims and a meaningful context, you can deeply harm a firm's immune system – its productivity. As we see in South Africa, the wrong goals and mismeasurement have the same impact on a country as on a business. The costs to employees and society at large are huge..The late Dr. Myron Tribus wrote a brilliant paper in the late 1980s called "The Germ Theory of Management". In it he compared doctors with managers. Doctors deal with patients using what they learn at medical school and from training and experience. They do what they know is "the way things work"..Only 150 years ago, surgeons sewed wounds with silken thread. They left some of it hanging out to draw off pus from infection caused by use of unsterilised thread, needles, and unwashed hands. Doctors at the time also believed bad night air caused the spread of "Mal-aria" fever. Their theory of medicine made them look in the wrong places for wrong answers to serious problems..In 1869 a breakthrough came in France. Louis Pasteur, investigating the death of silkworms, found air borne organisms caused the disease that killed them. At the same time, Lister tried out the first antiseptic carbolic acid to stop infection after surgery. Their work led to the "germ theory of medicine". Until then, doctors did their best with what they knew. Most of it was wrong..It's the same with managers. Faced with a tough, competitive environment, they pressure and lobby governments for changes in economic, tax and trade policy; form cartels with rivals to lift selling prices; merge or acquire other firms to gain monopoly pricing power. They question everything except their own "theories of management"..In the 1920s, came a different "breakthrough" – this time it was a measurement for managers. Bell Laboratories gave statistician Dr. Walter Shewhart a task to increase the life of telephone amplifiers. Positioned a mile apart, they were part of an underground cable transmission system used to strengthen signals for long distance communication. This is when he discovered the "virus of variability"..Even today, few managers understand the costs of uncontrolled variability for a business. Even fewer know what to do about it. Eliminating the virus was taught widely during World War 2 in America and played a big part in the success of its mighty war production effort..After the war, American managers got busy making money and forgot about it. Instead, the Japanese, under the guidance of Dr. W. Edwards Deming, Dr. Juran and Homer Sarasohn, picked up the baton and we know what soon happened. Within a decade, Japan made huge strides in building a hugely successful industrial machine. Toyota, amongst many others, became an exemplar in it..It took almost forty years for American managers to rediscover the principle. This led to the Quality and Lean Management movements that aim to eliminate the "Seven Waste" diseases that exist in all firms and institutions. Two of the biggest I found at a sawmill in Mpumalanga. This happened some years ago now, but its message applies as much as ever – even more so today..Briefly, this is what happened… After a ROAM workshop with his team, we walk through the sawmill and surrounds. The place hums with busyness. The production manager says, 'My big problem is no space for stock.'.You can see it. Driving onto the site, the first thing to strike you is stacks of timber under tarpaulins spread over the firm's soccer pitch..'Why?' I ask..He replies, 'We've run out of storage space. I'm doing my job and meeting budget. My key measures link to volume and cost – the more I produce, the lower the cost per unit. The problem is the sales guys aren't selling.'.What the heck is really going on? I wonder….We had used Dr. Deming's "Red Bead Experiment" during the workshop to explain Shewhart's discovery. When back in Joburg I contacted the CFO and said, "Give me two physical numbers, not financial ones. Sales and inventory with at least three, preferably five years' history.".The chart below records four years' sales data he gave me..It tells us little. Typically, when reviewing performance we compare one number with another; today with yesterday; this week with last week; this month with last month; this month with the same month last year; against budget and revised budget and on it goes. To prepare for meetings we think of all kinds of reasons for the ups and downs. Rarely are they more than opinions. The process is better than nothing but ineffective..To get a meaningful context, Dr. Deming said, "The great men plot data points". Using a Shewhart chart to do that – a 3 Sigma one – it shows the sales data within three standard deviations from the average of 33.3 thousand units a month. Added is part of the fifth year when the workshop took place..As you can see, there is big, random, monthly variation with a clear, annual, seasonal pattern that peaks towards calendar year-end with a plunge in December and January when the building industry closes down. More to the point, it shows that we operate in "systems". The data points are random within this system – one that shows no growth over four and a half years..The chart tells us more. Despite big monthly changes, there are no data points outside the system's upper and lower natural process limits. In other words, sales are stable and predictable. All "causes" of monthly variation are "common" to this system. If a data point were to fall outside the limits, then there would be a "special cause" for it – a Covid "lockdown" for instance..Of the Seven Wastes, two are over production which in turn causes the biggest one of all – slow moving inventory. Here are those monthly numbers superimposed on the sales numbers..For the first two years, inventory was stable at two months of sales. Then the wheels start falling off. Plot the data in a Shewhart chart and it would show "uncontrolled variation" rocketing up in year four. You often cause this by treating every cause of variation as "special" – a trap many managers fall into. Called "tampering", it leads to overreaction that results in even bigger variation..Unless you change and redesign the system, no amount of target setting with "big, hairy, audacious goals", kicking arse, pep talks, incentives, training, or any other artifice management uses to reach higher targets and numbers, will have any sustainable effect whatsoever..So, what could some "special causes" be for the rising trend? Why would stock levels keep climbing for 17 consecutive months when overall sales are stable?.A "special cause" might have been the new CEO. What does a "new broom" say and do? Despite the evidence, predictable physical volumes, who would accept no growth from a sales team?.There's another "common cause" in all firms – budgeting under a command and control style of leadership. There's the widespread belief you must do an exercise to predict in detail what will happen in the coming year. The output, the budget, is the basis of the monthly report. In Myron Tribus's view, using it as performance feedback is like steering a car by watching the white line in the rear-view mirror..The budgeting process encourages games that won't result in a viable strategic Game Plan based on what customers need or want; what competitors offer today; or what may happen in future. The typical ones played are….Negotiate the lowest targets you can get away with and the highest rewards for hitting them. Do everything possible to get your bonus even if it causes "snafus" somewhere else in the firm..Aim always to make your numbers but don't beat target. Rather find ways to tuck away gains in case you need them later in the year. Beat them and you risk ever higher demands..Don't share knowledge and always ask for more resources than you need – you know you'll be cut back anyway. Then, make sure you spend all you do get. You'd be dumb not to as you'll get less next year if you don't spend it all..The financial variances are the white line in the rear-view mirror. They tell you nothing about causes of variation so learn to give plausible reasons for them. If you can describe some outside your control, even better..The outcome is what Hope and Fraser, in their highly praised book "Beyond Budgeting", call the "Fixed Performance Contract". It comes from a top down process of goal and target setting and includes a reward system that's like feeding carrots to donkeys. The more of them you dangle, the more people find creative ways to gobble them up..With all the "noise" and confusion generated within the timber firm, neither the Divisional manager, a qualified CA, nor the CEO could easily accept the signals these charts sent. The "real" numbers were lost in the financials. However, they did admit inventory was "a big issue"!.The story is a simple but perfect example of how the systems we design and manage can make the brightest amongst us behave incompetently, even stupidly..As Dr. W. Edwards Deming said, "94% of all performance problems arise from the system, only 6% from the workforce". And who is responsible for the system?.Only management.."So, what other viruses are there?" you might wonder..Like varieties of flu, there are many. One in particular has infected firms worldwide causing huge harm. We'll look at it in the next article..But hang on a moment! We started by linking to Covid-19. Let's take a quick look at a couple of 3-Sigma control charts of deaths in England and Wales since 2010..Like our sawmill example, for five years, despite big monthly variation , the numbers are stable and predictable within the system. With average monthly deaths of 41,200 over the period, no data points fall outside the upper natural process limit of 59,400 deaths..Then, from January 2015 there's a big spike. Thereafter, variation increased (which could signal mismanagement of the health system) but with no more points above the new, higher upper limit of 64,600 deaths. However, by 24th April this year, there were 79,300 deaths. Of those, 27,330 had Covid-19 "mentioned" on death certificates..Moreover, since the start of 2020, people above age 65 never account for less than 85% of all deaths. The number at last count was 87%. That alone raises a question. Why couldn't the rest of the population have gone to work? The worst that could happen is you die – but, based on evidence so far, probably won't..Maybe soon we can ask more, better questions to establish what is really going on. Have most of the world's governments overreacted and "mismanaged" this epidemic? If they have overreacted, will it cause even more variation with massive, costly side effects? Could an effect be many more deaths not caused by Covid-19… even suicide… an economic one?.Ted Black runs workshops, and coaches and mentors using the ROAM model to pinpoint opportunities for measurable, bottom-line, team-driven projects. He is also a freelance writer with several books published. Contact him at jeblack@icon.co.za.

The mismeasurement virus: Have we over-reacted to Covid-19 numbers? Ted Black

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