Take heed, managers: your 'best practices' are killing your company

If you are a manager, you need to understand the ideas of W. Edwards Deming. Deming wrote several books about management, in which he chastised American business schools and American corporate management for perpetuating a failed philosophy and failed management techniques.

Deming proposed a new philosophy of management motivated by quality and grounded in systems theory. The Deming philosophy is too deep, too broad, and too rich to be explained in a mere blog post. Volumes have been written about it, and as I read those volumes I am sharing my thoughts through this venue (with apologies to Mr. Deming if I misrepresent anything, I am still learning.)

Probably the best introduction to Deming and his theories is his Red Bead Experiment. The experiment is detailed in Chapter 7 of his book, The New Economics for Industry, Government, Education. The experiment is extremely educational, and I highly recommend you watch it play out in the video below (you’ll need about an hour).

Deming's Red Bead Experiment

In case you haven’t the time to watch the video version, here is the one paragraph summary of the Red Bead Experiment.

The experiment simulates a company, the White Bead Corporation, whose job is to ship white beads to its customers. Several employees are recruited from the audience, including line workers and quality control workers. Workers are presented with a box containing 3,200 small white beads, and 800 red beads of the same size. They are given a tool to extract beads from the box 50 at a time, and strict instructions on how to carry out their task of “making” white beads. They use the tool as instructed, then report each batch to quality control for inspection, where the number of defects (red beads) is recorded. The foreman (the instructor) tries several management techniques to improve the performance of his workers: he puts up motivational posters, sets numerical goals, introduces pay incentives, conducts individual performance reviews, and finally lays off the poorest performers. In the end, the company goes out of business because it cannot meet customer demand for defect-free white beads.

Now, observers of this experiment can see that the game is rigged. The workers are destined to fail, and that is precisely the point that Deming is trying to make to the managers.

“Apparent performance is actually attributable mostly to the system that the individual works in, not to the individual himself,” Deming wrote. Despite the fact that there were observable differences between the output of individual workers, those differences were entirely the result of common cause, that is, the variation is inherent to the system itself. All the efforts spent trying to improve the individual performance of the workers is wasted, because the flaw is not in their performance, but in the system under which they work.

Deming warns, “Instead of setting numerical quotas, management should work on improvement of the process.” As a manager, it is your job to understand the difference between special causes that should be remedied individually, and common causes that can only be eliminated with a change to the system itself. And as a manager, the system is your responsibility, not to be delegated.

Deming describes how numerical quotas and incentive are not only useless, but actually counter-productive. He gives several examples where workers may report misleading figures, or make poor business decisions that game the system so that the numbers work out. A grocery manager accountable for inventory pulls cashiers to audit a delivery while paying customers wait in line. He stops stocking certain items that move slowly and might spoil on the shelf, forcing customers to shop elsewhere for those items. “He knows 55 other ways to help to meet his allowance of 1 percent shrinkage, all of which hurt the business. Can anybody blame him for living within his allowance?”

Listening to Deming, you have to conclude that those annual performance reviews you conduct as a manager are aimed in the wrong direction. Performance of your employees is not a result of the employee’s competence, but of the manager’s competence to build a system in which they can be productive. If your employees are not performing up to standards, you as a manager need to ask yourself what you are doing wrong. What changes must be made to the process of your business to make these employees productive? Ask them, they can probably tell you several, because they actually want to achieve, and they can see what parts of the system are holding them back.

Incentive programs and performance reviews are considered management “best practices” and this is why Deming chastised American managers. These practices simply don’t produce the results managers are looking for. Have you ever had a performance review or bonus program result in an order of magnitude increase in productivity? Never. At best, you’ll squeeze out a few percentage points. At worst, you make your employees feel micro-managed and powerless, removing all desire they may have to improve.

To move the needle on organizational productivity, you need to focus on the process by which your company produces value, and constantly improve that process.