ʻSYSTEMS THINKING: A CHALLENGE

TO CONVENTIONʼ
By John Seddon

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the February 2011 issue, no.185,
of Finance & Management, the
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 BUSINESS IMPROVEMENT

SYSTEMS THINKING
A CHALLENGE TO
CONVENTION
Many organisations struggle – and fail – We are used to thinking of our organisations as top-down
functional hierarchies. We think it is normal for managers
to satisfy customers while keeping down to decide and workers to do, and for us to decide what
costs. But there is a way to achieve this is ‘fair’ in our evaluations of the workers’ performance.
We teach managers to manage cost, and in service
aim, says John Seddon. Here he explains, organisations we equate cost with activity.
with the help of two real success stories, While all of this is normal, that doesn’t make it right. It
is also unfortunately normal that some of our service
how ‘systems thinking’ can deliver on organisations make customers unhappy and carry high
both counts. costs. Yet we don’t have to accept these negative
features of ‘normality’.
Understanding the causes of these phenomena helps
us create radical change – namely, provide far better
service at much lower costs. First, though, we have to be
prepared to change the way we think about
management.
Professor John Seddon pioneers ‘systems Mankind invented management so, arguably, we can
thinking’ in service organisations, helping re-invent it. Systems thinking starts with studying the
them change from conventional ‘command organisation as a whole system. This approach reveals a
and control’ mode to one of systems design. number of startlingly counterintuitive truths: truths
www.systemsthinking.co.uk
which are easier to accept when you see them for
john@vanguardconsult.co.uk
yourself.

10 icaew.com/fmfac
 FEATURES

G:

Cost is in flow The repeat demands made by customers as they try

One such truth is that cost is in flow*, not activity. For to get the service they need are what I have identified as
example, if outsourcing a call to a lower-cost provider ‘failure demand’ – ie demand caused by a failure to do
drives up the total number of calls it takes for a customer something, or do something right, for the customer.
to obtain a service, overall costs will go up rather than And in conventional service organisations failure
down, despite the fact that the cost per call is lower. demand can account for as much as 80% of all calls
It is the same when we ‘dumb down’ the front end of coming in. So treating all demand indiscriminately as
our service organisations. While managers point ‘work to be done’ – as conventional service managers
triumphantly to lower transaction costs (if cheaper, less
qualified people answer the phone, the cost per call goes
down), overall costs go up because the total number of
Ian Gilson, operations director of Comserv,
transactions rises. But these very real costs are invisible to
led the transformation of Comserv/MTS with
managers whose information systems focus on the costs
Portsmouth City Council.
of activity. ian@comserv-uk.com

Demand can be negative

Worse, obsessing over transaction costs blinds managers to
an even more significant counterintuitive truth: that Laurence Barrett led the transformation of
understanding demand is the greatest lever for VELUX Co Ltd’s service operations. He is
currently chief executive of Falkirk for
performance improvement.
Business.
laurence.barrett@falkirkforbusiness.org
*the customer’s end-to-end experience of a service.

FINANCE & MANAGEMENT February 2011 11

‘Here is another counterintuitive truth – to
reduce costs manage value, not cost!’

do – passes over the importance of understanding why would be if our telecoms provider, for example, adopted
customers call or turn up. this approach!) What’s more, Comserv/MTS provide this
service at startlingly lower cost than before.
The back-office/front office phenomenon Transformation begins with studying demand. In the
Compounding the problem is the phenomenon of the Portsmouth case, as well as identifying high levels of
‘back office’. Why do we divide work between a back and failure demand (people calling to ask why a repair
front office? The rationale goes as follows. The job of hadn’t been done or had been done wrongly),
management is to optimise the use of resources (people). Comserv/MTS rapidly came to the conclusion that
It is difficult to do that in an environment where the work demand for major types of repairs was highly
is unpredictable – when the customer can ‘interrupt’ predictable. This predictable demand was the starting-
workers as they do their job, for example. Hence the idea point for effective resource planning: there would
of a specialised ‘front-office’ to receive and document the always be a tradesman ready to take a job. The system
customer need, which it then passes to the back office for works as single-piece flow – the tradesman gets one
fulfilment. In other words, the customer is ‘decoupled’ job at a time and completes it before going on to the
from the provider of the service – we put the phone next.
down or say goodbye at the front desk – so that the back How it operates can be watched on two visual systems
office can work undisturbed, hence more ‘efficiently’. in the office, one showing the jobs and the requested
As a result of the espousal of the ‘back office’ rationale, customer timing, the second indicating when tradesmen
in financial services it is not unusual to find one customer will come free from their current jobs. As each
request being broken down into as many as nine tradesman comes free, he simply picks up the next job in
separate sub-tasks which are then sent to separate the queue. It works because of the next blindingly
specialised back-office functions in this country and obvious (when you see it) innovation: when the
abroad. Now, consider the assumptions contained in this tradesman arrives at the job, he tells the office when he
design of work. It assumes that the separate tasks have expects to finish.
been sent to the right places, they will be completed Many readers will be thinking, “But he’ll rip them
within agreed service levels, they will take standard times off!” He doesn’t. He is now working in a visible system
to complete, and they will be faultlessly reassembled at that supports him doing a good job. This stands in
the point of delivery to the customer. How often do you stark contrast to the typical ‘work management’
think all that happens as planned and the service flows systems employed by most repair organisations, which
‘cleanly’ and defect-free to the customer? Rarely. So now give workers jobs as specifications to be worked to
we know a further cause of failure demand. standard times. These systems ignore variation (with
We standardise and specialise work in this way because the best will in the world you can’t always tell how
we believe in economies of scale. Standardisation and long a job will take until you get there), so as soon as
specialisation were, for example, the hallmarks of Henry they inevitably encounter it they break down.
Ford’s mass-production system for driving down unit Variations send the system out of control, wrecking
costs: yet they also drove up human ones. Taiichi Ohno, predictability and increasing the likelihood of
the man who subsequently developed the very different maladaptive behaviour by harassed workers who are
Toyota Production System (TPS), understood the error of prevented, by the system itself, from doing a good
focusing on unit costs. TPS introduced two job. The Comserv/MTS system, by contrast, is
counterintuitive and unconventional moves – ignoring designed to absorb variation, which it does by putting
unit costs (because true cost is in end-to-end flow) and the tradesman in control.
giving control to the workers (rather than the managers). Every tradesman has his own van stock, worked out
by taking data on actual materials usage over time. As
Better service designs a result, the cost of van stocks has been reduced by
Similar counterintuitive designs are now being developed 75% while stock-outs are minimised.
in service organisations, and these, like the TPS in Ohno’s When a tradesman needs material he calls MTS, the
day, are setting radical new benchmarks for service quality logistics arm, and tells it when he’d like the item
and cost. Consider Comserv/Multi Trade Supplies (MTS), delivered (if you are changing a bath, you want the
two organisations that work together to provide housing new one to arrive at the same time as you remove the
repairs to Portsmouth City Council. Together with the old). And this is the nominal value that is measured.
council they provide a repairs service on the day the tenant By studying both ‘early’ and ‘late’ variations, managers
requests it, not by giving a ‘time slot’, but by asking the are able to further improve the system. For example,
tenant for a specific appointment time of their choosing. since it instantly becomes apparent that it takes longer
(Just think how astonished and delighted millions of us to supply a door than to remove it, it makes obvious

12 icaew.com/fmfac
sense for tradesmen who will predictably need doors
to carry them on the van. As time goes by, the stock
the van carries changes, as things go in and out.

Half the cost

It is not hyperbole to say that Taiichi Ohno would have
been proud: this is a system, in his terms, ‘designed for
perfect’. Of course it isn’t perfect, but it is miles ahead of customer opportunities (sales) and large amounts of waste
the competition and, what’s more, it will stay that way (handovers, duplication, re-work) caused by the parcelling
because ‘designed for perfect’ means that it works to get of the work into specialised service functions. A study of
ever closer to perfect results from the customer’s point of demand identified a high volume of predictable customer
view, just as Ohno’s TPS did. Like Ohno, Comserv/MTS demands which became the foundation for developing a
has set an economic benchmark. With partner single point of customer contact. Contact workers were
Portsmouth City Council (a happy marriage of public and trained to handle all high-frequency predictable demands
private sector), they deliver this extraordinary service at (things we know we are going to get a lot of) and were
half the original cost. Yet it challenges everything that is enabled to ‘pull’ support for things they needed help with.
conventionally believed about how to manage a repairs Conventional managers would assume that creating
service. greater (supposedly, more expensive) expertise at the
As in the TPS, the workers in Comserv/MTS control the point of transaction would drive costs up. In fact overall it
work. Managers do not sweat their people assets; they is considerably cheaper, underlining the counterintuitive
focus their attention on the system. The result is massive reality that cost is in flow, not activity.
improvements in productivity: a paradox. Instead of VELUX Co Ltd also opened a new sales channel. One of
treating materials as cost, managers work on the flow of the things it learned was that many callers wanted to buy
materials to minimise the time they spend in the system. something. Why send them elsewhere, as policy told
Time is indeed money. At the heart of most repairs people to do, rather than sell it to them direct? As a result
systems is a ‘schedule of rates’, specifying the work to be of the changes, the business experienced improvements in
done and the associated timings and costings. At revenue, service and efficiency. At the same time
Comserv/MTS all specifications have been removed; absenteeism and sickness rates fell and staff morale soared.
instead the diagnosis is always perfect because it is done Both of these examples turn conventional service design
by the tradesman whose job it is to solve the problem on its head. They feature systems designed on the basis of
either on his own or with extra assistance if necessary. customers’ demands. Think of customers as ‘pulling value’
from the systems, in their terms, rather than having
Manage value, not cost predetermined bundles of service pushed at them on the
Reflect for a moment on management’s measures-in-use company’s terms, as now. Managers in the above cases
before this change was made. Managers pored over work on the system (ie making it easier for customers to
weekly reports of tradesmen activity (jobs done), pull the value they want) rather than working on the
tradesmen costs, service-levels met, costs of materials, people. Understanding that standardisation and
costs of vehicles, fuel, and so on. Yet none of these specialisation (dumbing down) work against absorbing
measures is of any use in working out how to halve variety, they have rejected it in favour of ’smartening up’:
service costs. Instead, a focus on managing value – instead of controlling workers they put workers in control
increasing the frequency with which jobs are completed and as a result themselves achieve far greater control of the
on the first visit – has been the key to driving costs out. system. Instead of managing cost, they manage value.
So here is another counterintuitive truth – to reduce costs
manage value, not cost! Conclusion
Here’s another example to think about. By taking a All these ideas are, of course, foreign notions to
systems approach, VELUX Co Ltd – the UK arm of the conventional managers. But there’s no getting around the
world’s largest roof window manufacturer – shaved a jaw-dropping economics. And if such managers don’t get
million pounds off its operating costs and improved the the implications and change their thinking fast, then their
quality of customer service by leaps and bounds. The competitors certainly will.
company had had a traditional front-office/back-office
design based on the conventional assumption that this was
the way to deliver efficiency. But observation of how the
service actually worked for customers revealed otherwise.
There were actually high levels of failure demand, lost

FINANCE & MANAGEMENT February 2011 13