The Iron Law at Volkswagen

So Michael Horn, VW’s US CEO has made a “sincere apology” for what went on at VW.

And like so many “sincere apologies” he blamed somebody else. “My understanding is that it was a couple of software engineers who put these in.”

As an old automotive hand I have always been very proud of the industry. I have held it up as a model of efficiency, aesthetic aspiration, ambition, enlightenment and probity. My wife will tell you how many times I have responded to tales of workplace chaos with “It couldn’t happen in a car plant”. Fortunately we don’t own a VW but I still feel betrayed by this. Here’s why.

A known risk

Everybody knew from the infancy of emissions testing, which came along at about the same time as the adoption of engine management systems, the risks of a “cheat device”. It was obvious to all that engineers might be tempted to manoeuvre a recalcitrant engine through a challenging emissions test by writing software so as to detect test conditions and thereon modify performance.

In the better sort of motor company, engineers were left in no doubt that this was forbidden and the issue was heavily policed with code reviews and process surveillance.

This was not something that nobody saw coming, not a blind spot of risk identification.

The Iron Law

I wrote before about the Iron Law of Oligarchy. Decision taking executives in an organisation try not to pass information upwards. That will only result in interference and enquiry. Supervisory boards are well aware of this phenomenon because, during their own rise to the board, they themselves were the senior managers who constituted the oligarchy and who kept all the information to themselves. As I guessed last time I wrote, decisions like this don’t get taken at board level. They are taken out of the line of sight of the board.

Governance

So here we have a known risk. A threat that would likely not be detected in the usual run of line management. And it was of such a magnitude as would inflict hideous ruin on Volkswagen’s value, accrued over decades of hard built customer reputation. Volkswagen, an eminent manufacturer with huge resources, material, human and intellectual. What was the governance function to do?

Borrowing strength again

It would have been simple, actually simple, to secret shop the occasional vehicle and run it through an on-road emissions test. Any surprising discrepancy between the results and the regulatory tests would then have been a signal that the company was at risk and triggered further investigation. An important check on any data integrity is to compare it with cognate data collected by an independent route, data that shares borrowing strength.

Volkswagen’s governance function simply didn’t do the simple thing. Never have so many ISO 31000 manuals been printed in vain. Theirs were the pot odds of a jaywalker.

Knowledge

In the English breach of trust case of Baden, Delvaux and Lecuit v Société Générale [1983] BCLC 325, Mr Justice Peter Gibson identified five levels of knowledge that might implicate somebody in wrongdoing.

  • Actual knowledge.
  • Wilfully shutting one’s eyes to the obvious (Nelsonian knowledge).
  • Wilfully and recklessly failing to make such enquiries as an honest and reasonable man would make.
  • Knowledge of circumstances that would indicate the facts to an honest and reasonable man.
  • Knowledge of circumstances that would put an honest and reasonable man on enquiry.

I wonder where VW would place themselves in that.

How do you sound when you feel sorry?

… is the somewhat barbed rejoinder to an ungracious apology. Let me explain how to be sorry. There are three “R”s.

  • Remorse: Different from the “regret” that you got caught. A genuine internal emotional reaction. The public are good at spotting when emotions are genuine but it is best evidenced by the following two “R”s.
  • Reparation: Trying to undo the damage. VW will not have much choice about this as far as the motorists are concerned but the shareholders may be a different matter. I don’t think Horn’s director’s insurance will go very far.
  • Reform: This is the barycentre of repentance. Can VW now change the way it operates to adopt genuine governance and systematic risk management?

Mr Horn tells us that he has little control over what happens in his company. That is probably true. I trust that he will remember that at his next remuneration review. If there is one.

When they said, “Repent!”, I wonder what they meant.

Leonard Cohen
The Future

First thoughts on VW’s emmissions debacle

It is far too soon to tell exactly what went on at VW, in the wider motor industry, within the respective regulators and within governments. However, the way that the news has come out, and the financial and operational impact that it is likely to have, are enough to encourage all enterprises to revisit their risk management, governance and customer reputation management policies. Corporate scandals are not a new phenomenon, from the collapse of the Medici Bank in 1494, Warren Hastings’ alleged despotism in the British East India Company, down to the FIFA corruption allegations that broke earlier this year. Organisational scandals are as old as organisations. The bigger the organisations get, the bigger the scandals are going to be.

Normal Scandals

In 1984, Scott Perrow published his pessimistic analysis of what he saw as the inevitability of Normal Accidents in complex technologies. I am sure that there is a market for a book entitled Normal Scandals: Living with High-Risk Organisational Structures. But I don’t share Perrow’s pessimism. Life is getting safer. Let’s adopt the spirit of continual improvement to make investment safer too. That’s investment for those of us trying to accumulate a modest portfolio for retirement. Those who aspire to join the super rich will still have to take their chances.

I fully understand that organisations sometimes have to take existential risks to stay in business. The development of Rolls-Royce’s RB211 aero-engine well illustrates what happens when a manufacturer finds itself with proven technologies that are inadequately aligned with the Voice of the Customer. The market will not wait while the business catches up. There is time to develop a response but only if that solution works first time. In the case of Rolls-Royce it didn’t and insolvency followed. However, there was no alternative but to try.

What happened at VW? I just wonder whether the Iron Law of Oligarchy was at work. To imagine that a supervisory board sits around discussing the details of engine management software is naïve. In fact it was the RB211 crisis that condemned such signal failures of management to delegate. Do VW’s woes flow from a decision taken by a middle manager, or a blind eye turned, that escaped an inadequate system of governance? Perhaps a short term patch in anticipation of an ultimate solution?

Cardinal Newman’s contribution to governance theory

John Henry Newman learned about risk management the hard way. Newman was an English Anglican divine who converted to the Catholic Church in 1845. In 1850 Newman became involved in the controversy surrounding Giacinto Achilli, a priest expelled from the Catholic Church for rape and sexual assault but who was making a name from himself in England as a champion of the protestant evangelical cause. Conflict between Catholic and protestant was a significant feature of the nineteenth century English political landscape. Newman was minded to ensure that Achilli’s background was widely known. He took legal advice from counsel James Hope-Scott about the risks of a libel action from Achilli. Hope-Scott was reassuring and Newman published. The publication resulted in Newman’s prosecution and conviction for criminal libel.

Speculation about what legal advice VW have received as to their emissions strategy would be inappropriate. However, I trust that, if they imagined they were externalising any risk thereby, they checked the value of their legal advisors’ professional indemnity insurance.

Newman certainly seems to have learned his lesson and subsequently had much to teach the modern world about risk management and governance. After the Achilli trial Newman started work on his philosophical apologia, The Grammar of Assent. One argument in that book has had such an impact on modern thinking about evidence and probability that it was quoted in full by Bruno de Finetti in Volume 1 of his 1974 Theory of Probability.

Supposes a thesis (e.g. the guilt of an accused man) is supported by a great deal of circumstantial evidence of different forms, but in agreement with each other; then even if each piece of evidence is in itself insufficient to produce any strong belief, the thesis is decisively strengthened by their joint effect.

De Finetti set out the detailed mathematics and called this the Cardinal Newman principle. It is fundamental to the modern concept of borrowing strength.

The standard means of defeating governance are all well known to oligarchs, regulator capture, “stake-driving” – taking actions outside the oversight of governance that will not be undone without engaging the regulator in controversy, “whipsawing” – promising A that approval will be forthcoming from B while telling B that A has relied upon her anticipated, and surely “uncontroversial”, approval. There are plenty of others. Robert Caro’s biography The Power Broker: Robert Moses and the Fall of New York sets out the locus classicus.

Governance functions need to exploit the borrowing strength of diverse data sources to identify misreporting and misconduct. And continually improve how they do that. The answer is trenchant and candid criticism of historical data. That’s the only data you have. A rigorous system of goal deployment and mature use of process behaviour charts delivers a potent stimulus to reluctant data sharers.

Things and actions are what they are and the consequences of them will be what they will be: why then should we desire to be deceived?

Bishop Joseph Butler

 

FIFA and the Iron Law of Oligarchy

Йозеф Блаттер.jpgIn 1911, Robert Michels embarked on one of the earliest investigations into organisational culture. Michels was a pioneering sociologist, a student of Max Weber. In his book Political Parties he aggregated evidence about a range of trade unions and political groups, in particular the German Social Democratic Party.

He concluded that, as organisations become larger and more complex, a bureaucracy inevitably forms to take, co-ordinate and optimise decisions. It is the most straightforward way of creating alignment in decision making and unified direction of purpose and policy. Decision taking power ends up in the hands of a few bureaucrats and they increasingly use such power to further their own interests, isolating themselves from the rest of the organisation to protect their privilege. Michels called this the Iron Law of Oligarchy.

These are very difficult matters to capture quantitavely and Michels’ limited evidential sampling frame has more of the feel of anecdote than data. “Iron Law” surely takes the matter too far. However, when we look at the allegations concerning misconduct within FIFA it is tempting to feel that Michels’ theory is validated, or at least has gathered another anecdote to take the evidence base closer to data.

But beyond that, what Michels surely identifies is a danger that a bureaucracy, a management cadre, can successfully isolate itself from superior and inferior strata in an organisation, limiting the mobility of business data and fostering their own ease. The legitimate objectives of the organisation suffer.

Michels failed to identify a realistic solution, being seduced by the easy, but misguided, certainties of fascism. However, I think that a rigorous approach to the use of data can guard against some abuses without compromising human rights.

Oligarchs love traffic lights

I remember hearing the story of a CEO newly installed in a mature organisation. His direct reports had instituted a “traffic light” system to report status to the weekly management meeting. A green light meant all was well. An amber light meant that some intervention was needed. A red light signalled that threats to the company’s goals had emerged. At his first meeting, the CEO found that nearly all “lights” were green, with a few amber. The new CEO perceived an opportunity to assert his authority and show his analytical skills. He insisted that could not be so. There must be more problems and he demanded that the next meeting be an opportunity for honesty and confronting reality.

At the next meeting there was a kaleidoscope of red, amber and green “lights”. Of course, it turned out that the managers had flagged as red the things that were either actually fine or could be remedied quickly. They could then report green at the following meeting. Real career limiting problems were hidden behind green lights. The direct reports certainly didn’t want those exposed.

Openness and accountability

I’ve quoted Nobel laureate economist Kenneth Arrow before.

… a manager is an information channel of decidedly limited capacity.

Essays in the Theory of Risk-Bearing

Perhaps the fundamental problem of organisational design is how to enable communication of information so that:

  • Individual managers are not overloaded.
  • Confidence in the reliable satisfaction of process and organisational goals is shared.
  • Systemic shortfalls in process capability are transparent to the managers responsible, and their managers.
  • Leading indicators yield early warnings of threats to the system.
  • Agile responses to market opportunities are catalysed.
  • Governance functions can exploit the borrowing strength of diverse data sources to identify misreporting and misconduct.

All that requires using analytics to distinguish between signal and noise. Traffic lights offer a lousy system of intra-organisational analytics. Traffic light systems leave it up to the individual manager to decide what is “signal” and what “noise”. Nobel laureate psychologist Daniel Kahneman has studied how easily managers are confused and misled in subjective attempts to separate signal and noise. It is dangerous to think that What you see is all there is. Traffic lights offer a motley cloak to an oligarch wishing to shield his sphere of responsibility from scrutiny.

The answer is trenchant and candid criticism of historical data. That’s the only data you have. A rigorous system of goal deployment and mature use of process behaviour charts delivers a potent stimulus to reluctant data sharers. Process behaviour charts capture the development of process performance over time, for better or for worse. They challenge the current reality of performance through the Voice of the Customer. They capture a shared heuristic for characterising variation as signal or noise.

Individual managers may well prefer to interpret the chart with various competing narratives. The message of the data, the Voice of the Process, will not always be unambiguous. But collaborative sharing of data compels an organisation to address its structural and people issues. Shared data generation and investigation encourage an organisation to find practical ways of fostering team work, enabling problem solving and motivating participation. It is the data that can support the organic emergence of a shared organisational narrative that adds further value to the data and how it is used and developed. None of these organisational and people matters have generalised solutions but a proper focus on data drives an organisation to find practical strategies that work within their own context. And to test the effectiveness of those strategies.

Every week the press discloses allegations of hidden or fabricated assets, repudiated valuations, fraud, misfeasance, regulators blindsided, creative reporting, anti-competitive behaviour, abused human rights and freedoms.

Where a proper system of intra-organisational analytics is absent, you constantly have to ask yourself whether you have another FIFA on your hands. The FIFA allegations may be true or false but that they can be made surely betrays an absence of effective governance.

#oligarchslovetrafficlights

Deconstructing Deming XI B – Eliminate numerical goals for management

11. Part B. Eliminate numerical goals for management.

W. Edwards Deming.jpgA supposed corollary to the elimination of numerical quotas for the workforce.

This topic seems to form a very large part of what passes for exploration and development of Deming’s ideas in the present day. It gets tied in to criticisms of remuneration practices and annual appraisal, and target-setting in general (management by objectives). It seems to me that interest flows principally from a community who have some passionately held emotional attitudes to these issues. Advocates are enthusiastic to advance the views of theorists like Alfie Kohn who deny, in terms, the effectiveness of traditional incentives. It is sad that those attitudes stifle analytical debate. I fear that the problem started with Deming himself.

Deming’s detailed arguments are set out in Out of the Crisis (at pp75-76). There are two principle reasoned objections.

  1. Managers will seek empty justification from the most convenient executive time series to hand.
  2. Surely, if we can improve now, we would have done so previously, so managers will fall back on (1).

The executive time series

I’ve used the time series below in some other blogs (here in 2013 and here in 2012). It represents the anual number of suicides on UK railways. This is just the data up to 2013.
RailwaySuicides2

The process behaviour chart shows a stable system of trouble. There is variation from year to year but no significant (sic) pattern. There is noise but no signal. There is an average of just over 200 fatalities, varying irregularly between around 175 and 250. Sadly, as I have discussed in earlier blogs, simply selecting a pair of observations enables a polemicist to advance any theory they choose.

In Railway Suicides in the UK: risk factors and prevention strategies, Kamaldeep Bhui and Jason Chalangary of the Wolfson Institute of Preventive Medicine, and Edgar Jones of the Institute of Psychiatry, King’s College, London quoted the Rail Safety and Standards Board (RSSB) in the following two assertions.

  • Suicides rose from 192 in 2001-02 to a peak 233 in 2009-10; and
  • The total fell from 233 to 208 in 2010-11 because of actions taken.

Each of these points is what Don Wheeler calls an executive time series. Selective attention, or inattention, on just two numbers from a sequence of irregular variation can be used to justify any theory. Deming feared such behaviour could be perverted to justify satisfaction of any goal. Of course, the process behaviour chart, nowhere more strongly advocated than by Deming himself in Out of the Crisis, is the robust defence against such deceptions. Diligent criticism of historical data by means of process behaviour charts is exactly what is needed to improve the business and exactly what guards against success-oriented interpretations.

Wishful thinking, and the more subtle cognitive biases studied by Daniel Kahneman and others, will always assist us in finding support for our position somewhere in the data. Process behaviour charts keep us objective.

If not now, when?

If I am not for myself, then who will be for me?
And when I am for myself, then what am “I”?
And if not now, when?

Hillel the Elder

Deming criticises managerial targets on the grounds that, were the means of achieving the target known, it would already have been achieved and, further, that without having the means efforts are futile at best. It’s important to remember that Deming is not here, I think, talking about efforts to stabilise a business process. Deming is talking about working to improve an already stable, but incapable, process.

There are trite reasons why a target might legitimately be mandated where it has not been historically realised. External market conditions change. A manager might unremarkably be instructed to “Make 20% more of product X and 40% less of product Y“. That plays in to the broader picture of targets’ role in co-ordinating the parts of a system, internal to the organisation of more widely. It may be a straightforward matter to change the output of a well-understood, stable system by an adjustment of the inputs.

Deming says:

If you have a stable system, then there is no use to specify a goal. You will get whatever the system will deliver.

But it is the manager’s job to work on a stable system to improve its capability (Out of the Crisis at pp321-322). That requires capital and a plan. It involves a target because the target captures the consensus of the whole system as to what is required, how much to spend, what the new system looks like to its customer. Simply settling for the existing process, being managed through systematic productivity to do its best, is exactly what Deming criticises at his Point 1 (Constancy of purpose for improvement).

Numerical goals are essential

… a manager is an information channel of decidedly limited capacity.

Kenneth Arrow
Essays in the Theory of Risk-Bearing

Deming’s followers have, to some extent, conceded those criticisms. They say that it is only arbitrary targets that are deprecated and not the legitimate Voice of the Customer/ Voice of the Business. But I think they make a distinction without a difference through the weasel words “arbitrary” and “legitimate”. Deming himself was content to allow managerial targets relating to two categories of existential risk.

However, those two examples are not of any qualitatively different type from the “Increase sales by 10%” that he condemns. Certainly back when Deming was writing Out of the Crisis most OELs were based on LD50 studies, a methodology that I am sure Deming would have been the first to criticise.

Properly defined targets are essential to business survival as they are one of the principal means by which the integrated function of the whole system is communicated. If my factory is producing more than I can sell, I will not work on increasing capacity until somebody promises me that there is a plan to improve sales. And I need to know the target of the sales plan to know where to aim with plant capacity. It is no good just to say “Make as much as you can. Sell as much as you can.” That is to guarantee discoordination and inefficiency. It is unsurprising that Deming’s thinking has found so little real world implementation when he seeks to deprive managers of one of the principle tools of managing.

Targets are dangerous

I have previously blogged about what is needed to implement effective targets. An ill judged target can induce perverse incentives. These can be catastrophic for an organisation, particularly one where the rigorous criticism of historical data is absent.

Deconstructing Deming XI A – Eliminate numerical quotas for the workforce

11. Part A. Eliminate numerical quotas for the workforce.

W Edwards DemingI find this probably the most confused part of Deming’s thinking. Carefully reading Out of the Crisis (at pp70-75) Deming’s attack is not on standardised work, that is advocated as central to his message, but against specifications for the volume of work: calls answered per hour, finished parts per day.

Deming recognises management’s need to predict costs and revenues but condemns quotas as destructive of achieving productivity.

Deming also deprecates such quotas as corroding workplace pride. I shall return to that in Point 12.

Deming’s criticism of work quotas goes as follows.

  • Some individuals may achieve them easily and their productive capacity will then stand idle.
  • Some individuals may struggle and suffer poor moral.
  • Some individuals may compromise quality so as to make a quota or so as to make it sooner.
  • Achievement of quotas may be frustrated by faults in “the system” which are outside the individual worker’s control.

Deming gives the following example of how he would advise financial planning in a call centre of 500 people (at pp73-74).

  1. Set a preliminary budget.
  2. Make it clear to every one of the 500 that their aim is to give satisfaction to the customer, to take pride in their work.
  3. Everybody will keep a record of calls made.
  4. Customers with special problems will be referred to the supervisor.
  5. At the end of each week, sample 100 individuals’ record and summarise the data.
  6. Repeat steps 2 to 5 for several weeks.
  7. Analyse the data.
  8. Establish a continuing study following the above steps but on a reducing basis.
  9. Use the data to predict costs.

Now there is much merit in forecasting costs based on actual data. Further, improving performance based on the relentless criticism of historical data is essential. However, I think Deming’s prescription naïve and idealistic. The trick is to extract the ideals and industrialise them.

Planning

The simple matter is that any new enterprise has to be established on the basis of a robust business plan. There is competition for resources: people, capital, infrastructure … and everyone has to make their case. It is impossible to do that without judgment. No matter how much historical data or even qualitative experience is to hand we cannot simply project it into the future without establishing further conditions (RearView). It is unlikely this can ever be done exactly in a new establishment.

That competition for resources then prevents us from taking an overly conservative view of what can be achieved. Setting the bar too low for call centre operators starts off from an uncompetitive position. Further, the modest answering rate in the plan has to be resourced with infrastructure. Intentions to improve the answering rate post-launch are all very well but what will happen to the personnel and materiel that we bought in to accommodate the unambitious start-up?

Sometimes work needs to be set at a rate that is recognised by a team of co-workers and other parts of the organisation. Excess production is as contrary to the philosophy of lean operations as is shortage. The idea of takt time allows production lines to be balanced, receipts and deliveries co-ordinated, stock turns to be minimised and cash flows improved. In many situations that is sufficient to answer Deming’s fears about individuals distorting production to bank an accomplished target.

Stretch

What is now proved was once but imagined.

William Blake

Is it so wrong to set a target that nobody involved has seen achieved before? Deming would say that it was fine so long as there was a plan defining the means by which this could be achieved. There are many compelling stories from sports science telling how records have been broken by incremental improvement (e.g. Dave Brailsford and the GB cycling team).

But what about setting an ambitious stretch target without a plan for achieving it? That would be brave indeed. It would be based on no more than an exhortation to the call centre operators to work more furiously, more furiously than anyone had ever done before. I cannot say that would never work. In my athletics days I ran some of my best times when team mates were urging me on from the sidelines. However, as a business strategy it faces the social realities of employees’ collective ability to resist quietly that to which they do not assent. With a carefully recruited and motivated team it could work. It would certainly require a high degree of collective problem solving and improvement by the operators. But of all strategies for operational excellence it looks the most limited and the most risky. There is no obvious Plan B.

The Ringelmann effect

There is a tension between unrealistic stretch targets and a further problem that Deming ignores entirely, the Ringelmann effect. It may sadden the hearts of those who believe in the inherent fulfilling joy of work and best intentions of workers to do a good job but evidence is overwhelming that there are situations where individuals exert less effort in a group environment than they would if acting individually.

In 1913, Max Ringelmann conducted experiments that showed that individuals pulled less strenuously on a rope when pulling in a group than when pulling alone.

A realistically set and communicated takt time can assist in concentrating effort and communicating common work standards and the expectations of peers.

The poor supervisor

If Deming was so pessimistic as to believe that workers would sacrifice quality to hit targets then they would surely be more than happy to shunt enquiries off to their supervisor in order to post commendable performance. All that Deming’s proposal does is to divert the whole problem of difficult calls to the supervisor who, presumably, is either beset with his own performance problems or operates outside business measurement.