Give your company a little slack!

I’m concerned about our future because an important part of our economic and social systems is breaking down. Our relentless focus on efficiency, results, and profitability over the past several decades eliminated important slack in our systems, reducing our resilience and ability to respond to unexpected events. This change — and its unintended consequences — creates perverse rewards as we take action to recover in crisis situations. It’s time to take a step back and create a strategy to reintroduce the slack necessary to deal with unexpected or difficult situations.

Four decades ago, we embarked on waste elimination as a way to make our organizations more competitive and come to grips with difficult economic conditions. We latched onto Lean philosophies. Dr. Deming and his control charts became ubiquitous and we opened our minds to new ways of creating the best possible future. We leaned out our operations, focused on generating a return on every asset, and redeployed cash reserves. The improvements generated significant improvements in returns, put people to work, and created new innovations — but we went too far!

These actions taken to the extreme created brittle systems incapable of weathering even moderate disruptions. It’s much like driving a car without shock absorbers — you feel every bump in the road and cause significant damage to your vehicle as you drive along. Organizations without slack face the same fate, as any disruption puts the enterprise at risk. Slack provides resilience in the face of surprises and provides the flexibility necessary to address critical issues.

The system failures during the two most recent downturns demonstrated the importance of slack and its related flexibility. The banking and automobile industries eliminated slack in their operations and on their balance sheets to boost returns. The stresses brought on by the Great Recession put both industries in peril. We spent billions of dollars to bail out these industries. The current pandemic provides a new set of examples: Worldwide shortages and shutdowns damaging multiple supply chains, patient surges overwhelming the medical system, and new demands overwhelming the public sector’s social safety net infrastructure. This time, we’re measuring the shortfall in trillions of dollars, not billions, and we’re seriously undermining the free enterprise system.

Functioning free enterprise requires a strong relationship between risk and reward. If someone takes on the risk to create a new market offering and it works out, they reap the reward on their investment. At the same time, if the undertaking fails, individuals lose what they put at risk. The market punishes mistakes, up to and including bankruptcy.

That relationship is beginning to break down. People, companies, and even whole industries that removed the slack from their systems — increasing their risk — did not face the consequences when their shock-less companies hit potholes. Financial institutions were deemed “too big to fail” and the auto industry was deemed too important to the economy during the Great Recession, so we saved those sectors and their investors.

Now, we’re seeing new strains during the pandemic and we will see if larger organizations will receive support at the public’s expense. The early signs are not promising. The airlines received billions in direct support, with many other industries receiving indirect assistance. For example, over half of the PPP support — federal money targeted at smaller companies to keep employees on payrolls — went to the largest 5% of applying companies. That left 95% of the targeted companies to fight over the remaining assistance — far from the intended results!

The trend could continue as leaders pull even more slack out of our systems after we recover. Adoption of virtual meetings will pull money out of travel and office space budgets. This will cause more disruption in the economy, blur the lines between work and home life, and restrict the opportunities for in-person collaboration, potentially leading to reductions in our ability to innovate. Cost drivers will reverse the current reshoring efforts around critical strategic manufacturing and our exposure to foreign risks will increase.

Economic success requires a more sophisticated strategy than pushing Lean to its limits and eliminating all slack from our systems. Future strategies must include flexibility to address unforeseen disruptions, resources to nourish a thriving ecosystem, and investments to secure a brighter future. Market forces are critical to our success, but not sufficient to address the more complicated challenges we face.

Eliminating slack from our economy limits our flexibility to address unexpected disruptions, upsets the fundamentals of the free enterprise system, and increases the risk of foreign threats to our way of life. We need to rethink our approach to efficiency within our systems to build a secure and thriving future for all of us.

Let’s give ourselves a little slack!

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