Efficiency Can Kill Your Startup
Optimising a part of a system often results in sub-optimising the system as a whole
There is a real danger in relentlessly seeking cost-savings and efficiency in your company. The problem is that often as we optimise part of a system by making it more efficient we sub-optimise the system as a whole. This idea is explained as the Doorman Fallacy described by Rory Sutherland:
The ‘doorman fallacy’, as I call it, is what happens when your strategy becomes synonymous with cost-saving and efficiency; first you define a hotel doorman’s role as ‘opening the door’, then you replace his role with an automatic door-opening mechanism.
The problem arises because opening the door is only the notional role of a doorman; his other, less definable sources of value lie in a multiplicity of other functions, in addition to door-opening: taxi-hailing, security, vagrant discouragement, customer recognition, as well as in signalling the status of the hotel. The doorman may actually increase what you can charge for a night’s stay in your hotel.
When every function of a business is looked at from the same narrow economic standpoint, the same game is applied endlessly. Define something narrowly, automate or streamline it — or remove it entirely — then regard the savings as profit.
Excerpt from: Alchemy: The Surprising Power of Ideas That Don’t Make Sense by Rory Sutherland
As stated in this excerpt efficiency is a very narrow economic dimension. It is defined by the amount of resources needed to execute your process. Low efficiency means that you require a comparatively high amount of resources to execute your process (and vice versa). It does not look at the result of the process, which we define as effectiveness:
Effectiveness is the capability of producing a desired result or the ability to produce desired output. When something is deemed effective, it means it has an intended or expected outcome, or produces a deep, vivid impression. (Source: Wikipedia, where else :-p)
The system that describes the relationship between efficiency and effectiveness is called productivity. The Doorman fallacy describes a system where Efficiency increases but as a result Effectiveness goes down. This results in a decrease in productivity. In this system of productivity there are 4 scenario’s:
- Scenario 1:
Low Efficiency + Low Effectiveness = Declining business activity
- Scenario 2:
Low Efficiency + High Effectiveness = Unprofitable growth
- Scenario 3:
High Efficiency + Low Effectiveness = Unsustainable profitability (Doorman Fallacy)
- Scenario 4:
High Efficiency + High Effectiveness = Sustainable profitability
As a founder you should always focus on Effectiveness first. This usually means that a startup ends up in scenario 2. Which is fine as long as there are people willing to finance that growth. There always comes a point where a startup has to start optimising their process and look at the efficiency of the business to become profitable. This is where the Doorman fallacy becomes a real risk for your business. If you don’t fully understand why your company is effective you might loose what made you successful in the first place.
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