The Next Industrial Revolution

Executives rarely question their ability to notice the value available to their businesses. They might admit they leave a small amount of opportunity on the table, but they cannot imagine overlooking the routine waste of 15 to 20 percent of their earnings. It’s impossible. Someone would notice.

Unless “noticing” is fundamentally flawed. It is. A growing body of Nobel-winning research is charting the deep, predictable flaws in human perception, or “noticing.” Executives in every business instinctively overlook wasteful work methods and then scoff in disbelief at the value of the related improvements. It’s not intentional. It’s just the way our brains are wired. It’s an opportunity but only for executives who are willing to question their ability to notice business value. 

The most valuable oversights are concentrated in the growing legions of office workers, or knowledge workers. They represent 50 percent or more of all employees in developed economies. Their needlessly inefficient work methods erode 15 to 20 percent of hard-won, business-wide earnings – an untapped revolution in productivity. But try to point it out. Everyone will assert that an oversight so large is impossible. Reclaiming these lost earnings begins by overruling conventional perception and its entourage of overconfident biases. 

It has always been thus. Revolutions in business productivity have always required revolutions in perception. 

Two centuries ago, economist Adam Smith described a new way to make straight pins. Since ancient Egypt, each pin maker performed all steps from start to finished product. Smith told how innovators dedicated individual workers to each step. They became single-step specialists. Daily production skyrocketed from about 20 pins per worker to thousands. 

One century ago, Henry Ford stumbled onto a new way to design his automobile factory. Instead of isolated islands of work, he accepted the novel idea of a moving assembly line. That perception reduced the number of hours it took to assemble a Model T from 12.5 to 1.5.

Around the same time, business thinkers like W.H. Leffingwell and C.C. Parsons called for the application of similar standardization techniques to office work. They were ignored. Over the past century, knowledge worker jobs have grown at a rate six times faster than total employment. Now it’s finally time to heed Leffingwell and Parsons’ advice.

This opportunity awaits yet another revolution in perception. 

Too Big to Notice

To find it, we must look in an unexpected place: the office. Compared to a factory, what goes on there is pretty much a well-intentioned free for all. That’s because we perceive that knowledge work involves an endless stream of diverse problems that require one-off solutions – no questions asked. That’s why we don’t analyze knowledge work the same way that we analyze factory work. That’s a mistake. We don’t notice that factory-style standardization and specialization can drastically streamline knowledge work. Instead, we accept the conventional wisdom that only new technology can deliver major improvement. 

We have overlooked a valuable clue from Peter Drucker, the management guru who identified the shift of work from manual to intellectual. In the 1960s, he coined the term “knowledge worker” to describe the new kind of laborer. He also foresaw the revolutionary opportunity: “The most important contribution of management in the 20th century was the fifty-fold increase in the productivity of the manual worker in manufacturing. The most important contribution management needs to make in the 21st century is similarly to increase the productivity of the knowledge worker.”

The Upstairs Factory

For two decades my firm has scrutinized office work. Our analysis of hundreds of thousands of white-collar jobs has revealed that, contrary to conventional perception, knowledge workers routinely perform similar, repetitive activities. In fact, we say they work in an “upstairs factory.” 

Moreover, their one-off work methods are breathtakingly inefficient. Roughly 40 percent of their activities are avoidable, and the remainder can be streamlined through standardization. And yet this opportunity passes virtually unnoticed. 

Combining this finding with public financial data, we estimate that this widespread oversight costs Fortune 500 companies around 20 percent of their earnings. The margins eroded by knowledge worker inefficiency amounted to more than $212 billion in forgone 2014 earnings – or roughly $4 trillion in shareholder value. That’s more than five times the market value of Apple Inc, the world’s most valuable company. 

But this is only part of the cost. Businesses yield control and ownership of work methods to individual knowledge workers. That means that many of the best methods go out the door when workers leave, and the company passes up the opportunity to capture and standardize best practices. 

Fixing the Upstairs Factory

Ironically, knowledge workers designed the factories and work methods for straight pins and the Model T Ford. But each Industrial Revolution stopped at the office door.

Here’s what knowledge workers recommended that improved factory work: Workers yield decision-making on their methods to engineers, who identify and measure best practices. Each worker performs specialized tasks in a workflow configured to be as continuous as possible. Products are standardized. Components are simplified and interchangeable. Work methods and product design are closely coordinated to eliminate waste. Everything is measured and recorded to prove what works best.

Over time, compiling and using this knowledge delivers what is called “the experience curve effect.” The curve shows gains in efficiency resulting from investment in work methods. These methods are perceived as the property of the business. Many are classified as trade secrets. Some are patented. The experience curve can represent decades or more of accrued learning in a business. It can deliver a formidable competitive barrier. Executives make every attempt to ensure that these valuable assets never leave.

Oddly, the same executives responsible for factory productivity gains conclude that a similar approach is unfeasible for the repetitive work of their white-collar employees. They believe knowledge workers must own their work methods. They can’t see an alternative. This same perception initially hindered progress in the factory more than a century ago. Back then, machinists were expected to make their own tools, improve their own skills and decide how they would do their work. History repeats. Opportunity knocks.

The long history of business productivity revolutions demonstrates that obvious improvements routinely go unrecognized – sometimes for thousands of years. For example, bricklaying existed for almost 10,000 years before Frank Gilbreth studied it in detail before World War I. He identified how unnecessary motions could be eliminated. When he began, a bricklayer was expected to lay about 350 bricks a day. Gilbreth’s methods delivered productivity of more than 300 bricks an hour – nearly an eight-fold increase. The winner of a recent bricklaying championship exceeded 700 bricks per hour.

Tribal Knowledge

Although knowledge workers standardize work methods for manufacturing workers, they don’t perceive that the same techniques might increase their own productivity. Their companies and shareholders seem to accept this viewpoint. Knowledge workers are allowed to design their own work methods and define their own criteria for success – often simply the completion of their tasks. 

This was the case for the new product launch process at a top ten global manufacturer of pharmaceuticals. Outsiders might assume that the words “new product” imply unique tasks that represent the essence of knowledge work: “non-routine problem solving…that requires creative thinking.” 

The reality is painfully mundane. Most of the launch work involves an unrecognized “assembly line” of routine reviews and sequential approvals. It also includes a mini “supply chain” to manufacture product literature and drug samples. The launch processes could directly benefit from replicating the company’s existing assembly line and supply chain skills. A century-old experience curve resides “downstairs” in the company’s world-class manufacturing factories. 

And yet the knowledge workers involved in these product launches handle each as if it were a unique, one-time event. Unlike the company’s traditional factory network, there is no industrial engineering group to design an “assembly line” for product launches. Virtually no process documentation exists. There are few written instructions. 

The company’s launches run on unwritten tribal knowledge. The natural process flow is continually reversed by numerous “bounce backs” among legal, art, advertising, sample packaging and medical affairs. The result: permanent excess staffing to handle rework perceived as normal; cost overruns from vendors for rush items and rework; occasional warnings and fines from regulators due to errors in product info; frequent failure of the product launch team’s supply chain to deliver the right sales collateral and drug samples on time to the right locations. 

Nobody would accept this chaos on a factory floor.

Yet running critical business processes on tribal knowledge is not unusual for knowledge workers. One of the world’s largest manufacturers of industrial door hardware operates its plants at top quartile efficiency. The products are specified and built to order. Despite the high levels of customization involved, its manufacturing engineers standardize the sub-components to gain efficiency and reduce cycle time. Unfortunately, most of these benefits are lost to the one-off methods that rule the upstairs factory of sales and customer service.

Inside sales staff and field service technicians operate with loosely defined work processes – tribal knowledge. Product manuals and pricing tables are not kept up to date. Records of existing customers’ installed products can be unreliable. Training is minimal and informal. As a result, it takes 10 percent longer to book and process a customer’s order than it does to manufacture the hardware. After two generations, small, new competitors are finally winning customers with drastically shorter lead times and slightly lower prices.  

A New Perception

By comparing the productivity management of manual and knowledge work, Drucker identified the solution. The way to meet his challenge of increasing the productivity of knowledge workers to the levels achieved by manual workers is simple. Copy what worked in factories. Managing knowledge work productivity can be similar to managing manual work productivity. 

How? Exploit the competitive power of repetitive activities. Build “upstairs factories” for the standardized tasks in sales, finance, scheduling, marketing and other groups. Invest in work methods to achieve gains in efficiency. Standardize where possible. Identify waste. Find its root causes. Eliminate where possible. Reduce what cannot be eliminated. Industrialize knowledge work. Own the work methods. Exploit the experience curve. Just like any other factory.

This will fly in the face of conventional perception. It will seem impossible. It will initially be disruptive and chaotic. But that’s how productivity revolutions feel until they are successful. At that point, another flaw in human perception takes over. It’s called the “hindsight bias.” It rewrites history from a “knew-it-all-along” perspective. The shock of the new is removed. The trial and error of improvisation disappears. Suddenly, the improvement appears inarguably obvious. The struggle for credit begins. Success has many fathers. 

Despite hindsight bias, the messiness of productivity revolutions has been well documented. Henry Ford overlooked the moving conveyor in his own foundry. Conveyors had been in use for a century when one of Ford’s machinists, Bill Klann, got the idea by reversing what he observed during a visit to a slaughterhouse that used conveyors for “disassembly.” 

A member of Ford’s inner circle, “Cast Iron Charlie” Sorenson, summarized how the company stumbled through its revolution: “Henry Ford had no ideas on mass production. He just grew into it, like the rest of us. The organization was continually experimenting and improvising to get better production.” 

Industrialization opportunities are everywhere in knowledge work. They will be realized as fast as executives can reimagine and reinvent the way people work. In the end, fixing the work will be easier than overcoming the flaws in perception that hide the opportunity. 

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