Great Moderates In History?

Evolutionary biologists have proven that the more adapted (i.e., comfortable) you are in your existing environment, the less able you are to adapt to environmental changes.

Struggle is good for us. Rigidity is what organizations manifest when they are faced with either superior competition or outdated business models.

This is the history of business. New ideas, inventions, and business models from the tinkerer in the garage change the world, while rendering obsolete the existing modes of production, infrastructure, and business models.

The automobile replaced the horse and buggy, the calculator replaced the slide rule, and the personal computer replaced the typewriter, iTunes replaced CDs, and so on in a never-ending “perennial gale of creative destruction,” as described by economist Joseph Schumpeter.

Harvard professor Clayton Christensen writes:

Generally, the leading practitioners of the old order become the victims of disruption, not the initiators of it.

Change and creativity always take us by surprise. If it didn’t, we wouldn’t need it, because we could simply plan on it and incorporate it into our existing strategies and processes. Nassim Nicholas Taleb makes this very point in his book, The Black Swan:

We do not know what we will know. Invention and creativity is always a surprise. If we could prophesy the invention of the wheel, we’d already know what a wheel looks like, and thus we could invent it.

The professions, however, have been slow to adapt to the realities of an intellectual capital economy. Never before has this mentality been such a hindrance to success in today’s rapidly changing, globalized marketplace.

Business Model Innovation

In a meeting with professor Clayton Christensen, former Intel CEO Andy Grove made the point “that disruptive threats came inherently not from new technology but from new business models.” Perhaps this is why Grove titled his own book, Only the Paranoid Survive.

I am defining a business model as follows:

How your firm creates value for customers, and how you monetize that value.

Clayton Christensen’s partner in his consulting firm Innosight is Mark W. Johnson, author of the compelling book Seizing the White Space. He points out that most successful innovative business models are forged by start-ups.

Johnson studied approximately 350 business model innovations in the past ten years, with more than 30 percent being enabled by Internet technology. Fourteen companies founded since 1984 have entered the Fortune 500 between 1997 and 2007 through business model innovation, including:

  • AutoNation
  • eBay
  • Google
  • Qualcomm
  • Starbucks
  • Yahoo!

Thinking about the history of innovation, creative destruction, and business models in the context of professional knowledge firms, in combination with the radical business model proposed by VeraSage—from “We sell time” to “We sell intellectual capital”—the diagram provides an interesting look at where any firm can be at a given point in time. Since competitive advantages are built based on effectiveness, not efficiencies, I have chosen to highlight each as the axes of the diagram.


Luddites: Firms that resist technological advances and other innovations that are merely table stakes risk being Luddites. They have both low efficiency in doing things right, and low effectiveness at doing the right things—not a bright future.

Fortunately, not many firms are in this category. If you are here, you are dead already and the funeral is a mere detail.

Buggy Whips: Usually when an industry is at the apogee of its efficiency, it is at risk of being made obsolete by new technologies or business models. As Peter Drucker said, no amount of efficiency gains would have saved the buggy whip manufacturers from the automobile.

Innovators: As George Gilder wrote in Forbes, “Knowledge is about the past; entrepreneurship is about the future. If creativity was not unexpected, governments could plan it and socialism would work. But creativity is intrinsically surprising and the source of all real profit and growth.”

Innovators are firms that are willing to invest some of today’s profits into tomorrow, while at the same time sacrificing efficiency for effectiveness.

Innovation, creativity, and Total Quality Service are the antithesis of efficiency—ideas such as Google Time (where Google employees can spend 20% on innovation), experimenting with new ideas, investing in education, all reduce efficiency metrics.

But if firms do not make these essential investments they are simply coasting on their existing intellectual capital, and in today’s economy, knowledge becomes obsolete more rapidly.

Humpty Dumpty: This is a precarious future. This represents firms that are highly efficient and effective.

I am arguing if you are here, you better be sliding back to the Innovators position and start sacrificing some of that efficiency for innovation and making the firm more valuable to its customers.

Humpty Dumpty eventually falls and ends up like the industries mentioned under Buggy whips. Efficiency is not the answer. Effectiveness is.

Firm of the Future or Firm of the Past?

Embracing a new business model requires leadership and vision. It requires knowing you are doing the right things, not just doing things right.

It requires focusing the firm on the external value it creates for the customer and simultaneously building the type of firm people are proud to be a part of and contribute to—the sort of organization you would want your son or daughter to work for.

It requires a sense of dignity and self-respect that you are worth every penny you charge, and you will only work with customers who have integrity, whom you enjoy, and respect.

It requires an attitude of experimentation, not simply doing things because that is the way it has always been done.

It requires less measurement, less fear, and more trust. It requires boldness and risk-taking—there has yet to be a book written titled Great Moderates in History.

As science fiction writer William Gibson quipped, “The future is here. It’s just not widely distributed yet.”

Skeptics will call for an incremental approach, which is how they maintain the status quo.

But how will these optically challenged skeptics make incremental changes to an existing business model that is already dying? By making it incrementally less dead?

The late economist John Kenneth Galbraith wrote, “All successful revolutions are the kicking in of a rotten door,” not—I would add—merely oiling the hinges to make it swing more efficiently.

There is no limit to what we can achieve, as long as we do not lose faith in ourselves. It is the difference between remaining a firm of the past, or, like a chrysalis, emerging as a firm of the future.

The choice is yours.


  1. Hi Jim,

    Thanks so much for your comment. In addition to Taleb’s point about scalable, we also discuss how a billable hour is a “rival asset” whereas intellectual capital is a non-rival asset, meaning we can all possess it without it being diminished–like the alphabet.

    This is what makes IC scalable, and this is what is so deeply flawed about a business model based on “We sell time.” This distinction is based upon the work of Paul Romer, the economist who has done pioneering work on New Growth Theory.

    But your questioning of the effectiveness vs. efficiency debate will draw incredible fire from ALL the minds here at VeraSage. Rather than pointing you to all our posts on this very topic, and my books, my hope is you come to the same conclusions we have, but on your own.

    I will say this: This is more controversial than the billable hour vs. Value Pricing, and we get more push back on this then any other topic we discuss. You know us, we don’t shy away from a debate.

    In the spirit of trying to get you convince yourself, I will ask you two simple question:

    1) What is the difference between effectiveness and efficiency.

    2) Please tell me how you measure the “efficiency” of your knowledge workers.


  2. Ron,

    I know your questions are designed to get me to convince myself, so I am sure these knee-jerk responses will probably fall short of what you are looking for, but in the spirit of dialogue rather than introspection here are my first responses:

    1) Effectiveness vs. efficiency can probably be boiled down to, respectively, WHAT gets done (results) versus HOW(fast)it gets done

    2) I know what you are getting at here – how can you possibly measure the “efficiency” of knowledge or intellectual capital? – which of course I agree you can’t. However, while we like to think we are thought leaders here at my firm, neither are we a think tank where we are generating brilliant creative ideas all day. To some degree, clients are paying us to do a job that they would otherwise pay for internal hires to do. If it takes one of my senior accountants five days to close a client’s books and prepare its financial statements, and I can therefore only give her two clients to support before hiring again to support a third client, whereas another senior accountant can close a client’s books in just three days and I can give her three clients to support, the efficiency of the second accountant is more favorable to the economics of my practice than the first. Meanwhile, if the client claims their internal staff can close the books in just two days, then I won’t get the engagement with either of the senior accountants assigned to it. Unless, of course, I double the resources in the background and run at a loss. In summary, if it’s taking my group too long to perform typical accounting tasks, my payroll will become bloated and we will not make any money – especially under value-pricing, where the hours required do not affect what the market is willing to bear as a monthly price. So I think your question is phrased a bit unfairly; it is impossible to measure the “efficiency” of a knowledge worker WHEN THEY ARE ENGAGED IN KNOWLEDGE WORK, such as solving a particular client problem or proactively looking for innovative solutions. But like it or not, there are times that knowledge workers have to perform routine tasks and activities that do indeed have to have their efficiency measured.

    I also refer to David Maister’s book, “Managing the Professional Service Firm”, where he distinguishes between practices that are expertise-based, experienced-based and efficiency-based. The latter two practices specifically recognize that clients do not always need brain surgeons; sometimes they just want a firm that can do a particular type of job reliably and effectively, yes, but also more quickly than they might be able to do it internally due to established systems and processes. Now, you might argue that this comes back to what the client values and that reliability and convenience are what he is really paying for. But delivering on those types of projects repeatedly, and profitably, requires that I be concerned about my own group’s efficiency.

    Finally, I will add an analogy; if a taxi cab company charges its customers based on the mileage between two locations, is it not important for management to know if drivers are getting lost and actually driving 1.5 miles for every mile they are being paid, wasting time and fuel? Is it not important to realize that if they take two hours to complete what should have been a one hour trip, they will get paid for just one, one-hour trip during that two-hour period instead of getting paid for two, one-hour trips during the same period?

    Thanks for the opportunity to join the debate!


  3. Thanks Jim, not bad for off the top of your head!

    Let’s start with definitions, commonly accepted and written by Peter Drucker and Stephen Covey:

    Efficiency = Doing things right. Always a measurement.

    Effectiveness = Doing the right things. Always a judgment. (This is an enormous difference. It’s much easier to count the bottles than describe the wine).

    Your example of the two employees and the time it takes is correct as far as it goes. Nobody is arguing you should be deliberately inefficient. We are arguing something much, much different.

    That efficiency is a normal part of being a sentient human being. I’m going to do my 100th tax return quicker than my first few, if I’m a thinking person. This is called the learning curve, and it is a well-documented effect.

    What if we are efficient at doing the wrong things? Then customers aren’t going to care about how quickly you did them. If the Taxi gets me to the wrong destination fast, I will be very upset.

    A competitive advantage cannot be built on efficiency, only effectiveness. Your competition can match your efficiencies–hire just as good talent, deploy just as good technology, enjoy the same learning curve, etc.

    What makes a PKF valuable lies in its effectiveness.

    There’s much more to say, but let me quote Drucker, whom I accept much more than Maister on this topic:

    “Efficiency means focus on costs. But the optimizing approach should focus on effectiveness. Effectiveness focuses on opportunities to produce revenue, to create markets, and to change the economic characteristics of existing products and markets. It asks not, How do we do this or that better? It asks, Which of the products really produce extraordinary economic results or are capable of producing them? . . . It then asks, To what results should, therefore, the resources and efforts of the business be allocated so as to produce extraordinary results rather than the ‘ordinary’ ones which is all efficiency can possibly produce?

    “This does not deprecate efficiency. Even the healthiest business, the business with the greatest effectiveness, can well die of poor efficiency. But even the most efficient business cannot survive, let alone succeed, if it is efficient in doing the wrong things, that is, if it lacks effectiveness. No amount of efficiency would have enabled the manufacturer of buggy whips to survive.”

    “Effectiveness is the foundation of success…efficiency is a minimum condition for survival after success has been achieved.” [end quote]

    Efficiency is a hotel’s ability to clean rooms and change the sheets. So what? No customer is going to give them credit for that. The competitive advantages lie in being effective, like Ritz-Carlton escorting you to the location when you ask a question. That’s not very efficient, but it is highly effective.

    I’ll give you another economic principle to contemplate: There’s no such thing as generic efficiency. It all depends on what your purpose, objectives, and goals are, along with how much you are willing to pay. Can you think of any examples where companies/firm give up efficiency for effectiveness?

    So, we aren’t talking about your routine daily processes here. I’m assuming any business can do those. I’m asking what makes you effective. That’s where you create value. Efficiency is table stake–the minimum you need to be in the game. It offers no increased chance of winning.

  4. Hi Ron,

    Sorry for the long delay between comments.

    I do not disagree with a single thing you wrote in your last comment. My only point of contention is that in your original post, and in your first reply to my first comment, you seem to say that efficiency metrics are pretty much worthless because effectiveness is the critical success factor. As your most recent comment indicates, both in your own words and in the Drucker quote, efficiency will not give you a competitive advantage but the lack of it (at least an unintended lack of it within the context of the chosen strategy / business model) can be deadly. So how can you not measure it to keep an eye on this potential land mine? Echoing my first set of comments, the choice of metrics should not reflect a “one or the other” approach, effectiveness instead of efficiency. Once you have defined what “efficiency” means to your organization relative to the trade-offs inherent in your strategic positioning (e.g., the higher the level of customer service the less efficient in absolute terms you may want to be) I think the organization needs to track both effectiveness AND efficiency. The essence of leadership is identifying the acceptable trade-offs and appropriately balancing both metrics.

  5. Hi Jim,

    Excellent, now we are making progress.

    I stand by my point of contention. There is not “balance” between efficiency and effectiveness; there is “tension” between the two. Why? Because they are different.

    Now, I’m hoping we can change this discussion to the efficiency of knowledge workers specifically. If we are, then how, specifically, do you measure the efficiency of a knowledge worker?

    Here’s another contention: For any sentient human being, especially knowledge workers, efficiency is going to be driven more by the learning curve (and technology) then by almost anything else you can do.

    A surgeon will be more “efficient” doing his 1,000 operation than his first. So what? This is natural if you have thinking human beings trying to do things better.

    What matters is effectiveness. I can cite hundreds of examples where a decrease in efficiency leads to an increase in effectiveness–from Google time, to pianos in Nordstrom, to Walt Disney not making Snow White and the Three Dwarfs.

    I have challenged the efficiency experts with one question: show me where an increase in efficiency leads to an increase in effectiveness. I’m still waiting for one example (it’s harder than it seems, trust me).

    This is because these are mutually exclusive things that are in tension.

    Efficiency is going to take care of itself, assuming the firm isn’t full of Luddites and makes technology investments. That can’t be said for effectiveness.

    There’s more to this, but I’ll wait to see how you process this. And remember the question: how do you propose to measure the efficiency of a knowledge worker. Since efficiency is always a ratio, what ratio are you proposing?

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