The Efficiency vs. Effectiveness Debate Continues

We here at VeraSage never shy away from folks who disagree with us. We learn more from those who disagree with us rather than those who agree.

Jim Caruso, a CPA colleague, recently left four comments on four different recent posts.

Rather than replying to them individually, I wanted to start a new thread so others could chime in with their experience.

This just goes to show how controversial—and difficult to comprehend—this entire efficiency vs. effectiveness debate truly is for firm leaders.

Here’s Jim’s first comment to my post The Seven Moral Hazards of Measurement:


I agree with much of what you wrote and with the general thesis that metrics have dangerous limitations.

However, I continue to believe that, in general, efficiency cannot possibly be (and does not need to be) completely ignored in order to achieve effectiveness. One sentence in your post that I particularly disagree with is this: “Efficiency and effectiveness cannot be balanced like tires because they are entirely different things.”

Balancing entirely different things is one of the critical success factors for good leadership. CEOs have to balance short-term profitability with longer-term growth initiatives. CPA firms have to balance immediate client service needs with longer-term business development opportunities. Managers need to balance day-to-day urgencies with longer-term improvement initiatives. We all have to balance work priorities with family priorities, or the need for time to ourselves with time for friends and loved ones. The examples are endless.

I reject this premise of balance, Jim. Let’s hear what David Whyte, a corporate poet (and author of many excellent works) has to say in his book The Three Marriages: Reimagining Work, Self and Relationship:

Poets have never used the word balance, for good reason. First of all, it is too obvious and therefore untrustworthy; it is also a deadly boring concept and seems to speak as much to being stuck and immovable, as much as to harmony. There is also the sense of unbalancing that must take place in order to push a person into a new and larger set of circumstances.

My mentor, George Gilder, says this with respect to work/life balance:

One of the things that really makes me laugh is when I hear about the “workaholic.” Workaholics are what the make the world go. Show me a success in any field, and I’ll show you an obsessive. If your life is “balanced” by languid afternoons at the museum, you cannot develop a new business, break an important story, or make a contribution to the world. …Our task on earth—laboring in the service to others—can only be satisfied thru hard and unbalanced work.

My VeraSage colleague Dan Morris wrote that “Work-life balance is politically correct for ‘slacker.'” Dan has a point.

This is why management thinker Charles Handy uses the metaphor of a “portfolio life”—putting together a packet of different jobs, customers, and types of work.

He also dismisses the very concept of work-life balance as misleading “because it implies that work and life are two different things.”

Nobody is suggesting that you “completely ignore” efficiency. We aren’t Luddites here at VeraSage.

I am arguing that efficiency is not a competitive advantage since it can be so easily copied by your competition.

In addition, if you employ knowledge workers, efficiency gains will take place in the normal course of experience.

I will be more “efficient” doing my 100th tax return than my first few. If this is not true among knowledge workers, you have made a hiring mistake.

Moreover, measuring the “efficiency” of knowledge workers based upon time spent is meaningless. Was Einstein efficient? How about Paul McCartney, is he efficient? How would you know?

What matters is the results of their output, not the efficiency of the inputs. I don’t care how long it took Jonas Salk to develop the polio vaccine; I’m only glad he did.

But even beyond that Jim, economists have taught us for centuries that there’s no such thing as “generic efficiency.” It all depends on what your objectives are and how much you are willing to spend.

Jim’s next comment was to Ed Kless’s post On Timesheets and Cost Allocation:


I am completely on board with the negatives of hourly billing. While I know the VeraSage folks don’t like to talk about “efficiency,” one of the most succinct ways I use to explain to others the folly of hourly billing is that it rewards inefficiency and punishes efficiency (from the service provider’s perspective; from the client’s it’s obviously the opposite).

But I still cannot see time-tracking being totally irrelevant. You mention target costing, which I agree is the appropriate pricing practice. But how can you plan your time requirements in advance if you have no historical data on how long certain activities take?

I run an outsourcing practice that provides a fully-managed accounting function—what ADP does for payroll, we do for the entire finance function, including the CFO/controller roles for emerging growth companies. If I have no idea how long it takes to do a weekly A/P check run of 50 payments, how can I plan the resource requirement in advance and do target costing? Regarding your comments on project profitability, how can I say “who cares” if over the past year it took a full-time equivalent (FTE) to serve the client while the price I received failed to cover an FTE’s salary?

I will let Ed respond to this in more detail.

But Jim, you have an empirical problem with this line of argument:

There are over 1,000 firms out there that don’t operate with timesheets.

Please don’t argue that it can’t be done. It is being done, and more and more firms are ditching timesheets every single day.

Don’t you think they’ve answered all of your questions with superior methods?

If I were you, rather than arguing that it can’t be done, I would examine how they are doing it (some of their stories our in our Trailblazers section).

When you see empirical evidence that contradicts your world-view, do you change your mind, or do you stay wrong?

Jim’s next comment was on my Modern Measurements post:


The Ritz-Carlton example is compelling. However, Ritz-Carlton’s strategic positioning is based upon the type of stellar service you describe and measuring “efficiency” might indeed be counter to that. However, a Super 8 motel might be appropriately concerned with efficiency, as their strategy is based on being a low-cost provider.

I’ll wager that BOTH chains are concerned with efficiency in certain business processes, such as how many rooms are made up daily by each attendant. In this regard, Ritz-Carlton may have a very different target metric than Super 8, but their respective economic models cannot possibly fail to consider it. The Ritz-Carlton housekeeping staff person might go out of her way to do something special for a guest, but either that will be the exception to the rule and barely move the measurement, or it will be commonplace enough to be part of the historical data and make its way into the future targets. I cannot imagine that Ritz-Carlton would not care if for some reason they had to increase the housekeeping staff by 10% at a certain property because fewer rooms per staff person were being cared for when compared to the corporate-wide averages.

I would wager that the Ritz-Carlton maid is just as efficient as the Super 8 maid over time. So what?

The point is, that Ritz-Carlton is focused on effectiveness.

If you want be the low-cost provider in your sector, more power to you. Wal-Mart and Southwest are very efficient.

However, they are also very effective, otherwise no amount of efficiency would matter.

Again, I cite Peter Drucker from his book, People and Performance:

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 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.

Efficiency concerns itself with the input of effort into all areas of activity. Effectiveness, however, starts out with the realization that in business, as in any other social organism, 10 or 15 percent of the phenomena—such as products, orders, customers, markets, or people—produce 80 to 90 percent of the results.

The other 85 to 90 percent of the phenomena, no matter how efficiently taken care of, produce nothing but costs (which are always proportionate to transactions, that is, to busy-ness).

A business is an interdependent system, and to argue that by increasing the efficiency of each component (or each hour) is the equivalent of arguing you can build a world-class car with the best parts of a Ferrari, BMW, Porsche and Lamborghini.

You could not; you’d have a pile of very expensive junk, since each car is interdependent, and not simply the sum of its parts.

Jim’s last comment was on my post Wal-Mart Audits?:

[Ron writes]: “Efficiency is no basis for competitive advantage, since your competitors can adopt the same tactics.”

Maybe so, but that doesn’t mean it’s not important. Assuming equal effectiveness (again I believe it’s a balance between the two), if it takes my firm 20 people to handle a portfolio of audits that another firm can handle with 15 people, how can that not be relevant?

Efficiency might not be a competitive advantage, but that doesn’t mean it’s not necessary. The first gas station that installed “pay at the pump” technology had a competitive advantage over the gas station across the street that did not.

So when gas station #2 decides to implement the same technology, it does not give them a competitive advantage; but still they have no choice but to do it, just to stay even and survive.

Which brings up another point. Look again at the statement, “Efficiency is no basis for competitive advantage, since your competitors can adopt the same tactics.”

This can be said about many other tactics that your competitor later copies, such as the gas station example above.

Again, no one is arguing that you not pay attention to efficiency, just that’s it not a competitive advantage.

If your firm takes 20 people rather than 15 for a portfolio of audits maybe it’s because your people are delivering a hire level of customer experience, delivering more value-added services, etc.

If you price it right—meaning your customers are willing to pay for it—having 20 people may be very economically viable, and more profitable.

Excellent customer service is incredibly hard to duplicate, which is why Nordstrom, Ritz-Carlton, Amazon, and Zappos have such effective business models.

They are not obsessed with efficiency, but rather effectiveness.

Jim, I’m afraid you are far too focused on internal metrics at the expense of outputs, results, and value.

You can’t price for 100% efficiency, especially in a knowledge firm such as your.

But it’s true in any business. This is a lesson Ben & Jerry (of ice cream fame) learned early in their career.

It was an epiphany for them, and I hope one day it will be for you.


  1. Ron,

    I appreciate you taking my comments seriously enough to address them in a new blog post, especially during a holiday weekend!

    You wrote, “Nobody is suggesting that you ‘completely ignore’ efficiency. We aren?t Luddites here at VeraSage. I am arguing that efficiency is not a competitive advantage since it can be so easily copied by your competition.”

    Then maybe there is no real disagreement between us. But my impression from your other writings was that you were saying efficiency had no relevance whatsoever. I agree that it does not provide competitive advantage (at least not in a professional knowledge firm), and my only intent was to point out what Drucker more eloquently does in the line you quoted: “Even the healthiest business, the business with the greatest effectiveness, can well die of poor efficiency.”

    You wrote, “I will be more ‘efficient’ doing my 100th tax return than my first few. If this is not true among knowledge workers, you have made a hiring mistake.” I agree. But how is a firm to identify such situations if they have no efficiency-related metrics in place whatsoever? Should an employee be given no guidelines whatsoever on how long the return should take to prepare? Should they then be fired based on some subjective notion of it takingn too long, rather than them having some objective criteria by which their shortcomings can be quantified? (Of course, if the return took longer to prepare because new opportunities for tax savings were found, this would have to be considered. This is where management judgment comes in to play. I would never recommend that efficiency metrics be used in a vacuum without such judgment.)

    I like your response to my fourth comment (in response to “Wal-Mart Audits”). This gets back to strategic positioning (e.g., Tom Porter’s writings) and related price points. But if you go back to my illustration on 20 people delivering on a porfolio of audit projects versus 15, my point is that in this economic environment, it’s tougher and tougher to find clients that are interested in paying for the higher level of service that comes along with the 20 people. And it’s possible that 20 is too high, that nobody will pay for it, and that the real number even for superior customer service is, say, 18 people not 20. That’s target costing after all – what price is the market willing to bear, and how do we deliver profitably? Enough attention needs to be paid to efficiency to figure that out; you can’t just throw infinite resources at delivering services and then expect customers to pay for it – which is a key reason that billable hours make no sense.

    Candidly, I bristled a bit at the beginning of your post, when I read your response to my comments about “balance.” Your response focused only on my example of balancing work and family priorities, and included three different quotes on the virtues of hard work and why “work/life balance” is a lot of bunk. I actually agree with everything you wrote and am particularly happy to know about the quotes you provided because I have been called a workaholic myself and now I have material with which to defend myself! My beef is that anyone reading this is going to think *I* am a “slacker” (i.e., the Dan Morris quote) being reprimanded for advocating work/life balance. I was NOT doing so; I simply offered work and family obligations as but one example of mutually exclusive, conflicting priorities that need to be balanced; this was just one of several examples offered in my comment, short-term vs. long-term profitability being another of the several provided. Just wanted to set the record straight on that one 🙂

    Thanks again for the thoughtful response Ron.

    Best Regards,

  2. Reggie,

    Great comment. That’s all I had been trying to say, but you said it much better: that you “cannot sustain an effective firm without efficiency,” therefore it “really isn’t effectiveness VERSUS efficiency”.

    I also think you had a great insight: we may now be over-compensating in the emphasis on effectiveness, in order to advance the Firm of the Future concepts against the inertia of decades of efficiency-based measurement!

    Best Regards,
    Jim Caruso

  3. Jim, Reggie,

    Thanks so much for your comments, this is great! Especially since it’s over a Holiday weekend.

    Jim, I knew you were no slacker. My point is that “balance” is the wrong word entirely. How do you “balance” poison with food? I stand by the poet’s comment on the word being uninspiring.

    Maybe “tradeoff” is a better word. Google giving people 20% time is not efficient, it is however effective.

    But I think you both are ignoring far larger arguments:

    1) There is no such thing as “generic efficiency.” Please respond to this, and read my post quoting Thomas Sowell for why this is so.

    2) You can’t measure the “efficiency” of a knowledge worker. If you think timesheets do this, you are crazy. Noble prize-winning economists can’t do it, I doubt we can.

    3) All measurements are judgments. What should you measure?

    4) “Efficiency” in a knowledge firm is comprises of: a) Using the latest technology; b) Climbing down the learning curve. This is where 90% or more of efficiency gains come from. This is why Lean/Six-Sigma is a joke in a PKF.

    5) Efficiency is antithetical to innovation. You want errors, thinking time, etc., to foster new ideas. If all you’re doing is increasing efficiency you are hindering innovation–the source of growth and pricing power.

    I know you like Drucker’s quote on efficiency, but you have to listen to what he says on effectiveness. Businesses don’t thrive–or even survive–based on efficiency. You have to be doing the right thing. Drucker wrote “The Effective Executive,” not “The Efficient Executive.”

    There are too many examples of where efficiency is purposefully lowered to get increased effectiveness–from pianos in Nodrstrom, Ritz-Carlton escorting guests, Google 20% time, Disney doing the 7 Dwarfs, not the 3 Dwarfs, and myriad more.

    I can’t think of one example where an increase in efficiency increases effectiveness. Come up with one for us, but realize this is a lot harder than you think.

    Reggies, it is definitely efficiency vs. effectiveness. They are different things. Again, because there is no such thing as “generic efficiency.”

    I also reject entirely your claim that we have swung in too far towards effectiveness. Are you kidding? Most firms are obsessed with efficiency, not effectiveness–witness all the six-sigma consultants, etc. Your firm’s costs are fixed, mostly labor and rent. Tell me how you can cut costs by being more efficient? If a CPA takes 10 rather than 20 hours to do a task, your costs don’t change one penny. Don’t argue opportunity cost with me, because that has nothing to do with efficiency. Deal with the issue.

    If your costs are fixed, then you should worry about customer yield. This is what airlines/hotels/cruise ships do. They don’t do cost accounting, or efficiency metrics. They worry about yield–huge difference.

    Jim, your question of what metrics to use to figure out the efficiency of the knowledge worker goes right to the heart of this debate. There is no “objective” metric, there is only judgment.

    We like turnaround time. As Ed Kless has eloquently stated many times, it is “duration” that matters, not “time spent.” Sure, you can estimate time spent, but what if your intelligent knowledge worker can do it in half the time? Or what if it takes 3x longer? Do you know, just with the measure of time spent itself, whether this was efficient or inefficient? Without judgment, you know nothing.

    Get over the idea that you have to be precisely wrong with a metric. You have to be approximately right with a judgment. Again, read Drucker on this.

    My dad’s a barber. It takes just as long today to cut hair as it did in the 1950s–actually, longer because he washes it and styles it. Less efficient? Yes. But people are willing to pay for it. An example of why this is not a balance. If my dad focused on only doing cuts faster, he would have been out of business a long time ago.

    You guys need to answer my 5 points above, otherwise we are not furthering this debate. We agree that you can’t ignore efficiency; but effectiveness is where all competitive advantage lies. Without it, you are a buggy whip–efficient, but not effective.

  4. Oh, let me add a 6th point:

    6) The thousand + firms that operate without timesheets. Some of these firms are the most profitable in their sector. How do they do it?

    I still for the life of me don’t know how you can ignore this empirical evidence.

  5. C Davis,

    Great comments, and you bring up an example we’ve discussed internally–McDonald’s and I would add, Wal-Mart. These are possible examples of an increase in efficiency causing an increase in effectiveness, but I’m still not convinced (the effective output hasn’t changed). But I’ll concede it for now just to move on. And I agree that saving customer time is important, but I would classify that as effectiveness, including the efficiency you have to gain to achieve it.

    I will not concede your Ritz example. The CRM system may actually cost more than the efficiency gains, but Ritz is willing to suffer that loss to increase effectiveness and customer loyalty. Furthermore, if I spend 15 minutes chatting with a desk clerk about dinner recommendations, golf courses, sight-seeing, etc., I may very well be happy with that. To say that a faster check-in is ALWAYS better falls prey to the measurement fallacy (and Boyle’s Law), as witness call centers who measure how long a call takes rather than did the customer get satisfied, or a grocery cashier timed on how long it takes to ring up a customer. These make for lousy customer experiences.

    I applaud you for focusing on what the customer wants, which is what matters. And again, no one is arguing against efficiency gains. I’m only arguing that they take care of themselves through technology (e.g., McDonalds and Wal-Mart investing in better ways to do things) and the learning curve. They provide no competitive advantage.

    We are in agreement about the fallacy of timesheets to measure efficiency.

    Now let me issue another challenge. Let’s only talk about artists, or knowledge workers, where you concur about efficiency over writing a song. I say the same is true with CPAs and lawyers and any other knowledge worker.

    After all, artists could increase their efficiency with paint-by-numbers. It would just produce really crappy art.

    Where in a knowledge environment does an increase in efficiency increase effectiveness? We aren’t making hamburgers, we are using the iterative process of the mind.

    I have cited dozens of examples where a decrease in efficiency has increased effectiveness, from Google time to investments in education.

    Let me offer one more reason why efficiency shouldn’t be the talisman in a knowledge firm: errors. Lots of good ideas/innovations come from mistakes. If we strive for a perfectionist culture, we drive out serendipity and experimentation, and hence lose effectiveness.

    You can see how difficult this topic is to explain, so I appreciate your challenges. This is why we ask people to think WITH us, not LIKE us.

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