Engineering Life-Greatest Fraud Ever Perpetrated

Telling some stories and reminiscing about the foibles of working in corporations. Which serves to illustrate that we have bought the Greatest Fraud Ever Perpetrated.

The greatest fraud ever perpetrated upon our civilization is the myth that any and all businesses, no matter the scale, are generic; that the myriad of differentiating and salient features of all the different businesses are inconsequential; that the nature of the business has no bearing upon how the operator should operate that business. The fraud is further perpetuated by instilling the belief that there is a formula, a check list, a be-all end-all magical formula, a recipe, or a procedure which can be applied generically to all businesses and the result would be successful. The nature of the business: the kind of products make no difference because the magical management process is the same regardless of context or industry, it is just a matter of having a check list, crossing the t’s and dotting the i’s while disregarding all nuances of the business which defines that business.

Anyone who has ever worked in any kind of industry knows that the payoff of this approach has been disastrous for many businesses, both large and small, simple and complex; as well as for our society.

I was first exposed to this phenomenon at my very first job working for a division of what was once a Fortune 500 company. The product was motors, not commodity motors but special duty motors, engineered motors, not motors that can come out of completely automated factories but motors that are engineered and designed for specific applications. The motors are either very large or operate under difficult circumstances, like explosion proof or operating in challenging environments. A value-added business.

The president was a long-time corporate apparatchik of the highest degree. He worked his way up from being a lightbulb salesman to being the president of the lightbulb division. After that division failed under his eminent leadership, his corporate buddies applied the fraudulent myth and installed him as the president of the motor company. It was a mismatch from the very beginning. It would not have been so bad if he had bothered to learn the business, understand the product, the engineering, and manufacturing processes for what they are: interrelated and necessarily complex. But he proceeded to follow his System 1 (unthinking and reactive) instincts and tried to turn a value-added business into a commodities business. He thought lowering the costs, to the detriment of the product quality, but making up for the losses in volume was the key to his reinvention, just like when he was selling lightbulbs. His senior management informed him of the nuances of the low-volume high priced business that had been sustaining the business, to no avail. He moved manufacturing overseas, ignoring the extended shipping schedule that doing so would entail. In the end the motors were shipped via expedited air shipping rather than shipping by sea, at the cost of tens of dollars per pound, with each motor weighing a few thousand pounds. Everyone knew that life was going to be miserable as soon as they saw the Federal Express stickers on the motors sitting in the warehouse.

He made engineering create dummy parts that was designed to be used for all applications to cut back on the lead time for the motors, but those parts sat in the warehouse because they could not be tweaked to fit any of the custom solutions that the customers desired. The customers, being perspicacious consumers, specifically asked that their orders not be filled by these generic motors, no matter how much lead time was cut or how much financial incentive he carved out of the profits.

A few years after I left the company, the corporation sold the majority ownership of the motor division to the overseas manufacturing partner. The first thing they did was to move all the tooling that had been moved overseas back and started to manufacture back in the old plant, because they knew the business and knew this business model was unsustainable.

The president also dipped back into the commodity motors business even as corporate sold the commodity end of the motor business a few years before I joined the company, buying motors from overseas that fit the catalog descriptions but was a complete black box for engineering and manufacturing. That decision created a tsunami of repair backlogs and warranty costs because no one knew what was being sold nor how to fix what was broken.  

The man was placed in a difficult and challenging situation, as the motor business was evolving slowly away from the status quo. Anyone with an understanding of the motor business would have a hard time, but by putting someone who had no knowledge of the business nor the interest to understand the business enough to gain insight, the corporation made sure that they had to liquidate that business from their portfolio. Perhaps that was the intent.

At another one of my stops in the corporate world, the top management changes came along like a carousel on steroids. When I joined the senior management were all former engineers. A new CEO, who was an engineer decided that the engineers were too conservative and did not fit into the short-term profit-making model that came into vogue then, and whose hegemony of management thinking continues unabated to this day. He actually may have a point in that regard, as engineers are conservative by nature and are risk averse and reluctant to execute unless all uncertainties have been squeezed out of the decision, or they have assumed away all the uncertainties, rightly or wrongly. The focus of the company went completely away from engineering and manufacturing to veer towards marketing, finance, service, etc. The emphasis of course focused on the bottom line and not the top line, i.e. finding ways to cut costs over finding ways to add value to make profits. Moving manufacturing to non-union and then overseas factories became the norm. Warrantee costs skyrocketed as labor costs decreased, erasing the whatever margin that they had managed to carve out. Over time, as the workers overseas adapted to the manufacturing process and the quality of the products improved, the labor costs increased because those workers are now skilled, and they demand higher pay. I am not sure if the tradeoffs in costs were enough to justify to the management that the move was beneficial, I am pretty sure they convinced themselves that it was. Chances are that it probably was not, as manufacturing continues to migrate around the globe chasing cheaper labor.

At one point in time at this company, purchasing and logistics became the Queen Bee of management. It was determined that there were too many parts in the inventory, too many of them are duplicate parts, so they created a task force to decide on which parts were redundant and which ones were worth keeping in inventory. Many of the top engineers were pulled away from doing what they did best —  designing — to count nuts and bolts. Indeed, there was a significant reduction in the inventory. The unintended consequences were that many of the parts that were removed from inventory came from high profit, low volume products that the customers ordered less than once a year but paid a premium for those products. When the customers came to order those products according to their buying cycle, they were told that the company no longer carried the parts but if they could wait for the suppliers to replenish the parts, they could have it at a significant delay. Guess what happened? They went to a competitor that could deliver. I don’t know what the exchange in profits lost versus inventory savings worked out, but I am guessing that the advantages touted by those who did not understand the business was not as significant as they thought.

When Silicon Valley and the tech world was booming, the traditional companies actually opened their minds, mainly after seeing the profits rolling into the Silicon Valley. As is the wont of any hubristic egomaniac humans, and I don’t mean this behavior is limited to the tech billionaires, their secret magic formulas were foisted upon the business world. In keeping with the theme of this essay — the biggest fraud ever perpetrated — tech billionaires wrote books on how they did it; while their lessons are valuable and eye opening, in their context, those who drank the Kool-Aid of anyone-can-manage-any-business-if-they-knew-the-secret-formula fell into the trap.

The mantra that is most associated with that time is Fail Early and Fail Often.  The idea actually follows the scientific method: verify or refute your ideas quickly so that a decision can be made to move toward or rethink the ideas. It is the verify or refute portion that is problematic. In a tech environment, software and hardware tweaks are relatively simple to implement and test immediately. Once the idea has been verified or refuted, the process can continue. The problem is when decision makers who don’t understand their businesses try to implement and adapt the spirit of the idea while also being conscious of the constraints imposed by reality. It is next to impossible to create and test prototypes of physical products in a short time as with the tech world. In the world where there is an actual product to be manufactured, any prototyping is time consuming if the prototype is expected to perform as well as a product so that the measurement from the testing is reliable and real. Most of the time, the tooled manufacturing process produces better, less variable products, that is, the prototype measurements may have more imperfections that may lead decision making to erroneous conclusions.

One way to implement this Fail Early and Fail Often idea in spirit and in reality, is to do so with small scale testing of components or simple prototypes. Which, yet again, is a part of the scientific method. Unfortunately, those experiments that I have witnessed either were inconclusive because of the ambiguities from scaling or error stackup due to the roughness of the experimental prototype.

I was witness to a few of these discussions, with those business leaders who don’t know the business being frustrated and bullying engineering and manufacturing to accede to their phantasmagorial demands. Fortunately, much cooler heads prevailed.    

If you have read this far, I thank you for reading my diatribe. You are probably thinking that I am unfairly cherry picking those stories that illustrate my point. Unfortunately, there is an abundance of those stories that I can cherry pick. But there are people who have abandoned the biggest fraud and have learned to operate businesses without initially having deep seated understanding of the businesses but have worked hard to inform themselves of the business that they are operating. It is not a hopeless endeavor.

A guy I used to have coffee with every morning is a Naval Academy grad, a former submariner. He works for a private equity firm, and they put him in charge of a small die-casting company that had been in existence for decades. This business is like my motor business example: all the volume business had become automated and lost to larger die-casting companies, whereas the low-volume, highly engineered specialty business could not elicit the interest of the big, automated die-casting houses. Prior to him, the presidents of this firm had operated the company with the same procedural thinking: special products are too much trouble, go for the business with higher volume that had not already been sucked up by the automated die-cast houses. These managers also followed the generic business recipe to the T: decrease cost, i.e. payroll. They laid off the older, more experienced workers and kept the younger, less experienced workers. What my friend found when he took over was that the company cannot fulfill those orders that are in their sweet spot: those orders that needed skilled die makers to design the dies and execute the die-casting process effectively because the most experienced workers have been unceremoniously fired. He invested time and effort to understand the problem, enticed the fired workers to come back, paying them what they thought they were worth without unbalancing the payroll too much and finally were able to meet those orders. They are still a small shop, and their profits won’t send Wall Street into a frenzy, but they are employing people, those people are making a good living, they are providing their customers with what they need and want reliably without resorting paying too much for what they are getting.

A valid counterpoint to my diatribe is that to follow business as usual stifles creativity and innovation, especially in a climate of volatility and fast changes. We have learned through Kahneman and Tversky’s work on behavioral psychology as well as many others’ working in the area that our decision-making abilities are more often flawed than not because we overestimate our own experiences and underestimate the reality that we observe. (Kahneman, 2013)  Those who have extensive experience and knowledge of the business are also more likely to believe in forging forward with the tried and true, while at best missing opportunities or at worst make disastrous decisions. But having the understanding of the business will ameliorate the decision making. It is the dichotomy  between operating with too many constraints versus operating with no constraints, they are both impossible situations, but no one is obligated to operate at the two opposites. Having more constraints — i.e. understanding of the business — than none, better serves decision making.

Speaking more broadly, this fraud has become virulent and accepted in our society. Corporations airdrop junior executives chosen to be fast risers into divisions, ostensibly to “train” them. Most of these terms are for two years. Just long enough to wreak havoc with that division but not long enough to understand the business. There is no motivation for the airdropped junior executives to actually learn the business, it is too time-consuming. They have to show positive results after two years and then expect to be plucked out and moved to the next “training” position. The MO is usually to shake up the division, make as much profits as possible, ignore the consequences because it won’t be your responsibility after you leave, and screw the person after you.

In speaking to another friend, I find that the military has adapted the same procedure, all assuming that the greatest fraud is real and not just a mythology. The officers are on a two-year cycle and will usually leave a mess for the next guy. This kind of mindset is ubiquitous throughout our society.

I am not even advocating that the most senior management must be experts on all facets of the business that they operate, that is an impossibility; I am saying that they need to have respect for the expertise of those who are knowledgeable and more importantly, to make the nature of the business a large part of their decisions. In this age of executive arrogance and hubris amidst a culture where an idiot with an internet connection can pretend to be an expert, this is an extreme test of the decision makers’ humility and perception of reality. There are many corporate leaders who are extremely successful in operating their businesses with specific knowledge of their business, either through humble learning from their staff or through autodidactic learning.

The oft quoted adage: surround yourself with people that are smarter than you; has become almost trite in business literature. Every decision maker who wishes to demonstrate gravitas and foresight will trot that quote out, the question is how often do they listen and heed those people when it comes to a critical decision?

One of the more insidious results of worshipping the cult of the generic and formulaic business check list is that the business press and publishers have come to lionize those who have seen success at a specific moment in a specific context as heroes and published bestselling How-To guides for the larger public so that the book readers can replicate their hero’s successes in a different time, in a different context. It is what Annie Dukes call resulting. (Dukes, 2018) If your result is positive, then you have a methodology to emulate, a formula to sell, a recipe to share. But if you fail, it isn’t because of the methodology, formula, or recipe; it is because of bad luck, incompetent underlings, or Black Swans. (Taleb, 2007)

Indeed, those who believe that they have hit a homerun after having been born on third base are not shy about sharing their wisdom, basing their decision on their ego and the fraud of the generic business wisdom. They are not shy about serving on boards of their crony’s companies, offering their business wisdom to a business that they don’t know anything about, all at a hefty salary.

A friend who was privy to these board meetings once told me that the CEO of one of the companies I worked for gave his buddy’s board the diametrically opposing marketing strategy than had been recommended by the staff. The result was a waste of months and a few million dollars, ending with the CEO who I had worked for ripping into the staff for following through on such a stupid idea.

It is very illuminating to see the touted fool-proof How-To books of all the captains of industry from decades past sitting forlornly in the discount bins at the outside tables of used bookstores with nary an interest from anyone perusing. These books are bound for the recycling bin.

The reason I wrote this piece is that I have experienced the results of this dogmatic mythology all too often in my career. I am guilty of the same hubris and bias. But I have learned from my failures in judgement, and I am getting better at self-filtering in my old age. Unfortunately, corporate America continues in myopically following and propagating the same fraud.

A joke we had shared during many rounds of adult beverages is: what is the best way to thwart upstart competition from overseas? Train their managers in the generic American way of managing businesses, that should impede their progress forever.

I will leave you with that.

References

Dukes, A. (2018). Thinking in Bets. New York: Penguin.

Kahneman, D. (2013). Thinking Fast and Slow. NYC: Farrar, Straus and Giroux.

Taleb, N. N. (2007). The Black Swan: The Impact of the Highly Improbable. NYC: Random House.