08 November 2008

Implications of a Knowledge Economy

The idea of an "information economy" is such a cliché that I'm bored of this article already, and I haven't written it yet.

But all too often, the key implications are missed.

The central fact of the information economy is this: anything that we know exactly how to do can be done very cheaply.

The bulk of economic activity is now devoted to things that we don't know exactly how to do - things that we have to work out as we go along.

The important implication is that management is now the largest cost. To improve efficiency from here on, the most important thing is to reduce the cost of management.

That's an emphasis that's never been taken before. "Measure twice, cut once" has always been seen as wisdom. But if cutting, and the stuff to be cut, are cheap, and measuring is ten times as expensive, then we need to work out how to get by without measuring twice.

There has been one long-term trend which has improved management efficiency, and that is the trend towards large scale. If a business goes from one steel foundry to ten, the steel foundries don't become any more efficient, but you might spend less on management. It is easy to observe, that at ground level, large organisations seem to be less efficient than small ones, but this may be justified by reduced management costs. However, I think this trend has gone as far as it usefully can (if not further). A merged organisation may spend less on top management than its preexisting components did, but it has more layers of management, and the efficiencies can cancel out.

There is another trend that has to some extent concealed the increased cost of management, and that is the spread of managerial responsibility down the hierarchy. You do not need to have "manager" in your job title these days to be expected to devote a significant proportion of your time to managerial aspects of whatever process your organisation undertakes. Everyone fills in forms.

The important point is that a better managed operation is not necessarily a more efficient one - not if the cost of management outweighs the benefits. The old assumption that scrimping on planning will always cost more in the long run has to go.

This is not completely new - there is perhaps a parallel to the blitzkrieg or auftragstaktik innovations in the German army in the 1930's. As I understand it (and military history is not my field), the old principle was that, on encountering an enemy, an advancing force would stop, gather as much intelligence as possible, make a plan, and then attempt to take on the enemy. The new doctrine was, on encountering the enemy, to immediately attempt to outflank. Sometimes the lack of planning and knowledge would leave the advancing force stranded in a blind alley, but war is a dangerous business at the best of times, and the benefits in speed and surprise of skipping the planning stage outweighed the costs.

I was triggered to write this by Simon Jenkins' account of the 2012 Olympics (spit!). The budget for management of the Olympics has now hit £654 million, more than the cost of building the main stadium. This is partly the plain fact of the knowledge economy, and mostly the result of not recognising that doing something more efficiently, in today's world, means managing it more efficiently.

There is a secondary point, which is that managers have greater political and social power than non-managers, and that therefore there is stronger pressure to cut non-management than to cut management. But I won't be able to make that point better than chris dillow does, so I'll leave it to him.

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