A Friday thought on the law of diminishing returns.

So at what point does an additional cook spoil the broth?

Through a number of engagements over the last week, the notion of diminishing returns has entered my work a couple of times.  On both occasions the idea was met with surprise by a number of colleagues.  So, I thought, if there are a handful of people that haven’t heard of the concept, there must be lots of people who are a due a refresher.  So the topic of the next BITS article was decided.

So what is the idea?  The concept is an economic one, a component of the A-Level economics syllabus in fact.  It basically states that the marginal (incremental) increase in output of a process will decrease as the amount of a single factor of production is increased.  This site isn’t called Economic Insights Team Solutions though, so lets look at this in the context of human factors.  If you have a manufacturing process that uses humans to make things, and you make more sales so need more output, you may add a person to your team.  Let’s say the addition of this person takes your output from 10 units a week to 20.  You then have more success so add another team member, however this time the output only increases to 28 units per week.  The law states that this reduction in marginal returns will continue as you add resources.  In fact a point can be reached where the addition of new resources can actually reduce your output.  So why is this?

Again we will look at the human element here.  There are loads of practical reasons why this would occur.  For example, if your business is making wooden doors and you keep employing carpenters, at some point they will be competing for the capital equipment needed to make the doors.  They will get in each others’ way and compete for space to work and store the product they manufacture.  So the answer here is simple, grow your assets along with your team.

However, what if you aren’t competing for tools and equipment?  What if you have plenty of space because you planned for growth?  Will you still see this effect?  Research tells us you will.  Human behaviour is such that the larger a team gets the lower the marginal increase in productivity will be.  This is due to many human behavioural factors.  Here are a few examples to give you a flavour:

  • Large teams provide lots of cover.  People who aren’t naturally industrious can hide in large teams and allow the team to pick up their shortfall.  However, it is never all picked up, so overall production suffers.
  • Some people are not socially compatible with large teams.  Where they may feel comfortable sharing ideas and driving efficiencies in a small group, they might just sit back and let someone else do the talking in a larger team.
  • Managers do actually do something.  The importance of good management cannot be overstated.  A good manager can drive efficiency and productivity; but not if their team is so large they don’t get to speak to some members on a daily basis.
  • Communication.  Sometimes a management team can quickly flex in response to changes in the wider business environment, but if their instruction and guidance takes days or weeks to reach the team and then it takes even longer for change to take hold, this response time is lost.  Smaller teams react quicker and communication is easier.

This list is not exhaustive, but is hopefully sufficient to convince you that this occurs naturally due to human behaviour.

So if this is an economic law that we see everywhere, what can we do to overcome it?  Surely we are powerless to change such a phenomenon?  Well, sadly, yes we are.  We cannot prevent the effect from occurring.  We can, however, design and manage our business to avoid it from impacting our output.  Have you ever heard of the two pizza rule made famous by Amazon?  Often attributed to Jeff Beloz, the idea is that if a meeting has too many attendees to be fed by two pizzas then it will not be productive.  Likewise, if a team cannot be fed by two pizzas then they will not be efficient.  So here we have our answer.  A few bullets to enable us to hammer the thought home.

  • Keep team sizes small.  Instead of one team that takes care of sales, marketing, customer care, quality management and gardening; sub-divide your teams into manageable sizes.
  • Don’t spread too thinly.  Promote people into leadership roles and allow them to manage small teams whilst still producing themselves.  This way everyone has contact with a leader, teams are small enough to be innovative and people are motivated through additional responsibility.
  • Share and share alike.  Share the innovation that smaller teams bring through cross functional team work, matrix reporting lines or rotational assignments.
  • Use KPIs.  Even if your workplace has 200 people performing the same task.  Sub-divide them into teams and report on relative team performance.  Instead of people hiding within a large team they will now step forward to help their team be a top performer.
  • Innovate.  Increasing output or servicing more customers doesn’t always mean increasing your team size.  Explore other methods of increasing output.  Maybe instead of 3 new operators you need one robotics expert.  Even if the relationship is one-to-one, i.e. you employ three new computer programmers instead of three new production technicians, your output may still increase more by innovating through technology than simply adding more units of production labour.
  • Measure.  This may sound obvious, but measure your productivity and measure how it changes when team sizes changes.  So at what point does an additional cook spoil the broth?  You will never know if you don’t measure.

We cannot prevent the law of diminishing returns from occurring, but if we are aware of its causes and impact we can make better decisions that minimise it’s effect on our production.

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