I realized with some surprise that two of the most influential books about management among those I read in the past year were written over 20 years ago – years before Agile was a formal concept, a buzz word, a knight in shining armour or the worst thing to happen to humanity depending on who you are or how you’ve experienced it. The first book was Peopleware: Productive Projects and Teams, the other – the subject of this post – W. Edwards Deming’s The New Economics for Government, Industry, Education. Yep, perhaps it was naive of me, but all these years I sort of assumed that Agile was the new kid on the block fighting age-old management concepts with groundbreaking new thinking. These two books finally enlightened me to the fact that many of the ideas at its core were around for a long long time.

W. Edwards Deming died in 1993 at the age of 93 and The New Economics was published the next year. He made revisions to it up until his death. He refers to sources written in the 50s and some even longer before than – in the 1920s, a couple in the late 1800s. This book is a summary of lifelong thinking that Deming formulated as Systems Thinking and the Theory of Profound Knowledge.

Deming’s thought and writing were focused on manufacturing where America used to excel at the beginning of the 20th century through the wars and into the 1950s. Nowadays it is popular to blame the weakening of US manufacturing on open borders and trade agreements, but Deming describes its decline starting in 1955 – long before any such arrangements ever came into force (most trade agreements weren’t put in place until mid-1990’s, i.e. after Deming’s death: Wiki)

Simply, other countries like Japan, Mexico, Korea, etc, began making products of equal or better quality at a lower price. Deming thought that future success of US economy was in “specialized services and products” with an emphasis on innovation and quality. He placed the ultimate responsibility for both in the hands of management who are the leadership and change agents. Good management can propel innovation and creation of great products that customers love, bad management is doomed to be stuck in downward spirals unaware of how it fails the company and the employees. Continuing to act with best intentions and applying best efforts in the wrong framework of thought doesn’t lead to any improvement and sometimes successfully runs the company into the ground.

Yet there is no general understanding of this. In Deming’s time and in many cases today management continues to hold employees responsible for failures in quality and lacks a vision for the future. Those in leadership positions focus on the wrong objectives that miss the big picture, causing heavy damage to their human capital and the long-term bottom line. Deming put it in no uncertain terms:

The present style of management is the biggest producer of waste, causing huge losses whose magnitudes can not be evaluated, can not be measured. (p. 22)

Ranking people, incentive pay, punishment and reward of individuals, management by objective, emphasis on numerical goals, delegating responsibility for quality to groups or individuals and many other traditional management practices focus on maximizing performance of components and emphasize competition among people and departments. Instead, the job of leadership should be to foster cooperation and to optimize the performance of the whole system for the long-term.

Appreciating and understanding the whole system is at the heart of Systems Thinking. So what exactly is a system?

A system is a network of interdependent components that work together to try and accomplish the aim of the system. (p. 50)

The job of management is to orchestrate the interaction of these components so that they work together towards the aim. The aim Deming proposes is everyone’s gain in the long-term: shareholders, customers, employees. Working together towards the common aim means that individual departments might sometimes have to give something up or take a loss instead of always trying to maximize their own profit.

How does one acquire appreciation of a system and foster cooperation of its components? It sure sounds like a great goal, but anyone who ever worked with a group of people knows that it’s not so easily done (actually, it’s wickedly hard). Deming doesn’t claim it’s easy either, perhaps quite the opposite – and there is a hint in the name of the theory he puts forward: a Theory of Profound Knowledge.

An individual leader must first undergo a personal transformation. As I understood it, the gist of it is to be a compassionate and sympathetic person, who acts with integrity and mentors others to act with the same values, and strives to create a safe environment for change. Such a leader can then consciously work towards building up profound knowledge which lets her see and understand the organization in a new way that allows for its transformation and puts it on a path forward. Profound knowledge consists of four interconnected parts: appreciation for a system, knowledge about variation, theory of knowledge, and psychology.

A leader should understand that a system is made up of not just individual components but their interactions (appreciation for the system). Events in this interconnected system are inevitably affected by variation which leads to outcomes that deviate from expectations. Organizational leaders who recognize this can use statics to study the processes in their system. Once they have the data and the trends, they have a shot at properly addressing unexpected outcomes that can occur because of a common or a special cause. Deming writes that organizations often make costly mistakes when they try to fix (or replicate) an unexpected outcome that was caused by a special cause as if it was caused by common cause (and vice versa). So it’s important to minimize such mistakes.

Studying a process also lets the leader understand whether it is in a stable or an unstable state. Both states have variation, but we can make predictions about the performance of a stable process. Having the data, the leader can start forming the theory of knowledge by making predictions about future outcomes and then observing and systematically revising the theory. Finally, awareness of how people interact on a personal level, how they learn, what motivates them and other aspects of psychology helps managers optimize their people’s abilities and find appropriate rewards.

I found that Deming’s explanations of the theory, especially of variation weren’t the most straightforward, but he later describes two simulations that make it a lot easier to understand. The Red Beads and The Funnel experiments in chapters 7 and 9 provide a much more visual way to understand the concepts and the implications. An even better way is to participate in a simulation at a local meetup, conference or coach camp (as I recently did at the #SystemsThinkingTO meetup in Toronto.)

The New Economics isn’t exactly what I would describe as an easy read, but it gave me lots to think about. Deming’s style of writing is disjointed and sparse and also contemplative, almost like one would expect of an Eastern philosopher. Instead of breaking down ideas into easily consumable parts, he puts up signposts of his thinking and lets the reader fill in the rest. There is a lot of knowledge packed into the book’s 220 or so pages. I think many will find it impactful and influential.