14 August 2010

Repealing the second law of thermodynamics

Tony Abbott is going to eliminate waste in government.

The Labor Government is going to re-equip the Australian Defence Force by eliminating waste in the Department of Defence.

If anyone tells you that they are going to eliminate waste, your correct response is to ask them whether they can also convert base metals into gold, because the latter does not involve any greater violation of the laws of physics than the former.

The idea that it is possible to conduct any activity without waste is tantamount to violating the second law of thermodynamics.

There are many ways of expressing the second law of thermodynamics, but they all connect to the fact that without other interventions heat always flows in the direction from hot to cold.

Without going into all the physics of it, what that means in practice is that it is not possible to build a machine that is 100% efficient – otherwise we could build a perpetual motion machine.

We accept this fact in our everyday lives.  When we fill up our car’s petrol tank, we accept the fact that only about one third of the energy of the petrol will be converted into useful work (propelling the car forward), and two thirds of it will be converted to waste heat and noise.

We accept it because the petrol allows us to drive several hundred kilometres at a price we are prepared to pay. We would be delighted, of course, if the car could be made more fuel efficient, but we accept things as they are.

One of the reasons that the car is not more fuel efficient is that a well designed and properly tuned engine will be operating at about the point where diminishing returns set in; efforts to capture the waste heat and convert it into useful work will have impacts on the performance of the engine that make the exercise self-defeating.

So it is with large organisations. Decrees that waste is to be eliminated of necessity involve diverting people from the real business of the organisation (what we might call useful work) to establish and monitor the savings program, measure its outcomes, and regulate the behaviour of the rest of the organisation in ways in which they were not previously regulated. The people who are being made more efficient have extra work to do, responding to a constant barrage of well-meaning interventions from the people running the savings program.

The "savings"process usually involves the withdrawal of normal managerial delegations (the people further up the line have to satisfy themselves that money is not being wasted). It usually involves quite absurd levels of micro-management, like Department Secretaries deciding they will personally approve all Senior Executive Service travel, thereby taking up time that would be better spent on things that really matter.

It also invariably involves reductions of things that really matter in the long haul – maintenance, staff training, and proper record keeping are things that spring to mind. When the Fraser Government in 1976 was drawing up its first budget with a view to showing how profligate the Whitlam Government had been, the Departments of Foreign Affairs and Trade and Resources were instructed that there was to be no maintenance of overseas property. We had Commonwealth owned houses in tropical environments and we were not permitted to do the sort of routine maintenance that saves money in the long run – repairing leaky rooves for example.

To go back to the program that is going to save $20 billion in Defence to pay for the re-equipment of the ADF, my guess would be that most of the savings that are being delivered consist of reduced activity, deferred maintenance and deferred capital investment. None of that represents a saving in the plain English meaning of getting the same amount of capability for less money. The Government has forced upon Defence a devil's bargain: if you reduce the maintenance of the kit you already have, we will buy you some new kit and you can under-maintain and under-utilise that too.

The bottom line is that all large organisations should have a culture of continuous improvement, the improvements being identified and implemented locally, which can only be established by having the right people with the right motivations. Grand across-the-board savings programs are a maddening distraction that are almost always counter-productive.

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