Organisational inefficiency

Organizational inefficiency

Smaller organizations including start-ups are generally perceived to be more efficient compared to the large organizations. But still world over, the organizations, when become successful, tend to grow bigger. This would certainly be making them less efficient. But how much inefficiency market can withstand till the big beast start revamping itself through change management or demergers / bifurcations. What is the optimum level of efficiency for a group of people working together as an organization?

A study was done on Standard & Poor's S&P-500 index of leading companies in leading industries of the U.S. economy.  Profit per employee is taken as a measure of employee productivity and the same is plotted as a scatter plot wrt number employees for about 450 companies. It is found that for every tripling of the employee count, productivity becomes half, known as 3/2 rule of employee productivity. So if we have a starting count of 1000 employees and the profit per person is say Rs 100,000. The profit per person would become Rs 50,000 when the employee count becomes 3000! The ratio might vary for specific industry sector but the concept is proven that productivity drops when we increase the employee count.

To understand this in another way is to find out an efficiency of a system. It is known that if a system consists of a two sequential components each having efficiency of 90%, the overall efficiency of the system would be only 81%. If there are three components in sequence, system efficiency would be 73%.

The question now is how much is the acceptable productivity per person for a small, medium or a large organization? To answer this one needs to understand the variation in efficiency of a human being over a large duration say month. No human being can work with 100% efficiency for such a long duration given all the favorable conditions available and constant. Second consideration is the variation of efficiency among individuals also. Given these variations, let us assume an average of efficiency level of 90% for all the employees.

It is not very difficult to understand than that more the command and communication level, lesser would be the overall system efficiency.

But what is the optimum level of efficiency an organization must work within? What should be the measure of efficiency which can be used as a indication and what should be the corrective actions?

Once the great Dhirubhai Ambani mentioned to a banker that when I visit the suppliers and look at the level of inefficiency, I tend to get invigorated to move faster on the backward integration of the business knowing well that I can get the same work with higher efficiency and bring the price down for the end product.

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