Part 1 in the series started with the reinforcement of the American character. Throughout our history, Americans have come together in times of crisis by recommitting themselves to the principles that have made this country the greatest experiment in self-government in the history of the world.
Part 2 reinforced the challenge of unsustainable policies (systems) that have led to the debt crisis. Reducing the debt, which needs to include unfunded liabilities, requires a commitment by individuals to take responsibility for ensuring political representatives take action and adopt methods that result in outcomes that support the common good.
In this last part of the series, I’ll answer the question: “What will it take to win the second half?” The answer is short. In the words of W. Edwards Deming, “… it all has to do with reducing variation.” Methods for managing variation provide a common evidence-based approach for assessing the impacts of change in working to make progress in achieving “a more perfect Union.”
For example, solutions regarding the debt range from “austerity” (reductions in government spending) to increased government spending to stimulate the economy. What’s missing in the debate is the method that will be used to determine if and when change results in improvement.
Rise and Fall of Economic Systems
An interesting model for predicting the rise and fall of a country’s economic system is provided in a white paper titled “Why Countries Succeed and Fail Economically,” which was written by Ray Dalio, founder of Bridgewater Associates LP, a global investment management firm.
Dalio’s research indicates that countries follow a five-stage cycle and that “these cycles have occurred for as long as history has been written.” In quality terminology, his theory is that a country’s economic system follows a predictable pattern – i.e., a stable system of common-cause variation – that consists of the following stages:
- Stage 1 – Countries are poor and think they are poor.
- Stage 2 – Countries are getting rich quickly but still think they are poor.
- Stage 3 – Countries are rich and think of themselves as rich.
- Stage 4 – Countries become poor and still think of themselves as rich. This stage “is typified as an accumulation of debt that can’t be paid back in non-depreciated money.”
- Stage 5 – Countries go through deleveraging of debt and a relative decline that they are slow to accept.
In his white paper titled “An In-Depth Look at Deleveraging,” Dalio concluded that the U.S. deleveraging process in 2008/2009 was an effective balance between debt reduction, austerity, transfer of wealth, and debt monetization. He also cautions that too much stimulus can result in “ugly inflationary deleveraging.”
Regarding a projection of an early decline of the American economic system, the U.S. is an outlier (special cause). Unlike most other political systems, the U.S. system was designed to be continually improved. What is missing is the method that stakeholders (we the People) can use to assess and manage performance. This can be accomplished by leaders who apply the principles of quality. With the exception of an explicit reference to variability, these elements are incorporated into the Baldrige Criteria for Performance Excellence.
Foundation of Quality – A Guide for Leaders
Reducing variation – in other words, reducing the gap between the ideal (“a more perfect Union”) and actual – is synonymous with innovation and improvements in quality and productivity. Excellent quality is the result of doing the right things right. Effectiveness is doing the right things, and efficiency is doing things right.
The Foundations of Quality principles are interrelated components that introduce a system for improving efficiency and effectiveness. The principles deal with Customers/Stakeholders, Systems/Processes, Variation, Knowledge, Planned Change and People. To better relate to these principles, it may help to identify a time when you achieved a significant personal accomplishment. This accomplishment can be in any area – family, career, sports, community, education, etc. To guide you, I’ll include an example involving an accomplishment related to a family savings and investment strategy.
Customers/Stakeholders. Identify the people that were directly and indirectly affected by your accomplishment. What were their needs and wants, and what did you provide? What feedback was needed to confirm that you met their expectations?
Example: The stakeholders in my family’s investment strategy include the immediate family members. Considering the longer term, stakeholders also include the future spouses of children and their children. In a broader context, stakeholders also include society. A critical need and expectation for all the the stakeholders may be for fellow citizens to be productive and economically responsible.
Systems/Processes. Actions are accomplished through a process. A system is a collection of processes with a common aim. Systems determine over 90% of the result. What actions did you take to achieve the accomplishment and meet the expectations of the stakeholders? How predictable is the changed system in continuing to meet their requirements?
Example: My older son started earning money by mowing grass, raking leaves, and shoveling snow. His “system” and process for managing money was a simple, predictable and stable one: make money, spend money, repeat the cycle. It was not hard to imagine that once he got older, his process would change to include borrowing money and paying interest.
Variation. Variation is the “what’s new?” Variation provides the feedback that you need to assess the quality of a result. What feedback measures did you use to determine whether the stakeholders’ expectations were met? Were the performance trends predictable?
To correctly measure feedback, you need to know about the two causes of variation (common and special), two types of systems/processes (stable and unstable), and two types of mistakes (treating a common cause as special cause and vice versa). Deming estimated that a lack of knowledge of common and special cause variation resulted in situations where 95% of changes resulted in no improvement.
The technical terms contrasted with the more common terms and phrases are provided in the following table:
| Technical Terms | More Common Terms, Phrases, Examples |
| Common causes (majority) | Action that produces results that are considered usual, ordinary, normal, expected, or routine. |
| Special cause | Action that produces results that are considered unusual, abnormal, temporary, unexpected, out of the ordinary, or an outlier. |
| Stable (predictable) system (contains only c ommon causes) | Result that is considered routine, habitual, repetitive. If you always do what you always did, on average, you will usually get what you always got. |
| Unstable system (contains both common and special causes) | Result that is considered unpredictable and begs the question: “Who knows what will happen next?” |
| Mistake 1 – Treating a common cause as a special cause | The value of a mutual fund or stock goes down within the predicable range (see stable system) and you sell thinking the trend will continue. However, the stock then goes back up within the predicable range. |
| Mistake 2 – Treating a special cause as a common cause | You’re unusually late one day to work because of an accident that is unlikely to recur and you change your commuting process as a result. |
Example: In my son’s case, he was required to “plot points” on the amount of money he earned and invested, including monitoring performance trends. Based on his example, my wife and I started plotting points to assess the results from our savings and investment processes. For an additional example, see my previous article “Managing Variability in Thrift Savings Plans.”
A more ideal investment system that we embraced as part of our family investment strategy was identified by George S. Clason in his book, The Richest Man in Babylon. The aim of this system is to save and invest 10 percent of what you earn. In other words, pay yourself first and put your money to work for you. The strategy can also be supplemented by investing 10% in charitable causes.
Knowledge. Knowledge of variation is gained through repeated cycles of what Deming referred to as the Shewhart Cycle for Learning and Development:
- Plan a change or test aimed at improvement. (Decide what you want to do.)
- Test the change, preferably on a small scale. (Take action.)
- Study the actual results. (Assess the impact.)
- Act on what was learned. (Change your approach until you get what you want.)
Example: In my son’s case, the results of the change in his process resulted in higher savings and a better return on his money. This motivated him to reassess spending habits and make even more productive investments. Changes in our family investment strategy will contribute to an adequate quality of life in retirement, assuming we get our national economic system back on track.
Planned Change. Given your past accomplishment, have you been able to sustain the results? Do have a plan for improvement?
Planned change is supported through a Strategic Quality Plan (SQP). A strategy is a proposed solution that identifies ends (objectives), ways (methods), means (resources) and associated risks. Development of the SQP includes an assessment of the current environment and the strategy’s alignment with vision, values, and priorities. Part 2 in this series identified economic assessments provided by the National Commission on Fiscal Responsibility and Reform (aka Debt Commission), Government Accountability Office and the Congressional Budget Office. A plan is a critical part of learning what is working, what is not, what should be sustained and what needs to be improved.
Change generally falls within three categories:
- Sustain/maintain. Sustain and/or maintain the current systems, processes, products, and services.
- Incremental improvement.
- Radical/transformational improvement. Eliminate and/or develop new systems, processes, products, and services.
Generally 90% to 99% of systems within an organization fall into the sustain/maintain category. The remaining 1% to 10% fall into the incremental or radical/transformational improvement categories. The SQP would help to identify if this is the appropriate balance.
Example: Our family’s SQP resulted in an incremental change in our children’s processes and more of a transformation change in our family’s investment system. Both of my children graduated from college debt free and, as adults, live within their means. They also effectively manage their money, including having a reasonable amount of debt and contributing as much as they can to 401Ks. It’s likely that someday, their children will learn good “habits” and be productive and contributing members of society.
People. People will drive change if they are motivated and led to do so. The two categories of motivation are extrinsic and intrinsic, with intrinsic being the more powerful over the long term.
Stephen Covey, author of The 7 Habits of Highly Effective People and The 8th Habit, reinforces the critical need to develop and utilize individual potential aligned with purpose. Covey’s research and insights into timeless principles of human behavior reinforce the capabilities needed if we are to survive and prosper as individuals and as a nation.
Example: The People aspect of change in a family situation includes embracing the philosophy that everyone has a unique purpose in life and we need the support of families and society to achieve this purpose. Economic security is one aspect of a needed support infrastructure.
Challenges and Next Steps – A Way Ahead
The greatest barrier for transition to a new paradigm for managing variability is fear. This includes the fear of learning something new, giving up power, and getting more power. Power correlates to the quality and quantity of decisions that people believe they are empowered to make.
Power is a paradox. It is used to achieve positive or negative results and has the tendency to corrupt. The U.S. founding fathers certainly understood the negative side of human nature and designed a needed system of checks and balances on the amount of power that individuals and groups should possess.
Centralization or consolidation of power, be it by politicians, political parties, businesses, bureaucracies, interest groups, etc., is rarely if ever a good thing. On the positive side, people can agree on a shared vision in pursuit of the common good. Transparency within the stakeholder community through application of the Foundations of Quality principles is among the best ways to maintain the balance of power needed to achieve the best results.
Deming estimated in 1986 that it would be another 50 years (2036) before the basic knowledge of variability developed by Walter Shewhart was more commonly understood.
Given the current issues involving the national debt and resulting impacts on individual quality of life, NOW might be a good time to learn and demand application of a better method in striving to bring about “a more perfect Union.” Our founding fathers put their lives, families and property at risk when they signed the Declaration of Independence. The challenge of our time is to have the courage to do the right things by applying and demanding application of a better method for managing variability – that’s how we will win the second half.
