Thursday, June 10, 2004

more thoughts on Scale

On Sunday, Economy of Scale, I discussed the advantage that big outsource shops have over smaller ones because (assuming process maturity) they can more cost effectively buffer against special cause variation. Smaller businesses need to either buy insurance against it, negotiate the risk away in their contracts (unlikely) or simply take the risk and suffer the consequences.

I’ve been giving this some more thought this week as I consider the plan for scaling my new business. I care deeply about staff welfare and development and I like to see people keep their life in balance and proper perspective. This is not totally selfless. I genuinely believe that you get better work and higher productivity over a long term period, from people who have a well balanced life. So I would like to offer benefits such as 4 weeks paid vacation on starting - the Americans reading this will be envious whilst the Europeans will be scoffing - up to 6 months maternity leave and 1 month paternity leave within the first 6 months of the birth of a child, up to 1 month bereavement leave for immediate family members - spouse, parent, child - and so forth. At times of personal stress and personal special cause events, members of staff should not need to worry about their job, or their income.

However, consider how costly this is and the potential risk. For a small staff - say 10 people - doing one or two projects at a time, the project plan needs to identify many special cause events and calculate some probability. Then their is the issue of does the business buffer for these - effectively passing on the cost to the customer - or take the risk? Not to mention the potential financial burden. With larger corporations these concerns simply go away.

In fact, not only does the quality assurance / six sigma way of thinking about variation demonstrate that larger business have an advantage in staffing related variation but so does the Theory of Constraints which would suggest that only personnel working in the constraint (and theoretically fully loaded) can affect the throughput of the organization. Hence, variation whether special or common cause in other areas of the business will not affect throughput. If throughput is not affected then the cost of special cause variation, such as maternity leave, can be absorbed by the business. This still leaves the problem of what to do about the constraint. By insurance? Have a flexible workforce? Have a flexible supply chain with a vendor who can step in at short notice and absorb the capacity shortfall caused by the common cause variation. As most of you will know, this is not easy in knowledge work. What’s the ramp up time for a new contract developer to become effective? And what about other more specialist skills such as architect or user experience designer? How for example do you provide backup for an expert consultant in the application of the Theory of Constraints to software engineering? For those who suffered calendar adjustments last week when I called to say, “I have a back injury and can’t walk…. Oh it’s a long story, I injured it almost 10 years ago… yadda yadda… Can we re-arrange for next week or the week after?” they must be only too aware of where the constraint is with my business.