211 – Unpredictability, interdependence, complexity and chaos – why councils need to adopt the Third Principle: optimisation.

Posted by Lancing Farrell                                                                                              1200 words

the third principle

I recently rediscovered a book that I bought 17 years ago when it was first published. It is one of those useful management books that is an absorbing read when you buy it, and then it quietly sits on your shelf waiting for the day you really need it. It is now a book for the times with rate capping coming into Victorian local government.

Neville Lake’s central idea is that management practice has three fundamental organising principles – effectiveness, efficiency and optimisation. He believes that an organisation can be both effective and efficient but be sub-optimised. This leads to only 80% of its potential being realised.

The other 20% is trapped in processes that don’t work, management models that don’t deliver, and interactions with customers that fail to deliver expected value.

Having worked in local government for 30 years, I have to agree that we are sub-optimised organisations. There are many forces acting against optimisation, not the least of which is the inherent complexity in working in a situation where there can be several ‘right’ answers to problems. Despite this, we can do better and will need to if we are to slow the impact of rate capping to give the community time to adjust. But we need to work out how. Lake provides useful advice.

To begin, he says that many management interventions are essentially about efficiency, not optimisation. He cites shared services, new IT systems, and restructuring. Starting to sound familiar to those of you working in councils? I would add outsourcing after reading the work of Christopher Stone. It is easier in public services to look at inputs and efficiency than to look at outcomes and effectiveness.

Lake’s approach is simple. Don’t get caught up on complicated measurement systems to understand the nature and extent of the problem. Instead, rely on your intuitive understanding of the situation. This is an understanding he reached long before Daniel Kahneman explained so brilliantly how ‘System 1’ thinking is fast and intuitive, while ‘System 2’ is slower and analytical. Letting ‘System 1’ steer ‘System 2’ is effectively what Lake is suggesting.

At a macro level, there are three questions that Lake proposes need to be asked to assess whether or not something has been optimised.

  1. What could the organisation produce if all the processes were optimised?
  2. What kinds of outcomes could you achieve if all your people were as good as your best?
  3. How much more value could you add if you could gain all the possible business from your current customers and continually add new customers? In local government, this needs converting to something like ‘How much more value could you add if you could ensure that customer purpose is fulfilled each time and the favourable attitude to the organisation is increased.

Lake provides guidance on assessing a range of factors affecting the performance of people, customers, processes and measurement. The responses are plotted on the following chart.

Lake optimisation chartFor example, the chart above could show the difference between optimum performance and current performance for middle management (Lake’s chapter on ‘Optimising Managers’ is well worth reading). Lake says that middle management performance is difficult to determine and this might explain why layers of management have been removed with little effect in many organisations.

The idea is that you gauge the difference between what you think is possible and what you are currently achieving. It requires some imagination. Using the example of middle management again, you could ask whether middle managers are adding value by performing activities different to those performed by supervisors or the executive. Are they effectively supporting front line staff with the information and resources they need, and removing barriers that prevent optimal performance? Are they using their time effectively? Overall, what are they currently achieving compared to what they could or should?

Once you have estimated the actual performance and determined the gap with optimum, Lake suggests estimating the dollar impact of the sub-optimisation and thinking about how easy or difficult you think it will be to close the gap and what it might cost and how long it could take. You could make a bit of a list of actions you can take.

Lake doesn’t stop here. He provides three further organising principles that can be useful once you have started to optimise your organisation.


Lake believes that there is an in-built order in everything in life – nature, economies, and society. In organisations this order takes form as a hierarchy. Alistair Mant discusses a similar idea when he describes organisations as having a ‘depth structure’. He says that the only way purposive task systems operate well is when some people are held accountable for the work outputs of others. This requires hierarchy.

Lake believes that if the natural order is subverted, it will reassert itself given sufficient time. Sub-optimisation occurs when the natural order is ignored or misunderstood. In local government, this natural order is strongly represented in the organisational culture – the ‘way things are done around here’. He provides examples of symptoms of sub-optimisation resulting from failure to understand the natural order:

  • A manager who has no natural status in the group.
  • Second order thinking that happens first. Lake provides a classic example common to local government – the procurement of an IT system before there is understanding of what it needs to do.
  • Work that is dependent on previous steps but is scheduled to be done first.

When things are not going well, Lake suggests asking ‘what hierarchy is at work here?’ It is a good question. Often it reveals the true power structure in place.


Lake says that the dominant approach in business has been to reduce complex systems into component parts. Processes are pulled apart to form jobs. Problems are seen to be discrete rather than part of a pattern. In this scenario, individuals become the focus of attention rather than the work system.

Welcome to local government. We excel at separating activities into silos and focussing on making people overcome the problems at the interfaces between them. If they can’t, we criticise them. We also focus on the performance of people and not the contribution of the systems they work in, even though we know work systems are the primary influence on performance.

Lake recommends the following approach to analyse sub-optimised situations that are difficult to understand:

  1. Look for the mathematics. For example, represent the system as a series of mathematical cause and effect relationships – i.e. the output in one location is dependent on the rate of activity in another.
  2. Look for the interrelationships. Seek to understand the relationships between individuals, units, divisions, customers, suppliers, competitors and government.
  3. Look at the models and assumptions being used. If a simplified conceptual picture of the organisation is being used to make decisions, it might only be right 90% of the time. The 10% of the time that it doesn’t apply could be critical!

In understanding models and assumptions, he suggests asking:

  • What model is being used?
  • In what circumstances does it not apply?
  • What are the special cases?
  • What assumptions are being used?
  • How and under what circumstances were the assumptions developed?


“What is really happening is remarkably difficult to identify.”

Lake identifies a number of problems:

  • Information is incomplete and provides a distorted picture of the organisation.
  • Managers can easily start to believe their own rhetoric when there is no hard evidence to support it.
  • Commonly used words are not well defined – for example, ‘empowerment’, ‘supervising’ and ‘ongoing learning’ have no common definition and they can ‘disguise as much as they reveal’.

He says that in this ‘twilight world of misinterpretation, misunderstanding and misrepresentation’, it can be hard to find the truth. Therefore, it can be difficult to distinguish between what people know and what they think.

“When there is a deficiency in facts and when people are not forced to confront the ugly reality that parts of the business do not work, there will be sub-optimisation.”

Ingrained sub-optimisation can often be attributed to unwillingness to generate objective data, the refusal to challenge a corporate myth, or the inability to see that the facts no longer support the way that results are achieved’.

Lake says that confronting reality means collecting good, hard data. Yes.

Lake, Neville 1999. Third Principle – how to get 20% more your of your business.

Mant, Alistair 1997. Intelligent Leadership.