By Alex Jinich, Senior Strategist
A person’s wellbeing is in great measure a product of a pleasant environment, and as a society we are placing progressively more value in creating such environments in the form of comfortable offices, welcoming homes, and inspiring shops. It is remarkable, for example, the degree to which the luxurious Dubai airport, where I am now, has been carefully designed to make you feel at ease as you leisurely cruise through it as though through a warmly illuminated exhibit hall. To a large degree, however, the precise features that make such an environment valuable are nuanced intangibles. In other words, environments are always experienced as unified wholes, and the value they create for us is greater than the sum of its parts.
In the airport, the warm and gentle lighting is as much a part of the overall experience as are the carefully curated glossy brands and the well-dressed ladies and gentlemen that sell them. The harmony and general atmosphere creates value above and beyond the sum of the values of the individual components, and any minor dissonance can have a disproportionately negative effect on the overall value of the experience. To a great degree, this is why the premium for the great designers and architects can be so large and why experience design is increasingly becoming a key value aggregator in innovation pipelines and strategic thinking.
At the same time, we live in the era of the powerful CFO – the one with an insatiable appetite for cost-cutting and operational efficiency who will generously reward anyone who can find and generate savings. CFOs are versed in the language of accounting. They experience value through the balance sheet, a 15th Century innovation that is a useful abstraction through which we track value by decomposing it into its component-cost parts. Because it is so often the organizing lens through which companies (and, increasingly, non-companies) look at value, they tend to structure their thinking within these vertical cost-component categories and to analyze them as units, each a space within which to seek savings.
When an organization that seeks to create value has a strong bias towards understanding and tracking it in this way, as are most companies today, it tends to develop a culture that worships efficiency, cost-cutting, and analytic thinking that decomposes cost and value into neat component parts. Instead of just a useful abstraction that helps us track the value of what we are creating, the balance sheet and the atomistic bookkeeping logic behind it become hegemons – the lens through which we experience reality. If the only tool we have to measure value is financial accounting, which is atomistic and reductionist by nature, we get a culture that sees the world through that lens. And in that world, cutting COGS or PP&E become ends in themselves. This is certainly useful, for by providing us with a model to think about value, the balance sheet has given us a compass to know where to look for leakages and where to direct investment. But just like at the airport, workers and consumers experience the lived reality of the product or service behind the balance sheet as a totality; that is, as a whole phenomenon whose delicate harmony provides more added value than any of its component parts. And so in our world of sophisters, economists, and calculators in which the reductionist abstraction increasingly becomes the organizing principle of reality, the shortcomings of the proxy we use to track value become manifested in the real world as products and experiences that may not be delivering their maximum potential value.
To shed some light on this, let’s look at the recent example of how businesses and cities have cut costs by switching to higher efficiency lighting. As a recent article from the New York Times argues, energy-saving cool temperature LED city lighting may create significant financial savings, but it may also create potentially larger intangible social costs by breaking such a valuable harmony. Replacing gentle warm lighting with phosphorescent white light across a city involves not only an aesthetic sacrifice, but also the transformation of how people feel and behave in the city in ways that we cannot know unless we study them. Human experience and behavior is complex enough that indirect effects of a low temperature light environment might actually create new financial and non-financial costs for the city that could outweigh the energy savings. Unfortunately, little consideration is given to how this may indirectly and ultimately affect the balance sheet because our limited knowledge means its effect is hardly traceable, not to mention it would appear later and far off in some other dependency’s balance sheet such as health care, tourism, or the like.
It is true that given the difficulty in measuring intangible costs it might be best to stick to what we know, cut tangible costs where we can and invest the savings in a proven value-creating form. And in the short run this is probably the right course of action. But it is also true that a more profound and holistic understanding of how value is experienced (and, hence, created) may allow us to know more precisely where and how to cut costs. Crucially, compounded in the long term, the potential effect of this approach on the bottom line could be larger than those we achieve today by an order of magnitude.
As applied social scientists we are experts in studying how people experience value as a phenomenon, and in our studies we have uncovered what we believe is something outstanding: Most organizations, including those creating highly valued products and services, do not have a profound understanding of how exactly it is they are producing such value. That is not to say that their designers and engineers are not highly talented, but rather that they are like great chefs who have made an amazing dish and are simultaneously being asked to deconstruct the dish’s value into its component ingredients. Any great chef will tell you this is way more difficult than making the dish in the first place. And yet while great chefs (being artists and creative directors in their kitchens) have the luxury of not needing to do this, companies do, for they must keep creating value, know where to cut costs without sacrificing it, and report it all to the CFO.
Imagine a chef who has made an outstanding dish is told that he needs to take one ingredient away from it. He would most certainly not pick based on the cost of the ingredient alone, but rather, he would consider the dish as a whole and apply his complex intuitive understanding of the intricate ways in which the ingredients and processes interact with one another to create an overall effect upon the palate. In the same way, having a deep and systematic understanding of how and why our “product” creates value is the key hinge upon which lays the long-term competitiveness and success of companies facing cost-cutting pressures.
As a result of this, we believe that the tension between CFOs’ cost-cutting pressures and the rest of an organization’s priorities is a false one, and one which can be turned on its head and into a powerful engine of long-term strategic competitiveness through a careful reconfiguration of how we understand value and cost. Most business leaders are not great chefs, but they have the power to build organizations that use a phenomenon-driven understanding to mirror the complex intuition that chefs have of how their dishes create value. By supplementing the existing balance sheet-driven way of thinking with phenomenon-driven models of value, we could take a cue from the intuitive wisdom of great chefs and use it to build the lean and supple value-driven organization of the future. The scarce resource, I believe, is still knowledge of ourselves and of how we experience the world.