VR Logo

In praise of inefficiency

The pandemic has exposed efficiency and productivity as weak spots of modern businesses

In praise of inefficiency

The other day, I came across a tweet from Nassim Nicholas Taleb which I retweeted promptly: How you did in this pandemic, as a country, a village, a business, a group, or an individual, whether emotionally, economically, or morally, is an indication of how robust you are and how fit you will be for the next decades.

It sounds excessively judgemental, as Taleb often does. After all, it's doubtlessly true that many businesses and individuals will be laid low by the Chinese virus through no fault of theirs. How can we blame them? However, the point here is not to pass judgement but to see how 'robust' you are. What has actually happened is that the definition of robustness has changed.

What has happened is that we have learnt (or at least, should learn) the value of inefficiency. You read that right. The inefficient will come out of this pandemic much better than the highly efficient. We are so used to seeing inefficiency as a negative characteristic that we sometimes don't stop and think about what it means for a business or indeed any system. I remember back in early February, long before the virus became a crisis outside China, a friend who is familiar with the workings of private healthcare providers told me that there's likely to be very little excess ICU capacity in private hospitals when the virus spread in India.

Having too many ICU beds lying vacant is inefficient. All that investment in beds, rooms, equipment and people is not earning any revenue. As a business, this is undoubtedly true. Having a vacant bed is healthcare's equivalent of having capacity in a factory and not producing anything. If you are an investor in a company that runs hospitals, I'm sure you will be happy that there was as little spare, unused ICU capacity as possible. That's what efficiency is, and that's what makes for maximising ROI.

However, the advantages of inefficiency that the pandemic has brought about go well beyond healthcare. It's true of all businesses. The businesses that will suffer the most are the ones that are operating on a razor's edge of efficient use of resources. These were the ones that were getting by before the pandemic with what looked like precision. Their revenues, costs, debt and profits were tuned just so precisely for them to grow and make money. However, the lockdowns and the coming slowdown have just destroyed them. A severe reduction of sales has immediately made them deeply uneconomic. There were no reserves of any kind at all. A globally dependent just-in-time supply chain was efficient. Extra inventory was inefficient. These were unchallenged beliefs.

There is an individual equivalent of this, which helps the layperson understand what is happening. There are many people whose entire incomes are spoken for in expenses and EMIs. They have no reserve capacity. The slightest disruption of income, as has happened to some during the pandemic to many, has blown apart their personal financial situations. Again, I'm not blaming anyone here on an individual basis. Many people have no leeway to do anything better. Nor can one really say anything about small and new businesses.

However, many larger businesses have sacrificed all resilience on the altar of growth and ROI. They are structured entirely on the assumption that no serious downturn can take place and that by and large, straight line forecasts will turn out to be correct. It's not just a few but an entire culture of running a business that mistakes vulnerability for efficiency. As the months pass, we will clearly see how some businesses come back stronger and others become weaker or shut down. Unfortunately, the human and larger economic cost will not be paid by those who have promoted this culture of false efficiency but by employees, shareholders and other stakeholders.

One bright side effect should be that we will now have to take very severe disruptions into account. For many years to come, when a company tries to raise money from a bank or the public or any other source, they will have to explain how they would survive a pandemic shutdown for a few months. That would be a welcome change.