Originally published March 20, 2016
Suppose a company discovers that its projected revenue is below original expectations for reasons outside of its direct control. The bottom-line numbers are going to look bad, so something must be done immediately. Cost-cutting measures will be explored, and when every budget has been squeezed and nothing else remains, the company will cut people. The numbers will start to look better, and the company will appear to make it through the crisis.
Cynefin, as always…
The Cynefin Framework describes a cliff between the borders of the Simple/Obvious and Chaotic domains, over which it is easy to fall and from which recovery is difficult. In short, treatment of any non-Simple/Obvious situation as if it is Simple/Obvious will result in this fall. To wield cost-cutting as a best-practice (a Simple/Obvious approach) for a bottom-line problem (a Complex issue), therefore, is to confuse Complex for Simple/Obvious and to cause a fall into the Chaotic.
From the wikipedia article:
Bottom line as Complex
Theory of Constraints thinking approaches the bottom line as an ordered (Complicated) problem, analyzing the outcome of increased productivity or even deliberate inaction to that of cost-cutting (and layoffs). The mere existence of alternatives satisfies the assertion that the problem domain is not Simple/Obvious (no single best practice). For the bottom line to be Complicated, however, it must be completely knowable and predictable through analysis. The many unpredictable elements in the equation (influenced by humans, in particular) prevent that conclusion from being reached.
The bottom line is likely in the Complex domain, because the relationship between cause and effect is not predictable. The company cannot make any change to the system or its actors while fully predicting the consequences. True, layoffs will immediately influence the bottom line — the numbers will add up to a different result — but the reduction in organizational capacity, loss of tacit knowledge, and effect on morale will have an unpredictable impact. Lack of predictability indicates membership to an unordered domain (Complex or Chaotic), and we can retrospectively explain cause and effect (i.e., looking back, these various factors contributed to the loss in revenue and therefore the bottom line). The bottom line is Complex.
Descent into the Chaotic
Per the notion of the cliff, cost-cutting measures applied as a Simple/Obvious solution in a non-Simple/Obvious space will cause the company to temporarily enter the Chaotic domain. Company leadership will have to will act authoritatively to recover to a more comfortable ontological domain, but costs in terms of effectiveness, morale, and so on will be high. The bottom line may be negatively affected over the long term by reduced organizational capacity, driving the company into a spiral of further cost reduction measures unless otherwise prevented.
Prevention is rooted in understanding. Approaching the problem as it is, a member of the Complex domain, might enable a more favorable outcome.