Template:M intro design System redundancy

“I think the people in this country have had enough of experts from organisations with acronyms saying that they know what is best and getting it consistently wrong.”

—Michael Gove

The JC likes his pet management theories as you know, readers, and none are dearer to his heart than the idea that the high-modernists have, for forty years, held western management orthodoxy hostage.

The modernist programme is as simple to state as it is self-serving: a distributed organisation is best controlled centrally, and from the place with the best view of the big picture: the top. All relevant information can be articulated as data — you know: “In God we trust, all others must bring data” — and, with enough data everything about the organisation’s present can be known and its future extrapolated.

Even though, inevitably, one has less than perfect information, extrapolations, mathematical derivations and algorithmic pattern matches from a large but finite data set will have better predictive value than the gut feel of “ineffable expertise”: the status we have historically assigned to experienced experts is grounded in folk psychology, lacks analytical rigour and, when compared with sufficient granular data, cannot be borne out: this is the lesson of Moneyball: The Art of Winning an Unfair Game. Just as Wall Street data crunchers can have no clue about baseball and still outperform veteran talent scouts, so can data models and analytics who know nothing about the technical details of, say, the law outperform humans who do when optimising business systems. Thus, from a network of programmed but uncomprehending rule-followers, a smooth, steady and stable business revenue stream emerges.

Since the world overflows with data, we can programmatise business. Optimisation is a mathematical problem to be solved. It is a knowable unknown. To the extent we fail, we can put it down to not enough data or computing power.

Since data quantity and computing horsepower have exploded in the last few decades, the high-modernists have grown ever surer that their time — the Singularity — is nigh. Before long, and everything will be solved.

But, a curious dissonance: these modernising techniques arrive and flourish, while traditional modes of working requiring skill, craftsmanship and tact are outsourced, computerised, right-sized and AI-enhanced — but yet the end product gets no less cumbersome, no faster, no leaner, and no less risky. There may be fewer subject matter experts around, but there seem to be more software-as-a-service providers, MBAs, COOs, workstream leads and itinerant school-leavers in call-centres on the outskirts of Brașov

The pioneer of this kind of modernism was Frederick Winslow Taylor. He was the progenitor of the maximally efficient production line. His inheritors say things like, “the singularity is near” and “software will eat the world” but for all their millenarianism the on-the-ground experience at the business end of this all world-eating software is as grim as it ever was.

We have a theory that this “data reductionism” reducing everything to quantisable inputs and outputs — owes tends to a kind of reductionism, only about time: just as radical rationalists see all knowledge as reducible to, and explicable in terms of, its infinitesimally small sub-atomic essence, so the data modernists see it as explicable in terms of infinitesimally small windows of time.

This is partly because computer languages don’t do tense: they are coded in the present, and have no frame of reference for continuity. And it is partly because having to cope with history, the passage of time, and the continued existence of objects, makes things exponentially more complex than they already are. An atomically thin snapshot of the world as data is enough of a beast to be still well beyond the operating parameters of even the most powerful quantum machines: that level of detail extending into the future and back from the past is, literally, infinitely more complicated. The modernist programme is to suppose that “time” is really just comprised of billions of infinitesimally thin, static slices, each functionally identical to any other, so by measuring the delta between them we have a means of handling that complexity.

That is does not have a hope of working seems beside the point.

In any case, just in time rationalisers take a cycle and code for that. What is the process, start to finish, what are the dependencies, what are the plausible unknowns, and how do we optimise for efficiency of movement, components and materials, to manage

It’s the long run, stupid

The usual approach for system optimisation is to take a snapshot of the process as it is over its lifecycle, and map that against a hypothetical critical path. Kinks and duplications in the process are usually obvious, and we can iron them out to reconfigure the system to be as efficient and responsive as possible. Mapping best case and worst case scenarios for each phase in that life cycle can give good insights into which parts of the process are in need of re-engineering: it is often not the ones we expect.

But how long should that life cycle be? We should judge it by the frequency of the worst possible negative event that could happen. Given that we are contemplating the infinite future, this is hard to say, but it is longer than we think: not just a single manufacturing cycle or reporting period. The efficiency of a process must take in all parts of the cycle — the whole gamut of the four seasons — not just that nice day in July when all seems fabulous with the world. There will be other days; difficult ones, on which where multiple unrelated components fail at the same moment, or where the market drops, clients blow up, or tastes gradually change. There will be almost imperceptible, secular changes in the market which will demand products be refreshed, replaced, updated, reconfigured; opportunities and challenges will arise which must be met: your window for measuring who and what is truly redundant in your organisation must be long enough to capture all of those slow-burning, infrequent things.

Take our old, now dearly departed, friends at Credit Suisse. Like all banks, over the last decade they were heavily focused on the cost of their prime brokerage operation. Prime brokerage is a simple enough business, but it’s also easy to lose your shirt doing it.

In peace-time, things looked easy for Credit Suisse, so they juniorised their risk teams. This, no doubt, marginally improved their net peacetime return on their relationship with Archegos. But those wage savings — even if $10m annually, were out of all proportion to the incremental risk that they assumed as a result.

(We are, of course, assuming that better human risk management might have averted that loss. If it would not have, then the firm should not have been in business at all)

The skills and operations you need for these phases are different, more expensive, but likely far more determinative of the success of your organisation over the long run.

The Simpson’s paradox effect: over a short period the efficiency curve may seem to go one way; over a longer period it may run perpendicular.

The perils, therefore, of data: it is necessarily a snapshot, and in our impatient times we imagine time horizons that are far too short. A sensible time horizon should be determined not by reference to your expected regular income, but to your worst possible day. Take our old friend Archegos: it hardly matters that you can earn $20m from a client in a year, consistently, every year for twenty years if you stand to lose five billion dollars in the twenty-first.

Then, your time horizon for redundancy is not one year, or twenty years, but two-hundred and fifty years. Quarter of a millennium: that is how long it would take to earn back $5 billion in twenty million dollar clips.

On the virtue of slack

Redundancy is another word for “slack”, in the sense of “looseness in the tether between interconnected parts of a wider whole”.

To optimise normal operation, we hear, we should minimise slack, thereby generating maximum responsiveness, handling, cornering: what musicians would call “attack” — tightness gives the greatest torque, the most direct transmission of power to road; the minimum latency.

The tighter we couple inputs to outputs, the faster the response. But the less margin there is for variation.

And, as Charles Perrow notes this in-the-moment flow state, when the machine is humming, is only a stable state in tightly constrained environments. Where every outcome can be predicted, monitored, and sub-optimal ones can be avoided by rote.

But, generally, these are not very interesting environments. They are production lines. Factory shop floors — nomological machines — where every element of the process is under control. It is where production is not tightly controlled — intervening agents, third parties, shifting priorities and market conditions — that things get “interesting”.

That very lack of “give” that makes a sports car so responsive on a dry track makes it skid off a wet one. The less slack there is, the less time an operator has to diagnose and fix a problem — or shut the system down — to avoid catastrophic damage.

A system with built-in back-ups and redundancies can go on working while we repair failed components. A certain amount of “stockpiling” in the system allows production to continue should there be any outages or supply chain problems throughout the process.

But even a production line environment is not perfectly stable. It should be in a constant state of improvement whereby engineers monitor and adjust to optimise, to cater for evolving demand, to react to market developments, and capitalise on new technology and knowhow.

This is “meta-production”: a valuable “background processing” function — important and valuable but not day to day “urgent”— for which “redundant” personnel can be occupied, from which they can redeploy immediately should a crisis arise.

This has two benefits: firstly the process of “peacetime” self-analysis should in part be aimed at identifying emerging risks and design flaws in the system, thus heading off incipient crisis; secondly, to do that the personnel need expertise: an intimate, detailed, holistic understanding of the process and the system. By intimately understanding the system, these second-line workers should therefore be better able to react to a crisis should one arise.

This behaviour rewards long-term “skin in the game”. The best employees here are long-serving, local, full-time, employees full of institutional knowledge and practical hands-on systems knowhow. Inexperienced outsourced labour, of the sort by whom these traditional experts are being systematically replaced, will be far less use in either role.

To be sure, the importance of employees, and the value they add, is not constant. We all have flat days where we don’t achieve very much. In an operationalised workplace they pick up a penny a day on 99 days out of 100; if they save the firm £ on that 100th day, it is worth paying them 2 pennies a day every day even if, 99 days out of 100, you are making a loss.

Fragility and tight coupling

The “leaner” a distributed system is, the more fragile it will be and the more “single points of failure” it will contain, whose malfunction in the best case, will halt the whole system, and in tightly-coupled complex systems may trigger further component failures, chain reactions and unpredictable nonlinear consequences.

A financial market is a complex system comprising an indeterminate number of autonomous actors, many of whom (notably corporations) are themselves complex systems, interacting in unpredictable ways.

The robustness of any system depends on the tightness of the coupling between components. How much slack is there? In financial markets, increasingly, none at all.

When the JC started practise a millennium ago, to convey an urgent written communication one gave it to a chap on a bicycle. Well — one gave it to a secretary, who sent it to the mailroom, and they gave it to a chap on a bicycle. Facsimile was the innovation: while quicker than a bike courier, it was still manual and bounded at either end by analogue processes such that the communication began and ended embedded in a physical substrate which you couldn’t easily reply to, forward let alone cut and paste from.

The analog universe thus imposed its own immutable sobriety upon the conduct of business: there was a genteel maximum at which matters progressed, and that was that. Time is its own natural fire break. You could charge down to the mail room and call back an ill-advised letter in a way you can’t with an intemperate email. Just having the letter typed meant it passed through multiple hands, that effluxion was itself a kind of self-enforcing circumspection and a kind of natural brake upon precipitate behaviour.

In any case slow, loosely-coupled chain reactions have a better chance of being stopped, or contained. The liquidity crunch that ruined Silicon Valley Bank unfolded in minutes, not hours, and did for Credit Suisse, an unrelated bank on a different continent before bank executives could work out what was going on.

So, yes, financial services are tightly coupled. The increasing speed and complexity of the system’s interconnectedness aggravates crash risk. The more interconnections, the faster information flows around the system, the more quickly it can swamp whatever systems we erect to contain it. Credit Suisse had its own fundamental problems, to be sure, but the speed at which it was brought down by entirely unconnected system events should surely give pause for thought.

Redundancy — slack — in this environment, is a virtue.

Regulatory human capital?

Instinctively, we all know this.

We build certain kinds of redundancy into our systems precisely as a failsafe against catastrophic failure. Financial services regulators require banks to hold regulatory capital — cash, held against no specific risk, as a bulwark against divers credit and liquidity crises.

Tier 1 capital is a buffer — slack; a system redundancy — designed to protect not just the individual institutions who must hold it but the wider system. As executives at Lehman and Credit Suisse would tell us, after the fact, capital takes you so far. (Before the fact they might have grumbled, too, that capital is an expensive dead weight on corporate returns.)

For regulatory capital is an airbag: protects you in a prang, but doesn’t help you avoid one in the first place. To be sure, there are accounting techniques that do: risk weighting, leverage ratios, regulatory margin — when they work, they are better than airbags, but they suffer from being determinate responses to unpredictable problems. There have already been three Basel Accords; they are working on a fourth, because the first three haven’t had the desired effect. We still have periodic market meltdowns, not because the Basel rules aren’t detailed enough, but because, fundamentally, fixed rules cannot manage indeterminate risk situations. We have seen over and over well-meant rules behave counterintuitively at times of stress.

We should not be surprised: accounting rules aren't sentient. They cannot read the market, understand a given institution’s cultural dynamics, let alone its particular risk profile in times of unforeseeable stress.

But different kinds of buffers might be more effective at avoiding the pickles that leveraged financial institutions can get themselves into. Buffers of resource, material and significantly expert people: overabundance of skill, experience and expertise that can diagnose, react to, prevent and manage liquidity crises.

Why not, as well as regulatory share capital, encourage our institutions to hold excess human capital? Or at least be less cavalier about systematically removing it, in the name of short-term cost savings.

Just as we must hold share capital in fair weather as well as foul, we should not expect to run expertise in fair weather on a shoestring. You can’t buy-in institutional knowledge in a time of crisis. You can’t buy institutional knowledge at all. Even un-contextualised expertise, at a time of panic, will command outrageous premiums.

Jidoka

But what, a finance director might ask, would these expensive experts do if they are technically “redundant”?

Unlike tier 1 capital, human capital need not just sit there costing money. These are people you can use as systems design and process experts, to analyse systems, root out anachronisms, build parallel state-of-the-art IT systems from which legacy infrastructure can be migrated. This is jidoka — automation with a human touch. This is creative, rewarding, builds

We run the gamut from super-fragility, where component failure triggers system meltdown — these are Charles Perrow’s“system accidents”; a continuum between normal fragility, where component failure causes system disruption and normal robustness where there is enough redundancy in the system that it can withstand outages and component failures, bit components will continue to fail in predictable ways, and then antifragility, where the redundancy itself is able to respond to component failures and secular challenges, and resigns the system in light of experience to reduce the risk of known failures.

The difference between robustness and antifragility here is the quality of the redundant components. If your redundancy strategy is to have lots of excess stock, lots of spare components and an inexhaustible supply of itinerant, enthusiastic but inexpert school-leavers from Bucharest ,then your machine will be robust and functional will be able to keep operating as long as macro conditions persist, but it will not learn it will not develop, and it will not adapt to changing circumstances.

An antifragile system requires both kinds of redundancy: plant and stock, to keep the machine going, but tools and knowhow, to tweak the machine. Experience, expertise and insight. The same things — though they are expensive — that can head off catastrophic events can apprehend and capitalise upon outsized business opportunities. ChatGPT will not help with that.

Suitable candidates for regulatory human capital

Speaking of systems there is, too, a negative feedback loop operating here. The institutional knowledge lives with loyal, long-serving employees. The 20-year operations veteran you made redundant in the last cost-cutting challenge is not fungible with the team of school leavers from Bucharest to whom you diffused his role. Nor will those call-centre contractors have the expertise or disposition to be much use as a system redundancy: they don’t have the skills, commitment or continuity of experience to help with re-engineering systems and optimising processes: that is a job that requires subtlety, and intimate understanding of how the organisation ticks. Outsourced contractors neither know nor care.

“Redundancy” as a key to successful change management

But gravity always wins.

Radiohead, Fake Plastic Trees (1992)

Complex systems seek out their own equilibria. (A complex scenario that does not is not a system. It will fly apart).

It finds its equilibrium not from by divine command from the centre, but by countless decisions by the autonomous components that comprise the system. Over time, those autonomous components — people, mostly — react to stimuli, settle into habits and contrive ways of working, as they to, creating their own sub-networks, dependencies and generally acquiring their own meta theories of what they are there to do and how best to do it (some do this more consciously than others, but all, at some level do it.)

These priorities will be personal to each component: they may partly coincide with the organisation’s but won’t entirely — it is no part of a corporation’s plan, above all else, to make sure I stay here, and thrive, and get paid, while minimising personal risk and responsibility, but this, we submit, motivates most corporate employees more profoundly than ensuring immaculate shareholder return. But we digress.

In any case the systems and subsystems evolve their own ways of working. They create their own efficiencies — efficiencies that yield to those personal motivations, and may be quite perverse to the organisation’s stated mission.

They wear in grooves, smooth down edges and naturally, through the adaptive process of usage, seek out “local maxima”, judged from the perspective of the local components.

We should not be surprised that systems which have found such an equilibrium are hard to shift from it. Call that equilibrium an “operating paradigm”. They will, through force of habit, precedent, template, and agreed ways of doing things, drift back to it.

In a fight between logic and gravity, gravity always wins. The only way to beat gravity is to work with it, to find new maxima.

It stands to reason that a single “change agent” who arrives from outside and says, “hey, fellas, wouldn’t it be great if we fixed this?” won’t get far with the veteran crew who run the process now. Imagine an uncredentialised outsider presenting special relativity to the royal academy in 1700, a few years after Newton published Principia Mathematica. It is hard to imagine such an outsider even getting an audience, let alone going over well.

The thing about an operating paradigm is that it is operating. On its own terms, it works. It isn’t in crisis. Now in Thomas Kuhn’s conception of them, paradigms generally only break down when they stop working on their own terms. Even then, Credentialed practitioners go out of their way to reframe their data to ensure it is consistent with the paradigm. They make things up to make it work: cosmological constants, dark energy, even an entire multiverse. As far as its constituents are concerned, it is working fine. They may regard it as a thing of beauty, a many-splendoured contraption that they have, over the ages, grown into and dependent on, the way a beaver grows into and dependent on its dam. They will not easily give it up — cannot: they would be lost without it. We should not be surprised to see well-meant change initiatives foundering against this kind of entropy: this will for things to settle back to how they were.

This is the single virtue of the reduction in force. By arbitrarily removing a percentage of the system components, you might force it out of equilibrium, giving the components no choice but to find new ways of working. But their motivations as they do so are no less self-motivated than they were: you cannot shock a system into behaving selflessly.

Damon Centola research about concentration and bunching of constituents to ensure change is permanent. Complex change isn't like viral infection. We can’t expect to drop jewels of crystalline logic into a well established system equilibrium and expect it to spontaneously revolutionise itself.even viral infections,which do that, rip through the population and then vanish. Individuals are either dead or resistant to the virus, but beyond that the system carries on more or less as it did.

A better model, Centola says, is a fishing net. Where a virus spreads quickly and burns out before people have been influenced to change ( and indeed may be more resolutely set against change), when people are exposed to change through many strong, deep network ties change will spread more slowly but more effectively and permanently.

This, too stands to reason: if we are invited to propose change and sponsor it, rather than having it imposed upon us, we are more likely to own it.