By Simon Caulkin, award-winning business journalist.

Failure demand is a key concept for anyone running services. That only a minority of managers have ever heard of it speaks volumes for the state of management practice. Yet for those in the know it is a huge untapped reservoir of free improvement.

Failure demand is a defining symptom of the industrial-age but still dominant management paradigm we call command and control. C&C (for short) for many people summons up an image of commanders barking orders and demanding obedience from underlings. In fact, the key element is control. It results from the attempt to manage backwards from the desired outcome, which is a form of central planning, and like all central planning involves instruction from above and an apparatus of plans, targets, incentives and standards to channel effort towards the intended result. The hallmarks of C&C organisation, so common that no one even queries it, are management remote from the work, and work fragmented between front and back offices and by functional activity. It has been likened to driving using a rear-view mirror.

The better alternative – ‘Beyond C&C’ – is to think of the organisation and its customers as a system and manage forwards, not backwards. Demand and its nature is the starting point. The customer is boss, not the manager. This is not hard to understand in principle – but not by those trying to drive using a rear-view mirror.

It helps to know how the idea of failure demand originated. In the 1980s, Vanguard’s John Seddon was working with DEC Direct, a now defunct computer manufacturer that had the novel idea of selling computers by phone. To boost sales, the DEC chief wanted to introduce incentives. As a psychologist, Seddon reckoned that incentives would have perverse consequences (oh yes). Instead he proposed finding out what callers actually wanted. Investigating, the answer was clear enough: they wanted solutions to multiple problems with existing orders – documentation, billing, missing parts. Which led to the thought that if these unwanted calls could be eliminated, there would be more time (capacity) for agents to do what they were supposed to do – sell.

At first the offending calls were simply referred to as ‘calls we don’t want’. But it soon became evident that they were persistent and systemic – created by the system – qualities reflected in the name Vanguard finally settled on, failure demand, as opposed to the calls the organisation did want, the ones it existed to serve, which it called value demand. Failure demand is defined as ‘a demand caused by a failure to do something or to do something right for the customer’. Failure to do something – turn up, call back, deliver something – causes the customer to make another demand on the system. A failure to do something right – not solve a problem, send out wrong or incomprehensible forms, turn up at the wrong time – similarly generates knock-on demand and extra work.

Failure demand was a critical discovery. As it understood more, Vanguard came to see it as the smoking gun that proved a) that the C&C paradigm that enabled traditional mass-production didn’t work for services, and b) why. The reason is not hard to seek. The model behind the mass-production mindset of the 20th century is Adam Smith’s pin factory, based on standardisation and specialisation to achieve economies of scale and drive down unit costs. But customer service, let alone medical treatment, social care or benefits, can’t be made in a factory with standard times and procedures. Since it is unable to absorb the variety of human demand, it condemns those who are ill-served to come back until their problem is resolved. By manufacturing failure demand, this kind of service is self-defeating.

Once this is recognised a number of seeming paradoxes are suddenly explicable. Failure demand explains why conventional cost-control methods don’t lower overall cost; why efficiency and productivity measures aimed at regulating apparently rising demand (outsourcing, for example) do the opposite; and why high cost and low quality are as inseparable as the reverse. It explains how organisations can be simultaneously frantically busy and highly ineffective.

Does that remind you of anything? It should.

The bad news is that failure demand is shockingly prevalent, everywhere. Among the worst offenders are banks, financial services and telecoms in the private sector, where ‘calls we don’t want’ can be as much as 80 per cent of the total. The ratio is similar in parts of the NHS that Vanguard has studied, and probably the rest of it too. In other public services, such as the police and local authorities, 50-60 per cent is common. Even organisations that pride themselves on reaching all their service targets are dismayed to discover that up to half of their resource is being consumed by non-value work.

Let’s spell out some of the implications.

The NHS, for example. The reason the NHS is in permanent crisis is not inexorably rising demand, as the headlines would have us believe. Instead it is choking on self-created failure demand that causes patients to present and represent multiple times for the same issue. What’s more, the most intensive consumers of resource often aren’t the most ill but those that the service is least able to help: frail elderly stroke or accident victims who are kept alive at the cost of increasing indignity, pain and distress to themselves and their relatives, or those presenting over and over for drug- or alcohol-related issues whose underlying problems are not medical but chaotic lives – and the latter group is consuming more resource than the former, contrary to what we are told. Other public services are in the same boat: they do have a resource problem, but it’s one of deployment rather than quantity, as usually supposed. As just one contentious example, take housing, where demand for local authority properties is inflated by lists that are full of applicants who are dead, have moved away, are on all the lists in the region or are obviously ineligible, and cumbersome letting processes that encourage applicants to apply for every property available, however unsuitable, in the hope that once accepted they will be able to swap it for something more appropriate.

Private-sector customer service organisations are similarly dysfunctional. Because of their industrial design they don’t consider customers in the round or themselves as systems, with the result that they don’t perceive the double counting. All they can see is greater numbers of people clamouring at the door, which ironically they often attribute to growing value demand. One result is that many service organisations have no idea what underlying real demand is, nor their capacity to deal with it.

But there is another side of the ledger. Being self-created, failure demand is under the organisation’s control. The good news is that for aware management failure demand represents enormous unlooked for potential for improvement. Eliminating or at least reducing it provides a double hit. It cuts the cost of service by reducing rework and duplication. But at the same time – the big secret – it also frees up capacity to deal with the value demand, which now has much greater visibility.

Just how large the gain will be can never be accurately predicted in advance. But it is likely to be far greater than anyone would dare to put in a plan – as the two examples below make clear.

  • A large insurance company was planning to bring back its customer-service operation to the UK from India to improve ‘customer retention’. Instead of simply recreating the outsourced operation in the UK the leader was helped to analyse demand, which she found to be running at 70 per cent failure and just 30 per cent value demand. Further study showed that the primary cause of failure demand was detailed contract specifications that left agents no flexibility to respond to the variety of customer calls. In some cases it took up to 17 transactions to resolve a single case, with an average of 2.5. In response the work was redesigned with aim of making each transaction ‘clean’ so that a case could be settled in a single pass, with agents equipped to handle all predictable causes of demand and expertise on hand for the others. Two years on, the UK service centre was handling all the repatriated calls with 300 agents instead of the previous 700. C&C methods are now being replaced by systems thinking throughout the company.
  • In another insurance business, part of a large UK bank, the leader of a home claims operation was in charge of 35 ‘change projects’ aimed at combating rising costs and weak Net-Promoter scores. Much of her job was checking KPIs and ‘deliverables’ on the projects, while keeping operational ‘traffic light’ measures showing ‘green’. When she started studying the service as a system, however, she was shocked to find that none of this activity management was helping distressed customers get back to normal – worse, nor were her change projects. When senior managers were similarly sent out to study, they quickly agreed to cancel half the projects on the spot and for the first time saw the claims process through the customer’s eyes. As a result, failure demand shrivelled, claims were settled in days rather than weeks, and customer satisfaction shot up. Soaring morale in a front line which loved being able to help customers was an added bonus; more surprisingly, as trust between insurer and insured increased, indemnity costs fell by one third. After getting over the shock of discovering that their own work was the cause of the systemic failure demand (failure demand squared, as it were), managers too enjoyed their new role of making it easier for people to do their jobs.

As Peter Drucker once put it, ‘There is surely nothing quite so useless as doing with great efficiency what should not be done at all.’ To access the huge untapped reservoir of free improvement simply requires leaders to understand that failure demand is systemic, that it is a signal of ineffectiveness and that the only way to be rid of it is to change the system, change their theories of control, design effective services and, thus, go beyond command and control.