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MANAGING SCARCITY IN ORGANIZATIONS

St. John’s Regional Health Center, an acute care hospital in Missouri, had a problem with its operating rooms. Some thirty thousand surgical procedures were performed annually in thirty-two operating rooms, and scheduling the rooms was proving difficult; they were always fully booked. In 2002, the hospital’s operating rooms were at 100 percent capacity. So when emergency cases arose—and they were often 20 percent of the full load—the hospital was forced to bump long-scheduled surgeries. “As a result, hospital staff sometimes performed surgery at 2 a.m., physicians often waited several hours to perform two-hour procedures, and staff members regularly worked unplanned overtime,” according to a study summarizing the remarkable events that happened next.

This was a classic case of scarcity: more surgeries than operating rooms. St. John’s was stuck in a scarcity trap. The hospital was constantly behind, and because it was behind, it had to reshuffle surgeries, struggled with sleep and work regulations, and became even less efficient. Rearranging in circumstances like this can be costly. And, at least in the short run, these efforts can exacerbate scarcity because a portion of the already insufficient budget is “wasted” on the rearranging. The hospital was like the overcommitted person who finds that tasks take too long, in part because the person is overcommitted and cannot imagine taking on the additional—and time-consuming—task of stepping back and reorganizing.

But St. John’s had to figure out what to do. The hospital administration brought in an adviser from the Institute for Healthcare Improvement who studied the problem analytically, with the luxury of not having to tunnel on the hospital’s daily pressures. He came up with a rather surprising solution: leave one room unused. Dr. Kenneth Larson, a general and trauma surgeon at St. John’s, responded as you might expect: “We are already too busy, and they want to take something away from us. This is crazy,” he remembered thinking.

Yet there was a profound logic to this recommendation, a logic that is instructive for the management of scarcity. On the surface, what St. John’s was lacking were operating rooms. No amount of reshuffling could solve that problem. But if you looked deeper, the lack was of a slightly different sort. Surgeries come in two varieties: planned and unplanned. Right now the planned surgeries took up all the rooms. Unplanned surgeries, when they showed up (and they did!), required rearranging the schedule. Having to move a planned surgery to accommodate an emergency came at a cost. Some of it was financial—overtime—and some may have been medical—more errors. But part of it was a cost in efficiency. Having people work unexpectedly late is less efficient. They are less proficient at their tasks, and each surgery takes longer.

Without the reshuffling imposed by emergencies—with everybody working the scheduled hours and taking less time—there were enough operating rooms to handle all the cases. The scarcity in rooms was not really a lack of surgery space; it was an inability to accommodate emergencies. There is a close analogy here to the indebted poor, whose money might often suffice to live a bit better if it were spent smoothly and without shocks. But much of that money goes to paying off debts. It is not just the tight budget. It is that a chunk of the money goes toward financing the need to catch up. In the St. John’s case, it was not that the hospital was too “poor” in operating rooms. It’s that when emergencies arrived, the tight space went toward accommodating them and then catching up again.

“Everyone assumed that because the flow of unscheduled surgeries can’t be predicted, setting aside an OR just for ‘add-ons’ would be a very inefficient use of the space,” said Christy Dempsey, vice president of the Emergency Trauma Center, who led the initiative. As it turns out, the terms “unplanned” or “unanticipated” surgery are a bit misleading: they imply that these emergency surgeries are unpredictable. Of course, while each individual surgery is not known in advance, the fact that there will be such surgeries, much like the shocks that hit the poor or the busy, is quite predictable. There is always a steady flow of “unanticipated” cases. Why not set aside an operating room to be used specifically for unscheduled cases? That way, all the other operating rooms could be packed well and proceed unencumbered by surprises, and all the unplanned surgeries would go into the one specially designated room.

It worked. Once one operating room was dedicated to emergency surgeries alone, the hospital was able to accommodate 5.1 percent more surgical cases. The number of surgeries performed after 3 p.m. fell by 45 percent, and revenue increased. The trial had lasted only a month before the hospital made the change permanent. In the two years that followed, the hospital experienced a 7 to 11 percent increase in surgical volume each year.

In fact, once the hospital began to appreciate the benefits of change, other insights followed. Surgeons had tended to schedule surgeries earlier in the week to ensure that postoperative rounds would not fall on weekends, a practice that had led to an uneven distribution of elective surgeries. This imbalance became transparent once there weren’t emergency surgeries to hide it. Before long, St. John’s started scheduling elective surgeries evenly over the entire week, and further improvement followed.

UNDERAPPRECIATED SLACK

The St. John’s case illustrates something fundamental to the scarcity trap. The lack of rooms the hospital had experienced was really a lack of slack. Many systems require slack in order to work well. Old reel-to-reel tape recorders needed an extra bit of tape fed into the mechanism to ensure that the tape wouldn’t rip. Your coffee grinder won’t grind if you overstuff it. Roadways operate best below 70 percent capacity; traffic jams are caused by lack of slack. In principle, if a road is 85 percent full and everybody goes at the same speed, all cars can easily fit with some room between them. But if one driver speeds up just a bit and then needs to brake, those behind her must brake as well. Now they’ve slowed down too much, and, as it turns out, it’s easier to reduce a car’s speed than to increase it again. This small shock—someone lightly deviating from the right speed and then touching her brakes—has caused the traffic to slow substantially. A few more shocks, and traffic grinds to a halt. At 85 percent there is enough road but not enough slack to absorb the small shocks.

And yet, even those who should know better routinely undervalue slack.

You used to have an amazing assistant always ready to do the tasks you needed, on short notice, happily, and well. But then a management consultant discovered that your assistant had a lot of free time on his hands. The department was reorganized, and now you share the assistant with two other people. The office’s time-use data show that this is much more efficient; now the assistant’s schedule is packed as tight as yours. But now your last-minute short-notice requests can no longer be handled immediately. This means that, with your heavy schedule, even the smallest shock sets you behind. And as you fall behind, you start to juggle and fall behind further and further. The assistant was an important source of slack. He allowed for the handling of “emergencies” when all your regular venues were fully scheduled. The very fact that the assistant was “underused,” like that room at St. John’s, is what made the assistant valuable.

A standard impulse when there is a lot to do is to pack tightly—as tightly as possible, to fit everything in. And when you are not tightly packed, there’s a feeling that perhaps you are not doing enough. In fact, when efficiency experts find workers with “unused” time on their hands, they often embark on making those workers use their time “more efficiently.” But the result is that slack will have been lost. When you are tightly packed, getting stuck in the occasional traffic jam, which for others is only mildly annoying, throws your schedule into total disarray. You are late to meeting number one, and with no time in between, that pushes into meeting number two, which pushes into obligation number three. You finally have no choice but to defer one of today’s tightly packed obligations to the next day, except, of course, that tomorrow’s schedule is “efficiently” packed, too, and the cost of that deferral ends up being high. Sounds familiar? Of course it does. You have undervalued slack. The slightest glitch imposes an obligation you can no longer afford, and borrowing from tomorrow’s budget comes at high interest.

We fail to build slack because we focus on what must be done now and do not think enough about all the things that can arise in the future. The present is imminently clear whereas future contingences are less pressing and harder to imagine. When the intangible future comes face to face with the palpable present, slack feels like a luxury. It is, after all, exactly what you do not feel you have enough to spare. What should you do? Should you leave spaces open in your schedule, say, 3–4 p.m. Monday and Wednesday, just in case something unexpected comes up, despite the fact that there is so much you’d like to do for which you have so little time? In effect, yes. That’s what you do when you allocate forty minutes to drive somewhere a half hour away, or when you salt away some money from your monthly household budget to save for a rainy day. When you face scarcity, slack is a necessity. And yet we so often fail to plan for it. Largely, of course, because scarcity makes it hard to do.

SLACK VERSUS FAT

The mishandling of slack is not only about individuals; it applies to organizations as well. During the 1970s and the early 1980s, there was a perception that many corporations were “bloated.” Some industries were so awash with cash that the executives spent carelessly. They would overpay for real estate and business acquisitions, fail to bargain, and be unconcerned with the bottom line. Cash was spent so badly that some oil companies were worth less than the value of the oil they owned; the market anticipated they would simply waste their assets. The leveraged buyout wave in the 1980s was an attempt to solve this problem. The logic was simple: buy these companies and impose pressure by placing them in debt. Move them from abundance to scarcity. The discipline of debt—in our parlance, the focus that comes from scarcity—would improve performance. The executives would start paying attention, spend more prudently, and produce greater profits.

In fact, a raft of empirical studies showed that, whatever their other consequences, leveraged buyouts did improve corporate performance. One reason is that the “corporate fat” exacerbates the incentive problem of managers. They spend poorly because they are spending someone else’s money. Fat, which is effectively free money, is spent on luxuries that management enjoys but are useless from the shareholders’ perspective. By increasing leverage and reducing fat, managers spend more wisely.

Leverage also had an effect because of the psychology of scarcity. Companies became “lean and mean” in part for the same reason deadlines produce greater productivity, and low-income passengers know the price of cabs. Being a hypervigilant manager who keeps costs low can require a great deal of cognitive effort. You must negotiate diligently with suppliers and scrutinize every line item to decide if an expense is necessary. This kind of focus is easier to come by under scarcity and harder to come by under abundance. Even private companies, where managers are spending their own money, start acting “fat” when awash in cash.

But as we have seen, slack is both wasteful and beneficial. When cutting, it can be hard to separate out true waste from useful slack, and indeed, many of the leveraged companies were left at the brink of bankruptcy. Faced with that reality, they tunneled. If the 1980s were a lesson in the power of cutting fat, the 2000s were a lesson in the danger of managerial myopia. Perhaps these two were related. Cut too much fat, remove too much slack, and you are left with managers who will mortgage the future to make ends meet today.

MARS ORBITER

In December 1998, NASA launched the Mars Orbiter. Missions to Mars are fueled by centuries of human fascination with a planet so close, so similar in size to Earth (it even has a similar length of day) and with a tiny but tantalizing possibility of life. Orbiter was unlikely to make major findings by itself. But it was a spearhead. It would provide valuable data for future missions, perhaps even a manned landing on Mars. Its launch was the culmination of a $125 million project involving tens of thousands of hours of effort. As per its name, Orbiter was designed to enter a stable orbit close to Mars from which it would collect data.

Entering a stable orbit around a planet is tricky business. As the satellite approaches, gravity pulls it in. If the satellite approaches too slowly, gravity’s pull is strong enough to crash it on the surface. If the satellite is traveling too fast, gravity does too little: the satellite skates by the planet and proceeds in a different direction. At just the right speed (and the right angle, of course) the pull of gravity is just enough to pull the satellite into a stable orbit. Needless to say, determining the proper speed requires complex and precise calculation. As Orbiter approached Mars, it would have to fire its reverse thrusters to slow down just enough to get caught in Mars’s orbit. Since it takes about ten minutes for a signal to reach from Earth, this was all pre-programmed. All ground control could do was sit and listen (with a delay). Luckily, there are not too many surprises in the dead of space. Astrophysical calculations can be made with a precision that is the envy of earthbound engineers.

Nine and a half months after launch, on September 23, 1999, Orbiter reached Mars and began to execute its entry procedure. This would take it behind Mars, preventing any contact for several minutes. But then came the sign of trouble: no transmissions from the spacecraft at all, even though Orbiter was to have reemerged. With every tense second, a bit of hope dissipated. Eventually, the ground crew gave up. Orbiter was presumed to have crashed.

In the aftermath of such a public failure, scrutiny would follow. What happened? Why a crash? What could have been done to prevent it? Who was to blame? Failures, especially of complex systems, typically have many causes. In this case, however, the culprit was both newsworthy and obvious. The reverse thrusters had fired too strongly. But what was particularly intriguing was the degree to which the firing was off. NASA calculated that the ratio of desired firing to actual firing was a curiously familiar number, 4.45. This is the number used to convert between the metric and British measures of force. The embarrassing error quickly became apparent.

Satellites like Orbiter are built piecemeal by several subcontractors. The thrusters, built by one firm, were interpreting the input they were receiving in pounds, the English system measurement of force. The central processor, built by a different firm, was providing the input in newtons, the metric system measurement. Every time the processor said “X,” the thrusters heard “4.45 times X.” (When the processor said “10,” that meant 10 newtons, but the thrusters heard “10 pounds,” the equivalent of 44.5 newtons.) The result: Orbiter slowed down too much and got caught in the gravitational pull of Mars. For a project of this significance, this was a comical, if highly consequential, blunder.

Errors are inevitable. NASA engineers know this. This is why endless checks and tests are put in place. So what happened? In the months leading up to the launch, the entire team at the Jet Propulsion Laboratory was running behind schedule. They were understaffed and had failed to turn their attention fully to all the project details until it was late. Everyone falls behind, and it has been observed that organizations that are firefighting tend to allocate smaller teams to new projects, since much of the staff is still helping fight the last fire. Unlike workers in other industries, however, these engineers did not have access to the universal fallback of the tardy—an extension of the deadline. Celestial orbits drive the launch date: the locations of Mars and other bodies determine a narrow launch window. It is hard to negotiate with the astronomical calendar.

The tight deadline created long hours. But it also created tunneling. The focus was on making the launch date. Things directly unrelated to that goal were put off, and as it turned out, they were never returned to. The 4.45 mistake was one such casualty. The engineers’ own data showed there was something wrong well before the launch. They noticed the inconsistencies. But figuring out the source of the inconsistencies was one more task on the to-do list, and with so much left to do, not everything can be done. Following up on apparent inconsistencies was one casualty. Another casualty was a joint simulation of thruster and processor, which would have revealed the problem directly. The usual checks and balances were sacrificed, potential signs of trouble were overlooked, all in order to make the deadline. By now you will recognize this as a logical consequence of tunneling.

This is not hindsight. A NASA report to the Jet Propulsion Laboratory prior to the crash highlighted the problem. Initial project delays (perhaps because of understaffing), it argued, were leading to shortcuts and workarounds. Staff were working long hours and making mistakes. The initial delay was generating more inefficiency. Worse, crucial checks—those that seemed less pressing—were being overlooked. The report essentially foretold the pattern that led to the mix-up and eventual crash.

This is more than a symptom of falling behind. Once they established the technical autopsy, the investigators of the Orbiter crash looked to organizational reasons for the failure. One reason, they concluded, was the “Faster, Better, Cheaper” paradigm that NASA had adopted. This paradigm put an emphasis on cost savings and schedule reduction. Teams started to run short on time and tunneled. And then they neglected. In this case crucial checks were neglected because they were important but not urgent; they were not crucial to the task at hand—to make the launch happen, on time.

THE FIREFIGHTING TRAP

Both St. John’s and NASA had fallen into a firefighting trap. As the organizational researchers Roger Bohn and Ramchandran Jaikumar describe it, firefighting organizations have several features in common. First, they have “too many problems, not enough time.” Second, they solve the urgent problems but put off the nonurgent ones, no matter how important. Third, this leads to a cascade so that the amount of work to be done grows. Put simply, time is spent on fighting the immediate fire, with new fires constantly popping up because nothing is being done to prevent them. At St. John’s the surgeons were so busy dealing with patients right now that they could not step back and look at the overall patient mix. At NASA the engineers were so busy trying to make the deadline for each component that they did not look at how the components fit together. The firefighting trap is a special case of the scarcity trap.

A thorough five-year study of four top manufacturing firms in the United States documented multiple instances of firefighting. As one manager puts it: “If you look at our resource allocation on traditional projects, we always start late and don’t put people on the projects soon enough … then we load as many people on as it takes … the resource allocation peaks when we launch the project.” Based on their years of study, the researchers conclude, “There are few images more common in current discussions of R&D management than that of the overworked engineering team putting in long hours to complete a project in its last days before launch.”

Firefighting does not just lead to errors; it leads to a very predictable kind of error: important but nonurgent tasks are neglected. Just as the name implies, you are busy fighting the urgent problem (the fire); other problems, no matter how important, are drowned by the most urgent (seatbelts on the way to the fire). As a result, structural problems—important, but they can wait—never get fixed. When Microsoft shipped its Windows 2000 software, it went out with 28,000 known bugs. The project team knew they were shipping a product with lots of problems, but they were already behind the deadline. As a result, they immediately began working on a first patch, which was to fix all the bugs they knew they had shipped out. Not a good place to be when reports of new bugs start coming in.

Firefighting traps involve a great deal of juggling. You are so focused on the looming deadline that when you finish you realize the next project is suddenly due. Most of us have found ourselves doing this at one point or another, and we know intuitively that firefighting is a trap for all the reasons scarcity is a trap. Once you start firefighting, it is hard to emerge unscathed. When teams are frantically working on a project that should have already been done, they start late on the next project, which ensures they will firefight there as well and stay perpetually behind.

Understanding the logic of scarcity and slack can reduce the chance that we enter a firefighting trap. Yet we know that tunneling makes it easy to overlook other considerations. One solution, at least in organizations, is to explicitly manage and ensure the availability of slack. There is a lesson in how banks have tried to manage risk. Banks have long recognized that managers, tunneling on the bottom line, do not sufficiently take risk into account. As the 2008 financial crisis demonstrated, this is an understatement. More recently, many banks have introduced “chief risk officers,” who sit apart from the rest of the management team and report directly to the CEO. They must approve financial products, loans, and other transactions, viewing them through the lens of risk. Unlike the managers who focus (tunnel!) on the most appealing transactions and on making the big profits and the sales targets, these executives’ sole goal is to monitor risk.

Similarly, as fat continues to be cut, and slack goes with it, organizations may want someone in-house who is not tunneled on stretching resources. Someone, removed from the daily tunneling, whose job is to ensure that the organization has enough slack and who focuses not on what needs to be done today but on what possible shocks may upset tight plans tomorrow. Someone must ensure that those who are focused on meeting immediate project targets are not borrowing from future projects, thereby exhausting any slack and digging the organization deeper into a bandwidth hole in the future. It is not a coincidence that the adviser that St. John’s hired was clearly removed from the struggle for the next operating room.

MANAGE THE RIGHT SCARCE RESOURCE

The truly efficient laborer will be found not to crowd his day with work, but will saunter to his task surrounded by a wide halo of ease and leisure.

—HENRY DAVID THOREAU

There is another lesson to draw from the NASA experience. When the Jet Propulsion Laboratory crew started to fall behind, management did what most managers would do. They increased hours. They saw a scarcity of time—Orbiter must launch soon—and they deployed more time to address it. This is a common response to time scarcity. A project is running behind schedule? Put in more people on the problem to get caught up. And if an organization is stretched for employees—time is pressing, and hiring and training new people will take time—simply work your people more hours, at least until new employees can be brought in. On the surface this seems like an obvious solution and the easiest way to do more with a fixed amount of resources. Yet this response may not be as sensible as it seems. It recognizes one form of scarcity—time left to finish the project—but it ignores another form of scarcity—bandwidth. It neglects the consequences of reduced bandwidth on performance.

Consider the use of cell phones. Ten states now ban the use of handheld cell phones while driving. This makes some sense, and other states are sure to follow. After all, with only one hand on the wheel, you are bound to be a less efficient, less responsive driver. But this also makes a major, if hidden, assumption. As it turns out, drivers holding a cell phone are significantly more likely to get into an accident, but so are drivers using a headset. The hands are not the problem—the mind is. In one simulation study, drivers using hands-free phones missed twice as many traffic signals compared to those who were not on the phone. We naturally think of driving as an activity requiring physical resources, but safe driving requires more than two hands; it requires bandwidth as well.

Similarly, we often overlook bandwidth when arranging our time. What we naturally think of is the time it will take to complete our to-do list, not the bandwidth it will require or receive. Think of how the Jet Propulsion Laboratory engineers responded to the problem of the impending celestial deadline. They poured more engineer hours into the problem. But that did not necessarily provide more bandwidth, and one can argue that the overworked engineers may have given their work less total bandwidth despite the longer hours.

Nearly a century ago, Henry Ford recognized the distinction between hours and bandwidth. His decision to institute a forty-hour workweek for his factory workers was clearly motivated by profits as much as by humanitarian concerns. As one commentator observes:

When Henry Ford famously adopted a 40-hour workweek in 1926, he was bitterly criticized by members of the National Association of Manufacturers. But his experiments, which he’d been conducting for at least 12 years, showed him clearly that cutting the workday from ten hours to eight hours—and the workweek from six days to five days—increased total worker output and reduced production cost. Ford spoke glowingly of the social benefits of a shorter workweek, couched firmly in terms of how increased time for consumption was good for everyone. But the core of his argument was that reduced shift length meant more output.

Finding the data on Ford’s original experiments is difficult. But several similar studies have been run in almost a century since Ford’s experiments. One study, on construction projects, found that “where a work schedule of 60 or more hours per week is continued longer than about two months, the cumulative effect of decreased productivity will cause a delay in the completion date beyond that which could have been realized with the same crew size on a 40-hour week.” In a very different industry, a software developer notes that when his staff began putting in sixty-hour weeks, the first few weeks would see much more work getting done. But by week five, the employees were getting less done than when they had been working forty-hour weeks.

Another study looked at what happened in a cardiothoracic surgery department when the number of patients per medical service worker increased. Again, there was an increase in productivity in the short run. Patients were dealt with more quickly. But this came at a cost. There was neglect. Dealing with more patients quickly lowered quality: patients were more likely to die. In fact, even the benefits did not persist. A sustained increase in workload eventually led to an increase in the time it took to manage each patient.

The impact on productivity can also show up in other ways. Here is one researcher discussing innovation in the workplace:

At the end of each interview I asked the interviewees what they would do first to encourage innovation in their organization if they were suddenly omnipotent. By far the most common answer was time. But respondents often qualified this—they didn’t want more of the same kind of time, they wanted more unstructured time that did not have specific outputs or procedures attached to it. The managing director … put this very well when she yearned for “time to play … time to gaze out the window … time to let things settle … time to read and react.”

In a way, none of this should be surprising. Just as we get physically exhausted and need to rest, we also get mentally depleted and need to recover. Instead, with prolonged scarcity, bandwidth taxes tend to accumulate. To understand the mechanism, consider something as simple as sleep. People with time scarcity who are working more hours will try to squeeze more into the remainder of each day; they will neglect and patch things. Sleep is one obvious candidate. When you run out of time, you sleep a little less and squeeze in a few more hours of work. Yet the effects of sleep on productivity are striking. Studies have repeatedly shown that when workers sleep less they become less motivated, make more errors, and zone out more often. One clever study demonstrated this by looking at the start and end of daylight savings time, nights on which, because of the time change, people lose sleep. It found that people spent 20 percent more time cyberloafing—searching the web for unrelated content—for every hour of lost sleep on those evenings. And that is just one night of sleep. Research shows that the cumulative effects are far worse. As work hours accumulate and sleep time diminishes, productivity eventually goes down.

Yet most firms still manage hours, not bandwidth. One group of researchers describes a thirty-seven-year-old partner at a large accounting firm, married with four children:

When we met him a year ago, he was working 12- to 14-hour days, felt perpetually exhausted, and found it difficult to fully engage with his family in the evenings, which left him feeling guilty and dissatisfied. He slept poorly, made no time to exercise, and seldom ate healthy meals, instead grabbing a bite to eat on the run or while working at his desk. [His] experience is not uncommon. Most of us respond to rising demands in the workplace by putting in longer hours, which inevitably take a toll on us physically, mentally, and emotionally. That leads to declining levels of engagement, increasing levels of distraction, high turnover rates, and soaring medical costs among employees.

These same researchers tried a pilot “energy management” program. This included breaks for walks and focusing on key factors such as sleep. In the pilot study, they found that 106 employees at twelve banks showed increased performance on several metrics. Perhaps this sounds far-fetched. But how different is this from how we manage our bodies? To prevent repetitive strain injury, frequent computer users take mandated breaks. To help with computer vision syndrome, people are advised to look away from the screen every twenty minutes or so for about twenty seconds to rest the eyes. Why is it counterintuitive that our cognitive system should be so different from our physical one?

The deeper lesson is the need to focus on managing and cultivating bandwidth, despite pressures to the contrary brought on by scarcity. Increasing work hours, working people harder, forgoing vacations, and so on are all tunneling responses, like borrowing at high interest. They ignore the long-term consequences. Psychiatrists report an increasing number of patients who show symptoms of acute stress “stretched to their limits and beyond with no margin, no room in their lives for rest, relaxation, and reflection.” There is nothing magical about working forty or fifty or sixty hours a week. But there is something important about letting your mind out for a jog—to maximize effective bandwidth rather than hours worked.

Of course, all of these mistakes—from firefighting to failing to cultivate bandwidth—are individual problems, to which any person can fall prey. But organizations can magnify the problem. When one member of a team begins to fall behind or enters a firefighting mode, this can contribute to the scarcity felt by others. When one person’s bandwidth is taxed, especially at the top, a sequence of bad decisions can lead to further scarcity and to taxes on others’ bandwidth. Organizations can create a domino effect, with each individual member pulling the team toward firefighting and reduced bandwidth. But organizations can also be insightful, creating environments conducive to the successful management of scarcity’s challenges.

BENIHANA

Like many American entrepreneurs, Hiroaki (“Rocky”) Aoki had a wild youth. As a rambunctious teenager in Japan in the 1950s, he sold pornography in school and started a rock band called Rowdy Sounds. He also showed discipline: as a flyweight wrestler his hard work earned him a spot in the 1960 Summer Olympics, an athletic scholarship to an American university, and eventually the U.S. flyweight title and a spot in the wrestling Hall of Fame. As he matured, his creativity, energy, and diligence increasingly turned to business. While competing as a wrestler, he studied for an associate’s degree in restaurant management, and in his free time he ran an ice cream truck in Harlem.

Aoki’s most successful venture started small. With $10,000 from his ice cream truck, he started a four-table Japanese steakhouse called Benihana, on West 56th Street in New York. The first few years were bumpy, but the restaurant began to draw buzz for its food and atmosphere, eventually becoming a hotspot for celebrities. (Muhammad Ali and the Beatles dined there.) Aoki capitalized on this success by expanding the restaurant into a chain, first throughout New York City and eventually to the rest of the country and the world. Today Benihana is in seventeen countries. At the time of Aoki’s death in 2008, his empire was thought to be worth over $100 million. So thorough is his stereotype that it borders on parody, complete with his name, the paternity suits, intrafamily lawsuits, a collection of antique cars, an array of eccentric hobbies, and an ethnically flavored semi-mystical back story for the chain’s name (after a single red flower—benihana in Japanese—that Aoki’s father saw amid the rubble after a U.S. bombing of Tokyo in World War II).

Anyone who has been to a Benihana restaurant knows why it’s unique: The chef cooks the meal right in front of you; in fact, “cooking” does not do justice to the performance. The chef is a virtuoso: he juggles his knives, tosses food from the spatula directly onto your plate, and creates onion ring volcanoes! Only at Benihana do meals end with a round of applause. Search for “Benihana” (or, better yet, “hibachi chef”) on YouTube and you’ll see hundreds of videos, with tens of thousands of hits, showing the theatrics. All this contributes to Benihana’s success in a roundabout way. Aoki did more than create a bit of entertainment. He understood at a deep level the scarcity restaurants faced. And he solved it.

People think restaurants are about food, décor, and service. After all, this is what we experience as customers. Yet we all know wonderful restaurants that have shut down. Getting customers in the door does not ensure success in the restaurant business. Dry logistical and operational decisions drive profitability. The problem restaurants face is that much of their costs are fixed. Sure, they spend money on the food, but the ingredients do not cost as much as the overhead: salaries, rent, electricity, insurance, and so on. Whether you serve many customers or only a few, most of these costs must still be covered. As a result the business is all about “cream.” After your revenues rise to a level that covers the fixed costs, a large percentage of the remainder goes directly to profits. This creates interesting math. Three seatings on a busy Saturday night is not just 50 percent more profitable than two seatings. If the first two cover your fixed costs and leave you with a small profit, then the third is “cream,” mostly all profits.

What Aoki (and others) recognized is that the restaurant business is really about seating scarcity. How many seatings can you fit in? You get more seatings if you can squeeze in more tables. You get more seatings if you fit more people per table. You get more seatings if you can turn tables over faster, if you get four sets of customers out of a table each evening rather than three.

What appears to be theater at Benihana was really a very clever solution to scarcity. The chef’s production involves people sitting at communal tables. And communal tables of eight mean a much more efficient packing of customers. No more waiting for two tables of two to open up side by side so you can seat a party of four. At communal tables you simply fill up the tables as people come in. A table of four merely means four chairs at the table. But even better, the tables turn over much faster. The chef cooks theatrically—and quickly—in front of you. You sit, the chef is there, the menu is small, and the time to order is limited. The chef then festively paces the meal for you. The food is tossed onto your plate, and you eat quickly because you can see the following course is about to be tossed next. Even the dessert—ice cream, which near the hibachi melts quickly—is designed for speed. And when the show ends, the chef bows and you applaud and it’s over. What are you going to do, sit around and chew on your chopstick? It is hard to loiter when the chef is standing there, all done, the table has been cleared, and others are leaving. All this means that Benihana earns much more per table per night; some estimates suggest Benihana earns ten cents more in profit per dollar of revenue than other restaurants, making it far more profitable.

PACKING IN BUSINESS

Besides well-orchestrated meals, Benihana provides an important lesson for many organizations. Even when businesses are insightful enough to identify their true scarce resource, they often underappreciate the complexity of managing scarcity and the benefits that come from doing it just a little bit better.

Sheryl Kimes, an operations researcher at Cornell University, discovered this when she was hired by Chevys, a Mexican restaurant chain, to see if she could improve its profits. She started by talking to the staff to get a better feel for the challenges, and one problem was clear: long lines. In a way, this had to be good—the restaurant was popular. But it can also be a bad thing. Long lines can make you proud, but they bring in no money. You need people inside and eating, not outside and waiting. Customers can get disgruntled and not come back. You don’t want it said of you, “Nobody goes there anymore; it’s too crowded,” as Yogi Berra put it. To understand what might be done—raise prices? expand?—Kimes conducted a thorough statistical analysis, which gave her a snapshot more precise than the staff’s impressions: What was the income per table? Which tables were most occupied? What was the turnover? And so on.

What she found surprised her. The visuals showed long waits; the data showed low usage. Only during five hours each week were more than half the seats occupied. But there were many more hours with lines outside. What was going on? Two clues in the data helped crack the problem. First, there was enormous variability in usage time, and the biggest variation occurred after one meal ended and before the next one began. Even in busy times, there were long lulls between consecutive parties at a table. Second, even though restaurants like Chevys are considered places for friends and coworkers, the data told another story: 70 percent of parties were just one or two people. The restaurant didn’t seem to have the right tables for the parties it was hosting. To see if this was right, Kimes took the data on parties coming to eat and ran it through an algorithm to look for efficient packing for Chevys, particularly for what tables ought to be used. This yielded a clear suggestion: more tables for two. Management implemented it, and the result was a financial windfall—a more than 5 percent increase in sales, approximately $120,000 a year in just one branch. Of course, purchasing new tables, remodeling the restaurant, and making other changes were not without cost, but after all the accounting, the profits exceeded the costs in the first year and turned into pure profits in the ensuing years. The investment on managing scarcity earned a high rate of return.

Until Kimes showed up, Chevys was failing to manage its scarcity because it was undervaluing scarcity’s challenges. And those challenges were not trivial: serious computer analyses were needed for just one restaurant’s problem. And restaurants are not alone. Businesses often succeed and fail as a function of how they manage scarcity.