four

Rate

I know that most of what's out there in the world is occurring too quickly or too slowly for me to see.

—Roni Horn¹

Fast! Last night I cut the light off in my bedroom, hit the switch, was in the bed before the room was dark.

—Muhammad Ali²

Good timing depends on understanding how the environment is changing. A new technology has emerged. Does it represent a threat to your core business? One company may respond to change by taking its time, adopting a wait-and-see attitude. Its environment has always been stable, and executives may be right in assuming that any change will be slow and incremental. In another company, the winds of change can blow at hurricane force for years at a time, and it seems as if executives need to be supermen or superwomen to keep up. This chapter will examine different rates of change and help you use their different characteristics (direction, transparency, and so on) to make better decisions about timing.

Despite the fact that change is all around us, the actual pace of change is easy to miss or disregard. In 1995, for example, AIDS researchers made a significant discovery that revealed they had misunderstood the rate at which the virus interacted with a victim's immune system. Prior to 1995, the spread of the HIV infection was thought to be a gradual process. In fact, research revealed that the virus and the immune system were engaged in a pitched battle from the very start of the infection. This finding had major implications for the design of drug therapies and for how the disease is treated. So why did researchers overlook this crucial fact for so long?

Dr. Simon Wain-Hobson, who directed the molecular retro virology laboratory at the Institut Pasteur in Paris, said that his first reaction was, “Why didn't I think of this—it's so obvious.” He went on to say that the AIDS research field might have missed the forest for the trees in regard to rate: “we have technology that is so powerful, that is churning out so much data, so much information, that people don't take time to think,” Wain-Hobson said.³

We all have this problem: too much information and too little time to think. But the difficulty isn't just a lack of time; it is that we make the wrong assumptions. We assume, for example, that a slow rate of change is caused by another slow rate of change. Like creates like. We've learned this equation from our experience with the physical world. Swing a bat slowly, and the ball won't go very far. Swing it faster, and the ball will fly off the bat at greater speed and land much farther away. What we forget is that a given rate of speed can be the result of multiple processes, some of which can cancel each other out, like stepping on the brake and the accelerator at the same time. As AIDS researchers discovered, we need to remember that a given rate can have many causes. We like things simple: single rate, single cause. But the world is complex.

Another reason we fail to see multiple rates is that we fixate on a single rate at the expense of others. For example, Robert J. Gordon, a Northwestern University economist, discovered in the mid-1990s that “there has been no productivity growth acceleration in the 99 percent of the economy located outside the sector which manufactures computer hardware.”⁴ High tech was moving so quickly that economists missed or failed to note the lapse in progress elsewhere. We all were distracted.

Sometimes we fail to notice a rate of change because we simply assume that it doesn't exist. A good example involves our understanding of fat cells. Prior to 2008, scientists believed that individuals were predisposed, early in their lives, to develop a certain number of fat cells, and they lived with them. The hypothesis was that fat cells change in size but otherwise remain as part of our makeup. Then, in May 2008, the New York Times reported on Swedish researchers who discovered that “every year, whether you are fat or thin, whether you lose weight or gain, 10 percent of your fat cells die. And every year, those cells that die are replaced with new fat cells.”⁵

The finding has major implications for weight loss. Reducing the rate of replacement may open up a new avenue for controlling obesity. One reason the constant turnover of fat cells wasn't discovered sooner was that scientists had no way to measure the life and death of fat cells. But that wasn't the only obstacle. As science and health reporter Gina Kolata pointed out, “few even thought to ask that question.”⁶

The question you need to ask in your own work is, What rates of change are you not paying attention to?

CHARACTERISTICS OF RATES

The most obvious characteristic of a rate of change is magnitude: how fast or slow something is happening. But that is only the starting point. There are a number of other characteristics you need to take into account.

1. The normal rate. What's the normal or expected rate of change for a process?
2. Size—the Rate Envelope. What is the fastest and slowest rate of speed or change that you might encounter, and how fast or slow could that rate become?
3. Duration. How long will a given rate or frequency continue unchanged?
4. Direction. Does direction matter? If a rate changes, will it speed up or slow down?
5. Objective or subjective. Is there a difference between the real rate of change and the perceived rate of change?
6. Meaning. What does a given rate mean? How do different stakeholders interpret it?
7. Number. How many different rates of speed or change will you run into or have to manage?

Let's consider each of these characteristics in detail.

The Normal Rate

Different systems operate at different speeds. Although these speeds may change over time, it is important to know what the normal rate—or N-rate—is for a given system. The futurist and scientist Ray Kurzweil argues that progress in information technology occurs at an exponential rate—therefore, it is always accelerating. Its normal rate of change is very fast, whereas the normal or default speed of other systems can be very slow. As a general rule, technology changes more rapidly than political, legal, or cultural systems, which have different goals and requirements.

The N-rate is always contextual. When Robert Ludlum wrote the novel The Cry of the Halidon in 1975, he published it under the name Jonathan Ryder. When the book was republished in 1996, he used his real name. The reason, according to Ludlum, was that in 1974, an author who wrote more than one book a year would be considered a hack.⁷

There are at least two reasons why you should pay attention to the N-rate. First, systems with different N-rates can clash when they encounter one another, like two gears running at different speeds. (A familiar organizational solution is to create skunkworks to protect fast-moving innovators from the bureaucracy that would slow them down.) Second, systems running faster or slower than normal will return to their normal speed over time. Markets, for example, will seek equilibrium. Or, as statisticians say, there will be regression to the mean. So if something is running slower or faster than average, don't expect it to continue. In this case, the timing question to ask is, When will it return to its normal speed, and does the timing matter?

Size—the Rate Envelope

Pay attention to extreme rates of change. They can have dramatically different consequences depending on the extreme. Fire and rust, for example, are both results of oxidation; the difference is the speed with which the chemical reaction takes place. Fire is the rapid oxidation of materials. Rust results when oxidation occurs slowly. Likewise, financial markets exemplify why extreme rates of change matter: on any given day, the pace of trading can be frenetic, but markets can also freeze and stop functioning for a period of time. Both extremes have a notable impact on trading.

To find extreme rates, look for the fastest and slowest process that is important for the work you are doing. Those processes could be inside or outside your organization. Next, look for the maximum and minimum speed of each process. The result is what I call a Rate Envelope, defined by four combinations, or cells, as shown in Table 4.1.

Table 4.1 The Rate Envelope

Let's look at each of the four cells (1–4) in some detail to see why they are significant. I'll begin with the slowest process.

The Minimum Speed of the Slowest Process

Slow can be too slow. A project risks being cancelled if it fails to show at least minimal progress over time. The slowest rate, of course, is zero. It is important to flag anything that has a zero rate of change because what cannot change, bend, or flex can simply break. And that can happen quickly. For example, if a business has high fixed but low marginal costs, once the high fixed costs are met, every sale goes directly to the bottom line. But in a declining market, companies with high fixed costs can rapidly fall to their death, which is what happened during the Internet boom and bust of 2000–2001.⁸

The Maximum Speed of the Slowest Process

An important question is how much you can speed up a process that is inherently slow. For example, after a Hollywood film is shot, there is a long period of postproduction that must be accomplished in as short a time as possible because many films need to be ready either for the summer season or for a Christmas release. But film editing, like many processes, has a maximum speed. Because film production is a job where different teams manage specific tasks—adding visual effects, correcting the color, attaching the sound track, removing dust and scratches—changes made by one team must be accommodated by the others.⁹ That accommodation takes time. Even the latest technology gets you only so far where human effort and expertise are required. A recurring theme in this chapter is that we are slower than the technology we invent, which is one reason we invent it.

To identify processes in which the maximum speed of the slowest process is too slow, look for situations that are difficult to change or reverse, or processes that depend on precedent and continuity. Stamping out steroids in baseball takes a long time because of the confidentiality of doctor-patient relationships, “the sanctity of the clubhouse culture and union concerns about privacy rights.”¹⁰ Anything involving legal issues is likely to be slow. More than three hundred years ago, Shakespeare wrote about “the law's delay.” Certain things have not changed since Shakespeare's time.

The Minimum Speed of the Fastest Process

Some processes need a minimum rate of speed to succeed. Discount stores like T.J. Maxx depend on frequent repeat visits. If there is not a constant stream of new items to be browsed, shoppers will not return. I think of this as stall speed: fly slowly enough, and you will crash. The same is true for an economy. If it does not grow, it can fall into a recession.

The Maximum Speed of the Fastest Process

As a general rule, expect to find extremely high rates of speed or change in processes that depend primarily on symbols, such as letters or equations, or words that stand for real objects. For example, we can add the word tree to a sentence on a page, orders of magnitude faster than it takes to grow a real one. And when symbols refer only to other symbols, the speeds can be dazzling. Think about computers that use high-speed algorithms to execute thousands of trades per second on Wall Street. The maximum speed of the fastest process (symbols referring to other symbols) is very, very fast.

The speed and complexity of symbol systems came into play during the financial crisis that swept the globe in 2008. In fact, it recalls the time one hundred years ago when Wassily Kandinsky painted the first completely abstract painting. In an abstract painting, the shapes on the canvas do not depict anything in the real world. The artwork creates its own reality: it is a closed self-referential system. The same is true of complex financial instruments. Like abstract art, the structures financial engineers build often have no direct connection to what we call the “real world” or the “real economy,” which led the novelist Thomas Wolfe to describe stocks and bonds as “evaporated property.” “People completely lose touch [with] the underlying assets. It's all paper—these esoteric devices.”¹¹

Abstract artists needed only canvas, brush, and paint to separate symbol from reality; the modern financial system needed the birth of computers and the Internet. To paraphrase Carl von Clausewitz, I think that the modern financial system can be viewed as the continuation of abstract painting by other means. Both speak to a deeply human need, the need to use, play, and create with symbols. In fact, I think that one could say—a bit tongue in cheek—that one of Jackson Pollock's paintings (Autumn Rhythm, for example) is as good a picture of the modern financial system as you are likely to find. Complex derivatives are the natural result of financial “artists” at work.

The writer Italo Calvino describes what happens in a world in which symbols refer only to other symbols. One of his characters comments,

The difference in speed between how quickly we can change a sign or symbol and change the material reality to which it refers is one of the most important rate differences of the modern world. The result is that we have systems that run at hyper-speed and create a level of complexity that we—even those who seek to regulate such systems—cannot easily grasp.

Use the Rate Envelope as a way to assess what you know and don't know about a given situation. If you have little information about a particular cell—perhaps you don't know the maximum speed of the fastest process—then there are risks associated with your plans and projects that you haven't discovered.

Duration

It is important to know how long a given rate may last, as an amusing story about an old poacher and a local game warden illustrates.

The game warden, it seemed, was on to the poacher, who he heard was sneaking out into the woods before dawn to hunt deer illegally. Feeling exasperated that he was unable to catch the poacher red-handed, the warden organized a 2 AM stakeout in the bushes behind the fellow's cabin. He waited in the cold and darkness for signs of life, planning to follow the poacher out and confront him. Sure enough, at about 4 AM, the lights went on in the cabin, and the warden saw some activity. He was feeling optimistic.

Then the old poacher stepped out onto his back porch and called out into the darkness: “Mr. Warden,” he said, “no sense of you layin' out there gettin' all cold and damp in them bushes. Come on in here and get yourself a nice cup of coffee.”

The warden, seeing that his cover was blown, got up and went into the cabin to warm up. But he went back for another try a few weeks later. Again, he snuck into the bushes behind the poacher's cabin at 2 AM in the freezing cold. Finally, a light went on in the cabin. Again, there were signs of activity. The poacher came out on his porch.

“Hey, Mr. Warden,” he yelled. “Don't go catching cold out there in them bushes. You come in here, have some coffee and get warm.” So the warden, very embarrassed, went in and had a cup of coffee with the old poacher.

This went on for some time, and the warden was unable to catch the poacher. Some time later, he heard that the poacher was in the hospital, in grave condition following a coronary. So the warden went to visit him. “You've got to tell me something,” he said to the poacher. “When I was hiding in the bushes waiting for you, how did you know I was there?” The old poacher turned his head and smiled.

“I didn't know you was there, son. Every mornin' for thirty years I went out on my porch and yelled the same damn thing.”¹⁴

The lesson is that one way to solve the challenges associated with duration is to act continuously. Then you will never be too early or too late. Of course, acting continuously can be expensive and exhausting. Therefore, when you decide on the speed of your own actions, ask yourself what is sustainable. The poacher in the story found a rate that he could sustain over a long period of time, which enabled him to be successful.

Direction—the Way Things Are Headed

Speed refers to how fast something is happening; velocity adds the idea of direction. We often think that effective action depends on knowing which way things are headed, in effect knowing the velocity. And in many situations, the direction is clear. Most secrets will eventually come to light. Over time, fragmented industries will consolidate. Bubbles will eventually burst, and so on. But sometimes the direction of a change doesn't matter: all that matters is speed. This is particularly true when it comes to fashion. It matters less whether ties become wider or thinner, or hemlines move higher or lower, as long as there is something new to capture the customer's attention. In the 1980s, for example, Honda flooded the market with so many new models within an eighteen-month period that motorcycle design became a matter of fashion. Its rival Yamaha couldn't respond.¹⁵ It's an interesting strategy to remember. In fact, extremely high rates of change are part of the reason some industries continue to prosper.

Objective or Subjective: Know the Difference

There is a world of difference between how quickly something happens and how quickly it seems to happen. The year will always have 365 days, for example, but with age it appears to speed by. I use the labels O-rate (objective rate) and S-rate (subjective rate) to remember to take this difference into account. Customer complaints are likely to be driven by the latter rather than the former. Yet, in the case of Apple, the difference between objective and subjective rate prompted an innovation. The company found that when users could watch a progress bar, they felt that the computer completed the task more quickly.¹⁶ Similarly, during rush hour, highway signs sometimes display the time needed to reach a particular destination: 18 minutes until Route 280. Somehow, this is reassuring. Absent that estimate, frustration builds based on the subjective sense that we could be delayed indefinitely.

Meaning

How will various stakeholders interpret a given rate? Public relations firms advise companies to disclose bad news quickly. If they don't, people may think it means that they are hiding something even more awful. In the spring of 2008, Bear Stearns needed to unwind or sell certain positions. But if it acted too quickly, confidence in the bank would plummet. Individuals would worry that the bank didn't have adequate reserves, thus precipitating the very crisis that the fast action was intended to prevent. This situation comes up often enough that I have given it a name: a rate-reducing dilemma (RRD). Quick action is required, but doesn't occur because of the way speed will be interpreted. Because RRDs are almost always present in times of crisis, every risk assessment should take them into account.

Number

In any complex situation, there will always be several rates of speed in play at the same time, and the differences among them can create problems. Therefore, it is important to look for multiple rates and understand how they interact.

Think back to World War I, where the conflict was caused, in part, by the failure of diplomacy. Diplomats at the time could not cope with the volume and speed of electronic communication. Most of the gentleman who made up the diplomatic corps in 1914 “were of the old school… They still counted on the ultimate effectiveness of ‘spoken words of a decent man’ in face-to-face encounters.”¹⁷ Yet the Austrian ultimatum set a time limit that was unimaginable before the age of the telegraph and telephone, and required a fast response that was out of the question in the time given.¹⁸ It was a matter of multiple rates at odds with each other.

What was true one hundred years ago is equally true today. The speed of modern communications often requires that we respond more quickly than we can think. The demise of stand-alone Internet banking in the early days of the dot-com boom provides an example. According to the Economist, until early spring 2000 “no self-respecting financial consultant would travel without [a] bar chart showing that the marginal cost of Internet banking transactions was a tiny fraction of the cost of branch banking.”¹⁹ The argument was that Internet banks would need fewer employees and incur only a fraction of the expense compared to bricks-and-mortar competitors. Internet banks should win hands down. But we know what happened. They failed. The reason was a difference between two rates: how quickly customers would agree to trust the Internet with sensitive financial information, and how quickly costs at Internet banks would increase. The former would take a long time. The Web was and is a dangerous place, subject to viruses, system outages, and hackers. But if building trust was a slow process, other processes were not. To gain market share, Internet banks had to advertise heavily and offer customers rates that could not be sustained. As a result, costs grew much faster than businesses.

The presence of multiple rates is a problem that bar graphs often fail to capture because they, like pie charts, are static. However long we stare at one, its parts do not move. Pie charts are like fast food: we consume them in one visual gulp. In a world in which speed and time matter, they may have little nutritional value.

Even beyond communications and technology, rate differences are common. One example involves aluminum baseball bats. Aluminum bats have many advantages: they are cheaper than wooden ones; they don't break; they allow batters to hit the ball farther; and when a batter misses the sweet spot, an aluminum bat doesn't hurt his hands as much as the old wooden one does. So the case for aluminum seems clear: more interesting games, more home runs—which fans like—and lower costs. And making the switch from wood to aluminum would not upset the competitive balance of the game. All teams would benefit equally.

So what's the problem? Perhaps you know the answer. The ball would rocket off the hitter's bat so quickly that the pitcher would not be able to catch it or move out of the way in time (the speed of the ball would exceed his reaction time). The result would be injuries, which is an especially troublesome problem for young players for whom the game is still supposed to be a game.

To anticipate these kinds of risks, you need to consider which rate differences will be present when your product is actually used.

RATE-RELATED RISKS

Failing to notice rates of change may lead to a variety of timing errors. Because what is printed on a page is static, we need to remind ourselves of movement. Cartoonists achieve this with a few strokes of the pen. As the next sections indicate, there are many reasons why we miss rate-related risks.

Normal Rates

Failing to take into account the normal speeds (N-rates) of “systems” (political, cultural, economic, financial, legal, and so on) can lead to any number of problems. For example, investors expect to receive performance reports for mutual funds at the end of each quarter. But these reports can't be emailed or shipped until they are approved by the firm's compliance office. The N-rate for compliance approvals is slow. Firms need to take that fact into account in order to meet industry deadliness.

In some cases, an industry or enterprise has multiple N-rates. In the oil sector, OPEC tends to be quick to cut output in order to shore up prices, and slow to ramp up production to prevent shortfalls.²⁰ Anyone interested in the price of oil needs to know about this asymmetry.

Question to ask: Do I know the normal rate or rates of a particular system?

Direction

Look for instances when a rate is increasing when it should be decreasing, or vice versa. We normally think that increasing demand will cause companies to hire, but that is not always the case. If productivity is increasing faster than the overall economy (a rate difference), it means that when there is an increase in demand, companies can meet it while still laying off workers.²¹

Question to ask: Is the speed (or rate of change or progress) of a system moving in the direction I expect?

Size—the Rate Envelope

The rate of change in your environment may be faster or slower than you can cope with. For example, the maximum speed of the slowest process can be too slow. (Recall the example describing the causes of World War I: the diplomatic response was too slow.) Conversely, the speed of the fastest process can be faster than we anticipate. When there is an advantage to being early, expect those who could benefit from speed to jump the gun. For example, anticipating an agreement in March 2000 that would increase oil production, “many OPEC members cheated and began to increase production early,”²² which drove down oil prices faster than anticipated.

Questions to ask: Looking at the cells of the Rate Envelope, do one or more cells have a value that will be problematic for a system or process that is important to me? Do I lack information about any of the cells?

Duration

When a rate of progress is too slow, there are consequences. For example, when a company turnaround takes too long, managers find their jobs at risk; when an economy falls into a recession that does not end quickly, politicians pay the price during the next election.

Questions to ask: How long will a given rate (of change, progress, and so on) continue? When will it change?

Objective and Subjective Rates

Different stakeholders can judge the same rate differently. On the basis of their own subjective perspective, they may perceive a rate to be faster or slower than it is. As a result, they may act in ways you did not anticipate. What a company assumes is a rapid response to a complaint may seem like an eternity to the customer involved.

Questions to ask: How will various stakeholders perceive this rate? Who will be satisfied and who will be disappointed, and why?

Meaning

It is possible to misread the meaning of a rate. For example, you might decide that your proposal or bid was not seriously considered because it was promptly rejected. In fact, the other party acted quickly because it received and rejected a similar offer from another partner.

Questions to ask: What does speed in a particular situation really mean? Am I misinterpreting it?

Number

As we've seen throughout the chapter, coping with differing rates (of change, development, progress, and so on) can prove to be a challenge. In the war in Iraq, for example, the United States found that a police force could not be trained and mobilized quickly enough to deal with the power vacuum that the swift military defeat of Saddam Hussein created.

Questions to ask: Are many things going on at the same time with different speeds? Which processes are moving faster or slower than others, and will the differences among them matter?

RATE OPTIONS AND OPPORTUNITIES

The rate lens, like all the lenses described in this book, can be used every day to identify timing-related risks and opportunities in your environment.

Questioning

The rate lens can help you ask the right questions. For example, when inflation picks up, will it happen gradually, or will it speed up so quickly that it is as if someone pressed the price accelerator to the floor? Similarly, you can use the rate lens to help you plan your own activities. For example, how quickly should you proceed in launching a new product or adopting a technology? In industries where innovation matters most, of course, rapid speed to market is paramount. More and more, companies need to test new ideas with customers early and then iterate quickly, as opposed to keeping plans under wraps until a product or service is fully formed. But moving slowly can also be an opportunity. In some industries, such as luxury hotels and spas, one-to-one, personalized attention is worth more than rapid response. It is also possible to design a product that will enhance what is essentially a slow activity. Austrian glassware maker Claus J. Riedel was among the first to recognize that the bouquet, taste, balance, and finish of wines are affected by the shape of the glass from which they are drunk.²³ By altering the shape of the glass, Riedel made the slow sequence of actions and sensations involved in drinking wine even more enjoyable.

There are many opportunities to use rate-related questions in your work. For example:

• Disclosure. Should I let others know how quickly I am proceeding, or would it be better to disguise that fact or keep it a secret?
• Interval: Would it be better to continue at this pace for a longer or shorter time?
• Meaning. How do others interpret the pace or tempo of my work or actions? Can I influence what they think?
• Limits—the Rate Envelope. Which are the fastest and slowest components of the work I am doing, and what are their individual speed limits? Should I replace the slowest process with one that could be done more quickly, or choose another way to proceed?

Problem Solving

Using the rate lens can call your attention to differences in rates of speed, and these differences can solve problems. For example, one spring morning I watched a bulldozer attempt to scoop up a large cement slab. The piece was lying in soft dirt. Every time the scoop tried to get fully under the slab to lift it up, the bulldozer only succeeded in pushing it farther ahead. The operator finally solved the problem. He placed the scoop under the front lip of the concrete slab. Inching forward, he raised the slab up onto its edge, which bit into the soft earth, thus stopping the slab's forward movement. When the slab was almost vertical, the operator dropped the scoop. The slab hesitated, teetered, and then executed a perfect swan dive into the waiting scoop. What made this maneuver work was a rate difference: the operator was able to drop the scoop to the ground faster than the slab could fall.

I mention this example not because most of us work on construction sites but because rate-difference solutions are a part of everyday life. Yet because they go unnoticed, they do not become part of our conceptual toolbox. To be of use, they need to be identified and recognized so that we can carry them with us.

THE TEMPORAL IMAGINATION

One reason Rodin sculptures have a dynamic quality is that Rodin placed different parts of the body in positions they could not occupy at the same time, thereby creating a sense of movement as we try to reconcile the discrepancies. He created a subjective sense of movement (S-rate) in an object that was not moving at all (O-rate).