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See things clearly

Business lessons from a 19th century railroad manager

Marketer Seth Godin:

“Without a doubt, the ability to connect the dots is rare, prized and valuable. Connecting dots, solving the problem that hasn't been solved before, seeing the pattern before it is made obvious, is more essential than ever before.”

Back in 1854, Daniel McCallum must have had a similar perspective.

During that year McCallum had been promoted to become General Superintendant of the New York & Erie Railroad.  In his new post he was faced with what was then a new business problem – managing complexity.

As Caitlin Rosenthal explains in McKinsey Quarterly,

“With nearly 500 miles of track, it was one of the world’s longest systems, but not one of the most efficient. In fact, McCallum found that far from rendering operations more efficient, the scale of the railroad exponentially increased its complexity.

The problem was not a lack of information: the growing use of the telegraph gave the company an unprecedented supply of nearly real-time data, including reports of accidents and train delays.  Rather, the difficulty was putting that data to use...

Although the telegraph’s speed made more information available, organizing and acting on it became increasingly difficult. One delayed train, for example, could disrupt the progress of many others. And the stakes were high: with engines pulling cars in both directions along a single set of rails, schedule changes risked the deadly crashes that plagued 19th-century railroads.”

In a report to stockholders McCallum compared the ‘great railroad systems’ like New York & Erie with smaller, less complex railroad systems of ‘fifty miles in length’,

“In the government of five hundred miles in length a very different state exists. Any system which might be applicable to the business and extent of a short road would be found entirely inadequate to the wants of a long one. And I am fully convinced that in the want of system perfect in its details, properly adapted and vigilantly enforced, lies the true secret of their [large roads] failure; and that this disparity of cost per mile in operating long and short roads, is not produced by a difference in length, but is in proportion to the perfection of the system adopted.”

To improve the ‘perfection of the system’ McCallum ‘developed new ideas about a modern system of management’.  He realised he needed to upgrade operational reporting in the company,

“A system of operations to be efficient and successful should be such as to give to the principal and responsible head of the running department a complete daily history of details in all their minutiae...

a system, as a whole, which will not only enable the general superintendent to detect errors immediately, but will also point out the delinquent.”

To ‘point out the delinquent’ in any system the key is to understand the assets that make up the system and how the assets are all put together.

McCallum’s background was in architecture and engineering.  It must have been clear to him that in order to improve reporting, and subsequently the performance of the business, he would need to create more clarity on how the various assets of the business, including people, interacted to make the overall company operate.

So it was that McCallum created the first ‘modern organizational chart as a way to manage business operations’.

His insight was to not only show in a simple way how people, process and technology interacted to make the business work - the big picture - but to also show and demonstrate how data flowed through the organisation – ‘connecting the dots’.

Take a look.

                       

We can see that McCallum mapped the physical business based on how his trains flowed between the assets of the company (stations, switches, bridges and depots) along five rail tracks.  The telegraph closely followed the route of the tracks, so it was a simple task to simultaneously map (as a series of small crosses) how data flowed along his railway system.

At the same time he modelled how data/information flowed through the people of the business.

General Superintendant McCallum and his Chief Officers, depicted as the trunk of the organisational ‘tree’, reported to the President and Board of Directors - the roots of the tree. 

On the tree’s branches are portrayed five divisional superintendants. Each superintendant was made responsible for managing the physical assets of a rail line and co-ordinating the activities of that line’s workers as they interacted with the assets.

To minimise the risk of ‘deadly crashes’ and help reduce ‘costs per mile’, the superintendants were given a high degree of ‘authority over day-to-day scheduling and operations’ because,

“they possessed the best operating data, were closer to the action, and thus were best placed to manage the line’s persistent inefficiencies.”

While McCallum empowered the superintendants to make operational decisions, at the same time he ensured that ‘relevant and actionable’ data flowed ‘down from the branches of the tree’, through him, to the Board of Directors. 

Reports about business performance - metrics like average freight load/carriage and costs per ton/mile - were sent to him on an hourly, daily and monthly basis.  He filtered and prioritized this data/information for the board.  The reports enabled company executives to compare efficiency and profitability between the five railroads and make the best-informed decisions on strategic business improvements.

With the advent of the telegraph, business leaders in the 1850s American railroads had plenty of data, but ‘the difficulty was putting that data to use.’

In today’s exponentially more complex businesses, where ‘many leaders report that they are overwhelmed by copious data flows’, ‘aligning data with operations and strategy’ continues to be a key management challenge.

Daniel McCallum demonstrated that the key to overcoming this challenge is to create clarity on how the business works: understand the relationships between people, process and technology, and map important flows through those assets.

These concepts still apply today.

That is, create the simple big picture, and connect the dots.

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