A Journey Up River

I started out as an accountant in 1960. I practiced, taught, and wrote in that field from the early 1960's to at least to the mid-80's. Let me start by making a few comments about how I've gotten to where I am now in my thinking.

When I look back at the whole span of my career, I see myself now as starting out at the mouth of a great river. This great river is a metaphor for the economy and the business world, and the mouth of the river is where all the data about economic and business results pour out. The mouth of this river is the world that accountants and economists inhabit. That was the world I grew up in, became very comfortable with, and gained a lot of expertise in from the early 1960s to the mid-1980s.

Many of us in that world became increasingly concerned in the late 1970's and the early '80's that something was wrong with American business, and particularly American manufacturing. At the time, the numbers indicated deep problems with manufacturing productivity, and the problems were getting worse. It was getting to the point that as accountants we were virtually saying "When are we going to turn the lights out, and who was going to be the last one to turn them out?"

In that spirit I started the collaboration with Robert S. Kaplan, which led to the book, Relevance Lost: The Rise and Fall of Management Accounting (Boston: Harvard Business School Press, 1987). Although Bob and I came from quite different directions, we both had a sense that there was something wrong in business that accounting, especially management accounting, was contributing to. From our perspective as teachers and as consultants we had concluded that while management accounting probably had an important and very positive role to play in American business in the formative years of our economic system, in the 19th and early 20th centuries, this was no longer the case in the 1970s and 1980s. I had started to reach these conclusions working with Alfred D. Chandler, the business and economic historian, in the early 1970's. I worked with Al during the years he was doing research for his 1977 book The Visible Hand. On the basis of that work I had concluded that management accounting had a very positive effect on developing the great economic dynamo that existed in the American manufacturing sector in the early years of this century. But something had happened by the 1970s. By then, the major companies in manufacturing industries that had been prospering and leading the world in the early 1900's were bleeding red ink and many seemed to be dying.

The question on our minds was what had happened? And that's what provoked our interest in coming together on the book. Because I had an interest in the historical side of accounting, and Bob was very intimately connected with current practices in contemporary companies, we complemented each other. He was then living in Pittsburgh, as the Dean at Carnegie-Mellon's management school. He was meeting regularly with chairmen of companies like TRW, Westinghouse, US Steel, Alcoa, and other mainstream US manufacturers, and they were in a lot of trouble.

The upshot of our collaboration, articulated in Relevance Lost, was the argument that management accounting, despite making a positive contribution to American manufacturing growth in the 19th and early 20th centuries, was giving managers very misleading information by the 1960's and 1970's that was causing them to make poor, often disastrous, decisions. Misleading management accounting information, we believed, was causing American manufacturers to give away markets and technologies that should not have been given away. In Relevance Lost we suggested that management accountants must clean up their act. We outlined some ideas for how to do this, one of which came to be known as activity-based costing.

In retrospect, I think we made some very useful suggestions, at least from the standpoint of people who live "in the mouth of the river." From that standpoint, if management accountants implemented the reforms we proposed, then marketers and manufacturers weren't going to be misled anymore, certainly not as much as they had been, about what was profitable and what was productive, and what wasn't. Now, when they made decisions, they would make them in a clearer light of day. The specific reform we proposed that came to be known as activity-based cost was for accountants to trace the costs of objects such as products, customers, and departments to the resources that cause the spending of money, i.e., to the consumption of resources that cause costs. Those resources came to be known as "activities."

After that book came out I received many invitations to speak not only from accountants, but also from people in industrial engineering, manufacturing engineering, and operations management. The engineers were particularly enthused by the message in Relevance Lost. Some of them, after I gave a presentation, would come to me and say "you and Kaplan have done the greatest thing, because you are telling accountants what we industrial engineers have been trying to tell them for decades, but they never listened to us. Because you're coming out of accounting, they're going to listen to you. It's about time. This message is going to help us all."

But some of these engineers went on to say, "When you look at what you mean by consumption of resources, you're talking about work, aren't you?" I thought about it and said, "Well, yes, I guess we are." They said, "isn't that the cause of costs? You have people who work. If there aren't people around doing work, you probably don't have any costs, from a practical standpoint -- certainly not in the long run. So work causes costs." And then they said, "Industrial engineers and manufacturing engineers have gained a lot of insights in the last 15 years, particularly from Japan, about what it means to organize work. We've come to a whole new sense of this, and we think you should pay attention to it. We think you could push the argument you've developed even further." I said, "What do you mean?" They said, "Well, if you organize work properly, you don't have to worry about getting the lowest costs. The costs will take care of themselves. In fact, you do not need cost information to tell you how to organize work properly. If you organize work properly, the costs will take care of themselves. Look at Toyota to understand what we mean by this."

At first I thought, "these guys aren't accountants; they don't really understand." But I took up their advice. I started talking to consultants who had worked in Japan and I began to read a lot about Toyota that had been translated from Japanese. Gradually, it began to dawn on me that maybe there was a message here. It came slowly, but once it hit, it hit very hard and fast.

Along the way, other speaking invitations led me into the Deming network, to people influenced by the late W. Edwards Deming. They started to tell me another thing. They said, "This is nice, you're saying that work affects costs. We've always believed that. But, you know, there's another missing piece here in all these articles and books you write. We don't find the word customer anywhere." I scratched my head for a minute, and said, "Yes, well, maybe you're right." They said, "Well, why are we doing all the work? Isn't it to satisfy a customer?" This is what drew me in to the quality movement and gave me my first insights into systemic thinking.

As I look back, I realize now what I was doing. In terms of the metaphor of the river, I was starting to move upstream. In contemplating activities, I had starting to move above the mouth of the river, where there is this enormous amount of data about business and economic results. I was beginning to move upstream to observe conditions that gave rise to those quantitative financial data. Moving up to where I considered the nature of work, and how it is organized, was an even bigger jump than the one that took me to "activities." If you think of it in terms of moving up the Mississippi River, I was starting to see the water clear a bit. By the time I got to where you consider the way to organize work, and then to customers, I think I was almost beginning to see the bottom of the river.

All these encounters with people who worked outside accounting and outside economics was opening a whole new perspective to me. It was opening my mind to a whole new way of thinking about why we are in business and what we are doing, and about how we think about these problems that I had always studied through the medium of accounting numbers. In particular, I was beginning to be more convinced of the idea that if you do the right things--listen to the customers, listen to the voice of the process--then costs will take care of themselves. You didn't have to worry about having a cost system to tell you how things are going. Although at first I couldn't articulate the basis for this belief, I began to be convinced of it the more I thought about it.

Practitioners of a New Tradition

By late 1991 I had finished writing another book, Relevance Regained: From Top-Down Control to Bottom-up Empowerment (New York: The Free Press, 1992) where I expressed some of my new thinking in the form of criticisms against activity-based cost management. The new book raised the ire of my former co-author Bob Kaplan, who became outspokenly critical--in fact, openly contemptuous and disparaging--of what I was saying about "doing the right thing and costs will take care of themselves." To this day he continues to be the chief spokesman for the "manage by results" viewpoint that has dominated American and European management thinking since the 1960s. I sometimes wonder if the alternative that my own more recent writing offers to this viewpoint has been hidden from many people by the incessant attention that the cost management literature in the United States pays to my early-90s criticisms of activity-based costing. It's as though the American management accounting profession, led by Bob Kaplan and his minions, perceive my work only from a perspective in the mouth of the river. Perhaps it is because American management accountants have never been to the places I have traveled to upstream that I now find it difficult to communicate with them. However, I find no shortage of fascinating people who have been upstream and with whom I am communicating, and from whom I have been learning, in the past 7 or 8 years. Through these people who work in fields such as operations management, systems thinking, life sciences, design engineering, quantum physics, nonlinear mathematics, cybernetics, and quality management I hope someday to find the means to communicate again with the accountants and economists I once worked with in the mouth of the river.

Probably the most important result of my publishing the book Relevance Regained is the attention it brought from two people: Anders Bröms, a consultant in Sweden, and Kaz Mishina, a young operations management expert with a profound knowledge of Toyota who was teaching at Harvard Business School in the early 1990s. It was Mishina who contacted me first. He said "I like this new book of yours. It has a lot of good ideas that reflect what people say at Toyota. But," he said, "I detect in what you write about Toyota that you've never been in a Toyota plant. Have you?" I said, "You're right, I never have." He said, "I could tell." And he said, "What I want you to do, if you would like, is join me. I'm going to go to the new Toyota plant in Georgetown, Kentucky, to gather material for a series of Harvard Business School cases. They're going to be the first Toyota cases ever written at Harvard. Would you come and work with me?" I said, "Wow, would I come? When do we start?"

That was about six years ago. I've probably been to Georgetown 40 times since then. Although Kaz Mishina has long since returned to Japan, where I believe he now works in a government agency, he connected me with a wonderful network of Toyota people who are a continuing source of inspiration for me. It was in Georgetown that I started to learn firsthand, and finally began to understand, that "if you do things right, the costs will take care of themselves."

Soon after Mishina contacted me, I received a call from Anders Bröms in Stockholm, Sweden, who told me that he and one of his consulting clients--the heavy truck maker Scania--liked the message in my new book and they wanted to talk to me. Here began a relationship that has deepened enormously over the past five years. With Bröms, Scania, Toyota--and now with an evolving relationship between people in Toyota's Georgetown plant and people in Scania that Bröms and I have helped facilitate over the past few years--I have traveled farther upstream than I ever could have imagined possible when I wrote Relevance Regained. Indeed, thanks to Anders Bröms and his colleagues in SAM Samarbetande Konsulter, a small but fabulously exciting consulting practice in Stockholm, I have had an opportunity to explore the implications of viewing business through the lens of life systems, instead of through the usual lens of mechanistic systems that dominates American and, increasingly, most European management practice. The initial results of this exploration will be in a book that I am writing with Bröms that we hope will appear later this year or early next year.

The book will feature ideas gleaned from both Toyota, a company that most of you know a lot about already, and Scania, a company that is not well know in the United States. Whereas Toyota is expert in a unique approach to operations management, Scania is expert in a unique approach to product design that I think almost no other company in the world practices. Product design is an area I knew absolutely nothing about before I met Scania. To learn something about design engineering I came to MIT and met with Dan Whitney. I also learned a great deal from writings by his young colleague Karl Ulrich. But it's really Scania that taught me the most about design engineering, and especially about connections between Scania's approach to product design and Toyota's approach to operations management.

Somewhere during this time, in 1991 or 1992, I ran into Peter Senge and the Organizational Learning Center (OLC) and its programs. At about the same time I met Juanita Brown and I started to attend conversations with her friends in her home in Mill Valley. I had the privilege to join gatherings in her living room, in that beautiful setting on the side of Mt. Tamalpais, meeting people who were interested in things that were not different from what I was hearing from my Toyota friends, from Deming, and from Anders and the people at Scania. But it seemed to go further. We started to talk about systems, system thinking and relationships.

Somewhere along the way, about four or five years ago, somebody told me about Gregory Bateson. Now that was a remarkable turning point. I started to read Bateson perhaps four or five years ago. About three years ago, I started to finally get serious about it. (It takes a year or more to figure out what's going on when you read Bateson.) What eventually came out of reading Bateson was a sense that what we are looking at in the world of business are mechanical systems human beings have created. They're designed by minds that are good at doing mechanical things. These systems (defined essentially by lineal causality and independent relationships among parts) are then set down and put to work in a world which nature runs in quite a different way (a world of recursive feedback and interdependent relationships). Influenced by Bateson, I came to see the world as made up of two systems. There is nature's system and there is the system that self-conscious human beings create, what I would call the mechanical system. Without the human being I think there is nothing mechanical in the universe. Our problems in organizations come because they impose the mechanical onto the natural, and then operate in a necessarily parasitic way in the midst of nature's evolving system. I began to see what Bateson meant when he said that "the source of most of our problems is the difference between the way man thinks and the way nature works." With Bateson, I had advanced much further upstream. In terms of the Mississippi, I was a long way north of St. Louis.

So I set out to understand, how does nature work? This is a question I learned a lot about from reading Bateson, but also from reading Fritjof Capra and other writers talking about modern physics and evolutionary biology. I was beginning to get an appreciation of what Bateson was talking about when he said "the way nature works." I began to conclude that that's the way human beings have got to work. Work is work. Like the industrial engineers were telling me way back in the late '80's, it's all work in the end. If you get that figured out, then everything else is going to take care of itself. By now I realized that idea was even more than they knew.

When you start to study ecology, and you abstract yourself from the mess we've created in the world, and think about what nature has done for four billion years on this earth, it's a pretty remarkable accomplishment. You start with water-borne chains of carbon molecules about four billion years ago and eventually you get to dolphins dancing in the sunset and human beings. I think that's a pretty remarkable set of accomplishments. That's "results." If we can work like that system, we don't need to worry about where the results will come from.

What are the kind of messages that come out when we study how nature works? There are obvious things -- like nature is basically an inter-dependent system where everything is self-emergence, self-referential, self-identifying. Everything is working to ultimately increase diversity over time. It seems that nature's only job is to increasingly diversify the manifestations of the pattern that appears in all the matter that surrounds us. As the physicist David Bohm said, it's the constant process of the "implicate" being made "explicate," or as Aurobindo, an Indian philosopher of this century, put it, the involute becoming evolute. Before evolution there was involution. All that follows from that is involution spinning its web through the pattern we call evolution.

The Mechanical System and The Living System

The more you look at all of this, there are people who have been talking about such ideas for a long time. This is not just modern physics. It's not just evolutionary biology. These ideas don't appear for the first time with modern scientists such as Lynn Margulis and David Bohm. This is Buddha, and this is Christ, and this is Lao Tzu, and this is Pythagoras -- thinkers through the ages who have provided us profound shafts of insight. All the way down to modern times, to the 19th century with Blake and Goethe, and to this century with Whitehead, Tillich, Bohm, and so forth. There have been thinkers expressing these ideas, and we can call them System Thinking, in a way, if we want to -- as long as we remind ourselves that there are two kinds of systems.

There's the mechanical system and the living system. Peter, you hit it in the preface to Arie's new book (Arie de Geus, The Living Company). I really want to congratulate you on saying what you did in that preface. Those few pages are his book to me. They do a nice job of making that distinction between seeing a corporation as a machine for making money and seeing it as a life system, a human community. I think this is a distinction that we've needed for a long time. It's the one I was realizing as I looked at Bateson's work. You can see, given where I was coming from, why I was troubled with System Dynamics and much of the "system thinking" stuff for a couple of years. Because I think so much of that work comes out of the mechanical side of man's thinking, and not out of an understanding of life systems.

I look at that and I say, all right, "knowledge of nature's patterns" -- that's what we've got to focus on now. Science, religion,... there are lots of places we can turn to find out more. This body of knowledge is not an empty set that we have to build from scratch. There's a lot of knowledge out there to build on. For a while, now, let's put away all the economics books and all the accounting books. Let's go back and regroup. We'll find, once we get started, that it isn't that hard, and it's good stuff when you get into it.

The other day I pulled off my shelf a book that had been sitting there for years. It was the third volume of Paul Tillich's Systematic Theology. I had the good fortune to be an undergraduate at Harvard in the last half of the 1950s. For about two years, around 1958 and 1959, I attended some courses presented by Paul Tillich. Thinking back on it now, I realize I got maybe ten percent of what he was saying. But when I looked recently at the third volume of his Systematic Theology (published a few years after I graduated from Harvard), I realized that it was the material from which the lectures I heard in the late '50s were constructed. He talked in the book about life, in terms of "actualization of potential." That was the whole subject of the introduction to the book. I remembered sitting in old Emerson Hall hearing him say the phrase "actualization of potential." There I was a 19- or 20-year old kid, sitting and listening to his thick German accent, talking about "actualization of potential." Little did I realize then how forty years later I would rediscover his words in a journey upstream where I was learning about life as "actualization of potential" in writings by Bateson, by Whitehead, from Buddha, Goethe, and of course, from David Bohm. So I look at these things now, and I say, "Well, these are the messages we want to listen to."

I now think that's what "learning" really is: it is discovering and embodying nature's patterns. That's what our work is. That's what our work is as human beings. It should be the primary work of the organizations we belong to. That is what I hope we are going to discuss over the years in our meetings of SoL.

Nature and Measurement

Ed Deming used say that 97% of what matters in an organization can't be measured. Only maybe 3% can be measured. But when you go into most organizations and look at what people are doing, they're spending all their time focusing on what they can measure and none of their time on what really matters--what they can't measure. Why would we do this? We're spending all of our time measuring what doesn't matter. In fact, its part of avoiding a lot of the really difficult and important issues, like virtue, as Bill O'Brien has pointed out (see "Nine Frustrations of a CEO," SoL Assessment Initiative Working Paper). We spend almost none of our time on what really matters.

So I asked myself, why do we measure ? Why are we doing this thing that we are talking about here today under the heading of "assessing learning?"

When I think about it historically, I realize that in the context of business the kind of measurement we're talking about really is a 20th Century phenomenon. It isn't all that old a phenomenon. Even in a broader sense that goes beyond business, to include the sciences, measurement as we know it isn't all that old. It really goes back to Galileo. I think Galileo's greatest contribution -- and it was a stunningly profound contribution -- was the notion of measurement.

You probably know the story . As I understand it, Galileo was attempting to deal with the problem Copernicus had left on the table. If the Earth moves, how the hell are we all sitting here? Why are we not tumbling all around all over the place, the building falling down and so on. In order to deal with that issue, Galileo came to the conclusion that what you have to do was somehow separate motion from the object moving. I don't think anybody had ever really thought of that before.

Aristotle certainly hadn't. For Aristotle, the object moved because it had a place it had to go, it had a purpose and a teleological end that was to be reached and that was what gave it the motion. But Galileo disagreed. He said, "separate motion from the body moving." The minute you separate them, then motion can be measured. You can put it up against a scale. Of course, the story goes from there to Descartes, who shows how to put the scale on graphs using Cartesian coordinates and all that. Then Newton finally comes up with the answer to the question that Galileo was grappling with in the first place, which was the theory of gravitation. But it all had to have that initial incredible breakthrough; it had to have Galileo say, let's separate motion from the body moving.

Let me say, measurement can be two things. You can use measurement to describe and, in that sense, Aristotle was a measurer, too. Aristotle could have said, "well, one candle is brighter than the other." No problem with that. One shade of red is brighter than another, or one person is bigger than another, or one thing's heavier than another. But with Galileo, we started down a different road, the road of quantification. When we quantify, we are separating things that in nature are inherently combined. And in so doing we take apart and change that which is natural. That's what Aristotle didn't do; that's where Galileo started taking us.

Over time, we got very good at measurement and quantification. It leads to steam engines, internal combustion, high-rise buildings with central heating, eating a good meal provided from farms many thousands of miles away, and so forth. It leads, over time, to the creation of the entire mechanical world we human beings have produced in our global economic system.

But, absent the human mind and absent the human mind's busyness with measurement, there is no such thing in nature as a mechanical thing. Nature doesn't mechanize. Nature naturalizes.

And, nature doesn't measure. This is another of the points Bateson made, 50 years ago. Nature doesn't measure, nature doesn't quantify. Nature deals only with "patterns which connect." Nature focuses on the patterns. It's patterns and relationships and connections that create the reality of nature. Galileo wanted to escape that, and so he did. He got us on the track where we are today. In escaping patterns and relationships, we mechanized.

But what we have done to achieve mechanization-- particularly in our lifetimes, in this century -- is an incredible job of destroying nature. We have destroyed nature as a result of this mechanistic thinking and the mechanistic activity that follows from it. Particularly in the engineering realm and the scientific realm -- we all know about that story. But I think we don't often appreciate the extent to which we've destroyed nature to the point where if any of us were really dumped in nature, in its raw form, we'd absolutely be at wit's end. Imagine being dumped in a setting like Lewis and Clark were in only 200 years ago, in the middle of what today is Montana or Idaho. It would scare us all to death! Most people living today wouldn't know what to do. We'd probably drop dead from the shock.

Means and Ends

Now, measurement in many ways brought us to this point where we can no longer understand or even appreciate or even want to deal with nature. We've torn apart the means to achieve our consciously-contrived ends, what Bateson called "conscious purpose." We've done that so well that now we're happy with our ends, we're comfortable with them. We've created a physical, engineered realm, destroying nature, and we don't want to talk about nature anymore. We don't even want to think about it for the most part.

Now it is only in this century that we did this to ourselves in the human organizational realm. First measurement comes to astronomy. Then it comes to physics, then to chemistry and engineering. It is not until we get down to the early 20th century when events take place that give rise to the issues we're talking about here tonight. Only then do we start to measure this thing we call the human organization. It can be any type of organization, from a hospital to a church to a business.

In the process of applying measurement to organizations, we do the same thing we did in the so-called "physical world." We destroy what's natural. The process of measuring destroys what is natural. It has to. It's an inherent characteristic of measurement. Measurement takes what's inherently interdependent, and shaped by patterns of mutual causality in nature, and turns it into something that's inherently independent and shaped by patterns of lineal causality. In creating systems whose operation can be described with quantity, we create what is mechanical. Measurement mechanizes, and mechanizing is diametrically opposed to the natural.

So, we've destroyed the natural in our organizations, and we're very comfortable that way. And we don't want to go back. We don't want to contemplate the reality that would be there if we weren't measuring, anymore than we would want to go back to the world of Lewis and Clark. We are most comfortable with the abstraction we have created with our measurement prowess.

Another way to put this is to say that in the process of destroying the natural, what we've done is pervert ends and means. Nature, in a sense, is just the endless unfolding of means. However, the unfolding occurs according to definite patterns. The outcomes, in specific detail, are random, but the patterns driving the process are not. Nature doesn't care about the ends, they just happen. But the means is very much what nature is concerned about.

But as humans we decided that we're not happy with nature's ends. We think we can do a better job; and we do it by perverting the means. Measurement is one of the principal tools through which we do it. We've gotten very good at it. We've shattered the means; we've changed them, we've manipulated them. Deming used words like 'tampering', to characterize how we try to manipulate without understanding. We do this because the ends are what are important to us. They're what we regard as the permanent thing. Whereas in nature the means are the permanent thing. We consider the means ephemeral, throw them away, forget them. The means -- do whatever you want with them. The ends are what's important, the goal itself, what you measure for. We want what we can get.

As an aside, I am coming to believe that a lot of our deepest frustrations in contemporary society come from a deep sense of what's been lost in this process. People increasingly sense anxiety and pain at having lost the natural. Most of us can't even articulate it, but we've got a gut sense of it. We've lost the joy of conversation, the quiet being in the moment, being part of a larger web, the excitement of the journey itself -- some of what "the means" mean to us as human. We've pursued the path of the mechanical to achieve our contrived ends and, although many of us are inherently uncomfortable with it, we feel the only way we can proceed is to do more of what we've been doing. I worry that the generation coming along right now hasn't even got a sense about this loss; they scare me to death, this "cyber-generation" coming along.

I come back to my question, "Why do we measure anyway?" What is it? What have we been doing to ourselves in exercising this talent, this power, this capacity? We've got a long history now to reflect upon. We can talk about what we've done in the physical realm, in science and engineering, in the technological realm. What we're doing in the business realm today is no different. We're seeing it work out there, and the inevitable consequences follow. We've mechanized everything around us by quantifying.

My feeling is, what we need (if there's an answer, and I don't pretend to give definitive answers) is that, somehow, we've got to go back and talk about what it might be like to revisit the means, as a thing in itself. As the only thing. We might say to ourselves that it's not for us to create the pattern, the pattern is already there. It's for us to put ourselves in harmony with nature's pattern, somehow. And the ends will take care of themselves. The results will be sufficient unto the day. That's a leap that we're afraid of. It scares us to death.

But it is possible. I spoke earlier of Toyota. I have had the privilege of coming as close as I think you can to seeing this way of thinking in a business, in Toyota. Finally, after years and years of walking the floors in that company and, on a few occasions, working on the line, I come to this simple idea (expressed once by Joanna Macy). The means are the ends in the making. That's all there is. Get the means right and the ends will take care of themselves.

That's why Toyota, despite having an excellent accounting system that allows them to comply with regulatory authorities and so on, actually has no standard cost accounting system in the sense of other manufacturers. They don't drive operations with the numbers. They don't measure for this purpose, for the purpose of motivating action. They follow a different logic, a deeper logic. They measure only to enhance awareness of how the work is flowing.

Science and Measurement in the 21st Century

While nature does not quantify, nature does count. You'll see lots of things in nature in twos -- two eyes and two ears, the bilateral symmetry of our bodies, of the bodies of all mammals, and for that matter of much of life. Nature likes to work with twos, a lot: yin and yang, sexual reproduction, black and white, positive and negative. That, to me, is one of the most profound expressions of what Blake called the "twofold." An example of this is seen in Goethe's conclusions about color, which were quite different from Newton's. Goethe thought Newton drew the wrong conclusions from his experiments with prisms. He showed that color was not a quantitative abstraction explained by wave lengths. He showed that the intersection of dark and light is the real origin of the colors cast on the wall by the prism. His theories are now being resurrected by Henri Bortoff, a former colleague and protégé of David Bohm's. (Bortoff, The Wholeness of Nature (Lindisfarne Press, 1996).

Goethian science is, I think, the one that must shape our perception of reality in the 21st century. In the 21st century, Newtonian science must no longer shape our world view, if we are to survive as a species. Goethe's science is the science of twofolds, the science of twos.

So, number is there in nature. But so also is ratio, which is dividing numbers.

Working with Anders Bröms in Sweden, I found he had come up with something quite similar to analyze costs. He and his colleagues make extensive use of ratio indexes. They're very sophisticated mathematical constructions, as only Swedish engineers working 20 years on these things might come up with. He's got these beautiful pictures he can show you from clients. They tell the years when they were doing well, and the years they were doing badly, which client is doing better than another, and so forth. He does not use traditional cost information to do this. What he's developed are structural indexes that are made up of ratios. In a sense these are inequalities, based on the same principle as inequality indexes, like the Italian sociologist Vilfredo Pareto first started to use. But, with very sophisticated thinking behind these very simple ratio numbers, he can tell rich stories about a company's performance without ever resorting to numbers from the accounting system. He can also tell where their advantages are, in terms of design engineering or operational management. This has been applied with great success at Scania, and we're hoping to use it to explain better what Toyota is doing.

So when I say I'm not in favor of measuring or quantifying anymore, you understand I don't discard numbers, I don't discard ratios. There are descriptors that we can come up with that can help us see patterns. These will tell us whether one group is making it and one isn't. I think we can come up with some assessments and evaluations in answer to the issues here at this conference, in this research initiative.

We are very much at the beginning here. We're just seeing a very, very small tip of an iceberg out here. I'm not explaining it at all in detail here. I hope that the book Anders and I are writing now will help take this a bit further. It will be the first public airing of some of these views.

How Will We Know We Are Learning?

Assessment, answering the question "how do you know," is crucial. That was the question Deming wrestled with. People would talk about performance in terms of number and he would ask, "How do you know?" How can you possibly assess things with the minuscule little elements you're looking at here? How do you know?

In the end, I think the question, "How do we know we are learning?" can be addressed in terms of "Are we undoing the mechanical?" And "are we establishing and fulfilling the natural?" If we assess what we're doing in terms of how far we are progressing towards understanding and embodying how nature works, we will see that real progress is possible.

This gets to Bateson's idea -- are we undoing the way man thinks? Are we putting in its place a deeper appreciation of the way nature works? That's how we'll know we're learning. We've got to come to an understanding of what that means. We'll see it, and as we see it, we will find a reconnecting of the fragmented state of the world.

In the end, can we get an idea of what this might be like? I go back to Scania and a Swedish experience I had. Scania is a company owned by the Wallenberg family, a wealthy family that owns much of Swedish industry. The parent company, which goes by the name Investor, has held all kinds of companies, like Scania, for many years. Investor has always been run by a member of the Wallenberg family, up until this past year.

One of the great leaders of the family in the post-World War II period, Marcus Wallenberg, was very close to his companies. He regularly would go visit all the companies. He was not a person who sat above the clouds and studied his companies by looking at spreadsheets. He went down to the companies, like Scania, and when he did he invariably visited the shop floor. You can imagine, this is not the chairman of a board, this is the chairman of the chairmen of many boards. He would go down in the shop, where he would talk with workers and engineers. I believe he was trained as an engineer, so he understood what he was looking at. Someone asked him once, "How do you know, when you go into a shop, what to look for? What is it that tells you when things are right?" And he said, "I go into the shop, because that's where what matters takes place. And when I go there I listen for the music." That was his expression. "I listen for the music. And if I hear the music I know everything's all right. But if I don't hear it, then we go to work."

I think that, in a way, is what it is -- "listening for the music." Finding patterns, seeking them out. If you see them, then you know everything is all right. Maybe numbers or ratios, to some extent, can help us. But we will know, as well, when we're not hearing the music, when it's discordant, when it's disharmonious.

I think 20, 30, 40 years down the road, we must think this way and work this way. Then, in terms of my "traveling upstream" metaphor, we'll be somewhere north of Minneapolis (referring again to the Mississippi river), pretty close to the source of the river, with a very different approach to managing businesses than we've grown up with in our lifetimes.

I'm reminded that when you follow rivers upstream back home in the Cascade Mountains, to the extent that you can really find a river's source in mountains like that, you often get to the point where you realize that even when you've reached the river's source, you still haven't found the ultimate source. That realization comes when you look up, and see a cloud covering the mountain's peak. That's where the river is coming from. It's coming from the clouds, and in the clouds from the water that evaporated at the mouth of the river, where the journey began. You find, as T.S.. Eliot said, "the end of all our exploring will be to arrive where we started and know the place for the first time."

Open Conversations

(What follows are some segments of the conversations that followed Tom Johnson's evening presentations at the workshop)

Open Conversation 1

Question (Lori Breslow): What worries me about what you said is that you throw out, I think, an important tool. I think there are some questions that are answered very well by measurement and there are some questions that aren't. In my view, the real problem has been in many fields in the social sciences, for example, we have tried to answer certain questions where measurement should not be used.

I think the real question is, what is it that we're trying to learn about and what methodology best helps us to learn about that?

TJ: Well, I'm not advocating that we eliminate the descriptive nature of measurement. It's probably inevitable that we will use measurement to describe features of systems. It often is very useful, just as long as we don't let measurement drive actions. Once we say: "How can I take apart the pieces of what I've just measured and make what I've measured somehow better or different, or more or less?" That's where I draw the line.

Tim Savino: I would add that the question of why are we measuring may be also thought about along the lines of, " Who is asking and why are they asking?" There are some virtues to trying to measure in order to understand, because measurement and understanding can be intimately tied together. It's when the measurement and understanding are detached, that I worry. When we measure because we've been told to measure, or in order that we can boss somebody around with our measures, when we measure and we really don't understand what any of this is for, that I think we do harm.

I think from my viewpoint, the charge to this group, to this research initiative, is, in a sense, of trying to distinguish assess or measure.

TJ: I agree, Tim, with everything you say about keeping measurement and understanding linked.

Stella Humphries (?): As an organizing committee, we felt that two words we wanted to dissociate from one another were assessment and measurement. Assessment is the larger term in the sense that it is not possible for any learning process to not involve assessing, learners making sense of their actions and the consequences of their actions. Measurement as the smaller and more contingent term, and more uncertain term.

Tim Savino: To me, what I would hope to get out of this whole effort are steps toward better understanding, rather than an ability to say, "You are a learning organization, and you're not."

Peter Senge: Tom, I don't think you said Toyota doesn't measure anything. You did say something about how they don't use the measures.

TJ: Yes, it's the way they don't use them that I find interesting, not the fact that they do not measure. Toyota measures; they just don't drive actions with quantitative targets.

Bill O'Brien: They don't use it to motivate action.

TJ: Right, they don't use measures to drive decisions about how work should be done and what work should be done and so forth. Of course, they have an excellent accounting system. They invented what we call "target costing." But that's a descriptive measurement concept, really. It's an ex-ante tool, employed before the work is even started. But once the work begins, cost targets play no role in influencing operational decisions. The things that guide the work come from a different level of abstraction than quantitative measures come from. Guiding the work are things that aren't measurable. Over time, they develop systems and patterns of behavior that are deeply ingrained in people. These are deep disciplines they have in order to know, "how is the work flowing?" Do we have a capability to detect normal from abnormal? These are the types of things they focus on, that everybody comes to know.

Bill Torbert: You're also making, it seems to me, an incredibly important point which some modern social scientists don't appreciate sufficiently at all. That concerns the distinction between ordinal measurement and interval measurement. We assume that we need to drive measurement to interval because we need to use the most sophisticated, quantitative statistics (at least what we consider the most sophisticated).

In fact, it's not clear that human psychology, except in extraordinary cases is capable of accurate interval measurement. As you say, what we measure in reality is "more or less." We can sometimes prioritize first, second and third. We can sometimes accurately distinguish nominally, sometimes. So, the more "primitive" forms of quantitative distinction, at least as we think about it in statistics, are actually the ones that are more important for the sorts of assessments we want to make in action.

But you do seem to take a very extreme position. In a sense you almost come around and oppose what Bill O'Brien first said, which was to try not to dichotomize between the human development camp and the bottom line camp. You almost seem to come around to saying, "Let's get rid of that kind of measurement I associate with the bottom line camp."

It seems to me Aristotle actually was able to combine the different types of causation you allude to. He saw that there was "efficient causation," which is, if you will, mechanical causation. But he also saw material, formal and final causation ("final" not in the sense of reaching your goal but orienting toward what your purpose is). If we come back and think about a corporation or about our personal life in those terms, we see questions like: "How do you balance final, formal, material and efficient causes in myself or my corporation? and "How do you measure those causes, especially since only the efficient cause can be measured in this quantitative way?" Perhaps, we want to understand something about the other causes.

TJ: I have to think about the connection you draw between Aristotle's concept of the efficient and my concept of the mechanical. I have never thought about it.

Peter Senge: What did you think about the point Bill made about throwing out the measurements associated with the "bottom line camp."

TJ: Throw out...? No, again, I think profit's a descriptive measure that we can use, although I think it's a very crude and ambiguous one. I have particular concerns about profit which stem from the fact that I don't think we need it. We never had it, really, until the 20th century. Before the 20th century, for all practical purposes, what businesses had, coming out of double entry bookkeeping, was the balance sheet. The balance sheet told them how much they owned and how much they owed. Knowing how much they owned and how much they owed answered all the questions that bookkeeping was capable of answering.

The question the income statement purports to answer, "how well are we doing," was answered before the 20th century by real-time information in the hands of the guy who was out in the counting house, out in the plant, out with customers, or the guy who was getting news about how the ships were faring on long voyages. Those people did not use income statements to see how well they were doing. In this century, we somehow got caught up in the idea that we must have accounting measures of performance to answer this question. The more we relied on accounting abstractions to tell us how well we are doing, the less connected we were with the concrete, natural realities that generate revenue and profit.

Peter Senge: And then problems arose when that accounting performance information was used to guide the people doing the work.

TJ: Yes. Moreover, the coming of income taxation amplified the importance of these accounting numbers and helped accelerate their use. But I think if we go back to the day when it all got started, we should have stopped and said, "Do we really need this?" "Do we really want this?" Is there, perhaps, more danger in it than help? Because we might change our minds. I would say, for example, if I could re-write all the laws, I'd go back and argue for having nothing more than standard double-entry bookkeeping with a balance sheet. Of course you also must keep track of cash flow, there's nothing wrong with that. If you do not do a good job of managing cash flow, you're out of business.

But that's not what income determination is about. I would say, get rid of income determination and the obsession with income numbers that drives so much of what accountants do today.

Bob Putnam: Could I go back for a moment? When you were saying that Toyota does not measure the work in order to drive behavior, you also said that they do attend very closely to how the work is being done, and they try to imbue everybody in being able tell the difference between when the work is flowing normally and when it is not? So I'm thinking, they are very good at assessing the work practices -- not with measurements, but assessing in the sense of knowing "Is it going well or is it going downhill?" They can build a pattern. And that's, arguably, something that makes them Toyota.

TJ: Yes, I don't know what words to use for this. Maybe words like assessment may fit. One way I've described this in what I'm writing now is to say that they have a very highly developed immune system. Through the disciplines they have imbued in their people, through the training over the years and the standardization of work and so forth, they know, as Arie de Geus put it, "what is us and what isn't us." Everybody knows this, in everything they do. It isn't through measurements that they know that. They know it in the same way your body's immune system "knows," which is probably not through measurement either. It knows it by doing it.

Bob Putnam: But it is getting information and assessing that information.

TJ: Well, the information is the work, the work is the information. It isn't coming from anywhere outside the work.

Bob Putnam: But I'm saying that, if you want to use the analogy of your immune system, your immune system is in fact getting information from the foreign substances and assessing that.

TJ: Well, it's talking to them. In a sense, the molecules in your body are talking to the molecules that shouldn't be there and they're having a conversation. That's the way the biologist Francisco Varela puts it. I don't really understand this area very well, but that's the way he talks about it: there's a conversation going on. In a sense, the information is in real time, its part of the "work." Either we kick you (the foreign element) out, we kill you, or you join us somehow and you help us.

Bob Putnam: But I think the critical point here is that it's in real time. itselfThe assessment isn't something that other people come and do on a different time cycle from the work itself, and then reintroduce their conclusions at a later time. ( TJ emphasis)

TJ: Yes, it's part of the metabolic process.

Bill O'Brien: And it's done by the people who are doing the work. (TJ emphasis)

TJ: Exactly.

Bob Putnam (?): It sounds as if we're starting to develop some criteria for what we would want effective assessing might look like.

Bill Easterday (?): I was talking with somebody who was head of a car plant who said, "You know, when Toyota went into somewhere in the Southeast where they have a plant, they sent 300 managers from Japan to sort of shadow the people in the plant for a year, coaching them." My god, what an investment. But, if I then think about what those 300 Toyota coaches were doing is transferring knowledge of recognizing when the process and the practices are going right, then it starts to really make sense.

TJ: Actually, if it was Georgetown, Kentucky, I believe they sent approximately 600 people for about 3 years.

Bill Easterday: That's just mind-boggling. But from the point of what I'm thinking now, in the context of the current discussion, it starts to make sense. If you can develop the capacity of people on-site to recognize patterns in the way you have been describing -- I'll call that assessment of some kind -- if they can recognize what is going right and what is going wrong so they can make corrections, if they can transfer that sort of knowledge through a three-year process of face-to-face, one-on-one coaching...

TJ: Working together?

Bill Easterday: Right. That's a daunting challenge, but it does point to the fact that there is real knowledge for assessing what's doing well and what's not.

TJ: I think in the context of what Juanita Brown writes about it, it's a conversation. I mean, it's a conversation going on all the time that's making this work.

PS: Come back for a moment to Tim's question about who is asking the question, because it seems to be particularly appropriate. We are painting a picture of a type of learning going on within a group of people responsible for and active in doing something. But then there's somebody else over here, not involved. And they have the temerity to ask the question, "How's it going?" Now, somebody else wants to know.

There are usually two sorts of people in corporations who ask these questions: "management" and investors. Both are not directly involved in the value creating processes, they are on the outside. So it seems to me that we've come up with measures that may have been of some use as post-hoc, retrospective ways for people on the outside to know how things are doing, measures like profit.

How do we answer them? Do we answer them? Do we tell them to go away? Do we tell them, "Look, it's ultimately a matter of trust, period, end of story. If you don't understand the process and how people are learning in the process, you have no right to ask the question."

TJ: When you raise the issue of profit, again, I think that many people say, "we've got to have profit because there's a third party out here, the stock analyst." Well, when you think about it today, what accounting researchers have written about, what finance people have written about how share prices are determined, profit statistics are not as important as you think. I think good analysts for the last ten or fifteen years, who are thinking in terms of portfolio management and capital asset pricing models, don't spend a lot of time looking at accounting-based reports. They look at those a little bit, but basically the information they're putting together concerns combinations of securities, in portfolios, not the particular performance of a single company. Accounting-type measures don't really loom very large to them.

I think from a practical standpoint, this issue that many people are troubled with here, about what are we going to do about profit, can be answered if we got rid of the internal revenue code. I mean, if we didn't pay income taxes, particularly corporations, who'd give a darn? I think most of the accounting department could then be eliminated. Remember that famous picture, I think it was on the cover of Fortune, of the Chrysler controller or CFO standing next to Chrysler's annual income tax return. He was about 6'2" and this return loomed way over his head. If the need to prepare such a report were to go away, a whole lot of this concern about how do we measure profits, I think would also disappear. Because most of the other people in the organization and in the finance community aren't really that concerned about it anyway. I think an important political action we could all take is to write our Congressmen and press them to stop taxing income.

Peter, just to answer your point, how do we answer somebody who wants to know how it's going. My impression of what the most creative CEO's do is not throw numbers at people. They tell them, they have a conversation with analysts.

Stella Humphries (?): They tell stories.

TJ: Yes, they tell a good story about what's going on to assure analysts that the company's moving in the right path. And the worst CEO's that I see are the ones who really just rely on numbers. They don't have these conversations.

Now, I think people are getting more sophisticated, but I think there's still a huge difference in how CEO's deal with that. So I think it's possible to let people know how it's going by having a conversation.

Juanita Brown: I really want to honor the journey that Tom has been on, and his courage to continue that journey and to articulate his understandings.

TJ: Thank you. You've been an important part of it.

Peter Senge: Thank you, Tom, and everyone, for a most remarkable evening.

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