Monday, March 30, 2009

Efficiency's Inner Bound

The financial services industry makes its money helping capital find its way most efficiently to markets. But improving efficiency is not an endless game. You can't go beyond 100%.

Consider the rural electric transformer on a pole. It is about 90% efficient. That means that 90% of the electricity which goes in one end comes out the other. The rest departs as heat. The transformer could, in theory, be made 10% more efficient, but that's all.

The better the financial services industry does its work, the less there is to further achieve.

This suggests that so long as the biennial doubling of info system power continues, the financial services industry will converge on an ISO-9000 like efficiency. It will not be a growth industry.

Another version of the inner bound problem appears as quarterly report bottom-line creep. A business needs to be more efficient every year, spending less on costs and rendering a greater percent of income to its owners as profit.

But reducing costs is a game of diminishing returns. The more you work at reducing costs, the less productive your efforts. The ideal of reducing costs to nil and simply passing through any income directly to the owner is a model that - so far - only works for an author who sells her works online. Others who try this end in jail.

There may be a built-in imperative to the financial services industry that leads its members toward landing in jail.


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