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How to benefit from the compounding effect of changes

In ‘Ethical fading eats Configuration Management Principles for breakfast,’ I ended with the need for mental models to prevent ethical fading. This article will be the first in a series to explore different mental models and how to apply them in Configuration Management. The first mental model we will explore is probably known best from the world of finance: Compounding. However, interest is not the only thing that compounds over time. We will look into the compounding effect of changes. 
 
Compounding is, according to Collins Dictionary (from a financial perspective):
“the addition of interest on interest already earned or charged”.
Over time this can result in significant returns surpassing the interest on the principal amount. Charlie Munger (billionaire investor and vice-chair at Berkshire Hathaway) said:
“The first rule of compounding is to never interrupt it unnecessarily.”
Source: Samuel Cheong

Compounding effect of changes

This holds true for the compounding effect of changes as well. In the end, every change is an investment with expected recurring benefits. When used to invest in new changes, these benefits keep on compounding the recurring benefits. But there is another compounding effect. With changes, one can make good or bad decisions. Each decision will have an impact, positive or negative. But as each following change will include the impact of the previous changes. The impact compounds. Not only ‘interest on interest’ as one would have with investing, with changes, one would also have an ‘impact on impact,’ where every impact is based on a new set of decisions. 
 
Possitive and negative compouding effect of changes
 
And did we anticipate this compounding impact of changes, or in other words, did we account for it? For example, suppose we decide to use certain difficult-to-obtain materials when redesigning a part. In that case, we introduce risks that we will have shortages which could lead us to find other suppliers, lower-grade materials, or accept significant price hikes. In return losing risking profitability or having to increase prices to our customers. Better to investigate if we can use widely available materials.
 
A more extreme example will be if you have multiple changes that impact the same part or the same function. The choices that are made need to be aligned even if the teams working on these changes differ. If one decision undermines the other change to being implemented properly, it will start to compound negatively. Corrective actions will be needed, and delays will occur. In other words, things can go from bad to worse. Time and money spent on corrective actions cannot be spent on new changes. 
 
The factor of time can also be tricky. Imagine we decided to use a particular part in our design. By the time we sold thousands or even millions of products, a safety issue with the part was identified. A massive recall follows. But where are they? Who owns them? If this was a car, the average cost of a recall is about US$ 500,- per car. But if people were already injured or killed due to the safety issue, additional fines and settlements are likely, which can easily run into millions or billions of dollars.
 
If we do not achieve the anticipated benefits, the impact compounds negatively and, worst case can result in a net recurring cost increase. 
The total cost of GM’s Ignition Switch issue was US$ 6.9 billion. The intended recurring cost saving for the chosen design was less than US$ 1  per car.
 

How to benefit from the compounding effect of changes

We need to know a couple of things to anticipate the compounding effect of changes and make decisions that steer towards a positive compounding effect. First, the latest released state; second, all running changes and their expected impact, including identified risks and the changes we have on the backlog.
 
Knowing the latest released state is evident, as that is always the starting point for any change. But as I also explained in the CM Baseline series article Intentions are the desire for new stories, understanding the impact on planned changes is essential to stay in control of your configuration. When not taken into account, there could be dependencies that could result in a negative compounding effect. Not just dependencies based on parts and datasets that are being changed. Also, the related risks and how these risks create additional dependencies between changes.
 
Finally, knowing the items on the backlog and the potential dependencies with running changes will help identify the proper strategies for implementation. To ensure the positive compounding effect keeps running its course. The dependencies provide you with a map with all the possible routes as explained in Dependencies limit the possible sequences of events. Missing any of the dependencies increases the risk of a negative compounding effect. Being aware of them increases the chances for success and, therefore, the possibility of a positive compounding effect.
 
change dependencies

To read more about the CM Baseline and its components, please check out the previous posts from the CM Baseline series:

Header Photo by Joel Filipe on Unsplash

2 thoughts on “How to benefit from the compounding effect of changes”

  1. Pingback: Opportunity cost and the Lollapalooza effect - MDUX

  2. Pingback: Circle of Competence in Configuration Management - MDUX

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