Mark Woeppel on Management and Execution

In 2007, the Lean Enterprise Institute surveyed Lean practitioners about the biggest obstacles to their Lean Implementations.  Most practitioners cite “resistance to change” as the biggest obstacle; from every level of management, the middle, front line, and employees as well. 

Note that unrealized financial value ranks very low in obstacles, indicating the practitioners do not connect the lack of bottom line results to organizational resistance.  Rather, they seem to be focused on implementation “maturity”, which is another way of saying that the organization is using all the tools.  These results indicate that there is a disconnect between the goals of lean practitioners and management; emphasizing tool adoption over results achievement.

Why is everyone resisting the change?  Why wouldn’t the organization want to use these tools?  Certainly the lack of results is part of the problem, but it doesn’t explain the seemingly universal resistance.  To find the answer, we looked at a management fad from the past, Total Quality Management (TQM).

Malcolm Baldrige National Quality Award Research Results

To get insight into the reasons for CI success or failure, look at the Malcolm Baldrige Award, the award for business excellence in the United States.  The award establishes benchmark practices  and processses for business excellence, “To enhance the competitiveness, quality, and productivy of U.S. organizations for the benefit of all residents.”.  It has been criticized as being irrelevant to organizational competitiveness because many of the early recipients of the award subsequently failed.  In recent years this issue has been corrected and the award is focused more on the results the nominees achieve, with the tools adoption taking a secondary position.

Quite a bit of research has been done on the relevance of the Baldrige Award criteria.  In the spring of 2000 a study was commissioned to answer the question, “Is there a causal link between the Baldrige Criteria and actual performance of firms?”[1]

The research had several significant findings related to our discussion.

First, the most significant driver of system performance is not process, but leadership.  Leadership pervades everything the organization does, but those organizations that score well in leadership, score well everywhere.  This doesn’t mean that tools are not important, but they’re not as important as the core skill of leadership.

Process management is twice as important when predicting customer satisfaction as when predicting financial results.  We can conclude that having good processes are important to customers, but there is not a straight line from process excellence to financial performance.  So you might have happy customers, but unhappy stockholders.

The lesson for management and continuous improvement program directors is that the soft skills of leadership are very important to delivering results and that the program, to be financially successful must have strong leadership from the real leaders of the organization.  The real leaders must be commissioning, guiding, and delivering real accountability to CI teams.  CI and business excellence initiatives cannot be delegated to the “business excellence department”.  Leadership must be fully engaged in continuous improvement. 

Continuous Improvement and Business Excellence is not something to be added to the work of managers, it is the work of managers. 

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[1] An Empirical Investigation of the Malcolm Baldrige National Quality Award Causal Model 
Darryl D. Wilson, Sam M. Walton College of Business Administration, University of Arkansas
David A. Collier,  The Ohio State University

Here’s a short clip from my presentation last month.

Many organizations struggle with their continuous improvement (CI) efforts; achieving real bottom line results, whether in cost savings or increased revenues, has proven to be difficult.  In spite of the widespread implementation of Lean and Six Sigma principles, poor results persist.

The TLS process generates 15-20 times better performance than Lean or Six Sigma.  This presentation will show the root causes of poor CI program performance and a systematic framework to create ongoing bottom line results.

You can view the entire presentation by registering here

So you’ve been hit by the economic crisis, eh?  Demand has softened up a bit, sales are uncertain.  You’re wondering what you’re going to to do with all that extra capacity.  You don’t want to lay anyone off, but if sales don’t pick up, you can’t stay solvent.  Here are some things you can do to avoid layoffs while keeping the wheels on and position yourself for the recovery.

Focus on customer service. I’m not talking about being nicer, I’m talking about the basics of performance.  The number one reason that customers change suppliers is because of reliability issues.  Not price, not quality.  On time delivery.  Are you delivering on time?  Are your lead times consistent with the competition?  Don’t give your customers a club to hit you with.  This is entirely under your control.

I have a number of customers that improved their on-time performance and not only improved the customer service, but actually increased revenues.  They became the suppliers of choice simply because they could be counted on to delivery the goods when the customers were in a tight spot.

Build customer relationships. I’m not talking about buying more steak dinners or tickets to the ball game (although building relationships is always good), I’m talking about finding new ways for your firm to add more value to your customers.  Take a look at your value proposition.  Can you find a way to deliver more value?  You have all those skilled people.  Can you redeploy them to find new ways of helping your customers?  New services?  Modifications to existing products or services?

One of my customers was able to increase the amount of business with a key customer because they added a service to keep their product on site for on demand consumption.   It cost them very little, but it cemented a critical relationship, locked out other suppliers and positioned them for more business with that supplier.

Conserve cash. Eliminating non-essential spending is a common strategy, but there are other opportunities to improve your cost structure now and position yourself for even better profitability when things turn around.

• Look at your receivables risk.  Maybe it’s time to offer discounts on those old debts to encourage customers to pay immediately.  Better something now than nothing later.
• Renegotiate your materials pricing.  Now is a good time to re-evaluate your supplier’s performance and pricing.  There is never a better time to negotiate long term agreements than when the price is low, just ask Southwest Airlines!  They saved nearly$2 B in fuel costs in 2008 because of their hedging strategy.
• Look at your compensation strategy, especially sales commissions.  Are you paying for results achieved lately or a long time ago?  Often we believe that sales reps are due a commission for life. That turns hunters into farmers.  In this economy, you need hunters.  Are you creating the incentive to generate new business or hang on to old business?
• Take a fresh look at outsourcing.  Do you have the capability to bring some of  that work you had sent offshore back home?  Sure, your people cost more, but anything you can do in-house will go a long way to cover your fixed costs and help you retain your people.

Focus sales efforts on the stars in your product portfolio. Don’t waste your effort on selling marginally profitable products.  Make sure your sales efforts are geared to sell the products that maximize the highest rate of return.  That means focus on the products that generate the fastest return.  It may not be the highest margin products that deserve the attention, but those products that earn the highest turnover.

For example, if you have a product that generates $5 in gross margin once a month, it’s not worth as much as a product that generates $2 in gross margin every week.

Reduce your lead times; finish early. Focusing on project or product lead times improves your rate of cash generation.  Reducing your lead times also reduces your cash requirements.  Less work in process equals less investment equals more cash flow.  If you have projects in the pipeline, early finish equals early benefit.  It may be worth the investment to focus on bringing those projects in early.

When business is down, managers often take a defensive approach and hunker down and wait for the storm to pass.    Use this time as an opportunity to make your business more competitive.   You’ll be healthier now and in a great position to respond when the economy picks up.

Continuous Improvement (CI) organizations must be profit centers, not cost centers.  Too often, these organizations are established with little thought as to how they will function with the rest of the organization.  As a result, the CI organization goes about aimlessly “improving”, with no bottom line results from their effort.  No results = no buy-in.  No buy-in = resistance to change.  Resistance to change reinforces the lack of results.  Without any real results for their effort, people become discouraged.  If the cycle is not broken, the improvement initiative fails and management moves on to the next “thing”.  People become even more cynical because they think it’s the next “flavor of the the month”.

Stop it.

Take control of your improvement efforts by forcing the CI organization to justify their existence.   The return on your improvement investment should be at least 5 to 1.  Every year.  Without realized returns, the continuous improvement organization is mere window dressing.  Rather, it’s worse than window dressing, it’s poison; it is harming the organization.  Hurting your ability to move forward.

Fortunately, taking control is fairly straightforward:

Insist that all “improvement” projects are commissioned by a senior manager who is accountable for the results.

Being “commissioned” means being “sent”.  The senior manager sends a group to get something done, a task they’re quite accustomed to.  They’re given a budget, specific goals, and a time line.

This ensures that every project will be linked to the strategic objectives of at least one senior manager and linked to the global objectives of the organization (presuming the senior manager’s goals are in line with the rest of the organization).  It prevents local projects that are done just for the sake of “progress” or “tool adoption”.  After all, if the project doesn’t move the organization towards its strategic goal, how could it be called “progress” at all?

Ensure the local process owner is accountable for achieving the results.

No improvement project is done in a vacuum.  It’s done in someone’s area of responsibility.  That “someone” should be actively involved in the project, ensuring that the results are achieved by the people doing the work.

The senior manager gives the task to the project team and makes the process owner accountable for results.  This ensures that the project doesn’t become something extra the process owner has to do, but is central to what the process owner is doing.   If there’s resistance to change, it will rectified quickly!

Put teeth into your structure by reducing budgets of organizations that improve.

This may seem counter intuitive, because we shouldn’t reward improvement with penalty.  That’ s not what I’m suggesting. A cut in the budget is not a punishment, it is a reward (if your process owner sees it otherwise, you have a different problem that I can’t discuss here).   When the project is completed, a portion of the improvement goes from the local area back to the general fund or to other uses.

For example, let’s say that a project reduces expenses by $10,000 per month.  The process owner’s budget would then be reduced by that amount.  A portion of that, say 40%, would go to fund the continuous improvement department, 10% would go to a reward fund, and 50% is returned to the corporate budget for reallocation (to profit!).  If the savings is in payroll, people don’t get released, they are reallocated to areas where they can contribute.

In a sense, the process owner writes a check from his budget back to corporate.  This encourages him to be certain the improvements are real, not simply phantom “savings” that are bookkeeping tricks.

Building financial and organizational accountability into your continuous improvement process forces the improvement community to focus on the real needs of the organization and on projects that have concrete results.  Without accountability, your improvement efforts will be a show with the rest of the organization watching and applauding, but not participating.

According to Kishore Sengupta, an associate professor at France’s Insead business school, says that project managers says with 10 or more years of experience collectively generated higher costs and more errors and missed more deadlines than less-experienced colleagues.

Mr. Sengupta developed a simulation program for project management that demonstrates when project managers fall into the patterns of behavior that worked in past projects generally did worse than less experienced project managers.

“The more experience we have, the more overconfident we get,” Mr. Sengupta says.

All of us fall into patterns of behavior.  This is especially true when that behavior was successful in the past.  How do we internalize this lesson and prevent behavioral inertia?

This has profound implications for managing change efforts, since successful managers believe they already have the answer.  In order to be effective, they must be made aware that the strategies of the past may not apply to the present.  It takes some internal honesty to question yourself.

If you’re managing a project, the buffer burn ratio is a reliable way to determine if your management strategies are effective.  If they are, you’ll see buffer recovery.  If not, you’ll see continuing consumption of the project buffer.  The good news is you’ll see it before the project is late – in time to discover your strategies are not working as you hoped.

The buffer burn ratio is essential to understanding the risk of completing the project on time.

Progress on a project is measured by the ratio of work to be completed to the amount of buffer remaining.  The ratio tells us when a project is in danger of not being completed on time.  For example, a project that has 100% of the work remaining and 100% of the buffer remaining has a ratio of 1:1; it’s on schedule. A project that has 80% of the work remaining and 40% of the buffer remaining has a ratio of 8:4; clearly, it’s at risk of not finishing on time.  This the Buffer Burn Ratio.

When tasks are delayed, they consume the buffer , potentially threatening the project completion date.  By identifying which tasks are creating the highest buffer burn ratio, the project manager knows which task to focus on right now. His efforts can then be directed to solving that problem, thus causing the entire project to move forward.

Read the full article about learning from the past at the Wall Street Journal here.

A parable is a short story that conveys a profound truth.  A friend of mine, Clarke Ching, wrote this compact business book that contains a GREAT idea.  Spend 20 minutes reading it.  You’ll be glad you did.

The story’s protaganist is a software developer that fears he may lose his job.  His company is about to lose a major client and he comes up with a very simple idea to change his company’s offer, helping both his client and his company.  I found it very thought provoking – it made me think about how my firm creates and presents an offering to a client.

One would think we have the idea by now…

A recent study done by the London School of Economics and Stanford University shows that a standard of management practice is linked to the favorable financial performance of the business. The way an organization is managed has a strong effect on its performance. It also states that “Management excellence is a matter of internal policy and not just the business environment”

The study cites practices such as:

Setting Goals

Managing Performance

Promoting people based on merit

Managing people

Operations management

The study shows that practical management techniques actually do deliver financial results for the company, yet many organizations do not even attempt to implement such practices. “For companies, the research is good news, suggesting that they access to dramatic improvements simply by adopting good practices used elsewhere.”, says the authors.

The study of 4,600 factories in 12 countries, referenced in the September 8 issue of The Wall Street Journal, found that, “a one-point increase in a factory’s management rating (on a one-to-five scale) translated to a 25% increase in labor productivity and a 65% increase in return on invested capital.”

These results, which Harvard Business School said are, “pioneering work,” and, “a real innovation in the study of management,” led experts to conclude that, “common management techniques such as setting targets, monitoring performance and ‘lean’ manufacturing actually help companies become more productive and profitable.”

Another convicting – and humbling – finding in this research relates to the apparent inability of factory managers to accurately assess the strengths or weaknesses of their own leadership skills.

“Good management appears to be so strongly linked with good performance that it might be reasonable to expect all firms to make better practices a priority,” shares a Stanford University report about this research. “The techniques of good practice are, after all, available in the public domain in a wide range of easily accessible forms. Yet many firms are still poorly managed…The majority of firms are making no attempt to compare their own management behaviour with accepted practices or even with that of other firms in their sector. As a consequence, many organizations are probably missing out on an opportunity for significant improvement because they simply do not recognize that their own management practices are so poor.”

The authors also note a disparity between family run organizations and those that are not: “Family-run and government-run businesses are less well managed and less productive than similar plants with professional managers. Promoting successive generations of family management “significantly damages company performance,”

Remember the London School of Economics research finding above that, “a one-point increase in a factory’s management rating can translate to a 25% increase in labor productivity and a 65% increase in return on invested capital,”

You can read the article here

You can download a copy of the study here

It’s that time of the year; review your past successes and update your plans for the coming year or so…

I was doing some research on selling professional services, and ran accross the “best business brochure ever written”. It was a brochure written by Arthur D. Little for his fledgling consulting firm. In it, he describes how his team literally converted sows ears into a silk purse!

The purpose of the article? To demonstrate that the commonly accepted wisdom is not “true”, merely difficult. Secondly, along the same lines, the firm sought to make lead balloons fly. Quite successfully, too!

Here’s some insight into the process.

Here is the actual brochure

So often, when faced with a difficult situation, we accept the conventional wisdom as being “true”, when really, we haven’t looked deeply enough into the situation, challenging ourselves to find the essence of the problem.

I find the more problems I solve, the less willing I am to accept the conventional solutions. In fact, the more publicity a solution recieves as being “correct”, the more skeptical I become!

“Things that everybody thinks he knows only because he has learned the words that say it, are poisons to progress. The only way to get ahead is to dig in, to study, to find out, to reason our theories, to test them – and then hold fast to what is good”

What is excellence? Dictionary.com provides two:

1. The fact or state of excelling; superiority; eminence: his excellence in mathematics.
2. An excellent quality or feature: Use of herbs is one of the excellences of French cuisine.

These are two very different things. Typically, we think in general terms of business excellence in the terms of superiority, but in practice, it is often translated into the second term, to the features of the business; its products and services, its profitability, its customer relationships, or even its employee relationships. The generally accepted definition of business excellence is the use of quality management principles and tools in business management, It is the systematic improvement of business performance based on the principles of customer focus, stakeholder value, and process management.

Business excellence, as described by the European Foundation for Quality Management (EFQM), refers to “outstanding practices in managing the organization and achieving results, all based on a set of eight fundamental concepts”, these being “results orientation, customer focus, leadership and constancy of purpose, management by processes and facts, people development and involvement, continuous learning, innovation and improvement; partnership development, and public responsibility”.

In general, business excellence models have been developed by national bodies as a basis for award programs. For most of these bodies, the awards themselves are secondary in importance to the widespread adoption of the concepts of business excellence, which they believe ultimately leads to improved national economic performance. By far the majority of organizations that use these models do so for self-assessment, through which they may identify improvement opportunities, areas of strength, and ideas for developing percieved weaknesses.

“Business Excellence” is traditionally defined by tools, not the outcome of being excellent. This is the wrong approach. It’s like saying, “I’ve purchased a very good set of tools at Home Depot. Now, I’m going to build a fabulous building.” The assumption is that the adoption of tools will yield good economic results for companies and economies. This is not necessarily a valid assumption.

Business excellence is best defined by its outcome, not its process. The Malcolm Baldrige award now weights more the 50% of its award criteria on business results, not product quality. Therefore, business excellence can be better described as excelling in the important dimensions of the business: financial performance, customer relationships, product / service value, and employee relationships, over time.

None is more important than the others, no organization can be thought of as “excellent” without superior performance in all four dimensions. Moreover, when one dimension is sacrificed at the expense of another, overall performance suffers. So, the term, “business excellence” must be defined as excelling in the dimensions of its customers, employees, products/services, and profit / return on shareholder equity, over time. An “excellent” organization remains so as its environmental conditions change.

Who sets the standard for excellence? Excellence is a yardstick, against which, you can measure your organization. But who’s to say that one yardstick is better than another? Against whom or what do you compare your performance? Industry benchmarking can be misleading. You may be an excellent performer in an industry that generally does poorly in one or more of the dimensions. One executive told me, “You may be at the top of the worm pile, but you’re still a worm.” So what is the measure? Other industries? This seems like a better approach, but gathering accurate benchmarking data is a signficant obstacle.

I propose that rather benchmarking performance, excellence is a value. A culture. A tradition. A way of life. There is no single standard of excellence except what you say it is. It must be this way, because the drive for excellence must come from within – not imposed from the outside. At best, only the consequences of mediocrity can be imposed from the outside (as reality constantly reminds us). Excellence is a shared value. The entire organization knows who they are and where they’re going.

For those who would like to see their organizations become excellent, the nature of excellence says something about how to achieve it. Achieving excellence is something to be led from the top, not something organic that bubbles up from the bottom. However, a leader cannot impose excellence; he can only create the conditions under which it can develop.

The leader must create a compelling vision for excellence. The organization must have a clear understanding of why it exists. What is the value it creates in the community? Why do customers value their relationship? Why are people so important? What do we do that others do not? This vision precedes process creation and skill development, because the answers to these questions dictate the nature of the processes and the types of skills required.

In the end, excellence comes from leadership, not competition. Like a winning football team, excellence is displayed in competition. The competition doesn’t create excellence, only the results of leading with excellence as a value.