4th Sigma: A Tale of Efficiency… Why Bigger Is Better!

Posted on October 6, 2011 by Chris Niccolls

This Blog is another chapter in our ongoing collection of tips, tools and observations to drive simple process improvement…The 4th Sigma. Today, we’re going to talk about growth. A healthy firm is always trying to grow. Growth may be needed to overtake a competitor, or to open up new markets. Growth may be demanded by investors, or it may simply be needed to stay in business.  Whatever the reason for growth, there is an underlying assumption that as your firm scales up in size it will become more efficient. Bigger is supposed to be Better! The largest firms pay more, or offer better benefits, or have nicer offices for their workers. The largest firms can afford the best proprietary software, the best support services, the best of everything. But where does the advantage of scale come from? How big do you need to be to gain these advantages? Exactly how much of an advantage does size provide?  Surprisingly, a physicist has finally answered these questions!

A great source of information on leading-edge thinking is: TED Talks. TED (Technology, Entertainment and Design) brings together some of the most intelligent people on the planet, who make short video presentations on important subjects. In one of these videos Geoffrey West, a theoretical physicist, presents data on how the metabolic rate of an animal increases with size. Bigger animals require more energy than smaller animals, but per gram they consume less. Obviously, a single lion eats more than a single mouse, but the equivalent weight in mice will eat more than a lion. The really interesting thing is that it doesn’t matter what the specific animal is, the ratio of energy consumption to size is incredibly steady: double the size of an animal (grow by 100%) and you add 75% more energy. That may not sound like the most important thing you’ve heard today, but keep reading… it gets more interesting.

West’s research doesn’t apply to just animals. Forests follow exactly the same growth curve. Cities grow according to the same curve. The final test was to apply this to corporations… which follows exactly the same curve. For the average corporation, we can say with 90% confidence that doubling its size should only add 75% to cost. If a company, division, location, department, etc. that used to cost $100 million doubles in size (organic growth, merger, acquisition) should now cost $175 million to operate. That means that the new entity is 15% more efficient ($25 million savings divided by $175 million operating cost). Each additional doubling generates an additional 15% efficiency.

We can now measure the efficiency we can gain, but do we know how this happens? As a matter of fact, we do! Dr. West explains that growth efficiency comes from NETWORKS. If you look at the development of internal organs as animals grow in size, you will see that they get more sophisticated, through networking processes. For example, lungs and circulatory systems (both examples of networks) gain complexity with size. In corporations we grow management groups, upgrade our email and phone systems, create negotiation groups (Procurement) to obtain goods, and so forth. When animals evolve to a larger size without these improvements, they tend to die off. Companies that grow without gaining efficiency can be smothered by their own growth.

West’s statistics are only for the survivors. Except for a few outliers, firms that fail to develop efficiencies die off due to excessive costs. It really is a case of expand (and improve) or die. However, specific efficiencies can be much greater. When positions are collapsed, they cost less. Consider a $10 million firm, with a CFO that is paid “X”. When you grow to $100 million, the CFO will have a higher compensation (2x, 3x, more?) but not 10X. Some of the remaining savings may go towards people and projects, but the overall savings will follow the normal curve.

When you develop your business plans, or plan a merger, or expand a business group, what are your cost assumptions? Was the plan driven by linear assumptions (100% growth means 100% higher cost) or was a realistic sub-linear budget (100% growth for 75% higher cost) used? Should the performance of a group, the return on projects, and other growth-oriented planning be “discounted” for the 15% so you can measure any “real” performance improvement? Should growing departments that are not delivering, at least a 15% improvement be put on your “endangered species” list?

Only you can decide what’s the best for your operations, but you now have a tool to quantify the benefits of growth, adjust a budget to see “true” efficiencies in a growth plan, and be able to set expectations for growth and mergers (minimum of 15%). Add this process to your 4th Sigma knowledge-base, and remember the “15% rule” when planning or building a budget. And that’s my Niccolls worth for today!

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Myth & Merger Part 2: Communication Makes A Difference

Posted on October 5, 2011 by Chris Niccolls

Your firm has decided to acquire or merge with another firm. The merger allows you to achieve a key business goal (dominate a market, expand to a new size, move into new territories, etc.) faster or less expensively than by organic growth. However, mergers have a disadvantage. Even the best possible acquisition will never exactly fit your business plans. A custom-built solution is always a better fit. Lets take an example, such as expanding into markets in Chicago and Los Angeles. If you acquired a firm with offices in both cities, that firm might also have a small office in south Florida, that doesn’t fit into your plans. Alternatively, the Chicago office might not be located in the part of town you would like. Perhaps, the LA office isn’t large enough for your expansion plans. And of course, there are always individuals in the acquired firm that you wouldn’t have hired.

It’s that last point that interests everyone on both sides of the merger. They know that there are going to be changes in personnel. As a change manager, you can see the possibility of improvements; the rest of the staff is focused on winners and losers. To be fair, some individuals will win (promotions, new group heads) and some will lose (changes in roles or compensation, layoffs). The vast majority will see little personal change, but some will feel passed over in the new structure, or feel that they should have been considered for a more important role. The merger must create some changes if it is to produce a benefit to the new organization, making some unhappy individuals… unavoidable. Still, you can take steps to minimize internal friction and get more of your staff to contribute positively to the merger. The key is communications!

When your firm committed to the merger, your executives spent a lot of time developing an external communication plan that would keep clients and investors informed. Was as much effort put into the internal communications plan for your staff? How will your staff be informed of the coming changes? How much information is enough?

As discussed in Part 1 of this Blog, you first need a clear and measurable merger plan. The key differentiator in executing that plan is how well it is communicated. There is no magic formula for how much to tell your staff, or which channel of communication works best.  How much you tell your staff and at what level of detail depends on: experience in previous mergers; the level of corporate information your staff currently receives, the channels you use to communicate corporate information, and so on. If you almost never provide business information to your staff, suddenly providing very detailed information in the middle of a merger can cause more problems than it solves. Let your culture guide you.

Once you decide what you want to communicate to your staff, here are a few issues for you to consider that can improve the delivery of your communications plan:

  1. Consistency: The level of detail and frequency of communications will vary from firm to firm, but each communication must be clear, concise, and consistent. Never commit to a weekly update, and then fail to follow-up. A sudden stoppage in information or a change in how information is delivered is more likely to be interpreted as an attempt to hide a serious problem, rather than just an individual who is too busy to communicate.
  2. Channels: You need to decide how to send communications to your staff… in person meetings, phone calls, video conferences, or emails. You also need to give thought to the communicator. A different message is sent if it is communicated by the office manager or by the CEO. Geography, organization size, and time constraints will limit how often the “big boss” can directly communicate a message, but carefully consider who will communicate each message.
  3. Changes: Few plans are implemented without change. However, when the staff sees changes, but the change are not discussed, official communications can become suspect.  When setbacks happen, or schedules are missed, or even when something fails… say so. Always be mindful of the method and style of communication, but ensure that the content reflects reality, both good and bad. Bad news tends to get out. but you can control how that information is received, if you are willing to talk about it.
  4. Assumptions: Many events will happen during a merger, including some that have nothing to do with the merger. There is a basic human need to turn bits of information into a story, even when there is no real story. Don’t just provide staff with information, give them an understandable narrative that they can follow and that gives information a context. Rather than, “We have completed 37% of the planned objectives successfully,” consider, “It’s been three months and we’re about a third into the plan, which should take 14 months to complete. Compared to past mergers we’re doing better than average and that should lead to exceptional bonuses this year.” When narratives don’t exist, your staff will look for clues, leading to speculation and rumors.
  5. Influencers: You can keep rumors in check by tapping into the power of influencers. We all know individuals with extraordinary access to information,  unique insight, or exceptional honesty. We turn to these “influencers” when we need an answer. Your staff already uses influencers to find out what’s going on, or when there are times of crisis. Get to know your influencers, and give them a role. If you don’t know who your influencers are, ask your staff! You can survey your staff, or just talk to them. Tell them you want nominations for representatives who will communicate information to the staff. Ignore self-nominations, and focus on who everyone wants to listen to.
  6. Winners: Who gets promoted, who loses control of a department, who leaves the firm: these are the “tea leaves” that give your staff clues to their professional future. A big clue is how meetings are merged. For example, when two IT groups are merged, you have redundant meetings. Which will you drop? Typically, the acquiring department (the “winner”) set the new schedule, often simply moving everyone to their meeting schedule. This may be more efficient for the new manager, but… resist, Resist, RESIST the urge to do this! Moving all meetings to the “winners” schedule sends a very negative message to the “losers”. It’s a lot more trouble, but it sends a positive message if both meetings are canceled and replaced by a new meeting… based on input from all attendees.

We know that 90% of communication is non-verbal. We respond to more than the overt content of communication: our tone of voice, body language and other non-verbal elements are more important. While there is less research on the importance of communications channels, the communicator’s influence, or consistency between communications, we know that these factors matter. With just a little extra planning you can overcome resistance, reduce rumors and get more people on board with the coming changes. At least, that’s my Niccolls worth for today!.

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Myth & Merger, Part 1: Writing A Merger Plan

Posted on October 3, 2011 by Chris Niccolls

When your organization undergoes an acquisition or a merger, it has a profound impact. Of course, it is supposed to have a profound impact… that’s why money, stock and personnel were committed to this project. The merger of two firms is supposed to cause a magical transformation, making the new firm more than the sum of its former parts. If the two firms were unchanged, the merger was a failure. However, change alone does not equal  success. A successful merger must set and attain very specific goals. In order to achieve these goals sweeping changes in operations and staffing may be needed. Which is why executives spend considerable time to develop press releases to inform clients and investors about these changes. WIthout this effort external stakeholders may be surprised (or angered) by changes. But these executives usually spend far less time on internal communications.

How will you communicate the management plan to your staff, and how will they react? A period of change is frightening and confusing for both managers and staff. There will be miscommunication, confusion over roles, and resistance by individuals who disagree with roles for their group and themselves. Too often, status reports on a merger reflect hopeful thinking more than useful data on merger objectives.

If you’re on the hot seat for driving changes after a merger, how do you ensure that the management goals are achieved? You need to start out with a formal merger plan. The plan needs to have clearly defined goals and numeric targets. You can build your merger plan a number of different ways, but the easiest is to break down the overall goals into department goals. For example:

  1. If you are building a plan to merge two IT departments,  the goal should
    not     be, “successfully combine both groups.”
  2. Instead, you need to have specific measurable goals, and whenever possible numeric goals. The goal should be:
    1. By no later than March 12, all the following conditions of the plan are to be completed…
    2. The new structure is to have a combined cost of no more than 90% of the two previous groups.
    3. Compensation for each position needs to be analyzed, proposed new compensation structure (individual compensation, and group bonus) must be presented and agreed to by management.
    4. A written job description, in a standard format, must be created for each post-merger position and approved by HR.
    5. A new organization chart is to be produced for the department,  providing the new management structure and positions; changed positions are to be indicated on the org chart.
    6. All individuals in the department are to be moved into the new organization structure, and any remaining questions about
      position, title, compensation, etc. resolve with HR and signed off by management.
  3. Ideally, each goal should have detailed sub-plans. Since some steps are dependent on completing other steps (moving staff into the new org structure requires first agreeing to the new positions with HR) , a schedule will help to keep things on track.
  4. These individual plans should roll up into the main plan, and the main plan should reflect the goals of the merger, especially the total financial benefit of the merger.
  5. If department benefits fall short of the total expected merger benefits, where will the rest of the benefits come from? Reconsider what you have asked each department head to do. Either raise the contributions for each department or adjust your expectations from the merger.

When you set your goals for the merger, did you include efficiency and cost reduction goals? What level of increased efficiency did you assume? A growing firm should require less staff to do the same amount of work. We almost instinctively know this. We hear, “we will gain efficiency with scale,” but we rarely agree on exactly how much efficiency. Amazingly, there is a simple answer to this question!

I won’t go through the details here, that would require its own Blog (coming soon). But here’s the answer… when a corporation doubles in size (100%) growth, costs rise by just 75%. Therefore, if two firms that cost $10 million each to operate merge, the new cost should be $17.5 million ($10 million for the base, and 75% of the “growth” from the merger). Of course, if the merger plan is just part of a larger growth plan, some of these savings may be re-invested rather than realized as profit.

If you don’t develop clear goals, and have immediate follow-up to drive the efficiencies that justified the merger, you may not get the benefits you expect. Furthermore, if you delay in making the changes the merger requires, perhaps waiting a year for everything to settle down, you will put your firm through a double trauma and undermine internal good will, and company loyalty… when everyone thinks “it’s all over and we can relax”, your staff doesn’t want to see a second set of changes. So, the lesson for today is to  be clear in your plan, follow-up on the elements of your plan, and make each of your plan goals as clear and accountable as possible. We will continue this theme in our next blog when we talk about the internal communication of your merger plan. But for today, that’s my Niccolls worth!

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Monkey Traps, Career Development, And Your Next Budget

Posted on September 28, 2011 by Chris Niccolls

Have you ever seen a monkey trap? It’s a simple device, just a container with a narrow opening. Typically, it’s a gourd or a hole in a tree with an opening just big enough for a monkey to squeeze his hand into; inside of your trap is something tasty (a piece of banana?) or something shiny.  When the monkey grabs the bait, his hand can no longer fit back out of the trap. Of course, if he just let go of the bait, he could take his hand out. But he won’t. Well, I saw a picture of a very unhappy monkey, with his hand caught in a trap and I thought, “Y’know, give him a shave and a pair of pants and he look just like my uncle Horace.” We’ve not that far removed from our hairy cousins, especially “little Horace.” It may take more than a bit of banana, but like little Horace we can all fall into our own monkey traps.

I think we fall into the biggest traps in our own careers.  Either through promotions or chance, as you gain seniority you often gain titles and responsibilities. Not just growth in
size, but an expansion in the types of responsibility. As the range of your responsibilities
expands, are you equally capable of performing each responsibility?  Don’t think in terms of doing “good enough,” think about what you do exceptionally well. Are there responsibilities that you hate performing? Chances are, the responsibilities that you hate are the ones you preform least well, or put the least time into. In today’s economy, there
is more transparency in the organization than ever before, and under performance…… even when you do very well in some areas… is becoming a top management issue. For your long-term career, it is better to do what you do best, and do it exceptionally well. Then how do managers get into this monkey trap? Because in the past, taking on ever more responsibilities meant that you could justify ever higher pay. Today, the outputs of your work are being scrutinized much more closely. Your desire to do is still vastly important, but your pay and your career are going to be based on your ability to accomplish. 

People have always complained about bias in the workplace.  People have always thought that promotions are based on who the boss likes or who is the best yes man. And “people” have been right. It’s not that every boss is so biased that he ignores hard data on performance; the problem was that bosses lacked the tools to assign the right objectives
and to measure if workers achieved them.  Lacking data (and even good measures) on
performance, the boss falls back on indirect indicators, like ambition, a “can-do”
attitude, and… personal loyalty.  Why is personal loyalty so important? Because if I’m wrong about what I think you can do, I’ll at least know that you’re trying to do what I asked! This just builds a monkey trap for your workers. Their desire to please you, and your desire to reward them by adding responsibilities, leads to the same problem of spreading their attention between the things they do very well and a lot of things where
their performance may be only mediocre. Because of fear.. that we won’t be promoted, that we’re not indispensable… we try to hold onto things that aren’t necessarily good for us.

If this is what we do individually, what’s going on in the groups we manage? In most cases we’re not only committing the same errors on a much larger scale, we’re also degrading the reputation of our groups and sending signals to larger firm that our services are problematic. It doesn’t really matter that you’ve volunteered to take on task that no one else wanted. When you take on a task, you must perform that task better than anyone else. If your group stepped in as a temporary solution, that’s fine. But, when are you going to hand it over to someone else? How many functions are you still performing, that have been under performing for years?   When will you begin to advocate that unsuccessful functions should be handled by someone else? I know. Right about now little Horace is screaming in your ear, “no. No. NO! That’s my banana… mine, Mine, MINE! DON’T LET GO!”

Twenty years ago, I might have agreed with little Horace. But today he metrics you use to manage your functions not only provides more transparency than ever before, they are also circulated more widely. When you know, or even suspect, that the functions you mange could be better managed by someone else… the regulators in your firm (the groups that measure firm-wide performance) are drawing the same conclusions.  If you’re not sure when you should bringing up this issue, the answer is, “Before the regulators bring it up!” If you have a solution that can improve a poorly working function, apply it. If some other group in your firm should perform a function, and is capable, you might want to talk to them. If some other option (hire a consultant, change the process, outsource the function) will work, then pursue that option. Never “drop” a function because it looks like trouble, or toss a “hot potato” problem to some other manager. But if you have tried to fix a function, work but just can’t make it work, someone else may be able to do better. We can each be little Horace and hang onto something even when it’s in nobody’s best
interest. Think about what’s on your plate, what you’re good at, what your group is good at, and if your judging success by how much everyone does or by how much they do well. And that’s my Niccolls worth for today!

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Solving The Government Budget Gap: The Strategic Software Initiative

Posted on September 25, 2011 by Chris Niccolls

The government’s budget problems are not going away any anytime soon. The problems facing the Federal government get the headlines, but the problems facing counties and towns are even more problems. While the Feds can print their own money, and change regulations that drive a lot of expenses, local governments have limited power to produce more money or change demand for services. Furthermore, as government gets smaller, the staff not only shrinks, but it often becomes less sophisticated. A town doesn’t have the financial leverage of a state of Federal agency. It cost more to finance, and there is less
negotiation power for purchasing. The individuals voted into power in a local government may not have the skills and experience to handle their management responsibilities. Pension funds are in trouble and local budgets are at risk. Local governments are looking for solutions: more money from the Federal government, citizen agreeing to reduced services and higher taxes, and town workers accepting pay cuts and reduced benefits. These solutions provide temporary, but necessary relieve. An overlooked long-term solution is to reduce administrative costs by making communications between the local, state and Federal government more efficient. How?

For one example, look at New York State. NY has 62 counties, which contain 932 towns. Every day, these government units talk to each other, passing in formation up and down this chain of command. They report on work accomplished, requests for funding, changes in project assumptions, changes in schedule, regulatory reporting, budget updates, and just about a everything else needed to fund and run a government. These units of government then communicate with suppliers, the corporations and private entities that sell products and services to the government. Each town may work with tens if not hundreds of unique suppliers (real estate, lawyers, books, paper, car dealers, the electric company, furniture suppliers, etc.). Multiply this times not just New York’s 932 towns, but the 20,000 to 50,000 towns (depends on how you measure a town, vs. village, vs. other local government), and you  have hundreds of thousands of entities sending emails and paper mail with data that needs to be re-keyed (often many times) into other systems, so that the wheels of government can slowly grind forward.

What if we could still communicate all the richness of data that we have currently, while eliminating the majority of re-keying and most of the errors (that consume administrative time)? That is a part of what an Enterprise Reporting System (ERP) can do. However, ERP systems become truly magical when the number of users is very large. When we have to manually manage large groups of people and documents, costs (and errors) tend to rise with size, due to human limitation. With computer systems such as ERP, cost drop dramatically as you increase the number of users. If an entire state adopts one ERP systems (or a single ERP specification), then the potential is enormous.  There are some hit and miss implementation of ERP in government today, but they tend to be aimed at just one town or city, or at the state level but do not require participation by all towns, or many towns in a state-run individual ERP systems that do not communicate with each other. You need to walk before you can run, but early returns on ERP certainly indicate that they work, now we have to see if they can work together on a much larger scale.

Is this Strategic Software Initiative a totally radical idea? Not at all! In the late 70’s and early 80’s major railroad companies had a similar but less ambitious plan to reduce administrative overhead; they created a standard for EDI (Electronic Data Interchange). Before this initiative, all railroad purchases required some use of paper order forms. Some railroads were highly automated, and some were not. Likewise, different suppliers had different levels of computerization. However, no railroad used the same systems as suppliers, leading to a minimum of re-keying of data between the two systems. And any mistakes led to very costly human intervention. Sounds familiar? By being required to use the same electronic ordering system, re-keying errors are eliminated and administrative time is greatly reduced. Today’s modern procurement department requires suppliers to use or connect to their procurement systems. Many clerical processes were no longer
needed, and the cost of administration dropped dramatically. ERP has the potential to deliver greater efficiencies to local governments.  This initiative would work something like
this:

  1. FEDERAL SPONSORSHIP: The Federal government would set up guidelines for the Strategic Software Initiative, an aggressive ERP program to reduce the administrative cost of managing government. State governments that implemented a compliant program would receive federal funding (based on the potential administrative savings). ERP suppliers would receive specifications for an “open” ERP standard; suppliers who were compliant with the standard would receive federal certification. Any program receiving federal funds would be required to use a certified product.
  2. EFFICIENT ADMINISTRATION: The Federal government, state government, local government, and private supplier firms would each have separate components, since each entity plays a different role. By using a single system, re-keying of data is virtually eliminated and fixing of data errors is greatly reduced. Whatever the current cost of administration, by folding all four roles in the ERP, it could reduce 75% of reworking, or more. Still, lets assume that administration is only reduced by 50%.
  3. CLOUD BASED: Previous computerization efforts in smaller governments stalled or failed when equipment and software licenses were not kept up to date. A cloud based solution, with a fixed annual cost, would resolve these issues. A cloud provider can provide a higher level of service (and availability) and would reduce unexpected costs (broken server, software updates, hard drive replacement) that a small and unsophisticated IT department often fails to anticipate when a budget is approved. Typical savings for moving a network to the Cloud is usually in the range of 50%.
  4. FASTER PAYMENTS: In addition to the benefits of a streamlined system that requires a smaller administrative staff, the ability to process billing faster and with fewer errors and corrections means that suppliers can be paid more quickly.
    Granted, today small government (just like individual families) may be juggling
    and delaying payments, but even when governments want to pay on time, there may be too many approvals and a system that is too inefficient to deliver payments in a timely fashion.  If payments can be on time or even early, better discounts can be negotiated, reducing the cost of government. Discount of even 1% or 2%, applied nationally, represent huge savings.
  5. BEST PRACTICES: The greatest benefits may come from as yet unidentified best practices. ERP systems are tremendous resources for data mining. The Feds could develop a small (not a cast of thousands) office of best practices, and put out regular reports to all government parties on: state and national pricing, new contract patterns, a library of best contract clauses, how long it takes to complete
    different types of projects, which projects tend to be the most successful, and
    other important ERP data. For example, copier/printer paper: best rates; rates
    in-state vs. nationally; how rates fall with increased volume; how towns can contract jointly to lower pricing; most successful projects to automate work and reduce paper purchases; calculating the full impact of paper efficiency (cost of: ink, toner, printer purchases, maintenance contracts, etc.). The benefits across all
    purchases and projects would be enormous. Today, the data to drive those savings is buried in multiple systems and paper receipts.

Global corporations have developed the tools and techniques to coordinate the purchases and reporting of their many departments. The effort needed to put all US local governments on a single ERP system is at least an order of magnitude greater; then again, the potential benefits are equally high. Greater administrative efficiency has the potential to deliver cost savings to close the budget gaps affecting local government, without taking
away services or raising taxes. There aren’t too many proposals left out there that can do this. Think about it! A Strategic Software Initiative is the single greatest opportunity to boost government efficiency in our lifetime… at least, that’s my Niccolls worth for today!

Posted in Best Practices, Common Sense Contracting, Decision Making, Improvement, Continuous or Not, Unique Ideas | Tagged , , , , , , | Leave a comment

Management Focus, Gemba And… Rats In The Attic

Posted on September 23, 2011 by Chris Niccolls

In our last Blog, we talked about a survey that showed that 46% of outsourcing buyers were satisfied with cost savings,  26% were satisfied with transformation efforts and just 11% were satisfied with meeting innovation goals.  We went on to talk about other studies that found that Six Sigma, Lean, Kaisen and other improvement project methodologies also barely achieve a 50% success rate. The conclusion was that there are two factors that make it difficult for projects to achieve all of their goals. The first is that many projects are managed by individuals who have other responsibilities, and eventually lose their focus on a project. The second is that cost savings (or at least early evidence of cost savings) happen earlier than evidence of transformation, and evidence of innovation happens even later;
since we’re all constantly being distracted, more of your projects supporters are working with you on cost, fewer are still around for transformation, and almost all of your supporters have dropped off (for a variety of reasons) by the time you get around to innovation goals.

Today, let’s look at another management process, Kaisen… an early term created in Japan for what would evolve into “Lean” management. This methodology finds small inefficiencies, things that don’t need to be done or that the client doesn’t value, and eliminates them. Kaisen also introduced another term, Gemba. Gemba is the center, the origin, the “real place” or the “scene of the crime” in Japanese culture. This is where all or most of these problems arise from. It could be a misunderstanding of client needs, it might
be a poorly designed work process, it could be a good process with confusing training, or it might even be a group of employees with little motivation. It could be almost anything, but if you don’t get to the Gemba you only solve part of the problem and only receive a part of the potential benefits. In Japan, where these ideas originated, there is more of an effort to get to the Gemba. Attempts to transfer Japanese management techniques to the US have always been rather disappointing.  Something in US and European corporate culture limits the results of Kaizen.

That something may be that the US and Europe want a faster return on investments, and tend towards shorter time frames for investment and projects. Andrew Scotchmer, an author of Kaizen Books and the Founder of a Kaizen consultancy, wrote an interesting article about a US variation of Kaizen. This process is called the Kaizen Blitz. This is Kaizen done very quickly and broadly, the perfect process for cultures that are very bad at waiting for results. The only problem is, as Andrew Mr. Scotchmer points out, that it often doesn’t work. By skipping important steps to deliver quick results,
you never get to the Gemba, and the results are very superficial. Mere symptoms, not underlying causes, become the only targets.

Let’s take a look at a simple example. Let’s say that you buy a house out in the country. In that house, you have all the communications (internet, phone, cable, satellite, etc.) running through a single closet in your attic. After you’re in your house for a few months you start having problems. The cable stops working, the internet starts having problems, the phone has static.  You then look in the closet and see that many of the cables have been gnawed on, and the copper wires inside of these cables are now exposed and are touching each other. Success, you’ve found the problem! You wrap the cables in electrical tape, close the closet, and you’re done! No? Well, this is Kaizen Blitz… or at least poorly executed Kaizen Blitz. A better solution would be to ask yourself what gnawed the cables? Hmmm… looks like rats. So, you go a step further and after the cables are taped, you put out some traps to take care of the rats. Finished? No. You’re closer to the Gemba, but you’re not there yet. You need to ask yourself, “Why are rats in this closet, and how did they get  there?” Now you look for the holes that the rats made, and plug them. You also notice that someone stored flour and other groceries in the closet. That’s the Gemba, the real cause of your problem. You need to fix this if you are going to permanently solve your problem.

The lesson for today is that when you solve a problem, there is often a larger and more important problem lying just beyond the one you just solved. These deeper issues, the core of your problem, the Gemba, is what you need to find to get the full benefit of your problem solving. If you stop short of this goal, you may only get a small benefit and miss the true payoff of performance improvement. There are constant pressures to complete projects faster than makes sense. It’s hard to resist these pressures, but if you approach a project with a realistic timeline you are far more likely to find the Gemba and achieve far
more benefits. And that’s my Niccolls worth for today!

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Are Costs Savings The Holy Grail Of Outsourcing?

Posted on September 21, 2011 by Chris Niccolls

Whether your goal is re-engineering or outsourcing, somewhere along the line you’ve run into the term Transformation. Your organization may have been exposed to the idea of transforming your organization from contact with a consulting firm or members of your firm may have heard of transformation from a panel discussion at an industry conference.
Maybe an executive read about it in a magazine. However you came into contact with this idea, it has become the holy grail for many firms, and many service managers have been given the task of making transformation happen. Like most mythical quests, there are numerous stories about those who started this elusive quest, but there are few credible reports of anyone actually completing the quest and discovering the formula for transformation. Like the grail itself, the teams that have started out on this quest have provided conflicting stories about their quests, what they discovered and even what our elusive grail looks like. Is transformation just  a myth? Does true transformation really exist? Will it take Indiana Jones to find our transformational grail? it? For the answers to these and other questions, read on!

The reasons why this quest is often unsuccessful may be found in a recent article from Horses for Sources, a journal of outsourcing information so thelps you to find, “the right horse for your particular course.” They recently published the result of a survey that found that outsourcing tends to achive cost savings fare more often than than “higher level” goals such as transformation. For many of you, this may not be much of a shock. Many firms start off with very high aspirations, often as part of a larger effort to re-invent or re-invigorate their business. Yet, while the initial goals are very lofty, transformation is often forgotten and replaced by the simpler more easily measured goal of simple cost arbitrage, by moving to a lower cost location. This survey confirm this: 46% of outsorcing buyers responded that outsourcing was very effective at reducing costs. But, only 26% responded that transformation was very effective and just 11% responded that they achieved “innovation” goals. Let’s take a closer look at these numbers.

The first number, 46% very satisfied with savings, is a very profound number. It is not a coincidence that it matches some other numbers. For years McKinsey and Gartner have been publishing studies that say only 50% of outsourcing projects succeed. Likewise, there are similar reports from the world of project management, especially from the world of Six Sigma, that tell us that only half of the improvement projects are completed or completed successfully. While it might be less than scientifically rigorous, we can tie together these different, but related, pieces of information. Outsourcing, Six Sigma, Lean, Kaizen and other project based efforts fail frequently, but each involve different types of projects or different methodologies to identify or to manage projects. Therefore, the primary theme that ties togetehr these failures is that they each involve projects. Project are special, limited time, efforts outside of the normal course of business. Granted, there are project managers and consultants whose only job is to manage projects, but projects require teams and most of the team members have other jobs that continue after the project is over.

We all go into a new project with at least a degree of optimism, some belief that the project will suced (or the project wouldn’t get off the ground). As the project proceeds, we run into obstacles. Issues of all sizes that drain away the benefits of the project, and blunt our enthusiasm. Meanwhile, new projects and new priorities arrive all the time. It’s hard to keep your eyes on that project while new projects constantly arrive.  A large improvement project might take a year or more, and a large outsourcing project might take 3 or more years. Even if you are assigned to a project full time, it’s difficult not to get side tracked. If you are a senior executive who follows the project because of a very narrow interest, or because you are ensuring that the project has no negative consequences for your other interests, you can be easily distracted or may drop  out before the end of the project. Keeping executives focused on your project for months or years is… unlikely. There are exceptions, but we are all subject to human limitations, and maintaining a single focus for that long is a very difficult task for 99% of humanity. So, time is an issue. If we aligned cost, transformation and innovation on a timeline… cost (lowering cost) appears first and is achieved the earliest, and can be projected more reliably than other goals. Transformation (dramatically improving work) would occur next, and innovation (becoming the world’s best, industry’s best, or a similar benchmark) is the most difficult goal, and requires achieving some cost and transformation goal first. So, your full team along with their political and economic support is there at the cost stage. By transformation, a lot have dropped off. And by innovation, you have the fewest fully engaged supporters.

Does this mean that transformation and innovation are impossible,  or that these goals are too difficult to achieve? Not at all! What it does mean is that cost, transformation and
innovation are successive goals. You need to achieve the first goal before you get the second, and the second before the third. It takes considerable time… perhaps years.. between the first signs of cost savings and the first signs of innovation. You need to set up a timeline to understand when these milestones will occur, and then set your expectations accordingly.  And that’s my Niccolls worth for today!

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Are Cloud Services Really Outsourcing?

Posted on September 19, 2011 by Chris Niccolls

Technology is a tricky thing. It’s very, well, technical. Technology is not just complex, it also changes very rapidly. And of course, the names change as well. Today you see a lot of talk about “Cloud Services,” but the definition of this term is a little… well…
cloudy.  Today, we’re going to clear it up a bit and see how you can use it. Let’s get started!

What we call Cloud services today was called a number of things in the past: “internet services” was one term, with “pay as you go” as another and even “rental services” at one point. A Cloud service is a method of contracting for computer services, without actually buying the underlying software or equipment (or brining it onto your premises). The name
comes from an icon that was put on network diagrams, a “cloud” representing the telephone system. Later, the cloud was any complex system that you didn’t own and didn’t have the details to map out. But it’s not just a technical term for a service; it is also a method of outsourcing, since it leaves the work of providing and maintaining the service to someone else.

In the past when a firm outsourced technical services they often dictated the exact details of how the service would function. For example, when then management of a group
of servers was outsourced, every detail down to the brand and configuration of each server might be specified in a contract. With a cloud service, you contract for: five Terabytes of disk space, room for 10,000 photos, 500 new email accounts or even 100 hours of video conferencing. Cloud services have proven that it’s often better to buy a proven service than try to build (or configure) it yourself. By outsourcing to a company that “built the better mousetrap” your organization has an opportunity to move functions a quantum leap forward.

While a Cloud service can perform virtually any function for your organization, all Cloud services do share certain common elements:

  • OFF-PREMISES: While some element, an application or perhaps a communication device, may operate inside of your organization the primary service is outside… somewhere.
  • INTERNET: There are a few exceptions, but almost all Cloud services are accessed through the Internet, or the various parts of the service are connected via the Internet.
  • VIRTUAL: Your service may be located on a specific device (probably a server), or it may be on a cluster of devices at that location, or it may even be located on
    devices spread out around the world. You can’t tell the location, and your data
    may be located in multiple locations on multiple devices. However, the virtual
    nature of the service completely hides the physical structure. This is good for
    the function of the service, but it may raise questions within your organization about the security of your data, since you will not know the physical location of your data.
  • SHARED: The reason that almost all Cloud services are virtual is because this allows the provider to efficiently share all equipment and locations. This greater
    efficiency translates into a lower cost and/or better performance. A well-designed  Cloud service will provide a robust security model that ensures that sharing equipment doesn’t lead to your data being co-mingled with other users.
  • CHANGEABLE: Pre-Cloud outsourcing usually incorporated extensive notification and authorization approvals to change any part of the service they operated for you. Cloud services will continually change the location, hardware and software of their services without notice to their clients. If this is done correctly, the only sign that a change has happened is that performance improves. However, Cloud services will notify you when a visible feature is changed.
  • SUBSCRIPTION BASED: When you own software, whether you bought it or you built it, you pay a fee or a license. With a Cloud service you almost always pay a subscription, a set price per month or per hour of use or per user. In the old purchase model, you could choose not to move to the latest version, and put off the cost and effort of upgrading.  With a subscription, you pay for as long as you use the software, making the vendor’s revenue more stable and your upgrade path  (generally) less difficult.

Cloud services are definitely outsourcing! By moving away from the client directing every detail of the service to allowing the best providers to handle these details, the opportunities for service and cost improvement become much greater. Moving to this new model means that clients will need to let go of the little details of how services operate and focus on the bigger issues of how their entire technology infrastructure works. It’s a
big move, and it’s going to be frightening for a lot of technology departments. Firms that do not embrace this model will increasingly fall behind the early adopters, who will dramatically lower their operating costs. Don’t fall behind, take a look at Cloud services and see how they can improve your operations. And that’s my Niccolls worth for today!

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Technology vs. Outsourcing: How Four Job Positions Evolved

Posted on September 16, 2011 by Chris Niccolls

Outsourcing is a tool for getting work done, especially when you just don’t have the skills or the management bandwidth to do the work yourself. Outsourcing is often chosen because it can significantly reduce cost, either through more efficient processes or by better use of different labor markets. By using both global labor markets and the best work processes, an outsourced service could be offered at a dramatically different price point
than by performing the work internally. Of course, outsourcing isn’t the only way to achieve dramatic reductions in cost. Computer automation is another powerful tool for reducing the cost of work, and improving quality.

In any major corporation, there are projects that use outsourcing and technology together to achieve efficiency. How they work and how transformative they can be in combination is best seen when you look at a specific type of job. Today, we’re going to look at four job types that illustrate their impact.

  • PROGRAMMING: The development of software is a natural for outsourcing, especially offshore. The value of the worker is based on the understanding of a computer language, not a human language. IF you know a specific computer language, it doesn’t really matter where you’re located. Once it’s completed the computer code can be electronically transmitted anywhere. Because large firms use a combination of software they have created or customized, and software that they have purchased from third parties, having someone else develop code is a
    long-established tradition. While the technology isn’t new, the growing use of
    “cloud computing” reflects the recognition that when we are all connected via
    the Internet, the specific location of a server or programmer may not matter.
    Expect the globalization of computer services to continue.
  • DATA ENTRY: As far back as the late 70’s, different firms found that they could
    ship large amounts of paper to be electronically coded… somewhere in the world
    where English was spoken and typists were easy to find. Once it was coded it could then be transmitted back electronically. Outsourcing and offshoring tremendously reduced the cost of turning text to data. Which was convenient
    because the number of pages of legal documents created in America was increasing exponentially. Over time, human text input has been supplemented or
    replaced by OCR (Optical Character Recognition). Some corporations made use of this technology and insourced (took work function back from outsourcers) for a time. However, today most of this type of data entry is largely outsourced, using a combination of technology and people.
  • PHONE SUPPORT: A hundred years ago there weren’t many large corporations and the telephone was a new invention. As corporations grew, the number of phones grew as well. Groups of phone operators had to direct these calls, and increasingly complex switchboards were needed to support the operators. This was followed by a need for “phone answerers,” specialized operators who didn’t just pass on the call but who answered basic product questions (rather than the customer visiting a store or support center). The support line was born. For years we alternated between electronic systems (press “1” for customer support, “2” for…) and outsourced call centers. Today, both have gotten better. In the end, technology always wins. In the short term has a role to play.
  • BANK TELLERS: In the past, a position as a bank teller was a common first step in a business career. The teller sits behind a window at the front counter, and
    customers go to the window to deposit or withdraw money. While teller positions
    have grown slightly over the last decade, ATM machines have doubled in number,
    increased in functionality and can be used at any time of the day or night. Because these functions need to happen on site, and in many sites, outsourcing
    options are limited but the technology options are unlimited. ATM’s will take
    over more teller function, but may in turn be replaced by even more convenient
    technology such as on-line banking and smart-phone applications. Technology
    isn’t just replacing teller functions, it is evolving them.

Technology and outsourcing go hand in hand in changing, and even replacing job functions. Few job descriptions today have been unaffected by outsourcing or innovations in technology. In the past many jobs could only be done one way, but today we have many more options on how to perform work, where to perform it from, and even if we should hire an outside group to perform it for us. Work isn’t just getting automated or getting sent overseas, it is evolving in response to changes in the needs of consumers and the demands
of the economy. Will outsourcing or technology have the biggest impact on your business? It’s difficult to say. However, you can be sure that whatever job you have, there’s a pretty good chance that it will evolve significantly in the coming years. And that’s my Niccolls worth for today!

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How Do I Develop A Simple Outsourcing Plan?

Posted on September 14, 2011 by Chris Niccolls

A lot of discussions about outsourcing in the media make it appear complex, but it’s really quite simple. In fact, it’s so simple that you probably began “outsourcing” work at home before this became a trend at work. At home, we’ve “outsourced” many functions: cooking, maintaining our lawns, child care, and much more.

When we haven’t got the time, the focus, or the skills to do the work ourselves we look for someone who can do the work; we also need to make sure that we can afford the work, which often (but not always) means that it either costs less per hour to have someone else do it, or we get a better value when someone else does it (better quality, more convenience, greater consistency, etc.). Corporations think and work much the same way. The difference is that of scale. A business makes outsourcing decisions that will impact more jobs, require the consideration of more variables, and involve more decision makers.

Another similarity between your home life and your corporate life is that every outsourcing decision is unique. You and your neighbor may be superficially identical (same age, same job, same house, both married with two children), but that doesn’t mean you make the same choices. Your neighbor may have chosen to hire someone to clean their house, but you may have focused on more childcare. Corporations come to startlingly different decisions about what… and how much… they want to outsource. There is no template that works for all firms, but there is a process that any firm that is thinking about outsourcing needs to go through.  Let’s walk through that process:

  • Realization: Yesterday, big corporations didn’t know what outsourcing was. Today, they know about outsourcing, but don’t realize how many outsourcing (and outsourcing-like) programs they already operate: Copy centers, mail rooms, facility management, IT, even parts of your legal department. Outsourcing may not solve every problem, but learning about the previous generation of contracts will identify new projects and provide valuable insight.
  • Goal setting: Corporations perform a lot of different work functions. To be successful in creating an outsourcing program, you need to define specific goals: reduce corporate costs by 5%, focus on just your New York office, or only look at functions performed in one business unit. Goals don’t need tremendous detail. As your outsourcing experience increases, definitions will change.
  • Participation: You need participants with different areas of expertise to provide inputs to the plan, to verify assumptions and to provide expert judgment.  When you move from a general plan to specific projects, you will repeat this process and create sub-groups with even more specific knowledge.
  • Identification: Now that you have goals and experts to identify and interpret information, it’s time to identify specific projects for your outsourcing program. Every firm makes develops different criteria, and is driven by culture as much as by financial or operational analysis, but there are common criteria that you should look at:
    • Previous decisions: Your firm probably made earlier decisions about using non-employees, such as temporary workers or service contracts. Work with Procurement and your PMO (Project Management Office) for details. See how they addressed the issues on this list, and compile lessons learned.
    • Expertise: Are you performing functions or producing products without sufficient expertise, or are you having problems retaining managers? Does the current management have a plan to address these
      problems? If not, this could be a good outsourcing project.
    • Quality: Even if a function has the people with the right skills and experienced managers, you may not get the level of service you need. Does the manager conduct customer surveys? What are the customers saying? A gap in quality or a lack of interest in customer service is another flag for outsourcing.
    • Cost: An exceptionally high-quality service is not necessarily a good value. How do your costs compare to competitors? Does the function produce monthly reports: unit costs, operating cost, multi-year cost trends? If this function cannot produce these reports an outsourced service might provide greater transparency into your operations.
    • Scale: When you examine your entire firm, you will make many unexpected discoveries. Stay focused! To be a good project you need scale. A lot of “one off” projects are much harder to manage and will have less impact than a large group. Keep a comprehensive list, but only select candidates than provide a big impact in your first wave of projects.
    • Security: You now have a good idea of potential projects. It’s time to filter them according to security standards. Security is a complex and controversial subject. Different standards apply to different industries, and some firms are more security conscious than their competitors. Understand internal and industry standards, and limit outsourcing projects accordingly. Include legal, IT, corporate security, and compliance (if it applies), and any “risk” departments in your discussions.
    • Prioritization: Each item above (and perhaps other characteristics) must be scored, and then each project given a total “outsourcing value.” Undoubtedly, there will be much debate over which characteristics are the most important, if their scores are accurate, and if other characteristics should be considered. Don’t let this process drag on, if necessary got with projects that everyone can agree on and look at more controversial candidates later.
    • Communication: By the time you’ve prioritized potential projects, you’ve held a lot of meetings and talked to a lot of people. Don’t be surprised if these discussions are now public information in the departments you’ve targeted for outsourcing. Always assume that these discussions will get to your employee population, often in real time. Carefully thought out corporate communications need to be
      prepared and ready. Never let rumors become a better source of information than facts.

At the end of this process you will have your initial outsourcing plan. There are many more steps as you execute this plan: confirming data, sub-committees for specific projects, identifying vendors, running pilots, awarding contracts, and so forth. However, developing your plan provides you with the first and most important step! That’s my Niccolls worth for today!

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