Thursday, December 08, 2005

Making sense of BPM


Process is a very broad term…


The term ‘process’ could be used when discussing SAP functionality, and in a different breath, to describe Visio diagrams – so can it really be both?  Well, yes.  SAP functionality is the execution of a process.  A Visio diagram is a simple pictorial representation of a process flow. 


Add to the mix the concepts of ‘process automation’ and ‘process management’ and it’s hardly surprising that the business person is confused when talking with the IT team, and even more so when looking at some software vendor’s websites.


In an area buzzing with definitions, one common process-related acronym is BPM – which stands for Business Process Management which was typically used to describe a type of software.  In response to deepening sophistication in approaches to process, IT analyst Gartner has recently redefined BPM as an umbrella term to describe ‘approach, methods and software’.  Their full definition follows:

Gartner: Definition of BPM

BPM is a management practice that provides for governance of a business's process environment toward the goal of improving agility and operational performance. BPM is a structured approach employing methods, policies, metrics, management practices and software tools to manage and continuously optimize an organization's activities and processes.

So, where does this leave you?  Probably a little confused.  You’re in a business function and you want to improve your operation.  You can tell the difference between SixSigma, CMMi and EFQM.  You’re looking for tools that can help you with this improvement.


However, all software under the BPM banner looks the same at the outset – or at least seems to offer the same benefits, especially if you read vendors’ claims on their websites.  


‘…has been helping to build better businesses for more than three decades.’

‘…continually manage and deliver improved business performance.’

‘…helps organizations gain better insight into their business, improving decision-making and enterprise performance.’

‘…to help customers reduce costs, improve service and achieve agility.’


These quotes were taken from the websites from a major ERP vendor, a process automation start-up, a business intelligence player and a process-modeling vendor.  So which is which?  Beats me.  Which is why my clients are constantly asking me to unravel the ‘process conundrum’.[1]


And just when you thought you’d understood the different vendors’ solutions, a spate of acquisitions of complementary technology changes it all again.


BPM tools unraveled


Clearly there is software that supports Business Process Management – at the last count there were more than 200 vendors. This space will consolidate as some vendors combine through M&A, some retrench to focus on a small niche, while others fail and die.

This consolidation is creating vendors with a broader set of functionality, and Gartner has coined the term “BPM Suites” to describe them.  The BPM Suites will have capabilities in each of the five circles in the diagram.



These capabilities fall under three broad headings which make sense to the end user rather than the Marketing Department of a BPM vendor.  They are Simplify – Automate – Monitor. 





This concerns the capture and understanding of a business process from an end-user’s perspective. Ideally, this should be approached top-down in live workshops to get alignment and consistency from a senior level down to the shop floor and across the end-to-end process.  The processes may be costed to establish the value of any proposed changes, and simulation may be used to establish the best way to streamline the process and assess impacts.




Once the processes have been captured and streamlined, they can be automated to improve productivity further.  Automation can be implemented in a number of ways: 


  • Pure-play: If the process is very people-oriented it may require a ‘pure-play BPM’ software application which enables forms to be strung together to support the end-to-end process.  A simple example is the expense process.  It requires data to be captured in an expenses form by the claimant, which is then sent to the manager for authorisation.  The form will sit in the manager’s work queue until they review it, add their electronic signature to authorise, and then send it on to the accounts team to pay it.


  • Biz Rules: A further level of sophistication is to add some business rules. In our previous expense example, rules may determine who has to authorise expenses, based on the total value of the claim, or there may be escalation rules if the immediate manager is away.   These rules will need to be coded and managed


  • Enterprise Application Integration (EAI): At the next level of technical detail, the process may require that existing software applications are involved to complete the process alongside the forms. This integration requires the data to be pulled out of the existing software application databases, in context.  Continuing our expenses example, in order to work out an escalation route, the reporting hierarchy needs to be understood by accessing the personnel database. In many cases multiple applications and databases need to be coordinated to complete the process successfully. 




Once the processes are captured, streamlined and automated, they should be monitored to establish that they are performing, to identify opportunities for fine tuning, or to show where more remedial work is required. Any metrics that are reported need to be pulled from existing systems and presented in the context of the processes, so a manager can see clearly what decisions to make.


Simplify then Automate, don’t simply Automate


Some software vendors seem happy to dive in and automate the current processes, hoping that automation will identify any weaknesses and opportunities for streamlining.  Call me cynical[2], but these are more likely because the Automation vendors do not have strong products in the simplification area.  For them, talk of simplification means that any project has probably been delayed for six months.  Therefore, they fall into the ‘Simply Automate’ camp. 


Simplification software vendors are not saints either.  They appear unwilling to help the organisation automate the streamlined processes, as they’d prefer to focus on identifying other areas of the business that could be streamlined. 


However, there can be a smooth transition from simplification through automation to monitoring.  Currently this is achieved through integrations and alliances between vendors, but pretty soon we will see full BPM Suites offering all the capabilities. 


This is much like the world of operational applications ten years ago.  Once there were standalone customer systems, stock control, order management, accounts and manufacturing.  Now they have been rolled together and delivered as ERP systems made up of tens of integrated modules.  The same aggregation of products is starting in the world of BPM.  An example of the start of this roll-up is the acquisition of Staffware (Pure-play BPM) by Tibco (EAI).





So, looking at this set of software in a different way- the top of the triangle is the strategic direction setting, leading to a top level process diagram or strategy map and related key targets such as profitability, revenue growth, ROCE (Return on Capital Employed) etc.  


This top level process and metrics are broken down hierarchically (modelling, simulation, metrics, alerts) working with end-users in workshops to build consensus and alignment with the top level processes.  These lower level processes are automated with varying levels of technical integration into the core applications in the company (Pure-Play, Biz Rules, EAI). The automation may draw on the core Enterprise Applications (SAP, Microsoft, Oracle[3]).  The Enterprise Applications and Automation applications generate performance reports and metrics, which is where the Business Intelligence vendors sit with their Reporting applications.  A subset of the data reported is the key metrics which need to be presented in the context of the relevant process step, and as scorecards.


Benefits of simplification


So can an organisation get benefits through Simplification without using any Automation vendors?  Yes.  Many organisations already have core operational systems which work, and simplification simply enables them to optimise how they use their systems.  Here are some real life client examples of simplification


‘Project scope was a SAP & Siebel rollout, which was reduced from 36 to 18 months, the quote process reduced from 14 days to 10 mins, and no additional spend to achieve Sarbanes-Oxley.’


‘For a project based software development organisation, $50m new business, $21m savings from process improvement and achieved CMMi Level 3 – six months early.’


‘A distributed paper-based operation in 80 offices.  Rationalisation & streamlining processes across 1,000 people generated $8m savings in year 1, and a further  $15m in  year 2.’


The additional benefit of addressing simplification before automating is that the automation effort is focused in improving value-added activities,  i.e. it is not automating the ‘invoice error correction process’.  Streamlining will eliminate this process by fixing the invoicing generation process to eliminate errors so they don’t need to be corrected.


Integrating modelling tools and automation tools


Very visual hierarchical modeling is key to communicating change across end-user organisations.  But these models are also critical in eliminating any ambiguity in describing the business requirement, which often occurs with a purely textual document.


The information held in the models needs to be transferred into the more technically-detailed single-level modeling that the automation vendors provide for IT analysts.  The interface is based on ‘similar looking’ models, but the IT analyst plays an important role working with the end-users to interpret and validate the processes to be automated. This activity enables the additional technical and contextual information to be added to the process model so that it can be automated (executed). [4]   Compromises or changes from the end-users could dramatically increase the performance of the automated application, or massively reduce the development effort.


Therefore, blindly (or automatically) converting the end-user’s view of process into a technical view, pressing the button and having a running application is neither desirable nor feasible. There was a dream of a company where the end users can change a process by moving boxes and lines around, and in the morning the core applications (SAP) have been reconfigured.  That would make the company infinitely agile, but I doubt that the end-users could keep up and understand the changes, leading to complete anarchy.


Benefits from automation


Automation should build on and multiply the benefits achieved by process simplification, and as the models have been built top-down there can be confidence that there is alignment between the lowest level automated activities and the aims & objectives at the top of the organisation.  So can you get benefits from automation without some level of simplification or streamlining first?  You may certainly see benefits, but these will never be as significant as when combined with simplification.


The benefits you get from automation are:


‘Quickly implement the appropriate controls in order to enhance compliance capabilities in Accounts Payable and Accounts Receivable processes.’



‘Identify distressed deliveries and act immediately before the shipment arrived back at the company. These capabilities saved money on each shipment and greatly improved the customer experience.’


‘Guide users through the validation and approval process for incentive compensation which reduces the amount of human error in the previous cycle of manual calls, e-mails, and faxes.’



Standards, standards everywhere and not one everyone agrees on


Standards must be developed so that the integration between Simplification vendors and the Automation vendors can be as clean as possible – in both directions.  There have been a number of standards proposed for interoperation of the Automation vendors.  But this is not the most important area, unless the organisation is looking to standardize on one automation vendor.  Of more importance is the integration between Simplification, Automation and Monitoring, and there are emerging XML standards. 


Let’s be clear.  You wouldn’t expect a normal end-user to be able to read or write BPEL, BPMN or other similar standards.  BPEL (Business Process Execution Language), pronounced ‘Bee-ple’, is essentially an XML programming language for defining the automation of a process, which a process engine use to run (automate).  BPMN (Business Process Modeling Notation) is more end-user friendly, but both BPEL and BPMN are focused on the systems elements of a process i.e. the bits than need to be automated, which is only part of the models held in the Simplification vendors’ software applications.



The integration journey


So the end-to-end journey for BPM is shown in the diagram:


‘Senior management set strategic direction and then build out an end-user hierarchical model of processes and metrics (Simplification).  This model is transferred into a set of IT tools that allow technical context detail to be added and then the process to be executed (Automation).  The metrics generated are fed back into the end-user model to present them in the context of the processes (Monitoring).’





How this happens, in the nitty-gritty detail is the topic of a more detailed paper ‘The nitty-gritty of the integration journey’.  It describes in detail, based on practical examples not theory, how you can build a complete solution, integrating each of the technologies.  It will also discuss how this approach supports the design principles of Service Oriented Architecture (SOA) development and delivery.




Correctly applied, BPM can add a huge value to organisations, as they fight to streamline processes to eliminate non-value-added activities, and then automate those that are left to reduce costs, improve accuracy and compliance.  Once the processes can be monitored and problems highlighted, users can see the metrics in the context of processes and make better decisions and improvements.


This correctly positions BPM at the heart of any organisation’s intent of improving their performance.

[1] Conundrum: A paradoxical, insoluble, or difficult problem; a dilemma. Not to be confused with an Oxymoron, which is where two terms contradict – such as Military Intelligence or Microsoft Help.

[2] A Cynic is what an Optimist calls a Realist.

[3] I’m hesitant to list any other vendors as they could be acquired by these three and it would date this article

[4] or ‘Orchestrated’ to use the Service Oriented Architecture (SOA) lingo.

Tuesday, September 27, 2005

Performance = Process & Metrics, but which comes first?

Performance in business these days (and for the foreseeable future, I would imagine) is usually defined in budget discussions, then measured and reported by your Finance Department and for publicly quoted companies reported to the City. The Finance Department will of course liaise with the business functions/divisions to put together the budget, and (where the data is not collected automatically in some system) gather reporting figures.
The blatant misreporting of figures by a number of companies over the last few years has shown that the numbers don't tell the whole story. They describe the results of actions however inconsistent, flawed or manipulated those actions may have been.

So endemic is the perceived problem of reporting that the  Sarbanes-Oxley Act has been passed that forces top management to sign that the numbers have been produced correctly. This means that they must have confidence in the way the numbers have been producedSo much confidence they are willing to bet their job on it.

You could say that the numbers are the one common language in business, but as a common operational language the numbers on their own are just not enough, you need to draw together both the activities and the numbers.
Linking processes and metrics
Think about this: top management defines company goals and strategy and takes the lead on a number of key major initiatives. They will have defined the 'Critical Success Factors' (CSF) and will have outlined a budget. I am sure they will have included the Key Performance Indicators (KPI) so that the finance department can measure and assess the result. The people in charge of operations translate the efforts to be made into operational processes and this runs down the hierarchical chains of the company.
Yet the problem is that in many companies the two activities of (a) the definition of Key Performance Indicators and (b) translating them into operational processes to make it all happen, are not linked.  Each goes their own way.
As a consequence, the people in the finance department (who are doing all the work to prepare the budgets, deliver management reports and so on) have few links to what is really happening, and, conversely, the people in the operational end of the company probably have no understanding as to how their actions help in actually realising those budgets.
Enter the common operational language, where strategy gets translated from the top down in an uncomplicated way by defining processes linked to performance metrics. Whenever there are questions about how to do things (the operational people), or how well things are getting done (the finance people), anyone can have a look at the tools that have been used to record and describe these processes and find the most up-to-date information.
Corporate Performance Management
What I have described is sometimes called Corporate Performance Management, Business Performance Management or Enterprise Performance Management, i.e. the principle of displaying metrics and associated processes so that the overall performance of the business can be monitored and improved.
However, some IT analysts (such as Gartner) started off with a data- or metrics-centric view of performance management. Their view of performance management consisted of fixing the planning and reporting cycle. Currently, in most businesses, this is a series of MSExcel spreadsheets which are distributed throughout the organisation. This is being replaced by Planning systems for the budgeting cycle, and Business Intelligence and Scorecarding systems for reportingThis is not surprising as the Business Intelligence vendors are using their marketing budgets to drive the definition of CPM
What analysts are now recognising, driven by clients voicing their needs, is that there is a process element required to get the full picture. The previous metrics-only view is not really Corporate Performance Management, but Corporate Performance Reporting. There is no ability to change, as there is no relationship to process – the things that people really do.
No surprise then, that many of the Business Intelligence software vendors (such as Cognos, Business Objects and Hyperion) are now looking at how they add process management to their Corporate Performance management suites of software. I believe that this is more likely to be by acquisition (of software or software businesses) or through strategic partnerships than internal development, as the Business Intelligence vendors' world and expertise is in the management and manipulation of vast quantities of data. They have no experience in managing processes in the form of inter-related diagrams and their linked documents and applications. Combine that with the management of multiple versions and compliance and you have a very different problem.
What comes first: Metrics or Process?
Based on the understanding that both process and metrics are needed, then which comes first? This is a pertinent question as there are many companies who already have scorecarding initiatives which are defining metrics.
So what exactly do I mean by metrics?
You have a company which develops, manufactures and sells electronic equipment. Part of the strategy says that you need new product development to produce five new products, each with a minimum of £30 million sales each year by the third year as a Critical Success Factor (CSF).
The metric here is the number of new products with a minimum of £30 million sales per year
Therefore the underpinning Key Performance Indicators (KPI) in the six-stage product development process include:
  • 20 new ideas at stage two
  • budget tolerance up to 5% at stage four
  • product approval sign-off process to take less than 30 working days in stage six.
This gives you a hierarchy of interlinked measures, so that people at every level in the company understand their responsibilities and have clear accountability.
So, if you believe the Business Intelligence software vendors – just install their software and start measuring things for which you have data. This is because their software is good at aggregating all the corporate data and presenting it in a meaningful way – as reports or scorecards. However, this is not as valuable as working out what you should be measuring and going to find that data.
Once people start being measured they will start to change their behaviour. This is human nature. Over time areas of poor performance will be identified and, in analysing the processes that are broken, you need to make improvements in the processes. This requires people to change – for a second time. You will also begin to fully understand the measures, associated with the new processes, that you really want to hold people accountable for.

So this demonstrates that the metrics-first approach requires people to change twice – once as you start, and then once again as you implement improvements.

However, a process-led approach starts with an analysis of the operational processes. This reinforces the strategic direction from the top. At the highest level you define the core processes and the corresponding measures. Both the process and the metrics are broken down hierarchically, level by level, at the same time.

The act of discovering the processes helps you simplify them and improve them. At each level the metrics reinforce the new processes. Therefore change is only needed once and it is supported by shared access and adoption of the processes and metrics.

"If getting people to change is difficult, then changing twice in a relatively short space of time is more than TWICE as difficult."

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Thursday, September 22, 2005

Forget everything you know about being a leader

Marcus Buckingham teaches CEOs how to get the most out of their people and their organizations. His first lesson: Forget everything you think you know about being a leader.
There is a noble promise at the heart of the new world of business: Everyone has the right to meaningful work, and people who do meaningful work create the most value in the marketplace. Even as the talent wars have fizzled into pink-slip parties, few senior executives would dispute the vital importance of finding, engaging, and developing the best people. Ask any CEO, "What's your company's most precious asset?" Without hesitation, the answer will be, "Our people." Ask the same CEO, "What's the primary source of your competitive advantage?" Chances are, the reply will be, "Our unique culture."
This kind of talk drives Marcus Buckingham nuts. It's not that he disagrees with the sentiments -- he's spent his 15-year career as a pioneering researcher and a global-practice leader at the Gallup Organization, making the link between people, their performance, and business results. What troubles him is the lack of rigor behind the rhetoric. "There's a juicy irony here," says the 35-year-old Cambridge-educated Brit. "You won't find a CEO who doesn't talk about a 'powerful culture' as a source of competitive advantage. At the same time, you'd be hard-pressed to find a CEO who has much of a clue about the strength of that culture. The corporate world is appallingly bad at capitalizing on the strengths of its people."
Buckingham, on the other hand, is remarkably good at communicating his subversive message. He has produced two best-selling books: First, Break All the Rules: What the World's Greatest Managers Do Differently (Simon & Schuster, 1999), with coauthor Curt Coffman, and Now, Discover Your Strengths (The Free Press, 2001), with coauthor Donald O. Clifton. Meanwhile, Buckingham has helped build a ballooning consulting practice at Gallup, with more than 1,000 clients, including Best Buy, Disney, Fidelity Investments, Toyota, and Wells Fargo.
His mission, as he describes it, sounds almost quaint: "to create a better marriage between the dreams of workers and the drive of companies to win." His methodology is anything but quaint. Buckingham has led an effort inside Gallup to crunch three decades' worth of data on worker attitudes into actionable insights on human performance and productivity. First, he and his team tapped into a database of more than 1 million Gallup surveys that focused on workers from around the world. Although these workers had been asked many questions, there was one big question behind the interviews: "What does a strong and vibrant workplace look like?" Buckingham eventually distilled 12 core issues (called the "Q12" in Gallup-speak) that represent a simple barometer of the strength of any work unit.
Next, Buckingham's team ran massive number-crunching studies to analyze how answers to the Q12 shaped hard-core business results. The link between people and performance was vivid. The most "engaged" workplaces (those in the top 25% of Q12 scores) were 50% more likely to have lower turnover, 56% more likely to have higher-than-average customer loyalty, 38% more likely to have above-average productivity, and 27% more likely to report higher profitability.
Buckingham and his colleagues made one other finding that startled them: There was more variation in Q12 scores within companies than between companies. That is, in each of the more than 200 organizations that he analyzed, Buckingham found some of the most-engaged groups and some of the least-engaged groups. His conclusion: There is no such thing as a corporate culture. Companies are made up of many cultures, the strengths and weaknesses of which are a result of local conditions.
"It's staggering," he says. "Few of the CEOs in our study could say which work units in their company were engaged effectively and which weren't. They didn't know where their culture was strong and where it was weak, whether it was getting better or getting worse -- or how much this variation was costing."
Talk about speaking truth to power. CEOs don't understand what makes their employees tick. They don't know how to get the best performance out of the most people. They can't say where their companies are strongest or weakest -- or why. And that's just the first of Buckingham's series of assumption-busting messages. "The major challenge for CEOs over the next 20 years will be the effective deployment of human assets," he declares. "But that's not about 'organizational development' or 'workplace design.' It's about psychology. It's about getting one more individual to be more productive, more focused, more fulfilled than he was yesterday."
In several conversations with Fast Company, the tireless Buckingham offered an overview of his pathbreaking research and identified five attitude adjustments that redefine the essence of leadership in business.
Attitude Adjustment #1
Measure what really matters. (By the way -- the numbers you're using now don't matter.)
Numbers are crucial to running a company, and CEOs love them. Yet the numbers that most leaders use to manage the people who are part of their business are mostly off target. The CEOs who come to us are almost always fixated on two questions: How is our average performance improving over time? and How do we stack up against our competitors?
Both of those questions obscure what's really important. Averages hide the fact that within any company are some of the most-engaged work groups and some of the least-engaged work groups. But this range is what is most revealing.
You can divide any working population into three categories: people who are engaged (loyal and productive), those who are not engaged (just putting in time), and those who are actively disengaged (unhappy and spreading their discontent). The U.S. working population is 26% engaged, 55% not engaged, and 19% actively disengaged.
In essence, then, the CEO's job is to improve the ratio of engaged to actively disengaged workers. But here's the problem: Few of the CEOs in our study could say which work units in their company were effectively engaged and which weren't. They didn't know where their culture was strong and where it was weak, whether it was getting better or getting worse.
That's where the Q12 comes in. Survey the workforce every six months, and the result will be a vivid picture of which work units are engaged in a way that leads to the best performance and which workers are not.
I work closely with Best Buy, the big electronics retailer. When they started surveying their employees in 1997, they were in the 45th percentile of our Q12 database. By the end of last year, they were in the 70th percentile. More important, in those four years, 99 stores improved their Q12 scores significantly, while just 18 stores had scores that fell. The 99 stores that improved their engagement level dramatically improved their P&L budgets. The stores whose engagement level fell missed their P&L budgets. These are the numbers that matter.
Attitude Adjustment #2
Stop trying to change people. Start trying to help them become more of who they already are.
CEOs hate variance. It's the enemy. Variance in customer service is bad. Variance in quality is bad. CEOs love processes that are standardized, routinized, predictable. Stamping out variance makes a complex job a bit less complex.
There is, however, one resource inside all companies that will hinder any attempt to eliminate variance: each individual's personality. Human beings are the one irreducible complexity in every company. And you can't eliminate that complexity by forcing people to become more like one another. You can't standardize human behavior. Of course, that's precisely what most leaders attempt to do. That goal -- standardizing human behavior -- is the driving force behind most executive-training programs and leadership-development courses. What's the quickest way to build a coherent culture? Get everyone to manage the same way.
Not only is that approach psychologically daft, it's hugely inefficient. It's fighting human nature, and anyone who fights human nature will lose. The best managers don't even try to fight that fight. We studied 80,000 of them from 400 different companies -- people who excelled at getting great performance from their people. These managers followed the same basic set of principles: People don't change that much, so don't waste your time trying to rewire them or trying to put in what was left out. Instead, spend your time trying to draw out what was left in. When it comes to getting the best performance out of people, the most efficient route is to revel in their strengths, not to focus on their weaknesses.
Let me give you an example from my company. Our senior VP of marketing, Larry Emond, doesn't have a lick of empathy. It was surgically removed at birth. He also lacks a quality that I call "developer": getting a kick out of seeing someone else grow. Now, I could spend my time admonishing Larry. I could try to explain to him why that blistering email he dashed off had a crushing effect on several people. But he still wouldn't get it.
You might think that Larry is doomed to be a poor manager. Absolutely not. Larry's strength is that he has the qualities of self-assurance and a strategic mind-set. He doesn't need to have empathy to achieve results. People feel that Larry encourages their development, because he keeps thinking about how they can be part of this future he's describing.
Now Larry's approach seems obvious -- why would you do anything else? And yet, in most organizations, Larry would be confronted by some nice, well-intentioned HR person -- probably going off of feedback from a 360-degree survey -- who would say, "Larry, as a leader, you need to be more responsive to your direct reports." There would be a lot of, "Tone that down, Larry." Well, how about, "Dial that up, Larry"?
If you are clear about the outcome that you want, instead of standardizing the qualities and steps that you think are required to get to that outcome, you should honor the fact that Larry's nature is irreducibly unique -- rather than wasting time and money wishing that it weren't so. What goes for Larry goes for all kinds of people in companies. The best strategy for building a competitive organization is to help individuals become more of who they are.
Attitude Adjustment #3
You're not the most important person in the company. (Believe it or not, your middle managers are.)
American culture is CEO obsessed. We celebrate the hard-charging heroes and mythologize the iconoclastic visionaries. Those people are important. But when it comes to getting the most productivity out of everyone in the company, they're not the most important people. Our research tells us that the single most important determinant of individual performance is a person's relationship with his or her immediate manager. It just doesn't matter much if you work for one of the "100 Best Companies," the world's most respected brand, or the ultimate employee-focused organization. Without a robust relationship with a manager who sets clear expectations, knows you, trusts you, and invests in you, you're less likely to stay and perform.
I admit, it seems like the most obvious point in the world. But do we revere the role of the middle manager? Hardly. We don't even like the term! We'd rather transform everyone into grassroots leaders, change agents, intrapreneurs. We look at managers as costs to be cut -- or, at best, as leaders-in-waiting, people who are putting in time before they get the big job.
So what exactly do great managers do? First, the best managers start with a radical assumption: Each person's greatest room for growth is in the area of his greatest strength. It goes back to my last point. Good managers believe that each person is wired in a unique way -- and these managers are fascinated by this individuality. Rather than seek to round it out or fill it in, the best managers do everything they can to sharpen and amplify that uniqueness. And then those managers work with people to help them understand their strengths, to build on them, to give them the confidence to be different.
Attitude Adjustment #4
Stop looking to the outside for help. The solutions to your problems exist inside your company.
Talent is a multiplier. The more energy and attention you invest in it, the greater the yield will be. That's why the best leaders are relentless at seeking out, shadowing, studying, and highlighting the lessons of their own top performers.
The funny thing is that most CEOs spend their time benchmarking best practices in other companies. They want to know how they're doing relative to their peers. I tell my clients, Don't go on a tour of Disney, Southwest Airlines, or Discover Financial Services. You have some of the world's best managers working inside your own company. Look to them first. Learn from your own people first.
At Gallup, we've spent years documenting the simple, charming secrets of these extraordinary people. In the corners of every big company that we've studied, there are hundreds or thousands of them toiling away in relative obscurity. If you find them and shine a light on them, they will point the company's way to the future.
Take another look at Best Buy. It's like a controlled laboratory that is devoted to understanding the power of local managers and local work groups. In a sense, the company's strategy is built on uniformity -- everything from store layout to product positioning to uniforms to operations manuals are standardized across the country. Yet even across 400 nearly identical environments, there's an amazing range of employee engagement and business performance. In the Best Buy store that has the highest Q12 scores, 91% of employees strongly agreed with the statement, "I know what's expected of me at work." In the store with the lowest score, just 27% agreed.
Not incidentally, the store with the highest Q12 score ranks in the top 10% of Best Buy stores as measured by P&L budget variance -- and the store with the worst Q12 score falls in the bottom 10%. To improve overall corporate performance, Best Buy's leaders don't need to look outside the company. They just need to figure out how to build on the strengths of its best stores.
Building on these strengths means identifying internal best practices and shining a light on your best managers -- people like Ralph Gonzalez. Ralph is a store manager who was charged with resurrecting a troubled Best Buy in Hialeah, Florida. He immediately named the store the Revolution, drafted a Declaration of Revolution, and launched project teams, complete with army fatigues. He posted detailed performance numbers in the break room and deliberately over-celebrated every small achievement. To drive home the point that excellence is ubiquitous, he gave every employee a whistle and told them to blow it loudly whenever they "caught" anybody -- whether coworker or supervisor -- doing something "revolutionary." Today, the whistles drown out the store's soundtrack, and, by any metric -- sales growth, profit growth, customer satisfaction, employee retention -- the Hialeah store is one of Best Buy's best.
But here's what really impressed me. Most companies would take a best practice like Ralph's whistle and say, "That's a great form of recognition. Let's give out whistles in every store." Best Buy did something much smarter: It extracted and spread the core lesson from Ralph's best practice, rather than institutionalizing the practice itself.
Attitude Adjustment #5
Don't assume that everyone wants your job -- or that great people want to be promoted out of what they do best.
There are two myths about talent that feed the conventional -- and misguided -- approach to career tracks and leadership development in most companies. The first myth: Talent is rare and special. Wrong. We all have talent. What's rare and special is a worker who finds a role that suits his or her talents. The second myth: Some roles are so easy that they don't require talent. Wrong again. We hear a lot about developing more respect for frontline workers and customer-facing employees, but peel the onion and you run into a rigid hierarchy of jobs. The compensation system evolves out of that hierarchy. So do titles and careers.
We say that we want to build world-class organizations. That's meaningless if we don't value world-class performance in every role. Yet the people who touch customers the most -- hotel housekeepers, outbound telemarketers -- get the least respect and the lowest paychecks. The assumption is that anyone can do that job and that nobody would want to do it if they were given a choice to do something else. Frontline talent has a prestige problem, and it's turning into a corporate-performance problem.
We studied the 3,000 housekeepers of a 15,000-room luxury-hotel chain. It turns out that great housekeepers are not beaten down by the relentless grind of cleaning rooms. On the contrary, they seem to be energized by doing the work. In their minds, the work they do asks that they be accountable and creative and that they achieve something tangible every day.
Unfortunately, the only way we have to reward excellence on the front lines is to promote people out of the very roles that they do best. We turn great housekeepers into supervisors, virtuoso shelf stockers into salespeople, and managers into leaders. A major challenge for CEOs is to define excellence in every role -- and pay on it, award titles on it, distribute prestige on it, and make it a genuine career choice.
Satisfaction at work depends on nothing more than self-knowledge. And that gets leaders right back to their main task of engaging their employees at every level. What are you doing to turn your people's talent into the kind of performance that thrills customers, whether those customers are internal or external? The beautiful thing about a culture that is built by focusing on individual strengths is that no one can steal it. And any advantage that's hard to steal is an advantage that lasts.
Polly LaBarre (plabarre@fastcompany.com) is a Fast Company senior editor based in New York.
Sidebar: 12 Questions That Matter
If you want to build the most powerful company possible, then your first job is to help every person generate compelling answers to 12 simple questions about the day-to-day realities of his or her job. These are the factors, argue Marcus Buckingham and his colleagues at the Gallup Organization, that determine whether people are engaged, not engaged, or actively disengaged at work.
1. Do I know what is expected of me at work?
2. Do I have the materials and equipment that I need in order to do my work right?
3. At work, do I have the opportunity to do what I do best every day?
4. In the past seven days, have I received recognition or praise for doing good work?
5. Does my supervisor, or someone at work, seem to care about me as a person?
6. Is there someone at work who encourages my development?
7. At work, do my opinions seem to count?
8. Does the mission or purpose of my company make me feel that my job is important?
9. Are my coworkers committed to doing quality work?
10. Do I have a best friend at work?
11. In the past six months, has someone at work talked to me about my progress?
12. This past year, have I had opportunities at work to learn and grow?
(c) 1992-1999, The Gallup Organization, Princeton, NJ. All rights reserved.
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Sunday, September 18, 2005

Managing Innovation - an oxymoron?

Don't Laugh at Gilded Butterflies
Rather than chasing wonder new products, big companies should focus on making lots of small improvements. Economist Staff, The Economist

The Gillette company's website flashes out a message to the e-visitor: "Innovation is Gillette", it claims. There are few big companies that would not like to make a similar claim; for they think innovation is a bit like Botox — inject it in the right corporate places and improvements are bound to follow. But too many companies want one massive injection, one huge blockbuster, to last them for the foreseeable future. Unfortunately, successful innovation is rarely like that.

The latest manifestation of Gillette's innovative skill will appear in stores in North America next month. The global leader in men's "grooming products" is rolling out a successor to its popular three-bladed Mach3 range. It will not, as comedians had long anticipated, be a four-bladed version (Schick-Wilkinson Sword reached that landmark first, in September 2003, and Gillette has taken it to court for its pains). Rather, it will be the world's first vibrating "wet shave" blade. The battery-powered M3Power is designed to bounce around on your skin to give (yes, you guessed it) "a smoother, more comfortable shave".

For a company that claims to embody innovation, this is less than earth-shattering. On the innovation scale it falls closer to Brooks Brothers' new stain-proof tie than to the video-cassette recorder or the digital camera — especially since there is a suspicion that Gillette may be keener to create synergy between its razor and its batteries division (it owns the Duracell brand) than it is to usher in a genuinely new male-grooming experience.

But the launch is symptomatic of an important business trend: blockbuster new products are harder and harder to come by, and big companies can do much better if they focus on making lots of small things better. Adrian Slywotzky of Mercer Management Consulting says that, "in most industries, truly differentiating new-product breakthroughs are becoming increasingly rare." He claims, for example, that there has not been a single new dyestuff invented since 1956.

Even in relatively zippy businesses like pharmaceuticals, genuinely new products are fewer and further between. Spending on pharmaceutical R&D has doubled over the past decade, but the number of new drugs approved each year by America's Food and Drug Administration (the industry's key regulatory hurdle) has halved. Drug companies still live in the hope of finding a big winner that will keep their shareholders happy for a long time. But this focus means that many unglamorous, but potentially interesting, compounds may be bottled up in their laboratories.

The Road to Invention
Big companies have a big problem with innovation. This was most vividly described by Clayton Christensen, a
Harvard Business School professor, in his book, "The Innovator's Dilemma" (Harvard Business School Press, 1997). Few conversations about innovation take place without reference to this influential work.

The Oxford English Dictionary defines innovation as "making changes to something established". Invention, by contrast, is the act of "coming upon or finding: discovery". Whereas inventors stumble across or make new things, "innovators try to change the status quo," says Bhaskar Chakravorti of the Monitor Group, another consulting firm, "which is why markets resist them." Innovations frequently disrupt the way that companies do things (and may have been doing them for years).

It is not just markets that resist innovation. Michael Hammer, co-author of another important business book ("Re-engineering the Corporation", HarperCollins) quotes the example of a PC-maker that set out to imitate Dell's famous "Build-to-Order" system of computer assembly. The company found that its attempts were frustrated not just by its head of manufacturing (who feared it would lead to most of his demesne, including his job, being outsourced), but also by the head of marketing, who did not want to upset his existing retail outlets. So the innovative proposal got nowhere. Dell continued to dominate the business.

Mr Christensen described how "disruptive innovation" — simpler, cheaper and more convenient products that seriously upset the status quo — can herald the rapid downfall of well-established and successful businesses. This, he argues, is because most organisations are designed to grow through "sustaining innovations" — the sort, like Gillette's vibrating razor, that do no more than improve on existing products for existing markets.

When they are hit by a disruptive innovation — as IBM was by the invention of the personal computer and as numerous national airlines have been by low-cost carriers — they are in danger of being blasted out of their market. This message found a ready audience, coming as it did just as giant businesses from banking to retailing, and from insurance to auction houses, were being told that some as-yet-unformed dotcom was about to knock them off their pedestal.

Innovative Lessons
William Baumol, a professor at
New York University, argues that big companies have been learning important lessons from the history of innovation. Consider, for example, that in general they have both cut back and re-directed their R&D spending in recent years. Gone are the droves of white-coated scientists surrounded by managers in suits anxiously awaiting the next cry of "eureka". Microsoft is a rare exception, one of the few big companies still spending big bucks on employing top scientists in the way pioneered by firms such as AT&T (with its Bell Laboratories) and Xerox (with its Palo Alto Research Centre, the legendary PARC).

This will prove to be a wise investment by Microsoft only if its scientists' output can be turned into profitable products or services. AT&T and Xerox, when in their heyday, managed to invent the transistor and the computer mouse (respectively); but they never made a penny out of them. Indeed, says Mr Baumol, the record shows that small companies have dominated the introduction of new inventions and radical innovations — independent inventors come up with most of tomorrow's clever gizmos, often creating their own commercial ventures in the process

But big companies have shifted their efforts. Mr Baumol reckons they have been forced by competition to focus on innovation as part of normal corporate activity. Rather than trying to make money from science, companies have turned R&D into an "internal, bureaucratically driven process". Innovation by big companies has become a matter of incremental improvements within the processes that constitute daily operations.

In some industries, cutbacks in R&D reflect changes in the way that new products travel down the "invention pipeline". During the late 1990s, for example, Cisco Systems kept itself at the cutting edge of its fast-moving high-tech business (making internet routers) by buying a long string of creative start-ups financed originally by venture capital. The company's R&D was, as it were, outsourced to California's venture capitalists, who brought together the marketing savvy of a big corporation and the innovative flair of a small one — functions that were famously divorced at AT&T and Xerox.

These days there is less money going into venture capital, and a new method of outsourcing R&D is on the increase. More and more of it is being shifted to cheaper locations "offshore" — in India and Russia, for example. One Indian firm, Wipro, employs 6,500 people in and around Bangalore doing R&D for others — including nine out of ten of the world's top telecom-equipment manufacturers.

Pharmaceutical giants continue to get their hands on new science by buying small innovative firms, particularly in biotech. Toby Stuart, a professor at the Columbia Business School in New York, thinks that this shows another change in the supply chain of invention. He says that many of the biotech firms are merely intermediating between the universities and "Big Pharma", the distributors and marketers of the fruits of academia's invention. Universities used to license their inventions to these firms direct, but small biotech companies make the process more efficient. They are well networked with the universities, in whose "business parks" they frequently locate their offices. They may not, of themselves, be very innovative.

Companies need to resist the feeling that it is not worth getting out of bed for anything other than a potential blockbuster. Product cycles are getting shorter and shorter across the board because innovations are more rapidly copied by competitors, pushing down margins and transforming today's consumer sensation into tomorrow's commonplace commodity. Firms have to innovate continuously and incrementally these days to lift products out of the slough of commoditisation. After it used innovation to create a commoditised market for fast food, McDonald's struggled before recently managing to reinvigorate its flow of innovations.

Finding a Niche
Another factor to take into account is the fragmentation of markets. Once-uniform mass markets are breaking up into countless niches in which everything has to be customised for a small group of consumers. Looking for blockbusters in such a world is a daunting task. Vijay Vishwanath, a marketing specialist with Bain, a consulting firm, says that Gillette's bouncy blade may yet end up as no more than a niche product — fine if it is profitable.

Mr Chakravorti believes that the problem lies with the marketing of new innovations. It has not, he says, caught up with the way that consumers behave today. "Executives need to rethink the way they bring innovations to market." Too many are still stuck with the strategies used to sell Kodak's first cameras almost 120 years ago, when the product was so revolutionary that the company could forget about competition for at least a decade. Today, no innovation is an island. Each needs to take account of the network of products into which it is launched.

Companies that fail to come up with big new headline-hitting blockbusters should not despair. There are plenty of other, albeit less glamorous, areas where innovation can take place. Management thinkers have identified at least three. Erik Brynjolfsson of the MIT Sloan School of Management, says that the roots of America's productivity surge lie in a "genuine revolution in how American companies are using information technology". Good companies are using IT "to reinvent their business processes from top to bottom".

Reinventing, or simply trying to improve, business processes can offer surprising benefits to firms that do it well. The software that runs many business processes has become an important competitive weapon. Some business processes have even been awarded patents. These are controversial and, because they may stifle rather than encourage the spread of new ideas, are probably not in the wider public interest. Yet Amazon obviously views its patent for one-click internet purchasing as valuable, and there are plenty of other examples, particularly in the financial-services industry.

Nevertheless, there is no doubt that, patented or not, what Mr Hammer calls "operational innovation" can add to shareholder value. In an article in the April issue of the Harvard Business Review, he asks why so few companies have followed the examples of Dell, Toyota and Wal-Mart, three of the greatest creators of value in recent times. None of them has come up with a string of revolutionary new products. Where they have been creative is in their business processes.

While superficially mundane, Wal-Mart's pioneering system of "cross-docking" — shifting goods off trucks from suppliers and straight on to trucks heading for the company's stores, without them ever hitting the ground at a distribution centre — has been fundamental to the company's ability to offer lower prices, the platform for its outstanding success. Is it not over the top, though, to glorify such a common-sense change with the title "innovation"? For sure, it does not call for a higher degree in one of the obscurer corners of science. But Wal-Mart did something no competitor had ever dreamed was feasible and that was highly innovative.

Mr Hammer, who was once a professor of computer science at MIT, believes that the best qualification for innovation is a basic training in engineering. Crucially, he says, engineers are taught that design matters; that most things are part of a system in which everything interacts; that their job is to worry about trade-offs; and that they must continually be measuring the robustness of the systems they set up. Such a frame of mind, he believes, fosters innovation. It may be no coincidence that many of the greatest corporate leaders in America, Europe and Japan, past and present, trained first as engineers.

Companies are being encouraged to embrace other forms of innovation too. In a recent issue of the MIT Sloan Management Review, Christopher Trimble and Vijay Govindarajan, two academics from Dartmouth College's Tuck School of Business, recommend that they try a little "strategic innovation". The authors point to examples such as Southwest Airlines, a low-cost American regional carrier, and Tetra Pak, a Swedish company whose packaging products are handled at least once a day by most citizens of the western world. Such companies succeed, they say, "through innovative strategies alone, without much innovation in either the underlying technologies or the products and services sold to customers."

Tetra Pak's strategic innovation involved moving from the production of packages for its customers to the design of packaging solutions for them. Instead of delivering ready-made containers, the company increasingly provides the machinery for its customers to make their own packages: the fishing rod, not the fish.

But customers can then use only Tetra Pak's own aseptic materials to make their containers. This strips out all sorts of transport and inventory costs from the production process, for both Tetra Pak and its customer. It also makes it very difficult for the customer to switch suppliers.

Southwest's innovative strategies include its bold decision to increase capacity in the immediate aftermath of September 11th 2001, and its carefully timed rolling out this May of competitively priced routes focused on Philadelphia, an important hub for the ailing US Airways, an airline lumbered with an expensive legacy (such as highly paid crews). The low-cost carrier "is coming to kill us," said US Airways chief executive David Siegel shortly before his recent resignation. And he was not exaggerating.

In his recent book, "How to Grow When Markets Don't" (Warner Books, 2003), Mr Slywotzky and his co-author Richard Wise recommended another form of innovation. "A handful of far-sighted companies", they claim, have shifted their focus from product innovation to what they call "demand innovation". They cite examples such as Air Liquide and Johnson Controls, which have earned profits not by meeting existing demand in a new way but "by discovering new forms of demand" and adapting to meet them.

The French company Air Liquide, for example, was a market leader in the supply of industrial gases. But by the early 1990s gas had become a commodity, with only price differentiating one supplier from another. As its operating income plunged, Air Liquide tried to behave like a far-sighted company: it almost doubled its R&D expenditure. However, it reaped few fruits. An ozone-based alternative to the company's environmentally unfriendly bleach for paper and pulp, for example, required customers to undertake prohibitively expensive redesigns of their mills.

The company's saviour came serendipitously in the form of a new system for manufacturing gases at small plants erected on its customers' sites. This brought it into closer contact with its customers, and led it to realise that it could sell them skills it had gained over years — in handling hazardous materials and maximising energy efficiency, for example.

After exclusively selling gas for decades, Air Liquide became a provider of chemical- and gas-management services as well. In 1991, services accounted for 7% of its revenues; today they are close to 30%. And because service margins are higher, they account for an even bigger share of profits. An ozone-based bleach could never have done half so well.

The Dilemma Solved?
In his latest book, "The Innovator's Solution", published late last year, Mr Christensen argued that established companies should try to become disruptive innovators themselves. He cites, for example, Charles Schwab, which turned itself from a traditional stockbroker into a leading online broker, and Intel, which reclaimed the low end of the semiconductor market with the launch of its Celeron chip.

There are, says Mr Christensen, things that managers can do to make such innovations more likely to happen within their organisations. For example, projects with potential should be rapidly hived off into independent business units, away from the smothering influence of the status quo. The ultimate outcome of any one disruptive innovation may still be unpredictable; the process from which it emerges is not.

In the end, though, "no single innovation conveys lasting advantage," says Mr Hammer. In the toys and games business today, up to 40% of all products on the market are less than one year old. Other sectors are only a little less pressured. Innovation and, yes, invention too, have to take place continually and systematically.