A Better Way to Think About Cost Reduction

admin — Mon, 03 Aug 2009 17:23:17 +0000

It happened one Friday morning in 1991, just before Christmas. My boss eyed me as I arrived at work, and called me into his office. I found myself staring at a letter outlining my “package”.

As my boss was escorting me out of the building, there was so much I wanted to tell him about what I thought was important to keep doing, and stop doing in the group I managed, but no time.

Since then, I’ve been on the other side of the desk, and much the same thing happens – management huddles behind closed doors, decides that cuts must be made, and who will get the axe.

What’s wrong with this picture? The way we’ve been accustomed to make these decisions is that the managers are the brains, and the workers are the muscle. In a knowledge economy, the workers often know more than the management about what makes the organization tick – so is there a better way?

A big part of the problem, I’m convinced, is that we “visualize” our organizations in the wrong way. We draw organization charts that have no customers, we build process charts that don’t even have people at all. This reflects the heritage of our industrial, “machine” model of organization. I’ve often thought that management fiats such as “Each department must cut 15% of its budget” are rather like losing weight by amputating equal parts of one’s legs, arms and head. At least it’s fair, right?

A statistician named George Box made the observation that “Essentially, all models are wrong, but some are useful.” The top-down, command and control visualization of organizations is no longer useful. It would be more accurate today to say that an organization is a complex network of conversations, relationships, and exchanges of value. In a business organization, the objective is to optimize the value-producing capacity of this network.

Value Network Analysis is an emerging and highly useful method for visualizing your business. A VNA can include not only your internal resources but your entire supply chain, and your relationships with customers. Sophisticated mathematical network analysis techniques underlie the model. And, at the same time, once the network is mapped, it can be intuitively obvious where there are problems – bottlenecks, role conflicts, redundant efforts – and where in the organization value is truly being created.

Conventional thinking imagines the organization as a machine. If something’s not working, we optimize the parts – identify which ones are broken and fix, eliminate, or replace them. If, on the other hand, you see your organization as a living system, the objective is to optimize the relationships among the parts. Looked at this way, there are many more choices that can be considered when an organization is forced to reduce costs.

Measuring Sustainable Business Performance

admin — Thu, 28 May 2009 18:49:34 +0000

We are in a “perfect storm” of trends that are driving a new view of what consitutes “good” business performance. Our internet connected, “Hot Flat and Crowded” world puts all of us in each others’ backyards. A global company can pollute an indigenous tribal area today, and it’s all over the web tomorrow. The traditional view of business performance is simple = return to shareholders. The new view acknowledges the importance of a much wider variety of players in the system, what we’ve come to label as “stakeholders”. These can include employees, suppliers, customers, communities impacted by business operations, other species, and natural systems, in addition to the investors. A number of the entrepreneurs and others I’ve interviewed on my radio show have described a remarkably similar pattern that gives legs to the term “triple bottom line”.

First, we have to see the entire supply, manufacturing, distribution, consumption, and disposal chain as a whole system comprising multiple stakeholders with diverse interests
Second, we need to understand what constitutes “value” for each of those stakeholders, and how we measure that.
Third, we design products and business processes to maximize positive outcomes for all the stakeholders along the way, both in real time and in consideration of the future.
Fourth, we rethink what we mean by “branding” – today’s astute consumers want to consume information as part of the product – the product”story” becomes a key component of the packaging.

In a recent conversation I had with Bill Shutkin, Sustainable Development Chair at University of Colorado’s Leeds School of Business, he characterized both approaches as “Friedmanesque”. For you economists out there, the first is based on the view of Milton Friedman, the second on the very different views of Thomas Friedman. Many major corporations have begun annual reporting on wider stakeholder outcomes, using frameworks such as the Global Reporting Initiative. This has grown out of the “Corporate Social Responsibility” movement as well as environmental reporting. Increasingly, we are seeing initiatives like the Climate Prosperity Project, funded by the Rockefeller Brothers Fund, that takes the ideas being popularized by T. Friedman and puts them into action in major cities – the idea that there can be no genuine economic development or prosperity without addressing both the challenges AND the business opportunities of energy efficiency, new technologies and more “natural” products. How would you translate all this into practice, to keep your organization focused on the measures that matter?

Clarify your vision by identifying all the stakeholders you impact, the players from whom you need resources, money, services, etc
You are in a state of “exchange” will all of these stakeholders – what do you provide them and what do they provide you?
Design metrics that define what success looks like in relation to each of these stakeholders
Combine these into a scorecard and build a system for regular reporting and feedback
Learn, adapt, and refocus continuously

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A Better Way to Think About Cost Reduction

Measuring Sustainable Business Performance