Organizations that focus solely on reducing costs and head count will likely experience an endless cycle of quality issues and declining revenues. Rather than this strategy of self-reinforcing contraction, what’s needed is operational change to unlock performance and create real and sustainable value.
Just about every day, the business news is filled with stories of companies eliminating staff, cutting hours, reducing overtime, freezing salaries and benefits, and cutting back on services. Clearly, the majority of businesses today are in an extreme defensive posture. Their mantra is to preserve cash, freeze discretionary spending, cut operating budgets, and sell noncore assets.
While these near-term actions may seem appropriate in the current economic environment, they create ramifications over the long term. Organizations that focus solely on reducing costs and head count will likely experience an endless cycle of quality issues and declining revenues. This ultimately leads to more pressure to reduce costs again in the future.
Rather than this strategy of self-reinforcing contraction, what's needed is operational change to unlock performance and create real and sustainable value. Operational change is a robust alternative to simply pruning costs through reductions in force, layoffs, closing divisions, shutting offices, and redlining other expenses. And implementing operational change can be even more basic than applying process improvement methodologies like Six Sigma, Lean, or ISO 9000 standards.
During these lean times, companies can look within to improve their business processes and save money. Whether you're a small business or a multibillion-dollar organization, whether you're a commercial concern or a not-for-profit, and whether you're in services or manufacturing, the concept is the same: Improve your core operational processes to get the same, or better, level of service or output with less cost. Implicit in this concept is the commitment to investing in people via professional education and training.
Let's face it: The issues that are currently being laid bare by declining revenues have been building for years. Fixing them in a systemic manner may be the lifeline that pulls us out of this recession.
The Four Layers of Operational Change
Four principles underlie operational change: standardization, integration, centralization, and optimization. Implementation of these management principals doesn't occur overnight or in some random order. Rather, like the construction of a pyramid, they are built up, layer upon layer (Exhibit 1):• Layer 1 -- Standardization. Standards are used extensively in the production, delivery, and maintenance of products and services. Imagine life without some forms of basic standardization. Suppose each car model used a different-size opening for the gas tank? What if tax return forms were different for each state? What would happen if lumber was not measured and cut to standard sizes? Mundane activities like filling up your car with gasoline, filing tax returns, or building a room addition would be difficult, time-consuming, and extremely costly.
Standardization may seem an obvious operational necessity, but many large companies are just beginning to focus on this principle as a means of reducing operating costs and providing a consistent customer experience. In a more robust economy, standardization is generally viewed as an innovation killer in corporate offices. It's also seen as running counter to the autonomy that's necessary to serve local markets.
The answer is to deploy standardization only in those specific areas where disparity in process drives up cost. One of the earliest examples of the successful application of standardization was the Ford Motor Company. Standardization was the hallmark of Henry Ford's system -- standardized components, standardized manufacturing processes, and a simple, easy-to-manufacture (and repair) standard product. Standardization required nearly perfect interchangeability of parts. To achieve interchangeability, Ford exploited advances in machine tools and gauging systems.
Or take the case of another automobile manufacturer, Toyota. It's a little-known fact that Toyota uses the same chassis for its upscale Lexus models as it uses for its more affordable Corolla line. This saves considerable costs in design, engineering, sourcing, and assembly.
Another example is the standardized floor layouts used by some grocery stores and retailers. A consistent floor design improves the customer experience because a consumer who knows the location of, let's say, the produce section in one store can easily find the same section in any other store.
Customer support centers offer yet another example of successful standardization. The standard protocols used for greeting customers, diagnosing and resolving issues, and closing out tickets save companies time and money while improving the customer experience.
• Layer 2 -- Integration. This may be one of the most commonly used terms in business. As performance professionals, we implicitly understand the importance of integrating activities, processes, and systems in day-to-day business. Yet how many times are we faced with workarounds or one-offs? Too often, the workarounds become the norm.
Integration is typically associated with technology, but it's equally important on the business process side of things. Integration can be categorized into two types: internal and external. Internal integration includes all of the integration aspects within the enterprise; enterprise application integration (EAI) is a typical example of internal integration. External integration covers all of the possible integration patterns across multiple enterprises. For example, within a customer life cycle, many systems and processes are involved, from sales to service or product delivery, billing, and customer service. The ideal situation is to have a seamlessly integrated set of systems and processes to support the full customer life cycle.
Unfortunately, many organizations build specialized applications and processes over time to support new product offerings, regulatory changes, company growth, or acquisitions, and then fail to integrate them. For example, many of the large banks currently making the headlines are suffering from cost structures that are way out of line, primarily because of acquisitions that they completed without integrating their new assets' technology and business processes with those of the company at large. Organizations often do this with the intent to integrate at a later time.
• Layer 3 -- Centralization. This is the next logical step in our progression toward real operational change. Whether part of an overall shared services initiative or not, the core theme of centralization (also known as localization) is to remove redundancies and achieve economies of scale. Simply put, you want to perform like functions in fewer locations or with fewer suppliers or vendors. Obvious candidates for centralization are back-office in nature: advertising, accounting, purchasing, human resources, information technology, and legal.
It may seem intuitive that the challenges to effective centralization are technical and process-oriented. However, the real barrier is often company culture -- the people dynamics that are involved with change management.
A case in point is Home Depot. When Robert Nardelli became CEO of the home improvement giant in 2001, one of his first major initiatives was to centralize purchasing in the company's Atlanta headquarters. The change removed a great deal of authority and autonomy from Home Depot's nine regional purchasing offices. The company saved money by leveraging its buying power and simplifying life for suppliers, but managers found that they could no longer tailor merchandise for specific markets. Home Depot lost the money it saved through centralized ordering because it no longer had the right products in the right quantities in the right stores. What's more, many of the individual store managers felt alienated and powerless.
Home Depot's new CEO, Frank Blake, has now built a hybrid purchasing system. Blake re-created a regional merchandise team that's scattered around the country in about 10 cities, though the team travels as well. These professionals help the chain's buyers, still located in Atlanta, to choose suppliers and products.
• Layer 4 -- Optimization. Once your company has met the transformational challenges related to standardization, integration, and centralization, it's ready to optimize performance toward maximizing value. At this stage in a company's evolution, it often makes sense to deploy proven process improvement methodologies like Six Sigma and Lean. For sustainable improvement, it's imperative to continuously streamline your systems and processes while building a structured change-management process that focuses on return on investment. The key is to find the right balance among quality, cost, and speed to market.
It falls to corporate leaders to drive an operational improvement strategy that transcends knee-jerk head count reductions. Diligence in assessing the opportunities to improve core processes, developing a true business case with defined ROIs, and ensuring that cost reductions are actually achieved is critical for transforming today's businesses and making them viable for the future. Operational change requires a focused effort and committed leadership from the C-suite. This means having the vision to look past the next fiscal quarter and to invest in the organization's most important resource: its people.
Peter J. Sherman is a Certified Lean Six Sigma Master Black Belt and Certified Quality Engineer with 22 years' experience, including serving as Senior Black Belt for AT&T's Product Development Group. Peter is lead instructor at Emory University's Six Sigma Program in Atlanta, Georgia. Throughout his career, he has led Six Sigma initiatives across the entire value chain, including product development, sales, fulfillment, installation, customer support, and billing. Peter began his career in quality and process improvement working in Japan as a visiting MIT scholar from 1986 to 1987. In Japan, he was privileged to work with Dr. W. Edwards Deming, the noted American quality expert, and to learn firsthand such quality practices as The Toyota Production System, Kaizen, and Quality Circles. Peter has been published in Quality Progress, Quality Digest, iSixSigma, Hospitals & Health Networks and Solutions (supplement to the Journal of Financial Planning). He holds a master's degree in engineering from MIT and an MBA from Georgia State University. Peter is a member of the ASQ and ISSSP.