TOC Thinkers

6. Bryan E Logan - Turning Talent into Performance

In Northern Ireland the authorities boast about the pool of well-educated and hard working people available to potential inward investors. Indeed, the general level of education in the Province is good, and probably as good if not better than the rest of the United Kingdom. Why then does the Province not match the rest of the UK in terms of economic performance, and further, why does the United Kingdom not match America and the best in Europe?

There is no simple answer to this question as many factors are involved, not least the large number of firms, particularly the smaller ones, in the UK that have failed to keep abreast of the latest, or any, developments in new management thinking. Also there is the traditional conservatism and reserve of the British and their strong inclination to resist change.

The main factor though, in my opinion, has to be the calibre of management in general and its ability, or lack of ability, to extract anything like the true potential from their employees.

Managing people ought to be relatively straightforward; yet seeing it done well remains a rarity in my experience. Despite the thousands of years that human beings have been trying to influence the actions of other human beings, very little progress seems to have been made in mastering or refining the art of managing. We still appear to have the greatest difficulty getting people to row in anything like the same direction, never mind being able to co-ordinate their combined talents in the achievement of really outstanding performance.

To quote Ray Immelman in his ground-breaking book, ‘Great Boss, Dead Boss’:-

“Managers desperately want to build and manage a superb organisation, but every day they face a cesspool of dissent, non-cooperation, hidden agendas, power play, concealed realities, back-stabbing and low-level warfare”.

He goes on to say that this behaviour is prevalent in virtually every type of organisation including government, academic institutions, military and even the church. Such behaviour is appallingly destructive and makes it difficult, if not impossible, to achieve truly competitive levels of performance. In teaching management, I always maintained that it was not possible for an organisation to become ‘world class’ whilst a ‘them and us’ mentality prevailed within. Sadly, there are still far too many examples of this in the UK today.

What then is the problem, why aren’t organisations better managed? How are managers selected, how are they trained? Unfortunately some organisations still don’t seem to see the need to train managers, it is assumed that people know intuitively how to manage. Even those organisations that do train their managers fare little better. Again to quote Ray Immelman:-

“Companies send an endless stream of people on courses, seminars and training programmes but rarely get significant improvement in the performance of the business in return.”

All too often people find themselves in a management role as a reward for having performed well in their previous manual or technical role. Whilst I was working as a management consultant on an assignment for the Ormeau Bakery in Belfast, the Company promoted the best decorator of wedding cakes they had ever had. They then had no decorator of wedding cakes and an inexperienced manager, which didn’t strike me as a sensible swap, commercially or personally.

Unfortunately the attributes required of a good manager are not well known, never mind clearly understood, and as a result it is extremely difficult to identify those who would be competent in this role. This makes conventional recruitment and training of managers very much a ‘hit-and-miss’ affair.

However, new and important work has been carried out in the area of managing, and the solution, or ‘silver bullet’, that I am proposing in this paper is based on work undertaken by the Gallup Organisation. The results and background to this work are contained in the book: ‘First, Break all the Rules; what the world’s greatest managers do differently’, written by Marcus Buckingham and Curt Coffman and published by Simon & Schuster in 2001. Other follow-up books have further expanded on the concept.

The major problem with managing people is that there is no way of measuring objectively those factors that affect an organisation’s ability to attract, retain and motivate good employees. In the absence of any definitive measurements, the Gallup Organisation interviewed thousands of successful managers and hundreds of thousands of employees, and painstakingly analysed the results. Their analysis showed that the best managers, whilst all being very different as people, did have certain characteristics and attributes in common. By and large they went against the perceived wisdom associated with traditional management practices. In fact they “broke all the rules”.

One of the key findings, probably the most important in relation to employees, was that the critical factor in building a strong and effective workplace is the employee’s relationship with their immediate manager. This one crucial factor determines how long an employee will stay, once recruited, and how productive they are while they are there. To quote the findings:-

“People leave a manager, they don’t leave a Company.”

The role of the individual manager cannot be overstated. It is the critical ingredient in ‘turning talent into performance’. One hears a lot of talk about ‘self-directed work teams’ and ‘self-motivation’, but it is the role and behaviour of their immediate manager that really makes the difference for employees.

However, in the absence of a quantitative “measuring stick”, how do you gauge the response of employees, whether they are willing to do their best, whether they will cooperate with corporate objectives, whether they will stay and how much you can rely on their continuing support in the future? Based on all of their interviews, the Gallup Organisation developed a list of twelve questions that accurately gauges, in the absence of being able to physically measure, the answers to the above questions. Any group of employees giving strong and positive responses to all the following twelve questions will indicate a motivating and constructive environment for promoting high performance:-

1. Do I know what is expected of me at work?

2. Do I have the materials and equipment I need to do my work right?

3. At work do I have the opportunity to do what I do best every day?

4. In the last seven days, have I received recognition or praise for 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/purpose of my organisation make me feel like my work is important?

9. Are my co-workers committed to doing quality work?

10. Do I have a best friend at work?

11. In the last six months, have I talked with someone about my progress?

12. At work, have I had opportunities to learn and grow?

For twelve seemingly innocuous questions, this test has proved surprisingly reliable at assessing the motivational state of any group of employees and how willing they are to have their talents converted into real performance by good managers. Whilst it is easy to score highly on some questions at the expense of others, you will only get an environment conducive to high performance where all twelve questions receive positive responses.

It is up to their immediate manager, however, to get the best out of each individual employee. Every employee is a unique blend of “knowledge, skills and talent”, each with their own “personal filters” on how they see and perceive the world within which they live and work. The crucial distinction between knowledge, skills and talent, from a managerial point of view, is that knowledge and skills can be taught, but talent cannot. In essence, talent is “a recurring pattern of thought, feeling or behaviour that can be productively applied”.

Everyone has talents and there are many different types. They can be divided broadly into three basic categories; “striving, thinking and relating talents”. You either have particular talents or you don’t!

According to the Gallup Organisation findings, the best managers can identify the talents that their employees possess and use them to their organisation’s advantage. In effect they exploit the strengths of each individual employee’s talents, and adapt to compensate for any weaknesses.

In most organisations you find managers busy trying to cure employees of their weaknesses, in a vain attempt to make each employee a complete and rounded individual. Most employees receive some form of periodic personal feedback in which their weaknesses are identified and highlighted, with recommendations as to how these might be overcome. In many cases this involves trying to teach talents, which you cannot. To quote again from Buckingham and Coffman’s book:-

“People don’t change that much. Don’t waste time trying to put in what was left out. Try to draw out what was left in. That is hard enough!”

Having established that the relationship with an employee’s immediate manager is the cornerstone to achieving a productive environment, what actions help the best managers in the process of turning talent into performance? In their book, Buckingham and Coffman refer to “the ‘Four Keys’ of great managers”. These are:-

• Select for talent. In traditional recruitment and selection of employees, much attention is devoted to experience, intelligence and determination. How did the person perform in their last job? This is normally taken as a strong indicator of how the person will perform in a new and often very different environment. The intelligent manager, however, will identify the talents that they need from their employees and look for these in the interviewee. Most managers, or even recruitment specialists, wouldn’t know what talents are needed, never mind how to recognise them at an interview.

• Define the right outcomes. There is a strong urge among many managers to control their employees, rather than manage them. This leads to the desire to insist that employees slavishly follow prescribed methods or procedures in carrying out every task. “The hardest thing about being a manager is realising that your people will not do things the way that you would”. It is far better to define the outcome you want, and let the employees achieve this in their own way. Ok, they need to be properly briefed and know the parameters, culture and environment within which they are operating. In my experience trying to impose a ‘one best way’ is doomed to failure.

• Focus on strengths. Everyone is different, and the best managers will use this to advantage. The secret of turning ‘talent into performance’ is to make sure your employees are playing to their strengths, and not wasting time while you attempt to eradicate their weaknesses. Where an employee has a weakness, it may be necessary to compensate for this in order to capitalise on the strength of their particular talent. The vast majority of organisations spend too much time trying to fix employee’s weaknesses, and not nearly enough time exploiting their talents. The trick is to turn talent into performance by managing around weaknesses.

• Find the right fit. Two of the twelve questions, referred to earlier, ask; “Is there someone at work who encourages my development?” and “At work, have I had opportunities to learn and grow?” Obviously a crucial factor in creating the right environment for motivated employees is for them to have the opportunity to improve and better themselves. Unfortunately most organisations are structured in such a manner that the only way for employees to benefit financially and to advance their career is through promotion. As with the ‘decorator of wedding cakes’, this is not always the smart move. One rung on the promotion ladder doesn’t necessarily lead logically to the next and, having made a wrong promotional move, it can be difficult if not impossible to reverse. Having selected for talent and placed the employee in the position to exploit that talent, there has to be a better way of providing career advancement. It doesn’t take too much imagination to come up with more innovative ways of rewarding good performance, which was after all the objective of the exercise in the first place.

Human beings are capable of the most extraordinary feats of endurance and performance, given the right environment and managed or led in the appropriate way. As stated earlier; “managing people ought to be relatively straightforward”, and when done well can produce amazing results. Everyone has talents; although most managers still don’t know how to turn these into performance.

In this series of papers I have identified six ‘silver bullets’, based on what I feel are the best and most appropriate developments in new management thinking. These would transform most businesses and other organisations in the United Kingdom. For reasons that I can’t fathom, the top decision-makers in industry, government, academia and the professions appear reluctant to embrace new management thinking, preferring instead to measure and compare organisations with each other, based on outmoded and out-dated management techniques.

To quote Richard Zultner, an American consultant who has worked extensively in London for major clients, including the ‘Financial Times’:-

“The best focus is to focus on improvement, not on comparison to others, a standard, or some alleged ‘best practice’. Improve continuously and let the others worry about how they compare to you. Most organisations spend way too much time and effort on standards, benchmarking, maturity, best practice, this and that and far too little time actually improving.”

Throughout my career I became increasingly concerned and frustrated with the apparent obsession of managers, executives and directors to cling to old-fashioned and out-dated management methods. The United Kingdom must be among the most conservative countries in the world when it comes to encouraging new management thinking. How many times have I heard managers say; “we’ve tried that, but it doesn’t work”, based on experimenting with some half-baked notions? A few years ago I thought Northern Ireland was going to ‘buck’ the trend, when InvestNI offered clients the ‘TOC Business Improvement Programme’. But the old obsession with the status quo reasserted itself and the programme has been effectively sidelined

The 19^th century German philosopher, Arthur Schopenhauer, said:-

“New thoughts and new truths go through three stages. First they are ridiculed. Next they are violently opposed. Then finally they are accepted as self-evident.”

I will leave you with one final thought. How far has ‘New Management Thinking’ got along the road to being self-evident in the United Kingdom?

5. Bryan E Logan - How to Sell More

In the late 1980s a number of organisations, principally in America, achieved surprisingly high increases in productivity through experimenting with DBR, (Drum-Buffer-Rope). These improvements, which varied from at worst 20% to figures well in excess of 50%, were the result of identifying the firm’s constraint, or scarce resource, and managing it according to the process described in the book ‘The Goal’ by Dr E M Goldratt. Much to Dr Goldratt’s chagrin, however, the majority of these firms chose not to use the improved levels of productivity to increase their throughput; instead maintaining output at existing levels whilst reducing the size of the workforce.

Annoyed at feeling responsible for the laying-off of hundreds, if not thousands, of employees, Dr Goldratt asked the owners why? The answer was very simple; it was easier to layoff employees than to sell the increased throughput. This prompted Dr Goldratt to apply his mind to developing a system that virtually guaranteed selling more without having to lower prices. Lowering prices has long been a traditional ploy for increasing sales. In fact he insisted that his solution, the ‘unrefuseable offer’, must not lower prices but result in more products or services being sold at the same, if not higher prices. Dr Goldratt describes the concept of the ‘unrefuseable offer’ in his book, ‘It’s Not Luck’.

The ‘unrefuseable offer’ also provides the solution when an organisation’s constraint is external, that is in the market, rather than internal as described in the previous paper on ‘increasing productivity’. More often than not the result of applying DBR is to increase throughput to a level where the constraint moves and then becomes the organisation’s inability to sell all it can produce, shifting the constraint outside the organisation into the market. Pursuing any further improvement, such as opening up the market, often results in the constraint oscillating back and forth between being internal and external. This is undesirable from a management point of view. The more elegant solution is to hold the constraint internally, where you can control and manage it, whilst continuing to open up the market to prevent the constraint from moving outside. An ‘unrefuseable offer’ is an excellent way of opening up the market.

One of the most satisfying assignments a consultant can undertake is to assist an organisation in developing and implementing an ‘unrefuseable offer’. Such an offer involves changes in policy that benefit both supplier and customer. Developing such a marketing solution, one that results in the organisation selling more at the same or even higher prices will give any organisation a head start of at least two years on its competitors. Reducing prices to increase sales is a ‘mugs game’. Not only do you sacrifice the return on your throughput but also your competitors can quickly imitate you, should they so wish, immediately negating any dubious advantage you may have derived. On the other hand, changing a business policy makes it much more difficult for your competitors to emulate. Changing two or three policies makes it virtually impossible.

When stipulating their terms and conditions of sale, most businesses think solely of how these policies will benefit themselves, rather than how they might affect the customer. For example, in order to minimise distribution costs many organisations offer significant discounts to customers who place orders over a certain size, oblivious to the problems that this might cause their customers. These discounts can be at a level where the customer is forced to buy the discount quantity in order to remain competitive, but then finds that when they wish to re-order specific items, they have to purchase a further large quantity, whilst stuck with significant quantities of slower moving stock. Fortunately there are solutions to this and other problems, which can benefit both parties. One-sided policies, designed out of self-interest, have a knack of backfiring and not being nearly as beneficial as they were intended.

A key requirement of all ‘unrefuseable offers’ is that they must be ‘win-win’.

‘Unrefuseable offers’ rely on a fundamental principle of marketing, which is that there are two separate and very distinct perceptions of value regarding any product or service. These are:-

1. The supplier’s perception of value, which is based on all the costs that go into the manufacture of a product or provision of a service. These include provision for items such as materials, labour and overheads, plus some reasonable (or even unreasonable) margin,

2. The customer’s perception of value, which is based entirely on the amount of benefit or gain that the customer expects to derive from purchasing your product or service, and bears absolutely no connection whatsoever to the supplier’s perception of value.

Successful marketing is achieved when an organisation raises and succeeds in keeping the customer’s perception of value at a level higher than the supplier’s perception of value. The role of an ‘unrefuseable offer’ is to achieve this aim and provide the customer with an actual level of benefit (bottom line) from purchasing your product or service, which they simply cannot obtain elsewhere and that they find difficult to refuse.

It is not the purpose of this paper to go into the mechanics of how to design and develop an ‘unrefuseable offer’. Suffice to say that it is based on helping your customer to overcome problems that they in turn experience with their customers. The idea is that you should present your customer with an offer that makes their life easier and more profitable, to the extent that the customer realises it is worth paying more for your offering. Why else would a double-glazing company in America pay its supplier twice as much for its glass? A very common feature with ‘unrefuseable offers’, however, is that whilst the customer can clearly see the benefits to them of your offer, and is eager to do business, it can often be more difficult to convince the supplier’s own staff that the offer will be mutually beneficial, and that you are not ‘giving away the shop’.

A characteristic of ‘unrefuseable offers’ is that every one is unique and has to be tailored for the specific circumstances encountered in each specific situation. This is different from designing internal operating solutions, all of which will be based around the fundamental concept of DBR. The results achieved from a DBR implementation, in the form of reduced lead times and improved due date performance, can frequently contribute in a supporting role to the design of the ‘unrefuseable offer’. Because of shorter and more dependable lead times, and their impact on the reliability of due date performance, organisations can improve their offer even further by providing guarantees that their competitors couldn’t even contemplate, or risk. There are numerous examples and case studies on the Internet of exciting and innovative ‘unrefuseable offers’.

How many organisations and businesses would benefit from being able to sell more of their products and services at the same, or higher prices?

It is essential that every organisation have a clear understanding of their customer’s perception of value. This in turn must be reflected in a marketing plan that is closely linked to the organisation’s overall business strategy. Marketing has to permeate every function and activity within an organisation, and is absolutely core to continuing success and survival. Regrettably many managers perceive marketing as merely another discrete and independent function like all the others within the organisation, the ‘silo mentality’, rather than as an all-embracing expression of the organisation’s culture and ethos. Designing and developing an ‘unrefuseable offer’ requires the combined efforts of all functions within the organisation, as well as the approval and cooperation of every member of staff.

Selling, on the other hand, is a more clearly defined activity and not to be confused with marketing. Dr Goldratt explains the difference in the following analogy:-

“Marketing is spreading corn for the ducks to come and sit. Selling is taking a gun and shooting a sitting duck”.

Traditionally selling has been regarded as something of a black art best left to the devices of the individual salesperson, instead of being seen as capable of being an organised and managed activity. Great store is placed on the personal talent and skills of each salesperson. We also rely on the salesperson being personally responsible for a range of related and unrelated activities, including:-

• Finding new sales opportunities, including all the promotional activities,

• Arranging appointments, writing reports and maintaining records,

• Preparing quotations and supplying technical specifications,

• After sales and customer service activities,

• Trouble-shooting and chasing payment.

These are in addition to the key role of meeting customers face-to-face and closing the sale. All of this results in the salesperson having to multitask, which can distort priorities and requires a high degree of self-discipline to strike the right balance between the various activities. Research in Australia has shown that, taking into account all these other activities, salespeople are achieving as few as two planned business-development appointments in a week.

There have been a number of interesting developments in the field of sales and selling over the past few years. Disappointingly, I see little evidence of any of them being used widely in the UK. Among the new ideas that I would recommend all directors and executives to acquaint themselves with include:-

1. ‘SPIN selling’ as described in the book of the same name by Neil Rackham. This is particularly appropriate for so called ‘big ticket’ sales, where the sales process can extend over a period of time and can involve a number of meetings with the prospective client. The acronym ‘SPIN’ stands for; Situation, Problem, Implication and Need-Payoff. The technique was developed from analysing many hundreds of sales situations, and is now used by over half the ‘Fortune 500’ companies. It is taught extensively in business schools and universities throughout America,

2. ‘Re-engineering the sales process’ developed by Justin Roff-Marsh, the managing director of Ballistix, an Australian consultancy firm. This approach has a lot in common with DBR, with selling seen as a process comprising a series of consecutive activities that are scheduled and buffered. A promotional coordinator and a sales coordinator undertake almost all of the supporting activities in the sales process, leaving the salesperson to concentrate their individual talent on negotiating and closing sales. The promotional coordinator is responsible for maintaining a constant supply of sales opportunities and the sales coordinator schedules the salesperson’s appointments from these opportunities. A buffer of sales opportunities is maintained between the two coordinators, ensuring that the salesperson can be kept fully employed in their key role of meeting clients and closing sales. In conventional sales management, a lot of effort is expended on trying to improve the conversion rate, that is the percentage of sales opportunities that are converted into actual sales. The scope for making any significant improvement in conversion rates is marginal at best. ‘Re-engineering the sales process’, on the other hand, allows you to increase the number of face-to-face selling opportunities while accepting and maintaining the existing conversion rate. Experience using this process has shown that the number of business opportunity appointments, and hence successful sales, can be increased by an order of magnitude.

3. ‘Delta T-Selling’, a systems approach to selling described by Dieter Legat and Bill Woehr in their book, ‘Unblock the Power of your Salesforce’. Legat and Woehr head-up an organisation in Switzerland called the Delta Institute. The Institute publishes literature and runs training courses around their systems based approach to sales. Like most modern approaches to selling the ‘Delta T-selling approach reaches beyond the customer, in helping to solve their problems. Delta Institute’s concept of ‘Sales System Management’ is made up of ‘Sales Policy Management’ plus ‘Sales Process Management’. One major proponent of ‘Delta T-selling’ is Hewlett Packard.

4. ‘Soft Selling in a Hard World; plain talk on the art of persuasion’, is outlined in a book by Jerry Vass, the originator. He believes that it is essential for all professionals and small business owners to be good at persuading. Not everyone is a born salesman, but everyone needs to be good at getting their point of view across, be it convincing your colleagues of a new idea, persuading your fellow directors of a course of action or, as a small business owner, selling the potential value of your product or service to a customer. It is largely a mechanical approach, where you can prepare and practice the various stages. Vass refers to the stages as tools, and these include; mission statement, probe, listen, problem/ solution, proof statement, support, isolate, close and cross sell. The keys to the ‘Soft Sell’ are:-

Don’t talk - Listen

Don’t tell - Ask

Don’t sell - Solve

Don’t pitch - Probe

Don’t leave - Close

Soft selling in a hard world can be a very valuable attribute, irrespective of your primary role or profession. Being able to convince other people of your case can be a real asset at any time and in every walk of life.

The means now exist for all organisations to sell more of their products or services, and at even higher prices. ‘Unrefuseable offers’ can be developed for any product or service, including commodity items. Fortunately all of your customers have problems, and the emphasis today must be on helping them to develop solutions that create value for their customers and themselves.

Developing an ‘unrefuseable offer’ and re-jigging the sales process can be carried out at minimal cost and in less than a couple of months, given that you overcome any initial resistance.

I have now identified five ‘silver bullets’ that can be applied by any organisation to improve its performance. None of these ‘silver bullets’, however, will deliver the desired results without the people to carry them out. Every organisation needs to attract, retain and manage a talented workforce. The next and final paper in this series will show how to acquire such a workforce and how to turn talent into performance.

4. Bryan E Logan - NEW MANAGEMENT THINKING - Increasing Productivity

It has been my experience that very few managers, senior executives or even company directors fully understand the concept of productivity. In particular they fail to comprehend how productivity is affected by the way in which their organisation is managed. Most managers seem to associate productivity solely with working harder or faster, or both.

Yet productivity has to be better understood, as it is the crucial element in the performance of any economy. Virtually every report on the economy that I have read over the past ten years highlights productivity as the top issue needing to be addressed.

In a speech to the CBI in 1998 the then Chancellor of the Exchequer, Gordon Brown, confirmed that the UK had a ‘productivity gap’ of 20% - 30% with France and Germany and of 40% with the USA. The new Labour government, a year earlier had stated that:-

“Closing the ‘productivity gap’ was a key priority.”

A recent ‘policy analysis’ by The Centre for Economic Performance shows that whilst the productivity gaps have narrowed, they are still significant. In their conclusion they state:-

“Recent evidence suggests that the factors behind the UK ‘productivity gap’ include deficits in innovation, skills and management practices. Tackling these problems together is likely to remain a challenge.”

The new Northern Ireland Executive in a recent document; ‘Programme for Government, Growing a Dynamic, Innovative Economy’ state:-

“A successful economy is characterised by high productivity, a highly skilled and flexible workforce and employment growth. We have much to do in terms of building our skills base, increasing prosperity and improving our productivity.”

A common feature in all of these reports is that they are clear on what needs to be addressed, but are then woefully short on any practical advice on how these shortcomings might be tackled or solved.

Regrettably far too many executives remain firmly convinced that the only way to increase productivity is for their employees to work harder or faster. A chief executive in Northern Ireland was quoted in his company magazine as saying; “Any employee not producing value-added work all the time is a waste”. This attitude stems from the continued misunderstanding of productivity and a lack of any real appreciation of how it can be managed. In turn this has resulted in a complete failure to see any need for change, which unfortunately persists to the present day.

If the reasons for this misunderstanding are not exposed and rectified, then nothing else will matter in the search for a answer to the future economic well being of the UK.

The reputation of any country and its desirability as a location for investment are closely correlated with its prevailing level of productivity. A few years ago I was presenting a paper to the IPICS conference in Dublin on the morning when it was announced that the Republic of Ireland had just gone ahead of the UK in the world productivity league table. I believe the Republic had reached eleventh whilst the UK had slipped to thirteenth. The sense of excitement in the room was palpable. Productivity is probably the single most important factor in the industrial standing of any country.

Low productivity and corresponding poor performance can be traced almost exclusively to the way organisations are managed. The problem begins with the issues discussed and answered in the paper on ‘measurements’. Organisations need to be managed as a whole system and not by attempting to optimise the efficiency of each individual department, often referred to as maximising the ‘local optima’. Those organisations that are managed according to their ‘local optima’ will exhibit a range of adverse symptoms, or ‘undesirable effects’, which have the nasty habit of continually recurring. For example, managers involved in manufacturing will be all too familiar with constantly fire-fighting the following issues:-

• Trying to keep everybody busy,

• Priorities that are constantly changing,

• A lot of expediting,

• High levels of work-in-progress,

• Working a lot of overtime,

• Queues in front of most resources,

• Lead times that are highly variable, unpredictable and too long,

• Some products get through the factory more easily than others,

• Delays on things that customers do want

• High stocks of finished goods that customers don’t want.

Managing according to the ‘cost world’, or trying to maximise the ‘local optima’ in a futile search for efficiency, causes all of these. The prospects for improving productivity in such circumstances are virtually non-existent. Productivity depends on how the system and its processes are managed, not on the efforts of individual employees or machines. It is essential that every manager fully understand this and the factors that really affect productivity.

Improving productivity simply means achieving more throughput from the same resources. It can also mean achieving the same throughput from fewer resources, but more of that in the next paper. The factors that directly govern and influence productivity are:-

1. The combined efforts of the organisation as a whole. If any department or function fails to perform its part properly, in other words drops the ball, then the throughput and thus productivity of the entire organisation will be compromised,

2. The resources that currently exist within the organisation and how they are configured. This dictates and constrains the maximum output that the system as a whole can achieve,

3. The form of operational process that is used to manage the resources within the system,

4. The scheduling of this process, and how the resources are managed within the upper limit or constraint, mentioned in 2 above,

5. Variability within the system and how it is handled.

Many different techniques and management processes have been attempted in trying to improve productivity. In addition to the traditional ‘cost world’ approach, with everybody striving for local efficiencies, other more recent techniques have included JIT, Kanban, Lean, Agile and Cell Manufacturing. The best and most successful approach that I have encountered is ‘Drum-Buffer-Rope’, DBR. Despite its unusual name it is yet another ‘silver bullet’ that will increase productivity by at least 20%, and often much more.

‘Drum-Buffer-Rope’ is an operational process for managing the throughput of any system, commercial or otherwise, and was developed by Dr E M Goldratt, who describes the concept in his book, ‘The Goal’. DBR produces excellent results and outperforms all other production methods in terms of productivity and every other competitive metric.

‘Drum Buffer Rope’ is based on the concept of identifying and then managing the constraint or scarce resource within a system.

“Every real system, such as a business, must have at least one constraint. If this was not the case, then the system could produce an unlimited amount of whatever it was striving for, profit in the case of a business. Because a constraint is a factor that limits the business from making infinite profit, then a business manager who wants more profit must manage the constraint. There really is no choice in the matter, either you manage the constraint or it will manage you. Constraints determine the throughput of a system whether they are acknowledged or not; therefore managing the constraint determines the rate of return a company will experience on any investment.”

I first came across this fundamental statement in; ‘The Theory of Constraints and its implications for Management Accounting’, published by The North River Press in 1995. This was an independent research study into the ‘Theory of Constraints’, commissioned and funded by the Institute of Management Accounting in America.

Yet, as I mentioned in an earlier paper on ‘measurements’: “What organisation, business or other managed system, even knows its constraint or scarce resource, let alone manages its performance around such knowledge.” Managing the constraint in conjunction with the ‘throughput world’ measurement system can have a truly dramatic effect on improving the performance of any organisation.

In ‘Drum Buffer Rope’, the drum is the constraint, or the resource that determines the maximum throughput available from the system, as it currently exists. All other resources within the system must maintain some spare, or protective, capacity to enable the constraint to operate at 100% of its capacity. This spare capacity allows the other resources to subordinate their activities to the operation of the constraint, which is dictating the throughput and hence the performance of the whole system. (The concept of DBR is shown as a diagram in an addendum to this paper).

To protect the constraint and ensure that there is no interruption to its operation, a buffer is maintained in front of the constraint. This enables the constraint to continue operating at its full capacity, whilst interruptions, such as breakdowns, to resources elsewhere in the system are sorted out. Protective capacity at all other resources is essential so that the buffer, having been temporarily depleted in support of the constraint, can be rebuilt to meet further interruptions, whilst at the same time continuing to supply the constraint at its optimum capacity.

The rope, which is an imaginary concept, means that raw materials are drawn into the system at a rate sufficient only to keep the constraint working at its maximum capacity. The effect of this is that all other resources, with their protective capacity, are operating at less than 100% of their potential capacity, much lower in some cases. This is anathema to most of today’s managers.

DBR has the unique advantage that only the constraint or scarce resource needs to be scheduled, as all other resources are subordinating to the constraint to ensure that it is kept fully operational at all times. The result is that the system only does those things that should be done and doesn’t do those things that should not be done. At times this means people being available to work, but not actually working. Remember the comment of the chief executive; “any employee not producing value-added work all the time is a waste”!! How many organisations are producing things merely in order to keep the workforce busy, things that are not actually required to meet the current schedule but are getting in the way of things that are needed more urgently? How many production schedules are delayed and frustrated as a result of the weak excuse that the unnecessary items will be needed at some time in the future?

Even a rudimentary application of DBR to any organisation, once the concept has been understood and accepted, will result in a minimum improvement of 20% in productivity. A more comprehensive implementation, allied to what is called ‘buffer management’ and the ‘throughput world’ system of measurement, can add substantially to this level of improvement.

Other effects that will automatically flow from implementing DBR include:-

• Levels of work-in-progress will fall,

• Lead and cycle times will reduce,

• Scheduling becomes simpler and easier,

• Finished goods levels can be cut,

• Batch sizes can be reduced,

• Excess capacity will be revealed,

• Cash flow will improve, as less money is tied up in w-i-p.

Not only will productivity increase, but also these additional benefits can be used to provide other significant competitive advantages. Today, lead times and reliability of delivery are as important, if not more so, than price.

Further, the DBR approach has the advantage of acting as its own process of ongoing improvement; constantly looking for ways to improve the system. This is achieved through applying a repeating process known as the five focusing steps:-

1. Identify the current constraint,

2. Exploit the constraint,

3. Subordinate everything else to the above,

4. Elevate or increase the capacity at the constraint,

5. Check that the constraint is still the constraint, and if not go back to step 1.

These five steps provide a powerful process for managing and constantly improving any system. By focusing on the constraint you can achieve huge leverage on the system, greatly magnifying the effects of otherwise minor changes. Techniques such as ‘lean’ and ‘six sigma’ suddenly blossom and produce real tangible bottom line results when allied to the focus and leverage provided by the use of this constraint-based process.

Any organisation implementing DBR will experience an almost immediate gain in productivity of at least 20%. What organisation can afford to forego such an advantage, especially when it is there just for the asking? Such a gain in productivity would have a real impact on the performance and competitiveness of any organisation, let alone on the future economic prospects of the Country as a whole, if widely applied.

However, what if the constraint is not internal to the organisation, but is the market for the organisation’s products or services? The next paper details a ‘silver bullet’ that enables organisations to increase their market share, whilst often charging higher prices!

3. Bryan E Logan - NEW MANAGEMENT THINKING - Innovation and Technology Transfer

Innovation is probably the most overused and least understood word in the management lexicon. It is closely followed by the word entrepreneurship, which is routinely confused with enterprise. There is a need for everybody to be more enterprising, but it is given to only a few to be entrepreneurial.

Most executives and managers would have difficulty defining innovation or indeed differentiating its meaning from that of invention. Invention is something novel or new, whilst innovation is exploiting invention and using it to generate additional revenue and profits, a simple but subtle distinction. Colin Dale of the Welsh Development Agency put it very succinctly when he said:-

“Innovation is profitable change.”

Likewise technology transfer is a term much bandied about, with little or no understanding of its true implications for the donor or the recipient. To quote Dr Goldratt, author of ‘The Goal’:-

“Technology can bring benefit if and only if it diminishes a limitation.”

Sadly there are far too many examples of organisations that have purchased expensive technology for its own sake, with no understanding of whether or not it will diminish a limitation or constraint within the organisation. I have known several businesses where the fascination with sophisticated new equipment and its unnecessary purchase led to their demise. On the donor side, universities are urged to make available the fruits of their research and technical developments, with scant regard to the strategic and therefore commercial implications for the recipients.

Like technology transfer, innovation is a futile exercise if it does not increase the revenue and profits of the organisation. It has to be tied in with, and support the strategic aims of the organisation. The limited number of organisations, particularly SMEs, with any meaningful strategy means that there is often no discernible way of knowing whether or not innovation and technology transfer will be financially beneficial. ‘Strategic navigation’* described in the previous paper has the advantage of setting out logically and with clear priorities the actions that need to be taken for the future success of the organisation. Thus the most appropriate form of technology and the order in which it should be applied become self-evident.

Enterprise Ireland, in the Republic of Ireland, promoted a grant scheme at the turn of the century called the ‘eBusiness Acceleration Fund’, which supported some eighty indigenous businesses in the introduction of technology. In the main these were website based applications. They followed this with an excellent book setting out the results in the form of case studies, together with the lessons learned. The executive behind the initiative, Mr Lorcan O’Sullivan, identified two key weaknesses:-

1. “Strategy: Failing to deploy ICT where it can create best return and failing to use the most appropriate facilities for the chosen focus”,

2. “Day-to-day management: Existing systems were neither robust, nor secure or fully utilised”.

In a subsequent presentation Mr O’Sullivan suggested that in seeking to acquire and implement technology; “you should focus advice on setting strategy”. The second of the two weaknesses he identified highlighted the fact that many organisations, again particularly SMEs, are not sufficiently robust structurally or operationally in their day-to-day management to consider implementing, let alone take full advantage of technology transfer.

Innovation and technology transfer of themselves are no panacea, especially when the organisation is neither in a position to take the technology on board nor to exploit it successfully. Offering organisations technology, where there is no way of knowing if they actually need it and don’t have the capability to apply it anyway, doesn’t seem to me like a sensible solution to anything. Particularly when the chances of an organisation selecting the most appropriate option for their current situation are at best remote.

What is needed is a commercially orientated procedure that will allow organisations to assess accurately the technology that gives the best short-term return for the circumstances currently prevailing. Such a strategically based approach will produce a disproportionately higher return, as the initial gains are likely to come from garnering the so-called ‘low hanging fruit’. In turn this is likely to release more resources, enabling the organisation to strengthen its operational performance, or at least purchase additional expertise, which will enable it to take advantage of further innovation and technology transfer in the future.

Knowing the most appropriate solution, however, is only half the answer. Equally important is to know how to implement the solution, and successfully derive the anticipated benefits. Assuming that the technology is being implemented knowingly in order to diminish some limitation, then there are at least two further considerations. These are:-

• What rules or procedures were in place to accommodate, or get round, the limitation before the new technology was introduced?

• In what way does its introduction require you to change the previous rules to achieve the maximum benefit from the new technology?

Frequently organisations derive little or no benefit from introducing new technology, because they don’t change the old rules. A classic example of this was MRP where, after its introduction, many firms continued to calculate their ‘net requirements’ on the strict rule of once a month, when the ability to carry out recalculations much more frequently, indeed overnight, was the real benefit of the new technology. They didn’t change the old rule!!

What then is the process that organisations should follow in order to derive the maximum benefit from innovation and technology, new or existing? The process that I would suggest involves the following steps, or stages:-

1. Change the form of measurement used for day-to-day management from the ‘cost world’ to the ‘throughput world’. This was described in an earlier paper and would greatly assist in policy formulation and decision-making, essential for arriving at the organisation’s vision, goal and necessary conditions,

2. Develop a strategic plan based on the system of ‘strategic navigation’*, again described in an earlier paper. This will identify the actions needed to achieve the goal of the organisation, logically, in sequence and with clear priorities,

3. Identify from the ‘strategic navigation’* logic diagram, (‘strategy on the wall’), the areas where technology or other innovations can contribute to the injections, or new ideas, which must be introduced as part of the strategy to support the achievement of the overall goal.

The first two steps are ‘silver bullets’ in their own right, but when allied to the third step they form a very powerful combination, or further ‘silver bullet’, for transforming the performance of any organisation. It is almost impossible to conceive of a situation where technology would not be involved in helping to achieve the aims of a modern organisation, but there must be a strategic link.

Amongst the areas where technology can contribute significantly are:-

• Automating office systems to digitally store and retrieve information,

• Implementing and managing processes to increase productivity,

• Improving communications through internet, intranets and extranets,

• Using e-procurement to purchase supplies and capital items,

• Practicing supply chain management,

• Automating operational systems and processes,

• Reducing lead-times to customers,

• Increasing sales and improving customer relations,

• Planning and implementing projects,

• Introducing new and innovative products,

• CAD/CAM and all aspects of design,

• Reducing the design and development times for new or improved products.

There is an unlimited choice of technological solutions available to organisations today and they cover a wide spectrum of potential applications. It is essential therefore; that any solution embarked upon must be the best in terms of suitability and value for money, as well as supporting clear strategic aims.

Similarly with innovation, organisations must select the new ideas that will help most with improving their performance. The tendency has been for innovation to become associated primarily with the introduction of new ‘hi-tech’ products, on the false assumption that only ‘hi-tech’ products can overcome the twin handicaps of high costs and low levels of productivity. Increasingly, speed and reliability are becoming the dominant competitive factors, replacing price and cost. Innovation can help traditional industries compete successfully when it comes to these new factors. A well-known manufacturer had to close down not because of the price, cost or technology of their product, but because the company could not develop new models quickly enough for its principal customers to include in their latest catalogues. It must be appreciated that every organisation can use innovation to enhance key aspects of its performance.

Professor Michael E Porter of Harvard University claims that:-

“There are no low-tech industries, only low-tech companies that fail to incorporate new ideas and methods into their products and processes.”

One of the best innovations to have emerged in the past few years for increasing the speed and reliability of new-product development is ‘critical chain’. ‘Critical chain’ was conceived in the mid 1990s by Dr E M Goldratt and has transformed thinking in the field of project management. Amongst major world corporations, particularly in the USA, it has replaced the traditional ‘critical path’ approach. It is particularly powerful in the situation where multiple projects are involved, such as managing the development of a range of new products, or with planned maintenance. Both the US Navy and the US Air Force now employ ‘critical chain’ extensively in their routine maintenance programmes. Organisations from Boeing to Pfizer and The Mayo Clinic to Bank of America now use ‘critical chain’. All of Seagate’s R&D worldwide is conducted using ‘critical chain’. ‘Critical chain’ can be considered a ‘silver bullet’ in its own right.

An interesting article appeared in the McKinsey Quarterly (2004, Number 4). Stephen Dorgan and John Dowdy from McKinsey’s London office studied one hundred manufacturing companies in the USA, UK, Germany and France. They were trying to explain why European companies historically lagged behind their US counterparts in terms of productivity. Their study demonstrated that productivity is dependent more on management practices than on spending on technology. They judged the quality of management by its effective use of three tools; lean manufacturing that cuts waste, performance management that sets clear goals and talent management, which attracts and develops high calibre people. It was the conclusion of their study that organisations should first improve their management practices and then invest in technology.

Whilst it is clear that innovation and technology have a vital role to play in the operation of any modern organisation, there are to my mind two key provisos. These are:-

1. Innovation and technology must be used in the clear and logical pursuance of an organisational strategy,

2. Innovation and the transferring of technology must take second place to ensuring that the organisation’s management is of the highest calibre.

Finally to quote Tony Rizzo, formerly of AT&T:-

“In a well-run company, in modern times, the strategic constraint will be innovation.”

In the next paper I will look at the issue of increasing productivity. What if there was a ‘silver bullet’ that could increase productivity by at least 20%, quickly and for virtually no cost?

2. Bryan E Logan - NEW MANAGEMENT THINKING - Strategic Navigation

Strategic Navigation*

In nearly forty years as a consultant, businessman and member of staff of a Business School I rarely ever encountered a senior executive who could clearly enunciate a vision for their organisation. This paucity of organisational vision was amply demonstrated on a course I ran for directors and senior executives preparing for the IOD diploma in company direction. The executives were asked to write down the current vision for their organisation. After some coaching and a lot of rewriting all got there. Only one executive, however, was able to produce at the first attempt a clear vision of where their organisation should be in four or five years.

Yet one of the classic roles of all business leaders is to set the vision for their organisation, plan how it is to be achieved and carry the rest of their people with them in its execution. The normally accepted way for organisations to go about this is through some form of strategic or corporate planning. My overwhelming experience, however, was that with the distinct shortage of organisational visions, there is a consequent and parallel lack of strategic planning.

With this shortage of vision and lack of strategic planning, the approach that I most often encountered involved executives reacting to events and spotting opportunistic openings, as and when they occurred. There have been many examples of executives and business owners who have shown a marked talent in this area, becoming surprisingly adept at spotting exploitable opportunities. As a result many organisations have achieved relative degrees of success over the years.

However, this is no longer sufficient, or indeed acceptable. If organisations are to compete and survive in the world today they must become masters of their own destiny, and this requires knowing where they are going and planning on how they are going to get there. Also, if they are to maximise the odds in their favour, they must be aware of and have anticipated potential pitfalls, and have contingencies for how they will react to unforeseen events. Every organisation must be able to plot its course to a successful future, and not have to depend on the ability of their chief executive to fly by the seat of their pants.

Assuming one could persuade every organisation to come up with a clearly defined vision of where they should be in four or five years time, what is the track record of strategic planning itself as a reliable means of realising this vision? A former CEO of General Motors, after three unsuccessful tries at establishing a strategic planning system, was quoted as saying:-

“We got these great plans together, put them on the shelf, and marched off to do what we would be doing anyway. It took us a while to realise that this wasn’t getting us anywhere.”

What then are the shortcomings and limitations of conventional strategic planning? Why are organisations experiencing difficulties and feelings of frustration when attempting to develop a strategic plan? Chief amongst these must be that:-

1. Strategic plans become obsolete the minute they are completed. This is true of all business planning, although considerable benefit can be derived from the actual process of working through and preparing such plans,

2. It is extremely difficult to use conventionally prepared strategic plans as practical day-to-day working documents, because of their prescriptive and cumbersome format. Hence they are normally to be found on shelves or holding open doors,

3. Many organisations, particularly smaller ones such as SMEs, don’t have the time or resources to expend on demanding exercises that they don’t perceive as having near term consequences,

4. The process can get bogged down in an over emphasis on the planning aspects, to the detriment of the strategy, resulting in and suffering from a lack of strategic thinking,

5. Many executives are far from convinced that the results, by and large, justify the effort, blood, sweat and tears that go into preparing a comprehensive and full-blown strategic plan.

To quote H William (Bill) Dettmer, author of the book ‘Strategic Navigation’*:-

“The reality, however, is that strategic planning hasn’t lived up to the expectations of most companies that have embraced it. It’s been primarily a ‘feel good’ effort.”

If strategic planning, as we know it, is not delivering the goods in terms of meeting our expectations, then there is no point in continuing with more of the same. A new and different approach must be found. Such an approach does exist, and it provides yet another ‘silver bullet’ for improving organisational performance.

All organisations need to have a clear vision of what they want to look like in four, five or ten years time, and the owners, in whatever guise, must have a clear goal for their organisation. If the goal is making money now and in the future, then there are certain necessary conditions attached to that. On the other hand if the organisation is a hospital or educational establishment, then money is unlikely to be the primary goal but it will certainly be one of the necessary conditions.

Again to quote Bill Dettmer:-

“Strategy is the means and methods required to satisfy the conditions necessary for achieving a system’s ultimate goal.”

Given that strategic planning is regarded as vital and necessary to the future well being of any organisation, what then are the essential attributes that organisations need from their strategy? To be useful and practical a strategy must:-

1. Treat the system as a complete entity, clearly defining the vision and goal for the system or organisation as a whole,

2. Take account of the interactions and dependencies between the departments making up the whole organisation. Currently strategic plans tend to have the effect of sub-optimising the performance of the parts,

3. Be flexible; this requires the strategy to be easily and quickly adapted to meet rapidly changing circumstances. It should also highlight the actions needed, together with their intended as well as unintended consequences,

4. Be in a form where the overall picture can be viewed at a glance, and that allows the impact and validity of proposed actions to be checked. It is crucial that the effect of all decisions on the rest of the system can be shared readily between every member of the management team.

It also goes without saying that a good strategy should follow a clear and logical path in order to achieve the desired outcomes.

Bill Dettmer has developed a systems approach called ‘Strategic Navigation’*, which meets these requirements. It provides a solution for achieving a quantum leap in the whole field of strategic planning, and is the ‘silver bullet’ that would enable organisations to make dramatic and significant advances. Allied to the first ‘silver bullet’ on ‘measurements’ (described in a previous paper) significant advances could be made in the performance of the local economy. The ‘silver bullet’ proposed in this paper is based on Bill Dettmer’s concept of ‘Strategic Navigation’*, set out in his book of the same name, published in 2003 by the American Society for Quality and revised in 2007.

Mr Dettmer feels that the words ‘strategic’ and ‘planning’ do not sit easily together and indeed are part of the problem. Rather he proposes that an organisation should define the strategic outcomes it desires, establish the current situation, the starting point, and navigate from one to the other, hence the name of the concept. The concept contains all the steps and structured thinking necessary to undertake this exercise, and relies to a large degree on understanding cause and effect in organisational systems. Cause and effect underpins the ‘Theory of Constraints’ and, for this reason, Bill Dettmer calls his process for ‘strategic navigation’* the ‘constraint management model’.

The ‘constraint management model’ has a sequence of seven steps that make up a complete and self-regulating process. The steps are:-

1. Define the paradigm: The constraint management model begins with a determination of the system’s boundaries and its goal. It then identifies the necessary conditions and critical success factors, without which the goal cannot be achieved,

2. Analyse the mismatches: This is to determine the scope and nature of the gap that exists between the system’s current position, and that which will be required to achieve the goal and critical success factors,

3. Create a transformation: This is where you develop the strategies to close the gap. This third step tells the organisation ‘what to change to’,

4. Design the future: The fourth step verifies that the proposed new strategies will really deliver the desired outcomes. This is the stage where you trim the ‘negative branches’ to ensure that the new ideas are not creating more and different problems,

5. Plan the execution: This step formulates the activities needed to deploy the new strategies. The logical sequence and dependencies of individual actions are determined, together with accountability and projected completion dates. This is very much the ‘how to’ step,

6. Deploy the strategy: This is the implementation step. During deployment management must make any necessary minor corrections or adjustments,

7. Review the strategy: This step completes the loop, and permits a wider and more in-depth review of the model and strategy.

(A diagram of the constraint management model is shown as an addendum.)

The beauty of this model and approach is that the whole strategy is displayed as a logic diagram on one sheet of paper, referred to as “strategy on the wall”. This makes it into a practical working document with the advantages of being visible, integrated, flexible and accountable.

A really outstanding advantage, however, is that it can be constructed in a matter of six to ten working days spread over four to six weeks.

It is not my purpose in this paper to explain ‘Strategic Navigation’* in detail, rather the purpose is to make all those involved in running and managing organisations aware that a ‘silver bullet’ exists in the field of strategic planning. Anybody wishing to delve into the concept in more detail can put the phrase ‘strategic navigation’* into any Internet search engine. Like the ‘throughput world’, a concept described in a previous paper, ‘strategic navigation’* involves minimum financial outlay to implement, but does require a change in mindset by the senior management team and does need some help in its preparation and implementation.

Combining ‘strategic navigation’* with the ‘throughput world’ would enhance the performance and competitiveness of every organisation in the UK.

The next paper will concentrate on ‘innovation and technology transfer’, which has not been handled well by most organisations, particularly SMEs, but could become another ‘silver bullet’ if applied in the right way.

* ‘Strategic Navigation’ is the term for a systems approach to Business Strategy and is the copyright property of H William Dettmer.

 

Bryan E Logan - 1. NEW MANAGEMENT THINKING - Measurements

Clarke: Bryan Logan worked for twenty years for the Ulster Business School at the University of Ulster.  He is a Jonah and he taught TOC as an elective module on the MBA course for five years.  This is the first of seven articles he has kindly agreed that I can share here.

Among the industrialised nations of the world the United Kingdom has to be one of the most conservative when it comes to accepting new management thinking. The majority of UK businesses never achieve their full potential and constantly fall below levels of performance that could reasonably be expected in today’s commercial world. As a result wealth creation is less than it should be, and consequently the exchequer does not receive the volume of revenues needed to adequately fund the services required by a demanding modern society. One only has to observe the need to supplement mainstream revenues with an ever-increasing reliance on ‘stealth’ taxes. 

One of the principal reasons for this under-achievement would appear to lie in an almost irrational reluctance to change the way we manage our organisations. There is a seeming unwillingness on the part of top decision-makers in industry, government, academia and the professions to acknowledge that new management ideas even exist, let alone implement them for the future well being of the country as a whole.

In this series of short papers I am putting forward six new management ideas that are in regular use around the world, unfortunately less so in the UK, that would make significant improvements to any organisation taking them onboard. The ideas cover; ‘measurements’, ‘strategic navigation’, ‘innovation and technology transfer’, ‘increasing productivity’, ‘how to sell more’ and ‘turning talent into performance’. None of these ideas, which I refer to as ‘silver bullets’, are expensive to implement, unlike the vast sums spent currently on consultants in vain attempts to improve performance.

In this first paper I will look at how we measure the day-to-day operation of our organisations, and how we can improve greatly on the traditional approach.

How might the financial performance of every organisation in the United Kingdom be improved at a stroke? The easiest and quickest way is by adopting an alternative measurement system for the management of day-to-day operations. As a ‘silver bullet’ this action alone would deliver significant results for virtually no outlay, and is the first of six such ‘silver bullets’ that I will identify and explain in this and subsequent papers.

The way we currently manage the day-to-day operation of our organisations, and its attendant measurements, relies on what I shall refer to as the ‘cost world’. This is based on the principles and conventions associated with traditional financial accounting. It is the accepted system; indeed the only system most of us know and have grown up with, having been around for longer than any of us care to remember. So accustomed are we to the concept of the ‘cost world’ that we don’t give it a second thought. It is so ingrained in us, that it wouldn’t even cross our minds to challenge this approach to managing our organisations, never mind look for anything else.

Yet, as we shall see, there are many potential problems from using this approach to managing our organisations, and these problems actually hinder our ability to make the correct decisions needed to optimise the present performance of our organisations, let alone benefit from future improvement initiatives.

Tony Rizzo, formerly with AT&T, said:-

“Consistently, accountants confuse two models with two distinct purposes. The first is the model defined by GAAP, (generally accepted accounting principles). This has the purpose of distributing profits after they are generated. The second model is an operational one, which is required to generate these profits in the first place. These are two distinct purposes, which are not served well by just one model.”

It is entirely understandable that there should be a standard and accepted format, or model, for reporting the financial results of organisations, indeed HMRC insist upon it. Traditional financial accounting is the universally accepted means by which the profits or surpluses accrued by an organisation are calculated and then distributed. Underlying this accounting system is a range of standard conventions, in particular the concept of cost allocation and cost absorption, which allows us to apportion costs to the value of work-in-progress and finished goods. It is this concept of cost allocation that epitomises and distinguishes the ‘cost world’.

Unfortunately, it is also this concept of cost allocation that underpins the system of cost accounting, or management accounting, that is most commonly used to manage the day-to-day operations within our organisations. In this ‘cost world’ approach we allocate costs to machines when making investment decisions, we allocate costs to parts in make-or-buy decisions and we allocate costs to products and services when judging and ranking their profitability. At the very best this approach can have unintended consequences, which inevitably influence the way we behave as well as the decisions we make and the results we achieve. It is based on a series of erroneous assumptions, which lead to false thinking and result in arbitrary and frequently wrong decisions. 

Among the assumptions we readily accept, but should challenge are:-

1. If all the constituent parts of an organisation are efficient, then this will add up to an efficient whole,

2. An idle resource is a significant source of waste,

3. The sum of individual improvements within an organisation equates to the aggregate improvement to the system as a whole,

4. More data equals better decisions,

5. Too many set-ups are bad,

6. The only way to produce more is to work harder.

The effect of accepting these and other assumptions has been to develop a ‘cost world’ measurement system and ‘silo mentality’, which is aimed at ensuring the efficient operation of each individual department or function within an organisation. It uses measures such as ‘output per hour’, ‘cost per part‘, ‘machine utilisation’ ‘standard costs’ and other efficiency metrics. However, none of these metrics enable departmental managers to assess the impact of their local decisions on the performance of the system or organisation as a whole. Each department is busy being efficient, oblivious to the impact, good or bad, which its actions are having on the organisation as a whole. Under such circumstances it becomes difficult, if not impossible, to coordinate activities towards achieving the goal of the organisation as a whole. A question I used to ask students was: “what formula connects efficiency with net profit?” The answer of course is none, except for the belief contained in the first of the erroneous assumptions above. 

To quote Peter Senge in his book ‘The Fifth Discipline’:-

“From a very early age, we are taught to break apart problems, to fragment the world. This apparently makes the complex tasks and subjects more manageable, but we pay a hidden, enormous price. We can no longer see the consequences of our actions; we lose our intrinsic sense of connection to the larger whole.”

If management accounting has any purpose, it must be to provide managers with the information needed to make decisions in line with the organisation’s goal. The goal of most commercial organisations is to make money now and in the future. The erroneous assumptions underlying the use of the ‘cost world’ lead to faulty decision-making, concentration on wrong priorities and difficulty in implementing and achieving genuine improvements for the organisation.

What measurement system then should we use? It must, above all, recognise that any organisation stands or falls by its performance as a whole, and not by the efficiency of its individual parts or departments. The output or throughput of any organisation depends on the interaction between its constituent parts and the synchronised management of these interactions; a concept seemingly alien to most of today’s managers and executives.

To quote Dr E M Goldratt, author of the book ‘The Goal’:-

“The measurements must induce the parts to do what is good for the system as a whole”.

So where do we start? Almost every management accounting textbook advises against using GAAP generated numbers as the basis for making management decisions, and also contains a statement to the effect that; “A company will maximise profit when it makes and sells the product or service with the highest contribution margin per unit of its scarce resource”. However, so strong is the hold of the ‘cost world’ on all of us that we completely ignore both of these pieces of advice. What organisation, business or other managed system, even knows its scarce resource, or limiting factor, let alone manages its performance around such knowledge?

The alternative system to the ‘cost world’ is the ‘throughput world’, in which the concept of a limiting factor is central. The ‘throughput world’ focuses on the organisation as a whole, as opposed to optimising individual departments, and focuses on managing the limiting factor in order to maximise profitable throughput. This is achieved by a process of five repeating steps, which are:-

1. Identify the limiting factor, which can be either internal or external to the organisation and may be a physical scarcity or a managerial policy,

2. Squeeze the maximum amount through the limiting factor, as this dictates the ultimate output and hence performance of the organisation as a whole,

3. Subordinate the actions of all other departments in the organisation to continuously maximising the performance of the limiting factor,

4. Find ways of increasing the capacity of the limiting factor. As a consequence of opening up its capacity, the limiting factor or scarce resource may alter and move,

5. Return to step 1 above and identify the new limiting factor.

The ‘throughput world’ actively encourages the expansion of profitable throughput, whereas the ‘cost world’ seems fixated on cutting costs. There is only so far that you can actually cut costs, whereas expansion of throughput has theoretically no limit. Unfortunately British industry has been and continues to be obsessed with cost cutting. The late Peter Drucker said:-

“Enterprises are paid to create wealth, not control costs. But this obvious fact is not reflected in traditional measurements.”

The ‘throughput world’ is based around three new performance measures; T, I & OE:-

T Throughput; this is the rate at which the system generates money through sales. It is defined as sales less all totally variable costs, such as material, commissions and any sub-contracted items such as transport,

I Investment; this is all the money the system invests in purchasing items the system intends to sell,

OE Operating Expense; this is all the money the system spends in turning investment into throughput, including salary and wage costs.

Using these three measures and the fact that every system has to have a limiting factor opens up an entirely new world for any organisation, when it comes to managing their day-to-day operations. These new measures translate easily into familiar and recognisable terms. 

Net Profit = (T – OE) and Productivity = (T/OE)

Now decisions can be made in line with the organisation’s overall goal, and not in pursuit of the local optimisation of individual departments or functions. Managers can gauge the impact of local decisions on the organisation as a whole and the profitability of products and services can be correctly assessed against their contribution per unit of limiting factor. How many salespersons are currently being well rewarded on the basis of promoting the wrong product or service, in terms of their relative profitability? 

In future papers I will demonstrate the gains to current and future performance that can be leveraged from focusing on and managing the limiting factor. Managing using the ‘throughput world’ inevitably exposes and releases excess capacity, of which most organisations are totally unaware. This spare capacity can then be utilised in further strengthening competitive advantage. To me the two words that epitomise the ‘throughput world’ are ‘focus’ and ‘leverage’.

Everything becomes easier and makes more sense when the ‘cost world’ is replaced by the ‘throughput world’. Business improvement initiatives that many organisations are trying to implement, with less than convincing results, suddenly flourish. The ‘throughput world’ environment sharpens all improvement initiatives such as ‘Lean’ and ‘Six Sigma’. It focuses these techniques on the actual leverage points within the organisation. 

It must be pointed out, however, that transferring from the ‘cost world’ to the ‘throughput world’ is not as easy as just introducing a few new measures. It requires managers to acquire a new mindset and operate contrary to concepts they previously held sacrosanct and had regarded as second nature. 

Not actually knowing that the ‘throughput world’ exists is unfortunate, as its adoption offers a ‘silver bullet’ to enhance the performance of any organisation in the UK. The fact that the majority of executives in the UK have never heard of the ‘throughput world’ is disappointing, if not criminal when you consider the amount of money currently being spent on consultancy, in a vain attempt to improve organisational performance by traditional methods.

What further compounds the misfortune is the fact that the UK will continue to fall further and further behind other industrialised countries through not adopting the ‘throughput world’. The following is a quotation made in 2005 by Mark Abrahams, President and CEO of Delstar Technologies Inc.:-

“In 1996 Chesapeake Consulting looked at our manufacturing process and taught us a ‘throughput model’, which in our opinion has been the single best tool for evaluating profitability and simplifies the day-to-day decision-making process for the business.”

Delstar Technologies Inc. is the world leader in its field of thermoplastic netting, meshes and extruded components. Headquartered in Delaware USA, they have a presence at Bristol in the UK and now a brand new factory in Shanghai.

Finally to quote again the late Peter Drucker:-

“You don’t have to do anything, survival is not mandatory”.

In the next paper I will look at why ‘strategic planning’ doesn’t work for most organisations in the UK, particularly SMEs, and how another ‘silver bullet’ can quickly and at minimum cost provide any organisation with the right strategy and a logical roadmap for its achievement.