Opportunities exist everywhere in organizations, because businesses are constantly changing in both subtle and not-so-subtle ways. We spend a lot of time observing organizations of all shapes and sizes, and it is truly fascinating to see how they operate. Hospitals, wineries, hotels, transportation firms, production plants: they are all remarkably complex. So while opportunities may exist, they are often not obvious. Unfortunately, competitive reality demands that companies never stop improving their performance and, in turn, that managers never stop looking for opportunity. But where and how do you look for these opportunities?
To answer the "where" part of this question, we ask ourselves four questions:
- Are there any gaps between what your product or service provides and what customers (or users) actually want?
- Can the process be made faster, more reliable or with less cost, without impacting quality?
- Are the management-system tools effective and used properly by managers?
- What do managers actually do with their time and is it what the organization needs?
The "how" part can be a little trickier. When you spend as much time as we do looking for improvement opportunities, you start to create mental checklists of both what you should be looking for and where you're likely to find them.
In the previous Observation, we discussed how everyone agrees that management behavior is a critical issue in organizations. However, the meaning of the term itself is often a little fuzzy. What behaviors are we actually talking about? If we look at the specific behaviors that most organizations would like their managers to possess, we can group them into four broad categories, which aptly reflect Deming's PDCA model: plan, do, check, act.
Plan (planning behaviors)
- Strategic planning
- Sales and operations planning (S&OP)
- Improving performance
- Managing change
Do (execution behaviors)
- Assigning work
- Communicating expectations
- Following up and actively listening
- Giving performance feedback
Check (analytical behaviors)
- Monitoring activity volume
- Tracking key performance indicators
- Identifying variances to plan
- Improving processes
- Problem solving for root causes
Act (improvement behaviors)
- Prototyping possible solutions
- Making decisions
- Persuading others
- Training to improve skills
- Coaching for improved performance
We use this list when studying and observing managers, evaluating skill levels, and for training and development programs.
We often say it's tough to change management behavior. Universally, executives nod their heads in agreement. But when we all say it, what do we actually mean? What specific behaviors are we all talking about? What does changing management behavior really mean?
Like all of us, managers tend to repeat the same behaviors over many years, and in time those behaviors become deeply entrenched. Behaviors help form individual management styles and are the basis of familiar, comfortable work routines. Changing management behavior means getting managers to actually act differently from what they have done in the past. This could be setting clear daily expectations for staff, following up on planned work, actively listening or giving feedback. While these behaviors may seem very basic, they are not always common practice. Interestingly, they're actually more common in production environments than they are in office environments. When a behavior isn’t performed by a manager currently, it will be hard for him or her to start doing it in the future. Furthermore, not only does the manager not know how to do it, employees don't know how to respond to it.
Another aspect of changing management behavior is to modify the "style" of management that people use. We are strong believers in an active management style that is controlled, collaborative, and focused on results. On the other hand, we are not fans of management styles where an aggressive manager bullies subordinates, or a manager feels the need to flatter someone in order to get something done. We also are not fans of what we call "passive management" styles, e.g., where managers shy away from issues and avoid confronting poor performance. Nor are we fans of the management style where a manager asks an employee to do something but is apologetic and does not accept responsibility for giving the assignment -- or blames it on the company.
It's a lot easier to modify specific behaviors than it is to modify a person's management style. Behaviors are usually the result of doing something over and over again, which can often be tweaked or adjusted. Management styles tend to reflect both the social style of an individual and the culture of an organization. Some organizations are aggressive and some are passive; this often mirrors the styles of key executives. On their way up through the ranks, executives tend to hire and promote similar kinds of people, which over time creates a corporate management style. It's one of the reasons why corporate mergers can be so difficult: two similar businesses can have very different management styles.
Management styles can -- and do -- change over time, but from a practical perspective it's far easier to focus on modifying specific management behaviors.
In the relatively early days of our company, a few partners took a high-speed driving course on an old Formula 1 race track just outside Montreal. The conversation over dinner on the first night was not about how interesting or exciting it was to drive open-wheel race cars -- it was about how good the actual training approach was. In a nutshell, the instructors broke down racing into two things: driving in a straight line and driving around corners. To be a good driver, we had to master these two skills.
The instructors broke down each of these skills into specific steps. For example, driving around corners consisted of breaking on a straightaway, turning at a steady speed to the apex, then accelerating to the corner exit. They would teach one skill in the classroom and then take us out to the track to practice. Gradually we learned how to combine the skills.
Good athletic coaches use a similar technique to teach athletes where to position themselves and what to do while their often chaotic environment swirls around them.
The problem we have found with most management training programs is that they don't use this approach. They tend to overload managers with PowerPoint slides that tell them, in technical terms, what they should do and what to expect. They rarely break down management skills and get managers to practise those skills in pieces before trying to put them all together. One of the results is that many managers know what to do, but they don't always know how to do it. There is a lot of training about problem solving for example, but it's largely academic. It may instruct managers to identify the problem and look for root causes. But how exactly does a manager do that? Where and how do they learn about a variance? How do they look for root causes? What studies do they need to do? How do they do those studies? Who should be involved? What should they be trying to achieve? These are the questions that management training needs to address to be helpful.
The driving course left an indelible impression and made us go back and change the design of our training programs. We've still never achieved the clarity of the original course, but they are certainly more useful as a result of that experience.
When we work for a company, we always do our due diligence upfront to pinpoint a specific improvement target for the project. Well, almost always. Sometimes we estimate the potential improvement based on our experience, and to be extra cautious we use a range, rather than a specific number. We peg the expected target number in the middle of the range. This is usually a mistake.
The problem with ranges is that there is often a strong gravitational force pulling the objectives of the initiative towards the lower end of the range. The range itself suggests that anything within the range is OK, otherwise the range would be different. Psychologically, this results in the midpoint becoming the effective maximum, and the "negotiated" objective falling somewhere between the midpoint and the low end of the range. This is really not surprising, and it’s the same phenomenon that plagues budgets every year. Despite the financial incentives that are sometimes introduced to encourage people to maximize the "reach," when it comes to performance improvement it's simply not in the best interests of managers to reach too far. From the perspective of the manager tasked with getting the results, it's a good idea to manage expectations, and over-delivering is always viewed in a better light than under-delivering. As well, in this world of continuous improvement performance, gains are expected each and every year, so why wouldn't you hedge? If you throw too much into this year, it will probably just mean that next year's "reach" will disappoint.
All of which is why giving ranges is a bad idea. It's better to spend time upfront and properly assess the true value of opportunity that exists within a process or function, and then target a specific percentage of that opportunity. This provides logic and clarity in terms of what the requirement should be. Over time, the actual realized success rate of the improvement project will establish what the right percentage should be. If, for some reason, you have to use a range, it's better to keep it fairly narrow.
Sometimes we do a study that we call the "Span of Control" analysis, where we look at how many subordinates report directly to each manager in an organization. It's a more difficult study than it sounds, because the way organizational charts are drawn is not always how they really are. Reporting lines are sometimes blurry and titles can be misleading (e.g., some managers aren't really managers). The numbers alone don’t reveal the full story, but the study does help one learn a lot about the organization.
The question of how many managers an organization needs is a by-product of how many people each manager should have reporting to them. This is an important decision because it ultimately dictates the number of managers, the levels of management, number of divisions, business units and so on. Every manager, in turn, creates additional incremental costs (e.g., travel, meetings, equipment, space, reports, etc.). All these things heavily influence the fixed overhead cost base. During a recession, there is usually a general thinning of management positions (through combining departments and delayering), but this is not always a good business decision. We've seen many cases where companies stripped out managers and supervisors only to see productivity subsequently suffer as a result.
The number of managers that an organization needs is a function of the management approach and style of the organization. As such, it can vary by industry – and even by company within the industry. Many organizations use span-of-control rules of thumb to determine how many managers they need, but this approach can become ineffective as job functions and technologies change. The right number should be analytically determined, similar to any situation where you correlate activity and time. Managers do specific "management" tasks (e.g., plan, train, administrate, review) as well as general in-process work. What an organization wants its managers to do determines how many managers they actually need.
Many industries experience "shoulder periods." These are the time periods leading up to and away from the peak volumes. Figuring out how to manage these periods can be a difficult task for managers, but it’s also very important for realizing performance improvement gains.
When managers or performance-improvement teams try to "streamline" resource requirements (e.g., labor, equipment, space, etc.), they do this by figuring out what they have to do (activities); how much time it takes (time standard); and how often they have to do it (volume). Usually the biggest variable is volume. If the business has any kind of seasonality or variability, which of course many do, an average volume based on the total year could be too high one-half the time, and too low the other half. So companies build resource and production plans in order to forecast volume and determine their resource needs as they operate throughout the year.
Variability is tough to manage. If your peak volumes are in October and November, when do you add staff and when do you reduce staff? Or can you do this at all? What if the skills required are not easy to find? If you ignore the variability and carry a fixed staffing level, your productivity will be high for two months and naturally drop during the other 10 months. Will attrition take care of any of this imbalance? If you cut hours or lay off staff, will they go to competitors or get other jobs? What if you can't find enough qualified people when you need them and then miss your volumes and damage your service reputation? These are all very difficult questions that managers have to answer.
We've used "months" as a peak time period, but to make this issue even more complicated many functional areas have shoulder periods throughout the month (e.g., accounting), throughout the week (e.g., medical labs), or even throughout the day (e.g., restaurants). If you don't manage these shoulder periods carefully, it's very easy to see the productivity gained during peak periods offset by the productivity lost at other times.
Over the years, one of the things we've noticed is that each new manager tends to create new reports, for whatever purpose they have at the time. Old reports are not eliminated, so over time there are a mountain of available reports – and a mountain of performance indicators -- in the system. But like a software program with too many features, this is not necessarily helpful. Sometimes it's just confusing.
One of the hardest things about management is knowing what you should be focusing on. What specific key indicators are most important to ensure that your area of responsibility is achieving its core objectives? As consultants, we are sometimes part of the problem: we can become enamored with "drilling down" into issues and have a tendency to build too many metrics into operating reports. This can overwhelm management and fragment their focus, rather than help concentrate it.
We generally believe that people are most effective when they focus on just three things. When looking at reports and key performance indicators, use this rule as a starting point. As a manager, if there were only three indicators that you could focus on, what would they be? Culling a lengthy list of indicators down to your critical three is not only very illuminating, it can also help you figure out what reports you need or don't need.
Tell us your three indicators in the comments section of our blog!
Growing sales volume with existing accounts is sometimes referred to as "increasing your share of wallet," but it's actually not a very good description -- or even objective. We've found that companies are generally most successful increasing sales volume with existing accounts when those accounts are themselves growing, and they manage to maintain a share of that wallet.
Many companies are not great at increasing the "share of wallet" for three main reasons. The first reason is that this means taking business directly away from competitors. The harsh truth is that companies tend to think that their products’ (or service’s) advantages are more distinct than their customers do. The unfortunate result is that stealing business away from competitors often leads to lowering prices, which in turn damages profitability. The second reason is that customers often intentionally divide their purchases between alternate sources to optimize their leverage and reduce risk. The third reason is that sometimes companies try to increase their "share of wallet" by broadening their offerings, but this can confuse their customer. Unless your business is lucky enough to be some type of monopoly or oligopoly, where customers have little choice (e.g., a telecommunications company), it's difficult to get customers to believe you can be a leading provider in different, distinct categories. In the management consulting industry, for example, if you are known for operational performance improvement work, it's hard to sell strategy or IT consulting, even if you are capable of delivering it.
Despite the hurdles, the concept of growing sales volumes with existing customers is appealing because it's "friendly terrain." Your customers already know you and presumably like you. Salespeople usually prefer calling and visiting existing customers for the same reasons. To gain share from existing customers, you need very good intelligence about their requirements (e.g., a specific "inventory" of their purchases that you don't -- but could -- get), and a clear rationale for why your product or service adds value to their business.
It's possible to gain share of your customers’ wallets without just lowering your prices to "buy" the volume, but often it's a better bet to figure out which of your customers are growing -- and make sure you look after them well.
Pricing is the most powerful way to improve profit without the need for large-scale culture change. It is often said that a 1% improvement in price is worth a 10% improvement in productivity. Given that there is so much effort involved in trying to raise productivity by 10%, it's somewhat surprising that price isn't the first thing performance improvement groups focus on. But like the problem that many start-ups experience when they use similar math -- "All we need to be profitable is a 1% market share" -- getting that 1% gain can be very difficult.
Pricing is often something of a black art in many organizations. Many apply some kind of cost-plus-logic to determine their prices, but even the underlying costing methodology is a little cryptic (e.g., what costs are allocated). Many other companies set their prices based on what they believe the market can bear or based on what their competitors are charging. Actual negotiated pricing is often highly variable and can be significantly influenced by the size of the customer, what competitors do in bid situations, what procurement departments demand, the size and scale of the sale, future opportunities, etc. Prices are also influenced by personal relationships and even sales compensation plans. All of these factors result in a range in which prices for a certain product or service can vary.
Much like waste in a process, the opportunity in pricing lies in the variation. Raising prices is notoriously hard in many industries, so the key to remember is that the profit lever is average price. So focus on what we call "price optimization." The objective is to increase the average price, not to raise prices. If you can reduce any of your discounting, you can reduce the variation and improve the average price, all other things being equal.
The key question, then, is to ask and to study: Who actually controls pricing? Often, pricing control is distributed throughout an organization, and various people are allowed to discount from a benchmark. Identify where prices are discounted and try to understand what is driving that behavior. If you can tighten the parameters around who has the authority and how much can be discounted, you can reduce price variation and improve your average price. The more complex part for a project-based initiative is that the consequences are often felt at an aggregate level fairly high up in the organization, well after the price has been discounted. It's difficult to manage this gap between action and consequence.