Wednesday, December 19, 2012

Your Budgets For Next Year Are Likely Now Complete, Now See How it's Ruining Your Value Delivery.

Everyone has to deal with budgeting.  Budgeting is simply the process of determining how to fund your expected needs in a project.  Budgeting is not a process with an extensively long history.  Much like most modern management it is a function of how organizations with tremendous growth planned spending. They determine how people behave in any given situation. Focusing leaders' minds on the stewardship of shareholders' funds and ensuring that managers worried about controlling costs were its original functions, and leaders and managers, by and large, behaved accordingly. But budgets have since been hijacked by a generation of financial engineers that have used them as remote control devices to "manage by the numbers." They have turned budgets into fixed performance contracts that force managers at all levels to commit to delivering specified financial outcomes, even though many of the variables underpinning those outcomes are beyond their control. This leads to undesirable and, in many cases, unethical behavior.

How has budgeting and the finance process stiffed innovation to the extent where over 90% of professionals look at budgets in negative terms.  Why is there not more outrage regarding how the process denies agility?  Lean and agile models work towards delivering value while adapting to changing business needs.  I believe there is nothing more threatening to an agile and lean process then the limitations set forth with a budgeting process.  When budgets are calculated to forecast something a year to six months out how can this possibly foster value creation? Budgets are a modern day contract where the budget contract is usually fixed for a period of twelve months. Its purpose is to commit a subordinate or team to achieving an agreed-upon outcome and then to enable a superior to control the results against that outcome (reserving the right to interfere and change the terms if necessary).

How have we arrived at such high levels of dissatisfaction with budgeting? There are three primary factors: (1) Budgeting is cumbersome and too expensive, (2) budgeting is out of kilter with the competitive environment and no longer meets the needs of either executives or operating managers, and (3) the extent of "gaming the numbers" has risen to unacceptable levels. Few senior executives seem to be aware of these problems. They see outcomes in terms of numbers rather than behaviors. In this context, budget contracts can act like drugs. They seduce executives into believing that they have control over their future financial outcomes. But, like most drugs, they have serious side effects. They lead both senior executives and operating managers into an annual performance trap from which it is difficult to escape.

In these turbulent times the budgeting process struggled to cope. Goals and measures were internally focused. Intellectual capital was outside the orbit of the budgetary control system. Innovation was stifled by rigid adherence to fixed plans and resource allocations agreed to twelve to eighteen months earlier. Costs were fiercely protected by departmental managers who saw them as budget entitlements rather than scarce resources. The internal focus on maximizing volume collided with the external focus on satisfying customers' needs. And far from being empowered to respond to strategic change, front-line people found that it was easier to do nothing than to try to get multiple signatures on a document authorizing a change in the plan.

The organizations I have worked with used to set targets on the basis of financial numbers that, more often than not, were negotiated between superiors and subordinates before the start of the year. These numbers were fixed for the year ahead and represented the key component of the annual fixed performance contract. All actions were then focused on meeting the numbers not on value delivery. However, whether this process maximized the profit potential  is doubtful given the desire for superiors to stretch ambition and the desire for budget holders to play safe.

What does the Lean Technology Transformation do to solve this?  Well it's not so simple but here are some ideas.  What holds your organization together is not a plan, but a commitment to a clear purpose and to a set of clearly articulated principles and values.  To create value intellectual capital needs to be set free from stifling bureaucracies, free from the restrictions of predetermined plans, free from the fear of failing to meet fixed targets, and free from the forced cross-company actions designed by central planners.  Agile leaders set targets based on high-level key performance indicators (KPIs) such as return-on-capital, free cash flows, or cost-to-income ratios. Goals are typically set at levels aimed at maximizing short- and medium-term profit potential at every level of the business. Managers are willing to accept (or propose) these stretch goals because their performance will not be evaluated and rewarded against them. They will subsequently be measured and rewarded using a range of relative indicators such as peer group performance, internal and external benchmarks, and prior years' results. "Baseline" goals set a lower reference level of expectations. Though goals are primarily financial at the highest level, they become more operational the nearer they are to the source of value delivery.

By making this transition The benefits are that the process of setting targets is fast (days rather than months) and because it is based on relative measures it will seldom need to be reset. Also, because the benchmarking bar is always being raised, it is more likely to maximize profit potential. Some project leaders figure they have saved 95 percent of the time that used to be spent on budgeting and forecasting. This time is more usefully spent on planning how to create more value for customers and shareholders as well as how to respond more effectively to change.

Changing to a more updated model fundamental matches the goals of a lean organization.  The impact on the behavior of front-line people must not be underestimated. It leads to what Harvard professor Chris Argyris calls "internal commitment." The hidden problem, according to Argyris, is that people have to deal with two types of commitment. First, there is external commitment, which, by and large, leads people to fulfill contractual obligations specified by others, and in which performance goals are top down. Second, there is internal commitment, which allows individuals to define their own plans and the tasks required to fulfill them, and which is participatory, comes from within the individual, and leads to people taking risks and accepting responsibility for their actions.This is the behavior that the relative improvement contract seeks to encourage. The rhetoric of leaders does not produce internal commitment any more than it leads to effective empowerment or personal responsibility. Such changes require a fundamental change in the process that determines the behavioral context.

Finally, what needs to happen in the firm is a decentralization which enables leaders in your high performance teams.  Below are six common principles which organizations who have made this break posses:

1. Built a governance framework based on clear principles and boundaries
2. Created a high-performance climate based on the visibility of relative success at every level
3. Provided front-line teams with the freedom to make decisions that are consistent with governance principles and strategic goals
4. Placed the responsibility for value creating decisions on teams
5. Focused teams on customer outcomes
6. Supported open and ethical information systems

The leaders in question have abandoned the notion that employees base their commitment on mission statements and detailed plans prepared by someone else. They have abandoned the command, compliance, and control approach that assumes that strategy formulation and execution take place in separate compartments. And they have abandoned the assumption that front-line managers cannot be trusted with the responsibility to think and act on the latest information in the best interests of the firm as a whole. They have built a relative improvement contract based on mutual trust, with clear responsibilities for high-level performance from front-line people. They have also built a community spirit that reflects the interdependence of the organization and that supports seamless solutions for customers. Above all, they have recognized that people respond more positively to clear values and principles than to nebulous mission statements and detailed plans.

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Tuesday, December 18, 2012

Waste Is Everywhere and It Starts With You

Waste is certainly a catchphrase that is overused to the point where the word itself has become diminished as a way to define useless activities (catching up to "out of the box" and "at the end of the day").  James P. Womack has spent a great deal of energy simplifying how an organization can think about waste (As Lean practitioners know simplification is the true sign of a genius). Simply stated, the core idea is to maximize customer value while minimizing non-value added activity.  Waste can be defined as activities which the customer would not be willing to pay for. Simply, lean means creating more value for customers with fewer resources.
A lean organization understands customer value and focuses its key processes to continuously increase it. The ultimate goal is to provide perfect value to the customer through a perfect value creation process that has zero waste. The same goes for a Lean professional. 
To accomplish this, lean thinking changes the focus of management from optimizing separate technologies, assets, and vertical departments to optimizing the flow of products and services through entire value streams that flow horizontally across technologies, assets, and departments to customers.  Remember, this works horizontally not vertically.  Most organizations operating today are still structured in silos(vertical) which in themselves hemorrhage waste but in aggregate tremendously decrease customer value .  Lean initiatives that work up the vertical have their value but are much less effective than horizontal programs.  
Lean works not because it's a framework of best practices but because it it is a deep behavioral and cultural transformation that encourages everyone in the organization to think differently about the role of quality in the creation and delivery of value to the customer.  This thinking changes organizations fundamentally when they must think across the value stream (vertical).  Consider your organization.  If you're in marketing and you are responsible for the value of your product all the way through its cycle then you start to think more about change when its impact is measured from concept to cash.   When it fails (which it often does) it's because the cultural implications and focus were underestimated. 
I'm not interested in spending more time discussing Lean from a macro perspective because there are many smarter and better written books and blogs which accomplish that.  My point in this discussion is to bring about the idea that waste reduction can start with you. 
Look at every activity you perform in your job.  Think of an activity as a series of steps that take an input and turn it in to an output that is consumed by the next activity.  Ask yourself why you do it and is there a better way to do it?  Does it need to be done at all?  Once you find those activities which you feel can be improved and/or eliminated then do it.  Fix it now,  don't wait.  Once you fix it start measuring its impact.  After all if it's not helping it will be viewed as hurting and you will be forced to digress back to status quo. 
I'm often asked when suggesting this path.  Where do you start and how do you do it?  Over the next week I will be posting recommendations for how to start your own personal Lean initiative.  How you can socialize its value and how you can make it contagious in your organization.  Nothing here is new and nothing was invented by me.  It's already in hundreds of books and research papers but I've facilitated this process enough that I can share best practices which have personally worked for me in implementing a success Lean/Culture transformation.  
The steps I will walk your through are....
1. Current State Mind Mapping
2. Problem State Mind Mapping
3. Value Stream Mapping and Theory of Constraint Identification
4. Future State Mapping and Waste Elimination
5. Implement and Improve
Let the fun begin.  Please contact me if you have thoughts or ideas which you would like templates of my personal thoughts on. 

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