Updated: Feb 22
@Haydn Shaughnessy and @Fin Goulding
In the last article on leadership purpose, we touched on the unobserved costs of new transformation initiatives. Cost is top of mind as companies seek a way out of COVID. Inevitably the “way out” will involve redesigning parts of the operating model and the value connection a company has with its markets.
But nothing can happen if there is not a promise of savings. How to save significant money on new initiatives without creating a downside?
Focusing on sources of value in the company’s portfolio of work and taking out sources of waste is the obvious answer. And it can be done quickly.
In Lighthouse Thinking, we argue that most companies routinely cut value and add in more waste. This is clearly paradoxical because companies believe they are acting rationally when cutting. Trouble is they have no idea where real waste takes place because it often stems from decision-making rather than operational inefficiencies.
Huge amounts of waste build up inside companies in the form of projects that add little or no value to company objectives. They also do it by hauling the past with them. When they move onto new initiatives they fail to rationalise the business lines and systems of yesterday. They haul it forward in a messy bundle of incoherent systems and extensive rework.
Cuts that take out 15 or 20% of a workforce, though, rarely impact on core habits of waste, particularly of what we call the core platforms problem.
Now more than ever, it’s essential to move beyond your assumptions about where waste and value lie. If you don’t then you are hollowing out your company at just the time when you could be truly rationalising your approach to work and value.
There are a variety of ways that costs are driven up by waste that go equally unobserved and unmanaged, even during cost-cutting programs.
Your waste problem
These have occurred through the accumulated impact of major initiatives over time. In the table below we illustrate the types of transformations companies have gone through over the past thirty years. It also illustrates the scope for accumulated waste as many of these transformations are ongoing.
You can see from this that since 1990, when supply chain management really got up and running, there have been at least 10 major transformations.
That excludes all the cost-cutting scenarios in each period of recession (of which there have been at least 4). In other words, on average there is a major change to how companies operate every three years and every eight years they are in crisis. Therefore managing well in transformations and crises is actually your routine!
The rise of complexity needs simplicity
Complexity-advocates argue that the economy today is inherently complex rather than just complicated. We’ve heard consultants and trainers feasting on that one. Your decision-making is no longer complicated, it’s complex. And they mean it is unpredictable. Fin and I tend to think of it the other way round.
We believe that you can undo complexity if you see where it arises. Organisations have created complexity through all the transformations you see in the diagram above. By and large, those transformations are dealt with by adding more stuff in and foregoing the opportunity to take things out.
These transitions act like compound interest, they each add a layer of cost and complexity. The answer is simplification but why don’t we have a simplification theory?
Here are some of the reasons. But go here to look at some new tools we have designed:
Many sources of cost don’t get on the executive agenda: Strange though it may seem, sources of cost are often an unknown at senior levels.
For example, many companies have embarked on Cloud computing programs without being able to agree on a plan to retire the resources that they have in their own operations teams. They might also have very little in the way of a plan to exploit the full benefits of Cloud as a new, innovation-enabling operating model. Those are two sources of waste.
They are not trivial either because the cost of Cloud migrations can run into the tens of millions.
Designed waste: Waste is often designed into processes. Creating more waste actually coexists with cost efficiency programs. Here is an example of that.
Most companies we deal with have very large contingent workforces of contractors (either offshore or onshore). They are there because companies have come to the conclusion that employment is an unnecessary overhead. So any transformation comes with FTE reductions baked in.
Meanwhile, they willingly pay thousands per day for people who are not necessarily vetted for competency. Getting rid of good staff for contractors whose skills are not validated, as they would be in recruitment, and paying high daily rates, is a major source of cost, not to mention the disincentives to staff working alongside them.
Simplification gains: Conversely, there is no trigger that makes executives go after the simplification gains that are waiting there to be had.
There is no incentive for anybody in the leadership team to stand up for a more rational way to run the firm. If the CEO can’t spot the waste, then it won’t be addressed, even though, like right now, there will be periodic culls of very good areas of business and good people.
How much does designed waste cost?
The first thing to face up to is that companies have become irrational. The idea that they are the best way to organise economic activity is highly questionable. In fact, Seely Brown and Hagel calculated that return on assets among US corporations fell by 75% between 1965 and 2010.
There may be structural reasons for that but more than anything it is a sociological problem. Firms are not good at fostering transparency nor are they good at fostering strong interpersonal relationships (see article 1).
We’ve seen those two factors leading to waste on a grand scale. In a company we worked with management signed off Euro 14K a day to have a vendor team sit around its offices. Yes, you heard it right. Paying 14K a day to have someone sell to you. That went along with an inflated SaaS initiative that was going to cost a wasteful Euro 2 million too much. And a bill of 12K a day to contractors who had no work to do.
We brought some of these waste-producing decisions to the attention of the Chief Risk Officer and her answer was, well it might cost us Euro 10 million but that doesn’t threaten our viability. In other words, therefore it was not her problem.
These are far from unusual actions and responses. We have seen companies left with staggering consulting bills for no effective output other than confusion. And we have demonstrated to executive teams that they are replicating work in key areas of transformation, not just duplicating.
Systematically, we find that company portfolios of work are bloated by about 25% by projects that add no value but are leftover from some other initiative.
How to cut designed waste
As you respond to COVID, chances are you will address some of these costs but by no means all of them. To do so means redesigning your operating model so that it is appropriate for the times we live in. And changing the way you work. Here are three ways to do it.
Understanding waste better
Senior teams do not know enough about the costs that they have ultimate responsibility for.
For example, if they have promised the board an FTE reduction, then the bloated costs of contractors is not something they are counting. If they have been told to introduce a SaaS platform, they don’t necessarily police all the costs or decommission existing internal platforms...
Designing for value
Companies design for timescales and budgets rather than for value and as a consequence miss all three.
Designing for value means breaking projects or product initiatives down so that you deliver value every month. We always design that way and yet clients can find it abrasive. That’s when you know they have a poor value-seeking culture. Preach value. But real, frequent value.
Most companies, really MOST, fail to create an opportunity for legacy retirement. For example, one of our clients had 60+ platforms supporting one product line. Example two: everywhere we go we see extraordinary project dependency confusion that results in people appearing busy but having little constructive work to do.
They also suffer from having no product, service and IT legacy retirement planning. They complain about legacy but nobody has the job of retiring it.
Process simplification is just as important as legacy retirement. Legacy accumulates through each transformation. That leads to many broken processes, particularly at handovers.
Our approach to that is the Transformation Sprint. Four weeks to identify the ten most damaging problems you face and a solution. The answer is almost always an operating model change, coupled to new ways to work that prioritise frequent value delivery.
If you don’t replace complexity thinking with the value that simplification brings, you shouldn’t be surprised if your programs, projects or even your business fails. There has never been a more important time to think about this.