Too often business performance improvement initiatives result in disappointing outcomes. While most initiatives, such as today's popular Six Sigma and Lean, actually do provide enhancements, the results are far below expectations. Typically, people believe that initiatives fail because business leaders do not stay engaged in the improvement process. There are three key missing links that when addressed can help encourage leaders to take a more active role in ensuring the success of performance improvement initiatives. First, performance improvement initiatives need a clear definition of savings. Second, there needs to be more focus on strategic rather than improvement opportunities so that leadership stays engaged. Third, the correct metrics need to be used that relate to critical improvement opportunities and important fundamentals. Finally, the last missing piece in any improvement initiative is smart leadership.

As Published In November 2006

Missing Links in Improvement Initiatives
By Michael Bremer

How can you have US$1 million in savings but no change in your P&L?

Take a look at business performance improvement initiatives implemented around the world over the last 20 years. Whether it's Total Quality Management, Cost of Quality, Time-Based Management, or some other initiative, you'll find that the outcome is often disappointing. When asked, "Why did this improvement initiative fail?" people often respond, "Because our leaders are not engaged."

In reality, organizations almost always benefit from implementing these improvement programs. But the actual results fall so far short of expectations that companies rate the initiatives as failures more than 70 percent of the time, according to studies by McKinsey, Bain, and other management consultants. As a result, these initiatives quietly improve operations even as they disappoint expectations.

To close the gap between expectations and improvement realized, a better question is this: "How do we keep leadership engaged in businesses performance improvement initiatives that usually start out with active support?" Based on my organization's experience as practitioners and coaches for Lean/Six Sigma performance improvement, we believe there are three key missing links that cause this gap. When addressed, they will move leaders from a passive to a more activist role.

Missing Link No. 1: No Clear Definition of Savings

Improvement efforts lose credibility when their champions report savings but the company's P&L does not change. Four savings categories exist:

• Future revenues, directly traceable to the bottom line. They come from margin growth or increased volumes from specific sources—existing customers, existing or new products, new customers, and revenue acceleration. These savings are forward-looking, new-opportunity dollars.
• Hard-dollar savings, which demonstrate a clear, direct—and traceable—change in the financial results. These savings come from a net reduction in resources used—materials, people, outside contractors, transportation costs, elimination of defects, lower cost of quality, and so on. These savings are typically backward-looking or involve learning to do something at a lower future cost.
• Soft savings, which come from projects that are not directly traceable to the bottom line, but should yield a business benefit over time. Lean savings typically generate soft savings from faster cycle times, capacity improvements (when the increased outputs cannot immediately be sold), faster transaction processing, reductions in rework (without a reduction in inputs), improvements to a process that is not the bottleneck operation, and so on. These are "potential" but not yet realized savings. Soft savings require action from leadership if they are ever to be converted into hard dollars.
• Cost-avoidance savings—which are tough to quantify. If an organization develops a series of improvements that permit it to avoid a major capital expenditure, it may have cost-avoidance savings, but these are costs that were never actually incurred. "Prevention investments" to avoid safety problems, disaster recovery systems, and governmental compliance issues all fall into this category. While they may be critical preventive measures, they should not be included with project savings because they do not result in a change when comparing the current year's P&L to the previous year's.

Unfortunately, when reporting results, organizations often combine these four types of savings under one all-encompassing savings column. This undermines the effectiveness of the word savings because many of the dollars will have no perceivable impact on an organization's P&L.

Missing Link No. 2: Strategic Versus Improvement Projects

Most organizations have numerous opportunities for improvement, but there is a tendency to deploy resources on something other than strategic opportunities. If you're trying to keep your leadership engaged, this is a killer. Leadership ultimately loses interest in tactical improvement activities because its attention is rightfully elsewhere.

What Is Lean—or, What's Wrong with Batches? Traditionally much work is done in batch fashion; one person checks a pile of insurance claims for certain information on a form, then hands the pile to another person to check something else. It's the same in manufacturing. We make a pile of parts. Those parts are handed off to the next workstation, where someone adds the next component to the pile of parts. Lean introduces the idea of flow. Once we start working on something, we continue until it's complete. We don't start work until the customer needs it—this is the so-called pull method. Simple analytical tools are used to cut away waste. Organizations do not spend time working on things for which there is no current customer demand—and this is true for both internal and external customers. The argument for the old way of doing work was to achieve economy of scale. But the reality has been that we never have the parts the customer wants, or, in the case of administrative processes, it seems to take forever to get the documents through our system. In both worlds, there are mere minutes of value-added work being done. So it takes days, weeks, or even months to complete the work. By focusing on flow, Lean tries to drive out the waste and inefficiencies in these processes. Lean processes allow the "voice of the process" to be heard—and to be easily visible.

Here's a real-world example of this dynamic. A Wisconsin manufacturing company had launched both Six Sigma and Lean enterprise improvement initiatives. They had 50 projects underway. The leadership team attended a one-day champion's training where this question was asked: "How many of the improvement projects underway were discussed at your recent strategic planning retreat?" The answer was none. They had spent their time talking about three issues critical to the future of the business: a startup in China, new environmental regulations coming out of Europe, and a planned new product. When asked if these issues were more important than the 50 projects, their response was, "Yes!" They ended up redeploying their resources as a result of that insight.

This shift had several major benefits. The company had the new China venture up and running 50 percent faster than originally planned. The leadership team also learned about the improvement methodologies the company was using as a result of managing the project in China. This lesson carried over to the other improvement projects underway in the organization. It upgraded the entire "improvement process."

Missing Link No. 3: Wrong Metrics Are Used

Organizations have many metrics, yet they still do not have the right ones. Consider the following story from baseball, a metrics-driven industry that's more than 100 years old.

Several years ago, Michael Lewis analyzed the performance metrics used by baseball teams and wrote a book about them. As he explains in Moneyball, Lewis tried to predict how often a team would win based on baseball's traditional measures. Existing statistics, focused on output measures (home runs, hits, pitches thrown), could not accurately predict a team's win total for a given season. But Lewis did discover a direct relationship between wins and a few key process metrics (see table below).

This discovery was powerful—an industry with a long history and visible daily-performance results was not using the right metrics, or leading indicators, that correlate to success. If an industry with such obvious wins and losses doesn't have it right, what does that indicate about the rest of us? Perhaps we have major opportunities to improve our use of metrics.

Your competitive climate has probably changed over the last 10 years. Yet most business performance measures have not changed for decades. How could they possibly focus on the important issues for today's business environment? Metrics should relate to key improvement opportunities and important fundamentals. The fundamentals—product quality, on-time delivery, and so on—may not change. But improvement needs—such as new strategies, cycle times, and competitive targets— do change.

Organizations need to focus on process metrics or leading indicators that will guide people toward desired results. In a healthy system, 25 percent of the metrics may change every 18 to 36 months. Information systems with built-in business intelligence can play a critical role here, helping to determine which metrics best correlate to desired results in areas such as customer relationship management, enterprise resource planning, and supply chain management.

Who's on First: Back to Leadership

Smart metrics are important, but a company also needs smart leadership. One of the primary purposes of leadership is to create an environment where employees can do their best work. Though the acclaimed management consultant Peter Drucker introduced this idea years ago, many leadership teams still do not see it as a high-level responsibility.

What Is Six Sigma—and Why Should You Care? Six Sigma teams use a problem-solving process called DMAIC (Define, Measure, Analyze, Improve, and Control.) Six Sigma emphasizes variation reduction and root-cause analysis. In the interest of speed, organizations often jump from Define to Improve and then implement a new fix later when the first one does not quite work out. Six Sigma places strong emphasis on measurement. Under Six Sigma, teams gather evidence or data about the problem/opportunity and then fix the root causes of problems so that they do not resurface. Six Sigma provides tools to reduce undesirable variation. Motorola, GE, and Allied Signal have elevated Six Sigma and now use it as a management system, which boils down to making better decisions by gathering an appropriate amount of key information. Six Sigma allows the voice of the customer and the voice of the process to be better understood.

In a typical organization, two to three years after implementing a major business process improvement methodology, the initiative will no longer focus on issues critically important to the leadership team. So the leadership team will lose interest. Obviously, if leadership expects to see a more meaningful result from its current improvement endeavors, then something different needs to happen.

Getting Down to Business

To maximize the results of your improvement initiatives, you need leadership to address these three missing links. Project team sponsors and leadership teams have specific roles and responsibilities that must be defined and carried out. For example, let's consider Measure, the second step of the DMAIC process in the Six Sigma methodology. A project champion or sponsor should do the following:

• Ensure the business relevance of the metrics: Are they meaningful?
• Evaluate the team's data-gathering plan: Does it make good sense?
• Review and understand the baseline results: Was evidence gathered about the extent of the problem/opportunity?
• Positively challenge the team to push thinking: How can they move beyond mere incremental improvement?
• Communicate team progress to the leadership team and key parties.
• Get input from people not on the team.

You should also ask specific questions as a team progresses through this phase:

• What critical-to-quality indicators were identified, and how does the team know whether the customer is affected by them?
• What critical-to-process indicators are important to the business?
• What are the most-important leading indicators that ensure future success?
• How has the team ensured that the data collected is representative of the process?
• What have they learned about the source of the variation from their data collection? Is the process in control?

Sometimes these questions are specific to the methodology used—but all critical improvement initiatives require an activist role from the project sponsors and leadership. Most organizations have an endless list of improvement opportunities. Leaders who take action to address the above issues begin to think more deeply about their organization and develop what Dr. Edward Deming called "Profound Knowledge." Organizations need this level of knowledge and insight in order to prosper in the global marketplace.