It’s Not Your People

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It’s your structure. Peter Schutz (1930-2017), former CEO at Porsche quipped, “the successful companies are those that get extraordinary results from ordinary people.” It’s not your people, it’s your structure.

Structure is the way you think about your company. That includes your business model, who you think your customers are, how you think they use your product or service, why you think they use your company vs a competitor. It’s your structure.

Organizational structure is way we define the working relationships between people. The first level is every person playing their role. The second level is the way those roles work together. It’s your systems. The way we think about roles and the way those roles work together determines the effectiveness of the organization.

Every company has people. Every company thinks their people are special (and they are). It’s the structure that determines the company’s success. Extraordinary results from ordinary people. It’s your structure.

Democratic Decision Making

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“Alright, let’s take a vote,” Ralph directed. I was sitting in the back of the room. I watched the hands go up in favor of Ralph’s plan. There was no dissent. Meeting adjourned.

Ralph was proud, no opposition, he picked up his stuff and strutted out of the room. And that’s when the truth came out. It started as a whisper, a snide remark, and then the piling on began. As it turned out, no one was in favor of Ralph’s plan.

“What do you mean?” Ralph said as I settled into his office.

“I don’t think your plan has a chance for success,” I replied. “As you left the room, I got to thinking, wondering if your plan had covered all the bases, in fact, if it was even the right decision.”

“But, everyone voted,” Ralph protested.

I nodded. “Do you think voting is the best way to make a decision?”

“Hey, it’s how we elect a president?”

I smiled and repeated, “Do you think voting is the best way to make a decision?”

“Well, do you have a better way?” Ralph challenged.

“I was just looking at your four alternatives. You know, there were two things that were absolute deal killers and the one you picked doesn’t meet the criteria.”

“What do you mean?”

“Think about it this way, Ralph. Put up a big chart on the wall and make a quick list of all the things that absolutely, positively have to be a part of the solution. Deal killers. Then make a list of all the things that are not absolute, but would be really nice to have. Now you have two lists, absolutes and desirables.

“Take your four alternatives and put them up against the criteria and see how things shake out.”

Ralph didn’t say a word. His eyes got wide. I could see him mentally checking his quick list. “I think I need to bring the team back in the room. I think they voted for a mistake.”

Appropriate Timespan of Goals

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From the Ask Tom mailbag –

Question:
I would like to roll out a goal-setting program for my team. Management by objectives (MBO) is a process where everyone in the company is required to set annual goals. I think it will go a long way toward results based performance.

Response:
The big failure of MBO is the focus on annual goals. If you look at the sequence below, you can see that MBO is appropriate for only a small slice of your workforce, and some of the most important goals and objectives are beyond two years.

Goals Framework and Timespan

  • S-V business unit president – longest timespan goals – five years to ten years
  • S-IV executive manager, VP – longest timespan goals – two years to five years
  • S-III manager – longest timespan goals – 12 months to two years
  • S-II supervisor – longest timespan goals – three months to 12 months
  • S-I technician, production – longest timespan goals – one day to three months

Goals and objectives should cascade through the organization starting with the longest timespan goals first, most often from the CEO. Each successive layer should have shorter timespan goals that support the goals from the layer above. You can also see, based on timespan, that longer timespan goals are more strategic (conceptual) in nature, and that as timespan falls below 3-4 years, those goals become more tactical, below 1-2 years, exclusively tactical.

While we have a general orientation toward marking our lives in annual timeframes, goals and objectives require a more specific orientation in the timespan of each role.

Leading Indicator

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“They missed it again,” Isla complained. “The goal was very clear. Sometimes, the team gets close, but last month, dramatically disappointing.”

“We’re already two weeks into this month,” I nodded. “You’re the manager, what are you going to do?”

“The team better brace themselves for another speech,” she replied.

“And, how are you going to build this speech?” I asked.

“It’s pretty easy, I’m going to copy the speech from two months ago. Better get in gear, chin up, pay attention, focus.”

I waited. “Focus on what?” I finally said.

“The goal, of course. They know what the number should be,” insisted Isla.

“And, the goal comes at the end of the month, you don’t get your reports for two weeks. Isn’t it a little late by then?”

“I suppose I could get my reports out earlier,” Isla floated.

“Right now, you have a monthly number in mind, but by the time you get to the end of the month, no amount of effort will save you. And, yet, one week into each month, don’t you already know how the month will turn out?”

“You mean, like intuition?” Isla looked puzzled.

“Okay, let’s call it intuition. During the first week of each month, what is going on that gets your attention?” I wanted to know.

“You’re right. The number of sales appointments are always light during the first week, barely better the second week, improving by the third week, then crammed on the last week, right before we miss the target at the end of the month,” Isla’s eyes became distant, imagining the numbers in her head.

“So, in addition to measuring completed contracts at the end of the month,” I probed. “What would happen if you tracked sales appointments each week, while there is still time to impact closings at the end of the month?”

Don’t Judge People

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From the Ask Tom mailbag –

Question:
It’s been at least four years since you spoke to my TEC group. I was chatting with one of my members yesterday and he asked me if I knew whether there was a profiling tool available that indicates a person’s capability related to stratum level?

Response:
I had the same question in 2002. The answer was and still is, no. There are some consultants who propose to have a profiling solution, but I would question its validity. Anecdotally, most profiling tools have about a .66 correlation with reality. You might say, well, that’s not too shabby until you understand the flipping a coin has a .50 correlation. So, even if there were a psychometric assessment, its validity would likely not be any better than the others.

I don’t judge people. I’m not very good at it. So, let me propose a much cleaner method. Focus on the work. I don’t judge people, but I do judge the work. Work is decision making and problem solving. Focus there.
Problem Solving Methodology

  • S-I – Trial and Error, substituting a single variable at a time until something works.
  • S-II – Cumulative diagnostics, experience, best practice. Solving a problem by connecting to a best practice.
  • S-III – Cause and effect, if-then, required for a single serial system or a single critical path, root cause analysis.
  • S-IV – Multi-system analysis, how one system impacts its neighboring system, based on outputs and inputs, or capacity mis-match.

Look at problem solving required in the work. Then look at the candidate. Is this person any good at solving problems at that level. If they are, that is a clue. Design a project with embedded problem solving, see how they do.

Don’t overthink this level-of-work stuff. It’s not that difficult.

Scalability

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From the Ask Tom mailbag –

Question:
We have worked very hard to refine our core process. We believe we have the highest quality in our product offering and simultaneously have driven out extraneous costs. So, our customers enjoy a high quality product at the most competitive price. In spite of that, while sales growth is steady, our profitability suffers. Our gross margin is good, but by the time we get to the bottom line, the net is not so good. We have tried to cut SG&A, but that seems to make the net even worse. The more we try to take our company to the next level, the more frustrated we become.

Response:
You are in that No Man’s Land dilemma, too big to be small (amongst your competitors) and too small to be big (among those companies who have the biggest market share).

This is a classic integration issue. You describe your refined core process, which is clearly a step up to S-III. Your core system is well-honed, but scalability is elusive. Your core system creates your gross profit, right where it needs to be, but it sits among other systems that drag down the net profit. Companies at S-III have great products, but scalability only happens at S-IV.

  • S-I – Product
  • S-II – Process
  • S-III – Core system (sequenced processes, critical path)
  • S-IV – Integrated systems (multiple critical paths)

Your core system is critical, it is the product that your customers want, but it is now surrounded by other systems. Not only do these systems have to be effective and efficient, but they also have to be integrated together, and that is the challenge at S-IV.

Most core systems exist in a defined operation function, and are surrounded by a marketing function, sales function, project (or account) management, quality control, research and development, sustaining engineering, human resources, facilities and finance. You may have a strong core function in ops, but your company will never scale without the integration of all those internal systems.

Tactical vs Strategic

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From the Ask Tom mailbag –

Question:
You seem to challenge the name of our annual planning exercise that we call Strategic Planning. We are clear that exercise is conducted away from the office, off-site, so we are not dragged into the minutiae of the day to day. We do our best to be strategic.

Response:
One reason I know that most Strategic Planning Meetings are not strategic is by a quick examination of the action item list that emerges from the meeting. Rarely is there a single action, goal, objective with a due date further out than 12 months. There is nothing wrong with tactical plans, we need them, but don’t mistake a strategic session just because that is what it’s called.

Looking at Elliott’s framework –

  • S-I – 1 day to 3 months – Tactical
  • S-II – 3 months to 12 months – Tactical
  • S-III – 12 months to 24 months – Tactical
  • S-IV – 2 years to 5 years – Transition from Tactical to Strategic
  • S-V – 5 years to 10 years – Strategic

Some would push back that there is no point in planning 5 years out because so much will change by the time we get there. Exactly.

Tactical planning is short term (up to two years) where things are knowable and we can call them by name. Strategic planning is long term where things are NOT knowable, where there is uncertainty and ambiguity. Yet, in the face of that uncertainty, we still have to make a decision today. Foolhardy to make a tactical move without a longer term strategy.

The biggest problem is in the language of strategy. When things are uncertain and ambiguous, we can only speak in terms of concepts. And, we don’t practice speaking conceptually very often. Most CEOs and managers, given a problem to solve, want to fix it. Fixing is tactical, so before we even have the conversation, we have to rethink the discussion.

Five years from now, we will have customers, we just might not know who they are. We will have facilities, but perhaps not our current facilities. We will have employees, but we don’t know who they are, how many or what they may be doing. We still have to think about markets, infrastructure and human capital even when we don’t know what that might look like in the future. Four years from now, your five year plan will be your one year plan.

Out of Integrity

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“When we hired Lucas, we were clear about our values,” Alex described. “He’s been here for two weeks and we already caught him.”

“Can you be a bit more specific?” I asked.

“One of our values, integrity,” Alex replied. “We found him skipping the product testing step in quality control. Not on every unit, but he was only testing one in five.”

“How did you find that out?” I wanted to know.

“Easy. We have a reject rate of 20 percent. I know, I know, that’s high, but we had some raw materials out of spec lately, so our reject rate is higher than normal. Lucas’ reject rate was only 4 percent.”

“What did Lucas say?”

“He was proud. Said he thought a lower reject rate was good. Something about sampling. Pointed to his bonus on output. On that, he was right, his output was 16 percent higher than anyone else. But now we have to go back and re-test the entire batch.”

“The entire batch?”

“Yes, his lot output was mixed in with the other lots, so we don’t know which is which,” Alex answered.

“I have three questions for you,” I said.

  • How is your bonus system out of integrity with your quality standards?
  • How is your measurement of output out of integrity with the raw materials problem?
  • How does your management system blame an employee attempting to do his best, when this is really a management issue at a higher level?

    • Done or Done, Done?

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    “But, Paula promised to finish that report by Friday,” Francine lamented. “Now, I guess I will have to finish it myself, to meet the deadline for the Board meeting.”

    “So, your definition of finish and Paula’s definition are different?” I asked.

    “What do you mean, finished is finished,” she flatly stated.

    “I understand what you mean by finished and I understand what Paula means by finished. Your understanding is that the report is complete, legible, proofread for accuracy, math checked and double-checked. What you mean by finished is published. What Paula means by finished, is substantial completion of the report so she can go home at 5p.”

    “But, on Monday, we were in agreement,” Francine protested.

    “Yes, but you agreed on different states of completion,” I nodded. “What words could you, as the manager, have used to clarify the agreement?”

    Innovation Metrics

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    “We are going to start measuring innovation,” Samuel announced.

    I gave him a raised eyebrow.

    “Yes, we believe our competitive advantage is our ability to innovate and bring new products and variations of products to the market, so we think it is important to measure it,” Samuel added.

    “When you were working on your efficiency program, you developed metrics to determine improvement,” I said. “Why do you think your metrics worked well in those circumstances?”

    It didn’t take Samuel long to ponder. “We had a system, and we worked to make that system predictable. When we determined what we wanted to control, the metrics just fell into place. Any variation was quickly identified and eliminated.”

    “Pay close attention to your words,” I replied. “You were working in a system with predictability, control, seeking to eliminate variation. You now want to create a system of metrics to do just the opposite. Innovation is hard pressed to be systematic, certainly unpredictable, sometimes outside the bounds of control and designed to encourage variation. Just exactly how do you intend to measure that?”