Leading by Omission - Ricardo Semler Videocast

Ricardo Semler, CEO of Semco, is one of the most interesting leaders in business today. His company is not just extraordinarily successful, it is also a world class leader in workplace democracy. Ricardo Semler is one of the world's most innovative business leaders.

This videocast is from a lecture at MIT. It is 48 minutes long, but well worth watching. Semler is a very good speaker and he has a message worth listening to.

I strongly recommend that you read his book Maverick.

Here is a link to the original page where the videocast was published.

Exchanging Bricks for Jade at Business Network International

Last Friday I visited the Business Network International (BNI) team Draken (The Dragon) in Gothenburg. I have made a couple of visits to other BNI teams before and it has always been interesting experiences.

BNI is a business reference network. A BNI team in the network consists of up to 40 people. The group meets once a week for the purpose of exchanging business references.

What makes the teams work is that each individual represents a different kind of business. A team may have only one car salesman, one hairdresser, one IT service provider, one accountant...

An IT service provider never has to worry about an accountant stealing her business, or vice versa. On the other hand, the accountant might have customers who need IT services. The IT service provider might know of a company that wants to lease cars, and so on.

BNI team members provide each other with information that is of little value to the sender, but of great value to the receiver.

This is of course a feature of all trade. If you buy a bar of chocolate, you buy it because the value of the chocolate bar is greater to you than the value of the money you must spend to get it.

As with all business transactions, the exchange of business references in a BNI team works better the greater the difference in perceived value by the team members.

This may seem way to obvious to be useful, but it is often the obvious things we miss. Finding something you have that is of low value to you, but of high value to someone else, so that you can trade it for something of value to you is a basic negotiating technique.

For example, the thing that brings new people to BNI is the promise of business references, but once you visit a team, you will discover that a considerable part of the value is the sense of community within the team. Of course, that sense of community also drives the sharing of business references.

BNI teams have a fixed meeting agenda they may not deviate from. The same agenda is used by BNI all over the world. Within the framework set by their meeting agenda, there is a lot of freedom. It is a great example of complex, intelligent behavior, that arises from a simple set of rules. You can see the same thing in an Agile (Scrum, XP, etc.) software development team that works well, or in some network based companies, like the famous Semco, W.L. Gore & Associates and Richard Branson's Virgin Group.

Managers and management consultants are like chess players: We look for patterns. When I first visited BNI I recognized the strategical set up as Exchanging Bricks for Jade, one of the Chinese 36 Stratagems. BNI calls the idea Givers Gain. One of the things givers gain in the BNI community is trust. Trust is valuable currency, because if people trust you, they will give you references.

Here is a diagram showing how it works:

Thus, the more you give, the more you gain. It is a nice reinforcing loop. I do like the setup. A lot. BNI does of course add a lot of tweaks to the basic process in order to strengthen the reinforcing loop above.

10 Rules for Better Management

It is easy to get so caught up in managing messes that one loses sight of the basics. Here are 10 simple rules that I have found useful:

• The Interaction/Isolation Principle: Strengthen interactions with allies (customers, employees, subcontractors, partners, etc.). Isolate opponents (from customers, their own employees, from partners, from subcontractors, etc.)
• When you manage a unit (team, department, etc.), watch the queues!
• When you manage several units (team members, collaborating departments, project portfolio, etc.), manage the interactions between the units, not the units themselves.
•  Both Theory X and Theory Y are self-fulfilling. Therefore:
• When you manage people, use Theory Y!
• When you design the organization (structure, rules, etc.), use Theory Y! (Read up on Gore & Associates, Semco, the Virgin Group, Whole Foods, Google, and somewhat surprisingly, the U.S. Marine Corps.)
• People overestimate themselves and underestimate other people. It follows that:
• You are not as smart as you think you are. Therefore, from time to time, you need help!
• People around you are smarter than you think they are. Therefore they are more able to help you than you think they can. (Theory Y says they are also willing - you just need to ask politely.)
• Read at least 4-6 serious management books each year.
• Practice what you read.
• Integrate theory and practice by reflecting on it.
• Learn to read frickin' Process Control Charts! And why!!!
• Learn Little's Law and it's implications!

The Cost of Coffee - How Built in Brain Rules Mislead Economic Decisions

I had promised myself not to blog today (too busy working), but just a few minutes ago I saw a prime example of cost world thinking gone wrong:

I am sitting in a coffee shop, drinking coffee. Awhile ago, a family sat down at a table close to mine and began discussing a rather peculiar management policy in force at this shop: 30-60 minutes before closing, the shop won't brew more coffee if it runs out. This is to ensure that no coffee, and thus no money, is wasted.

If you run your business from a Cost Accounting perspective, a policy like this makes sense. Most companies have policies like these, policies designed to minimize cost. When the financial crisis struck in 2008, cost cutting was the method most companies used to balance the reduction in Net Profit. Stands to reason, right: Net Profit = Throughput – Operating Expense. Therefore, if Throughput drops, the only recourse is to reduce Operating Expenses.

This reasoning is simple, analytical, easy to understand, and totally daft!

I am sure you have figured it out already: The profit from selling a single cup of coffee will pay for making an entire pot. Even more important: Not selling a cup of coffee will annoy customers. They may go elsewhere.

Once lost, it may be difficult to gain a customer back. Think of the stores where you do not shop, the suppliers you no longer use, because somebody else provided better service. If one of those places improved, would you start using them again? Probably not. First of all, how would you know about their improvement? You no longer use their services. Second, even if someone you trust tells you about them, you have now built a relationship with someone else. That bond might be difficult for someone else to cut.

In the case of the coffee shop, just about everyone can figure out that their policy is a bad one except for the coffee shop owner. If she understood, she would change the policy.

What is it that makes the problem difficult to understand for the coffee shop owner? There are two likely contributing factors:

1. Cost focus by education and culture. Most people believe cost is always the most important factor to control. Even if they understand better, they have a deep rooted belief cost is the only factor they can control.
2. Loss aversion. The human brain has evolved to make very quick decisions about very simple things. To do that the brain uses simple decision rules. One of those rules is that it is better to hang on to what you have got, rather than risk it to get more.

Of course, Loss aversion, the decision rule in the brain, shapes and reinforces the cost focus in our economic models and in our culture.

Raising the amount of money involved does not necessarily make us more inclined to reason about the situation. Instead, it raises the amount of stress involved and makes us rely even more on our built in decision rules.

Once the decision has been made another of the brain's decision rules, Confirmation bias, sets in. Confirmation bias makes us look for evidence that confirms our decision, regardless of whether that decision was a good one.

So much for individual thinking, but it gets even more difficult to calculate the cost of a cup of coffee because of Groupthink. Humans are social animals. We are so social that belonging to a group is often more important to us than thinking critically about decisions.

Groupthink is a strong social force. It is the reason why people tend to stick with the same political affiliations as their relatives. It is one of the reasons why we got into the financial crisis of 2008. It is also the reason why it is unlikely that a coffee shop employee will suggest to the boss that she should change the policy about not brewing coffee the last hour before closing the coffee shop. An employee that did that would risk losing his boss's approval and jeopardize his standing within the group.

Note that the employee might feel this pressure even if the employer would be delighted to have input from the employee. It is one of the built-in brain rules.

There are plenty of techniques for reducing the pull of the decision rules that mislead us. The problem is that to get someone to be interested in learning to use these techniques, we need to appeal not to the part of the brain that reasons, but to the part of the brain that makes decisions using the very rules we want to teach them how to work around.

Then, and only then, can we help people figure out the true cost of a cup of coffee, or the true cost of more important business decisions.

Looking for Trouble!

I am looking for trouble! That is, I am looking for clients that can present me with difficult, messy, horrible challenges.

Forget the easy stuff! I want to help solve the worst problems you have:

• Is it just not fun to be the boss? Is your work draining the life out of you? I have met plenty of smart, very intelligent managers at all levels who are  drowning in their work. Too many problems, not enough solutions, day after day. I've been there. I clawed myself out of the mess the hard way. Along the road, I found out how to make managing fun. I can show you how I did it, and help you find your own way. Let's be clear: It will not be an easy road. There will be plenty of challenges. I can promise you a lot of fun though, provided that you are willing to seriously try a couple of new things.

• Do you have a great vision, but your organization just won't budge from its set course? I can help you find the pivot points you can push to make your organization turn. Part of my value proposition to you, is that I stay around and help you push. My job is done when you succeed.

• Are the departments in your company at each other's throats instead of collaborating? They may be Accidental Adversaries. I can help you resolve the problems.

• Did you lose some of your best people during the downturn? Now that the economy is looking up, you may be left behind, because you no longer have the key people you need. I can help. Even better, I can help you set things up so you your organization is a lot more resilient when the next recession hits.

• Want to increase net profits, but you do not have the cash on hand to make heavy investments. I can help you. Most companies perform far below their potential. I can help you find the hidden capabilities and work with you to unleash them.

• Are you providing what your customers say they want, but when you show it to them they turn around and buy from a competitor? Common problem, but it can be fixed. I can help you do it.

There are a few things you should know up front:

• I screen clients. I do not take on a job unless both you and I believe I can add real value. That means you must be prepared to work with me, first on a preliminary diagnosis, then on determining the cost of the problem. The problem must cost something in terms of your objectives, so that it is worth solving for you. 

If my talents and experience does not suit the problem, I will pass on the commission. If I know someone with experience better suited to solving your problem, I will refer you to them.

• I always have clear objectives. That means you and I will construct a simple mission statement in the form of an Intermediate Objective Map. This is a simple thing to do. Often, it takes only a couple of minutes. However, it is very important for the quality of my work. 

We will also set limits, that is, determine in broad terms what I am not allowed to do (at least not without talking to you first). For example, I have worked in situations where I cannot interview certain people, and where certain information must be confidential.

If we discover the objectives should change, no problem, but we do construct a new Intermediate Objective Map.

• I have one boss. Companies are fraught with people who have conflicting agendas. I do not split my loyalty. We determine from the outset whom I work for, and I report to that person or entity (such as a board or steering group) only.

• You must be prepared to participate in finding a solution. Depending on the problem, participation can range from reading weekly reports and having lunch once or twice a week, to participating in a hands on course, to leading a change team. There are three reasons: 
• There is a lot of useful knowledge inside your head. I will need access to that knowledge, and your insights, in order to fully understand the problem.
• You run your organization. I merely help, and for a limited time at that. You must be involved in solving the problem, because sooner or later you must take ownership of the solution. The earlier you do that, the easier it will be.
• You should not become overly dependent on consultants like me. My ultimate goal is to help you achieve your full potential. If you need me to solve the same kind of problem twice, I have failed. (Working with me again for the fun of it is a different matter.)

• I work according to three simple rules:
• Treat the customer as a highly valued friend. I will work for you to the best of my ability. I will keep your confidences. I will be honest with you, even if the things I have to tell you are difficult to hear. Part of my job is telling you the things no one else in your organization can, or dares.
• Go for Win-Win Solutions. I operate on the premise that there are almost always win-win solutions.
• Go and find out for myself. I will think for myself. It is part of who I am. It is also a major part of my value to you. I can offer you a different perspective because I am an outside observer of your business. If you want different results from what you have, a different perspective is what you need.

Make 2010 your year! Email me, or call +46 708 56 23 65.

The Cost of Queues

Lean practitioners and scientists have known for many decades that cost effectiveness isn't all it is cranked up to be. Cost effectiveness is a measure of how much of the capacity of a resource is utilized. The resource may be a person, a computer, an aircraft, a machine in a workshop...

Most people believe that people should be as close to 100% cost effective when they work. That is, their capacity should be utilized 100%. And yet, for other kinds of work, it is well understood that utilizing a resource 100% is a bad idea.

Take your computer for example. If you run one application, the computer is responsive, you can work very fast. With one major application running, your computer uses only a fraction of its capacity. If you decide to run your computer in a more cost effective manner, and utilize its maximum capacity by running a large number of programs at the same time, you will find that the computer slows down and becomes unresponsive. At 100% capacity utilization the computer is frozen. Nothing happens, even though the processor runs full tilt, and the fan is straining to cool the system.

This effect is not specific to your computer. It is a result of how processes work. When capacity utilization of a resource increases, there will be a queue in front of that process. Due to variation in arrival times of new tasks, queues will begin to build long before capacity utilization reaches 100%. The same thing happens in processes where people do the work. (We actually treat machines better than people in many cases. For example, programmers know they should not overload a server, but their project manager often does not know how to protect the programmers from overloading. Nor do the programmers understand the consequences of overloading themselves.)

Queues will increase lead times because tasks will have to spend time waiting in them, rather than being processed by one of the resources in the process.

If you try to become more cost effective by reducing capacity, and thereby capacity cost, all will be well at first, from an economic point of view. (The people who are let go are usually of a different opinion.) The catch is that this will increase the queues in the system. This increases lead times. Consequently, cost associated with lead time will also increase. (In manufacturing there is also a considerable storage cost due to increased inventory, but we will ignore that for the purposes of this blog post.)

A diagram of the relationship looks something like this:

The diagram may of course vary in shape depending on several factors, including how much variation there is in the system. (There are several disciplines, like Six Sigma, that focus on optimizing processes by managing variation.)

What the diagram says is that beyond a certain point, pushing for more cost effectiveness increases total cost. In his book Flow, Donald Reinertsen reports that software developers are often loaded to about 98,5%, which means the increase in queueing cost is far greater than the savings in capacity cost.

Here is a Current Reality Tree showing how overloading people and other resources will affect Return On Investment of a process (Click the diagram to see a larger version):

Most managers have practical experience of projects that just do not get anywhere, or production lines where orders are often delayed. Yet, most do not stop to think about the cause of the problems, and how to fix it. This is a pity, but it is of course also an opportunity for those companies where managers, especially top executives, are seriously interested in solving the problems. If they do, they can leave competitors eating dust.

One would think that most companies already are very competitive, but the truth is that they are not. Many are choking themselves by being to cost effective. this causes more damage to them than their competitors ever will.

Another thing to consider is that large queues slow response times. Today, when the ability to respond quickly is becoming more and more important, not understanding the cost of queues can easily kill a company.

New Tempo! Supplement – Communications in Network Organizations

I have published a new Tempo! supplement on Scribd. As usual, you can download a PDF version from the Scribd page.
Tempo! Communications in Network Organizations

Solution To the Management Challenge

A couple of days ago I posted a management problem. Here is the solution:

The CEO brought you in to fix a sudden drop in sales. You got the following sales data:

and a time series graph based on the data table:

The key to solving the problem is being able to interpret the data correctly. The CEO told you there had been a rising trend in sales, followed by a disastrous drop, but is that really true?

You would not expect sales figures to be exactly the same each month. Sales figures are subject to random variation just like almost anything you measure in a business organization. The question here is whether the variation you are looking at is random or not.

You may be looking at the results of two systemic changes, one that is improving the system, and one that is making it deteriorate. On the other hand, what you see might also be random fluctuation. It is possible to figure out which by using a process control chart. (There are other tools that can do the same thing. I use process control charts in combination with EWMA charts to increase the reliability of the data analysis, but using only a process control chart suffices for this example.)

A process control chart has three parts:

• A time series chart, similar to the one above, but with three important additions, lines showing the average, the upper and the lower process limits.
• A moving range chart showing the change between consecutive data points. The chart has lines showing the average and upper range limit
• A data table showing the source data. This is important, because it enables anyone to check the charts, and to construct other kinds of charts if necessary.

I won't repeat the table, but let's look at the other charts. First the time series:

OK, we are close too, and even slightly outside the process limits. With data points this close to the limits, it is difficult to be certain. Let's look at the moving range chart:

The moving range chart says we do not have a change in the system, just random variation.

At this point, we do not have a clear cut case, but the right thing to do is bet on random variation. The CEO told you there has been "the occasional hiccup" before, which may indicate that there was quite a bit of variation in sales the previous year too.

Of course, you can and should ask for the sales figures of the previous year to make sure.

Let's cut to the chase. Here is raw data for both the previous and the current year:

Here is the time series:

The current year does not look so special now. Let's look at the moving range chart to make sure:

Compared to the roller coaster ride last year, the current year was positively boring. There were no systemic changes though. (This in itself is a bit strange: No seasonal variations, no other fluctuations in the market. It could be that there is a very steady market for thingamajigs, or it could be that the data was generated using a very simple computer simulation of a sales department. You pick the most likely alternative;-)

The CEO was happy with the average sales figures. What you need to do is convince the CEO that the past three months sales figures are just a run of bad luck, like the five months before were just a run of good luck. No one has done anything exceptionally good or bad in either case. At least nothing that has had a significant effect on sales. (We assume that the market has not changed significantly.)

Problems similar to the one described here occur very often. Managers interpret random variation as a sign that a process has changed in some way, and demand action, mete out punishments, or, if the company has had a bit of luck, reward people for doing exactly the same thing they have always done.  When such actions are taken they are more likely to harm than do good.

The opposite is also common, there is a significant change for the worse, but like a frog being boiled in slowly heated water, nobody notices the change until it is too late. Also, slow but consistent improvement is liable to go unnoticed.

The same kind of problem crops up very often when companies start using Key Performance Indicators of various kinds. KPIs are great, but there are two things you need to get right:

• You need to pick the right ones.
• You need to be able to interpret them correctly

Strategy Maps, or my favorite, Intermediate Objective Maps, can help you with the former. Process control charts and EWMA charts can help you with the latter. Unfortunately, most companies don't bother. Some outsource the whole KPI development process, paying consultants to measure the wrong things and present the data in confusing ways, like the original time series diagram in this little exercise.

A better way to do it is to hire a consultant to coach you and work with yourself and your people, so that you can develop a set of KPIs you understand and trust. (You can also do it yourself, read up on the techniques and practice a lot. Being a consultant, I would much prefer it if you contact me. It is your choice though.)

You might wonder what a top rate consultant would have done if there had been a significant change. This is what I would have done:

• Get hold of all relevant quantitative data I can, and do the same kind of analysis. (Such data might be the number of sales calls per week, percentage of sales calls leading to closed deals, etc.)
• Run a Crawford Slip brainstorming session get the qualitative data I need to figure out what the problem is, and engage the work force in solving the problem. I would start with the sales department, but it is quite likely that I would involve other parts of the organization before I am finished. (For example if thingamajig sales had dropped because thingamajig quality had dropped.)
• Use The Logical Thinking Process (TLTP) to take the collected data and figure out the root causes of the problem, and how to deal with them. This process should involve company executives. Otherwise, it will be difficult to get the executives to trust the results.
• Execute the project plans that are the result of the TLTP process.

I did not provide enough information to find specific root causes in the example, which was a tip-off that there were no root causes to be found, which in turn was a tip-off that the problem was the perception that there was a problem, not a problem with the sales process itself.

Oh, and just in case you enjoy solving management problems, here is a book full of them. (Though of course not the one I have described here.)

I intend to write more management challenges, so I'd would like your comments.