Walking The Tightrope

By CIO Update Staff

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There are two fundamental ways in which any organization can reduce its costs: cut operating budgets or improve processes. For a company to be successful, it must nurture both methods and keep them in balance.

Too much process and not enough budget controls leads to a lack of focus, poor priority-setting, financial chaos, and, more than likely, a river of red ink. Too much budget control and not enough process work creates a rigid, change-averse environment, stifles creativity, and leads to stagnation.

Can't Teach An Old Dog ...

Unfortunately, as organizations grow and mature, they tend to devote more and more attention to budget controls and less and less to process innovation. Dictatorship of "the numbers" is a proven formula for a lengthy and painful decline, as the organization will become more and more inflexible and unresponsive.

Successfully walking the tightrope requires both methods to be in balance.

Companies that embrace the dogma of "we don't do anything without an ROI" are going to gravitate too far toward financial dictatorship, because the return on process investments is often hard to quantify at the outset. Process improvement activities are fundamentally R&D investments, i.e., trying something new or, at least, trying to do something in a new way.

These activities might be a great success or a total waste of time and money, and nobody knows which will be the outcome when the work begins. Since the costs of these activities are usually clear and well understood up front, given any sort of pressure to reduce budgets, managers will toss process improvement initiatives overboard first, because any benefits from these initiatives are speculative and distant, while the costs are real and right now.

Persuasion & Accountability

So how do we persuade our companies to try new stuff, while still keeping enough of the financial discipline that helped bring us the success we've had up to this point? The solution is to manage routine, core, day-to-day business operations separately from process improvement activities. Having a separate budget for process improvement activities is a good way to keep from falling off the tightrope.For core activities, the traditional financial management approach is very effective, especially if the underlying processes are mature. If the budget says your department should be able to produce widgets at a cost of 10-cents each and you come in at 11 cents, you are accountable. The CFO will want to know why, especially if your predecessor consistently made the 10-cent cost goal. Conversely, if you figure out a way to reduce cost to 9 cents, your year-end bonus should be favorably impacted.

Speculative Outcomes

But this structure is way off base for managing process improvement projects. These types of projects have speculative outcomes -- they might not meet expectations. And if you hold the project manager responsible for the outcome, very quickly you will have a culture where no one wants to take on a process improvement initiative.

Rather, you should hold the project manager accountable for organizational learning. If the new process didn't work, why not? Can we do it differently next time? Did we look at enough variations to do a valid test? Sloppy execution of a process improvement project, which will leave these and many other questions unanswered, is just as much a failure as the line manager who failed to produce the widgets for a 10-cent unit cost.

In addition to being accounted for separately from core activities, process improvement budgets must be sacred; i.e., the resources should be spent regardless of the state of the company or the economy. It is generally accepted cutting back on product development will lead to a long-term disaster from lack of new products; the old products will eventually run their life cycle, and competitors will take advantage.

It is the same for process improvement -- managers must not be allowed to throw R&D efforts overboard in order to compensate for bad numbers in some other part of their budgets. Every organization, no matter how old its mentality, will have loads of ideas for new things. Failing to spend the money means ideas are being suppressed by the culture. So just do it, and eventually the ideas will come out of the woodwork.

CIO's Value

Facilitating process improvement projects company-wide is an area where CIO's can add value. Since IT is almost always a major component of a process improvement initiative, you can provide support and resources to the business unit by managing the IT part of the prototype effort.

If the process experiment succeeds, you can help with the business case for the production effort and scope out the IT work necessary to support the rollout. The R&D resources are going to be scarce, and this means you must sometimes say "No" if, in your judgment, there are better projects or ideas out there. Just be sure you say so firmly and up front, so unrealistic expectations do not have a chance to germinate.

Without some discipline, most mature companies will gravitate toward skimping on process improvement activities in order to produce a short-term uptick in financial results. As CIO, you can provide a balancing voice within the senior management framework. All companies want to change and improve, but doing so requires a culturally acceptable process for trying new things (and failing sometimes, without getting hanged).

Because of IT's role in effecting change, you can help support, develop, and enhance such efforts. It may not do much for your company's earnings this quarter or next, but in the long run there is a no more certain formula for adaptability and success.

Ira Gershkoff is president and co-founder of C&I Architectures, a Rancho Palos Verdes, CA-based strategic IT consulting firm specializing in IT architecture planning, deployment, and change management. Gershkoff has spent the last 25 years focused on strategic and operational information systems and technology management in the transportation industry. He can be reached by phone at (310) 809-4889 or by email at igershkoff@ci-arch.com.