Chapter 10 Too Many Trees Step Two: Decide What to Measure Measurement does the most good when focused on and used for the most important management processes in your organization and when designed to help you to succeed with your most important opportunities. This chapter shows you how to decide where to apply measurements, what to measure, and how to use the measurements to achieve exponential success. Having created an environment where the value of measurements is appreciated, your next step is to address how measurements can help your organization to improve the most. The best way to do this is to focus on a particularly important process within your organization or company, especially if you suspect there is a large opportunity to improve. Then you should determine what it is about this process you want to measure so as to make more rapid progress. If you are a laggard in developing successful new products in an industry where that skill is critical, the new product development process could be a fine place to start. If your service costs are high and service costs are a very important factor in profitability, you could choose your service process instead. Using the experience you gain in the process, you can later extend this approach to other important processes. Tend to Your Organization's Large, Low-Hanging Fruit Companies that achieve exponential growth are far better than others at measuring the processes they use where major positive benefits can be created easily. For the most success in this effort, you should be sure to consider emerging areas of opportunity that are likely to be created now and in the future. Since few organizations can accomplish more than a few changes at a time, be aware that employees tend to focus on areas with the most immediate personal benefit, such as salary increases or better working conditions. This focus can negatively affect the bottom line relative to areas with larger, long-term potential, such as better service for customers. In general, many high-potential payoff areas for your organization are being ignored now unless they are strongly linked to pay and promotions. There are thousands of processes that a company can measure. But again the tendency is to measure a process that is psychologically or emotionally satisfying and that is not truly important to success. Thus, precious capital is more likely to be spent on a larger parking lot for employees than on a process adding directly to profits, like reduced costs. Lots of mistakes are made in deciding which ideas are the best ones to go ahead with. In that an organization can only absorb a limited amount of change in a given period, change implementation capacity must be treated as a scarce resource. Thus, each change contemplated must be seen in terms of its relative overall importance. CEOs must be careful to focus on things that actually change behaviors in ways meaningful to company prospects. It is a fundamental error to zero in on areas solely because they enjoy the greatest internal support. Remember: Every worker's first priority is likely to be a pay raise. The wise CEO will crank in wish-list items of all the other constituencies--the customers, the suppliers, even the community. Certainly the shareholders. The firm then benefits through improved profitability. Ideas offering such benefits include, for example, new products and services, better pricing, and reduced costs--all fruitful areas for change. A basic tool in managing change is listening. Paraphrasing the real estate agent who stresses location, the successful executive knows that she must listen, listen, listen, As indicated, she must heed every relevant group, not just customers and company shareholders. She must hear employees and company suppliers, as well as the fifth constituency: people in the communities where the company has operations. To be effective, managers must talk to a representative sample of each group at a minimum, and, if possible, each manager should broaden the samples to best discover important areas of dissatisfaction and sources of delight. Change Is a Moving Target The process of making changes is an evolving one. Circumstances change over time. At one time U.S. auto quality was so poor that people sought out cars that didn't break down. The result was that many Americans bought Japanese cars. But when car quality improved in American plants, quality vis ý vis Japan was more or less neutralized as an issue. American car builders then shifted their focus to improving dealership repair service, which then became a major element in their success. But soon, as the newer, better cars became an increasingly large part of the vehicle population, the repair business part of the dealership issue became less important. Cars did not break down as they had in the past. At that point--and once again--styling became important. The Lexus lost ground because it did not look much different from Japanese cars that were far less expensive. Lexus rivals made much of this, too. Detroit dodged that bullet. Next, there was a major shift in demand. Americans wanted sports utility vehicles and minivans. We fostered the truck/minivan craze. Japan did not at first respond. You will fail if you keep measuring the same thing. As each shortcoming is overcome, customer cravings will move on to something else. The able executive will constantly shift what is measured, how important that measure is, and what actions are taken to reflect the current and likely future environment. Finding the Suggestion-Box Winners We find a startling success story relative to Step Two at one of the world's leading companies in the humdrum consumer products business, an industry not known for progressive ideas. The company had finished last in all the usually tabulated measures of success for investors--profit margins, profit growth, and return on investment. Management was appalled. It decided to put forth a company-wide effort to discover ways to become number one in these measures. Rewards were offered for the best ideas from employees. Being a large company, tens of thousands of ideas poured in. Judges were chosen who could appreciate and understand each idea from a technical point of view and know if it was a good one. The review team consisted of executives from every functional area: manufacturing, distribution, marketing, sales, research and development, purchasing, finance, and human resources. The reviewers were senior-level managers in positions to implement the ideas they selected. The reviewers were able to identify the good ideas right off the bat. There was absolutely no confusion on this point, no mystery about it at all. The good ideas had two characteristics: (1) They had enormous, immediate, and long-term benefits, and (2) they were easy to implement right away. Despite this awareness, the executives felt that it was important to consider all the suggestions, so they also pursued scores of ideas that they were convinced were of little, if any, merit. In fact, so many ideas were being worked on that the small number of really good ideas were not pursued as aggressively as they should have been. Once top management discovered the unfocused approach was hurting the good ideas, they added a special management process. Fifteen executives were assigned to the overall improvement process to make sure the top twenty ideas got proper attention. As it turned out, 1 percent of the ideas brought 95 percent of the eventual improvement. By pursuing those few good ideas, they got exceptional results. Had they worked on all of the ideas at once, they would have gotten almost nowhere. As a result of this focused effort, three years later the concern was in the number one position in the key financial measurements of the industry. Less Is More A similar lack of focus hurt a major retailing company in the late 1970s. This retailer's sales had been in retreat for years and the business was barely breaking even. In an attempt to turn around the flagging operation, management implemented 100 improvement projects, all of them scheduled to be finished in one year. But, unfortunately, a year later every single project had failed. Then management focused on improving the retail operation and selected the few areas where the biggest improvement could be made. They worked on four areas, none of which, by the way, were on the original list of 100 improvement projects. They learned that they had missed the highest payoff opportunities before. Soon, they were earning high profits. Have a Nice Day When there are multiple problems all screaming to be addressed, how do you focus effectively? One of the world's largest retailers faced customer gripes on every important shopping issue. The service was said to be poor, there were too few clerks to serve the trade, the merchandise was not well chosen, and the prices were considered high. As we have already seen in considering what are causes and what are effects, one of the major issues in problem solving is to know in which order to address the obstacles, not an easy matter when virtually every key element in the business is out of whack. What's more, the nature of all of the other problems will shift each time a single problem is successfully addressed. At each resolution point, it is important to reexamine the issues to be addressed. The retailer in question experimented differently (changing prices, goods offered, staffing levels, training, compensation, and store layout) in its stores throughout the world. It then measured which stores did well and which ones did not. The idea was to identify the conditions that seemed to be most associated with good results in the successful outlets. It was found, for example, that if shoppers were happier, the store earned higher profits. That part might seem obvious. Less obvious, perhaps, is that what first made customers happier was happier employees. What worked best for increasing the happiness of employee and customer alike was to allow the employees to spend the time needed to provide good service. Previously, store employees were kept busy simply checking out the customers. Many customers needed help in selecting items as well. The retailer studied staffing levels in the successful stores and how the workers spent their time there. To re-create the successful conditions in each store, help was hired as needed, and the efforts of employees who were unhappy, ineffectual, or misusing their time were redirected. Once the retailer knew employee happiness was the key to happy customers, the company created a wall chart for the clerks in all stores. Each employee was told to come by and note what actions or factors improved their attitudes. Within weeks everyone understood the relationship of how more staffing could create happier employees and customers, and, thus, better results for the shareholders. In such an improvement plan based on measurements, employees have to understand the effects of one part of the system on the rest so that they can work on the right elements. The measurements need to be in a very simple form and fully disclosed so that people can gauge the impact of the measurements. This type of system creates a valid understanding of what needs to be done. One reason infants learn to walk is because they see everybody else walking. They persist even though they keep falling down. They have to observe so they know that what they must work on is putting one foot before the other. We say we need higher profits. But we do not usually get that by firing lots of people. We get that by getting everyone focused on the right areas to improve. After discovering that customer happiness was related to employee happiness, the retailer found new ways to improve profits. For one thing, it changed the performance measure, setting higher goals on the amount of goods people bought when they came to the store. Shoppers said they would shop and buy more if the outlets offered women's clothing in greater variety. Management obliged. The result was more purchases per customer and per store. Profits, which were already rising, went up even further. This retail company has now done several rounds of such analysis. The company went from having its worst year in history to its best year ever in profits. But attitude was key. The company might not have sold more women's clothing if unhappy clerks gave poor service. The Elevator Stall Can Cool Your Scrambled Eggs It is not easy to give better service if a company is unaware of why service is falling down. Consider what happened at a major hotel chain. This sophisticated chain had aggressive initiatives for solving problems. It sought customer comments through guest complaint cards and by using direct interviews. Management learned that guests were dissatisfied with the hotel's room service. It took too long to get breakfast to the room even if the guest left a breakfast order on the door handle the night before. The chain gave this complaint top priority. It added more people to deliver room service. It even added to the hotel kitchen staff. But the situation got worse, not better. They examined the process further. They checked inventories to be sure they weren't running out of eggs or other breakfast food items. They counted the number of deliveries made by each waiter, noting the elapsed time from the moment an order reached the kitchen to the minute that the order was delivered to the guest's room. Wait! They were on to something here. Deliveries took far too much time. The hotel management then asked the room-service waiters to talk about all the things they were doing and what problems they faced in the process. With this systematic process, the hotel chain discovered the bottleneck in short order. It turned out room-service waiters had to wait for up to eight minutes for elevators to arrive at the kitchen or the guestroom floor. Further checking revealed that housekeeping was delivering sheets and towels during high-pressure times on the elevators, e.g., the breakfast rush and when guests were leaving. Since housekeeping had to unload large amounts of linen to each floor, individual housekeepers kept elevators stopped while the linen was unloaded. Once the elevator stall was identified as the problem, housekeeping delivery schedules were changed. Room-service complaints dropped to near zero. As so often happens in organizations, a key issue, in this case a turf battle well-known to maid and waiter, had not been communicated to management. In process measuring, we often find that factors thought to be completely unrelated to the core issue turn out to be the critical ones. Shareholders: The Ultimate Customers Investors can make or break many company programs through their support or lack thereof. Oddly enough, the financial people may stand in the way of honest efforts to please the shareholders. One company that did very poorly in terms of share price decided it had to change direction. It was suggested that the company measure the attitudes of shareholders and potential investors. But the company CFO said it would be a waste of the shareholders' money to try to find out what they wanted to do with the company. Yet the CFO insisted his purpose was to make the shareholders happy by not spending the money. The thought of listening to shareholders was a novel idea for him. The company eventually did solicit shareholder views, after the CFO was dismissed. The benefit of listening to them was many hundreds of times what it cost to obtain their input. The same company found itself with limited information in many areas of critical importance to its success because of this approach to saving money. Consider another example of misdirected emphasis. CFOs and controllers love to benchmark their own operations. Large organizations are willing accomplices. They can tell you down to a fraction of a penny per invoice how the financial operations are doing compared to rivals at other firms. Trouble is, efficient financial operations usually cost less than a penny on a dollar of sales. Take that to zero and you will not change much in the corporation's overall results. Put one-tenth of that effort into the right parts of a key process, and you will make real headway. Do that five times over in key processes, and you are wooing the 2,000 percent solution for the entire organization. Different Strokes for Different Folks Once you have isolated a good process to measure and where in the process to look, you must decide what to measure about it. Many errors can occur at this point in the decision making. Many of the communications stalls that you now know about can return to haunt you if several different people are responsible for the same set of measures. They will think they are measuring the same performance or conditions, but often are not. To cite an odd case for emphasis, on the same day in the northern and southern hemispheres, one location's normal temperature will be a lot warmer than the other's. Fail to adjust for that factor, even if you measure on the same day with everything else the same, and the result will confuse you. A retailer needs to offer the right goods for that day in that location. Stay with the weather example for a bit and let it snow for a while. The amount and type of snow has a big impact on gas utilities because snow can be a building insulator. It is said, by the way, that the Eskimos have several words for snow. Nolan Doesken has a dozen ways to measure snow, and for good reason. Doesken is the assistant climatologist for the state of Colorado. He says his studies of state records show that some National Weather Service stations will measure as much as 50 percent more annual snowfall than the nearby volunteer stations. One reason (and there are many others): The National Weather Service measures every six hours, whereas some volunteers measure just once a day, enough time for the snow to compact under its own weight and throw the measurements off. As natural gas delivery to homes is deregulated so that competition grows, gas providers need to measure market potential and price elasticity accurately. Better measuring can help, especially if everyone measures the same way. Similarly, the water content of snow in Colorado is always lower than many people assume, thus skewing an important factor in gas consumption as well as in water supply calculations, in avalanche warnings, and in information concerning the potential for floods. The Riches Are There If You Only Look Up Perspective often plays a key role in measuring. The personal outlook of the decision maker can cast a long shadow on a measurement's validity. The treasurer of a well-known but temporarily strapped public company was feverishly seeking to raise cash. His search was focused on the value of items on the company's balance sheet. As he sat in his office worrying, he was staring at a painting, one of several dozen owned by the company, that had been done by a famous American artist. The paintings were worth millions of dollars. But because the paintings had an accounting value of a few hundred dollars each, and he did not know art, he could not factor in the true value of the paintings for his hard-pressed corporation until a visitor pointed it out. The Footloose Cannon In days of yore, the inadequacy of measuring sticks was clear to everyone, but no mere mortal was prepared to do anything about it. In England, the foot was the foot--the length of the reigning king's foot. (In France, the similar standard measure was le pied du roi.) When a carpenter said, "Long live the King," he meant it--fervidly. Imagine the chaos that would follow if a half-grown size 8 prince took over from a dying size 11Stallbusters This section will help you find your biggest and best opportunities to benefit from measurements by locating your most important processes, their most critical factors, and what to measure. Identify Your Most Important Processes How can you identify the processes most important to your organization? The simplest way is to begin by estimating how long your organization could survive without them. Then, you can also consider how long the organization would prosper if they were done poorly. For another perspective, speculate on how long you will last if you perform the process less well than competitors. If you have a good understanding of the potential benefits from these processes if you did them better, you can ask a parallel set of questions about the missed opportunities that exist in each process. If you did the process as well as you can imagine it, what would be the size of the benefit compared to how well you are doing today? If you did the process as well as you can imagine it, what other opportunities would that open up? What would those opportunities be worth? If these ideas for identifying your most important processes do not help, you can pick from among the frequently important process areas given in the following list. These processes often receive limited measurements in organizations, and their importance may not yet be fully understood. A benefit of reviewing this list is to see if there are processes you should be focusing on that you wouldn't normally think about. Begin by reading the list and writing down any initial thoughts you have about the potential importance of these areas in your own organization. Then go back to the preceding questions that look at the importance of process areas. See if you can quickly eliminate some areas and highlight others for more consideration. If you find that you do not know enough to evaluate the importance of a particular area, plan to discuss the subject with someone in your organization who does. In fact, one alternative is to have a group review of this list to narrow your attention to one area for initial focus. Samples of Potentially Important Processes to Measure Tracking of why large institutional investors do not buy your organization's stock Developing new products and services that provide customers with major benefits over competitors' offerings Focusing marketing based on total cost to serve each major customer versus what the competitors' costs are for the same account Shifting your mix of customers, products, and services to reduce costs versus competitors Identifying and implementing your most important cost-reduction opportunities Identifying and implementing effective programs in your organization's largest opportunity areas Reducing cost of capital in ways other than by reducing borrowing and refinancing for lower interest rates Tracking the effectiveness of compensation and recognition for reinforcing the behavior that you want employees to exhibit Obtaining win-win ideas for mutual benefit from suppliers and the communities you serve Break Down Your Process Into as Many Subprocesses as Possible The simpler the aspect of the process that you seek, the easier it will be to find, measure, and learn from it. Also, you can assign the further analysis of subprocesses to different groups of people who are already more familiar with these areas. How do you go about dissecting a process into its subprocesses? If you are not sure how to do this, hire someone with experience in process analysis to help you. A local professor will often suffice for the purpose and will not usually be terribly expensive. Find the Critical Factors of the Most Important Process Once you have selected an important process to focus on, you need to narrow your attention further to reveal the most important parts of the process. The following questions will help you do this: Who can help you determine the critical factors in the process you are focusing on? Begin by asking everyone affected by the process what is most important to them in what the process does or should do. Ask these people not only "what" other areas they think are important, but also "why" they consider those areas of this important process to be important. What can you measure that may cause or influence the process's important aspects? As an example, imagine that you are measuring your process to shift your mix of customers, products, and services to reduce costs versus competitors. Since this process relies heavily on measurements in many different areas in order to be effective, focus first on aspects influencing measurements, such as the availability of the information to do the measurements, the accuracy and timeliness of that information, and the availability of the measurements to those who should be using them. A process like this also relies very heavily for its effectiveness on how people in the organization are motivated by working on the process. You will want to see how well aligned the personal objectives of each person are to achieving this process, how directly compensation reinforces the process, what effect promotion practices have on the process, and the comfort level with the time allocated to the process. This process is also very dependent on how well everyone in the organization understands it. How well trained are people? What is the error rate in key areas? When and where are mistakes most likely to occur? What opportunities are most frequently missed? In addition, you naturally want to consider the overall effectiveness of the process. How closely does your mix of customers, products, and services match the profile that would give you the lowest cost you can imagine versus competitors? Where you are far off from the optimal level, and what are the causes? You will have your own ideas about influential aspects that can be measured, but you should remember that at this point, the more questions you ask, the better. Just don't make the evaluation too cumbersome. If you have engineering training, you may have the skills to draw a process flowchart that will identify all the steps in the process as one way to spot areas to measure. If you do not have this training, you can learn more through the type of training that is frequently provided by consultants during reengineering projects. If your company has participated in any reengineering projects, chances are that someone who worked on such a project can provide you with the necessary information or training you need to prepare a flowchart. How can you check your conclusions about the critical factors of important processes using statistical analysis of the relationships you are looking at? Most people find that the relationships are more complicated and different from what they initially understood them to be. Consider our retailer with stores throughout the world as an example of how this analysis can be done. Start by Measuring Everything You Can Think Of (That Seems Worth the Cost) Concerning the Process Output and Its Causes--And Then Narrow Your Focus You may be wondering why this topic is in the Stallbusters section. It's here because the main point of this chapter is the importance of narrowing your focus on what to measure. Therefore, you need some way to reduce to a manageable number all of the many measurements that could be used in the process in order to begin tracking your organization's effectiveness efficiently. Beginning to eliminate some measurements while paying more attention to others is an essential part of this second step in the eight-step process you are learning. What you need to do is create data that can be used to statistically identify and connect causes and effects. For example, product-quality measures may tell you that your products have no defects. That observation about product quality is probably accurate if you also find you are outperforming your competitors in market share, profit margin, and customer satisfaction growth. If these things are not occurring, something is wrong with your measures. You will need to add more measures until you find out why you are not growing in these critical areas. (Recall that, as previously stated, the best sources of measures are those defined by the people who are affected the most by your processes.) You can also save a lot of time now (if you like) by thinking ahead to something we do not cover until the next chapter. In that next step, you will be using the measures you selected to compare your organization to other organizations. To make this step easier and faster, find out now, while you are picking your measures, what measures are most available for comparisons outside of your organization, and be sure that you include these on your list. Be careful in deciding not to do a measurement because of expense. Not all expensive measures are a bad investment. It all depends on the size of the potential benefit relative to the cost. Spending a few hundred dollars for a cheap measure that will not help you is a waste of money, while spending several million dollars for something that will make you many billions could be a real bargain, as long as you have enough money to do so. A company that used this second step in the eight-step process found that a single measure (which cost more than all of the other measures combined) provided almost all of the insights into how to improve an essential process. Had the company stopped looking because of the expense, the firm's business would probably be less than half its current size and operate at less than a quarter of its current profit level. 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