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12/28/2008
Fit for the Future – Part 3

Step 3: Think capability

To summarize the arguments of the first two steps: The major disease of modern organizations is in their design and management. If we want to achieve a quantum leap in performance, we have to be prepared to change the way we think.

In Step 1, Be prepared to change the way you think, I exposed the problems associated with designing and managing organizations as top-down functional hierarchies.

In Step 2, Think outside-in, we began to look at the organization in a better way, from the outside-in.

If you conducted the exercise as suggested you will have a model of the transactions with your customers at each point of transaction, and some ideas about the nature of customer demands. We will take this exercise further. But let me first introduce the idea of capability.

Figure 1

Capability and Prediction

The concept of capability is equivalent to prediction. If you want to improve an organization, it helps enormously to know what is predictable about what is currently going on between your organization and its customers. The simplest way to think about capability or predictability is in terms of demand and response – what demands do customers make at the points of transaction and how does your organization respond? If you can improve your organization’s performance at each point of transaction, your profit and loss account will improve – always.

So the first question you should ask is:
What is predictable about customer demand?

While conducting a demand analysis in a mobile telephone service provider, it became immediately apparent that a lot of customers were calling to complain about a letter demanding they send in their direct debit authorization form. The customers’ complaint was that they had already sent it. A walk through of the work flow revealed the following:

·        New customers’ direct debit authorization forms arrived along with their contracts in a head office department.

·        The forms were then sent out to the customers’ banks for authorization.

·        Banks were taking time to return the form.

·        Meanwhile, the customer management IT system would regularly sort for those customers who were on contract but did not have automated payments arranged.

·        The computer system would send a standard letter to these customers.

Incredibly, the organization was predictably upsetting at least a third of its new customers.

This is an example of what I call ‘failure’ demand, or ‘demand we don’t want’ – you might be surprised at just how much failure demand exists in traditionally designed organizations.

Activity

Step 1: Using your diagram of the transactions between your organization and your customers (from Step 2 – Think outside-in):

·        Go to the transactions where customers place demands on your organization.

·        Listen to the demands they make and sort them into two types – value demand (the things you want customers to make demands for) and failure demand (the demands that reflect a failure of your organization to do something right).

To do this properly may take you a few days but, in the long run, it is vitally important to get a reliable view of customer demand. The ultimate purpose of the work will be to turn off failure demand and optimize the way your organization deals with value demand – but that is for later in the series.

On your list, would you expect to have examples of failure demand? For example, progress chasing, complaints and so on? Is this work currently generally accepted as a normal part of doing business? If so, imagine the costs.

Step 2: Know their predictability

Having established the types of customer demand, the next thing you want to know is their predictability.

The mobile telephone example (above) and the next example show one way of establishing predictability – establishing a relationship or interdependency between parts. You can ‘see’ what is happening and why, hence you can predict that this will continue until the relationship is changed:

The second method for establishing predictability is to take measures over time. Count the number of times a day or week that a particular type of demand occurs. You know you have a reliable view when you can predict the nature of demand in the next day or week. You may be inclined to rush this part of the work, especially as you will start to see things that are going wrong. Don’t, it is vital that you first establish predictability; otherwise you may act on something that is unpredictable and make things worse – a common mistake.

Now we turn to establishing the predictability of response.

Activity

Step 1: Returning to your diagram:

For every type of demand customers place on your organization, what measures can you find that tell you how well your organization RESPONDS?

In most organizations we find few measures that inform managers about the predictability of responses to customer demands. Instead we tend to find ‘internal’ measures which tell you little or nothing. In the above examples, it took time to establish response measures – they were not in use in the organization. The measures that were in use in each case, were measures of a different sort.

·        In the telephone company, managers measured activity (calls per man per day).

·        In the printing example, managers measured revenue against targets.

Such measures not only prevented managers from understanding demand and response, they made response worse – something we return to in Step 5 (“Think System”).

It is important to bear in mind that view we want to take is ‘outside-in’, the customers’ view of the organization. So your measures of response should best be measures of how well the organization does things for customers, for example,

·        time to fix something,

·        time to respond,

·        time to quote,

·        percentage of demand resulting in sales,

·        percent of problems solved on first call and so on.

And finally, there will be one other type of transaction you will need to study:

Activity

Step 1: Returning to your diagram:

Go to the transactions where your organization DOES THINGS TO OR FOR customers. What measures can you find which tell you how well these things work?

We call these ‘outbound transactions’. The most obvious outbound transactions are marketing and sales. However, they are not the only ones.

Delivery is an outbound transaction.  Failure to deliver on time and to specification will cause waste (customer complaints, fall in customer loyalty, re-work, duplication of effort and so on).

Invoicing is another outbound transaction. Get it right – what the customer expects – and the flow will be smoother, more customers will pay on time.

Have you heard the common phrase: “I know about half of my marketing budget works, the only problem is I don’t know which half”? Whenever I hear this I ask: “How do you know it’s half?”

Once again, managers were focused on the wrong things – in this case total sales revenue. They should have been working to understand the performance of each of the sales or ‘customer acquisition’ processes.

Summary

If you know what is happening at the points of transaction between you and your customers, any subsequent improvement will improve service, reduce costs and increase the probability that customer will keep doing business with you.

This is a very powerful analytic tool. It is concrete: people may argue over what we should or should not do for our customers, but they cannot argue over what we actually do. It is vital to get capability data before taking a look at how work flows through your organization – the next step in the series.

Articles were written by John Seddon (Managing Director) and Vanguard Consulting Ltd.  He is an occupational psychologist, author and consultant.  John describes his work as a combination of systems thinking – how the work works, with intervention theory – how to change it.  This article has been edited by the people of Bryce Harrison Inc. (USA).  The Bryce Harrison website is www.newsystemsthinking.com.