Achieving Operational Excellence: Leading sustainable improvement

Episode #247 Achieving Operational Excellence: Leading sustainable improvement

THERE’S ALWAYS ROOM FOR IMPROVeMENT

Almost every company has an operational delivery component, even pure services businesses. We could be talking about making the supply chain more efficient in a food delivery company in the FMCG sector… we could be talking about delivery of legal services to corporate clients… we could be talking about maintaining a gas pipeline… or we could be talking about loading containers onto a cargo ship.

My corporate experience was very much in asset intensive industries, so I’ll be using examples from there, of course. But I think you’ll find that if you can home in on the lessons in this episode, the principles will definitely apply to you, regardless of your current context.

There’s one overarching principle that I want us to all be comfortable with before we go too far: The object of operational excellence is to improve performance. That’s it!

It’s not to simply drive your people harder and get more out of them–it’s understanding how to improve the holistic combination of people, processes, technology, and investment to achieve superior outcomes.

Improved performance is good for everyone. It leads to increased value creation for your shareholders and customers. It reduces frustration, and it increases job satisfaction for your people. And it increases the likelihood that the company’s going to be there to offer them (and their children) stable employment well into the future.

It underpins growth, so that you can invest in innovation to improve products and services. It enables you to get great traction from every unit of resource expended (assets, people, money, and even time).

Unfortunately, sometimes actual performance and perceived performance are inversely proportional. I’ve often seen leaders in traditionally low-performing sectors claiming to have high performing teams. In industries where I know for a fact the performance is extremely poor, I can get greater than 50% of the leaders claiming that they have high performing teams.

But when I work with companies that are indisputably market-makers and performance trailblazers, and I ask their leaders how many of them have high performing teams, I might get 5- 10% saying that they do.

Rule number one: if you want to get anywhere in terms of operational excellence improvement, be realistic. Be brutally honest with yourself about your current performance.

This calls for some form of measurement. It’s no coincidence that the poorest performing industries I’ve been in like to avoid any form of objective measurement. I guess that’s based on the philosophy that ambit and subjective claims of high performance are really hard to refute.

Independence of some sort is definitely preferred, either an independent body set up internally (if your company’s large enough), or some form of expert third party assessment.

For example, it’s relatively easy to get a performance comparison from similar organizations that are listed on the securities exchange. They always have loads of high quality, publicly available data that you can use to compare with your own performance. Financial ratios are really easy to calculate, and you can use them to find out where you sit with reference to the top industry performers.

Then, there are independent benchmarks. You can get these from many different sources, but it’s really important to use them so that you’re not too inwardly focused. Some form of benchmarking is going to let you know where you stand in your industry, in relative terms. The more time I spent in large businesses, the more I came to believe in benchmarking as a valuable independent source of genuine comparison.

And then, of course, there’s a customized independent assessment, conducted by an expert third party, to assess your operational maturity. These reviews typically start with benchmarks, and then branch out to look at the specifics of organizational culture, process maturity, and your internal capabilities, in terms of both systems and people.

So, the first step in trying to improve performance and move towards operational excellence is to be open to the possibility that there is actually room for improvement. After that and, of course, before you do anything else, it’s important to establish the appetite for chasing any improvements relentlessly.

SETTING IT UP RIGHT

Let’s assume that you’ve done the analysis, and you’ve found room for improvement (there are very few companies that wouldn’t, right!?)

The first step is to know your value drivers. Now, I might sound like Captain Obvious here, but you need to know what good looks like. What outcomes are you trying to achieve, and which levers are available to pull in order to achieve these outcomes? Improving efficiency is futile unless it directly impacts results.

You also need a profound understanding of cause and effect. If you don’t, then instead of ‘replacing the door’, you could just end up ‘polishing knobs’. And when you have a clear understanding of what’s required, but before you charge off down any path, think about what needs to happen in order to drive the improvements.

Any change you try to make is going to rely on people–both the leaders in the company and the individual contributors who work at the front lines. So you’d better ask yourself a few important questions. What’s in it for them? Why would they go over and above to improve the performance of the company, other than fear of reprisals? How do we motivate and invigorate the people we need to do the work?

For example, businesses that have superior operating discipline also tend to have better safety performance. With improved performance comes less injuries and reduced risk of major incidents. This should be a no-brainer, although I’ve been in companies where the historical distrust for management is so deeply entrenched that even something as obviously beneficial as reducing injury risk is a tough sell. But this is our baseline for a successful move to operational excellence.

So, there’s five things we’ve covered:

1. Take a reality check

   Work out, with a high degree of realism, where you truly are in relation to your competitors. Benchmarking is your friend.

2. Calculate the size of the prize

   Is it really worth going after, and what payback can you realistically expect?

3. Understand the relationship between action and outcome

   Get extreme clarity on which levers you need to pull to get maximum traction in operational excellence. Will your efforts translate directly into improved performance? They need to.

4. Understand your organization’s appetite for change

   Lots of companies think they want to make the improvements, but when push comes to shove, they don’t really have the appetite for doing the hard yards. That’s because there might be people impacts… and there might be customer impacts… and there might be structural impacts… and you or your boss might not be up for that, because it often creates conflict. If you don’t have the appetite for change, you could spend a lot of time, energy, and money only to hit an immovable roadblock later on.

5. Determine how you can make it attractive for your people.

   They’re the ones who are going to execute the changes, so you need to think about what’s in it for them. Without a compelling why, anything you manage to introduce into your operations through sheer force of will is going to slide backwards the minute you look the other way.

my experience…

I want to give you a couple of real life examples of operational excellence initiatives that I led as an executive during my corporate career. Just bear in mind, I wasn’t actually doing any of the work on these. But I was setting the tone, the pace, and the standard for the teams who did the work, and I was accountable for the eventual outcomes.

The first one I want to mention was a productivity improvement initiative at an operational site. I knew there was room for improvement, but the performance of some of the teams at this site was so poor that even I was shocked when I saw the initial assessment.

We started with some benchmarking on worker productivity. Now to be clear, it wasn’t necessarily the case that people weren’t working hard, but it certainly was the case that the amount of bureaucracy, inefficiency, and process for process’s sake was debilitating, and it prevented even the keenest worker from delivering operational excellence.

We engaged a specialist consulting firm with a track record in our industry, and a history of assisting with sustainable operational improvement. They did a fantastic job of understanding the size of the prize, analyzing the current state, and then mapping the value drivers to the activities that we’d have to focus on.

They followed our teams around every day for months, seeing firsthand where the inefficiencies and bottlenecks arose, and they came up with ways to make improvements. And in that first couple of months we demonstrated, without a shadow of a doubt, that massive operational improvements were within our reach. But it took enormous leadership focus and constant attention.

One trend that we picked up on in the reporting that was really enlightening (but not at all surprising), was that the teams who struggled most were the ones with known poor leaders… the leaders who rated lowest in our performance assessment and talent management processes. The link between leadership capability and team performance was, once again, blindingly obvious.

Over a period of six months, we worked on improving operational performance, and in some teams the improvement was over 500% above the baseline. We started to see less safety incidents. We started to see less operational variation. We started to see more reliable asset performance. This was indeed a virtuous circle.

But, interestingly, as soon as we stopped the weekly scrutiny, the drive on the lower level leaders, and the visibility of reporting, things just tended to slide back to the way they were before. And these improvements didn’t require any structural changes or loss of jobs–there just seemed to be a natural entropy in the culture that made it impossible to sustain.

Trust me, no one was overworked, and everyone was extremely highly paid for what they did. So why wasn’t it sustainable? My speculative hypothesis is that there just wasn’t enough reward in it for the low-level leaders to encourage them to keep the pressure on their teams: it was just so much easier to go with the flow.

Now, I wouldn’t say the experience was a complete failure, but I will say that there was a huge amount of upside that we proved was there for the taking, but that we simply couldn’t get at in a sustainable way.

And in the absence of any comparison, the organization fell back on its old habits. They used the line, “Hey, we’re doing pretty well. We’re the best in our industry. And our people are our greatest asset.”

WHEN OPERATIONAL EXCELLENCE WORKS!

One other experience I had in chasing operational excellence that I think is worth mentioning (and which had a greater long-term impact) was the capital productivity work that we undertook at the rail freight company, Aurizon.

I spoke about this in an episode a little over 12 months ago, and it may be worth revisiting if you want more information. It was Ep.189: Successful Transformation – is there such a thing?

Aurizon owned and operated a significant amount of rail infrastructure: over 6,000 miles of tracks, bridges, signaling systems, and so on. These were built to transport coal from Aurizon’s customers’ mines in central Queensland to the export shipping ports, sometimes hundreds of miles away on the east coast of Australia.

When mines were developed or expanded, additional rail capacity had to be created. The company’s default position, which had developed over decades of operating habit, was to build additional rail infrastructure. It was the simplest, but it was also the most expensive way to solve the problem and deliver the new capacity.

I was given the job of running a transformation project to improve the productivity and effectiveness of our capital investments, not just in the rail infrastructure business, but across the whole of Aurizon’s operations. Once again, we set the project up the way I mentioned previously, and engaged one of the top consulting firms to provide the expertise that we didn’t have in-house.

We realized that, if there was to be any improvement in performance that didn’t involve building additional infrastructure, the operational performance had to be improved. This meant isolating and removing the bottlenecks and inefficiencies in the overall system.

For example, in one case, the data showed that if we could reduce the throughput time in one of the locomotive provisioning yards by about 30%, we could save almost $200 million in capital expenditure, which would’ve been spent on new infrastructure capacity. The object of the exercise was to increase the capacity in the most cost-effective and efficient manner possible. So, instead of $200 million in rail infrastructure, we spent a few hundred thousand on operational improvement initiatives. Let me tell you though, the $200 million project would’ve been easier!

The lesson from this is that any change that brings these types of massive rewards is going to be hard to implement, by definition. It requires a different perspective, finding new ways of solving old problems. And it requires real focus and ingenuity to find and remove the bottlenecks that exist in operating processes.

Just as an aside, if you haven’t read it yet, I have a book recommendation for you that should be considered required reading if you’re trying to achieve operational excellence. It’s The Goal by Eli Goldratt.

Even though making the operational change was easier said than done, it provided a pathway to massively improved financial outcomes, for both Aurizon and its customers. And given that we baked the improvements into pricing and future performance, there was a solid appetite to make the changes stick.

This was a really successful shift to operational excellence that set a new baseline for performance in many parts of the business. And it was done in such a way that, even if it did nothing more than provide some short-term relief–that is to say, delaying the need for additional infrastructure by a few years–the option of being able to kick the can down the road had a substantial impact on our commercial outcomes.

But none of this comes without a single-minded focus on results, a huge investment of energy, and a fair measure of pain.

EXECUTING SUSTAINABLE CHANGE

I’m going to finish with a few rules of thumb that you can use as a quasi-checklist to guide your move to operational excellence (and you’ll be able to get a summary of this as a free downloadable). I’ve already covered the critical five points in setting up a program to achieve operational excellence, and these are in the downloadable. But now, I want to move on to execution. Here are some of the key factors that you’re going to need to check off, if you want to be successful. I’m going to continue the list by starting at number six:

6. Shine a light on problem areas, don’t cover them up

It can be really confronting to see the reality of where you are, if you’re entirely honest with yourself. Embrace the ugly, because that’s the only way you’ll really be motivated to make it better.

7. Own it in the line.

It can seem really attractive to stand up a dedicated transformation team and to make that team accountable for the change. And look, a transformation team can offer focus, energy, and independence. But any changes need to be owned by the business units who run the day-to-day operations. Otherwise, sustainability is impossible.

8. Push accountabilities downward

Make sure ownership of accountabilities is at the lowest practical point in the company. Empower your frontline people with the autonomy to make changes that they know are going to improve the efficiency of their jobs.

9. Understand the role of technology

More often than not, technology doesn’t deliver fundamental enablers for sustainable change, it just provides accelerators. Don’t fall into the trap of pinning your hopes on technology-driven change. Without the human element, any operational excellence work will always be half-baked and largely unsustainable.

10. Drive it from the top

Senior executive support is essential, and without a top-down drive, results are going to be patchy at best.

11. Resource your teams appropriately

If the size of the prize is large enough, it’s worth investing in the resources you need to capture it. For example, hire the best consultants you can possibly afford. Provide reporting and analytical support so that you can easily see what’s working and what’s not.

12. Give your leaders clarity

Make it really clear to leaders at every level what part you’re expecting them to play in the move to operational excellence. And when it comes to the drive for operational excellence, you need to be really clear with every leader that not changing is not an option.

13. Finally, execute relentlessly

You’ll almost certainly underestimate the amount of time, energy, and commitment that’s required to execute change and make it stick. So, pushing through the barriers of resistance is going to be a daily challenge. And the minute you think you can back off, you’ll see your teams slip back into old habits. Just accept that this is the way the world works, and double down on your commitment to operational excellence.

bite the bullet and go!

The real reason we pursue operational excellence is to make our business more efficient, more competitive, and more sustainable. Without that push and constant drive to operational excellence, we’ll almost certainly slip back into the pack, and our company will struggle to compete.

Unfortunately, the case with many businesses is that they simply wait until it’s too late. They know how difficult operational excellence is to achieve, so they resist the pressing need to head down that path until it’s almost unavoidable.

As Niccolo Machiavelli said in The Prince,

“There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success than to take the lead in the introduction of a new order of things.”

If you’re serious about achieving operational excellence, your first step is to understand this principle, to accept it, and to make a commitment to never back down. Otherwise, you’ll end up doing what many companies do–you’ll spend the money on the transformation, but you’ll never see the value of the expected benefits drop into the piggy bank.