There was a time when delivering “perfection” at a low price was like a business miracle that customers get a “high” from – but not anymore. In this article, Christopher Surdak elaborates on customers’ perception of quality and cheapness, the “four horsemen” which limit organisations from adapting to an evolved market, and the looming end of Six Sigma.
The human body is an amazing machine. Our bodies are highly developed, remarkably complicated systems that produce complex outcomes from many complex inputs. With complexity comes errors, as the various parts of our bodies constantly struggle to maintain homeostasis in an ever-changing environment.
For such complexity to work there always has to be some function that cleans up these errors. Some system has to compensate for our bodies’ over- or under-response to the environment, because even the most sensitive and agile systems cannot compensate for every variable it encounters. In our bodies this sanitary function is largely taken up by our livers.
Livers are amazing organs that maintain the chemical balance in our bodies. They remove toxins, store surplus energy or nutrients for future use, and ensure that all of our functions operate in harmony. They are the biochemical equivalent of executive management, compliance, accounting and housekeeping all wrapped up into one.
A Disease of Excess
But like the processes and control mechanisms in organisations, our livers have their limits too. Among its many functions, the liver removes alcohol from our systems when we choose to imbibe. When we have one too many pints or that extra glass of chardonnay or merlot it’s our livers that step in and deal with our excesses, ensuring that we recover the following day.
Like all things in life too much of a good thing can be a bad thing and such is the case with alcohol. If we expose our bodies to too much alcohol for too long our liver runs out of capacity for maintaining balance and begins to actually scar from overuse. This condition is known as cirrhosis, and over time it is a fatal condition. It turns out that every time we overindulge in almost anything, alcohol, sugar, fat or cholesterol, our livers end up “taking one for the team”. Over time this eliminates our ability to compensate for systemic errors and stresses, and ultimately may kill us. While the trip along way may be fun, cirrhosis is a terrible place to end up.
Too Much of a Good Thing
So what does this have to do with six sigma, lean manufacturing and other quality initiatives? Six Sigma arrived after World War II, where global demand for products and services exploded as part of the peace dividend. Demand was also pushed along by the need to rebuild most of the civilised world and to fight a new, Cold War, but I digress.
Companies were hard pressed to meet the global demand for goods, and in many cases quality was sacrificed in the name of quantity. This was acceptable when people were happy to have anything, but as the global economy recovered, and then boomed, customers could afford to demand more from manufacturers, and so they did.
The inefficiency of producing defective or low-quality products annoyed one Edward Deming, a cantankerous American economist. At a time when customers were willing to buy almost anything that companies produced, Deming argued that improving quality could actually reduce costs, improve productivity and increase customer satisfaction. Like most revolutionaries, Deming was a polarising character. His notions were considered radical at the time, and companies in his native United States summarily ignored his advice.
Deming’s story is well-documented elsewhere so I won’t belabour it here. Suffice to say Deming’s quality revolution did indeed take place, first in Japan and much later in his home country. His belief that improved quality could actually reduce production costs, improve productivity and increase customer satisfaction has been proven conclusively. The world around us today is a product of the successful implementation of Deming’s then-radical ideas about quality and cost. We drank lustily from Deming’s fountain.
After 60 years of working to improve business quality perhaps we have drunk too much and our systems are now beginning to fail us due to over exposure. When product quality was horrible, as in the Post-War years, small improvements in quality could generate significant reductions in cost. These small improvements produced outsized returns because there was so much room for improvement. Cost-cutting works like compounding interest in reverse. With compound interest you earn more money overtime. With compounding cost-cutting you earn less and less overtime, but hopefully the savings outpace the reductions in revenues.
The challenge in all of this slicing and dicing is this: after decades of cutting perhaps we have gone too far. The fat in our processes was cut away long ago, yet we have continued to trim away. Now, many organisations find themselves cutting away at their muscle, sinew, and bone, or worse, allowing entire limbs to be severed; their functions left to others to provide.
We are habituated, even addicted, to cost-cutting as a means of creating value long after most of the value in cost-cutting has already been harvested. However, we continue to go back to that well, that bottle, over and over again because we hope to get from it the same benefits, or buzz, that we got before. But, not only is the high not what it used to be, the cost of going back for more keeps getting worse and worse.
Four Horsemen of the Value Apocalypse
Decades of Six Sigma over indulgence has made many organisations ill. Their disease is caused by excessive reliance on incremental improvement to the exclusion of real innovation. This disease has moved beyond merely damaging their businesses, it has in many cases left permanent scars. This damaged, ineffective, moribund organisational tissue no longer creates value for its organism. Indeed, it destroys value, much like the sick liver in an aging rock star.
These operational scars leave a mark, much as a damaged organ can be diagnosed with medical tests. Four of these mechanisms of value destruction are as obvious as they are insidious. They exist in most organisations long-suffering from their Six Sigma hangovers, and they likely sound familiar to you. I call these four symptoms the Four Horsemen of the Value Apocalypse; because the name sounds dramatic, but also because they foretell of coming doom to any organisation who has over indulged from the Six Sigma Keg.
The Four Horsemen are:
1. Unilateral Thinking
2. Linear Metrics
3. Looking Inward
Unilateral thinking is the tendency to focus on only one aspect of an issue, or an opportunity, to the exclusion of all others. Singular focus was management dogma in the 1980s and 1990s. Business guru’s such as Jack Welch, Tom Peters, Peter Drucker and so on all promoted the idea that maniacal focus on a single outcome was the key to being the leader in your chosen industry. At the time, when Information Technology, the Internet and Globalisation were new trends, such focus was key. There were so many new changes to the business landscape that focus was critical in picking the right approach and seeing it through to competitive advantage.
When these organisations added Six Sigma, Quality and Lean Manufacturing to their single-focus strategy they tended to look at cost as the one and only driver of customer value. The vast majority of companies measure, manage and manipulate their costs, in order to remain competitive. Cost control is an obsession with nearly all companies and in many cases this is warranted. For publicly traded companies fiscal responsibility isn’t just a strategy, it is a legal obligation.
But, after decades of successful optimisation this singular focus has now become a strategic dead end. The danger in such myopic focus on cost-cutting is that you quickly become a one-trick pony. If the only thing you have to offer your customers is a price lower than your competitors’, then price is your only differentiation. You will quickly find yourself in a commoditised business, competing with other companies in a “race to the bottom”. In a world where customers have instantaneous, ubiquitous and nearly perfect access to information, market prices are set by your most efficient, least rational, or most desperate competitor. Further, in a race to the bottom there are zero points for coming in second place.
While cost still matters it no longer differentiates, except in situations where customers value nothing else. Companies who focus strictly on price have effectively self-selected only those customers who care about nothing else. Customers who value other things either go without or find organisations who share those values. This process explains why many consumers will buy a non-fat, fair-trade, gluten-free, organic, sugar-free, solar-powered latte from Starbucks for three times the price of an average cup of coffee. Companies that focus on only one dimension of customer need abandon the field to those who broaden the scope of their appeal
One foundational principle of Six Sigma is constant, incremental improvement (CPI). CPI (Continuous Process Improvement), or Kaizen, builds on the notion of compounding interest. If you make things a little bit better or a little bit cheaper over time the accumulation of these improvements leads to big rewards. Edward Deming was a proponent of this philosophy, but not in isolation. Nonetheless, most organisations are thoroughly saturated with the expectation of small, incremental, linear improvement.
This belief is so deeply ingrained in modern business thinking that such cost reductions are actually written into many business contracts. No matter what you did for a customer last year, this year you need to do it X percent cheaper. There are many problems with this approach. First, your customers come to expect these reductions, and so they do not value them (again, the destruction of perceived value). Second, your own organisation expects these reductions, and so people build “margin” into their estimates, budgets, costs and models. The result of all of this is decreased accuracy in all of these things, which is the exact opposite of the desired result. And this expectation of constant, relentless decreases in cost runs entirely counter to the Capitalist Era’s expectation of constant, incremental inflation.
The most insidious effect of linear metrics is that they prevent breakthroughs. If you gave your organisation the goal of cutting costs in half, or cutting cycle times by an order of magnitude many of your employees would say this goal would be impossible; others would say it is possible. In both cases those employees would probably prove themselves to be right. The question then must be, which group of employees deserves the company’s support? Non-linear metrics lead to non-linear results. These tend to break our ROI models with which we run our businesses, but they also break through the roadblocks to the value generation those same models reinforce.
The vast majority of Six Sigma or Lean Manufacturing initiatives focus on processes that are internal to and upstream of an organisation. The reason for this is simple: organisations have some degree of control over their inputs. By controlling their inputs, and how they are used, organisations can improve how they generate outcomes that are valued by customers.
Anyone familiar with business modelling and analysis has probably witnessed a disturbing trend: the disassociation between inputs and outputs. In many large organisations inputs (raw materials, labour, know-how) are managed by one group (operations), and outputs (products and services) are managed by an entirely different group (Sales and Marketing). Frequently these organisations are at loggerheads, if not fully at war with one another. Operations tries to figure out how to squeeze as much as it can from its inputs, while Sales tries to figure out how to push the results into the marketplace.
In either case, the organisations are focussed inward, rather than outward. Operations is looking inward, trying to get the same inputs they require for less, while Sales is trying to take what they have on the shelf and get it off their shelves. In either case, a focus on cost reduction and improved efficiency removes any hope of generating more value for customers. Companies do invest in things like market research, focus groups, pilot projects and the like, but these efforts are nearly always tempered by the inherent inward-focus of these organisations.
This is why breakthrough products such as the iPhone or iPad, the Tesla Model S or ride-sharing apps like Uber or Lyft are so rare, and so compelling. In each instance the creator didn’t look inward towards improving an input, they looked outward at what customers would value and then how to deliver it. An internal focus is a natural consequence of Six Sigma and Lean Manufacturing because both approaches demand looking at oneself with excruciating detail. However, organisations may find that the harder they look inside themselves, the faster the world outside may be passing them by.
It is important to realise that the quality revolution began in Japan in the 1960s, then arrived in America in the 1980s. This means that Western Capitalist companies have been doing the Six Sigma shuffle for half a century! The vast majority of the global workforce has never not worked under the expectation of constant, relentless cost-cutting. For people working in larger, older, more established companies this has created an environment of “do the same, or less, with less”, mentality.
The expectation of constant cost-cutting and constant profitability hasn’t always made sense. At times, such as during the crash of the Internet Bubble in 2000 or in the Great Recession of 2008, they were downright irrational. But, these expectations have nevertheless prevailed, fed by weekly reports generated by our oxymoronically-labelled “business intelligence” applications.
Toiling to achieve irrational and reward-less goals leads to one of two outcomes: Either you buy into the irrationality or you recoil against it. Those who buy into it are familiar with the process of acquiescence, or treating irrational thinking as if it were both normal and appropriate. Those who acquiesce are easy to identify, they usually speak in a common language of surrender. Some of their favourite phrases include:
- It is what it is (IIWII)
- That is just our way (TIJOW)
- I can’t help you (ICHU)
- That is not our responsibility (TINOR)
And so on…
It’s often hard to get through a day without being inundated with these slogans of servitude, immediately following a huff, an eye-roll, or a shrug of the shoulders.
There are some who do not acquiesce. Some who do not accept doing less with less, or the same with less. Rather, they try to do more with less. They break out of the improvement treadmill and jump to the zipline of innovation. These people don’t buy into these old, tired paradigms. Instead they work to use innovation to meet customers’ unmet, and sometimes unrealised, desire for value.
Such revolutionaries may be loved or hated, depending upon which side of their revolution you find yourself. Regardless, by challenging current dogma, such people tend to be controversial. In a call with his staff in 2017, Amazon CEO Jeff Bezos challenged his employees to “Disagree, then commit.” As a dyed-in-the-wool revolutionary, his words carry weight. Merely complaining about the status quo makes you a malcontent. Complaints are for the lazy and the uncommitted. True revolutionaries and innovators don’t just complain about the status quo, they challenge it. They don’t acquiesce to dogma, they doggedly work to assassinate it.
Single-threaded focus. This is great if you’re a wooly mammoth or saber tooth cat during the middle of an ice age, but it’s not so great if you’re a hyper adapted animal, like polar bears, during a period of change.
The Four Horsemen Among Us
I recently experienced an excellent example of the Four Horsemen in action. I was working with a company that specialised in business process outsourcing, an industry that relentlessly, almost psychopathically, follows the principles of Six Sigma. Among my expenses was a charge for $11.97 for a dinner grabbed at a fast food restaurant one night while running from one flight to another. I faithfully retained the receipt from that purchase so that I could submit it for reimbursement.
Quizzically, this particular company required receipts for any expense over $10; which is the first time I’ve seen this requirement in 25 years of professional travel. Apparently someone, somewhere, determined that the return on investment from receiving, reviewing and retaining $10 receipts, versus the global normal of $20-$25, was sufficient to justify the added cost. How the economics of this worked out in that person’s Excel model baffles me still, but I followed the policy nonetheless. I dutifully submitted the report including that receipt and waited to be reimbursed by the company’s “optimised”, “benchmarked”, “World-Class” business process.
Almost a month after submitting that expense report I received a notice that it had been rejected. The reason given was that my $11.97 receipt was not itemised, and itemisation was required. Most people I’ve shared this story with have accused me of exaggerating, embellishing or simply making it up, but I assure you, this actually happened.
That company, in its infinite wisdom and dedication to “quality” and “World-Class operations” required an $11.97 dinner expense to be itemised. I have no idea what it actually cost to audit that report, find that line item, single it out as a disallowed exception (it was a manual process), take the time to reject it and then send it back. But I am absolutely certain that those costs alone were well in excess of $11.97.
But wait, there’s more. Upon having the multi-thousand-dollar report rejected I then needed to have my “exception” reviewed and approved by not one but two vice presidents at the company. This caused an additional two weeks of delay in processing the transaction and any number of additional communications between those involved. Others at the company shared with me that their standard practice was to submit every single expense line item as a separate report, so that each exception only impacts a single item, rather than a whole week or two of expenses.
Dumbfounded by what had occurred, I did a quick calculation of the likely costs to the company for finding and managing this one “exception”. It wasn’t hard to conclude that the cost of this decision was at least forty times the value of the amount at risk, and yet none of those involved thought that the practice was questionable. Indeed, their uniform response was, “That’s just our policy.”, or “It is what it is.”, and “I just do what I’m told.”
Many companies are contemplating the use of robots to further automate their business processes. Upon some self-reflection on how they presently operate, they may discover that they already have robots in these roles, they just run on food rather than electricity.
I am a career-long fan of Edward Deming. I have studied his philosophy and approach, and I have applied it to my work for over a quarter-century. But, over time I have become increasingly convinced that the time of Six Sigma is coming to an end. I’m not suggesting that people no longer want quality; far from it. Sixty years of improvement has taught customers to expect perfection. But in our success we have taught customers to not value cheapness or quality. Quality and low price have become like oxygen: as long as you or someone else delivers them, they don’t matter.
Customers’ perception of value has changed because they’re habituated to perfection and cheapness. They no longer get a “high” from these things. Instead they perceive value elsewhere, like “green-ness”, “meaning” or “purpose”. Businesses that provide quality, low cost and then something more stand to dominate their markets because they stand out. Their differences make them resilient against the Four Horsemen, who are otherwise busy stampeding organisations suffering from empty casks, cost-cutting hangovers and scarred ability to adapt to change. In the next installment of this discussion, we will review how organisations can detox from their addiction to cost-cutting, and start delivering new value to their thirsty customers.
About the Author
Christopher Surdak is an industry-recognised expert in Mobility, Social Media and Analytics, Big Data, Information Security, Regulatory Compliance, and Cloud Computing with over 20 years of professional experience. Mr. Surdak is author of “Data Crush: How the Information Tidal Wave is Driving New Business Opportunities”, published by AMACOM Publishing, recipient of GetAbstract’s International Book of the Year Award, 2014. He launched his own international consultancy firm Surdak & Company, providing strategic business and technology guidance to leading organisations around the world. To learn more about it, visit www.surdakandco.com