When you hear the words ‘operational excellence’, what does that mean to you? I’ve asked many senior leaders this question and received many different answers. However, there are three common pillars that set the foundation for operational excellence.
The first pillar of operational excellence is being efficient and cost effective in how you deliver operations. This sounds deceptively simple, so how do you measure whether you are efficient and cost effective? The answer is to identify your SLA (service level agreement) and KPI (key performance indicator) measures that drive your operational activities, baseline them, and then drive towards improvements quarter over quarter or year over year. If they are getting better, then you are getting more efficient. If they are staying flat or getting worse, then you are not becoming operationally excellent, but instead need to re-visit how you run your operations. Now, the way to ensure you achieve SLA/KPI improvements is to implement a number of tactics that include:
- a rigorous process evaluation and re-design to eliminate waste and non-value added activities,
- automation of any manual or repetitive tasks,
- high quality, repetitive, training of your employees on the processes along with the stated goals and improvements, so you gain their buy-in and ownership,
- providing detailed reporting and analytics of key steps in your processes to team leaders so they can quickly adjust when things change or are behind plan, or they can help push if they are ahead of plan, and
- the empowerment of middle management to own their team’s goals and have the ability to tweak the process to improve them without constantly getting approval from senior leadership.
What is amazing to me is that these steps are well known and proven to work, yet I routinely find that many companies execute only on 1 or 2 of these steps, and then wonder why they are not getting better. To have sustained improvement over time, you must execute on all 5 steps, and you must continually execute against all 5 steps, not just reactionarily when things go poorly.
Cost effectiveness is measured similarly. First, baseline your operational costs against your revenue as a percentage. If you are operationally excellent, then your costs should be going down over time as a % of revenue. This is only true if you are driving operational efficiency as stated above, because those gains will translate into margin accretion as your company grows. Companies should have clearly stated goals for operations to reduce costs as a % of revenue each year, while maintaining or improving SLA/KPI goals. This alignment of focus will help ensure a company becomes operationally excellent.
The second key pillar of operational excellence is cultural alignment with the attitudes that drive operational excellence. Companies that are operationally excellent exhibit key traits in their culture that enable them to constantly execute on their initiatives. These cultural traits are:
- a disdain for the concept of ‘that is the way we have always done things’. Operationally excellent companies always think there is a better way to do everything.
- A willingness to act like companies in The Lean Startup (book by Eric Ries) and build a culture of constantly testing, measuring, and pivoting based on what the data tells you.
- Elimination of any ‘not invented here’ attitudes amongst middle and senior management, because many great ideas come from outside your organization, or from fresh eyes with a different perspective. Additionally, many operational breakthroughs come from improvements in processes that cross one or more organizational boundaries, and therefore improvements require department leaders to be willing to listen, collaborate, and do what’s best for the process and the ultimate outcome…and not just do what’s best for their department. I truly believe one of the worst mistakes you can make is promoting someone with a ‘not invented here’ attitude into any senior management role. You have just dramatically increased the risk for stasis, degradation of performance, and the likelihood of poor reaction to customer, economic or industry changes. The good news is this attitude can often be identified and fixed with proper coaching and mentorship.
- Celebrate your operational improvements and reward your people for their ideas and innovations, even those that you try but don’t work. A culture that knows they will be rewarded, and not penalized, for trying new things will always triumph over a culture that resists change and penalizes people for failure when trying something new. Remember, you learn just as much, if not more, from your failures as you do from your successes. This try, fail, succeed process loop is how people were born to operate. It’s how we learn to walk, speak, ride a bike, play a sport, and pretty much everything else in life…so why wouldn’t we operate this way in business? It’s natural, but we resist this model in business, to our detriment.
The third, and last, pillar for becoming operationally excellent is a willingness to look closely at your business and decide to outsource tasks that are not key to your customer offerings and your overall mission. No company can be operationally excellent at every process and in every function or department. The key to success is focusing your discretionary funding, your operational investments, and your coaching and mentorship of key personnel in those areas that will not only improve your operations, but also will drive incremental value for your customers. Therefore, you should look to outsource items that need to be good-enough to run the business but are not customer differentiating. I guarantee you will easily find outside firms who specialize in being operationally excellent in the areas you are considering outsourcing. In today’s modern world this is easier than it ever has been, since the world is both smaller, and more connected. Small startups today completely get this model of outsourcing non-core processes. They routinely outsource things like Accounting, Legal, Public Relations, Help Desk, Payroll, and many other functions. In each case, there are amazing companies out there with high quality technology offerings that enable you to achieve process excellence without having to do the day-to-day management, and most importantly, without having to dedicate your limited leadership cycles to figuring out how to operate and improve those functions. The internet and cloud provided services are game changers for delivering operational excellence to companies. A startup now can outsource their email, voice, data center, collaboration platform, call center/help desk, accounting, legal, public relations, components of Marketing, payroll, benefits management, and many other items required for a modern company, but usually not core to your customer offerings and customer delight. The challenge is to decide what to outsource at what point in your growth? An example might be that Accounting was outsourced when you were small, but as you grew globally, and as your product offerings multiplied, and as your customer billing became more complicated, suddenly insourcing Accounting might make sense to ensure customers are billed correctly and global tax and other issues are properly dealt with. Conversely, you might have started with an in-house help desk with people sharing help desk duties, but as you experience explosive growth, hiring help desk personnel and dealing with the typical 25% attrition annually might not be where you want your management attention, so you might outsource to a dedicated help desk service firm that brings process/technology and a shared personnel model that reduces churn, and therefore improves your help desk with minimal management oversight. Regardless of what you choose to outsource, you still need to hold your chosen vendor to achieving your operational SLA/KPI measurements while also improving them over time. Thankfully this can often be contractually negotiated, which is much easier to manage than trying to identify, plan, implement and manage process improvements yourself.
With these 3 pillars in place, your company will be on track to becoming operationally excellent. The journey will be different for every company, but you will know you are achieving operational excellence when your costs to operate are the lowest in your industry as a % of revenue and your company is able to re-invest more money into growing, innovating and differentiating your core product/service offerings to your customers. This focus on operational excellence will result in a virtuous cycle that increases the likelihood of delivering compound growth in earnings for your shareholders, employees, and your community you serve. That is how we win at business.