Imagine you were to awaken one morning suffering from a strange disorder: one that rendered your eyesight unreliable.
When you open your eyes, your bedroom appears roughly as it did the night before. Your bed is below the open window, and your dresser is still adjacent to the door.
However, a second look reveals that the curtains that normally hang above your windows are missing. As is the painting that normally hangs, slightly crooked, on the wall facing your bed.
What’s more, you notice some strange additions to your bedroom furnishings. A plaster bust now dominates your dresser. And an empty hat rack leans precariously against your bed head.
As you rise and navigate your way around your bedroom, you discover that your memory provides the accurate version of reality. In spite of the information tendered by your eyes, your curtains still hang above your open window, and your painting still adorns the wall adjacent to your bed. Your sense of touch confirms that there is no plaster bust on your dresser, and that the hat rack is also a mirage.
You only have to spend a day in a typical marketing or sales department to discover that this scenario is analogous to the environment in which management operates.
Various reports and performance indicators (both formal and informal) provide glimpses of reality. However, this feedback falls short of delivering the accurate and complete viewthat managers need in order to be truly effective.
When hobbled with an incomplete and unreliable view of reality, managers’ activities are, at best, inefficient and risk-adverse. At worst, managers unknowingly engage in activities that are harmful to the organisation as a whole.
Hence the need for an objective management structure!
Reality
By definition, reality must be the starting point for an objective management structure.
Without the ability to accurately perceive reality, measurement and, accordingly, management is impossible.
Of course, the concept of measurement presupposes something to measure.
This means that the ability to perceive reality is not enough. We need also to determine upon what aspect of reality we should focus.
It is perhaps self-evident that our focus must be determined by our goal. After all, a measurement out of context with a goal is just a number (data, not information).
If your goal were to drive from Sydney to Darwin, your current location, speed and direction of travel are information; the weather in Perth is data.
For this reason, the most critical step in designing an objective management structure is defining your goal.
I’ve had many managers assure me that this is also self-evident:
Marketing managers tell me that it’s their goal to generate sales opportunities.
Sales managers advise me that their goal is to generate sales.
In each instance, managers forget that the processes they manage are part of a larger system. As a result, they fail to recognise that their goal must be subordinated to the goal of the system.
One system, one goal!
For simplicity, let’s define a system as a set of interdependent processes.
A fine example of a system — one with which we’re all familiar — is an internal combustion engine (pictured below).
As you no doubt know from your experience with this particular system, the goal of the internal combustion engine is to generate torque (rotational force).
As depicted above, this system consists of four processes:
- INTAKE (a mixture of fuel and air is drawn into the cylinder).
- COMPRESSION (this mixture is compressed by the rising piston).
- COMBUSTION (the fuel/air mix is ignited by the sparkplug).
- EXHAUST (the resulting exhaust gasses are expelled from the cylinder).
Now, consider this question for me:
If you were the sparkplug in this system, what would be your goal?
- Would it simply be to generate sparks (as many as possible)?
- Or would it be to generate (a set quota of, say) 10 sparks a second?
Of course, neither answer is correct.
Your goal could only be expressed in terms that recognise the relationship between your activities and the goal of the system.
Accordingly, your goal would be something like the following:
To produce a spark at the top of each compression stroke.*
* Technically, the sparkplug produces a spark fractionally before the top of the compression stroke.
If your goal must be subordinated to the goal of the system, it’s essential for us to identify your organisation’s goal.
Why does this organisation exist?
Whenever I ask this question of a seminar audience, I get a range of answers:
- Some managers claim that their organisations exist to manufacture widgets.
- Others explain that their organisational goal is produce happy customers.
- Others try and cover all bases with statements that reference the organisation¡¯s relationship with all stakeholders (shareholders, staff, the community, the goldfish in the corporate pond etc.)
In each instance, managers are confusing the goal of their organisations with necessary conditions.
The goal of any commercial organisation is, by definition, to make money.* Necessary conditions are the conditions that must be present to enable this goal to be achieved.
* Goldratt (whose work has had a significant impact on the thinking behind this article) explains that the goal of a business is to make money, now and in the future. I would argue (as, in fact, does he) that the latter part of this statement is redundant (we’re all accustomed to recognising the value of future revenues). To learn more of Goldratt’s work, begin by reading The Goal.
While the idea that the goal of a commercial organisation is to make money may initially cause managers some discomfort (believe me, it does), it also provides the clarity we need to start to piece together our objective management structure.
Unravelling organisational complexity
As our internal combustion example illustrated, all goals at a process level must reflect the contribution that the process makes to the goal of the system as a whole.
Unfortunately, organisations tend not to be as simple as our little engine.
In fact, one of the greatest challenges faced by managers is the requirement to understand the interaction between multiple organisational processes.
As has been explained in recent editions of AdVerb, this challenge has been greatly simplified by Goldratt’s Theory of Constraints (TOC).
In short, TOC recognises that the output of any system is determined by the system’s constraint (or bottleneck). It also points out that:
- Every system has a constraint (if it didn’t, output would be infinite).
- At any one point in time, every system has only one constraint.
- A stable system is one where the constraint remains in one location.
- Because the constraint is the sole determinate of system output, every management decision should reference the constraint.
- The investment of resources in any non-constrained process or activity will produce absolutely no return (contrary to the assumptions that underpin cost accounting).
An understanding of TOC enables a manager to ignore organisational complexity when making decisions, and simply consider the impact that the options under consideration will have on the system’s constraint.
Now, because the goal of the organisation is to make money, when we’re discussing system output, what we’re really talking about is money. And when we’re discussing the system’s constraint, our consideration is the flow of money at the constraint.
TOC practitioners use a simple formula to express this concept:
Flow of Money = Throughput / Available Constraint Units
Throughput (T) refers to revenue minus totally variable costs (true gross profit).
Available Constraint Units (ACU) refers to the number of units of constraint that are available over the period of consideration. (If the constraint is a machine, the Constraint Unit is likely to be time-based. If the constraint is a salesperson, the Constraint Unit will be an appointment slot.)
As we’ve established, the goal of every process within our organisational system should reference the organisational goal: maximising the flow of money at the system’s constraint (or T/ACU).
Let’s pause now, for a practical example.
A two-process organisational system
Consider the simple organisation pictured below.
If we assume that the constraint in the organisation above is in the production process, what is the goal of the sales process?
Is it to produce as many sales as possible?
Obviously not!
The sales process should produce enough sales to ensure that the production process operates at peak capacity, all the time. To produce more sales than this would waste resources (and annoy the marketplace).
But, that’s only the half of it.
If the production process is constrained, the sales process should also produce the kind of sales that are going to deliver the greatest return on the Constraint Units consumed.
Here’s the solution:
System Goal: maximise T/ACU (measured at point of sale).
Production Process Goal: maximise T/CU (measured at point of sale).
Sales Process Goal: maintain a production buffer of optimal size (x days’ worth of unstarted work in progress). Maximise the value of the production buffer (T/CU).
To translate this into plain English:
The goal of our simple organisation is to maximise the yield (Throughput) it gets on its Available Constraint Units. (Because the output of a system is determined by the system’s constraint, this is equivalent to saying that the goal of the organisation is to make money.)
The goal of the production process is to maximise the yield it earns on every Constraint Unit it consumes.
The goal of the sales process is to:
- Maintain a buffer (or inventory) of unstarted work in progress (or orders) of an optimal size. If this production buffer is too small, there is a risk that the production process may sit idle from time to time. If it is too large, this indicates that the sales process is wasting resources that would be better deployed at the constraint.
- Maximise the value of the production buffer. The value of the buffer is the total Throughput that the buffer represents, divided by the number of Constraint Units that will be consumed to realise this Throughput. The inference here is that not all Throughput dollars are equal in this scenario. The sales process must focus on winning the sales that produce the greatest yield on the scarce Constraint Units.
The sales process dissected
We have now accumulated all the theory we need to apply our focus to the sales process.
I’m going to assume for simplicity’s sake (and because it is often the reality) that your system constraint is your sales process. In other words, I’m assuming that your production process can handle all the sales that your sales process produces (at least for the duration of this discussion).
Because we’re now shifting our focus from the system (which is a collection of processes), to one particular process within that system, we’re now going to have to think at a more granular level.
Our interest now shifts from determining which process is constrained to determining the exact location of the constraint within the constrained process.
Let’s consider a simple sales process (designed around Relationship-centric guidelines), containing three personnel:
The basic responsibilities of each person are:
- Marketing Coordinator. Producing sales opportunities.
- Sales Coordinator. Managing the salesperson’s diary.
- Salesperson. Negotiating transactions.
Before we even attempt to manage this process, we need to determine exactly where the constraint is.
Now, the nice thing about operating at this level of granularity is that you get to choose! At this level, it’s quite easy for you to shift resources around to ensure that the constraint is exactly where you want it to be (and to ensure that it stays there).
If you consider that, in any process, by definition, it is only the constraint that operates at 100% capacity, ask yourself, who in the process above would you least like to be idle?
It’s obvious, isn’t it?
You would like your salesperson to be operating at 100% capacity, all the time. This is because your sales process will generate a greater flow of Throughput when your salesperson is fully utilised than it will when either your sales or marketing coordinator is flat-out (and your salesperson has idle time).
If you want to ensure that your salesperson is the constraint (and stays that way), you simply over-resource the marketing coordinator and the sales coordinator. In practical terms, this means ensuring that they never have to operate at full capacity (at least where their critical tasks are concerned).
As we did in our previous example, we’re going to take one more precaution to ensure that the constraint stays put.
We’re going to build an inventory (or buffer) of unallocated sales opportunities to ensure that the salesperson never has to sit idle.
The resulting process is pictured below:
Now, let’s apply the same logic to this sales process that we applied a moment ago to our simple organisational system.
We should first remind ourselves that the sales process pictured above is part of a larger system ¡ª the business as a whole.
We already know that the goal of that system is to make money.
We also know that the money that the system makes is determined by the organisational constraint, which happens to be the salesperson.
The salesperson’s Constraint Unit is an appointment slot.
Accordingly, the goal of the system as a whole is to maximise T/ACU (or Throughput / Available Appointment Slot).
Now, if we shift our focus to the sales process, it is obvious that the goal of the sales process must be the same as the goal of the system. (The sales process is the constrained process.)
Let’s look now at each of the personnel operating within the sales process.
The salesperson’s goal should be to maximise his Throughput per appointment slot consumed (or Throughput / Appointment). It’s worth noting that the salesperson’s goal is not simply to maximise Throughput, nor is it to maximise his conversion rate. Each of these goals is likely to result in behaviour that is sub-optimal in the context of the system as a whole.
The sales coordinator’s goal is to keep the salesperson fully utilised. In other words, it is her responsibility to ensure that every available appointment slot is filled. (An empty appointment slot represents an opportunity cost equivalent to the average Throughput / Appointment).
As you’ve no doubt guessed, the marketing coordinator is responsible for both the size and the quality of the opportunity buffer. The buffer should be maintained at its optimal size (measured in days¡¯ worth of appointments). It should also be composed of opportunities that are likely to yield the highest Throughput / Appointment.
Now that we have established an objective (and systemically congruent) goal for each person in our sales process, performance indicators are pretty much self evident:
| Function | Goal | Performance Indicator |
|---|---|---|
| Sales Process | Maximise yield on Salesperson | Throughput / Available Appointment Slot |
| Salesperson | Maximise yield on Appointments | Throughput / Appointment |
| Sales Coordinator | Ensure salesperson is fully utilised | % of Optimal Utilisation (Optimal Utilisation is 100%) |
| Marketing Coordinator | Maintain opportunity buffer at optimal size. Maximise value of opportunity buffer |
% of Optimal Days. {Throughput / Appointment Slots x Probability}* |
* means sum of. Throughput, Appointment Slots and Probability are all estimates. Probability refers to the probability of your converting that opportunity.
Management just got easier
Well there it is: an objective sales process management structure!
Each person’s goal (and the accompanying performance indicator) is congruent with the goal of the system as a whole ¡ª and, accordingly, is reality based.
Each performance indicator is quantitative, rather than qualitative, meaning that no subjective interpretation of results is required.
Each person has only one or two performance indicators (one is optimal), meaning that there is no confusion as to what she should be doing, and how she will be judged.
Each person is likely to have a clear understanding of the contribution she makes to the success (or otherwise) of the system as a whole. As well as being good for morale, this discourages the development of political factions.
Creating a productive environment
As I’m sure you’ve already realised, an objective management structure will make an enormous contribution to organisational productivity.
However, there are three more initiatives we recommend you implement in order to create a truly productive environment.
- Use run charts. It’s one thing to allocate a performance indicator to a team member. It’s another to find a way to use this information to positively influence her behaviour. If you remind yourself that a performance indicator is just feedback from the system, the solution is obvious: plot it on a graph. Better still, have each team member plot her performance indicator on a run chart. An example of a run chart follows. This was generated within Excel, however, traditional plotting paper does as good a (and some would argue, better) job.
- Eliminate budgets and bonuses. Managers traditionally have attempted to motivate their teams with a cocktail of artificial stimulants. Budgets, bonuses, performance reviews, quotas and management exhortations are tactics invented by management to cope with the lack of an objective management structure. You’ll find that, if you simply pay your team members what they’re worth — and have each discuss his or her run chart at a weekly management meeting ¡ª your requirement for these artificial stimulants will rapidly dissipate.
- Replace the word maximum with optimum. In this discussion I have taken a shortcut (for the sake of simplicity) and allowed myself to use the word maximum on a couple of occasions. I’ve referred to maximising the yield on the constraint and to maximising the value of the opportunity buffer.
My preference is, in both cases that you replace the word maximise with optimise.
We’ve already discovered that every process (and system) is constrained. What this means is that, if you scale a process, you will eventually reach a point of diminishing returns.
In the case of maximising the yield on the constraint, you may find the constraint moves (which is generally undesirable), or that your ability to grow your business is constrained (it takes time to recruit and train new staff).
In the case of maximising the value of your opportunity buffer, you’re likely to find that, past a certain point, increased promotional costs are likely to overwhelm any increase in opportunity value.
Now, in both instances, it will take some experimentation to determine those optimas. However, in the short term, I suggest you aim only for incremental improvements in these (and similar) situations. From a systemic perspective, it is far healthier to aim first for stability, and second for incremental improvement, than it is to set stretch goals. (The latter approach is guaranteed to wreak havoc elsewhere in the system.)
My thanks to James Powell (Viago), who provided technical assistance for this article. Viago assists organisations to apply TOC to production processes. www.viago.com.au
