Author: Brad Power

We don’t often think about the way we usually operate at work, whether we’re performing an informal five-step process for evaluating a new proposal, or setting priorities for managing our time. But our ability to improve the ways we do things depends on defining and shaping our daily habits of mind and practice — our “standard work.”

Consider the experience of my friend Lynn Kelley, who joined Union Pacific Railroad, the largest railroad network in the United States with 46,000 employees, as vice president of continuous improvement about two years ago. When she arrived, she learned that a large proportion of the workforce would retire over the next decade. So the organization started documenting standard operating procedures to capture employee know-how and wisdom. She told me, “I initially thought standard work would make people into robots. Instead we learned to use standard work to involve workers in documenting and improving their work. Managers think that they should find out what the best practice is and then roll it out. But we decided if we did that, we’d pay for it in worker engagement. Instead, we look for work groups that are willing to be involved in developing their own standard work, and implement there first.”

In the discussion that followed my post on balancing compliance and autonomy, I learned that there is great richness and breadth in the reasoning behind how organizations have defined standard ways of doing things. But it struck me that the reasons broke down into three broad categories: (1) to ensure people comply with “must do” procedures (e.g., safety checklists), to achieve consistency, avoid safety or regulatory problems, or handle emergencies; (2) to make people aware of “should do” practices (a routine that has been determined to be the best way to do things), to achieve adaptability, flexibility, and even innovation; and (3) to let people know where they have discretion in what they “may do” (e.g., give up to $50 to customers who have been treated badly), to foster creativity, innovation, flexibility to meet customer needs in real-time, and worker job satisfaction.

“Must Do” Procedures. Avoidable failures continue to plague us in almost every realm of organizational activity. In his book, The Checklist Manifesto, Atul Gawande, a surgeon at Brigham and Women’s Hospital in Boston, makes the case for the simple checklist as a way to avoid failures and manage complexity, especially when human lives are at stake. Airplane pilots developed the checklists they use for takeoffs and landings to make sure that planes don’t fall out of the sky due to avoidable mistakes. Gawande tells of dramatic reductions in infections when putting a “central line” in patients by checking off the steps, such as washing hands and cleaning the patient’s skin with antiseptic. Checklists help with memory recall and clearly set out the minimum necessary steps in a process. As Gawande says, “Under conditions of complexity, not only are checklists a help, they are required for success. There must always be room for judgment, but judgment aided — and even enhanced — by procedure.” “Must do” procedures also require permission for deviation.

“Should Do” Practices. How can we do the work of the organization, execute its strategy and fulfill its mission, better. The disciplines for how workers should do their work best are well defined by certain process improvement methods I’ve discussed previously, some well-known and others less so. To distill: when something has been standardized, that standard becomes the foundation for experiments to improve the work. Workers identify problems in delivering what customers want, develop a hypothesis about how work can be improved to deliver the required quality level, change one variable at a time, and observe whether it makes the work better. Adhering to the standard ensures that improvements will be sustained; it also facilitates training. “Should do” practices provide help for workers on what to do in the zone between “must do” procedures and “may do” discretion. And a final key point: to make many small and rapid improvements to the work on a continuous basis, people need to be strongly engaged in generating new ideas and conducting experiments.

“May Do” Discretion. To build an organization’s capabilities, and to increase people’s overall engagement and motivation, leaders should give team members every opportunity to take initiative and be creative. Your people want autonomy to master their work and fulfill the organization’s purpose. Therefore, an organization should be explicit about where it encourages initiative. One obvious area, as described above, is to ask people to look for ways to improve their work. Another example is in handling customer dissatisfaction incidents. For example at Ritz Carlton employees can spend up to a certain dollar limit to solve a guest’s issue. Or at Starbucks, employees follow an approach that encourages them to be flexible in their customer interactions. As Kelley told me, “When customers need service in real time, workers who are empowered to be flexible within standards can better meet those needs…because you can’t anticipate each one — or write a script in advance! Putting decision-making closest to the people who touch the customer is key.” “May do” discretion helps workers do what they probably should do, not what they must do.

We need to do away with the notion that standards necessarily mean rigidity. Rather, standard work can help people do their jobs consistently and reliably, and improve how they do it. Instead of considering your people as mindless, uniform “workers” (as Frederick Winslow Taylor did in a bygone era) who must be constantly supervised and arm-twisted into doing the correct thing, companies like Union Pacific are helping them do their jobs better using a flexible view of standard operating procedures. The traditional view that efficiency requires bureaucracy and that bureaucracy impedes flexibility should be replaced with a new model: clever application of standard work allows you to have efficiency and flexibility.

Most people think standard operating procedures are a strait jacket that limits their flexibility. Yet in our increasingly complex world of work, with so many possible decisions and steps, clever use of standards can liberate. They can actually make it easier to tailor customer experiences at low cost.

Consider how standards are helping the Cleveland Clinic, rated one of the top hospitals in the United States. As Chief Marketing Officer Paul Matsen told me, “We use enterprise-wide standards. There is one marketing communications team, and we work across all our institutes, such as heart and vascular, or cancer. Having a single enterprise brand and image creates organizational challenges because it seems as though it constricts autonomy. But it actually creates freedom within a structure. For example, we are building a development platform for the iPad, and defining how it will interact with our electronic medical record system. When we resolve that for this first application, then our people will be able to create content for other applications using the same standard platform. Once you set up the standards and platforms, you can do more, and you can do it well.”

The Cleveland Clinic cleverly uses standards to deliver operational consistency, reliability, and low cost. Yet at the same time they use these standards as a springboard for creating unique solutions for each customer based on a deep understanding of their needs. (I call this understanding and tailoring “customer intimacy”). The result is a powerful combination that fulfills two customer value propositions at the same time.

Another example at Cleveland Clinic is in search engine marketing. Paul Matsen: “We’ve seen that when patients are diagnosed with a disease, they’re increasingly going to the web to research care, diagnosis, treatments and doctors. We’ve reshaped our marketing mix to reflect this new patient behavior. We spend half our media dollars to reach consumers searching for health information, and we have built reliable and useful experiences for those who come to our site. We partnered with institute leaders to build a few patient pathways, and we’ve expanded to over 100. It’s a very efficient model for patient access. Building on our standard approach, we were able to scale and replicate easily.”

Twenty years ago my friends Michael Treacy and Fred Wiersema asserted in their HBR article “Customer Intimacy and other Value Disciplines” that leading companies succeed by excelling at one of three “value disciplines” — operational excellence, customer intimacy or product leadership — while meeting industry standards in the other two. They predicted that future winners would need to master two of these value disciplines. And the smart use of standards, as at the Cleveland Clinic, is part of the answer.

I see more and more companies mastering “operating models” — that is, their culture, business processes, management systems, and computer platforms — that use standard work to drive operational excellence and also provide a platform for tailoring customer solutions. For example, in a previous post, I described how Tesco made major strides in its supply chain management in the 1990s by applying standard process disciplines. It then added customer insights it gained from its Clubcard loyalty program and online shopping data to those more capable supply chain processes to tailor customer offerings in local stores and online.

The traditional view that complying with standards is part of a rigid “command and control” management system should be replaced with a new model: clever application of standard work allows you to have both efficiency and the flexibility to offer unique solutions to each customer. In my next post I’ll delve more deeply into different kinds of standards, from checklists for safety to the standard work that forms the basis for continuous improvement.

Going to market effectively these days, no matter what business you’re in, means relating to customers as individuals — even if there are millions of them. In a previous post, I described how U.K. retailer Tesco built detailed profiles of customers and then used these insights and a flexible supply chain to customize their products and offers.

How, precisely, did they do this? Creating products and services for market segments of one (“mass customization“) isn’t easy. The only way it can happen: marketing, IT, operations, and human resources functions must collaborate in unprecedented ways. As John Kennedy, vice president of corporate marketing at IBM, told me, success requires that companies execute the marketing basics they’ve always done — getting to know customers better; helping them in the buying process and tailoring offerings; and developing their trust — but, crucially, updating and amplifying them in light of new technologies. The biggest changes, not surprisingly, are in the marketing function, itself — the source of these new, more detailed customer insights. But the insights won’t be useful unless companies change core business processes and employee behavior. Here are some illustrative ideas in each of the three areas:

Getting to know customers better depends on getting them to share more information, as Tesco did with its Clubcard. It means building a profile of each customer, based on transaction and social media data (e.g., their comments on Facebook and LinkedIn). IBM has built a customer database called Blue Insight, an analytics cloud computer system that unifies hundreds of software applications for more than 200,000 IBM consulting, sales, technical and marketing people. Blue Insight integrates marketing campaigns (and the customer inquiries they spawn) across digital, social, mobile and traditional marketing channels. It provides sales and marketing professionals with insights on customers, which in turn helps IBM tailor communications based on this deep customer knowledge.

Helping customers includes offering information to make their buying process easier, as, for instance, Netflix and Amazon do with their product recommendations. They’re using tailored suggestions to drive customer loyalty. When done well, it feels like a service. For example, Marcus Sheridan, an owner of River Pools and Spas, a 20-employee installer of in-ground fiberglass pools in Virginia and Maryland, overhauled his company’s marketing by shifting almost exclusively to using educational blog posts and videos. In a recent article, Sheridan described how he answered customers’ most common questions about fiberglass pools regarding prices, problems, and competitors. Now when you enter these questions in a search engine, River Pools web pages appear prominently. Clicking on these pages shows a company that is educating customers, not hawking products. By addressing common (and often difficult) questions in such an up-front way, the impression customers get, said Sheridan, is “Oh my gosh, these guys are so honest.”

Developing customer trust requires managing interactions sensitively in an environment of increased transparency. This transparency works both ways. Companies know far more about their customers by analyzing all the data they collect on them. In turn, customers know far more about the companies they buy from through social media — their family, friends and work colleagues talk about companies and their products every day, often not in flattering ways. How a company behaves, and how it responds to this new customer knowledge, have now become moments of truth, as well as the coin of the realm in customer interactions — adding to or subtracting from brand equity. Disgruntled customers can make a video on YouTube to broadcast their tale of mistreatment, as Jarrett Seltzer did when Verizon billed him $2,345 for its equipment when his home burned down. The video went viral, and caused Verizon to change its policies.

But enhanced marketing capability, by itself, is not sufficient for gaining maximum customer intimacy. All the company functions must collaborate towards this goal. Leading marketers are looking to influence all their customer interactions by working closely with operations and their chief human resource officers on the company culture. IBM is analyzing its brand using a “Corporate Reputation and Brand Analysis” system, and it has launched an initiative to address the full range of interactions with customers.

The IT organization is also crucial in becoming intimate with customers. Besides helping analyze customer data, IT can also increase the number and value of online customer interactions. Consider the Cleveland Clinic, the multispecialty academic medical center rated one of the top hospitals in the United States. In a recent HBR video, Paul Matsen, chief marketing and communications officer, and CIO Dr. Martin Harris described how the marketing team works with IT to deepen online relationships with patients by using the web more effectively. For example, marketing wanted to attract patients who need very specialized medical procedures. So it worked with IT to place online ads when people use key words in online searches. The ads steer patients to information relevant to specific medical needs and provide the ability to schedule a consultation from the Cleveland Clinic’s specialists. While this may be seen as a pretty basic story of paid advertising, it also highlights the necessity of collaboration across functions in order to achieve close knowledge of, and high value for, the customer.

As I’ve said previously, translating customer data into insights is hard. But turning these insights into new customer experiences and revenue is even harder. An even bigger challenge is getting all the functions of the organization to work together to create the most value from detailed customer insights.

Most organizations continuously strive to achieve operational excellence, but they spend less effort understanding customer needs — and few marry these two sources of customer value effectively. While a focus on lowering costs, improving quality, and providing consistent, reliable service will continue to be important, I see a shift in the coming decade to combining operational excellence with customer intimacy: tailored solutions for individual customers based on a deep understanding of their needs.

Consider Tesco, one of the world’s largest retailers with over 500,000 employees, which has spent the last three decades improving its supply chain processes, and the last two decades collecting and analyzing customer data. In the 80s and 90s,Tesco modernized its supply chain, introducing point-of-sale scanners, centralizing and/or automating ordering, distribution and warehouse control, and establishing electronic data exchange with its main suppliers. As a result, lead times to stores came down from as much as two weeks to two days, and lead times from suppliers fell from 2-3 weeks to three days. In 1996 Tesco adopted Toyota Production System approaches to take its supply chain operations to an even higher level. Working with suppliers, it mapped the flow of several product families and uncovered opportunities to streamline logistics. The company redesigned its processes so products flowed quickly from suppliers to store shelves, rather than be processed in batches in production, packaging, transportation, and stores. For example, Tesco introduced wheeled dollies for fast-moving products such as soft drinks, which dramatically streamlined handling between suppliers, warehouses, and the stores, improving cycle times and reducing costs.

But to get the full value of its improved supply chain capabilities, Tesco needed to marry its upgraded operations with a deeper knowledge of its customers than it could get from aggregated scanner data. So in 1993, the company launched its “Clubcard” with which customers could earn points for purchases, redeemable for discounts or gifts. While it was building loyalty with Clubcard points, Tesco quietly built up profiles of its card-holders, including which areas of the store they visited and their product preferences. Working with consultancy dunnhumby, they eventually defined 16 lifestyle “clusters” by combining in-store shopping data (which told them what customers bought and where) and home shopping data (which also told them what customers wanted to buy but which wasn’t available).

You may be saying, OK, so they built a customer database. What’s the big deal? The big deal, and what’s really powerful, is what Tesco did with the insights it gathered. It used the customer profiles to uncover unmet needs, and to design and launch a series of services to meet those needs, including smaller local convenience stores and online shopping. Tesco tracked where customers bought — online, or in convenience, High Street, supermarket or hypermarket formats. Then it customized the product ranges at smaller stores for the local customer base. With only 1,500 items, a convenience store has to get its product mix just right. As told to me by Dan Jones, the chairman of the Lean Academy who worked with Tesco, CEO Terry Leahy was convinced that the company should develop these new formats, and actively supported their development, despite the concerns of store managers that their sales would be cannibalized. (For more on the Tesco story, see Terry Leahy’s book Management in 10 Words and Dan Jones’ book Lean Solutions).

Linking supply chain capabilities and customer insights, Tesco worked out the operational details of how to deliver exactly what customers wanted to each type of store. Their agile supply chain allowed them to replenish small stores at the same cost as big stores — so they could charge the same prices in every format. They continued to use insights from Clubcard to regularly adjust offers, tweaking the supply chain accordingly. Interestingly, as soon as they rolled out home shopping, store managers saw increased sales rather than cannibalization and so were quickly won over.

If you listen to the hype about “Big Data” and “analytics,” it sounds as if it’s getting easier and easier to derive customer insights. But the truth is, translating data into insights is hard, and translating insights into new customer experiences is much harder still. That companies like Amazon and Netflix can help you purchase by recommending products is a step forward. But it is a bigger challenge to change order fulfillment and other concrete steps in the customer lifecycle as Tesco has done.

Few organizations have Tesco’s foundational discipline of continuous operational improvement, which allows them to take full advantage of the insights they can glean from analyzing customer data. Even fewer companies have the cross-functional teamwork that enables them to turn those insights into new customer experiences delivered by operations and customer service. But marrying these two competencies is quickly becoming a competitive necessity to deliver higher levels of value to customers than was previously possible.

What do you do if you’re a leader in a large, successful organization with an entrenched bureaucracy, and you see the need for innovation? Can you change the way a large organization — such as the federal government — does its work, when all the forces are arrayed for stability and conservatism?

Consider the story of the Business Transformation Agency of the Department of Defense, which was founded in 2005 under Defense Secretary Rumsfeld, and “disestablished” in 2011 by Defense Secretary Gates. The Business Transformation Agency was populated by people brought in from the commercial sector. They were bold and brash and injected fresh new ideas that challenged existing policy and practice in many quarters of the Department of Defense administration (such as finance, human resources, procurement, and supply chain processes). They ran into many of the familiar challenges of making changes in the federal government: the difficulty of firing; the complexity of hiring at many levels of management; the need for contracts to be put out for competitive bidding; multiple stakeholders including civil servants, appointees, contractors, regulators; and Congress to be considered in almost all decisions. Unlike at commercial companies, there was no senior leader who could mandate changes. The Deputy Secretary of Defense that originally sponsored the agency under Rumsfeld left, and the new leader was less enthusiastic, ultimately leading to the agency’s demise. The entrenched culture of the Department of Defense defeated attempts to change it.

The Internal Revenue Service (IRS), however, was successful in transforming its bureaucracy. The IRS had two advantages: Congress provided a strong mandate for change (the U.S. IRS Reform and Restructuring Act of 1998); and an outstanding, senior executive from the private sector, Charles Rossotti, was appointed for a five-year term to drive the changes. Under Rossotti’s guidance, the IRS reorganized from a geographic structure to four new customer-oriented operating divisions. IT also upgraded old technology and processes, achieving significant improvements in service and compliance. For example, it implemented an Internet service that answers the question “Where’s my refund?” that has had over one billion hits and freed up 800 customer service representatives to handle more complex issues.

So, what makes the difference between success and failure? Based on long experience working with government agencies and with large organizations of all stripes, I have seen that big changes to the way work is done require:

• a team of insiders and outsiders to come up with new ideas
• a clear external motivation to do something
• strong leaders who believe in the ideas and push the bureaucracy to implement them consistently over a number of years

Sometimes (but not often) bureaucracies do make incremental changes to the way they do work, but they are usually not sufficient to meet citizen-customer needs. An innovation team composed of the “best and brightest” (like the “bold and brash” Business Transformation Agency) can identify bigger changes, but those cannot be implemented inside a strong bureaucracy without a strong and clear motivation to change. Now, in a competitive free-market environment, a for-profit company can be motivated by threats to its survival, or by declining market share and profitability. The big challenge for a government agency, however, is that the motivation needs to be a congressional or administration mandate. I’d like to tell you there’s another way to motivate change in case you don’t have such a mandate, but in the extreme environment of an entrenched bureaucracy, I haven’t seen it. Thus, needed process changes within bureaucracies should always be built into such initiatives. Probably most important, though, as in the example of the IRS, a senior leader is absolutely essential to drive the change and sharpen the organization’s focus on citizen-customers — to overcome the natural tendency of bureaucracies to focus internally. And as the IRS and Department of Defense stories illustrate, the bureaucratic ship won’t turn on a dime — leaders need to sustain focus on the changes over the long term, likely for five years or more.

Leaders of big bureaucracies need to get — and keep — everyone enthused, create and communicate a future vision, assure support during the transition, insist on excellence, create demands on managers, and convince everyone of top management’s conviction and commitment to change. These leadership challenges may seem familiar, but in a bureaucracy they are, if anything, magnified. To sustain momentum in this special context, leaders may need to adopt the behaviors of a fanatic — as Winston Churchill said, “A fanatic is one who can’t change his mind and won’t change the subject.”

Of course, the federal government provides an extreme example of entrenched bureaucracy with an established way of doing things. But it offers lessons to any organization that is mature, successful, and set in its ways, yet recognizes the need to transform itself.

Companies increasingly use outside specialists to do their work. Driven by the ever-lower costs of global communication and online collaboration tools, Henry Ford’s vertically integrated organization is yielding to Procter & Gamble’s network of external innovators. Almost anything can be outsourced to specialists and reconnected.

While companies have outsourced low-value work such as payroll processing and call centers for decades, today they farm out critical activities. Apple gets mobile apps from independent software developers. Forbes.com uses external bloggers (not just internal staff) to write articles. And Indian mobile phone provider Bharti Airtel uses IBM to manage its computer systems and Ericsson to operate its cell tower infrastructure.

Consider how the largest consumer packaged goods firms are outsourcing an activity that has become vital to the top and bottom line: making sense of huge volumes of customer data. You might think these companies should crunch and analyze this data themselves. Don’t they live and die on quickly identifying key changes in shopper behavior and attitudes? That’s essential to tweaking products and marketing campaigns — or overhauling them when necessary. Yet Carrie Shea, president of AMG Strategic Advisors, the growth strategy consulting unit of Acosta Sales & Marketing, told me, “Most are leveraging outside partners rather than doing this all themselves to (1) make sense of the overwhelming volume of data that they have to analyze, (2) get a strategic view across channels and categories, and (3) be efficient in complex advanced modeling.”

TW Garner, which makes Texas Pete Hot Sauce and Green Mountain Gringo Salsas, has hired AMG Strategic Advisors for consumer, shopper, and category insights and analytics services. Steve DeCorte, TW Garner’s general manager of sales, told me that “as a small company, using AMG Strategic Advisors puts us on a level playing field with the largest consumer packaged goods companies when we call on retail customers.”

While companies are making greater use of outside specialists to improve performance, they face two trade-offs. The first is greater costs; outside specialists can be expensive. The second is increased risk of coordination and integration, such as managing service level agreements and handoffs.

How can you organize a fragmented team of internal and external people to improve the customer experience, rather than optimize each party’s objectives?

Create a shared purpose and an end-to-end process map.
Whether in sports or business, a team is a group of people with a shared goal. A fragmented process team needs a single, clear objective to focus and coordinate their activities. For example, as I described in a previous post, all of the doctors, nurses, therapists and other health care providers involved in delivering a hip or knee replacement need to believe they are primarily focused on delivering an excellent patient experience, and that any one of them can jeopardize the reputation of all of them.

But a shared purpose isn’t enough. To succeed in a process that crosses the boundaries of several organizations, workers must see it from end to end. Only by understanding the entire flow and logic can they see opportunities for improvement. And only by collaborating with other process workers can they implement the changes. The best way to get the team in synch is to assemble the key stakeholders of a process in a multi-day workshop to map the current and future process, identify areas of improvement, and define an implementation plan. After the workshop, everyone will have a common vision of what they are trying to jointly achieve. They will also understand how the various work steps affect the process or behavior of others across departments, customers, suppliers, or other stakeholders, and how they can jointly improve the process for the customer.

Liberally share information on process performance.
Many retailers’ supply chains stretch overseas and involve many steps and players. Orders go from the retailer to overseas vendors that manufacture products. After they’re made, the products are trucked from the factories to a container freight station where they are consolidated, then shipped by sea to a domestic port distribution center, transferred to rail or trucks for domestic distribution, and finally to stores. As Charlie Kantz, Vice President Supply Chain with Lighthouse Consulting, told me, many companies lack visibility into, and control over, their products as they move through the pipeline. Yet a number of easy-to-use software apps can provide managers with visibility and control of inventory from the order to a store shelf. The technology (browser-based apps and “cloud” infrastructure) for these apps didn’t exist five years ago, according to Steve Christensen, CEO of Babbleware. The apps sit on top of the underlying legacy systems, providing a communications layer for vendors, logistics providers, and the retailer’s employees at each step. The retailer now sees inventory accumulating in real time without the administrative overhead of phone calls, e-mails and faxes. By having more data on the process, they have much more control of the process.

Create an online community for your process team.
Social networking systems offer a new way to support process teams across organizational boundaries. In a previous post, I described how MITRE, which manages five research and development centers for the U.S. government, has deployed a collaboration system (“Handshake”) to build teamwork between its 7,600 employees and an external network of academics, former employees, vendors, industry, sponsors and front-line beneficiaries of its research (such as IRS workers, soldiers, and health care professionals). For example, a new mobile application MITRE developed was distributed to front-line soldiers, who then gave rapid feedback on the product through Handshake.

Question: How have you used a team of outside specialists to deliver a better customer experience?