Harry Chapman Principal Bay Area Consulting Group LLC Hchapman@baconsulting.net (415) 971-5746

1. The “Science” of Proven Performance Measurement Techniques and How to Apply them Harry Chapman Principal Bay Area Consulting Group LLC Hchapman@baconsulting.net (415) 971-5746 5

2. Let’s Look at a Process

3. Various Measures Can Be Inserted into the Process

4. Proven Approaches • Re-engineering • Six Sigma • “Lean” Six Sigma • Total Quality Management (TQM) • Kaizen • Balanced Scorecard

5. Re-engineering • Business process re-engineering is the analysis and design of workflows and processes within an organization. According to Davenport (1990) a business process is a set of logically related tasks performed to achieve a defined business outcome. Re-engineering is the basis for many recent developments in management. • Cross-Functional Teams • Enterprise Resource Planning • Supply Chain management • Collaborative Systems • Customer Relationship Management

6. Re-engineering Start over with a clean sheet of paper – “Green field”

7. Six Sigma • Six Sigma is a set of practices originally developed by Motorola to systematically improve processes by eliminating defects.[1] A defect is defined as nonconformity of a product or service to its specifications. • Six Sigma asserts the following: • Continuous efforts to reduce variation in process outputs is key to business success • Manufacturing and business processes can be measured, analyzed, improved and controlled • Succeeding at achieving sustained quality improvement requires commitment from the entire organization, particularly from top-level management • The term "Six Sigma" refers to the ability of highly capable processes to produce output within specification. In particular, processes that operate with six sigma quality produce at defect levels below 3.4 defects per (one) million opportunities (DPMO)[3]. Six Sigma's implicit goal is to improve all processes to that level of quality or better.

8. Six Sigma Systematically improve processes resulting in processes that are HIGHLY CAPABLE Defects < 3.4 in 1 million occurrences

9. Six Sigma Six Sigma is Here – 99.99966% defect free

10. Six Sigma is Important because: • Non- Six Sigma companies typically spend 25-40% of their revenues fixing problems • Six-Sigma companies typically spend <5% of their revenues fixing problems.

11. Deming’s Philosophy Quality tends to increase and costs fall over time

12. Six Sigma is Based on “DMAIC” • Define • Measure • Analyze • Improve • Control

13. Six Sigma is Based on the “Three Components of Knowledge” [according to Dr. W. Edwards Deming] Original Data as Evidence Prediction Degree of Belief in Prediction Based on the Evidence

14. Underlying Assumptions re Six Sigma • Optimizes the reliability of a process • The underlying assumptions are: • Process is repeatable • Process is well-defined • Process is frequent (many cycles) • Process is stable • Process can be flow-charted Approach only applies to WELL-STRUCTURED work

15. Six Sigma • Raytheon’s Aircraft IT Department • Used Six Sigma to improve claims processing and save the company $13 Million • J.P. Morgan Chase • Used Six Sigma to standardize the company’s processes and measure the impact of technology programs • Seagate Technologies' IT Department ALL have Six Sigma Training • Saved $4.7 million over two years by treating IT processes as if they were a factory

16. “Lean” Six Sigma Defects < 3.4 in 1 million occurrences FASTER

17. “Lean” Six Sigma • Lean Six Sigma is a business improvement methodology which combines (as the name implies) tools from both Lean Manufacturing and Six Sigma. Lean manufacturing focuses on speed and traditional Six Sigma focuses on quality. By combining the two, the result is better quality faster. • Lean Six Sigma utilises the DMAIC phases similar to that of Six Sigma.

18. Underlying Assumptions re “Lean” • Optimizes processes for efficiency • The underlying assumptions are (same as six sigma): • Process is repeatable • Process is well-defined • Process is frequent (many cycles) • Process is stable • Process can be flow-charted Approach only applies to WELL-STRUCTURED work

19. The Synergy of “Lean” and Six Sigma

20. “Lean” Six Sigma • Lean redesigns processes for efficiency • Six Sigma optimizes the reliability of a process Together, they can be quite powerful as long as they are applied to well-structured work

21. Total Quality Management (TQM) "TQM is a management approach for an organization, centered on quality, based on the participation of all its members and aiming at long-term success through customer satisfaction, and benefits to all members of the organization and to society." - International Organization for Standardization Another definition – from Introduction and Implementation of Total Quality Management (TQM) “TQM is a management philosophy that seeks to integrate all organizational functions (marketing, finance, design, engineering, and production, customer service, etc.) to focus on meeting customer needs and organizational objectives.”

22. Total Quality Management (TQM) Supplier Company/Employees Customer

23. Kaizen • Kaizen(改善?), Japanese for "improvement", or "change for the better" refers to philosophy or practices that focus upon continuous improvement of processes in manufacturing, engineering, and business management.

24. Kaizen Focus on Specific Measures to Improve Process

25. Balanced Scorecard • A concept for measuring a company's activities in terms of its vision and strategies, to give managers a comprehensive view of the performance of a business. The key new element is focusing not only on financial outcomes but also on the human issues that drive those outcomes, so that organizations focus on the future and act in their long-term best interest. The strategic management system forces managers to focus on the important performance metrics that drive success. It balances a financial perspective with customer, process, and employee perspectives. Measures are often indicators of future performance.

26. Balanced Scorecard And Now for Something COMPLETELY Different- The Balanced Scorecard focuses on measures for initiatives that enable organizations to implement strategy – more on this later

27. OK – Now What? • What do these companies have in common? • Wal-Mart – The largest retailer in the world • Dell – Creator of direct to consumer computer sales • Southwest – Innovative low-cost airline (think Ryan Air) • Volkswagen – Now the largest automobile manufacturer in the world

28. Lessons • Each has achieved sustained leadership in an intensely competitive industry • None presents offerings with highly differentiated features • Key to each one’s success is operational innovation – inventing and deploying new ways of performing work that yield strategic advantage

29. Keys to their success: • Wal-Mart – logistics – efficient supply chain • Dell – Fulfillment – build to order • Southwest – Operations – quick turnarounds • VW – Manufacturing – “Using Common Parts across multiple product lines” Results: lower costs, higher quality, superior service, better asset utilization

30. A subtle but important distinction… Operational innovation is not the same as operational excellence Flawless execution of conventional mechanisms vs. deployment of novel mechanisms

31. The Key…. • Process: End-to-End Work • Breakthrough performance improvement comes from redesigning work on an end-to-end basis • The constraints on performance are in the process, not in the tasks • Getting at the “white space” in the organization and eliminating non-value-adding work

32. The Ingredients of Process • Cross-functionality and teamwork • Customer and outcome focus • Design and discipline

33. Insights from a Process Leader • “At Toyota, we get brilliant results from average people managing a brilliant process. • Others get average results from brilliant people managing broken processes.”

34. Increased customer retention, higher market share, entry into new markets, execution of new strategies Lower prices, greater customer satisfaction, differentiated offerings, stronger customer relationships, greater agility Lower direct costs, better use of assets, faster cycle time, increased accuracy, greater customization or precision, more added value The Pyramid of Process Payoffs Strategic Marketplace Operational

35. But what does any of this have to do with IT?

36. Shift to Process-Centered IT • Position the work of IT in process terms • IT as a business within a business • The customer is the enterprise – treat it as a customer • Develop a process model for IT • Identify and name processes • Specify inputs, outputs and inter-relationships • Formulate customer-driven performance metrics • Appoint process owners • Senior managers with end-to-end responsibility for process performance • Not necessarily resource owners • Manage the processes on an ongoing basis • Measure relentlessly • Redesign for breakthrough improvement • Improve to solve problems

37. Experience has Shown… • Organizing and Managing Work as a Process Leads to Consistency and Low Cost • Outcome Focus and Team Orientation • Measuring the Right Things and Using Metrics in a Disciplined Fashion Leads to Superior Results • Treat IT Management as a process • Others will persist with traditional thinking despite its manifest failure • The Inertia of internalized mental models Source: Dr. Michael Hammer – Hammer and Company

38. Experience has Shown… • Managing with Metrics Requires Ceaseless Discipline and Disturbs Ingrained Beliefs and Behaviors • Reshaping the value system and culture • Measuring the Right Things and Using Metrics in a Disciplined Fashion Leads to Superior Results • Treat IT Management as a process • Others will persist with traditional thinking despite its manifest failure • The Inertia of internalized mental models Source: Dr. Michael Hammer – Hammer and Company

39. Some Examples from Industry.. • Fast Food Chain • Left-over food • Electric Power Utility • Time to Reinstitute Service • Aircraft Engine Manufacturer • Accelerating Engine Repair – “W2W” • 6 days to 2 days

40. Key Point!!! • You Can’t Manage IT Unless You Understand How IT works