For the last couple of decades, businesses have been doing a lot to improve their internal operations. They’ve ticked off an impressive array of programs that have driven corporate productivity to ever higher levels.
Businesses have undertaken:
- quality programs to dramatically reduce waste, scrap and poor customer satisfaction
- low-cost country sourcing to reduce the landed cost of products
- shared services to eliminate intra-firm inefficiencies in areas like back office finance, accounting, IT and HR
In these efforts, businesses have become more operationally efficient. They need fewer workers to deliver the same amount of revenue (i.e., a measure governments use to determine productivity).
But, operational efficiency is an elusive target because as soon as your firm achieves a new level of high performance, a competitor will try to meet or beat your standard. Operational excellence is a never-ending goal. Smart firms are always looking for new methods, processes, technologies, etc. to give them an advantage. This quest for high performance is what keeps thought leaders (e.g., Tom Davenport) and consultancies like Accenture in great demand.
Lately, I’ve marveled at the financial numbers so many firms are posting on Wall Street these days. If you haven’t noticed, firms that are reporting lower revenues are still reporting pre-recession or better earnings. They are doing so because they are scrupulously managing headcount, discretionary spending and other drains on earnings. Most of these moves are working in the short-term while some (e.g., the elimination of R&D spending) will come back to haunt firms later.
That brings me to IT. We’ve tried offshoring some of IT. We’ve tried BPO and we’ve certainly seen a lot of shared service initiatives. In shared services, companies have eliminated a lot of redundant data centers, application software, back office personnel, etc. to get that one big nut: a single set of processes and a single instance of data globally across the entire enterprise.
The gains from shared service initiatives have been huge in some firms. One CIO this December spoke about the hundreds of millions of dollars they spent standardizing on SAP software. While that was a huge sum, he indicated that once the system was in place, the company could, for the first time, see its true inventory in real-time. What this firm freed up in working capital the first year of its shared services operation was a form factor more than what they spent installing SAP.
But now, I suspect, we are at a crossroads. Businesses that are hungry for more operational improvements are going to have to look beyond ERP, shared services and the many other techniques and technologies that have fueled past operational excellence gains.
The cost of back office functions, for example, used to run approximately 4% of total corporate revenues back in the 1960s. It’s down to less than one percent today. Best in class firms can get this down to 0.4% of total revenue. When you’ve already squeezed this number this low, how much more can you do? How much are you willing to spend to get anymore savings/efficiencies out of this? The answer is not much.
No, the focus will need to shift away from shared services, TQM, and other techniques. These will still be valuable to firms but they won’t necessarily be on the cutting edge anymore.
The focus will need to be on different uses of IT and data. We need to focus technology on areas like sensor data, the use of large (1TB or bigger) memory resident databases to parse massive amounts of non-accounting, non-transaction data to corporate advantage. We need to find gold in the data from satellites, from web videos, from news events, from currency movements, etc. We need technologies that tell businesses what to do well before competitors can even sense something has changed in the business world, government, capital markets, weather, etc.
The new technologies need to re-define operational excellence from a study in labor productivity to business opportunity creation. To be operationally excellent now is to:
- have the goods and services people want at the exact moment of need – no sooner and no later
- pre-empt competitors from acquiring footholds in what will become the best markets and market segments
- correctly anticipate the decisions/actions of other constituents (e.g., the U.S. Federal Reserve) and act on this knowledge for significant economic advantage
We have to quit thinking in terms of accounting events. It’s holding us back. It’s hurting our businesses and our economic livelihood.
Are you ready to re-define operational excellence?
