Which savings? How do we prioritise?

Last week I was in Germany, working for a multi-national engineering manufacturing company.  Great place and great people.  The Procurement Manager took us out to dinner, and I took the opportunity to ask him what his major problems were.  He took a few seconds to think (a sensible man), and then described his situation.

All the business units have to make savings - everyone is clear about that (although margins and profits are up across the board).  However he is locked into his approach.  Effectively there is a triple lock;
1. Price reductions
2. Working capital reductions
3. Zero inflation.

All laudable goals, but of course the interaction of them leaves him very little room to manoeuvre with suppliers.  A contractor cannot be award for good performance on a 3 year contract with a say 0.5% increase, regardless of the changes in their input costs.  Higher stock levels and fewer deliveries or longer lead times cannot be used to incentivise the agreement.

To make things even worse, the product mix is highly variable and unpredictable and sales are not located on site.  So if they sell in the EU working capital can go down when the manufactured item is invoiced to the customer.  If the customer is in China and terms are DDP, then it will only leave stock (accounts) 5 weeks after it has been dispatched from the factory when it arrives at the customer.  The procurement department has no input to that, but of course has to deal with the WIP issues.

Tricky.

So the Manager has to achieve all of his targets both individually and collectively, and there can be no trade off.  He was very unhappy when I raised the sort of tricks that business managers often use to make those targets - he is going to do it properly.  I am sure he will, but it is a situation where a little more flexibility might actually help achieve the overall targets.  In particular I worry that Quality is at risk if they have to switch to new suppliers rather than stay with established ones simply in order to gain lower prices.

KPIs in Education and Sport

It is exam result time, and as every year we have a strange situation.  Every year pass rates go up and (almost) every year this is seen as a sign of failure.  If the pass rate has gone up, then the standards must have gone done. 

It is hard to think of any other situation in which improvement in a key metric (pass rates) is seen as a problem.  Generally we think that if something is important, and measured, then over time the measured value will increase because there will be a focus on improvement.  This philosophy is rather at the heart of KPIs.

Of course there are complicating factors.  Newspapers tend to sell more copies when telling us that all is doomed and rubbish, rather than saying how bright and sunny things are.  This does lead them to finding some quite novel ways of highlighting the black lining in a silver cloud.

Politicians of course also have their own agendas - usually how rubbish their predecessors were and how brilliant they have been.  The spin again often has little basis in objective reality  (I note that this year the government were keen to push the idea grade inflation has stopped, when in reality more passed than last year - which in previous times was seen as a symptom of grade inflation).

One of the essential problems here is that we don't really know what we are measuring or why, and what we actually want to happen.  Are exams a way of determining the brightest and best?  Or are they about people meeting a certain standard?

If it is about meeting a standard then it is not surprising that pass rates increase over time - even if the standard itself is raised.  This is what we would normally expect in a business context - conformance increases, and output increases over time as people learn how to do their job more effectively and efficiently.  You would expect teachers to be the same.

If it is about identifying the brightest and the best, then there is no reason for pass rates to increase, and we could just be clear that it is a competition and top marks will go to the top say 5%, and so on down the bell curve.  Of course this does rather mean than only have of the students can be better than average (rather than most being so, as Michael Gove once rather optimistically targeted).  And it does mean that in a good year good but not great students will be penalised, and in a bad year poorer students will be rated higher.

Is it possible to achieve both meeting a standard and identifying the brightest and best?  Probably.  But that requires rather more sophisticated and complex measures than can be printed on the front page of a newspaper.

Which is where Sport comes in.  There is a suggestion that all athletes should publish their blood data, and Paula Radcliffe has had a few fingers pointed at her for suggesting that this is not a good idea.  No one has yet accused her of being a cheat, but there is a feeling some would like to.  I think she has a point.  The data is complex and needs considerable expertise to interpret.  My statistics are not great, but I do understand the main points that any repeated measurement has a variation in it, and that rogue measurements do occur.  Not only are 50% of measurements above the average (mean, assuming a Gaussian distribution) but 2% will be significantly above (and below) the mean - more than 2 standard deviations.  So we WILL get outliers.  Odd results.  Random high scores. 

Do you think that newspapers seeing one very odd high result will say "oh that is with the margin of error, and is probably random noise on the measurement"?  Or will they say "cheat"? 

And of course if you are a female athlete do you want your pregnancy to be announced through your drug testing results?  Particularly in the very early days when the body adapts but the pregnancy is not yet secure.

The point of both of these examples is that measurement is vital to improving performance - but we do have to be very clear about what we are trying to achieve, how the measurements will support that, and how we are going to interpret those KPIs.  It is not as simple as asking "what can we measure".

So, good luck to all those students who got their results this summer.  Your lives are ahead of you.  Go and do things better than us.

Business Basics: Looking after your health

The Head of Lloyds TSB, Antonio Horta-Osorio, is taking medical leave after suffering from physical and mental exhaustion.  There has been speculation about whether he will ever return, but thankfully relatively little suggestion that his illness showed that he was not up to the job.

There is a common machismo in business that can easily lead people to overwork without taking care of themselves.  It is an easy trap.  Office life is pretty sedantary, commuting is both stressful and sedentary, and much business life revolves around either lunches or fast food grabbed on the run.  It is easy to put on weight and take no exercise.  And to cap it all wine or beer often accompanies the lunch or dinner, or is an easy way to relax after a stressful day with the boss, co-workers or customers.  Holidays are distractions from the office, and thanks to blackberries and the internet often not even that much of a break.

I'm not being moralistic, and my wife will point out that I am guilty of much of the above.   Especially not taking at holidays and working at weekends.  My self justification is that my income depends on the level of work I do, and so a holiday costs double in both the cost of the holiday itself and lost income.

This cuts little ice.

And rightly so.  What we often dont think about it that if we do not take breaks, eat and drink moderately, and excercise well it actually interferes with our ability to do the job.  Maybe not in the short term, but for most people the working career is long.  And getting longer.  We can now expect to be at the coalface for 45 years or more.  That is a marathan not a sprint.

When we are stressed and have poor health we tend to make poor decisions.  We tend to be depressed and morose, or occassionally manic, and our judgement goes.  Of course we don't notice it.  But it happens.
And we are no use to the business if we have a heart attack (or worse).

Exhaustion is easy to fall into.  Your body and brain just pack up with the stress and exertion.  Some people come back more aware and able to prevent it in future.  Others never come back.
  So no matter the workload and the crisis, try to put some effort into looking after yourself.  Athletes train and watch their food to ensure they perform at the top level.  Business people need to do a bit of the same.  Only a bit - today I have just had a delicious bacon butty, but I did go to the gym.  I found that setting gym visits as a KPI helps me to go regularly - otherwise it is just something I intend to do but don't get round to.  I might not make my 100 gym trips per year, but recording how many I have done (and how many still to go) helps me focus.  For you it might just be scheduling a daily 10 minute lunchtime walk to the coffee shop.  My today list has a little section for personal development which includes going to the gym.

Your doctor probably gives you all the advice you need on this (mine has wanted me to lose 10kg for 20 years), and I don't to be another nag.  Just that you need to think about and prioritise your health to ensure you can work at peak performance for nearly half a century.  The usual suspects - watch what you eat, stop smoking, try not to drink too much, take regular holidays (ideally somewhere with no Blackberry reception - I recommend the Scottish Borders!), walk or take regular exercise.  You are no use to anyone if you are dead.

And incidentally the same applies to your staff and direct reports.