Building targets, constructing behaviour

Recently, the press reported that UK construction company Bovis Homes Group PLC have run into trouble for encouraging new homeowners to move into unfinished homes and have therefore faced a barrage of complaints about construction defects. It turns out that these practices were motivated by a desire to hit ambitious growth targets. Yet it has all had a substantial impact on trading position and mark downs for Bovis shares.1

I have blogged about targets before. It is worth repeating what I said there about the thoughts of John Pullinger, head of the UK Statistics Authority. He gave a trenchant warning about the “unsophisticated” use of targets. He cautioned:2

Anywhere we have had targets, there is a danger that they become an end in themselves and people lose sight of what they’re trying to achieve. We have numbers everywhere but haven’t been well enough schooled on how to use them and that’s where problems occur.

He went on.

The whole point of all these things is to change behaviour. The trick is to have a sophisticated understanding of what will happen when you put these things out.

That message was clearly one that Bovis didn’t get. They legitimately adopted an ambitious growth target but they forgot a couple of things. They forgot that targets, if not properly risk assessed, can create perverse incentives to distort the system. They forgot to think about how manager behaviour might be influenced. Leaders need to be able to harness insights from behavioural economics. Further, a mature system of goal deployment imposes a range of metrics across a business, each of which has to contribute to the global organisational plan. It is no use only measuring sales if measures of customer satisfaction and input measures about quality are neglected or even deliberately subverted. An organisation needs a rich dashboard and needs to know how to use it.

Critically, it is a matter of discipline. Employees must be left in no doubt that lack of care in maintaining the integrity of the organisational system and pursuing customer excellence will not be excused by mere adherence to a target, no matter how heroic. Bovis was clearly a culture where attention to customer requirements was not thought important by the staff. That is inevitably a failure of leadership.

Compare and contrast

Bovis are an interesting contrast with supermarket chain Sainsbury’s who featured in a law report in the same issue of The Times.3 Bovis and Sainsbury’s clearly have very different approaches as to how they communicate to their managers what is important.

Sainsbury’s operated a rigorous system of surveying staff engagement which aimed to embrace all employees. It was “deeply engrained in Sainsbury’s culture and was a critical part of Sainsbury’s strategy”. An HR manager sent an email to five store managers suggesting that the rigour could be relaxed. Not all employees needed to be engaged, he said, and participation could be restricted to the most enthusiastic. That would have been a clear distortion of the process.

Mr Colin Adesokan was a senior manager who subsequently learned of the email. He asked the HR manager to explain what he had meant but received no response and the email was recirculated. Adesokan did nothing. When his inaction came to the attention of the chief executive, Adesokan was dismissed summarily for gross misconduct.

He sued his employer and the matter ended up in the Court of Appeal, Adesokan arguing that such mere inaction over a colleague’s behaviour was incapable of constituting gross misconduct. The Court of Appeal did not agree. They found that, given the significance placed by Sainsbury’s on the engagement process, the trial judge had been entitled to find that Adesokan had been seriously in dereliction of his duty. That failing constituted gross misconduct because it had the effect of undermining the trust and confidence in the employment relationship. Adesokan seemed to have been indifferent to what, in Sainsbury’s eyes, was a very serious breach of an important procedure. Sainsbury’s had been entitled to dismiss him summarily for gross misconduct.

That is process discipline. That is how to manage it.

Display constancy of purpose in communicating what is important. Do not turn a blind eye to breaches. Do not tolerate those who would turn the blind eye. When you combine that with mature goal deployment and sophistication as to how to interpret variation in metrics then you are beginning to master, at least some parts of, how to run a business.

References

  1. “Share price plunges as Bovis tries to rebuild customers’ trust” (paywall), The Times (London), 20 February 2017
  2. “Targets could be skewing the truth, statistics chief warns” (paywall), The Times (London), 26 May 2014
  3. Adesokan v Sainsbury’s Supermarkets Ltd [2017] EWCA Civ 22, The Times, 21 February 2017 (paywall)

The Iron Law at Volkswagen

So Michael Horn, VW’s US CEO has made a “sincere apology” for what went on at VW.

And like so many “sincere apologies” he blamed somebody else. “My understanding is that it was a couple of software engineers who put these in.”

As an old automotive hand I have always been very proud of the industry. I have held it up as a model of efficiency, aesthetic aspiration, ambition, enlightenment and probity. My wife will tell you how many times I have responded to tales of workplace chaos with “It couldn’t happen in a car plant”. Fortunately we don’t own a VW but I still feel betrayed by this. Here’s why.

A known risk

Everybody knew from the infancy of emissions testing, which came along at about the same time as the adoption of engine management systems, the risks of a “cheat device”. It was obvious to all that engineers might be tempted to manoeuvre a recalcitrant engine through a challenging emissions test by writing software so as to detect test conditions and thereon modify performance.

In the better sort of motor company, engineers were left in no doubt that this was forbidden and the issue was heavily policed with code reviews and process surveillance.

This was not something that nobody saw coming, not a blind spot of risk identification.

The Iron Law

I wrote before about the Iron Law of Oligarchy. Decision taking executives in an organisation try not to pass information upwards. That will only result in interference and enquiry. Supervisory boards are well aware of this phenomenon because, during their own rise to the board, they themselves were the senior managers who constituted the oligarchy and who kept all the information to themselves. As I guessed last time I wrote, decisions like this don’t get taken at board level. They are taken out of the line of sight of the board.

Governance

So here we have a known risk. A threat that would likely not be detected in the usual run of line management. And it was of such a magnitude as would inflict hideous ruin on Volkswagen’s value, accrued over decades of hard built customer reputation. Volkswagen, an eminent manufacturer with huge resources, material, human and intellectual. What was the governance function to do?

Borrowing strength again

It would have been simple, actually simple, to secret shop the occasional vehicle and run it through an on-road emissions test. Any surprising discrepancy between the results and the regulatory tests would then have been a signal that the company was at risk and triggered further investigation. An important check on any data integrity is to compare it with cognate data collected by an independent route, data that shares borrowing strength.

Volkswagen’s governance function simply didn’t do the simple thing. Never have so many ISO 31000 manuals been printed in vain. Theirs were the pot odds of a jaywalker.

Knowledge

In the English breach of trust case of Baden, Delvaux and Lecuit v Société Générale [1983] BCLC 325, Mr Justice Peter Gibson identified five levels of knowledge that might implicate somebody in wrongdoing.

  • Actual knowledge.
  • Wilfully shutting one’s eyes to the obvious (Nelsonian knowledge).
  • Wilfully and recklessly failing to make such enquiries as an honest and reasonable man would make.
  • Knowledge of circumstances that would indicate the facts to an honest and reasonable man.
  • Knowledge of circumstances that would put an honest and reasonable man on enquiry.

I wonder where VW would place themselves in that.

How do you sound when you feel sorry?

… is the somewhat barbed rejoinder to an ungracious apology. Let me explain how to be sorry. There are three “R”s.

  • Remorse: Different from the “regret” that you got caught. A genuine internal emotional reaction. The public are good at spotting when emotions are genuine but it is best evidenced by the following two “R”s.
  • Reparation: Trying to undo the damage. VW will not have much choice about this as far as the motorists are concerned but the shareholders may be a different matter. I don’t think Horn’s director’s insurance will go very far.
  • Reform: This is the barycentre of repentance. Can VW now change the way it operates to adopt genuine governance and systematic risk management?

Mr Horn tells us that he has little control over what happens in his company. That is probably true. I trust that he will remember that at his next remuneration review. If there is one.

When they said, “Repent!”, I wonder what they meant.

Leonard Cohen
The Future

Amazon II: The sales story

Jeff Bezos' iconic laugh.jpgI recently commented on an item in the New York Times about Amazon’s pursuit of “rigorous data driven management”. Dina Vaccari, one of the employees cited in the original New York Times article, has taken the opportunity to tell her own story in this piece. I found it enlightening as to what goes on at Amazon. Of course, it is only another anecdote from a former employee, a data source of notoriously limited quality. However, as Arthur Koestler once observed:

Without the hard little bits of marble which are called ‘facts’ or ‘data’ one cannot compose a mosaic; what matters, however, are not so much the individual bits, but the successive patterns into which you arrange them, then break them up and rearrange them.

Vaccari’s role was to sell Amazon gift cards. The measure of her success was how many she sold. Vaccari had read Timothy Ferriss’ transgressive little book The 4-Hour Workweek. She decided to employ a subcontractor from Chennai, India to generate for her 100 leads daily for $10. The idea worked out well. Another illustration of the law of comparative advantage.

Vaccari them emailed the leads, not with the standard email that she had been instructed to use by Amazon, but with a formula of her own. Vacarri claims a 10 to 50% response rate. She then followed up using her traditional sales skills, exceeding her sales target and besting the rest of the sales team.

That drew attention from her supervisor. Not unnaturally he wanted to capture good practice. When he saw Vaccari’s non-standard email he was critical. We now know that process discipline is important at Amazon. Nothing wrong with that though if you really want to exercise your mind on the topic you would do well to watch the Hollywood movie Crimson Tide.

What is more interesting is that, when Vaccari answered the criticism by pointing to her response and sales figures, the supervisor retorted that this was “just luck”.

So there we have it. Somebody made a change and the organisation couldn’t agree whether or not it was an improvement. Vaccari said she saw a signal. Her supervisor said that it was just noise.

The supervisor’s response was particularly odd as he was shadowing Vacarri because of his favourable perception of her performance. It is as though his assessment as to whether Vacarri’s results were signal or noise depended on his approval or disapproval of how she had achieved them. It certainly seems that this is not normative behaviour at Amazon. Vaccari criticises her supervisor for failing to display Amazon Leadership Principles. The exchange illustrates what happens if an organisation generates data but is then unable to turn it into a reliable basis for action because there is no systematic and transparent method for creating a consensus around what is signal and what, noise. Vicarri’s exchange with her supervisor is reassuring in that both recognised that there is an important distinction. Vacarri knew that a signal should be a tocsin for action, in this case to embed a successful innovation through company wide standardisation. Her supervisor knew that to mistake noise for a signal would lead to a degraded process performance. Or at least he hid behind that to project his disapproval. Vacarri’s recall of the incident makes her “cringe”. Numbers aren’t just about numbers.

Trenchant data criticism, motivated by the rigorous segregation of signal and noise, is the catalyst of continual improvement in sales, product quality, economic efficiency and market agility.

The goal is not to be driven by data but to be led by the insights it yields.

Deconstructing Deming XI A – Eliminate numerical quotas for the workforce

11. Part A. Eliminate numerical quotas for the workforce.

W Edwards DemingI find this probably the most confused part of Deming’s thinking. Carefully reading Out of the Crisis (at pp70-75) Deming’s attack is not on standardised work, that is advocated as central to his message, but against specifications for the volume of work: calls answered per hour, finished parts per day.

Deming recognises management’s need to predict costs and revenues but condemns quotas as destructive of achieving productivity.

Deming also deprecates such quotas as corroding workplace pride. I shall return to that in Point 12.

Deming’s criticism of work quotas goes as follows.

  • Some individuals may achieve them easily and their productive capacity will then stand idle.
  • Some individuals may struggle and suffer poor moral.
  • Some individuals may compromise quality so as to make a quota or so as to make it sooner.
  • Achievement of quotas may be frustrated by faults in “the system” which are outside the individual worker’s control.

Deming gives the following example of how he would advise financial planning in a call centre of 500 people (at pp73-74).

  1. Set a preliminary budget.
  2. Make it clear to every one of the 500 that their aim is to give satisfaction to the customer, to take pride in their work.
  3. Everybody will keep a record of calls made.
  4. Customers with special problems will be referred to the supervisor.
  5. At the end of each week, sample 100 individuals’ record and summarise the data.
  6. Repeat steps 2 to 5 for several weeks.
  7. Analyse the data.
  8. Establish a continuing study following the above steps but on a reducing basis.
  9. Use the data to predict costs.

Now there is much merit in forecasting costs based on actual data. Further, improving performance based on the relentless criticism of historical data is essential. However, I think Deming’s prescription naïve and idealistic. The trick is to extract the ideals and industrialise them.

Planning

The simple matter is that any new enterprise has to be established on the basis of a robust business plan. There is competition for resources: people, capital, infrastructure … and everyone has to make their case. It is impossible to do that without judgment. No matter how much historical data or even qualitative experience is to hand we cannot simply project it into the future without establishing further conditions (RearView). It is unlikely this can ever be done exactly in a new establishment.

That competition for resources then prevents us from taking an overly conservative view of what can be achieved. Setting the bar too low for call centre operators starts off from an uncompetitive position. Further, the modest answering rate in the plan has to be resourced with infrastructure. Intentions to improve the answering rate post-launch are all very well but what will happen to the personnel and materiel that we bought in to accommodate the unambitious start-up?

Sometimes work needs to be set at a rate that is recognised by a team of co-workers and other parts of the organisation. Excess production is as contrary to the philosophy of lean operations as is shortage. The idea of takt time allows production lines to be balanced, receipts and deliveries co-ordinated, stock turns to be minimised and cash flows improved. In many situations that is sufficient to answer Deming’s fears about individuals distorting production to bank an accomplished target.

Stretch

What is now proved was once but imagined.

William Blake

Is it so wrong to set a target that nobody involved has seen achieved before? Deming would say that it was fine so long as there was a plan defining the means by which this could be achieved. There are many compelling stories from sports science telling how records have been broken by incremental improvement (e.g. Dave Brailsford and the GB cycling team).

But what about setting an ambitious stretch target without a plan for achieving it? That would be brave indeed. It would be based on no more than an exhortation to the call centre operators to work more furiously, more furiously than anyone had ever done before. I cannot say that would never work. In my athletics days I ran some of my best times when team mates were urging me on from the sidelines. However, as a business strategy it faces the social realities of employees’ collective ability to resist quietly that to which they do not assent. With a carefully recruited and motivated team it could work. It would certainly require a high degree of collective problem solving and improvement by the operators. But of all strategies for operational excellence it looks the most limited and the most risky. There is no obvious Plan B.

The Ringelmann effect

There is a tension between unrealistic stretch targets and a further problem that Deming ignores entirely, the Ringelmann effect. It may sadden the hearts of those who believe in the inherent fulfilling joy of work and best intentions of workers to do a good job but evidence is overwhelming that there are situations where individuals exert less effort in a group environment than they would if acting individually.

In 1913, Max Ringelmann conducted experiments that showed that individuals pulled less strenuously on a rope when pulling in a group than when pulling alone.

A realistically set and communicated takt time can assist in concentrating effort and communicating common work standards and the expectations of peers.

The poor supervisor

If Deming was so pessimistic as to believe that workers would sacrifice quality to hit targets then they would surely be more than happy to shunt enquiries off to their supervisor in order to post commendable performance. All that Deming’s proposal does is to divert the whole problem of difficult calls to the supervisor who, presumably, is either beset with his own performance problems or operates outside business measurement.

Deconstructing Deming IX – Break down barriers between staff areas

9. Break down barriers between staff areas.

W Edwards Deming

Something there is that doesn’t love a wall,
That wants it down!

Robert Frost
Mending Wall (1914)

Point 9 of Deming’s 14 Points. One that is always attractive to a self describing iconoclast. Barriers must be bad if they prevent the exchange and interaction of ideas, or worse if they lead to optimisation within a subunit that suboptimises the wider system. Deming was thinking of managers such as John Browett. Browett was given charge of Apple’s retail operations and immediately started to cut staff numbers and hours in order to reduce his own budget. However, Apple’s avowed strategy is to foster reputation and brand loyalty through a distinctive, unconventional and delightfully effective Apple Store encounter. My wife is more of an enthusiast for Apple products than I, but I am always wowed by our Store visits.

I feel sorry for Browett as he was clearly left to guess the corporation’s strategy. Some organisational functions are just there because they enable the principle value streams. Without them profits would fall. Silo management is the term mockingly used to satirise a management dominated by pillars of functional expertise bolstered by professional status and mute to its “rival” silos.

Deming reminded us that somebody in a leadership position does need to maintain a synoptic view of the business system to prevent Browett type misunderstandings.

Deming system diagramAnybody who has been to a Deming seminar will have seen the Deming system diagram. Deming invited participants to focus on the system that created revenues for the organisation and, further, to see that system as a network of processes. Deming used the diagram to emphasis that the critical business processes transect organisational boundaries. Raw materials, whether physical or transactional, run into and out of the silos. Some processes don’t transform the raw materials but act as critical support for the supplier-customer strand. Deming argued that equipment maintenance, product development etc. are nonetheless processes transforming their own inputs into vital enablers and accelerants of the revenue generating activities.

Further, held Deming, those processes run across the external boundaries of the organisation into suppliers and customer. A manufacturer making car tyres is part of a bigger picture including the manufacture of the tyre rubber and even the way the end user drives his motor car. Only by understanding the whole can the tyre performance be optimised, customer value maximised, and growing market share and revenues realised.

Yet the power of the functions remains and is seldom mitigated by implementing process management. Process management is something with which organisations still struggle.Those who try to follow the idea of dispersing expertise into the processes frequently find that individuals embedded in cross-functional teams perform less well than within their concentrated centres of excellence. It is worth remembering how two counterbalancing forces arise.

Behaviour

Any proposed system of reward must be risk assessed against the behaviours it is likely to encourage or discourage. Managers given the job of reducing the cost of running their own silo will do just that. All managers are optimising within their own bounded rationality.

Goal deployment

One tactic that can help prevent managers from optimising their own subsystem at the expense of the greater is to adopt some system of goal deployment such as hoshin kanri. Visibility, both horizontally and vertically, of how individual results contribute to organisational goals, effected through objective supervision and strategic governance, ought to discourage suboptimisation and reveal any such trends at an early time.

Professional expertise is important

In 1776, Scottish philosopher Adam Smith told the parable of the pin maker. Smith set out a detailed argument for the benefits of specialisation and the division of labour. The silos provide the means of rewarding the development of expertise in itself, something whose value may only be seen in the future, and of fostering the application of that expertise in management.

Deming was somewhat inimical to this idea and thought that managers should work in a variety of roles across functions as they ascended the hierarchy, as he felt they did in Japan. Yet it is critical in that environment to maintain the virtues of the silos as incubators of expertise. This is not so easily achieved.

Organisational boundaries exist for a reason

In The Democratic Corporation (1994) Russell Ackoff asked why we could not make a business out of mutually and severally co-operating individuals, each negotiating a web of personal contracts that made up the system that delivered the goods.

Nobel laureate economist Ronald Coase had already answered the question in his 1937 paper The Nature of the Firm. Coase explained why organisations are promoted and employ the people who might otherwise be a market of interacting individual contractors. It simply came down to the costs of operating such a market and the savings that could be made from making a global decision to bring some people and facilities under a single enduring roof.

Organisational and even function boundaries often arise from subtle cost structures. Perhaps these develop over time as more connected ways of remote working become commonplace. But it is important to analyse the forces that created and perpetuate the silos. Otherwise, it should be no surprise when the benefits of process management go unrealised.