Wednesday, September 28, 2011

Considering the Cost of Change

Executive Summary:
We make business decisions all the time that we expect to improve our business.  When we make these decisions, however, we often neglect to consider the change these decisions mean for our businesses and what the short or long-term costs of those changes might be.

The Rest of the Story:
There is a common theme throughout many of my posts to this blog.  That theme is the pain associated with change and how to manage it.  Something we don’t consider when we make business decisions, however, is the cost of making and managing that change.

I know that this will sound obvious.  Any time we make a decision to do something differently than we already do, we have just forced a change.  Duh, I know.  But if it’s so obvious, why do we neglect to consider the cost of that change when we make our business decision?

Let me provide a few quick examples to set the tone, then we can discuss common themes to look for and ways to minimize the costs to us.  These examples come from my own experience, tales from colleagues, or the news.

Boeing just delivered the first 787 Dreamliner, three years late.  There were a number of contributing factors, but the primary reason that the delivery was late was that this was the first product by Boeing that was largely outsourced.

Because the 787 Dreamliner is primarily constructed of composite materials, Boeing contracted other experts to manufacture the body parts that Boeing would have traditionally produced and assembled in-house.  The decision to outsource drove a major change to how Boeing did business and the impact of that change was felt.

We can’t always put a finger on the cost of making changes, but Boeing reported that this aircraft development cost more than twice what a typical new jet development would cost.   The cost of development of the Dreamliner “topped $32-billion due to delays… new jets typically cost closer to $15-billion.”1  I hope I never make a business decision that costs $17-billion dollars more than I promised.

For several years, I worked for a corporate sector where change was the norm.  Every year the leadership changed as leaders jostled to fulfill the various career portfolio requirements to take the next step on the corporate ladder.  As a result, goals and objectives and agendas changed every year as well.

What was the drive and big thing one year, would be old news and bygone the next.  The good news is that we all became very accustomed to change, even adaptable.  The bad news is that nothing stabilized.  It was difficult to prove that any change made any difference. On those occasions where we could prove we had made significant strides, whatever we had set in motion soon became forgotten or reorganized within a few months.

I once talked with a business owner who had to pull himself out of retirement to fire the CEO he had installed and rescue his business from disaster.  In short, the corporate-minded and groomed CEO he hired didn’t know how to lead the family-owned and grown business.  The new leadership didn’t understand or drive the same values the business was based upon.

My first opportunity to manage another leader, leading a team, didn’t work out so well.  I was skilled at leading other individual contributors, but I experienced a learning curve with regard to balancing leadership of another leader against getting in his way.  When we are leaders, changes that challenge our own experience and skills affect others.

I devised a simple, versatile product development methodology that would allow a diverse business with several different engineering functions, of different disciplines, in several global locations to follow the same product development process.  The standardization would enable a vast improvement to collaboration and product innovation.

As a veteran of process and business behavioral change, I knew better than to pull the trigger without first developing a solid plan to address the risks and plan the change process.  It took me longer to address everyone’s concerns and negotiate the OK to launch the new methodology than it took to teach it to the engineers.  In fact, the process had been vetted so many times throughout the negotiation process that many of the engineers knew it well enough to use it before we received permission to launch it and officially teach it to them.

A close friend of mine works for a business that recently changed the business model from in-house production to outsourced production and in-house assembly.  This was done to address a need to significantly increase capacity to meet customer demands.

To facilitate management of logistics and resources they also implemented an Enterprise Resource Planning (ERP) system (another drastic change to business-as-usual).  Before the business model change, this business boasted on-time delivery metrics in the upper nineties percent.  Now on-time delivery is the business’s biggest problem with some deliveries more than 90-days late and a recent month reported no deliveries at all.

That’s enough examples for now.  What can we learn from all of these examples?  Here is my list, feel free to add to it.
  • Change requires new skills, new processes, and new behaviors, which don’t fall into place overnight:  change is a process not an event!
  • Simple decisions (such as changing business models or leaders) can drive enormous changes
  • The bigger the change, the greater the pain
  • Change is necessary, but constant, uncoordinated change is just chaos
  • Do not underestimate the importance of your business culture when calculating a change
  • If you need permission to make a change, the negotiation effort will increase exponentially with the number of people that must approve it
  • It costs more to change without a plan to handle it, than it does to invest in the plan, but it takes work and expense to build a plan
  • When a leader experiences a change and isn’t accustomed to the new way, everyone pays for it
  • Change invites risk, make a plan to mitigate and manage risks

I won’t address all of these individually.  In many cases the same activities that address one lesson will address several.  The bottom line is this.  Decisions often dictate change.  When you make a decision, consider the extent of change that decision will demand and be sure you have a plan manage that change.

At a minimum, we need a risk mitigation and management plan to go along with any significant change.  Assume that things will not go smoothly.  Prepare your personnel and your customers to expect the change and all that it implies.  The more you plan for the change, the smoother it will go, but we can’t plan forever either.

All changes require new behaviors in some way or another.  Be sure you have a plan to train and instill those behaviors, and a way to enforce them appropriately.  An e-mail or a memo is usually not a sufficient solution.

Changes that drive different ways of doing what we do require new skills and new processes along with new behaviors.  Do not assume that because your team is good at what it does that it will automatically be good at doing something different.  I know that sounds unnecessary to say, but we do it all the time.

Consider the business described above that is struggling with on-time delivery after changing from in-house production to outsourced production and a new ERP system.  Why should we expect someone who is excellent at in-house operations to suddenly be good at outsourcing?  Remember, new models mean new skills and processes.

Make sure that your risk mitigation and management plan includes elements to introduce new skills and processes.  This can be done by hiring personnel with the skills or by hiring consultants to teach them.  These same sources of experience can help drive process and behavioral change as well.

Let me briefly sum up.  If you make a decision, consider the extent of change that the decision demands.  It’s better to invest in a plan to drive the change than it is to deal with the consequences of the change process as it happens naturally.  Make sure that your plan includes risk management, new skills, new processes, and new behaviors.  Make sure that plan also fits your current business culture.

Don’t make the mistake of assuming that everything will fall into place once you have made a decision.  Change is costly, one way or another.  You can influence that cost with a plan, or you can find out when the dust settles, the choice is yours.

Stay wise, friends.

1.  Hepher, Tim.  “After 3 Years, Boeing Dreamliner Becomes Reality.”  Reuters, 25 September 2011. 

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