Author: Fred Fishman, Manager Strategic Procurement Programs, TechSolve, Inc
Issue: 1/2006

Bookstores are crowded with large print, 90-page bestsellers that tout the next miracle cure for every business ill. Unlike these flavor-of-the-month moneymakers, the idea of Continuous Process Improvement is a relatively simple concept that has a proven track record and is adaptable to nearly every business. Putting it bluntly, Continuous Process Improvement is what it says it is – introducing improvements continually.

Whether working in manufacturing or a service industry, in a giant corporation or the corner eatery, serving as a corporate executive or working at a day care center, living in the United States or most anywhere else in the world, businesses perform work that usually has room for improvement.

Imagine a product assembly line where each week brought some small but useful improvement to its process. A better tool might be introduced one week, an easier-to-reach point of assembly the next, a common part replacing two similar parts the next, and so on. While each change was simple and of limited impact, the steady accumulation of these improvements over time made for a dramatically improved operation.

Continuous Process Improvement in the front office might be the elimination of steps in an order review and entry process where it can be determined that many of these steps slowed the process without adding true value. Why did these extra steps exist? Upon investigation, the answer is typically found to be unknown or what is called “office folklore.” Once participants see that change is possible, the floodgate often opens for further rounds of investigation and improvement; but change must be embraced by upper management.

In the same way that compound interest accelerates the rate of growth of an investment by adding interest on top of the interest, the positive effect of continual and uninterrupted positive change on an organization can be enormous.

The term Continuous Process Improvement also serves as an umbrella spanning a great many improvement processes with different and more exotic names. While these various techniques appear quite different on the surface, experts in these respective fields generally acknowledge that most share a common theme.

Whether portrayed in a formula-rich analysis during a Six Sigma event, the rapid fire and instinctive physical changes implemented during a kaizen blitz, the reduction of muda (Japanese term for waste) in the lean journey, or the methodical development of a value stream map to visually identify value-added vs. non-value-added steps in a flow of work, each technique employs some variation of mathematical, statistical or visual analysis to achieve the desired result – improvement.

Winners and losers

Some companies have taken these concepts and have run with them to achieve incredible success. The giant of the giants would probably be Toyota, rising to (near) dominance in the auto industry from its genuinely humble beginnings. Unfortunately, many other automakers have not applied the continuous improvement philosophy with comparable zeal and the results speak for themselves

Companies that treat continuous improvement as a trendy, something nice-to-do activity to fill in the time, or an assignable task with a clear beginning and end, miss the entire point. Continuous improvement is a different way of operating, not a modification of business as usual.

Continuous improvement requires an organization to have a high level of confidence in itself, and the willingness to inspire individuals to be fearless and constructively critical of everything they, and others, do. Continuous improvement is a process of continually trying to achieve a better way and understanding that while not every attempt will be a winner, the large number of attempts will result in plenty of successes.

An interesting paradox exists, however. To achieve the compounding benefits of a continuous improvement process, a company must take deliberate action. Simply accepting change when it happens to occur is not enough. They must require change.

Conversely, a company that likes where it is already (i.e. does nothing) typically undergoes compound deterioration. Just as unprotected steel eventually turns into a pile of rust, processes left unattended invariably get worse all by themselves; it’s the theory of entropy.

And therein lies the problem.

Many companies are oblivious to the shortcomings that limit their performance and profits. Some of the largest and most powerful corporate names of the past few decades no longer exist, or exist as a shadow of their former glory

These powerhouse companies basked in their success and felt good about themselves while their competition better recognized and worked harder, more nimbly, and more open-minded, and more opportunistically, to improve their own shortfalls. The common excuse of burdensome legacy costs (older facilities, higher-paid long service workers, pensions and healthcare, etc.) becomes irrelevant when you peel back the layers and see the real reasons for failure – overconfidence, poor planning, lavish spending, and inability to promote real and positive change good for the business and its employees.

To gauge the extent of this problem, you need only to casually compare the companies included in the various US stock market indexes over the past 30 years. It's apparent that astounding reversals of fortune have occurred in corporate status.

Getting help

While many companies have successfully embraced Continuous Process Improvement on their own, others have found the process much tougher than it looks. This is where a skilled consultant can add significant value. Some quick questions to consider:

Are we working as hard/fast as we can and still cannot compete?
Is our best pricing model not enabling profitability?
Is the CEO demanding better performance, yet all indications are that we are working at maximum capacity?

Consultants in the continuous improvement field are typically professional observers and optimists who have heard every excuse in the book. They hear about the distant machine that can't be moved, the work area that can't be kept clean, the tools that can't be located near the operator, and so on. Successful consultants avoid being enamored with specific products, businesses, processes or technologies. They view less as more – shorter distances, less complexity, simpler instructions, straighter lines, sharing knowledge and doing what's obvious, rather than mysterious. Consultants also have the advantage of seeing lots of companies and lots of situations. From this perspective, they can offer pragmatic advice that is not limited by the daily politics that often stifle great suggestions by a company's own employees.

The reaction that companies have to improvement recommendations, whether initiated by a consultant or by their own employees, is very indicative of their ultimate success, or lack thereof. Large and mature companies can be the most difficult to convince. Many strong-willed entrepreneurs, however, exhibit similar denial. These entrepreneurs can micro-manage their companies in their own image, not realizing that others, outsiders who have seen scores of similar situations, can pinpoint fatal errors in their company's approach or processes.

One thing is certain. Whether you use a consultant to guide you, or do it yourself, applying the Continuous Improvement methodology is not an option. It's a requirement for business survival. Get going, or get out of the way.

That simple query to customers is shaking up planning and executive pay

It wasn't exactly Thomas Edison and the lightbulb, but for Peter McCabe, it was a eureka moment all the same. In the fall of 2004, McCabe, chief quality officer for General Electric Co.'s (GE ) health-care business, read a Harvard Business Review article recommended by a colleague. It suggested companies measure customer loyalty by asking one simple question rather than relying on lengthy satisfaction surveys: "On a scale of zero to 10, how likely is it that you would recommend us to your friends or colleagues?"

The article showed that "net promoter scores," which measure the difference between the percentage of customers who give high responses ("promoters") and those who give low ones ("detractors"), correlate closely with a company's revenue growth. Promoters are defined as customers who give the company 9 or 10, while detractors hand out "0" through 6. Customers who log 7 or 8 are deemed "passively satisfied" and aren't calculated in the final score. The article's finding stopped McCabe in his tracks. "Wow, this is kind of perfect," he thought.

McCabe and others at the famously metrics-driven company had been looking for a better way to measure customer loyalty. At the time, some of GE Healthcare's units were using traditional customer satisfaction questionnaires as a gauge. But those indicated only vague feelings rather than the more telling action of praising a product to a friend -- and they didn't track with repurchase rates. As a result, such surveys often got the brush-off from employees who saw them as a "hobby" of the marketing or quality-control department, says McCabe.

He and other GE Healthcare executives quickly rolled out net promoter scores in place of the satisfaction surveys some divisions were using. "It was a 'Texas hold 'em' kind of thing," he says. "We went all in." Twenty percent of managers' bonuses were tied to the scores, which closely tracked sales growth. Then, in January, 2005, members of McCabe's team shared the idea at GE's annual global leadership meeting in Boca Raton, Fla., where CEO Jeffrey R. Immelt greeted the approach with enthusiasm. As a result, in 2006 all GE businesses must report net promoter scores for the first time. "I have little doubt that this will be as big and long-lasting for GE as Six Sigma was," says McCabe of GE's vaunted and much-copied quality system.

With rhetoric like that, it's no wonder net promoter scores are becoming a popular, and, many say, powerful way to measure customer loyalty, drive compensation, and flag troubled products. By asking customers whether they would put their own credibility on the line by recommending a company to a friend, net promoter scores, say fans of the concept, are truer indicators of loyalty and future behavior and, therefore, sales growth. American Express Co.'s (AXP ) U.S. consumer-cards president, Jud Linville, calls the scores a "beacon." Management and information technology consulting firm BearingPoint Inc. (BE ) is considering tying bonuses to the scores after it found that clients that give high net promoter scores also show the highest revenue growth. Software maker Intuit Inc. (INTU ) is even reporting its scores in conference calls with analysts.

The approach is gathering steam at a time when CEOs are increasingly focused on getting closer to customers. It also plays into the executive lament that loyalty management programs, which track customer retention, are among the most ineffective tactics in their toolbox. Pair that with mounting recognition of the power of word of mouth and social networks, and it's easy to see why buzz is building. There's even a book on the horizon: The Ultimate Question by Fred Reichheld, founder of Bain & Co.'s loyalty practice and author of the article that piqued McCabe's interest, is due out on Mar. 2.

LOOK FURTHER
Still, Reichheld's concept is controversial. Many in the customer satisfaction industry say it is facile, and they worry that companies will start using the analysis without doing enough follow-up research to understand what's going right or wrong with their offerings. They also question the precision of the metric. Angry detractors who rate the company a "0" on the 0-to-10-point scale are weighted the same as uninspired customers who give it a "6." "Clearly, it's attractive to have something simple," says Claes Fornell, the University of Michigan researcher behind the American Customer Satisfaction Index, which tracks national customer sentiment about some 200 companies. "But to have something simplistic that points you in the wrong direction is not recommended, either."

As academics debate the details, managers are putting the scores into practice. At AmEx' consumer-cards unit, for example, low scores act as a tip-off that something may be wrong. One co-branded card suffered from low scores despite high customer usage and acquisition rates. That alerted managers to probe further. They discovered a need to simplify a complex application and make card rewards match up more closely with customer spending. The result? Net promoter scores almost doubled.

One effect of the new approach is that companies are spending more time listening to promoters and detractors. In the European unit of GE Healthcare's services business, which maintains its hospital imaging equipment, managers following up with naysaying customers found that a chief complaint was slow response times from competent engineers. So the division is overhauling its call center and putting more specialists in the field; now net promoter scores are jumping by 10 to 15 points.

McCabe says higher scores have already been linked to a greater likelihood that GE Healthcare will win new contracts from existing hospital clients. "Ultimately, it's not about the score," he says. It's about "focusing on the customer."

By Mike Jude
January 24, 2006

Opinion: Outsourcing has by and large taken the place of the process improvement efforts popular some years back, but there is room for both.
Process improvement caused a fair amount of excitement a few years ago in the business management community.

Thanks primarily to efforts by such corporate giants as General Electric, process improvement methodologies such as TQM (Total Quality Management) and later Six Sigma became standard approaches to assessing existing processes for improvement opportunities and as a basis for process design.

The aim was always to reduce overhead and to improve the quality of the process output.

Lately, the idea of process improvement has given way to the idea of process outsourcing. Many companies that made significant investments in Six Sigma are now focusing on cost reduction.

Other companies, rather than adopting process improvement methodologies, are going straight to an outsourcing model, hoping to address both endemic problems and cost.

The focus is on immediate returns rather than on the process improvement methodologies, which are thought to only return savings over the longer term.

However, there needn't be any disconnect between process improvement and outsourcing. It is possible to build outsourcing into business as an adjunct to the objective of implementing a thin business model: That is, one in which the company focuses on core competencies rather than adjunct or support functions.

Click here to read about the high potential costs of outsourcing.

How does an enterprise ensure that such an integration of outsourcing will lead to a seamless process that is as efficient, if not more so, than the original process? And how does the company do this without a significant investment in a process improvement methodology?

According to Ed Baker, CEO of Alpine Business Technologies, the key is to think of outsourcing as a normal adjunct to process improvement. As he told me recently, "First of all, we like to work under the assumption that process improvement and outsourcing go hand in hand. Outsourcing simply does not return the anticipated savings without some level of process characterization and improvement, unless perhaps your organization is performing the outsourced process in the lowest quartile for your business segment.

"People often look at outsourcing as quality- and process-neutral, yet hope for big savings. Our contention is that it rarely ends up neutral, but will end up more on either the good or bad side of the equation."

So, outsourcing without process improvement can lead to an undesired outcome, yet the problem that many companies have is that process improvement can be time-consuming and involve a long-term investment in training and culture change.

According to Baker, however, there are alternatives: "Since Sigma is focused on the improvement and design of effective process, it is possible for companies that wish to address immediate needs to apply that expertise through specialist consulting companies that can 'suitcase' that expertise on-site. My company, Alpine Business Technologies, is one such, but there are others.

"Once the engagement is over, the consultant leaves and the company can go ahead and use the new process without investing so heavily in a full-blown Sigma culture. The virtue of this approach is that other parts of the company see how an outsourcing engagement was planned and supported, with the appropriate focus on supporting processes, their integration, tracking and adjustment. They see how the customer experience was measured and improved."

Ultimately, though, the question most often asked by companies is where to apply outsourcing for a maximum return. Baker said, "In many cases, the answer might be that outsourcing of the entire end-to-end process may actually be more expensive than just doing the work internally, and may not yield better quality.

"However, in a significant number of cases, it is likely that a judicious application of outsourcing or out-tasking, in combination with improvement of the internal processes integrating with or supporting the outsource partner, can increase the process efficiency in a measurable way. A side benefit here is that you know the actual costs and quality output of the operation as a result of the process examination. Since you now know what it should cost, supplier negotiation is more effective."

Outsourcing has been portrayed as an-all-or-nothing proposition. However, as my conversation with Ed Baker demonstrates, outsourcing is merely one arrow in the quiver for companies that wish to improve business and instill customer confidence, not just reduce the cost of operations. Application of specific quality methods to targeted processes can be an effective way of integrating outsourcing into business processes to achieve cost reduction and quality improvements.

Mike Jude is a business analyst who focuses on the application of decision modeling to complex business decisions. He is the co-author, with Martha Young, of The Case for Virtual Business Processes. He can be reached at mjude@novaamber.com

"Mumbai's Dabbawallas - A Complete Management Workshop!"

A Six Sigma quality certification endorsed by the Forbes magazine, a fan club that includes Prince Charles and Richard Branson; this guest lecture was sure going to be unlike any other we have had on campus. The speakers were not the normal pinstripe-suite clad swanky corporate types who are often spotted in B-school auditoriums. Instead, they were two humble, rustic gentlemen dressed in a dhoti and wearing a Gandhi cap.

Mr. Raghunath Munde and Mr. Gangaram Talekar, President and Secretary respectively of the Nutan Mumbai Tiffin Box Suppliers Charity Trust or the dabbawallas as they are fondly known, held us NITIEns spellbound with their narration of how a motley gang of 5000 ensures the prompt delivery of over 2,00,000 lunch boxes every day in the bustling metropolis of Mumbai.

Here is a clutch of statistics that reveals the task that the dabbawallas are up to: -

History Started in 1880
Average Literacy Rate 8th Grade Schooling
Average Area Coverage 60 Km per Tiffin Box
Employee Strength 5000
Number of Tiffins 2,00,000 Tiffin Boxes,
i.e., 4,00,000 transactions every day
Time Taken 3 hours (9 am - 12 pm delivery of carriers,
2 pm - 5 pm collection of empty carriers)
Cost of Service Rs. 200/- month
Turnover Rs. 50 crore per month approximately

As Mr. Raghunath Munde took us through the intricacies of their supply chain, one could not but marvel at the complex organizational dynamics in place. The dabbawallas are a prime example of Porter's five forces theory at work, using which an organization can maintain its leadership position by obliterating the five forces that govern competition.



Fig. Forces Governing Competition in an Industry

Threat of New Entrants: The experience curve of the hundred-year-old dabbawallas serves as a huge entry barrier. No one could possibly replicate this supply chain network that uses Mumbai's jam-packed local trains as its backbone.

Current competition: Dabbawallas face competition from fast food joints and office canteens. Since neither of them serves home food, the dabbawallas core offering remains unchallenged.

Bargaining power of buyers: The rates of the dabbawallas are as it is so nominal that one simply wouldn't bargain any further. Also, their monopoly status negates any scope of bargaining from their customers.

Bargaining power of sellers: The use of minimum infrastructure and a total aversion to technology ensures that they are not dependent on suppliers.

Threat of a new substitute product or service: Nobody has thought of one yet!

A few interesting tidbits from the presentation: -

The dabbwallas are extremely disciplined. Consuming alcohol while on duty attracts a fine of Rs. 1000/-. If found guilty more than twice, the dabbawalla's contract is terminated.

Unwarranted absenteeism is not tolerated and is treated with a similar fine.

The Gandhi cap serves as a potent symbol of identification in the crowded railway stations. Not wearing the cap attracts a fine of Rs. 25/-.

Selection of new dabbawallas is done very carefully. Only after the antecedents of the applicant are thoroughly verified is he taken into the fold for a six-month probation.

As management students, we learnt a lot from the dabbawallas. They shattered the myth of technology being indispensable to solve complex problems. Their incredibly efficient supply chain that incorporates advanced concepts such as reverse logistics and multi-level coding is worthy of emulation by modern day FMCGs. However, the most enduring lesson that the dabbawallas left us with is to place the customer ahead of everybody else. It is said that when Prince Charles expressed a desire to meet them during his visit in 2003, the dabbawallas requested him to schedule the meeting such that it did not hamper their mid-day delivery deadlines. With that one act the dabbawallas showed the world that "the customer is truly the king!"

By Richard Snow

For a long time, the main business driver for contact centers has been to reduce the cost of handling customer calls and other interactions, such as letters, e-mail messages and Web communications. In an effort to reduce the number and length of customer phone calls to agents – the most expensive form of interaction – contact center operations managers have tried various kinds of automation, among them interactive voice response (IVR), automated e-mail handling, customer self-service channels and speech recognition. None has worked well. In fact, some have even increased the number of calls. Worse yet, these efforts often have had negative impacts on customer satisfaction. IVR has a particularly bad reputation; customers get confused by complex menus of options and may give up when it appears they can’t find a way out or get to an agent.

It was in dealing with this frustration that speech recognition came into its own in contact centers. The core of any speech recognition system is an engine that can convert speech to text, thereby removing the need for the caller to input data by pressing keys on a touch-tone phone. It seems that, for very simple tasks at least, customers prefer “talking” to a machine rather then pushing buttons. As a result, companies have been able to successfully automate the handling of some relatively simple tasks such as giving an account number or a balance or activating mobile phone services or credit cards. This kind of service can reduce the need for customer-to-agent calls or reduce the time (and therefore cost) of calls. Feedback from early implementations has helped the vendors hone their speech recognition engines, which now are mature and accurate enough to allow more sophisticated applications.

This improvement is timely because for today’s contact centers cost-cutting alone is no longer sufficient. Just as companies have moved on from specific automation and efficiency measures to making their whole operations more effective in supporting the business, this also applies to contact handling, within a contact center or anywhere across the enterprise. Measures such as average call length, first-time call resolution and wait times are no longer good enough gauges of the effectiveness of the center and cannot measure critical factors such as customer satisfaction, volumes and costs of up-sales, and the lifetime value of customers. To determine them requires more sophisticated analysis of data and presentation of the results; this is the domain of business intelligence (BI) and analytics.

Until now, BI in the contact center has been limited for three main reasons: a lack of vision of the center’s real mission and of appropriate measures to reach it; the diversity of data sources to be analyzed; and the nature of the largest volume of data (the phone calls).

The first is changing as companies realize they need a better balance between efficiency and effectiveness, and between transactional measures and business-related measures. We see emerging a hierarchy of new analytics applications as vendors consolidate or form partnerships. For example, since Witness acquired Blue Pumpkin it has been able to combine analysis of recorded calls and agent performance data. This allows users to schedule agents to fit not only call patterns but also types of calls, raising the likelihood that an agent with the right skills will be available to handle a particular contact and thus to deal with it effectively. Vendors such as KnoahSoft and Performix are working closely with vendors of voice recording and voice over Internet Protocol (VoIP) systems to go one step further and use the analysis of call content to drive agent performance management and identify training needs.

Vendors such as AIM Technology, Merced Systems and Opus have successfully addressed the issue of the diversity of data. Working with other contact center technology providers, they have found ways to extract the data, normalize it and then make sense of it. Now that they are able to combine all these sources of data, they can begin to deliver cross-center analytics such as which customers generate what revenues and the cost of securing those revenues, which agents are delivering more up-sales and what the cost of achieving these sales is compared to, say, a simple inquiry.

That leaves the third issue – the call data. It is the raw input for contact handling, but it has been a very under-utilized asset. Most call centers have recorded some, probably not all, of the calls and used the recordings as input for quality monitoring. This has been a labor-intensive task that required a third party to listen to the recordings and record some form of assessment, either manual or electronic. These records could then be analyzed as part of agent performance management. Now, technology advances now can automate this task, even though the output from a speech recognition engine is unstructured data.

Vendors such as Genesys, NICE Systems and Verint are using different techniques to deliver very accurate analysis of the call’s content, the context of the call and the demeanors of both caller and agent. The techniques include word recognition, phrase recognition, contextual recognition, pitch and tone of the voices, and call and customer trend-spotting. The result is that analytics now extend the functionality from agent performance management into customer behavioral analysis and profiling, trend analysis, root cause analysis and other measures. Each in turn can be used to carry out process reviews that identify ways in which the processes and agent training can be changed to improve the overall effectiveness of call handling, from the viewpoints of both the business and the customer.

The new technologies also form the basis of two other ways to improve effectiveness: the adoption of Six Sigma quality practices and the determination of which types of contact are best-suited to be made self-service. The principle of Six Sigma is to reduce variation by taking key measures and then identifying and instituting process changes until variation in the measures falls within acceptable boundaries. In the contact center, variation in calls is vast; some would say no two calls are the same. However, by analyzing the raw input and deriving better measures from it, operational management will be able at least to spot trends and make changes to keep the trends in line with expectations.

The same concept can be applied to selecting self-service. Analysis will reveal common types of calls with common outputs. These can become candidates for automation, with the expectation that customers will gain the same desired outcome without having to speak to an agent.

By Kelly Shermach
CRM Buyer
01/09/06 5:00 AM PT

"In the beginning, when you talk to a customer, you try to avoid talking about your problems and they try to avoid talking about theirs. It's always a perfect world," Hans Bohnen of SGL Carbon, said. "But once you have used one another's data confidentially, you can move into product and market development, working much more intensely with your customer."

According to a McKinsey & Co. survey conducted in June 2005, leading B-to-B companies that conduct collaborative projects with supply chain partners and end customers increase their revenues and profits by more than 20 percent on average. But joint projects are rare in B-to-B because process chain members worry about sharing internal secrets with others, even their partners and customers.

The push for cash flow improvement, increased revenues, competitor-resistant customer relationships and greater marketing accountability is changing this traditional isolation.


Desperate to Work Together
A well-developed understanding of Six Sigma discipline and a desperate need to appear savvier about sales and marketing drove SGL Carbon of Wiesbaden, Germany, to initiate a joint project with a manufacturing partner and an end user. "An extension of Six Sigma offered significant strategy improvement potential," says Hans Bohnen, a Six Sigma Master Black Belt and quality leader at SGL. "The important thing was to get the customer involved in Six Sigma as well."

British Energy, SGL's customer, produces nuclear electric energy for the world. SGL produces the graphite from which nuclear reactor sleeves are made, then sends the graphite from Germany to Westinghouse Springfield Fuels (WSF) in England to have the sleeves assembled for British Energy.

SGL wanted to retain British Energy's business and keep WSF in the fold too, but its existing process meant excessive, costly graphite supplies -- US$1.5 million to $2 million worth -- were always on hand at WSF. This allowed the company to begin installing sleeves when SGL called about a new British Energy order. Equally expensive amounts of materials were kept at SGL to prepare it for British Energy's next order.

Strengthening Relationships
"We wanted to enforce our relationship with this key customer," Bohnen says. Retaining and nurturing the relationship required a solid understanding of the customer's business and profit potential. SGL knew that if British Energy would agree to a joint Six Sigma project, it would remain loyal to SGL for its graphite sleeves -- loyal out of the Six Sigma collaboration experience and the vulnerability inherent in sharing the details of current processes, future business forecasts and pie-in-the-sky, new market penetration plans.

"In the beginning, when you talk to a customer, you try to avoid talking about your problems and they try to avoid talking about theirs. It's always a perfect world," he says. "But once you have used one another's data confidentially, you can move into product and market development, working much more intensely with your customer."

"What we recommend to our customers when we work on these process issues is that marketing should adopt whatever process discipline is used in the other functions of the company that are mature and experienced with process discipline," says Naras Eechambadi, founder and CEO of Quaero, a marketing effectiveness consultancy in Charlotte, N.C. Marketing will appear more accountable if it uses a process approved by and acceptable to the rest of the company. "Six Sigma has its own language, and in the marketplace, there are lots of people who understand Six Sigma."

New Opportunities
SGL's marketers could improve their relationship with British Energy by passing on valuable, reliable concepts for growth and innovation. "We wanted the customer to see the value of the Six Sigma methodology, DMAIC (Define the project, Measure the current situation, Analyze to identify root causes of defects, Improve, Control), and apply it to a new product development project with us," Bohnen says. "Six Sigma comes from operational excellence, but now we're trying to apply it to innovation excellence to help our customers find new market opportunities for graphite."

The materials flow and manufacturing problems were helped with lean Six Sigma elements, such as value stream mapping. All three companies merged their process and needs information onto a single map -- then worked together, openly discussing the bottlenecks and frustration each experienced.

The outcome was stronger, more accurate sales forecasting for SGL, as well as leaner raw material production and fewer demands on the machining partner, WSF. British Energy reduced the sales cycle time from 7 1/2 months to three months, and each of the three companies reduced the inventory they had available. British Energy ordered fewer sleeves at a time but ordered them more frequently.

Win-Win Scenario
"We now have a close relationship with our customer," Bohnen says. "Our customer's so secure with our ability to supply it with product on a timely basis that it signed a long-term contract with us."

The real benefit for SGL and British Energy was the win-win on cash flow. "We have seen immediate results in cash flow and revenue generation," Bohnen says. Additionally, both SGL and WSF were able to improve their working capital situation, which helped both make their businesses more profitable. The long-term contract and compressed sales cycle, as well as regularly scheduled British Energy purchases, increased SGL's and WSF's revenues considerably.

"Our next opportunity with British Energy would be to work on product development through design for Six Sigma," Bohnen says. "We want to extend this collaboration year over year. We want to look for growth. If British Energy asks for a product or market change, the likelihood is that we'll be the first company it asks for help."

Rigid rankings hinder the teamwork and risk-taking necessary for innovation. But what combination of methods works best?

Holiday shopping, yearend deadlines, and emotional family dramas aren't the only stresses in December. 'Tis the season for companies to embark on that dreaded annual rite, the often bureaucratic and always time-consuming performance review. The process can be brutal: As many as one-third of U.S. corporations evaluate employees based on systems that pit them against their colleagues, and some even lead to the firing of low performers.

Fans say such "forced ranking" systems ensure that managers take a cold look at performance. But the practice increasingly is coming under fire. Following a string of discrimination lawsuits from employees who feel they were ranked and yanked based on age and not merely their performance, fewer companies are adopting the controversial management tool. Critics charge that it unfairly penalizes groups made up of stars and hinders collaboration and risk-taking, a growing concern for companies that are trying to innovate their way to growth. And a new study calls into question the long-term value of forced rankings. "It creates a zero-sum game, and so it tends to discourage cooperation," says Steve Kerr, a managing director at Goldman Sachs Group Inc. (GS ), who heads the firm's leadership training program.

MORE FLEXIBILITY
Even General Electric Co. (GE ), the most famous proponent of the practice, is trying to inject more flexibility into its system. Former Chief Executive Jack Welch required managers to divide talent into three groups -- a top 20%, a middle 70%, and a bottom 10%, many of whom were shown the door. Eighteen months ago, GE launched a proactive campaign to remind managers to use more common sense in assigning rankings. "People in some locations take [distributions] so literally that judgment comes out of the practice," says Susan P. Peters, GE's vice-president for executive development.

Striking that balance between strict yardsticks and managerial judgment is something every company, from GE to Yahoo! (YHOO ) to American Airlines , is grappling with today. But finding a substitute for a rigid grading system is not an easy task. It drives truth into a process frequently eroded by grade inflation and helps leaders identify managers who are good at finding top talent.

That's one reason GE isn't abandoning its system. But it has removed all references to the 20/70/10 split from its online performance management tool and now presents the curve as a set of guidelines. The company's 200,000 professional employees tend to fall into Welch's categories anyway, but individual groups are freer to have a somewhat higher number of "A" players or even, says Peters, no "bottom 10s." Even those low achievers are getting some kinder treatment, from a new appellation -- the "less effectives" -- to more specific coaching and intervention than in the past.

The changes are key for a company trying to evolve its culture from a Six Sigma powerhouse to one that also values innovation. Tempering such rigid performance metrics, says Peters, "enables individuals and organizations to be more comfortable with risk-taking and with failure." To drive that point home, the company's top 5,000 managers were evaluated for the first time this year on five traits, such as imagination and external focus, that represent the company's strategic goals.

NEW DATA
Separating stars from slackers remains a long-standing part of GE's performance-driven culture. But for most companies, especially those without such cultures, the benefits of adopting a forced ranking system are likely to dissipate over the long term.

A recent study lends hard data to that theory. Steve Scullen, an associate professor of management at Drake University in Des Moines, found that forced ranking, including the firing of the bottom 5% or 10%, results in an impressive 16% productivity improvement -- but only over the first couple of years. After that, Scullen says, the gains drop off, from 6% climbs in the third and fourth years to basically zero by year 10. "It's a terrific idea for companies in trouble, done over one or two years, but to do it as a long-term solution is not going to work," says Dave Ulrich, a business professor at the University of Michigan at Ann Arbor. "Over time it gets people focused on competing with each other rather than collaborating."

One company that recently decided to dump forced rankings altogether is Chemtura (CEM ), a $3 billion specialty chemicals company formed by the July merger of Crompton in Middlebury, Conn., and Great Lakes Chemical in Indianapolis.

"The system forced me to turn people who were excellent performers into people who were getting mediocre ratings," says Eric Wisnefsky, Chemtura's vice-president for corporate finance. "That demotivates them, and they'd follow up with asking: 'What could I do differently next year?' That's a very difficult question to answer when you feel that people actually met all your expectations." Chemtura's new process still assigns grades. But to better motivate employees in the middle, labels such as "satisfactory" have been upgraded to phrases such as "successful performance."

Yahoo, too, was looking for better dialogue and less demoralizing labels when it made substantial changes this year to its rating system, which compared employees' performance to an absolute standard rather than to each other. Libby Sartain, Yahoo's senior vice-president for human resources, knew that review discussions at the Sunnyvale (Calif.) tech leader frequently included the wink-wink "I wanted to put you here, but I was forced by human resources to do something different" comment that discredits so many appraisals. This year, Yahoo stripped away its performance labels, partly in hopes that reviews would center more on substance and less on explaining away a grade.

But that doesn't mean Yahoo went all Pollyanna on its employees. To do a better job of finding and showering top performers with the rewards necessary to keep them from jumping ship in talent-tight Silicon Valley, the company also instituted a "stack-ranking" system this year to determine how compensation increases are distributed. It asks managers to rank employees within each unit -- a group of 20 people would be ranked 1 through 20, for example -- with raises and bonuses distributed accordingly. During reviews, employees are told how their increases generally compare to those of others.

Some Yahoo managers are livid about the new system. "It's going to kill morale," laments one senior engineering manager who says he's getting a stronger message to cull his bottom performers. Yahoo says its new program doesn't automatically weed out a bottom group and was designed specifically to reward its stars.

Indeed, what Yahoo has introduced in place of its old system shows how hard it is for companies to find ways to foster merit-driven cultures that coddle standouts while staying tough on low performers. Whether a company calls it stack ranking, forced ranking, or differentiation, "there's no magic process," says Sartain. "We just want to make sure we're making our bets and that we're investing in the people we most want to keep. That's what this is all about."

By Rick Whiting

Sales representatives would rather spend their time selling and working with customers instead of generating sales forecasts and other paperwork. Xerox Corp. has implemented data mining and predictive analysis software to improve sales forecasts and free up its sales force for more important tasks.

The goal is to resolve an age-old problem: "How do we get the salespeople out of non-value-added processes and allow them to spend more time with our customers?" says Dave Rowlands, VP of Lean Six Sigma for Xerox North America.

Xerox installed Rapid Insight Analytics software from Rapid Insight Inc. about five months ago to analyze customer order, sales prospect, and supply chain data to develop monthly and quarterly sales forecasts for the company's North American operations. Rowlands' Lean Six Sigma quality management team has been using the software to build and test sales forecast models which analysts at Xerox' headquarters will use to generate the forecasts.

Xerox previously used the Minitab statistical analysis application to develop the forecasts, but Rowlands says that tool was complex to use, especially with the large sales data sets. "The Rapid Insight tool is really much more intuitive," he says, noting that the software graphically groups data by subsets to help users see relationships. The software automatically mines data sources to create forecasting models, Rowlands says, and testing those models and spotting and correcting data errors is easy.

Moumita Bakshi Chatterjee

When does most value come at least cost? Today's BPO players are getting their business metrics right by applying Value Engineering — a discipline born out of the ashes of World War II.



WHEN the world went to war for the second time in 25 years following Germany's invasion of Poland in September 1939, the fierce battles that followed in the ensuing six years could not have offered a more gruesome setting for an innovation that would revolutionise 21st century productivity.

Larry Miles — who would later come to be known as the father of Value Engineering — was a procurement officer for low-military-priority materials in General Electric when the US entered World War II.

His mandate was to procure military-related materials amid war-triggered shortage of labour, components and materials.

Unable to obtain the parts he needed through traditional means, Miles began looking for effective substitutes. These substitutes, he found, often reduced costs, or improved the product. At times, both.

Thus rising from the ashes of the deadliest war was a new discipline, `value engineering' that could be applied to any business or economic sectors in years to come.

Simply put, value engineering or VE helped to find new and better ways of doing things, by examining each component of an undertaking. Since then, the method has effectively been used in building highways, constructing factories or even for museum plans.

Now the $5.8-billion Indian BPO industry is reaping rich dividends by implementing the concept across its processes, and reducing costs considerably.

Tapping VE the BPO way

Consider this: HCL BPO has a separate Value Engineering cell that analyses costs after breaking them into components and suggests ways by which the same function could be performed at a lower cost.

"Typically, BPOs are characterised by multi-year contracts, many of them are projects spanning 5-7 years that come at a fixed price. It is, therefore, imperative for companies to manage their costs," says Ranjit Narasimhan, President and CEO, HCL BPO, which has 9,000 employees.

The problem of keeping the cost under control is further compounded by the Rupee appreciation. Add to that the rapid increase in wages, and you have a situation where margins are low, the income is in depreciating dollars, and there is a year-on-year escalation in costs.

"The BPO industry's cost arbitrage model has evolved to deliver improved quality and flexibility to the clients.

Continued cost inflation, higher wages and a talent crunch threaten India's global sourcing competitiveness. This will allow lower-cost countries to grab market share from India. To sustain competitive edge, BPO companies should not only innovatively cut costs but also deliver higher value to customers. Classical Value Engineering aims to improve performance, reliability, quality, safety, and life-cycle costs," says Genpact's President and CEO, Pramod Bhasin.

Value is a ratio of Function to Cost. Value can, therefore, be increased by either improving the function (output) or reducing the cost (input), and the BPO companies are striving to do both."

Genpact cuts costs by identifying and eliminating redundant steps in a process. This reduces the manpower needed to execute the process. The process consequently runs more efficiently, which increases output.

Process excellence is a continuous journey and is largely attributable to Genpact's discipline of Six Sigma. "Continuous Value Augmentation through process innovation is key to our growth and leadership," Bhasin says.

Trimming transport, power bills

HCL BPO, on the other hand, is implementing the Value Engineering tool in allied functions such as transportation and communications.

For BPO operations, transport happens to be a major cost, typically working out to a sum of about Rs 36,000 per employee per year. Roughly put, this translates into 20 per cent of the cost per team member.

"Earlier we would hire cabs for transporting employees on a mix of fixed hourly charge and a variable charge. We found that these cabs used to remain idle for most part of the day. We then changed to a completely variable model by paying only on per km basis. However, we soon found that controlling the kilometres became a challenge," Narasimhan recounts.

Without the required skill sets to monitor logistics, the BPO company began searching for an effective alternative.

"We zeroed-in on a cost-per-employee model. When we rolled out this model, we found that the transport agencies tried to optimise the routing of vehicles," he says.

By re-orienting the payment model, the company reduced its cost of transportation by an average 15-20 per cent. The saving in its centres in Noida was about 13 per cent, whereas the Chennai centres grossed savings of close to 20 per cent.

The company did the same for electricity charges — a move that pruned its monthly electricity bill by Rs 1.5 lakh per month.

"We use the value engineering concept to reduce electricity charges, as well. The electricity charges are a combination of fixed and variable component where fixed component is the maximum demand charges on connected load, and variable charge depends on the actual consumption," says Narasimhan.

For its Chennai centre, HCL BPO had opted for a connected load of 1000 KVA, but soon realised that the maximum demand requirement for the facility was substantially low.

"By the nature of the industry, bulk of the operations would take place at night when the air-conditioning load was considerably lower, as compared to day time requirement. The air-conditioning load is typically the largest component of the total electricity consumption, but since we operated at night, the electricity consumption was lower. The maximum demand worked out to a mere 435 KVA," he says.

HCL BPO immediately brought down the connected load from 1000 KVA to 500 KVA and although it had to pay a hefty one-time charge, the move still translated into substantial savings for the company in its electricity billing.

Some smart utilisation

For some companies, one of the key areas of cost reduction has been in the form of seat utilisation across all shifts. At WNS, the largest third-party BPO firm, the current seat utilisation is as high as 3.2 times against the industry average of 2.2.

The company feels that while costs such as infrastructure, transport (buses), etc, remain the same as they ply the same routes, an optimal utilisation of the seat can offer a reduction in overhead costs as well as an opportunity to service more clients.

"Thus costs get shared between more than one client, leading to overall cost benefits for WNS and clients too. At WNS, this is value engineering for us," says a company spokesperson.

Agrees Vipul Doshi, CEO of Interglobe Technologies, which has been striving to increase its seat utilisation while optimising bandwidth usage.

"Once you install bandwidth, then it is an opportunity cost in how much you use it. The more the bandwidth is used in 24 hours, the better off we are.

So, if we are running voice processes at night for US customers, then during the day we run either processes for those clients located in non-US geographies (such as the UK and Australia) or do back-office work that allows us to use the same telecom and physical infrastructure," he says.

Equally critical for the company is managing routes for its employees to and from the workplace.

"We try to group people from the same location together and put them on similar type of work. In fact, as a company policy, we also check on a prospective candidate's residential location at the time of hiring. We try not to hire fresh recruits who reside far away from common points of pick-up," says Doshi.

Cost benchmarks help

HCL BPO has gone a step ahead and created cost benchmarks for regular inventory items such as furniture and computer terminals. It registers the lowest cost at which an item was procured, and uses that as a benchmark against any further purchase decisions in the same category.

"We have completely benchmarked all the costs and created a reference benchmark for minute things — such as the cost of carpeting per square footor the cost of air-conditioner.

When we get a quotation for a new centre, we check it against the existing benchmark, and negotiate a lower rate. This lower rate becomes the new benchmark for subsequent transactions," Narasimhan reveals.

The reference benchmarking exercise has enabled the company to bring down the cost of equipment such as the voice logger by more than half from the original cost of $950!

Increased utilisation through optimum occupancy/trip usage, and routing using technology such as Global Positioning System cut transportation costs. Facilities consolidation and new technologies such as Voice over Internet Protocol (VoIP) have also cut costs. "In the last three years, Genpact reduced its input costs by 8-10 per cent, year on year," says Bhasin.

Business impact - the final goal

But Genpact believes that generating `Business Impact' goes beyond cost-cutting, and involves assisting customers to increase revenues, penetrate new markets, and better cash flows.

"In the final analysis, just cost reduction will not do. Indian BPOs have to move to the next level of maturity and deliver business impact.

Dedicated Six Sigma, Lean and Reengineering teams continuously spot and improve processes for Genpact as well as its customers. Supported by 500-plus Six Sigma Black Belts and Master Black Belts, 150 Lean Coaches, these teams have implemented 400-plus breakthrough improvements, 3,000-plus Kaizen improvements that enhanced productivity by 6-8 per cent year-on-year. Genpact shares these benefits with customers," says Bhasin.

For one of its customers consolidating operations from multiple centres to one, offshoring the processes and Six Sigma initiatives delivered a productivity benefit of $300 million, he says.

According to S. Nagarajan, Founder and Chief Operating Officer of 24/7Customer, value engineering is a means of value creation more than cost reduction.

"If our clients are spending their dollars with a specific cost of service metric, we outperform that by delivering higher business returns through better performance for the same dollar value.

Today, in over 70 per cent of our relationships, we are better than the best centre of our customers, and achieve more than the targeted Service Level Agreements. This translates into higher value at the same cost," says Nagarajan.

VE is the journey, not destination

But although companies across the board are busy implementing value engineering in multiple areas such as generating business impact, eliminating waste, investing in domain expertise, improving customer processes and increasing customer stickiness, they realise that value engineering is a journey. Not the destination.

"Cost reduction is just part of the equation. Several countries will soon be able to provide services at costs lower than India's. While costs have to be reduced, it is important that BPO companies deliver business impact through process excellence to stay competitive," says Bhasin of Genpact.

That, he hopes, will extend the cliché — They came for cost, stayed for quality, but really settled for measurable business value.