FEATURE – We see the shortcomings of strategies based solely on financial metrics every single day. The author discusses how Lean Thinking offers an alternative that leads to better and more sustainable results.

Words: Tshepo Thobejane

The recent horrors and unfortunate events at Boeing led me to reflect on the impact of measurements and how they drive behavior. As I was doing some research on this, I came across a number of articles that correct the famous quote attributed to Deming: “If you can’t measure it, you can’t manage it.” The full and correct quote that can be found on page 35 of The New Economics book by W. Edwards Deming states that: “It is wrong to suppose that if you can’t measure it, you can’t manage it – a costly myth.” It’s amazing how omitting a few words and taking a quote out of context can lead people to unknowingly spread a message that is contrary to the original.

There are hundreds, if not thousands of articles detailing the problems at Boeing, but one that particularly appealed to me was written by an Improvement Practitioner who worked at Boeing from 1989 until 1999. Writing on his website, The Lean Thinker, Mark Rosenthal shared his personal story from his past experiences as an Industrial Engineer who joined a company plagued with delivery issues, inefficient production methods and cost overruns. He then tells of the time Boeing decided to shift from an engineering-focused organization to a process-centric organization focused on meeting customer needs. This journey included training of staff, running kaizen events and ultimately led to introducing flow production in the form of a moving assembly line. All these changes led to improvements in quality and the on time delivery of the first Boeing 777, after the launch of its design program.

Mark’s article informs us that a major change started in 1999 when the organization’s management focus shifted to prioritize financial metrics. The management team was told to use “shareholder value” as the primary consideration for decisions. Shareholder value was understood to mean maintaining a high stock price and focusing on financial ratios like Return on Net Assets (RONA). Eli Goldratt liked to say: “Tell me how you measure me, and I will tell you how I will behave. If you measure me in an illogical way… do not complain about illogical behavior.” In the case of Boeing, when RONA became the key metric for determining performance and rewards, the management team used shortcut approaches to drive up the metric (outsourcing business areas to improve balance sheet ratios). This change reversed all the gains made during the Continuous Improvement era and led to a drop in the quality focus and performance.

Financial metrics are not a problem in themselves. The issue is when we forget that financial results are outcomes of a process and not the means to achieve an outcome. In The New Economics, Deming admonishes us to avoid focusing on numerical goals because it leads to distortion and faking, especially when the system is not able to meet the goal. He advises us to work on methods to improve the process, instead. Another challenge with just focusing on financial ratios (reducing numerators to improve the ratio) is that we forget to recognize that organizations are living and social systems. The recorded numbers may not necessarily reveal the value of all the social interactions in the organization.

In his 1963 Informal Sociology: A Casual Introduction to Sociological Thinking, William Bruce Cameron wrote: “It would be nice if all of the data which sociologists require could be enumerated because then we could run them through IBM machines and draw charts as the economists do. However, not everything that can be counted counts, and not everything that counts can be counted.” If we need to make structural cuts on the basis of numbers and ratios, it is in our best interest to make sure that we understand what is behind each number. We need to go to the Gemba and ask questions to understand the potential risks from taking such actions. Without this, we may even lose critical institutional memory.

How then can we use measurements as reliable tools for managing business performance? For this, we need to start with a few words on what Lean is. The definition that always stuck with me was offered by John Shook in one of his presentations on the Lean Transformation Framework. John talks about Lean Thinking and Practice as a management approach to “Systemically develop people and continuously improve processes to create value and prosperity while consuming minimum resources.” Looking at this definition, we should be able to see how the different elements of the Balanced Scorecard work together.

The concept of the Balanced Scorecard was introduced in 1992 by David Norton and Robert Kaplan, who took previous metric performance measures and adapted them to include nonfinancial information. The word “balanced” is an indication that they recognized that financial metrics in themselves were not sufficient to properly manage organizational performance. Drawing on the above definition of Lean Thinking and Practice and the concept of the Balanced Scorecard, we can see that using metrics to achieve outcomes should follow an integrated process structure.

In this process, we start with ensuring that we have the right skills and track the plans for developing the capabilities of our people. They are developed to improve the processes and methods used to deliver products and services. We track the number of improvement activities at different levels of the organization. The improvement should be aligned to our strategic focus in the market, and therefore result in increased customer satisfaction and sales. In addition to increased sales, process improvement should drive a reduction in costs, and the combined result is increased profitability for the shareholders. This process requires more effort and time to improve RONA, but on the bright side, it ensures future sustainability of the organization. Strategy deployment – Hoshin Kanri – can help an organization to ensure that we arrive at balanced metrics with alignment across business functions. Setting goals is only a portion of the process. We need to apply the PDCA process to track and respond to deviations as we work to achieve the desired outcomes.

Naturally, it only follows that leaders will take shortcuts, if the boards of directors only reward their executives based on short-term financial results. In the case of Boeing, we should not have been surprised to hear that the former CEO, Dave Calhoun, received a 45% salary increase while his organization was taking shortcuts when it came to quality and safety checks. Every management team needs to ensure that a long-term view and balanced metrics are used to direct its decisions.

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_THE AUTHOR