Posts Tagged ‘business’

Acknowledging risks…ooh scary!

May 15, 2013
"John T. Raymond as the insurance agent i...

Random dude…I’ll bet you started to create a story behind this guy. (Photo credit: Wikipedia)

We are all irrational to some extent. That truth is undeniable. Fear affects our behavior whether we like to admit it or not. However, how we deal with that fear differs widely among organizations, which is affected greatly by the leadership in those organizations.

For a more thorough treatise on this topic, check out the McKinsey article on managing the people side of risk here.

I’ll take the lazy way out and add a couple random thoughts and experiences of my own. I have worked closely with a couple different organizations who are in similar situations with wildly varying standard operating procedures when it comes to risk. If risks were openly discussed with Organization A, the outcome of the conversation would be one of the following scenarios:

  1. The risk would be greatly exaggerated, and there would be a mad scramble to ‘fix’ the issue without regard to costs or resources. Blame would be assigned in a structured, post-event analysis. 
  2. The risk would be quickly dismissed as not valid if it was judged to be something requiring a top-level, systematic fix to which there was no readily apparent solution. Business would carry on as usual until the problem came to a head. There are no worse headaches than those caused by cognitive dissonance.
  3. Whoever raised the risk would be blamed for not having fixed it already as it fell under their area of responsibility. It would then be classified into either scenario 1 or 2.

In Organization B, there is a more rational approach to risk. Risks and assumptions are brought to the forefront. Sometimes, those risks would be acknowledged and accepted. Other times, an immediate fix was decided. In still other instances, there would be an acceptance of the current way of doing business as the cost would be too great to change, with a view to adapting in future decisions.

The important thing to remember is that in business, there is no such thing as a free lunch. Decisions that impact profitability are complex and do not involve easy solutions. The test? If they were easy, someone would have already figured out the way forward.

So what can we do? The first step is developing the mental discipline to overcome one’s gut reaction to hand out blame. Where issues are complex, our mind tends to distill the world’s randomness by creating stories, often assigning malevolent motives to people that, in fact, had no such motives. Understanding this tendency will provide some perspective, so that next time, risks can be openly discussed.

The next step is to choose which risks are truly the most important, and be relentless in finding and implementing the answer. If we swing wildly from one worry to the next, based on the randomness of one person’s perspective, we’ll be stuck in an eternal loop. However, if we pool our mental resources, talented people working together can do extraordinary things.

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The TPS Report hits the road

May 1, 2013
Conférence supply chain

Random Supply Chain Conference. Conférence supply chain (Photo credit: Pierre Metivier)

 

Well, I wouldn’t say we ‘hit the road’ exactly…unless by hitting the road, you mean that we pressed the little green button on Skype.

 

Anyway, friend of the blog, Dustin Mattison made a mistake invited me to discuss how prediction markets could be used in the supply chain, commodity modeling, and solving problems through data analysis among other topics.

 

Did I have anything intelligent to say? You’ll just have to click over to the Future of Supply Chains Blog to find out.

 

 

Procurement’s role – a behavioral economist’s perspective

March 25, 2013

Regions of the cerebral cortex associated with...

Procurement’s role in a modern, giant corporation – discounted by many – is to promote ‘decision efficiency.’ ‘Decision efficiency’ may sound like some piece of business jargon, but it is actually the fundamental reason why procurement is absolutely necessary to an organization. Here’s why:

When people spend money on something, there is some amount of pain associated with that purchase. For some of my tightwad friends, this pain is almost unbearable. Spendthrifts, on the other hand, are particularly good at fooling themselves – i.e. shutting it out of their minds.

I hear the procurement naysayer crowd now…’that’s great for individuals, but what about organizations.’ Ok, maybe you weren’t saying that, but I’ll go ahead and refute it anyway.

People experience the pain of paying to the degree to which they feel directly affected by it. So, while a budget holder may feel mildly connected to the pain of spending some of her budget, the next layer removed will feel even less. By the time we get to the maintenance supervisor that runs out to Home Depot/B&Q on a regular basis, he may actually look forward to some time away from the plant.

Even the budget-holder, however, will be much more in tune with the utility (pleasure/usefulness) derived from an expense or ‘investment’ than the pain. After all, it is one line of expenditure, and the only incentive is to stay within the budget. This phenomenon is called ‘hedonic efficiency.’ I.e. the budget holder wants the benefit and to sweep the expense out of mind as quickly as possible.

What does that mean in practical terms. A). Ownership – i.e. to be able to control the good or service purchased B) Prepayment – i.e. get the money out of there and forget about it.

So, where does procurement come in? We promote decision efficiency. In practical terms this may mean leasing or renting, paying only for what we use (avoiding the prepayment bias), and making opportunity costs explicit. To the extent that we show the utility the business receives against the costs involved, we become an effective conscience for the business. We are there to prevent bias.

Companies – specifically executives – must first be cognizant of the biases that impact them. At that point, they will recognize the need for procurement to be there to counteract those biases.

Procurement has a responsibility here too. We must present the case as clearly and rationally as possible. There is an interdependency present as well. If the business continually shows they do not want to be inconvenienced with the facts, procurement receives the implicit message that their lives will be easier if they just remain quiet.

CEO’s – yep, pointing directly at you – take note.

Setting KPI’s

March 18, 2013

Brief and to the point. Setting KPI’s is difficult, but people tend to make it more difficult than it is. Check out smartcompany.com’s take on setting KPIs. It is mostly in line with my own view, apart from the fact that where they say you can either have many or few, I would strongly emphasize ‘few.’ Especially from the perspective of procurement or managing people.

KPI Park

This area is very near to my heart as I have seen this done badly in a number of ways including:

  • KPI’s that are unrealistic or way out of the control of the party being measured. Nothing will be 100% within anyone’s control, but there needs to be some correlation between the KPI and reality.
  • KPI’s that, if completed, would have very little effect on overall performance. I have been in multiple situations in which I could either perform to the KPI, or I could do the stuff that helps my organization perform better, but not both. Don’t be the organization that makes the employee or supplier make that choice…
  • Don’t be falsely scientific. Formulas that assign 1-10 or high, medium or low should not be part of a mathematical formula. In statistics, high medium or low are called ‘factors’ and are treated differently than qualitative variables. If you think about it logically, ‘medium’ is not necessarily 33% higher than ‘low.’
  • KPI’s not tied to any strategy or even impetus for improvement. If the onus is put on one individual to change the world, but they are not allowed to affect change, then the result is absurdity.

If you are going to tear down, then you must build it back up as well right?

  • Make stretch targets that are achievable – innovative people like to be challenged with reasonably difficult targets…and then get rewarded for doing so. They have to feel, however, that they are possible and that they have the mandate to fundamentally change the way we are currently doing business (how could you get breakthrough results without major change?).
  • Make KPI’s ‘intermediate’. I.e. don’t target suppliers with an increase in your share price (how could they possibly influence the psychological swings of hedge fund investors?), but target them with improvements in productivity in your organization that could be reasonably expected to contribute to a rise in share price.
  • Make them together with the supplier/employee. It is almost a cliche at this point, but people and organizations respond much better when they contribute to the forming of the KPI’s by which they will be judged. They will have insight into what makes for better performance.

There is probably many more on both sides of the line. Give me your KPI success or failure stories in the comments section. If you do, you’ll get a free one-year subscription to TPS planet.

Procurement governance – not as painful as it sounds

February 28, 2013
HONDA CB750. 1969-2003. 750cc FOUR CYLINDER.

HONDA CB750. 1969-2003. 750cc FOUR CYLINDER. (Photo credit: ronsaunders47)

 

I have been thinking lately – yes, yes, the fire department has been notified – about procurement governance. It then follows that neither you nor I will have trouble sleeping tonight.

 

Since I won’t be writing a textbook on the subject, I’ll just pick two items that I think should be considered that, in many cases, are not.

 

  • The Decision-making process – Often, the process for making-decisions is an afterthought. The person or small group that makes decisions assumes that he/she/they accurately represent what is A). Right or B). The will of the group around them. However, ask Loewenstein, Surowiecki, Taleb, or J.S. Armstrong how that generally works out. Two words “Sub” + “Optimal”. Say them together now. Good.
  • Emergent Strategy – I love creating and building systems. It feels like we are being scientific, even though business can only uneasily borrow concepts from our more systematic brothers and sisters.  It feels like we can build a system that, if everyone just performs their role, will work brilliantly. And again, we’ll be….well, right! The problem is that reality has no particular interest in our feelings, and that some of the best strategies emerge from the ground up. Soichiro Honda, can you hear me? Giving people the skills and knowledge to think creatively, and then empowering them to take advantage of opportunities should be part of our approach to governance. My own tendency is to go all out on the rational planning thing, but knowledge and experience tells a different tale.

 

Go forth and do great things.

 

 

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The week in review

February 22, 2013
Paul Krugman, Laureate of the Sveriges Riksban...

Paul Krugman, Laureate of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2008 at a press conference at the Royal Swedish Academy of Sciences in Stockholm (Photo credit: Wikipedia)

Outsourcing – the London 2012 debate

February 11, 2013

It’s all Twitter’s fault. I was about to start doing real work and then I saw this short article on outsourcing for the London 2012 Olympic games from the CIPS News page.

I have to echo CIPS CEO David Noble’s comments about taking a rational approach to the outsourcing decision rather than making it into a political decision. And that started getting me thinking about outsourcing in general.

I have heard the argument made that outsourcing is generally neither a good or a bad thing…which is right to an extent. The argument goes that when you look at the decision from a cost perspective, whether to outsource or not is simply a decision regarding how to divide up the overheads. However, I like to take a closer look at the situation.

I believe that an organization must decide what is strategically important to them, and what is less so (which is different than ‘not strategic’). I am cringing while writing that last sentence, because many business people are not capable of truly saying ‘this activity is important, but is less strategic when measuring the activity relative to all the other value-generating activities that we perform.’ So consider the grain of salt added.

The reason for the emphasis on what is strategic boils down to who is better at managing an activity. To the extent that an organization can be honest with itself (generally down to the level of introspection of a key leader or group of leaders), that organization will make the right call on in-sourcing or outsourcing. Almost anyone can acquire the technical know-how, but not everyone can manage that activity well or know how to value the activity in the context of the overall value chain (e.g. I may be good at managing something that consumes a lot of my time and whose major problems and obstacles have already been solved/overcome). In this scenario, I’m in danger of re-inventing the wheel.

I could continue rambling, but then I would have to send 8 bosses around to my own desk to tell me how we do things here.

Leave comments and thoughts below. I know you have some.

London 2012 banner at The Monument.

London 2012 banner at The Monument. (Photo credit: Wikipedia)

Leadership from Tom Moore

February 10, 2013

I’ve often felt that the military (with all its faults firmly acknowledged) and high level sports (same) have benefited from excellent leadership…much more so than is generally found in the business world.

The quote below from ProFootballTalk.com is excellent evidence of my theory. American football coach, Tom Moore, could have been talking about a procurement department, consultancy, or technology services company.

“Football is a game of people,” Tom Moore said. “There are lots of systems. One of the things you want to make sure you do, and it’s what we are doing, you don’t come in with preconceived ideas. You don’t say, ‘I’m Tom Moore and this is what we’re going to do.’ It doesn’t work that way.”

There are not many in the business world intelligent/wise enough to adapt to the strengths of their people…those that do have a marked advantage over the competition.

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Leadership in procurement

January 30, 2013
Dr. Jan Emmanuel De Neve

Dr. Jan Emmanuel De Neve

One of the key elements in a successful category management, SRM, or negotiation preparation activity is leadership. There are people that are good at crunching numbers, running meetings, collecting data etc., but those things don’t change the way an organization does business. Straight to my thoughts…

You don’t have to be Lincoln…

I also feel like there are some massive misconceptions about leadership with some unfortunate consequences…especially in business:

  1. The leader as the self-absorbed hero – There are those who inspire, those who neither add nor take away from overall performance, and there are those who demotivate a large portion of those around them. Don’t be the third guy! If you notice that you turn off everyone around you, it is probably time for a change…a fundamental change.
  2. The leader as decision-delayer – please, make a decision and go with it. If that decision needs to be changed at a future point, by all means revisit. However, if everyone knows that the result of their work will not result in a decision, but rather telling them to do more research and come back later, they will then wait until the point at which the decision must be made to present their work. The decisive leader allows the organization to learn by moving forward.
  3. + The leader as facilitator – I’m not talking about the guy that tries to stop your boss from rambling at meetings. On the positive side, there are leaders who make everyone around them better and bring out their talents.
  4. + The leader as generator – These people boost the energy of those around them by their positive energy. People leave encounters with the generator feeling better about themselves, and ready to do more/better than they ever thought they could.

So how do we improve leadership in the procurement discipline? More fundamentally, are leaders born or bred? My feeling is that there is a fair amount of both. Dr Jan-Emmanuel De Neve, from University College London gives me a bit of backing…thanks, big guy!

One way to improve leadership in procurement is through our human resource strategy…get beyond specific knowledge and experience to get the best people. Another is to develop the people already in the function. I was thrown into the fire as a 24-year-old Lieutenant leading a platoon of 50…not realistic for everyone, but the principle holds. Get people into positions of responsibility and give them the mandate – and potentially training – to make it happen.

Pirlo’s penalty – a lesson for life and business

June 24, 2012

For those few that did not see England vs. Italy, it was an excellent football match. The match went all the way to penalties, and the key one was taken by Andrea Pirlo of Italy. But this post has nothing to do with football.

Pirlo bucked convention by playing a ‘change-up’ penalty that, if the keeper had simply stayed where he was, would have been saved easily. It takes a cool, confident person to play such a penalty.

I would even take it a bit farther and say that it takes a certain view of life to take such a penalty. It takes true flexibility and mental agility. It takes a higher level of intelligence to know that any option involves risk…it is all about a probabilistic way of looking at life.

There is no way of ensuring success in anything, so sometimes taking a calculated risk is the way to go. Pirlo knows, do you?


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