Outside In design

I spend time in several Business Process groups on LinkedIn and one of the terms I keep seeing is “Outside In”.  I keep seeing people using that phrase as if they just had an epiphany or that they just came over the ridge and have seen the promised land.  What I don’t understand, or what surprises me, is that it seems to be a new thing to experienced people.  “top down, outside in” is how everything should be designed.  How do you go about designing something where you have not established its purpose?  How do you design something if you don’t create specifications (performance requirements)?  Outside In is common sense and I don’t see why it is getting so much play.

So I responded to a discussion and wrote the following: 

‘Outside In’ is about Context.  Understanding Context is critical in every line of thought – not just BP design.

In order to understand the purpose of an activity you have to understand it in the context of the process in which it exists.  Processes are a collection of activities.  Evaluating an activity on its own has some merit but to fully understand the activity one must understand it within the context of the process in which it exists.

Seeing an activity on its own will not provide you with an understanding of how it fits into the whole.  Every activity has a cost associated with it and should also have a value associated with it (non-value added activity?).  The activity receives its performance requirements from the next level up – the process.

In order to understand the purpose of a process you have to understand it in the context of the system in which it exists.  Systems are a collection of processes (Senge – Fifth Discipline).  Every process has a cost associated with it and its corresponding value.  The process receives its performance requirements from the next level up – the system. 

 Every business has a number of systems which support it and to understand the performance requirements of those systems you have to view them in the context of the overall business.  The system receives its performance requirements from the next level up – the business. 

 And there is where some companies have stopped their thinking.  They view their systems, processes and activities only in the context of the business itself.  They are operating in a vacuum and use performance indicators focused within their four walls.

 However those businesses need to go the next level up – the competitive environment.  They need to add another layer of context.  The business operates within the context of the competitive environment.  If a business does not factor the competitive environment into their performance requirements it will be flying in the dark.  And the likelihood it is going to hit the mark (from the competitive environment’s perspective) is slim to none. 

Hence the need for Outside In design.  While one can look at performance from the ground up (activity to process to system to business) the requirements come in the opposite direction.  One needs to understand the competitive environment first.  One has to know what the outside (competitive environment) is requiring to know the minimum performance requirements for the business and then it cascades all the way down to activities and individual employees.

And the competitive environment is not defined solely by the expectations of the customer.

What happens if your company slightly exceeds customer expectations but there are competitors offering even more?  In that situation you will most likely lose market share.  Remember, your investors are not the only ones looking for a Return on Investment.  So are the customers.  Customers want to get the most for their money (the greatest return on their investment) and if your competitors are offering more than you then you need to adjust your performance requirements.  You need to be offering a compelling Value Proposition to the market and if you don’t understand what the customers want and what your competitors are offering then you will most likely fail.

Companies don’t get to decide what the performance requirements are for products and services.  Customers do.

That is one perspective on Outside In design.  Where does your understanding differ from mine?

Customer Focus

This post is actually a response I gave to a blog from the ITtoolbox.  The gentleman I was responding to takes the position that companies may believe themselves to be customer focused when in fact they fail to take into consideration what the customer wants.  Seems fairly obvious but he is correct.  It isn’t unusual for executives to not understand who their customers are and still  believe they are customer focused. 

 

But the author of the original post and I quickly diverged when it came to how we see the organization.  It is his contention that the organization (especially in those companies that view its employees as their number one asset) should drive the design of the processes.  Read on to see how his opinion may contradict his own view of being customer focused.

 

There is one more point I want to make before you begin reading this blog.  I view publicly-held companies, privately-owned businesses, government agencies, non-profit organizations and even departments to be basically the same.  Each one of those entities has customers they are serving and processes they are executing.  As you read through my response don’t think it does not apply to you if you don’t work in a ‘business’ – these ideas do relate to you.   

 

 

I agree with your initial premise that a value chain that does not consider the customer is in trouble.  How can a company believe it is customer focused if it does not take the time to define and quantify the expectations of the customer and take into consideration what the competition is offering?

 

How a business is designed will determine whether it is customer focused and plays a huge part in its level of performance.  I know this to be true since I am a business architect.  I provide customized business design tailored to reach the goals of my customers.  In order to do that I have to understand all the components of a business and how they relate to each other.

 

Business designs have 5 components:

Ø      Capstone – all strategic information about the business

o       Internal:  Vision; Mission; Values; Principles; Goals; Business Strategies, etc.

o       External:  The competitive environment (trends, obstacles, risks, critical business issues, …).  Designs that do not take into consideration the competitive environment are flawed.  It is a big mistake to not understand the context in which your business exists.  A once robust design can become quickly obsolete if the context (environment) changes.  As Joel Barker once said:  “When the paradigm shifts everyone starts back at zero.”

Ø      Market Model

o       Here is where your perspective comes into play.  Business leaders need to understand what each market place is looking for from products and services being sold into that market.  Leaders must take the time to define the expectations of customers and then quantify them.  Vague and arbitrary requirements do not provide good input into product development.

o       Here is where we appear to diverge.  Business leaders have to understand if their existing Market Model can deliver on the growth goals of the company.  The Capstone creates the performance requirements for the Market Model.  The performance requirements for the Market Model are not arbitrary.

o       If the Market Model is not designed to achieve the growth goals then either the goals need to be adjusted or the design needs to be updated.  By having defined and quantified the expectations of the customers it is possible to analyze whether one’s offerings to the market place need to be redesigned.  This is being customer focused – you are delivering what the market wants.

Ø      Process Model

o       Input – Process – Output.  Every business has processes to fulfill the demand for its products and services.  Those processes do affect how the customer is being served.  All of the processes performed by a company are considered to be its Process Model.

o       Here is where we definitely differ.  The Process Model receives its performance requirements from the Market Model.  For instance, if the market place establishes a two week lead time your business will not be competitive with a four week lead time.  You will have to reengineer your processes to deliver on the promises made to your customers.  This is in keeping with being customer focused.

o       Your processes will determine what skills, talents, knowledge and experience you need in your organization.  Therefore processes create performance requirements for organizations.

Ø      Organizational Model

o       Processes are executed by the organization.  As mentioned previously the design the Organizational Model receives its performance requirements from the Process Model.  If the business needs to outsource some of its work and has never done that before then new skills such as Vendor Management and Service Level Agreements will be need to be executed and either the existing staff will be trained or experienced personnel will be brought in.

o       Process designs should factor in the skills of the organization but the company should not under deliver to the market place due to inabilities of the organization.  If you under deliver to the market place your sales will suffer accordingly. 

o       The organization needs to be designed in order to execute the processes that deliver its products/services and achieves the strategic goals of the company.  The models are all connected and when designed to support each other the business can actually achieve alignment.  Alignment has to be designed into an organization.

Ø      Systems Model

o       The organization uses systems to execute the processes.  Many executives start with systems and work backwards.  This is the reason why there are so many dissatisfied business leaders.  They are applying a new system to an outdated business design. 

o       Will changing the dashboard in your car have an effect on the design of your car?  Investing in new IT systems before updating the overall business design can only bring marginal improvements.

 

Designing a business is a cascading process and if you are changing your processes or organization before defining and quantifying the goals of the company and the design of the Market Model then you can not consider your company to be ‘customer focused’ and you can not know if your goals are even achievable. 

Eight Steps to Business Excellence

Success will be defined differently for each area of our lives.  For some personal success is measured by the size of their bank account while others look to their marriage and children.  Professional success may be looked at from how high in the organization you have climbed or it can be the degree of delight received from a job well done.

 

The eight steps I am going to discuss does not address either directly but if you look closely and think about each one you will find many applications for these steps.  This “process” was developed to assist businesses in achieving sustained Business Excellence but its application goes beyond strictly business. 

 

Too many businesses are on the down-side of their growth curve and are facing very difficult times and decisions.  Executives at these companies are not in enviable positions.  They have an entity that has existed for many years, was successful and is now struggling.  Some have been at the helm during the good times and bad while others have been brought in to ‘right the ship’.  Regardless the challenge is the same.

 

As they work with their management team and try to address the situation they will repeatedly ask themselves these four questions: 

·        “How did we get here?” 

·        “How could things have gotten this bad?”

·        “What could we have done differently”

·        “What can we do to get out of this mess?”.

 

An answer to the first two questions can be found in Tom Peter’s book Re-Imagine.  Mr. Peter’s identifies some very interesting facts.  In 1917 Forbes magazine first identified the top 100 companies in America.  These were the best and the brightest.  One could make the argument that these companies had everything they needed to ensure their survival.  Fast forward 70 years and 61 of those 100 companies were not to be found.   

 

Next Mr. Peters investigated the performance of companies listed in the S&P 500.  Again these are top companies with money and people to drive their businesses forward.  The span of time is now from 1957 to 1997, so the window of change has been reduced by 30 years.  Here we are shown that 426 of the 500 S&P companies ceased to exist.

 

From 1917 to 1987 – 60% of top companies did not make it.  From 1957 – 1997 81% of the largest companies no longer existed.  The percentage and speed of becoming obsolete is increasing.  But what causes companies to become obsolete? 

 

It would be interesting to establish a correlation between the rate of change in the world around us and the rate of obsolescence in business.  Who doesn’t say things are happening faster and faster – that the merry-go-round of life isn’t speeding up?  While a part of us yearns for the good old days at the same time we want our HD TV and Blue ray technology.  As the world turns faster and the globe becomes smaller, customer expectations change more rapidly and businesses are challenged to keep up.

 

The relevance of any business and the products/services it offers to the market place is determined by the world external to it.  I refer to the external world as the competitive environment.  Businesses don’t get to decide how relevant they are, instead it is the competitive environment that determines the relevancy of a business.  Each business, its suppliers, business partners, competitors, customers, distributors, sales, …are all within a competitive environment.    The environment provides the context in which to evaluate the relevance of the design of every business and its products/services.

 

So in response to the questions:

·        “How did we get here?”  

·        “How could things have gotten this bad?”

Answer is:

·        Your business became obsolete due to a changing environment.  

 

And that leads to the next two questions:  “What could we have done differently?” and “What can we do to get out of this mess?”.

 

Just as the first two questions had a single answer so do the second set of questions.  Allow me to develop this idea by returning to the ideas of environment and Context.

 

Businesses are created in the environment in which they are going to compete.  As a business takes off its products/services are designed to meet the needs of the customer – otherwise the customer would not buy them and the business would fail to exist.  Along the way the business grows and adds new functions and internal services to support the increasing demand for its products/services and the operations to fulfill that demand.  All this is happening in the original environment.

 

Over time that environment will change.  Customers will expect new levels of quality, service and options; competitors will offer new and improved products; new materials will become available; new suppliers will arrive on the scene; trade barriers will be erected or torn down,…. and your business, which was designed to compete in the old environment becomes less and less relevant.

 

Here I introduce the idea that businesses have a design just like products or services.  That may be hard to conceive since you have never seen a set of Business Blueprints™.  It is hard to visualize something that you have not seen but that does not mean it does not exist. 

 

Sadly, Dr. Michael Hammer passed away recently.  For those of you who are not familiar with his writings, he made popular the idea of reengineering processes to improve business performance.  When his first book came out in the early 1990’s I had already been doing process design work for years but did not have a name for what I was doing.  I just thought of it as solving problems at the root cause level. 

 

Dr. Hammer came along and was able to have people understand that a set of activities used to accomplish a purpose could be defined as a process and that the design of any process has the largest impact on how well work is performed.  By documenting every activity and placing those activities side-by-side the process design becomes visible, enabling you to analyze and subsequently intelligently reengineer that design to meet performance goals.   

 

Understanding process design remains important in business today.  BPR, Lean Six Sigma, Kaizan, Total Quality,… are all extensions of this concept.  Many consultants are referring to business processes when they speak about business models (processes are only one perspective of a business design).  Executives are looking for ways to improve the performance of their businesses and actively seek it through process reengineering. 

 

All designs become obsolete.

 

Earlier I spoke about businesses becoming obsolete – the same thing happens at the process level for all the same reasons.  Thanks to people like Dr. Michael Hammer and Mr. Derril Watts with Mountain Home Training and Consulting, http://www.mhc-net.com/, people have come to understand that just because you can’t see processes does not mean they don’t exist and that they don’t have a design.  It took years for this concept to work its way into most businesses and I would argue that any business that does not have Process Management as one of its disciplines is lacking as a professional organization.

 

As process designs are invisible until they are documented so are business designs.  The impact that designs have on process performance is even more powerful at the business/organization level.   

 

Design Dictates Performance.

 

So in response to the questions:

·        “What could we have done differently?”   

·        “What can we do to get out of this mess?”

Answer is:

·        Design your business to compete in today’s environment.  

 

If you are part of a business or organization and wondering what you should have done or what you can do to get out of your current dilemma it comes down to executing these Eight Steps to Business Excellence. 

 

1. Document the existing business design

·        When a business is not meeting performance expectations you can not know whether it is a design or execution problem if the design can not be seen.

·        More than 80% of the time an obsolete design is the root cause of performance issues.

 

1. Establish the performance goals you wish to achieve

·        Every company has growth and profit goals.

·        Business designs must support business goals.

·        Setting goals that are not attainable with the existing design is harmful.

·        Unrealistic goals are a waste of money and represent lost opportunities.

 

1. Establish the strategies you want to execute

·        How will the strategic goals be reached given the environment and company’s organization?

·        How you will accomplish something is deciding what strategies you wish to execute.

 

1. Analyze the design of your business model in light of your goals and strategies

·        Just because a goal is set does not mean it can be reached.

·        Can you execute your strategies given the constraints of your design?

·        If a design can not be seen it how can it be analyzed?

 

1. Update the design to achieve goals and execute strategies

·        The words design and strategy are not interchangeable.

·        Changing a strategy has absolutely no impact on the design of a business.

·        Designs determine what strategies can be executed.

 

1. Create Strategic Plan and Master Project Plan

·        A Business Strategic Plan:
o      Strategic goals

o      Analysis of the changing environment and the impact to business

o      Clearly identified strategies and a description of each one
o      All strategic initiatives and the rationale behind each one.  

                   

·        A Master Project Plan is the ‘road map’ all executives want to see:

o    Initiatives, dependencies and the sequence of projects
o    Project prioritization no longer exists
o    All initiatives from the Strategic Plan are in the Master Project

      Plan.  

 

1. Implement the new design

·        A Master Project Plan is the ‘road map’ all executives

·        The design has to be in place in order for strategies to be executed.

·        The Master Project Plan shows how to implement the new business design.

·        To receive the full benefit of a new design it must be completely implemented.

 

1. Execute the strategies

·        The entire design does not have to be in place before management starts to see positive results.

·         Some strategies can be executed with the existing design while others can be executed after particular initiatives are completed.