Book Extract

Planning for the Six Sigma business scorecard

The Six Sigma Business Scorecard helps executive leadership and shareholders to not only understand the company’s performance through simple measurements, but also plan success. The Six Sigma Business Scorecard can help create a system that will improve the company’s performance.

Leadership and improvement

Many companies neglect to plan for improvement, in both good times and bad. When the economy is strong, margins are good, and the company is profitable, the leadership does not sense the urgency to improve profitability through strategic planning. On the other hand, when the economy weakens, margins shrink, and profit evaporates faster than steam, the focus is directed to fighting fires rather than planning. Rather than plan to collect meaningful operational data, leadership develops a plan backward from sales numbers and hypothetical profitability projections. The numbers are allocated to managers, who then create measurement methods to achieve the desired numbers. When the net results of this effort are not good, the real problem areas become even more difficult to identify. Thus begins the spiral of cost management: cutting expenses, reducing the workforce, and streamlining the product or service portfolio.

To be successful, leadership must gather information that accurately demonstrates what is happening in the business. Leadership must identify the key business measurements that indicate corporate wellness, gather operational performance data, identify opportunities for improvement, and use all this information to develop a strategic plan to improve business performance. The urgency to achieve the desired results must be clearly understood by the executive and management teams of the company.

Extent of improvement

What extent of improvement is appropriate to aim for? When a business sets a goal to improve performance by 10 percent per year, employees are likely to complain that no one in the company feels any improvement. In fact, that may even feel that the company’s performance has degraded. The reason is that the tangible results of about one-half of any improvement in performance may be consumed by cost-of-living adjustments. Another portion of the improvement may be attributed to measurement errors (whether intentional or not), and the remaining improvement may be attributed to real improvement in a few areas. As a result, most employees see no improvement, practically speaking.

Suppose a company’s CEO sets a goal to improve business performance by 10 percent. The management team is requested to submit a plan that will achieve the expected results. Naturally, they look for areas that can easily be tweaked. The 10 percent improvement is quickly realised, and everyone celebrate the success.

There’s a better way to plan, however. Suppose that the CEO asserts that an aggressive rate of improvement is critical to maximise profitability and assigns challenging rate-of-improvement goals to all management team members. Practically everyone has the same goal: to improve at the specific rate. Typically, managers react with dismay, “This rate of improvement is impossible! We have never done this in the past.” After the initial shock, however, when they come to understand the current problems and accept the common corporate goals, the goal of aggressive rate of improvement is accepted. Then the challenge to improve current processes begins. The way to achieve such aggressive rate of improvement goals is to examine and test the existing processes and look for a new way of doing them. To institutionalise and sustain such a high rate of improvement, the corporate culture must change. The cultural change begins with a new vision and new enthusiasm.

Some call this cultural change corporate renewal; others call it reengineering the corporation. Whatever it’s called, the change must be driven by the new, clearly established corporate performance goals. Creating the vision is a critical step that must be led by the company CEO.

Business opportunity analysis

To achieve financial goals, a clear relationship must exist between the opportunities and the profitability. A business opportunity analysis will establish a baseline and identify the opportunities for improvement. If a company has done limited data collection up to this point, the Six Sigma Business Scorecard measurements can be used as a starting point. If an extensive data collection system already exists, however, those data can be analysed and used to develop a business model that will identify what drives that company’s profitability.

With a full understanding of the relationship between opportunities and profitability, being able to visualise the company’s actual opportunities, anticipating trends in the industry, and taking into account plans for future growth, the company’s leadership can commit to implementing the Six Sigma Business Scorecard. The following relationships, although well understood, must be constantly monitored.

Once a company’s executive understands the potential for profits and its impact on compensation and value to shareholders, it is easier for that executive to commit to the strategic plan that facilities it. He or she must be further aware, however, of external environmental factors (such as acquisition and mergers, competitive performance, government regulations, societal changes, and economic trends) in order to achieve desired growth.

Organisational adjustments

A business must be organised to balance profitability and growth. The executive leadership team includes the chief financial officer (CFO), the chief growth officer (CGO), and the chief operating officer (COO). The CFO must ensure that the rate of improvement occurs as planned as well as monitor the various business performance indicators that correlate to rate of improvement. The CGO, in the place of chief technology officer (CTO), must monitor external factors and employee innovation beyond the internal research and development activities.

The COO is responsible for executing the operational plans within the organisation as well as maintaining an eye on any variances in performance. Once the roles, responsibilities, and benefits of key executives are understood and defined along the lines of the Six Sigma Business Scorecard, their commitment starts to build. Executive commitment for any initiative has become a buzzword at many companies. Such commitment is often demonstrated in letters or memos posted in the lobby and throughout the company.

The key to gaining CEO commitment, and hence that of the rest of the company, is through demonstrating the benefits of aggressive change; better performance, lower costs, higher growth and profitability, and superior financial incentives for executives and employees. The commitment begins with setting a Six Sigma Business Scorecard vision for the company.

Excerpt from ‘Effective Training: Systems, Strategies, and Practices’ by P Nick Blanchard and James W Thacker. Published by Pearson Education