Learning to Manage What Matters – Not Always Intuitive

October 11, 2009 — Posted by Al Shalloway

The Intuitive Solution – Not Necessarily Correct

If there is one established measure of business success it is return on investment (ROI). ROI is the mantra of business. If you are a business executive and establish a high ROI for a sustained period of time – you are golden. ROI is easy to calculate – it is a measure of your profits (revenue-less expenses) divided by your expenses. ROI can therefore be achieved by increasing your revenue or decreasing your costs. Doing both has you walk on water.

Our revenues, of course, are related to the total number of products we sell. We can increase this by either increasing the sales of our current products or by adding new products – or again, doing both. Thus, increasing our productivity to increase revenue seems like a natural thing.

Learning to increase ROI by increasing productivity, while lowering costs, is intuitive. It makes sense. The relationship is clear. Unfortunately, as in the words of H. L. Mencken – "For every complex problem, there is a solution that is simple, neat, and wrong." So if this solution to achieve high ROI by managing productivity and cost is wrong, why is it so pervasive?

The ROI explanation above has stuck around because it was right at one point in time. One of the best industrial success stories is of Henry Ford and the Ford Motor Company. Another one is post-WWII production by many US companies (the automotive industry in particular). When things are totally false, we tend to ignore them. But things that are partly true, or were true in the past, have a funny hold on people. Achieving high productivity while lowering costs to get a good ROI is one of these.

During Henry Ford's day, the problem was productivity. Ford invented the moving assembly line. It was a dramatic improvement over methods before. To do it, he sacrificed one thing – variation of the product. But, given that without him, few people could afford a car, this variation was not missed (until later – which is how GM overtook Ford by offering more models and colors).

Post WWII production was simply a "whoever can produce the most wins" situation. Consider what free-world countries had post war productivity. Europe was bombed out as was Japan. Our factories had been built up throughout the war and now the free-world needed our manufacturing goods. Turn the factories on and let them roll. Innovation wasn't as important as cranking things out – at least for a while.

Causality Thinking

While the same return at lower cost will increase ROI, how does one achieve lower cost? Managing costs does not lower costs. In fact, typically, just the opposite occurs. Managing productivity also often has an adverse effect on it (and therefore costs) as well. Why? To understand these statements, we must look at what we are really trying to accomplish.

Let's first recognize that productivity is not actually a primary goal. It is an attempt to maximize the delivery of value to our customers (internal or external). We want to deliver high value, high quality products, quickly. This value part is critical. Productivity is essentially useless if we're building the wrong things. Thus, to increase revenues, we want:

  • The right products
  • with high quality
  • delivered quickly
  • with the lowest cost

The right products should be those that deliver the most value for the effort required to create them. Thus, we should be value driven – not productivity driven. When looking at how to increase our return then, no matter what we do to our product development system, we must have an effective way of selecting products to go into it. In other words, our return will be based on a combination of selecting the right products and building them to a high-enough quality-standard quickly. For the rest of this blog we'll concentrate on the cause-and-effect of the issues on the production side.

So, why does managing costs not lower costs? And, why does managing productivity lower productivity (and therefore value delivered)? In figure 1, each arrow is meant to ask the question about how managing one of the issues affects another one.

Figure 1: Relationships between time-to-market, quality, cost and productivity.

 

How does managing cost affect time-to-market? Lowering costs directly will have an adverse affect on TTM. Why? You have fewer resources available. It will take longer. If you work smarter, eliminating waste, etc., then the gains will come from the improved working methods (which lower the cost as well).

How does managing cost affect quality? Again, lowering cost will not have a direct positive effect on quality and will likely lower it. Fewer resources or people will usually make achieving higher quality more difficult.

How does managing productivity affect time-to-market? Managing productivity means keeping people busy working on useful things. Unfortunately, the side effect of keeping people busy typically means that there is more work in process at any one time. This will increase the time-to-market for several reasons. A primary reason is that people will take longer since they are working on more things. But they will also find themselves waiting on other people more since those people now need to assist more people than they did before. In software development, the cost for fixing errors will be greatly magnified since developers will now often get defect reports later than they would have before.

Keeping people busy sometimes gets confused with raising people's productivity. In other words, if people have to wait for other people to be available, a common "solution" is to have them start working on another project. But then, this causes the side effects mentioned earlier – causing more problems. People often want to work on particular types of tasks. However, if that work isn't actually resulting in more product being delivered, it really isn't helping. This often occurs when there is a bottleneck and instead of working on that, people just keep doing more work in front of the bottleneck.

How does managing productivity affect quality? Quality will go down as the feedback cycle lengthens. This is due to delays in error detection in requirements, design and coding. But, people will be busy (in fact, they will be busier because they now have to fix these errors as well).

How does managing time-to-market affect cost? If we can lower the time to market by eliminating delays we will not raise cost. In fact, by improving feedback cycles, we should lower the incidence and fixing of errors – thus, costs should actually go down. Furthermore, shortening our time-to-market can have a significant positive effect on our revenue.

How does managing time-to-market affect quality? Again, by providing quicker feedback, quality should actually go up. Early error detection almost always lowers the cost of fixing the error.

How does managing time-to-market affect productivity? Productivity in terms of people being busy may actually not improve. It may even go down. But that's ok. We're not really trying to keep people busy as much as we are trying to deliver value quickly.

How does managing quality affect cost? Much of the cost in software development is in finding errors. Although developers think they spend a lot of time fixing bugs, on reflection they will acknowledge it's actually finding them that takes the most time. Here's the thought experiment to verify this. Consider a bug that is detected immediately and requires only 30 minutes to fix. Now, consider the same bug being found 2 weeks later. Forget the cascading affect that might occur because of the late error detection. It is easy to speculate that fixing this bug won't be in 30 minutes – but could take several hours or days. Why? Because the developer won't remember what he did last. He'll have to reinvestigate things, rethink things. This will take extra time (and cost).

How does managing quality affect time-to-market? By keeping quality high we have less rework and fewer errors. We will go faster.

How does managing quality affect productivity? Improved quality will improve productivity. But, again, that's not really our target.

Summary of Causality

Managing productivity and/or costs has an adverse affect on time-to-market and quality. Managing time-to-market (though the elimination of delay) and quality will lower costs and improve value delivered. Thus, we focus on these to get the desired results.

Figure 2 summarizes this.

Figure 2: Summarization of how managing one aspect of development affects the others.

Managing the Right Things

Once we understand that we want to achieve value and that value delivered is related to time-to-market and quality, we begin to understand that managing different issues will result in different results. This notion of managing one thing to get another is not really that new. For example, when wanting to turn right while driving one wants the car's wheels to turn to the right – but one uses the steering wheel to get that to happen. The causality is clear and the action is straightforward. In the case of management we often haven't looked at causality enough to truly understand what is going on.

The problem with product development is that it is a very complex system. In other words, even though there is causality present, that does not mean that it is of a deterministic nature. To manage things we will require a lot of feedback.

For more information on how to manage time-to-market, see my earlier blog The Essence of Lean where I discuss how delays problems and therefore there elimination will improve things. How to reduce delays, work on smaller features (Minimum Marketable Features) with less work in process at any one time.

Other Articles

Here's an excerpt from a great article by John Seddon:

"You have to teach people that the cost is in flow and not in activity. If you understand flow you can cut costs.

"Whenever managers are going after cost reduction, it just makes the system worse. If you manage costs, costs go up. If you learn to manage value, costs go down.

"I can take you to places where they do five times as many pot holes with the same number of people. If you redesign services you can get massive results."

A systems-based approach brings other, less tangible benefits, Mr. Seddon says. "This not only gives you massive improvement in performance – you can expect many hundreds of per cent – but most importantly it transforms morale."

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About the author | Al Shalloway

Al Shalloway is the founder and CEO of Net Objectives. With 45 years of experience, Al is an industry thought leader in Lean, Kanban, product portfolio management, Scrum and agile design. He helps companies transition to Lean and Agile methods enterprise-wide as well teaches courses in these areas.



        

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