White Paper

Assuring Senior Executive Champions’ Program/Process Improvement Support

This White Paper Assumes You Want To Get Projects Support, and Grow Managerially

Introduction

This White Paper will focus on the key ways to more effectively gain senior executives’ support for process improvement (PI) projects. Several surveys, the most recent by iSixSigma Magazine in the May/June, 2011 edition, cites the lack of senior executives’ support as one of the top barriers to process improvement success (the other is change resistance, which is the subject of a separate White Paper from TQG). This White Paper can help with garnering the needed executives’ support.

The insights in this White Paper are a product of the authors’ many years as CEO of companies and being PI practitioners in former roles where they had to win approvals themselves, and did so. Two key success constructs will be reviewed (and a slide presentation of the key graphics is available if helpful internally):

1. Program/Project Value Positioning (Financially and Politically); and
2. Knowledge is Power…And Vice Versa.

Per Figure 1, the mindset of Process Improvement (PI) is the way top leaders have to think and act in today’s hyper-competitive business world. Learning to be successful at gaining top executives’ support and then executing in a manner that exceeds expectations are proven paths to future leadership promotions for PI leaders themselves. Showing that one already thinks that way, can convince others, and can execute to plan are clear signals of promotability. Top management is always looking for such talent for the future.

I. Program/Project Value Positioning (Financially and Politically)

Winning senior executive champions’ PI support is best thought of as a value-based marketing and sales process. Both absolute value and relative value must be presented and convincing arguments made to multiple people. Very significantly, executive champions WANT to improve financial results so the core potentials exist.

The Competition For Approvals Is High

Many types of projects and programs vie for executives’ financial, and perhaps as importantly, political support.

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Only X% will be supported, per Figure 2. A few project/program types include:

• Lean programs to eliminate waste and better align to customers
• Six Sigma defect reduction programs
• Mergers/Acquisitions
• New business lines
• Eliminated business lines (e.g., Saturn being liquidated by GM)
• Rightsizing/Downsizing/Outsourcing
• Technology re-tooling (e.g., robots vs. people)
• Cost over-runs, requiring more, un-budgeted resourcing
• Other projects

Corporate Mission Alignment Will Be Commanding

The "Golden Rule" always applies in life…who has the gold rules. In this instance, it is the C-level leaders and the Board of Directors; heavily influenced by the EVPs and SVPs. They are the resource (“gold”) allocators. At these top levels is where the corporate missions are set as an action framework. Some missions might include the following, and ALWAYS must be reflected in approval submissions:

• Leading technology quality
• Largest market share
• Fastest growing
• Fastest adapting
• Most global
• Most profitable
• Most Green
• Shareholder value

Corporate Objectives Are Commanding

Below the Corporate Missions are the more numerical Objectives. Some of them might be as follows; and, these too must be reflected in approval submissions.

Per Figure 3, the Goals, set by the Executive Committee, can include any combination of:

• Revenues growth/levels
• Profit levels
  • Gross
  • Net
  • Both
  • EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization; also is free cash flow from operations)
• Marketshare (may be for each market entered)
• Others (Operational goals also, per the Figure 4 actual example from a Fortune 100 company).

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Some Approval Realities

Improvement projects need approved initial resourcing, with later large paybacks the focus. Both “OpEx” and CapEX” resource allocations are based on what is best for shareholders (financially and legally).

Management has a legal fiduciary responsibility to have proven business case and resource allocation processes in place. Both bogus “Greenmail” and meritorious stockholder lawsuits happen daily. These are expensive and embarrassing, so are avoided. The larger and more impactful the project/program, the more essential that mission and numerical objectives must be effectively integrated into the business case.

C-managers also have a personal interest in choosing the right projects/programs because their bonuses and stock options are often based on earnings and stock price growth. Additionally, C-managers always have to protect their political power. Potential failing and sub-optimized projects/programs will be avoided.

Part of the legitimate prioritization process involves inter-manager jockeying to win the needed resources for success and advancement, even if hidden. The process is somewhat political, often behind the scenes. Many business cases will be challenged, especially larger ones. The more thought out the business case, including incorporating political needs (more about this later) the better chance for approval. Support from the CFO’s staff is also critical to success: they are seen as more neutral, and are tasked with financial vetting. Figure 5 provides some example BPM impact insights. Be assured that the Figure 6 days are long gone.

"OpEx" programs are expensed on the P&L Statement (Profit and Loss), and directly affect Earnings Per Share (EPS) in an operating year. Thus, highly certain payback, often in one year, is needed.

Operating efficiency ratios use vary by industry and are often tracked by Wall Street analysts as operational health barometers of the business versus competitors. These two “Investopedia” examples provide insights:

"Operating Ratio

What Does Operating Ratio Mean?

A ratio that shows the efficiency of a company's management by comparing operating expense to net sales. Calculated as:

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Investopedia explains Operating Ratio
The smaller the ratio, the greater the organization's ability to generate profit if revenues decrease. When using this ratio, however, investors should be aware that it doesn't take debt repayment or expansion into account.”

"Efficiency Ratio

What Does Efficiency Ratio Mean?
Ratios that are typically used to analyze how well a company uses its assets and liabilities internally, Efficiency Ratios can calculate the turnover of receivables, the repayment of liabilities, the quantity and usage of equity and the general use of inventory and machinery.

Investopedia explains Efficiency Ratio
Some common ratios are accounts receivable turnover, fixed asset turnover, sales to inventory, sales to net working capital, accounts payable to sales and stock turnover ratio. These ratios are meaningful when compared to peers in the same industry and can identify businesses that are better managed relative to the others. Also, efficiency ratios are important because an improvement in the ratios usually translates to improved profitability.”

Thus, if a proposed PI project will positively skew the ratio, then both earnings improve AND the Price/Earnings (P/E) multiple could be upgraded (less risk is associated with better operating efficiency vs. peers). An over-achieving, high ROI vs. Plan project results can boost earnings and may boost the P/E as well. Stock price and shareholder value grow. People get bonuses… and promotions.

Thus, getting the ROI and business cases correct (slightly conservative is desirable) are important defensively and offensively.

"CapEx" programs, reflected on the Balance Sheet, receive special funding allocations by a senior policy process that affects the Balance Sheet. Four options exist:

1. From Cash and Retained Earnings on the Balance Sheet. This means less liquidity safety and perhaps too little net working capital vs. expected ratios. The P/E can be reduced. Dividends might be negatively impacted, affecting the P/E ratio and shareholder value. Payback and safety are important to show.

2. From debt borrowings. These Balance Sheet Liabilities include liquidity risk and incurs fixed debt service expense obligations; and is the source of possible bankruptcy risk. Debt usually is via issued corporate bonds, bank loans or short term “trade credit.” These carry an interest rate that must be expensed each year; which will affect the below “hurdle rate” for the ROI and EPS. Interest payments are usually tax deductible.

3. From new stock issues. The Balance Sheet Owners Equity changes can include some combination of Preferred and/or Common stock. Such issuances dilute existing shareholders and may lower the P/E multiple; and also impact EPS (as the number of shares increase). Annual dividends on Preferred shares are not tax deductable like debt service. Common Stock dividends are non-tax deductible.

4. A combination of the above elements.

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Some Return On Investment (ROI) Insights

The "ROI" is a critical objective arbiter for the value of a PI project, both absolutely and relatively. ROI is a measure of the net gains after the investment required, including project expenses, compared to the investment/expenses needed. ROI encompasses several analyses simultaneously, all of which are considered when comparing competing projects and programs for resourcing:

1. Payback period (P= ((Project Gains-Project Costs) / Project Costs) X 12). For a payback months calculation example: (($10M-$6M)=$4M) /$ 6M = .667 X 12 = 8 Months Payback. (Note: This is a simplified “linear” example. In reality a project could take six months to begin the benefits and a year to realize them; the linear principles still apply.)

A payback may take 2+ years to occur.

2. NPV (Net Present Value)

All future net gains (results minus costs), say for five years, discounted back to present value at a “hurdle rate” (what money can be borrowed at, or what it can earn in a low risk or alternative investment standard) to its value today… “If we invested that amount today at the hurdle rate it would be worth the total net gains at the end of Year 5?” According to “Investopedia,” for having $5000 at the end of year 4 at an 8% hurdle rate you would need $3675.15 today, or .735 of the $500. (seehttp://www.investopedia.com/terms/p/pvif.asp for more insights).

3. IRR (Internal Rate of Return)

IRR is the (NPV / The Investment) X 100. Per the above simple example, if the investment today is $2000, then the IRR would be ($3675.15/$2000=1.8375 X 100 =) an IRR of 183.8. This will be compared with other IRRs for resource allocation decisions (along with other business factors).

The additive/contributory (output) elements of ROI can include:

• New revenues
• Faster revenues
• Faster time to market and/or faster growth slope
• Higher revenues than would otherwise exist
• Reduced COGS (Cost of Goods Sold), for a higher Gross Margin
• Reduced expenses
• Reduced liabilities
• New markets
• Improved marketshare (including by better attracting competitors’ customers)
• Improved shareholder equity value.
• Increased operating expenses

• Increased operating expenses

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• Capital equipment costs
• Project financing costs
• The costs of capital financing
• Project costs
  • People time (usually not “opportunity costs”)
  • Materials
  • Direct allocated costs
• Acquisition costs (e.g., software, consultant services, and more)
• Consumed assets costs, increased liabilities costs

Other ROI factors that must be identified and addressed as they may apply are:

• Reduced business risks:
  • Marketplace (large enough and not owned by others)
  • Competitive edge (valued differentiations exist)
  • Legal (compliance, etc.)
  • Financial (profitability, shareholder value, P/E potential)
  • Operational (safety, union rules, etc.)
• New markets that are desirable
• Leave poor markets
• Execution differentiation (e.g., re-tooling, such as robots)
• Planned obsolescence
• Strategic differentiations (e.g., acquisitions and mergers)
• Other factors

A range of "What if" estimates are often used, since all numbers are estimates only. A range of potential gains and costs can be projected. From this, three cases can be presented:

• Good Case
• Most Likely Case
• Bad Case

The underlying assumptions for each case are needed. Risks for each assumption also must be identified, and mitigation steps must be planned as well … to keep “Murphy” away.

Other Criteria Are Often Needed Also

Multiple projects/programs will always exist. As reflected in Figures 8 and 9, both from a Fortune 100 company, the selection and rating criteria will vary by business type, in addition to an ROI calculation. Weightings and scorings are used to objectify subjective areas that are difficult to financially metricize precisely. These scores are usually added to ROI estimates when recommendations are presented.

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Understanding Senior Executives

Except for occasional nepotism, the cream generally rises to the top in organizations. In these hyper-competitive times, no margin is left for promoting what Professor Ed Mazze once called “creeping meatballs” based on style alone, and who they know. Skill is the key, to have Darwinian principles work for the organization, and not against it. Gone are the days where the “Peter Principle” often occurred, where people were politically appointed to a level where they were no longer competent. Little such luxury exists today. Thus, senior executives need to be respected.

Importantly, each higher organization level introduces higher levels of intelligence, education, drive, ego (good thing), ambition, confidence, peer competition, and jockeying for the next promotion. The higher organization pyramid layers have fewer and fewer job potentials. The promotion competition thus becomes material.

An executive is regularly assessing his/her career growth potential. An executive wants to be perceived as ready for the next promotion (safe). The quality (completeness, depth, breadth, risk mitigation, forecasts, execution plan, etc.) of a business case’s support by an executive champion is a strong barometer of growth capability. (This is true also for the business case developer, such as an MBB or VP).

Project success or failure has major career impacts. Talk (the plan) is not enough. Achieving great gains generates needed buzz. Sustaining a failure generates even more buzz! Thus, under-promise and over-perform. Make sure dependencies are identified, for later possible protection (if another group you depend on does not perform, it is important that the dependency was pre-identified and performance metrics used, so that variances by them will be evident to all).

The informal organization is often the real organization, and a political power source to be harnessed. Business case quality, with risks mitigation, and with great execution, builds positive momentum both from formal and informal power sources. Pre-socializing the case, including seeking inputs, is important. Not only will the business case be improved (“we IS better than me”), but “fingerprints on the knife” will be garnered. Have strong political backing and mentoring. Use it.

Harness The “Prima Drives Software” In All Of Us (In Executives Also)

Per Figure 11, Neuroscience has made major strides in understanding how we truly think, and why we do what we do; and usually well below our conscious level. The coming book “Primal Leadership”™ also identifies eight key “Primal Drives”™ in all humans, six of which can be consistently harnessed to achieve desired business outcomes.

The Primal Drives are even stronger than often thought; and even exist far below Instincts. Some believe they even drive the Autonomic.

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system, per Figure 12 (e.g., the Safety Primal Drive causes adrenalin to surge with fear).

The Primal Drives are easy to leverage via “The Judo Principle™” (harness forces for you, whether positive or negative). As noted, eight Primal Drives (needs) exist in general, but only six can be applied to business situations. They are, in approximate order of power (and they will “marble” in varying combinations in different situations—which is where persuasion “art” comes in):

1. Safety and Control Need
2. Self Interests (financial gains, career, etc.)
3. Hope, Transcendence
4. Energy and Time conservation
5. Honesty and Trust
6. Sociability.

In addition to the ROI estimates and the other scorings referenced above, for project business case approvals, executives’ motivations can be defined using the below table. For each row, list multiple tangible and intangible bullets that apply, as completely as possible for each project:

The purpose is to better understand key, deep motivations, situationally (by executive and by project, together). This will help with choosing the correct words to define benefits, objectives, risks, and more. In Marketing, this process is called “Communisuasion” (per Professor Phillip Kotler of Northwestern University); communicating to persuade. Once again, the process of getting executives’ support is a marketing and sales effort.

II. Knowledge Is Power…And Vice Versa

As Yogi said so well, “You can’t hit ‘em if you can’t see ‘em.” This is true for executives as

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well. Many do not know the history of the formation of Lean and Six Sigma philosophies, practices, methods and tools; and how proven they are in thousands of situations, first started with Motorola and GE. They have not tracked the growing sophistication and prove application of the “LSS” tools and methods. They do not know why TQM and other past quality methods were inadequate and have been very successfully replaced by Lean and Six Sigma. Perhaps most importantly, they do not appreciate their essential leadership role if a PI initiative is to achieve its potential for improving operational and financial performance.

Just hoping an executive will understand the Why?, What?, and some Hows? of Lean Six Sigma and be passively supportive is not a good strategy. Knowledge must be proactively made to exist. Not doing so is too risky, and frustrating, and detrimental to the business.

A popular method is Executive Champions Blended Learning, as reflected in Figure 13, where easy to access online courses and virtual mentoring, and perhaps even a class, are used to productively and effectively get executives bought in to the Lean Six Sigma PI mindset of:

1. There is true value to be realized;
2. The elements are proven;
3. They are understandable;
4. Implementation can occur;
5. The right projects are worthy of support, including for personal gain;
6. Time and energy should be dedicated to considering a presented project;
7. Using “political capital” to support a good plan could be smart to do.

Summary

This White Paper focused on the key ways to more effectively gain senior executives’ support for process improvement (PI) projects. Several surveys, the most recent by iSixSigma Magazine in the May/June, 2011 edition, cite the lack of senior executives’ support as one of the top barriers to process improvement success (the other is change resistance, which is the subject of a separate White Paper from TQG).

The insights in this White Paper are a product of the authors’ many years as CEOs of companies, and being PI practitioners in former roles where they had to win approvals themselves, and did so. Two key project support success constructs that were reviewed are:

I. Program/Project Value Positioning (Financially and Politically); and
II. Knowledge is Power…And Vice Versa.

By following these project support principles, a PI leader can be more successful, and can advance his or her career potential, per Figure 1, repeated here. Executive education is a key success factor.