Just about every day the business news is filled with stories of companies eliminating staff, cutting hours, reducing overtime, freezing salaries and benefits, and cutting back on services. Clearly, the majority of businesses today are in an extremely defensive posture. Their mantra is to preserve cash, freeze discretionary spending, cut operating budgets and sell noncore assets.

While these near-term actions may seem appropriate given the economic downturn, they create ramifications over the long-term. Organizations that focus solely on reducing costs and headcount will likely experience an endless cycle of quality issues and declining revenues. That ultimately leads to more pressure to reduce costs again in the future. Rather, what is needed is operational change to unlock performance and create real and sustainable value.

Operational change is an alternative to simply cutting costs through reductions in force, layoffs, closing divisions, shutting offices and redlining other expenses. Implementing operational change is even more basic than applying process improvement methodologies such as Six Sigma, lean or ISO 9000 standards.

Issues being laid bare by declining revenues have been building for years. Fixing them in a systemic manner may be the real key to pulling us out of this recession. During these lean times, companies can look within to change and improve business processes in order to save money. The concept is the same for both small businesses and multibillion dollar corporations, service or manufacturing, profit or not-for-profit: Improve core operational processes to get the same or better level of service or output with less cost.

Principles of Operational Change

There are four principles to achieving operational change: standardization, integration, centralization and optimization. Implementing these management principles does not occur overnight or in some random order. Rather, like the construction of a pyramid, they are built up layer upon layer.

Layer 1 – Standardization

Standards are used extensively in the production, delivery and maintenance of products and services. Imagine life without some form of basic standardization. Suppose each car model used a different sized opening for the gas tank? What if tax return forms were different for each state? What would happen if lumber was not measured and cut to standards? Mundane activities such as filling up your car with gasoline, filing tax returns or building a room addition would be difficult, time-consuming and extremely costly.

Standardization seems obvious, but many large companies are just beginning to focus on this principle as a means of reducing operating costs and providing a consistent customer experience. In a more robust economy, standardization is generally viewed as an innovation killer at corporate offices. It is seen as running counter to the autonomy necessary to serve local markets. The answer is to deploy standardization specifically in areas where disparity in process drives up cost.

One of the earliest examples of applying standardization was Henry Ford, founder of Ford Motor Co. The hallmark of his system was standardization—standardized components, standardized manufacturing processes and a simple, easy-to-manufacture (and repair) standard product. Standardization required nearly perfect interchangeability of parts. To achieve interchangeability, Ford exploited advances in machine tools and gaging systems.

It is a little known fact that Toyota uses the same chassis on both its upscale Lexus models and the more affordable Corolla models. This saves Toyota considerable costs on design, engineering, sourcing and assembly. Another example is seen in the standardized floor layouts in certain grocery stores and retailers. This floor layout consistency helps improve the customer experience by allowing the consumer to quickly locate, for example, the produce or meats section.

Layer 2 – Integration

Integration may be one of the most commonly used expressions in business. As quality professionals, we implicitly understand the importance of integrating activities, processes and systems in day-to-day business. Yet, how many times are we faced with work-arounds or one-offs? Soon the work-arounds become the norm. Integration is typically associated with technology, but it is equally important on the business process side of things. Integration can be categorized into two types:

Internal integration includes all the integration aspects within an enterprise. Enterprise application integration (EAI) is a typical example of internal integration.

External integration covers all the possible integration patterns across multiple enterprises.

For example, within a customer life cycle, many systems and processes are involved, from sales to service or product delivery, billing and customer service. The ideal situation is to have a seamlessly integrated set of systems and processes to support the full customer life cycle.

Over time, many companies have unfortunately built specialized applications and processes to support new product offerings, regulatory changes, company growth or acquisitions.

Layer 3 – Centralization

Centralization is the next logical step in the progression to achieving real operational change. Whether part of an overall shared services initiative or not, the core theme of centralization, or localization, is to remove redundancies and achieve economies of scale. Simply put, one wants to perform like functions in fewer locations or with fewer suppliers or vendors. Obvious functions are back-office in nature: advertising, accounting, purchasing, human resources, information technology and legal.

It may seem intuitive that the challenges are technical and process oriented. However, the true barrier to effective centralization may be company culture: the people dynamics that are involved with change management.

Case-in-point: The Home Depot. When Robert Nardelli became chief executive officer of The Home Depot in 2001, one of his first major initiatives was to centralize purchasing in its Atlanta headquarters. This change removed a great deal of authority and autonomy from Home Depot’s nine regional purchasing offices. The move saved money by leveraging buying power and simplifying life for suppliers.

But managers found they could not tailor merchandise for specific markets. Home Depot lost the money it saved through centralized ordering by not having the right products in the right quantities in the right stores. In the process, many of the individual store managers felt alienated and powerless. Home Depot’s new chief executive officer, Frank Blake, has now built a hybrid purchasing system. It recreated a regional merchandise team scattered around the country in about 10 cities, though the team travels as well. The team helps the chain’s buyers, still located in Atlanta, choose suppliers and products.

Layer 4 – Optimization

After companies go through the transformational challenges related to standardization, integration and centralization, it is essential to optimize performance toward maximizing value. At this stage in a company’s evolution, it often makes sense to use proven process improvement methodologies such as Six Sigma and lean.

For sustainable improvement, it is imperative to continuously streamline systems and processes while building a structured change-management process focused on return on investment (ROI). The key and challenge is to find the right balance among quality, cost and speed to market. It falls to corporate leaders to drive sustainable improvement. In particular, diligence in assessing the opportunities to improve core processes, fully developing a true business case with defined ROIs, and ensuring that reduced costs actually result is critical for transforming today’s businesses and making them viable for the future.

Rather than solely focusing on reducing costs and headcount, operational change is needed to unlock performance and create real and sustainable value for an organization. Operational change means looking within to change and improve business processes in order to save money.

Tech Tips

There are four principles to achieving operational change:

Standardization is deployed specifically in areas where disparity in process drives up cost.

Integration produces a seamlessly interlinked set of systems and processes to support the full customer life cycle.

Centralization removes redundancies and achieves economies of scale.

Optimization relates to the use of proven process improvement methodologies such as Six Sigma and lean.