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SERVICES & ORGANIZATION – THE CONSISTENT SEPARATION OF SERVICE AND MANAGEMENT LEAN

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Page 1: Lean - Stern Stewart & Co · “lean”, in the best sense of the term, i.e., ... stern steWart researcH #55 // Lean services & Lean organization On the Do’s and Don’ts of organizational

services & organization – tHe consistent seParation oF service anD ManageMent

Lean

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originating with toyota, the term “lean management” has become synonymous with efficiently orga-

nized production processes in all industries. With respect to the services of an organization, however,

this approach is not widespread. Wrongly so. For while “lean” in the area of manufacturing has incre-

ased both productivity and the quality of the output, even in well-established organizations, the ser-

vice functions are frequently only a third as productive, at best.

the reason is often the incorrect definition of roles and responsibilities inherent in the functions –

producing a negative effect on dimensioning and output. take accounting and Finance for instance: it

is not uncommon today to have most of their functions positioned as a “shared service.” regardless

of how effectively the shared service center actually is (capacity management, process design, qua-

lity, etc.); everything that typically remains in the holding company is not adequately scrutinized.

Probably only a small share of 10-20% is actually officially handled, while the rest consists of expert

services that have no place in a “corporate center” with its claim to leadership. on the contrary: this

combination ensures that the function neither serves nor manages properly – thus not playing its role

effectively. three rules should be adhered to in order to establish organizations and services that are

“lean”, in the best sense of the term, i.e., highly productive:

1. The holding company should focus on supervisory functions – thereby beco-ming sleeker (and at the same time stronger) 2. Based on this, the relationship between the holding company and the strategic business units should be desi-gned to enable the latter to assume entrepreneurial responsibility with “top down” delegation of supervisory processes. 3. Expertise-driven functions should be bundled across all levels and converted into a critical mass with spe-cialized know-how through the creation of so-called ‘Centers of Excellence’.

Management Summary

stern stewart research // volume 55

gerhard nenning, stefan Heppelmann

services & organization – tHe consistent seParation oF service anD ManageMent

Lean

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stern steWart rese arcH #55 // L e a n s e r v i c e s & L e a n o r g a n i z a t i o n

On the Do’s and Don’ts of organizational design

First of all: there is no right or wrong organization – even the discussion of whether it is a financial,

strategic, management or operational holding company falls short. instead, the following key que-

stions must be addressed when designing the organization:

What tasks are to be performed by the holding company? basically, the following applies:

a variety of functions or a large workforce are not synonymous with a productive, efficient

holding company. on the contrary: policemen often work as waiters, as a sideline.

How is the entrepreneurial role of businesses divisions strengthened? Please note: strong

business divisions require functioning corporate governance as well as a clearly defined allo-

cation of responsibilities among the holding company and business division.

How is expertise specifically acquired and a culture of service promoted? important: it is only

when the right management signals are triggered on the demand side and on the service side

that waiters become waiters with heart and soul.

in the “lean” organization, enabling a thorough absorption of specialized resources into selected

areas ensures not only a powerful holding company, but also the creation of latitude for “entrepre-

neurial” business divisions and high service quality. thereby, three design rules apply:

© 2013 // a L L r i g H t s r e s e r v e D F o r s t e r n s t e W a r t & c o . g M b H 3

CONCEPTUAL OBJECTIVE

OF THE “LEAN”

ORGANIZATION

H o L D i n g

b U s i n e s s D i v i s i o n s

c e n t e ro F

e x c e L-L e n c e

1.Focusing the holding company on supervisory functions

2.Strengthening the entrepreneurial responsibility

3.Development and expansion of service functions

s H a r e D s e r v i c e c e n t e r

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4 © 2013 // a L L r i g H t s r e s e r v e D F o r s t e r n s t e W a r t & c o . g M b H

Rule 1: Lean and strong – Reducing the holding company to supervisory functions

there is no room for service functions in the holding company of a “lean” organization. therefore, the

strict separation of supervisory and service-oriented tasks is the basis for a holding company that is

as lean as it is “mean”.

Three criteria characterize supervisory tasks / responsibilities:

1. the task is necessary for the achievement of corporate goals and strategy

2. the task is necessary in order to channel conflicts of interest in terms of corporate governance

3. the task is required from a regulatory perspective, or used for monitoring purposes.

stern steWart rese arcH #55 // L e a n s e r v i c e s & L e a n o r g a n i z a t i o n

TASK TYPES AND

ORGANIZATIONAL

INTEGRATION

KeY

is

sUes

Dec

isio

n c

rite

ria

KeY

QU

esti

on

s

1. Supervisory tasks

4. Business-specific tasks

2. Expertise-driven tasks

3.Transaction-driven tasks

Strategy

Governance

Monitoring

Expertise

Synergy potential

Option of bundling

Scalability

Synergy potential

Option of bundling

Market and customer proximity

Interface to operational processes

Relevance for only one business division

GC CoE SSC OpCo

HoLDing bUsiness Di v ision

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© 2013 // a L L r i g H t s r e s e r v e D F o r s t e r n s t e W a r t & c o . g M b H 5

typically, the task analysis and the subsequent analysis-based activity split will result, on one hand,

in holding company functions that were previously, and to a large extent, will continue to be supervi-

sory (e.g., corporate Development). on the other hand, it also identifies departments that have no

real supervisory function and therefore should not reside in the holding company (e.g., Legal).

Furthermore, when considering individual tasks, potential for merging individual departments often

becomes apparent.

stern steWart rese arcH #55 // L e a n s e r v i c e s & L e a n o r g a n i z a t i o n

SUPERVISORY TASKS OF

THE HOLDING COMPANY

TYPICAL RESULTS OF

THE TASK ANALYSIS

s t r at e g Y g o v e r n a n c e M o n i t o r i n g

Defining the group‘s objectives and fund allocation

standardization and harmoniza-tion in consideration of various interests

Fulfillment of the governance function and monitoring the operational business

c e o b o a r D o F c o M P L i a n c ec F o c H r o

Corporate Development

Group Standards

Innovation& Quality

InformationTechnology

Executive Management

Internal Auditing

Controlling& Risk

Corporate Finance

InvestorRelations

Mergers & Acquisitions

Accounting &Financial Reporting

Corporate Affairs

Sustainability / Environment / Polit.

Compliance

Corporate Programs

Legal

Corporate Communications

Taxes & Customs

Supervisory Outsourcing into CoE

Materials Management

Human Resources

Does the task involve strategic decisions?

Does the task affect the business model?

Does the task involve the basic allocation of funds?

Does the task represent a central governance instrument from a group perspective?

Does the centralization of the task support the resolution of conflicts of interest?

Does the task support the group-wide standardization?

Does the task serve performance measurement?

are guidelines developed, refined or their implementation reviewed?

Does the task reflect the legal requirements?

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6 © 2013 // a L L r i g H t s r e s e r v e D F o r s t e r n s t e W a r t & c o . g M b H

based on this, the following is important for structuring the future organization: blueprints for de-

emotionalizing the decision among various design options. otherwise, the discussion will become

highly perspective-specific, especially in terms of structure, roles, areas of responsibility and func-

tion interfaces.

by streamlining the holding company, savings in the mid-double-digit percent range are generally

possible. in order to simultaneously increase the impact rate, focusing on value-creating activities is

essential. even well-designed companies currently apply this no more than 40% of the time. a first

lever for avoiding waste is to review the performance spectrum. For example, the finance function:

What level of granularity and which reports are actually necessary? other starting points may be

found in the processes within departments, e.g., in the form of a reduction of the coordination / moni-

toring by strengthening the individual’s responsibility for quality. additional potential that can be

tapped through regular, institutionalized exchange is typically found in the area of cooperation across

departments of the holding company and between the holding company and other units.

in summary, the design of the “lean” group management model represents a new, more powerful

layout of the holding company and the optimization of the structural costs. in general, the number of

truly supervisory departments can be substantially reduced. the holding unit no longer executes

tasks of a service or consultative nature. in short, the holding unit is no longer defined by “requests”,

but rather by “announcements”.

Rule 2: The Rediscovery of Subsidiarity –Empowerment of Business Units to Become “global entrepreneurs”

these are the business units that expand and secure the company‘s position as a global group. in the

“lean” organization, the units play a major role – of course within the framework of the reinforced

functional governance of the holding company. therefore, the business units must be equipped in a

manner that allows them to always act flexibly and entrepreneurially as “global groups”.

accordingly, the “lean” organization is designed in terms of the concept of subsidiarity: tasks, ac-

tions, and problem solving should be undertaken independently and autonomously within the busi-

ness units to the extent possible. selected supervisory functions should thus be moved out of the

holding company; in this process the basic condition applies that there cannot be any substantive

duplication or identical tasks on different levels.

stern steWart rese arcH #55 // L e a n s e r v i c e s & L e a n o r g a n i z a t i o n

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© 2013 // a L L r i g H t s r e s e r v e D F o r s t e r n s t e W a r t & c o . g M b H 7

another approach to the development of the role of business units consists in “lifting up” supervisory

functions from downstream units. if there are knowledge-based tasks that cannot add value by their

aggregation in the center of excellence, then their continued performance within the business units

is an option.

not only the tasks, but also the organizational structure of the business units should be aligned to the

entrepreneurial role. in this context, the ceo principle in particular, has proven to be effective.

according to this principle, a cFo supports the ceo – in theory complemented by a cHro. typically,

the overhead of the business division is completed through the business Development, controlling,

Hr, accounting and it divisions. However, according to the leitmotif of a lean organization, the majo-

rity of the operational resources resides in the shared service center or in the center of excellence.

an example of the strengthening of corporate responsibility in the business units is the “pierced fi-

nancial organization.” Formerly, an investment proposal was first assessed in the business division

and subsequently a second time in the holding company. not only are the redundancies obvious – the

practice also promoted mistrust and absolved the controlling of the business of ultimate responsibi-

lity. Well-designed companies solve the problem this way: the cFo of the division reports in both

discipline-related and business terms directly to the group cFo. therefore, the latter has direct con-

trol over the investment controlling the business division – and thus requires no separate department

for this.

LEVER FOR STRENGTH-

ENING THE BUSINESS

DIVISIONS

stern steWart rese arcH #55 // L e a n s e r v i c e s & L e a n o r g a n i z a t i o n

1.Relocation of individual supervi-sory CCs tasks from the holding company into the GEs (prerequisite: strengthening the functional governance of the holding company)b U s i n e s s D i v i s i o n s a s g L o b a L e n t r e P r e n e U r

H o L D i n g

CEO CHROCFO

Business Development ControllingAccounting

HR ComplianceIT

PL 1 PL 6PL 5PL 4PL 2 PL 3

Country CountryCountryCountry Country

Country CountryCountryCountry Country

Country CountryCountryCountry

Country CountryCountry

CountryCountry

2.Selective “lifting up” supervisory functions from downstream units

3.Analysis: added value by bundling in CoE?

4.Revision of Approval Regulations

CCs

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8 © 2013 // a L L r i g H t s r e s e r v e D F o r s t e r n s t e W a r t & c o . g M b H

However, it is only the appropriate management and contract models that set the course for an opti-

mal interaction of service providers, holding company and business units. in this regards, the solution

latitude of management models is far more sophisticated than [merely] the professional and discipli-

nary characteristics. that notwithstanding, in the “lean” organization the scope of action is clearly

defined: at least in terms of clear functional governance, the manager of the center of excellence

reports to the holding company via a “solid line”. Moreover, in the management of the center of

excellence the “cost-efficient quality” within the given budget is paramount – as opposed to the

shared service center, whose objectives are maximum process efficiency and low list price.

Rule 3: The aggregation of expertise – implementation of “lean” in expert Divisions

the dominant guidelines for “lean” services are synergies and functional excellence – and thus the

counterpart of impact and efficiency, which are paramount at the holding company.

the guidelines are initially implemented with the expansion of shared service centers around the

transactional tasks that have been outsourced from the holding company and the business units. in

the expertise-driven service functions, however, a change in philosophy occurs: instead of offering

the services from the holding company as previously, the “lean” organization now aggregates the

tasks in a center of excellence. the aim is the commitment and creation of highly specialized exper-

tise through sharing of resources and expertise. in addition, achieving a critical mass of demand en-

sures the efficient use of expert knowledge.

CONTRACT MODEL

FOR SERVICE FEATURES

stern steWart rese arcH #55 // L e a n s e r v i c e s & L e a n o r g a n i z a t i o n

H o L D i n gNo transfer anticipated

g eIT

HR

Reporting

No potential

SSC receives

s s c

Business Serv …

IT Services …

Real Estate …

H o L D i n g

g eTax

Legal

Market Research

CoE receives

c o e

Inhouse C. Tax

Risk & Insurance Compliance

Market Research Accounting

Tax

Legal

Market Research

Legal …

Market model / Business agreement

“ s e r v e ” P r i n c i P L e

Commissioning model

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© 2013 // a L L r i g H t s r e s e r v e D F o r s t e r n s t e W a r t & c o . g M b H 9

stern steWart rese arcH #55 // L e a n s e r v i c e s & L e a n o r g a n i z a t i o n

EXAMPLE: STANDARDIZED

MANAGEMENT MODELS

AND DESIGN OPTIONS

Functional DisciplinaryFunctional and personal

1. Resource Management

2. Personnel & Performance Management

3. Content Focus

4. Cost Management

5. Quality Management & Organization

6. Statutory requirements and guidelines

No Right of Codecision Limited Commercial Comprehensive participation proposal veto power Partnership decision management hearing hearing

Accountability / Form of Management

t r a n s F e r P r i c e s P e r F o r M a n c e i n D i c at o r s a n D K P i s

s e r v i c e L e v e L a g r e e M e n t s c o n t r a c t i n g M o D e L

Other Other

15%

15%

40%

No clearing

Employee-related

Cost-basedFinancial

Negotiations-based Process-related

Market price-based

Customer-related10%

20%

4%19%

33%20%

24%

Compulsory contracting

Others

Competition solution

Last call provision

66%

20%

8%

6%

Price / Clearing

Customer aspects

Process aspects

Conflict aspects

Financial aspects

CIP

33%

18%

11%

20%

11%

7%

the transition to the center of excellence is a key step towards achieving significant cost reductions

and quality improvements in overhead functions. these go hand in hand with a mental paradigm

shift: the waiters become waiters with their heart and soul and are no longer police officers as a

sideline.

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10 © 2013 // a L L r i g H t s r e s e r v e D F o r s t e r n s t e W a r t & c o . g M b H

Summary

“Lean” services, “lean” organization – in simple terms: the consistent separation of service and

management.

to truly enhance productivity and output quality, the following levers must be applied along the three

design principles, when configuring the “lean” organization: First, the holding company must be

strengthened by focusing squarely on supervisory tasks. the business units must be clearly distingu-

ished from the holding company; they must be structurally empowered to fill their role as “global

entrepreneurs.” in supporting functions, the building of centers of excellence enhances the quality of

service and strengthens the consolidation of expert knowledge. at the same time, the extension /

roll-out of shared services promotes a rise in process efficiency. Finally, appropriate management

and governance systems must be developed to ensure the optimum interaction of holding company,

business units and service functions.

consistently implemented, the following features characterize a “lean” organization:

1. the holding company is no longer defined by “requests” but rather by “announcements”.

2. the business units can act as “global entrepreneurs”.

3. the support functions turn into service providers, dedicated with heart and soul.

stern steWart rese arcH #55 // L e a n s e r v i c e s & L e a n o r g a n i z a t i o n

MODEL ROLES OF THE

“LEAN” ORGANIZATION

H o L D i n g

c e n t e ro F

e x c e L-L e n c e

Strengthening the holding company by focusing on its super-visory function

Clear management model for each function with corresponding responsibilities

Appropriate commissioning and market model for each function

Strong entrepreneurial business divisions with reduced overhead

Service quality and ex-pert knowledge through Centers of Excellence

Functional process efficiency through Shared Service Centers

s H a r e D s e r v i c e c e n t e r

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12 © 2013 // a L L r i g H t s r e s e r v e D F o r s t e r n s t e W a r t & c o . g M b H

stern steWart rese arcH #55 // L e a n s e r v i c e s & L e a n o r g a n i z a t i o n

stern stewart & co.

stern stewart & co. is an independent strategy consulting boutique. our consul-

ting focus is on the key management issues. this includes strategy and corporate

finance, as well as organization and performance management. We see the

company‘s management as a strategic investor in the business and support them

to increase the value of their company.

The authors

gerhard nenning, Partner, [email protected] Heppelmann, Partner, [email protected]

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Stern Stewart & Co. GmbH

Munich Salvatorplatz 4D-80333 MünchenT +49.89.242071.0F +49.89.242071.11I www.sternstewart.de

ViennaSchottenring 16A-1010 WienT +43.1.53712.4111F +43.1.53712.4000I www.sternstewart.at

ZürichSeefeldstrasse 69CH-8008 ZürichT +....F +....I www.sternstewart.ch