B00AZRBLHO EBOK

by Kim, Gene

  “Wait a second. I thought Phoenix was supposed to fix all this?” I ask.

  She snorts in disgust. “All we’ve gotten from Phoenix is a bunch of promises. It was supposed to do a lot of this reporting, but there’s so much political pressure to ship something, they keep dropping features. And guess which feature they’re delaying until sometime next year?” She rolls her eyes in disbelief.

  “Reporting?” I guess, fearing the worst.

  When Maggie nods, I try to stay upbeat. “For now, let’s assume that the magic wand worked. We now have great data coming out of the stores. You’re keeping the right products in the stores, and the campaigns you’re dreaming up are succeeding beyond your wildest dreams. What then?”

  “Life gets exciting, that’s what!” she says, her eyes lighting up. “Last year, we shipped a custom fuel injection system for a new upcoming sports car. We had just six months to get this to market, from the drawing board to the shelves. We nailed it! The designers, R&D folks, and Marketing all kicked ass. We had the right product, right place, right brand, right price, and right quality. It was one of the best-selling products of the year.

  “We took a risk and won big,” she says. “If we had better visibility into our retail operations, with our amazing R&D and manufacturing capabilities, we could make fifty of those bets per year. I’d bet four of those would be runaway hits! We’d not only be profitable, we’d be insanely profitable.”

  Patty interjects, “What’s an acceptable time to market for your products?”

  She responds quickly, “These days? Products need to ship in six months. Nine months, tops. Otherwise, some Chinese company will steal our idea, have them on our competitors store shelves, and take the majority of the market.

  “In these competitive times, the name of the game is quick time to market and to fail fast. We just can’t have multiyear product development timelines, waiting until the end to figure out whether we have a winner or loser on our hands. We need short and quick cycle times to continually integrate feedback from the marketplace.

  “But that’s just half the picture,” she continues. “The longer the product development cycle, the longer the company capital is locked up and not giving us a return. Dick expects that on average, our R&D investments return more than ten percent. That’s the internal hurdle rate. If we don’t beat the hurdle rate, the company capital would have been better spent being invested in the stock market or gambled on racehorses.

  “When R&D capital is locked up as WIP for more than a year, not returning cash back to the business, it becomes almost impossible to pay back the business,” she continues.

  Holy crap. Maggie is starting to sound eerily like Erik, too. The need to continually reduce cycle times is part of the First Way. The need for amplification of feedback loops, ideally from the customer, is part of the Second Way.

  But nine months to return cash back to the company, tops? We’ve been at Phoenix for nearly three years and it still hasn’t created the desired business value.

  I have a terrible feeling that we may be going about Phoenix entirely the wrong way…

  Looking at my watch, I see that we’re almost out of time. Putting the thoughts of Phoenix aside, I ask Maggie about other ways that IT is impeding the achievement of her goals.

  Her expression darkens. “Well, there is one more thing…”

  Maggie then describes the intense competition for IT project resources. “Our planning horizon is six to twelve months. How does anyone know what projects they should be working on three years from now?” she says angrily, suddenly reminding me of Ron.

  Nothing unifies people better than complaining about IT.

  “I completely understand your frustration,” I say stoically. “You have any ideas on how to fix it?”

  She shares a bunch of ideas about hiring more IT people, dedicating IT people to her group, putting more scrutiny on the projects that are clogging the IT project queue, and so forth.

  Most of the ideas aren’t new, and I merely raise my eyebrows at the notion of a larger IT budget. Steve and Dick will never go for that.

  * * *

  “Incredible!” Patty exclaims, as we leave Maggie’s office. “I can’t believe how frustrated Maggie and Ron are. Can you believe that unreliable data in the order entry and inventory management systems came up again? And I can’t believe that Phoenix, as it’s currently designed, won’t actually fix the data quality problems!”

  I nod and say decisively, “Get a meeting together with John and Wes. We’ll show them what we’ve learned so far. Invite Chris, as well. This goes beyond just IT Operations. This may change how we prioritize and develop our applications, too.”

  As she leaves, I look at my Phoenix calculations again.

  We’ve spent over $20 million on Phoenix over three years. With all that WIP and capital locked inside the project, it will likely never clear the ten percent internal hurdle rate. In other words, Phoenix should not have been approved.

  Chapter 27

  • Tuesday, October 21

  I’m in a conference room with Patty, Wes, Chris, and John to share the progress Patty and I have made.

  I begin by stating, “We interviewed Ron and Maggie, the business process owners on Dick’s company measurements slide. I’ve spent some time thinking about what we’ve learned.”

  I dig out my notes and walk to the whiteboard, writing out, “Parts Unlimited desired business outcomes: increase revenue, increase market share, increase average order size, restore profitability, increase return on assets.”

  Then I draw the following table:

  Performance Measures

  Area of IT Reliance

  Business Risk Due to IT

  IT Controls Relied Upon

  1. Understanding customer needs and wants

  Order entry and inventory management systems

  Data not accurate, reports not timely and require rework

  2. Product portfolio

  Order entry systems

  Data not accurate

  3. R&D effectiveness

  4. Time to market (R&D)

  Phoenix

  three-year cycle time & WIP makes clearing IRR hurdle rate unlikely

  5. Sales pipeline

  CRM, marketing campaign, phone/voicemail, MRP systems

  Sales mgmt can't view/manage pipeline, customers can't add/change orders

  6. Customer on-time delivery

  CRM, phone/voicemail, MRP systems

  Customer can't add/change orders

  7. Customer retention

  CRM, customer support systems

  Sales cannot manage customer health

  8. Sales forecast accuracy

  (same as #1)

  (same as #1)

  Pointing at the whiteboard, I say, “The first column names the business capabilities and processes needed to achieve Dick’s desired outcomes; the second column lists the IT systems that those business processes rely upon; the third column lists what can go wrong with either the IT systems or data; and in the fourth column, we’ll write down the countermeasures to prevent those bad things from happening, or at a minimum, detect and respond.”

  For the next half hour, I walk them through the table and all the grievances. “Apparently, for the things that Dick cares about most, IT matters.” I say, deadpan. Wes says, “Jesus Christ. I’m not the smartest guy in the room by any stretch. But, if we’re so important, why are they trying to outsource all of us? Face it, we’ve been moved from one foster home to another for decades.”

  None of us have a good answer.

  “You know, I really like Bill’s third column: ‘business risk due to IT,’” John says. “By describing what could go wrong in IT that prevents the business outcome from being achieved, we’re helping t
he business process owners get their bonuses. This should be very persuasive. We may even be thanked by the business for doing all this work, which would be a refreshing change.”

  “I agree. Nice job, Bill,” Chris says, finally. “But what’s the solution?”

  I say, “Anyone have any ideas?”

  Surprisingly, John speaks up first. “Seems pretty obvious to me. We need to come with the controls to mitigate the risks in your third column. We then show this table to Ron and Maggie, and make sure they believe that our countermeasures help them achieve their objectives. If they buy it, we work with them to integrate IT into their performance measures…

  “That example Erik gave you is perfect. They integrated ‘compliance with vehicle maintenance procedures’ as a leading indicator for ‘on-time delivery’ and ‘customer retention.’ We need to do the same.”

  We roll up our sleeves and get to work.

  For the phone and MRP systems, we quickly establish that the predictive measures include compliance with the change management process, supervision and review of production changes, completion of scheduled maintenance, and elimination of all known single points of failure.

  When we tackle ‘customer needs and wants,” we get stuck.

  It’s John who gets us rolling again. “Here, the objective isn’t system availability, it’s the integrity of data, which, incidentally, form two of the three legs of the ‘confidentiality, integrity, and availability triangle’ or CIA.” He asks Chris, “So, what’s causing the data integrity issues?”

  Chris snorts in disgust. “Phoenix fixes a bunch of them, but we still have issues. Most of them are caused upstream, because the Marketing people keep putting in malformed inventory SKUs. Marketing needs to get their crap together, too.”

  So for ‘marketing needs and wants,’ our proposed measurements include ability for Phoenix to support weekly and eventually daily reporting, percentage of valid SKUs created by Marketing, and so forth.

  By the end of the day, we’ve generated a slide deck that Patty and I will take back to Ron and Maggie, which we’ll then present to Dick.

  “Now that, my friends, is a solid proposal,” Wes says, proudly. With a loud laugh, he says, “Even a monkey could follow the dots we just connected!”

  Over the next day, Patty and I get great feedback from Ron and Maggie, and they commit to supporting our proposal with Dick. When Ron learns that we still haven’t been granted budget for our monitoring project, he calls up Dick right in front of us, leaving him a heated voicemail, demanding to know why he’s dragging his feet.

  With all this enthusiastic support, I figure our Thursday meeting with Dick will be a slam dunk.

  * * *

  “All you’ve told me is that you’re completely asleep at the wheel!” Dick says sternly, obviously unimpressed by what I’ve presented. Suddenly, I’m reminded of how Steve didn’t even look at the spreadsheets I had prepared for him when I asked him to prioritize Phoenix and the audit finding work.

  But Dick isn’t being dismissive. He’s actually angry. “You’re telling me something a nutless monkey could have figured out. You didn’t know these measurements were important? At every town hall meeting, Steve repeats them over and over. It’s in our company newsletters, it’s what Sarah talks about in every one of her strategy briefings. How could you all miss something so important?”

  I see Chris and Patty fidget on either side of me as we sit across the table from Dick. Erik is standing by the window, leaning against the wall.

  I have a flashback to when I was Marine sergeant, holding the flag on parade. Out of nowhere, a colonel appeared, growling at me in front of my entire unit, “That’s an out of regulation watch band, Sergeant Palmer!” I could have died on the spot from embarrassment, because I knew I had screwed up.

  But today, I’m certain I understand the mission, and for the company to succeed I need Dick to understand what I’ve just learned. But how?

  Erik clears his throat, and says to Dick, “I agree a nutless monkey should have figured this out. So, Dick, explain why on that little measurement spreadsheet of yours, you list four levels of management for each of your measurements but nowhere are there any IT managers listed. Why?”

  Not waiting for Dick to respond, he continues, “Every week, IT people get dragged into fire drills at the last minute by managers trying to achieve those measurements—just like Brent was pulled in to help launch Sarah’s latest sales promotion.” Erik pauses and says, “Quite frankly, I think you’re just as much of a nutless monkey as Bill.”

  Dick grunts but doesn’t seem perturbed. He finally says, “Maybe so, Erik. You know, five years ago, we used to have our CIO attend our quarterly business reviews, but he never opened his mouth except to tell us that everything we proposed was impossible. After a year of that, Steve stopped inviting him.”

  Dick turns back to me. “Bill, you’re telling me that everyone could do everything right in the business, but because of these IT issues, we would all still miss these objectives?”

  “Yes, sir,” I say. “The operational risks posed by IT need to be managed just like any other business risk. In other words, they’re not IT risks. They’re business risks.”

  Again, Dick grunts. He slumps in his chair, rubbing his eyes. “Shit. How the hell are we supposed to write an IT outsourcing contract if we don’t even know what the business needs? Goddamnit!” he says, slamming his hand on the table.

  He then asks, “Well, what’s your proposal? You’ve got one, I presume?”

  I sit upright and begin the pitch that I’ve rehearsed so many times with the team. “I’d like three weeks with each of the business process owners on that spreadsheet. We need to get the business risks posed by IT better defined and agreed upon and then propose to you a way to integrate those risks into leading indicators of performance. Our goal is not just to improve business performance but to get earlier indicators of whether we’re going to achieve them or not, so we can take appropriate action.

  “Furthermore,” I continue. “I’d like to schedule a single topic meeting with you and Chris about Phoenix,” then explaining my concerns how Phoenix as defined should not even have been approved.

  I continue, “We’re going way too slowly, with too much WIP and too many features in flight. We need to make our releases smaller and shorter and deliver cash back faster, so we can beat the internal hurdle rate. Chris and I have some ideas, but it will look very different than our current plan of record.”

  He remains silent. Then decisively, he declares, “Yes on both of your proposals. I’ll assign Ann to help. You need the best talent in the company.”

  Out of the corner of my eye, I see Chris and Patty smile.

  “Thank you, sir. We’ll make it so,” I say, standing up and pushing everyone out of the room, before Dick changes his mind.

  As we walk out of his office, Erik claps his hand on my shoulder. “Not bad, kid. Congratulations on being well on your way to mastering the First Way. Now help John get there, because you’re going to have your hands full tackling the Second Way.”

  Confused, I ask, “Why? What’s going to happen?”

  “You’ll find out soon enough,” Erik says with a chuckle.

  * * *

  On Friday, John convenes a meeting with Wes, Patty, and me, promising some fantastic news. He says effusively, “You guys did fantastic work linking IT to Dick’s operational objectives. I’ve finally learned how we dodged the audit bullet, and I’m pretty sure we can do something equally fantastic to reduce our audit and compliance workload.”

  “Doing less audit work?” Wes says, looking up, putting his phone down. “I’m all ears!”

  He has my attention, too. If there were some way to get audit off our backs without another Bataan Death March, it would be nothing short of a miracle.

  He turns toward Wes and Patty. “I needed to figure out how we escaped all the findings from
the internal and external auditors. At first, I thought it was just the audit partner bending over backward to retain us as a client. But that wasn’t it at all…

  “I got in front of everyone from the Parts Unlimited team who was at that meeting, trying to figure out who had the magic bullet. To my surprise, it wasn’t Dick or our corporate counsel. Ten meetings later, I finally found Faye, a Financial Analyst who works for Ann in Finance.

  “Faye has a technical background. She spent four years in IT,” he says, as he hands out papers to each of us. “She created these SOX-404 control documents for the finance team. It shows the end-to-end information flow for the main business processes in each financially significant account. She documented where money or assets entered the system and traced it all the way to the general ledger.

  “This is pretty standard, but she took it one step further: She didn’t look at any of the IT systems until she understood exactly where in the process material errors could occur and where they would be detected. She found that most of the time, we would detect it in a manual reconciliation step where account balances and values from one source were compared to another, usually on a weekly basis.

  “When this happens,” he says, with awe and wonder in his voice, “she knew the upstream IT systems should be out of scope of the audit.”

  “Here’s what she showed the auditors,” John says, excitedly flipping to the second page. “Quote: ‘The control being relied upon to detect material errors is the manual reconciliation step, not in the upstream IT systems.’ I went through all of Faye’s papers, and in every case, the auditors agreed, withdrawing their IT finding.

  “That’s why Erik called the pile of audit findings a ‘scoping error.’ He’s right. If the audit test plan was scoped correctly in the beginning, there wouldn’t have been any IT findings!” he concludes.