by Gene Kim
Patty and I are sitting in front of his desk in Building 2. As we listen to him bellow at his colleagues on a conference call, I look at the many pictures of him on the wall: on golf courses, with his top sales people in exotic locales from decades of President’s Clubs, and shaking hands with customers. In the corner is a fake potted tree, completely covered with hundreds of conference badges and lanyards.
This is definitely the office of someone who loves being in front of people. He’s a large, gregarious guy with an even larger laugh.
Over many scotches with him one evening in Chicago, I was surprised to learn that much of his demeanor is a carefully crafted persona. While he’s outwardly very loud and outspoken, he’s actually an introvert by nature, very analytic and passionate about sales discipline. Hearing him chastise yet another person on the phone, I think about how odd it is that even a discipline like sales, known for its chaotic and unpredictable nature, is more predictable than it.
There’s at least a predictable funnel that comes from marketing campaigns, generating prospects, leads, qualified leads, and sales opportunities that leads to a sales pipeline. One sales person missing their number rarely jeopardizes the entire department.
On the other hand, any of my engineers can get me fired by making a seemingly small, harmless change that results in a crippling, enterprise-wide outage.
Ron slams down the phone. “Sorry, guys. Despite all the training I do, sometimes my team behaves like a bunch of wild animals,” he says, still exasperated. He rips the stapled document he’s holding in two, and then tosses it into his trash can.
“Oh man, Ron,” I can’t help but say. “Your recycling bin is right next to you!”
“I’ll be dead long before the landfills are full!” he says with a large laugh.
He may be dead soon, but my kids won’t be. As I explain to him why we’re here, I reach under the desk to grab the papers from the wastebasket, putting them in the recycling bin. “You’re listed as the owner of the ‘sales pipeline’ and ‘sales forecast accuracy’ measures on Dick’s spreadsheet. What can you tell me about the challenges of hitting those numbers?”
“Look, I don’t know much about it. Someone on my staff might be better for you to talk to,” he responds.
“Don’t worry, I’m not asking about anything it-related. Let’s just talk about your measures,” I assure him.
“Okay, it’s your nickel…” he says. “If you want to talk about sales forecast accuracy, you first need to know why it’s so inaccurate. It starts when Steve and Dick hand me a crazy revenue target, leaving me to figure out how to deliver on it. For years, I’ve had to assign way too much quota capacity to my team, so of course we keep missing our numbers! I tell Steve and Dick this, year after year, but they don’t listen. Probably because they’re having some arbitrary revenue target jammed down their throats by the board.
“It’s a crappy way to run a company. It demoralizes my team, and my top performers are quitting in droves. Of course, we’ll replace them, but it takes at least a year for replacements to perform at full quota capacity. Even in this lousy economy, it takes too long to find qualified sales people.
“You know what chaps my hide?” he continues. “Sarah promised that acquiring the retail stores would accelerate our sales. And has it happened? Hell, no!
“We’re completely screwing up the execution. This morning, a district manager was screaming that they need truckloads of our new fuel injector kits because all his stores are completely stocked out. We’re losing the easiest sales we can make! Our customers want to buy, but they’re walking out empty-handed, probably buying something crappier from one of our competitors.”
Ron says angrily, “We are clueless about what our customers want! We have too much product that will never sell and never enough of the ones that do.”
His words sounding familiar, I look down at Dick’s slide again. “You’re saying that ‘sales forecast accuracy’ is being jeopardized by our poor grasp of ‘understanding our customer needs and wants?’ And that if we know what products were out of stock in the stores, we could increase sales?”
“You got it,” he says. “With the traffic we get in the stores, that’s the fastest and easiest way to increase revenue. It’s a lot easier than dealing with the fickle whims of our large automotive buyers, that’s for sure.”
I make a note to myself to find out how stockout data are generated, and I see Patty furiously taking notes as well.
I ask Ron about the sales pipeline process and its challenges, and I get an earful. He tells us at length how difficult it is for his managers to get the reports they need out of our customer relationship management system (crm) and the endless battle to make sure his entire sales force uses it in their daily work.
But the floodgates really open when I ask him what a bad day for him looks like.
“A bad day?” he repeats, staring at me disapprovingly. “Why, Bill, it’s positively catastrophic when the mrp and phone systems that you manage go down like they did a few weeks ago. For just the mrp outage, we had customers screaming about delayed orders, and two of them canceled a quarter-million dollars of orders outright. We’re scrambling to keep some of our best customers from putting $1.5 million of contracts up for rebid.”
He leans across his desk. “And when the phones went down in the last few days of the quarter, and customers couldn’t give us orders or make last-minute changes! That’s delayed another $1.5 million of orders, and ten customers are reevaluating their contracts, putting another $5 million of contracts at risk.”
“You’re making my job much, much harder, pal,” he says. “A lot of my sales people missed their quota by the tiniest fractions, due to things totally outside of their control. To keep morale up, I’m demanding Steve give quota credit for any order that was delayed because of our screwups.”
I grimace. Steve’s going to love that idea as much as he loved Sarah giving away vouchers to disgruntled Phoenix customers.
“I’m really sorry that happened on my watch. There’s no excuse for it,” I say sincerely. I tell him what happened with the vendor making the unauthorized change to the phone switch, and the steps we’re taking to ensure that it doesn’t happen again.
I explain, “We have change control policies, but as you know, training and trust only go so far—at some point, we need monitoring to enforce those policies. The trouble is, we need to expand the licensing beyond what Information Security has deployed, and emergency capital is hard to get these days. Especially for it Operations.”
Ron turns bright red. “Why? What are they saving it for? Probably another harebrained acquisition that Sarah is dreaming up.” He laughs humorlessly. “How much money are we talking about?”
When I tell him, he looks disgusted. “We spend more money watering the lawns at the manufacturing plants every week! Dick is going to hear from me about this. If he’s not willing to spend money, we may lose orders—even if your project is just insurance so we can collect on all the hard work my sales team does—it’s a no-brainer!”
“We sure think so. Thanks for the support,” I say. “We’re about out of time. Are there any other challenges or impediments that we can help with?”
He looks at his watch for a moment. “No, just keep those vendors from crashing our phone systems again, you hear?”
Patty looks invigorated as she flips through all her notes by the elevator banks. She says, “Ron mentioned how critical the phones and the mrp systems are, but I’m sure there’s more, like the inventory management systems. I’ll work on creating the complete list of applications and infrastructure that support Ron. If any of them are fragile, we need to get them added to our replacement list. This is a great opportunity to be proactive.”
“You read my mind,” I say, smiling. “That preventive work supports the most important objectives of the company. How do we know? We started from the measures that Dick cares about most.”
I’m pleased. Now I’m really looki
ng forward to our next interview, which is with Maggie Lee, who sponsored Phoenix.
Patty and I meet with Maggie on the following Monday. Over the weekend, Sarah e-mailed me, demanding to know the agenda for the meeting, threatening to cancel it. When I start copying Dick and Steve on my replies, she relents, but warns me not to meddle with her department.
I’m not worried. Both Patty and I work with Maggie regularly. She’s the business sponsor of over half the it projects. Among other things, Maggie is responsible for making sure that the company has the best possible assortment of merchandise in each of our stores, and she owns the category and pricing roadmaps.
In describing her responsibilities, she summarizes, “Ultimately, the way I measure our understanding of customer needs and wants is whether customers would recommend us to their friends. Any way you cut it, our metrics aren’t very good.”
When I ask why, she sighs. “Most of the time, we’re flying blind. Ideally, our sales data would tell us what customers want. You’d think that with all the data in our order entry and inventory management systems, we could do this. But we can’t, because the data are almost always wrong.”
Patty glances my way meaningfully as Maggie continues, “Our data quality is so bad that we can’t rely on it to do any sort of forecasting. The best data that we have right now comes from interviewing our store managers every two months and the customer focus groups we do twice a year. You can’t run a billion-dollar business this way and expect to succeed!
“At my last job, we received sales and stockout reports every day,” she continues. “Here, we get them once a month from Finance, but they’re full of errors. What do you expect? They’re done by a bunch of college interns, copying and pasting numbers between a million spreadsheets.”
“If you could wave a magic wand, what would you do instead?” I ask.
“How big of a magic wand?” she asks.
“It can do anything you want,” I reply, smiling.
“That’s a big magic wand,” she says, laughing. “I want accurate and timely order information from our stores and online channels. I want to press a button and get it, instead of running it through the circus we’ve created. I’d use that data to create marketing campaigns that continually do a/b testing of offers, finding the ones that our customers jump at. When we find out what works, we’d replicate it across our entire customer list. By doing this, we’d be creating a huge and predictable sales funnel for Ron.
“I’d use that information to drive our production schedule, so we can manage our supply and demand curves. We’d keep the right products on the right store shelves and keep them stocked. Our revenue per customer would go through the roof. Our average order sizes would go up. We’d finally increase our market share and start beating the competition again.”
As she’s telling us this, she looks animated and excited. Then her exuberance disappears. Sounding defeated, she says, “But we’re stuck with the systems we have, unfortunately.”
“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 2
1
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:
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, “Come on. 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 the 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?”