We’ve been following the Lean Six Sigma, data-based problem-solving methodology of DMAIC – Define, Measure, Analyze, Improve and Control. In order to create a case study, we performed a quick and dirty data analysis using market research from Bain’s 2017 Annual Report.
Business process improvement can’t be done without a gap. We arbitrarily chose internal rate of return (IRR) for our first case study. Using the data fromBain’s report we defined a process gap of 6.0 net IRR by benchmarking top performers and comparing their IRR to the average private equity firm’s returns.
We called these phases, “analyze” because this is a more common term than “measure”. Call it what you need to but this second phase is where we drilled down into the 6.0 IRR gap to understand how the gap behaved over time to gain insight into how to close it.
Part 1: Map
We needed to visualize our process at a high level and to better understand which steps were the process bottlenecks or choke points. Once we drilled down into the choke points, we could more easily see the process waste creating them.
Part 2: Root Cause Waste
Once we drilled into the choke points, the next level we could drill down to analyze was the 8 standard process wastes creating these choke points. Once we knew the process waste root causes, we could remove it.
Part 1: ROI
Once we were able to identify all process waste, we quantified it to understand what it was costing us and how it was damaging our bottom line; thus strengthening our business case with financial data analytics.
Part 2: Action Plan
This is where we got our hands dirty. We removed the process waste through an iterative process of studying and adjusting our countermeasures to close our process performance gap.
Why You Standardize High-Performance
I’ve seen too many companies try to transform their company into a Lean Six Sigma culture because they want to be “top quartile” or save money. Additional revenue and profit are outputs of a Lean Six Sigma culture, they are not visions.
As the decision makers, your vision needs to inspire others to believe and follow you before there’s proof. If you don’t have a “why” or vision that inspires someone to make a leap of faith, you’ll fall into the statistic about over 80% implementation failure rate.
How To Standard High-Performance
Backsliding – or performance deterioration – is not an option in a high-performance culture so we standardize our new process before we consider ourselves “improved”. We control and standardize by using two tools:
- Visual Management
- Standard Operating Procedures (SOP)
Visual management means turning information from text into something graphic (map, chart, arrow, pictures, etc). By making performance visible, you can act immediately to close gaps.
Rules For Visual Management
- Can be on paper, whiteboard or electronic – start with paper and optimize later
- Make it ugly – pretty colors and charts don’t solve problems faster
- Should drive action – no vanity metrics
- Should show the following (at a minimum):
- Root Causes – 5 whys
- Countermeasures – what are we doing to close the gap?
- Accountability – who owns these actions? by when?
- Should be like a member of the team; not wallpaper – should be at the center of the conversion
Standard Operating Procedures (SOP)
Visual management detects performance gaps. SOPs prevent performance gaps. Most SOPs are dusty old documents, no one actually uses because they already know how to do their job.
Lean Six Sigma SOPs are living documents; revised – in real time – if a more efficient way of doing something is found while doing the process. We’re always experimenting with our SOP formatting and content and so should you.
Return on Investment
Your gap should always be tied to your financial statements. When you know what not improving costs you, you can easily create a business case for investing in your future. In the first post, we highlighted the Statement of Operations expense section, but you’re going to see improvement in various places depending on the gap being closed.
For our case study, we closed an IRR gap, therefore, we see improvements hit as increased cash flow, increased net realized gain from investments and decreased costs (due diligence costs, broken deal costs, etc).
How Much Gain Should You Expect
That’s going to depend on one thing: how well you followed the DMAIC process. DMAIC is just a process and you know the higher the quality in the front end of a process, the easier it is to hit your target.
If you improved any process steps other than the choke point, you don’t see the improvement flow to the bottom-line because you didn’t really scale your process. This mistake is very common and sets apart consultants who pay for themselves from the majority.
Do-It-Yourself: Opportunity Cost
Even after 80 years Toyota and Motorola, the creators of Lean Six Sigma, believe only 16% of their processes yield perfect customer value. Although this is about 15% more than the rest of the business world, that’s only 0.2% value increase per year over the past 80 years.
Some of your competitors can eat the cost of lost investments, investors and additional profit growth but can you afford it?
Just as a private equity firm’s value is not just capital but the chance to grow beyond what’s possible without them, a great process improvement consultant should offer the same value.
Private Equity Software
Software – being a fancy, branded process – only works if you already have a documented process and you know exactly where and have it closes your current process gaps. We’ll review tools specific to the PE and venture capital later but here are the tools we use:
- Process mapping (we use Lucidchart)
- CRM (or deal pipeline data to show the activity level detail your deals flow through. We use Agile CRM)
- Accounting software (pull your financial statements. We use Xero)
- Excel or Google sheets
- Word or Google Docs
If you want to improve fast, these supplies work just as well.
Better Tomorrow Than Today
Lean Six Sigma is founded on the beliefs of humility and respect for the individual. Toyota, Lean Six Sigma gold standard, is famous for saying people don’t come to Toyota to work, they come to think.
We’ve given you plenty to think about over these past few weeks and it can be overwhelming. Greatness failing and experimenting. If you’re struggling some quick advice – email us.
If you don’t have the luxury of time and need a coach, we look forward to learning more about your process.