Matt Barney Today more than ever, leaders find it difficult to systematically manage risks effectively. High- profile disasters such as Lehman Brothers record breaking $639 Billion USD bankruptcy have highlighted the urgency for better ways to manage enterprise risks while winning in the marketplace. In the case of the 2008 banking collapses, some leaders had sufficient risk management controls, and survived. Bank of America, for example, was one who retained sufficient stamina to both survive and also rescue Merrill Lynch and Countrywide. But even Bank of Americas Chief Risk Officer was let go after failing new government-mandated stress tests (Story & Dash, 2009). A key question is whether Lehman may have survived if its leaders were more clear about the risks of complex derivatives in Lehmans portfolios. An introduction to the Cue See Model 2 | Infosys White Paper The reason Enron and Lehman Brothers are spectacular examples is because they are rare. Much more common are the perpetual uncertainties and risks that might not destroy the firm but could thwart goal achievement. Most leaders deal with ever-moving bottlenecks- the constraints caused not only by internal operational gaps, but also by supply chain variation, competitor actions and government legislation. Take for example, Infosys award winning Finacle product. A USD $200 business unit with customers in 80 countries, Finacles product was awarded the highest honors by Forrester and Gartner in 2010. The challenge that Finacles senior-most leader, Haragopal Mangipudi, faces is the ability of his operations to scale effectively to a tsunami of diverse, global demand. Mangipudi desires more clarity about the location, and size of bottlenecks in his P&L. With better visibility, he would be better able to direct his teams actions in order to realize his aspirations to have an annual run-rate of a billion US dollars in revenue. Typically, bottlenecks move over time (Triestch, 2007). Tracking these uncertain gaps in a global P&L would require a huge amount of manual effort to support leaders ability to track and remediate uncertain gaps. For practical reasons, its not done today. Leaders need practical help to effectively manage complexities in managing their value chains - especially when the strategy changes. It is extremely difficult for a leader knowing the flow of value across geographies, time zones and market segments. Models augmented by decision aides help Leaders manage complexity. One practical solution is to build on existing frameworks for business process management. Infosys uses an approach inspired by the Malcolm Baldrige quality framework called Infosys Scaling Outstanding Performance (iSOP, Figure 1). Effective Business Process Management (BPM) supports strategy execution and clarifies decision making about risk mitigation. But this requires a paradigm shift in BPM away from transactional workflows and toward monitoring the probabilities of achieving goals based on alternative investment portfolios within the leaders sphere of responsibilities. Figure 1: Leadership and the Cue See Model To start, leaders need support to define firm-level targets. This way, leaders can quantify their strategic intent, cascade it throughout the firm, and with the help of appropriate tools, examine bottlenecks that require their periodic attention. Such a system could help free senior leaders to focus on strategy, CxO relationships and the complexities of the competitive landscape while knowing that operational risks are effectively being managed. By having intelligence built into each layer of each business process, it would help middle and junior managers avoid solving the wrong problems. But Business Process Management software needs scaffolding to articulate the flow of value, ensuring that it realizes ultimate long-term strategic objectives. Table 1 summarizes the assumptions from organizational science used to frame the Cue See model software components. Table 1: Assumptions for the Cue See Model Infosys White Paper | 3 Cue-See, Systems Engineering & Goals The Cue See model is an approach developed to blend expertise across a variety of business sciences to help leaders make better decisions about executing strategy and mitigating risk. Evidence from Finance, Industrial/Systems Engineering, Organizational Psychology, and Economics are integrated into what is hoped is a practical approach to make better decisions about investments, respecting the complexity and scarce time of senior leadership decision making. Systems engineering has refined approaches to articulate system-level requirements that impose requirements on sub-systems. Since an organization is one special kind of probabilistic system, these same methods may be used to deploy goals through all processes. Industrial Engineers and Design for Six Sigma Master Black Belts call this Requirements Flowdown. In contrast, the ability of a system to realize ultimate goals is called Capability Flowup. Figure 2 gives an example of the flow down of goal targets, and allowable sources of variation from ultimate outcomes (capital Ys), to lower levels of performance (lowercase ys) through meso and micro processes (depicted by xs). Figure 2 hypothesizes the specific causal links between the Cue See models four process factors and ultimate financial outcomes. The intent is to clarify how the organizational system is designed to execute strategy and ensure the probabilistic combination of assets is likely to win in the marketplace. Each facet of the Cue See model has a different impact on balance sheets, profit and loss statements, and income statements. The models four factors in have probabilistic relationships with each other and cause ultimate goals to be realized (see Figure 2): Quality - The degree to which a product or service is useful to the customer. The relationship between quality and price; and quality and quantity is probabilistic. Higher quality (Low cost of poor quality; fewer defects) favorably affects total costs, as indicated by the positive green arrow between quality and cost. Cost - Expenses are the total sum of monetary outlays in a period across all processes and overhead in the firm. Some costs are supportive (G&A) while others directly vary as a function of production/service delivery, and are allocated to the cost of sales. Quantity - Volumes are the units delivered. In manufacturing, they are products sold; in services they are the number of customers served. Overproduction of units or over engineering services beyond the marketplace demand negatively affects cost shown by a red arrow between quantity and cost. Cycle Time - The timeframe in which the cost, quality, and volumes are produced. This is a critical lens through which to consider organizational performance, with respect to the dates the business wants to achieve strategic goals. Cycle Time is additive in that each process and sub processes require a certain level of time to achieve the target quality, cost and quantity levels. The total amount of time required to produce services or products affects the degree to which the customer is delighted, and ultimately the desired level of economic profit realized. The purpose of the Cue See model is to help characterize organizational level strategic goals requirements themselves throughout the company. The Cue See model reflects a framework and set of methods to design and manage an organization and/or processes toward specific outcomes. It borrows highly refined approaches to articulate system-level requirements that impose requirements on sub-systems, such as parts from Lean Six Sigma and Reliability Engineering. Six Sigma methods use techniques such as the House of Quality also known as Quality Function Deployment are another way establish relationships between ultimate outcomes and lower level performance requirements. This cascade of requirements from the top of the organizational system to lower level processes, and the resources required to perform effectively is also known as the Critical to Quality (CTQ) flowdown. In the Cue See model, each of the four variables (QCQC) have different tolerances, or ranges of variation that are sufficient for the firm to achieve its goals. Quality is ultimately customer defined, and parameters that drive customer delight could be targeted around one of three options - minimize, maximize, or optimize around a target. Higher quality creates less waste and reduces total costs. At various process steps, however, quality may take different forms, depending on the outcomes required to fulfill ultimate customer requirements. Quantity is also Cost of Capital Taxes General Administrative Costs Q&A Cost of Sales Gross Receipts Price Volume Quality Cost Quantity Cycle-Time Brand Loyalty Figure 2: Relationship Between Facets of the Cue-See Model and Financials 4 | Infosys White Paper Phases in Cue See Management The Cue See model proposes an approach by which all assets can be specified, valued and optimized to achieve an organizations goals. The steps by which to apply the model parallel those recommended by risk managers: Step 1 Step 3 Step 5 Step 2 Step 6 Step 4 customer defined, and producing too much, or too little to service the marketplace is wasteful and dissatisfying to customers, so it is always an optimized variable around a target. In many cases, its desirable to have processes and business models that can scale to different levels of production with varying demands from customers, but even then there are optimized targets. At the firm level, cost and cycle time ultimately are cumulative across all organizational processes. At first glance, it might seem obvious that lower costs are always better. That is true, if and only if customer requirements can be fully met (or exceeded) with lower cost processes. Investing too little can aggravate customers by skimping on quality, or the quantity they wish to purchase, or create processes too slow to fulfill customer wishes, therefore cost minimization can be nearsighted and wasteful. Because too few investments in a process and too much expense are both wasteful, cost is also a target variable in the Cue See model. The cost targets are established to ensure apriori system-defined margin targets. Cycle Times requirement profile is similar to cost, although usually, faster processes make customers happier. But this isnt always the case. A customer of a luxury spa or fine dining experience wont want to be rushed. Suppliers to manufacturers may not have space to store materials or equipment that arrives before a new factory is built to house them. At the same time, anyone who has waited in line at an amusement park for a ride can acknowledge that cycle time cant be too long either. Cycle time is a variable in the Cue See model to be optimized around a target that will please customers. Infosys White Paper | 5 References Ackoff, R.L. (1999). Re-Creating the Corporation: A design of organizations for the 21st Century. Oxford University Press. Andriesson, Daniel (2004). Making Sense of Intellectual Capital: designing a method for the valuation of intangibles. Elsevier Butterworth-Heinemann, Amsterdam, Netherlands. Algera, Jen A.; Monhemius, Leo; & Wijnen, Cees J.D. (1997). Quality Improvement: Combining ProMES and SPC to Work Smarter. European Journal of Work and Organizational Psychology, 6(3), 261-278. Barney, Jay B. (1991). Firm Resources and Sustained Competitive Advantage, Journal of Management 17: 99-120. Barney, Matthew F. (June, 2002). Measuring ROI in Corporate Universities: death of the student day and birth of human capital. In Allen, M. (Ed.), The Corporate University Handbook. Pepperdine University Press: Malibu, California. Barney, Matthew F. & McCarty, T. (Eds) (2002). The New Six Sigma: A leaders guide to rapid business improvement and sustainable results. Prentice Hall: Saddle River, NJ. Barney, M.F. (2009a, February). Leading Scientifcally - Introducing the Cue-See Model for Evidence-based Leadership. Invited address, Society of Psychologists in Management (SPIM). San Diego, California. Barney, M.F. (2009b, April). Enhancing Utility Analysis to Infuence Your CFO: Introducing the Cue See Model. Poster at the 2009 Annual Society for Industrial-Organizational Psychology (SIOP) Conference, New Orleans, LA. Bawden, Tom. (2008, September 16). Bruiser of Wall St Dick Fuld looked after his people, but didnt know when to quit. Times Online. Downloaded September 23, 2008: http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_fnance/article4761890.ece BBC News (April 21, 2005). Dozens killed in Zambia explosion. http://news.bbc.co.uk/2/hi/africa/4466321.s Box, George E. P. (1976): Science and Statistics. Journal of the American Statistical Association, 71, 791-799. Burton, Richard M. & Obel, Borge (2004). Strategic Organizational Diagnosis and Design: the dynamics of ft, third edition. Kluwer Academic Publishers. Boston. Conclusion Early studies on the Cue See model are promising (Barney, 2009a, Barney 2009b, Barney 2010), and it is hoped that with additional evidence and tools, the Cue See model may better focus leaders actions in the areas most likely to realize ultimate goals (Trietsch, 2005). This paper outlines hypotheses and an early example of applying this interdisciplinary, cross-level approach. Future work needs to examine other aspects of finance and operations decisions including probabilistic contingency-based valuation including Managerial Real Options (Munn, 2000), and discrete-event simulations (Sage & Rouse, 1999); ensuring that the results empirically translate to real organizations. Ultimately, empirical evidence is needed to fully flesh out the degree to which the model and simulation results are more useful than alternatives. Further, for the Cue See model to be practical, information technology is required to deploy a better, more dynamic and mass-customized balanced scorecard and business process management system for Leaders. If the Cue See model holds as a useful way to think about stochastic value creation, and can be substantiated empirically, then Business Process Management (BPM) software is ideal for executing it. BPM is useful in preventing defects in white collar, human-intensive processes as well as manufacturing and equipment-intensive processes. Youve used components of a BPM as a customer when youve ordered something on-line, and forgot to include your email address and the web server prevented you from submitting your request until you had corrected the omission. In good BPM software, managerial approvals can be requested and obtained, and digitally implement. But more important for senior leaders is to use BPM more for tracking uncertainty and the portfolio of actions underway to harvest ultimate goals. The software in effect combines uncertainty with a leadership GUI that respects Vilfredo Paretos 80/20 Principle. By programming a BPM system with the Cue-See models targets and specifications for every process and team, in all 4 areas of process performance that are necessary and sufficient for firm-level performance, uncertain bottlenecks can be prioritized. Within each leader or work teams sphere of influence, the software can be used to only point out the places with the largest gaps in Quality, Cost, Quantity and/or Cycle time for action. This can include just do it actions to make improvements or reduce variation; or it can include situations where the root cause isnt obvious and classical Lean Six Sigma (e.g. DMAIC) methods are better applied. In this way, the Cue See model can augment a firms Business Operating System and Dashboard Drill Down detail tracking, by providing a dramatically faster way to determine a better portfolio of improvement projects, specified from a strategically-cascaded set of goals across the enterprise, and characterized against specific performance targets in all four of Cue Sees categories. This combination of the Cue See model and the software should help leaders at all levels focus on what really matters to the firm, and not drown in the complexity of too much information. If specified correctly, they can rest assured that the measures and deltas tracked in their processes are the right set to ensure firm-level success. 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Service Quality, Proftability, and the Economic Worth of Customers: What We Know and What We Need to Learn. Journal of the Academy of Marketing Science. 28: 67-85. About the Author Matt Barney, Ph.D. Vice President and Director of the Infosys Leadership Institute He has held global leadership positions at AT&T, Lucent Technologies, Motorola, Merck, Sutter Health, Virtual Mindworks, and The Scientifc Leader. He has published in areas ranging from Human Capital Asset Management to Lean Six Sigma. He is co- editor of the best selling book, The New Six Sigma and authored 3 patents, with two more pending. In 2007, he was named a Future Leader by Human Capital Magazine. Barney is a certifed Motorola Master Black Belt, a certifed Risk Manager; and holds a masters and Ph.D. in Industrial-Organizational Psychology from the University of Tulsa; and a B.S. in Psychology from the University of Wisconsin-Madison. Dr. Barney can be reached at Matthew_Barney@infosys.com