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Optimizing Operational Efficiency

operational-efficiency-small Optimizing Operational Efficiency - An Orgtology Perspective

Efficiency is the corner stone for any operation. Without it, Org will not survive. In nature, efficiency defines the cycle of life. Resources are never infinite. Therefore, the goal is always to decrease energy whilst increasing the result. To watch the incredible power of an ant or the precision of a honeybee will show the efficiency in nature. Organisations are no different.

Efficiency always begins with purpose since purpose creates process. In so, to develop a process one must understand purpose. Through purpose we know what we must deliver and produce.

To ensure that Org remains afloat, we predict its future performance through targets. These are predictions of how capable a process is within a given time boundary. Where a process will not organically achieve the set targets, we create strategy. This is a plan that will ensure the future relevance of Org. Strategy is successful if it creates the change that operations need.

In turn, Org must integrate any change into its operational process construct. From here it becomes an evolutionary process of marginal process adjustments until an efficiency "sweet spot" is found. This is how Org optimises its efficiency.


Working with operational efficiency


The role of efficiency in strategy

Before one can develop a strategy, one must first understand and then predict a desired efficiency. In this, a first step is to analyse process flow. The second step would be to set operational targets for a strategic period. If the operational construct will not organically achieve the set targets, then we develop strategy. The routine and marginal changes that processes undergo is not strategy. They create evolutionary change. Contrariwise, strategy has a revolutionary nature since it fundamentally changes a future destination. E.g., to repair and adjust the flow of water from a dam is operational and evolutionary. To replace the entire old water flow system with an AI driven one is revolutionary and thus strategic.

Many companies confuse the running of Org with changing it. The former is operational whilst the latter is strategic. They also have different rules. Operations is mathematical, repetitive, and receptive. Strategy is abstract, non-repetitive, and projective. In so, target setting is not strategy. It simply predicts how the processes and systems of Org will perform within a given period. Strategy is a plan to induce change that will not organically occur.

In orgtology, we understand the development of strategy as three progressive parts. The first is an understanding of how the organisation defines and identifies itself. This part is about organisational identity and definition. Here we define the purpose, values, intent, and business model of Org.

The second part is a projection of how Org will optimise its operations. This is about optimising operational efficiency. Here we aim to grasp the efficiency of Org's core operational systems. In orgtology, we understand operations through a process construct because in doing so, we can make precise predictions. We call these our operational targets. In my experience it is best to set annual targets for a three-year period. Less than that would hamper strategic thinking. More than that will be unrealistic since we live in a world that changes fast. To understand targets, one must know what the top-ten operational risks are. Not doing that might add risk to an already problematic situation.

The last part is where we work with what we must change to optimise our relevance. This part is about strategic effectiveness. Here we aim to define our strategic objectives as well as the programs and projects that will execute them. As with operational efficiency, risk analysis is key. We must know what the top-ten strategic risks are.

Jointly organisational identity, operational efficiency, and strategic effectiveness will explain how Org intends to run and change over a given period. Central to this strategic process lies efficiency.


Basic assumption on operational efficiency

If an efficiency measure relates outputs to inputs, then we must understand the relation between operational predictions and process flow. This will enable us to analyse efficiency.

We no longer function in a linear "production-line" world where inputs and outputs are clearly separated as "begin and end" items. The "Input-Process-Output" model only works well in a linear production line. The world of Org is now more complex. What a process delivers and where it consumes resources happens at every activity point within a process flow.

Outputs are quantifiable deliverables produced through repetitive process cycles. An output can be any measurable result within a process construct. Inputs are synonymous with energy. In orgtology, energy is the people, money, and assets (including raw material, etc.) that a process needs to cycle.


Measuring operational efficiency:

Targets define what we predict a process must do. Where we predict resource consumption, we are creating targets for inputs. Where we predict operational results, we create output targets. Both types originate within a process flow. The deviation between prediction and actual result is our performance.

Labour hours, machine & systems labour, raw materials, organisational assets, investments, and direct payments are all inputs. They create energy for a process to flow. To understand their efficiency, we must measure them against their cost and duration. We measure outputs against goals, mandate, initial requirements, or target dates.

A question that I regularly get, is whether time is an input or an output. The answer is that time by itself is neither. Time is a situation, not a resource. Its not something that one can control. E.g., We all have 24-hours in a day – it is not possible to have more. Yet, where we use time as a metric, we can extract valuable efficiency data. E.g., where we compare planned labour hours to actual hours worked, we can set an input target. Where we compare the projected date of completion to the actual completion date, we can set an output target. The difference in these two are that with labour hours we assess the efficiency of a human resource. There is a direct correlation between the time that a person spends on a task and his/her efficiency value. Yet, missing a target date can have a myriad of causes. In so, using your energy efficiently (labour hours) is an input value, whilst finishing on time is an output value.

To get an efficiency score we must divide outputs by inputs, which means that they must both be quantified. The attached table gives a simple example of this. Calculations are mostly more detailed. I.e., targets will have weights to show priority and one will calculate each input target separately.


Operational Targets - an Orgtology Perspective


Optimizing 
the operational construct

A process construct is an operational construct. We thus optimise operational efficiency through process engineering. In orgtology we do not base our process construct on the organisational organogram (structure) since an organogram only depicts authority relations between the employees of Org. Its mostly not a good depiction of the flow of activity since processes flow across and far beyond payroll boundaries.

A construct engineering exercise should always begin with mapping high level activity against a Level Zero construct (attached). Level Zero assumes that any organisation has five core systems. These are resources, core business, relationships, transformation, and risk. In this context a system is a group of processes that have similar purpose.

We begin the process construct through a process map that shows high level activity within the organisation. From there we cluster such activity under the Level Zero model. This then becomes the basis through which we can create process families and sub-systems. The result is a network of processes depicted on distinct levels. This will ensure that we fully understand the flow of activity that keeps the organisational purpose alive.

A process construct should give us an accurate idea of the organisational efficiency model. This will become the basis for cost projections, developing targets, identifying risks, assessing performance, and devising strategy. A good strategy consultant will not attempt to facilitate change without understanding the operational construct of Org.



Making cost and revenue projections

In the private sector, it is key to track cost since that is the only way to calculate profit. In the public sector cost must be traced as a measure of accountability to the communities who they serve. In both cases, cost targets will let Org know how well it is doing. In addition, accurate cost data will drive well-informed decisions.

The problem to date with costing models is that we run them through an organogram. I.e., we turn departments, divisions, and units into cost centers. Yet, activity flows far beyond the boundaries of an organogram. The processes of Org create a neural network of intelligence, resources, and activity. This is an intelligent system that often differs from the flow depicted in an organisational structure. E.g., in the average organogram, we would cluster HR functions under a HR department. Yet, this would make as little sense to AI as it would for the human body to have different digestive systems for liquids and solids. It would make sense to cluster recruitment, procurement, and budgeting together, because they all serve the same purpose, which is to facilitate resources into and out of Org. Purpose binds them into one system. In so, customer and stakeholder relations will have a lot in common with employee relations, since they all negotiate relationships, etc.

If an organogram is tuned into a cost center, it becomes impossible to accurately cost the organisation. This is because an organogram is a structure that regulates authority and organises expertise. It does not reflect the flow of activity throughout Org. However, if we turn processes and projects into cost centers, we can accurately cost the operations and strategy of Org. Processes repeat, and in so, they create the operations of org. Contrariwise, projects begin and end, thus they create change for Org. Where projects are part of a process cycle, they are operational cost centers. Where projects directly influence the functioning of Level Zero (attached above) they are strategic cost centers. In this way we can separate the cost of running of our business from the cost of changing it.


Predicting operational performance 

From an orgtology perspective, all performance is operational. Driven by purpose, operations run in the here and the now. On its flipside is strategy, a plan that aims to control the future. Performance is repetitive, concrete, and driven through implied intelligence. In so, operations are predictable, which means that we can predict the performance of Org.

We predict operational performance through targets. Thus, a target is Org's assessment of a future operational result. This includes our predictions on inputs and outputs. Business schools often confuse targets with goals. They are not the same. A goal is a projection of an outcome. Org can control its inputs and outputs, but it cannot fully control the effect thereof. In so, we can communicate targets, whilst we must negotiate our goals. In operations we have targets, in strategy we have objectives and goals. To predict operational performance means understanding targets.

A target must be specifically explained. I.e., it must be specific, measurable, achievable, relevant, and time bound. Targets must thus be SMART. We measure efficiency when we divide outputs by inputs – what we get out should be equal or greater than what we put in. To ensure efficiency, we must create targets for our inputs and outputs. When we achieve our targets, it shows us that our processes are working. I.e., it shows us that we are efficient.

Organisations often make the mistake to link targets to an organogram. E.g., departments, units, divisions, teams, etc., hold targets. This is mostly done to measure individual and departmental performance. Yet, it is the process construct of Org that must perform. Were there is a disconnect between the process construct and the organogram, one will get a distorted idea of performance. I often see how employees get bonuses for satisfactory performance, whilst Org performed poorly. The most effective way to measure performance is to link targets to processes. Once we understand how a process must perform, we can start linking its targets to the people who participate in such process. We should never be thinking about whether people are performing. If the process performs, then the people who are part of it have also performed.

Yet, targets are not the only measure for process efficiency. There are also rules. We only set targets when there is a possibility to deviate from an expected output. For this reason, rules and not targets drives AI. Humans need targets because they are unpredictable. E.g., a disturbing experience might cause Susan to sell less. In so, we control processes through a combination of targets and goals. Process rules should guide policy since policy is an official position on a rule. Policies thus empower processes. In turn we explain policy through procedures. E.g., the purpose of a hospital is to physically heal people. This ignites a process of entering the hospital premise, going through admission, being monitored in a ward, going for surgery, recovering, and then being released. To control this process, we have rules, e.g., that a surgeon must be clean and hygiene before working on a patient. This will become policy. The hospital will explain this policy though several procedures, e.g., how to wash hands before entering the surgical room, etc. Unlike processes, procedures are linear and non-complex (step 1, step 2, etc.).


 Minimizing operational threats

Similar to cost management, it is key to separate strategic from operational risks. When a risk affects the change on the Level Zero construct (depicted above), it is strategic. Mostly EXCO teams and the governing board is involved with change at this level. Where change is part of an operational process, e.g., a customer project, or a process adjustment, then it is operational.

From the above it is clear that to understand operational risks, we should find them in the process construct. They originate here in two ways. The first are risks that relate to a resource, e.g., depreciation, or non-performance. Org uses people, money, and assets as its resources. These all have inherent risks. Then there is the risk of not being efficient. These risks are more difficult to identify because they relate to the construct of process flow. Here the risks are not necessarily inherent. I.e., the risk depends on how the process is constructed. Once more, locating risks in an organogram will wildly distort our idea of efficiency.

To grasp the risks of a process construct we must first understand the critical success factors for the efficiency of a process. These CSF's become risks by default.

To minimize operational threats, we must quantify and rank operational risks. It is not my aim to unpack the quantification process here, but in my experience, many organisations get this wrong. Risks are mostly quantified in a three-level colour coded system. E.g., red = bad, orange = neutral, and green = good. This system makes it impossible to rank risks because all risks will fall into one of three categories. The best way is to give the risk exposure value as a percentage. In that way we can rank all our risks and know which ones are the most threatening.

Another mistake organisations often make is to assess a risk value without assessing a control value. E.g., if we assess the risk as 85% high, it will only be meaningful if we relate it to our ability to control the risk. If our control value is 90%, then then our exposure value is -5%, which is then a fully controlled risk. When one for instance has a risk value of 50% and a control value of 40%, then the 50% risk will be a greater threat than the 85% risk mentioned above. In my experience, risks are mostly poorly managed in most organisations.


Calculating Risk Exposure - an Orgtology Perspective


Conclusion

One of the things I have learned from Eastern philosophy is that attention and intention are the corner stones for any transformative process. From an orgtology perspective, attention is the receptive part. It is precise and extremely focused. Attention teaches us the right way. In so, it is about efficiency. Intention is the projective part. Its aim is to deviate, and therefore its nature is abstract. Intention teaches us a new way. In so, it is about effectiveness.

For Org, attention is operational whilst intention is strategic. They create a space where efficiency and effectiveness can co-exist. The one runs Org whilst the other changes it. Through efficiency we achieve effectiveness, and vice versa.

Efficiency is fully under the control of Org; therefore, it makes sense that Org precisely assesses it. This is a daily task. In fact, there should be no point in which Org does not precisely understand its efficiency.

Originator of Orgtology

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© Derek Hendrikz: 2021-08-22

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