Operational excellence is a great way to improve company financials, enhance customer satisfaction and engage employees. Some directors, especially those with a background in manufacturing and other operational fields, may be familiar with this concept while others may not. So, what exactly is operational excellence? And how does a board help its company obtain value from operational excellence without interfering with the work of company executives or adding too much to the board’s growing workload?
What is Operational Excellence?
Joris Wijpkema, a partner with McKinsey & Company, describes operational excellence as “a consistent way of working that delivers on the goals, really activating the entire organization to continuously get better every day at achieving that organization’s purpose. So, it’s really a set of culture, behaviors, mindsets and daily practices that is intimately tied to the organization’s reason for being.”
This can include a wide variety of activities and will vary by a company’s product or service, size, market and environment. A key point is operational excellence is not one or two improvement projects or a specific tool, but an overarching, consistent mindset and culture. While individual projects and tools, such as Kaizen and Six Sigma, are useful and may be applicable, operational excellence goes beyond that. It leads individuals and teams to continuously think about what improvements can be made and to collaborate with others, internally and externally, to take the appropriate steps to turn those improvements into reality. As Wijpkema points out, it is not an occasional improvement but the “mindsets and daily practices” that are critical to success.
Leadership needs to:
- Model the behavior.
- Publicize the culture, the program and its benefits.
- Support the relevant activities.
- Reward successful efforts.
Operational excellence extends beyond physical operations (although this is a major area of opportunity for some companies) to all aspects of a firm’s activities, including:
- Invoicing and accounts receivable. Are invoices issued promptly? Are they easy for customers to understand? Are there good processes for following up on payment requests? Can the internal process be more efficient?
- Human resources. Is hiring a positive experience and timely process for both internal hiring managers and for customers? Are there ways to optimize the time the human resources team spends on this critical area without impacting both the experience and its results?
- Finance and accounting. Are there opportunities to improve the timeliness and accuracy of financial reporting and its inputs? Are there ways to make this more efficient for these teams?
- Hardware and software development. Are there ways to improve the tools, processes, documentation and learnings from these efforts? Can go/no-go decisions on products and services be made more timely and efficiently?
- Sales and account management. Are there better processes and tools for managing opportunities and providing customer (and potential customer) satisfaction?
Sometimes, technology and digitalization get confused with operational excellence. While using these may be part of the path to achieving operational excellence, it is important to distinguish between them. Operational excellence extends beyond these tools — automating a suboptimal, customer-unfriendly process may not have positive impacts on the business. Doing the wrong thing faster is not the goal.
The results of an operational excellence culture provide a wide range of benefits to the company. Internally, these include time savings, cost reductions, increased productivity and better use of the team’s skills. Externally, customers may experience faster delivery of higher-quality services and products and quicker response times, leading to higher customer satisfaction. Suppliers may see the benefit and participate as well. In one role where I led new product introduction teams in two divisions, operational excellence involved looking not only at the best practices in each division, but also requesting the key supplier’s perspectives on which processes best helped it satisfy my company’s needs. Operational excellence efforts that result in the reduced use of resources (such as materials or utilities) may reduce both the company’s input costs and its environmental impact.
A robust operational excellence culture can also assist companies with employee engagement. Many boards’ compensation committees have expanded their roles to include employee engagement given its importance in retaining valuable employees through experiences that are positive for them as well as for customers. Operational excellence assists employee engagement by calling on the workforce to participate and valuing their insights, increasing employee satisfaction and commitment. IBM highlights one key to successful operational excellence is “creating a culture where management and employees are invested in business outcomes and empowered to implement change.” Thus, the appropriate board committee (whether it is the compensation committee or another) will want to understand the extent to which employees are involved in operational excellence activities and how they are recognized and rewarded for outstanding participation.
For example, an operational excellence culture — in name only (one without support, action and feedback) — risks negatively impacting employee sentiment instead. I recall visiting a factory where employee suggestions were proudly posted on the lobby wall. While having such a program is a good first step, a closer look revealed that many of the suggestions had been provided several quarters earlier or even a year before. No action on those employee ideas had been taken nor had feedback been provided to the people who suggested them. Company leadership needs to not just talk about operational excellence, but to act on it as well. Directors need to ask questions to understand that this is truly occurring.
The Board’s Role in Operational Excellence
But what questions should be asked? That depends on the maturity (or even existence) of a company’s operational excellence culture.
For companies without a formal operational excellence culture and related set of activities, directors will want to discuss with the executive team if and how such a mindset will aid the company in achieving its goals. This could serve as a topic in one or more board meetings. If, as in many cases, it is determined that such a culture will benefit the company and its stakeholders, the board can take the next step by asking the CEO, or his or her designee, to develop and present an operational excellence implementation plan. The directors can then review this plan to provide constructive recommendations and approval to move forward.
The board should request reasonable periodic updates on the implementation progress against the plan for this initiative, as they would for other key efforts. It is helpful to keep in mind this often will be a gradual launch of activities — instilling a potentially new mindset, the resulting culture change and the rollout of the supporting processes, roles and responsibilities will require the leadership team to utilize change management. The process should not be rushed by the board. The ability of the company to achieve some “quick wins,” and show all team members this culture both provides positive results and does no harm, will go a long way toward obtaining buy-in. Directors can provide guidance in setting these expectations.
The board’s work is not over once the operational excellence culture is in place. It is important to regularly request updates on progress from the CEO or other executives. With this information, directors can provide feedback, which may include congratulations on successful efforts as well as suggestions to help improve the program or address challenges. A well-composed board with a variety of experiences should be able to provide additional perspectives that will assist the leadership team with operational excellence execution. It is important directors do so in a way that helps the leadership team succeed and improve, without micromanaging.
Best practices include the CEO or other appropriate executives reporting to the board periodically (perhaps every other board meeting) on operational excellence activities and results. For example, the executive could briefly share an example of an impactful operational excellence improvement in each board meeting. If the company tracks the combined impact (in terms of cost savings or other metric) of these activities, this can also be reported to the board. Since the board should be interested in employee engagement, it may also be helpful to quickly share photos of any award ceremonies for employees who contributed exceptionally to operational excellence.
Implemented effectively, a properly planned operational excellence culture and associated programs can provide significant benefit to a company and its stakeholders in many ways. The board plays a key role as part of its governance function in guiding the executive team through the consideration, implementation and continued execution of this mindset. By providing the proper level of oversight and guidance based on their experiences, directors can best contribute to successful operational excellence. Â