Show me the money!

“Show me the money” is more of a question than anything else and, when it comes to lean, it is a reasonable question.

The lean management model is fairly straightforward:

1) Align every job with value for the customer (just-in-time techniques).

2) Make sure every employee knows whether or not they are doing a good job (jidoka techniques).

3) Engage every employee in their own development by giving them room to think through basic skills training (standardized work techniques) and encouraging them to take part in team or individual improvement efforts (kaizen techniques).

Lean, in simplified terms, is this: customer satisfaction derives from employee satisfaction or, to be more specific, satisfying customers (in their varied preferences) requires personal fulfillment at work and continuous learning. Nowadays, few people would argue with this, although they stumble over the strange Japanese terms of the “how.”

Still, “show me the money!”, right? Let us take a look at the alternative model to lean. It usually goes something like this. A strong leader makes bold decisions in terms of high-return investments, selects trusted people to implement his strategy and makes sure the necessary systems are in place to deliver results. Enough of this “develop people and pray” stuff! Good, direct leadership is very simple to understand. And if every part of the company is profitable – and that profit is leveraged by specific return-on-investment projects –, profit will, mathematically, grow.

In the lean movement, we tell ourselves that this traditional management style is like playing roulette at the casino: the odds favor the house. First, big bets usually lead to big losses. Second, treating people like cogs in a machine leads to disaffection and disengagement, which ends up affecting customers who look for something better, and revenue falls. Unless you are extremely lucky, this “Wizard of Oz CEO model” (the great decision maker running a finely tuned (lean?) machine) usually leads to disappointing results. Sometimes, disastrous ones! Again, many people may say they agree with this, especially after the fall of the Lehman Brothers bank. But, even so, show me the money... We cannot escape the money question, nor should we.

How, then, do we make money with this “to develop products, you must first develop people” approach to business and management? Here is the answer:

L/C = L/R x R/C

Profitability is, one way or another, profit over capital: how much you get back over how much you invested. L/C can be described as profit over revenue (gross profit margin) multiplied by revenue over capital (how much sales revenue you can generate with the money you invested). No surprises.

However, in real life, profit is actually P – “?” (profit shortfall), revenue is R – “?” (sales shortfall), and capital is actually C + “?” (more capital than expected to run the business). Profitability, in real life, essentially consists of reducing the “?” component – in lean terms, eliminating waste. What do we know about these “?”?

Perceived quality ?Revenue ?

Waste elimination ?Profit ?

Flexibility?Capital ?

Perceived quality, waste elimination and flexible use of equipment and processes cannot be forced – these things cannot be prescribed. They can only be obtained through employees' full engagement, attention and initiative. Lean leadership and management mean continuously developing people's deep knowledge of their own jobs and encouraging people to work together.

Lean management is uncomfortable because managers must trade a direct action (the manager tells the employee what to do) for an indirect one (the manager coaches the employee, encouraging their own development and listening to their suggestions).

This change is deeply uncomfortable, since it is much easier to solve problems yourself and just tell others what to do than to get them to consider their actions first, identify areas to be developed and support people in their learning cycle of interest – discomfort – satisfaction!

If we do not get better at being explicit in showing where the gains from lean practice and thinking lie, why should managers listen to us? They would have to trade a clear, well-known problem for an uncomfortable and messy one. Unless they see a path that leads to financial success, they are unlikely to take the bet.

As lean enthusiasts, how good are we at showing the money?