Why organisational change can be difficult

January 5, 2014

Organisational change seems to be far more difficult in some organisations than others – this blog will suggest the reason and a possible solution! But before looking at these concepts, let’s lay out the basics:

  • The concept of using projects to enable the creation of value is fairly well accepted, the value creation chain starts will innovative ideas and finishes when the benefits are realised and value is created (read more on Benefits and Value):

Fig-1 Value Chain Grey

  • The effect of the ‘chain’ means that when you have got to the end of the project (or program) all that has happened is you’ve spent money, benefits and value come later and need a ‘team effort’ from all levels of management to be maximised (read more on Benefits Management).

Fig-2 Benefits_Management

  • Consequently the key to realising the benefits and maximising value is effective organisational change (read more on organisational change)

Fig-3 Change_Management

  • And the basic concepts of organisational change have been defined by numerous authorities from the perspective of stakeholder attitudes:

Fig-4 The-Change-Curve

And the rate of adoption of the change:

Fig-5 change-normal-curve

  • The concepts are documents in a range of references including
    –  PMI’s Managing Change in Organisations – a practice guide
    –  APMG International’s Managing Benefits

But none of these well established concepts really explain why some organisations are open to change and others are not; the question this post is focused on.

One insight that helps explain why some organisational cultures are resistant to change and others more open to change is discussed in an interesting paper: Darwin’s invisible hand: Market competition, evolution and the firm (Journal of Economic Behavior & Organization: Dominic D.P. Johnson, Michael E. Price, Mark Van Vugt).

The paper suggest that the Darwinian view that competition among firms reflects the ruthless logic of ‘selection of the fittest’, where the free market is a struggle for survival in which successful firms survive and unsuccessful ones die, is only partially correct.

The application of Darwinian selection to competition among firms (as opposed to among individuals) invokes group selection, which requires altruism and the suppression of individual self-interest to the benefit of the ‘greater good’ of the group and the advancement of the firm.

This effect can be achieved in circumstances where the organisation is lead by a charismatic leader who can inspire the members of the organisation to sacrifice their short-term self interest to the ‘greater good’. Or when the members of the organisation are either inspired by the organisation’s mission (eg, committed workers in many aid organisations) or feel the organisation is threatened and that sacrificing their short-term best interests to help the organisation survive is essential for everyone’s long term good. These types of situation create the same effect as a ‘high performance team’ – individual team members ‘play for the team’ ahead of any selfish interests.

If any or all of these factors are in play, and are appreciated by the individuals that make up the organisation, the ability to implement change is significantly increased (provided the change can be seen to contribute to the mutual good / mutual survival).

However, if the members of the organisation feel the organisation is fundamentally impregnable, there’s no threat (or common enemy) and no inspiring mission, a completely different dynamic come into play. The competition and Darwinian ‘survival of the fittest’ plays out at the individual level. What matters most is how the proposed change will influence existing power structures and networks. To most people the change is likely to be perceived as a threat; they know what the status quo is but can only imagine the future state after the change and will generally imagine the worst case due to our innate biases. And consequently the change has to be resisted – the normal ‘change management challenge’.

These ideas seem to make sense of our general observations:

  • Change seems easier in small or medium sized organisations because the members of the organisation see their self-interest is closely aligned to the success of the organisation
  • Some inspirational organisations seem to adapt to change easily, 3M and Apple spring to mind, a combination of inspirational leadership and a strongly believed mission to create new things.
  • However, in many established large organisations in both the public and private domains, the link between the individuals well-being and the organisations well-being is less clear and entrenched self-interest takes over. The well known ‘office politics’.

So how can a change agent overcome the entrenched inertia and covert opposition experienced in the change resistant organisation? Short of generating a massive crisis (eg, the General Motors reorganisation) most change initiative will fail if they are not carefully managed over a sustained period.

One idea that can be used in these circumstances is Paul Finnerty’s Big Jelly Theory.

The Big Jelly Theory, postulates that large or very large organisations are extremely difficult to change, but it is not impossible to do so. The problems change agents often encounter are caused by the approach chosen to effect the required organisational changes.

Paul’s theory is that if you throw yourself and your team members, 100% mentally and physically at the organisation in an attempt to force it to change at best the organisation will giver a little shiver, momentarily, like a giant jelly, and then immediately return to it’s pre-existing shape and carry on with business as usual as though nothing has happened.

Fig-6 Big jelly theory

The theory postulates that the only effective way, to change or realign an organisation, is to metaphorically issue each of the change team members with spoons. The team members then use these spoons, to sculpt away at the big jelly, and in doing so changing the organisations shape, to whatever has strategically been deemed as more desirable, for the future.

In other words whilst effort and enthusiasm are important, in making or reshaping organisational changes, they are very often ineffective, when used alone. Whereas the spoon approach, whilst often time consuming, yields discernible result almost from the start.

This is in effect the Kaizen Way – great change is made through small steps. Rooted in the two thousand-year-old wisdom of the Tao Te Ching, Kaizen is the art of making great and lasting change through small, steady increments. Dr. Robert Maurer, a psychologist on the staff at the UCLA recommends:
1.  Ask small questions.
2.  Think small thoughts
3.  Take small actions.
4.  Solve small problems
5.  Bestow small rewards.
6.  Identify small moments of success.

Provided you have the overarching ‘grand vision’ to coordinate and align the small changes, the results can be amazing!!!! It just needs time, perseverance and really effective long-term stakeholder management which is where tools like the Stakeholder Circle®  come into play.

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Be careful what you govern for!

March 9, 2013

Governance is an interesting and subtle process which is not helped by confusing governance with management or organisational maturity. A recent discussion in PM World Journal on the subject of governance and management highlighted an interesting issue that we have touched on in the past.

The Romans were undoubtedly good builders and managers (see: The Roman Approach to Contract Risk Management). They also had effective governance and management processes, when a contractor was engaged to build something, they had a clear vision of what they wanted to accomplish; assigned responsibilities and accountability effectively; and failure had clearly understood, significant consequences.

Roman bridge builders were called pontiff. One of the quality control processes used to ensure the effective construction of bridges and other similar structures was to ensure the pontiffs were the first to cross their newly completed construction with their chariots to demonstrate that their product was safe.

Roman-Bridge

An ancient Roman bridge

This governance focus on safety and sanctions created very strong bridges some of which survive in use to the present day but this governance policy also stymied innovation. Roman architecture and engineering practice did not change significantly in the last 400 years of the empire!

No sensible pontiff would risk his life to test an innovative approach to bridge design or construction when the governance systems he operated under focus on avoiding failure. Or in more general terms; the management response to a governance regime focused on ‘no failure’ backed up by the application of sanctions is to implement rigid processes. The problem is rigid process prevents improvement.

To realise the significance of this consider the technology in use in the 17th century compared to the modern day – the vast majority of the innovations that have resulted in today’s improved living standards are the result of learning from failure (see: How to Suffer Successfully).

But the solution is not that simple, we know that well designed and implemented, processes are definitely advantageous. There is a significant body of research that shows implementing methodologies and processes using CMMI, OPM3, PRINCE2, P3M3 and other similar frameworks has a major impact on improving organisational performance and outcomes.

However, organisational maturity is a similar ‘two edged sword’ to rigid governance and management requirements. We know organisational maturity defined as the use of standardised processes and procedures creates significant benefits in terms of reduced error and increased effectiveness compared to laissez-faire / ad hoc systems with little or no standardisation. But these improvements can evolve to become an innovation-sapping straightjacket.

Too much standardisation creates processes paralysis and a focus on doing the process rather than achieving an outcome. In organisations that that have become fixated on ‘process’, it is common to see more and more process introduced to over come the problem of process paralysis which in turn consume more valuable time and resources until Cohn’s Law is proved: The more time you spend in reporting on what you are doing, the less time you have to do anything. Stability is achieved when you spend all your time doing nothing but reporting on the nothing you are doing.

Avoiding this type of paralysis before a review is forced by a major crisis is a subtle, but critical, governance challenge. The governing body sets the moral and ethical ‘tone’ for the organisation, determines strategy and decides what is important. Executive Management’s role is to implement the governing body’s intentions, which includes determining the organisation’s approach to process and methodology, and middle and lower level management’s role is to implement these directives (for more on this see: Governance Systems & Management Systems). The governance challenge is working out a way to implement efficient systems that also encourage an appropriate degree of innovation and experimentation. The ultimate level in CMMI and OPM3 is ‘continuous improvement’. But improvement means change and change requires research, experimentation and risk taking. As Albert Einstein once said, “If we knew what it was we were doing, it would not be called research, would it?”

To stay with the Roman theme of this post: Finis origine pendet (quoting 1st century AD Roman poet and astronomer Marcus Manilius: The end depends upon the beginning). The challenge of effective governance is to encourage flexibility and innovation where this is appropriate (ie, to encourage the taking of appropriate risks to change and improve the organisation) whilst ensuring due process is followed when this is important. The challenge is knowing when each is appropriate and then disseminating this understanding throughout the organisation.

Organisations that follow the Roman approach to governance and avoid taking any form risk are doomed to fade into oblivion sooner or later.

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Note: According to the usual interpretation, the term pontifex literally means “bridge-builder” (pons + facere). The position of bridge-builder was an important one in Rome, where the major bridges were over the Tiber, the sacred river (and a deity). Only prestigious authorities with sacral functions could be allowed to ‘disturb’ it with mechanical additions.

However, the term was always understood in its symbolic sense as well: the pontifices were the ones who smoothed the ‘bridge’ between gods and men. In ancient Rome, the Pontifex Maximus (Latin, literally: “greatest pontiff”) was the high priest of the College of Pontiffs (Collegium Pontificum), the most important religious role in the republic. The word “pontifex” later became a term used for bishops in the early Catholic Church and the Bishop of Rome, the Pope, the highest of bridge-builders sumus pontiff.


Communication in governance

November 20, 2012

The effective governance of an organisation relies on effective communication between the organisation’s ‘governors’ and ‘managers’. If the communication fails, governance fails!

Governance is the exclusive role and responsibility of the governing body, in a commercial corporation this is the board of directors, and is their equivalents in other types of organisation. The role of governance is a subtle balancing of competing interests to optimise the long-term value of the organisation (see more on corporate governance). The outcomes from governance decisions are policies and strategies designed to guide the development of the organisation and balance the interests of its various stakeholder groups.

Management’s role is to implement the strategy within the policy framework defined by the ‘governors’ and to assure the governing body their policies are effective and are being implemented properly to achieve the organisation’s strategic objectives (or highlight issues).

The governance communication loop starts with the governing body communicating its strategy and policy decisions to management and is closed once the governing body receives assurance that this has occurred and is satisfied with the feedback. This process is not a one-off loop; continual adjustments are needed to the strategy, the policy, and their implementation to deal with changes in the environment, learned experience and the actual effects of the work undertaken.

The communication challenge is dealing with shades of opinion and expectation in areas where there are very few empirical measures. Let’s look at one practical policy area to demonstrate the challenge: optimising risk.

The role of the governing body is to develop a policy that defines the optimum risk profile for the projects and programs the organisation intends to undertake. Accepting too little risk leads to stagnation, too much risk may lead to failure. What is needed is a policy that accepts some long term, high risk projects in the expectation of higher rewards, and some low risk lower return projects that keep current operations functioning. The risk policy would also need to consider different classes of risk including safety, reputational and financial risks as a minimum.

Good practice suggests the best approach to governance is principles based rather than rules based so the policy should define the principles that management will apply in the management of risk.
Communication challenge #1 – this policy needs to be meaningful and then communicated to management in a way that can be implemented!

Having understood the policy intent, management then have to create the management systems to implement the policy by developing processes, procedures and guidelines that are capable of effectively delivering the policy objectives and communicate these systems to all levels of the management structure.
Communication challenge #2 – communicating the existence of the systems and way it is to be interpreted and implemented to other levels of management!

Ultimately individual managers (or committees) have to make decisions about specific projects and programs to implement the policy. Some of the decision points include:

  • Deciding which project and programs to select for investment at the portfolio level.
  • Deciding what risks can be accepted, and which risks require either contingencies to be created or the project changed to mitigate the risk at the project oversight level (sponsor or PCB)
  • Deciding what emerging risks need escalation to more senior management, and how quickly, at the project management level.

Communication challenge #3, – communicating the decisions correctly so they are properly implemented.

Each of the specific management decisions made within the policy framework will have an effect. Assurance systems need to be in place to observe the outcomes of these decisions, with two primary objectives, firstly by observing the outcomes identify ways to improve the current practices and enhance the implementation of the current policy. Secondly to feed back to the governing body information on how the current policy is being implemented and suggestions for improvement.
Communication challenge #4 – understanding exactly what is occurring as a result of the management decisions (at all levels – this is a multi-faceted challenge).
Communication challenge #5 – providing effective feedback and recommendations to both senior management and the governing body.

None of these communications are simple. Decisions need to be made about what’s significant and what’s business as usual in an environment where very few of the matters under consideration have simple yes/no, right/wrong answers. An assessment of ‘significant’ depends on the perspective on the observer, not an empirical value. $500 may be significant to one manager $50,000 significant to another.

Given risk is only one facet of governance and similar communication loops are needed for all of the different facets of the governance framework, the magnitude of the communication challenge can begin to be understood. It therefor follows that it is a governance responsibility to ensure these critical communication channels are working effectively, which in turn requires a communication focused strategic intent, appropriate policies and for management to allocate adequate resources to achieve the intent.


Productivity decline should generate more projects

October 6, 2012

Projects and programs are the key organisational change agents for creating the capability to improve productivity through new systems, processes and facilities. But only if sensible projects are started for the right reason.

Declines in productivity seem to be widespread. In Australia, labour productivity in the market sectors of the economy increased at 2.8% per annum between 1945 and 2001, reducing by 50% to an annual rate of 1.4% between 2001 and 2001.

  • The measure of Labour Productivity is the gross value added per hour of work.
  • The ‘market sectors’ measured exclude public administration, education and healthcare where measurement is almost impossible.

Some of this change can be attributed to macro economic factors, there were massive efficiency gains derived from the shift from paper based ‘mail’ and copy typist to the electronic distribution of information, improved global transport systems (particularly containerisation) and the restructuring of manufacturing post WW2. These massive changes in the last half of the 20th century are not being replicated in current.

Whilst this decline in the rate of improvement in labour productivity is significant, the capital inclusive index is a more telling statistic. The multi-factor productivity index which includes the capital invested in production, giving a purer measure of the efficiency with which labour and capital are combined to produce goods and services. In the six years leading up to 2001, this measure of productivity grew by an average of 1.5% per annum, in the decade between 2001 and 2011 this reversed and productivity fell by 0.4% per annum.

Around 40% of the decline in the last decade can be explained by massive investments in mining and utilities that have yet to generate a return on the capital invested. The other 60% represents the massive cost of ‘new capabilities’ in general business for relatively small, or no improvement in productivity.

One has only to look at the ever increasing number of ‘bells and whistles’ built into software systems ranging from high definition colour screens to features that are never used (and the cost of upgrading to the ‘new system’) to understand the problem. 90% of the efficiency gain came with the introduction of the new system many years ago, the on-going maintenance and upgrade costs often equal the original investment but without the corresponding improvement in productivity. Another area of ‘investment’ for 0% increase in productivity is compliance regimes. Whilst there may be good social arguments for many of these requirements, the infrastructure and systems needed to comply with the regulations consume capital and labour without increasing productivity.

In Australia general management have been rather slow to appreciate the challenge of declining productivity, the impact being cushioned by a range of other factors that helped drive profitability. But this has changed significantly in the last year or so. There is now an emerging recognition that productivity enhancing organisational change is an imperative; and smart management recognise this cannot be achieved through capability limiting cost reductions.

Organisations that thrive in the next decade will:

  • Enhance customer satisfaction and service,
  • Enhance their engagement with their workforce, the community and other stakeholders,
  • Enhance their products and capabilities, and
  • Improve their labour productivity.

Achieving a viable balance across all four areas will require an effective, balanced strategy supported by the efficient implementation of the strategic intent through effective portfolio, program and project management capabilities that encompass benefits realisation and value creation.

The three key capabilities needed to achieve this are:

  • The ability to develop a meaningful and practical strategic plan.
  • An effective Project Delivery Capability (PDC); see: WP1079_PDC.
  • An effective Organisational Change Management Capability; see: WP1078_Change_Management.

Improving productivity is a major challenge for both general management and the project management community; and the contribution of stakeholder management and project management to the overall effort will continue to be a focus for this blog.


Linking Innovation to Value

October 1, 2012

In a recent post looking at the The failure of strategic planning  and the overall value delivery chain centred on projects and programs, the link between innovation and the strategic plan was raised briefly. The purpose of this post it to take a closer look at this critical ‘front end’ of the value chain because it does not matter how well you do the wrong projects! The ability to generate sustainable value for an organisation’s stakeholders requires the right projects to be done for the right reasons; and yes, they also need to be done right!

The section of the ‘value chain’ leading into a portfolio management decision to select a project or program as a viable investment is far more complex than the section after. Once a project or program has been selected, it needs to be accomplished efficiently, the outputs transferred to the organisation and the organisation adapt to make efficient use of the ‘deliverables’ to realise the intended benefits and generate value. This flow of work is primarily the responsibility of the project/program sponsor initially supported by project and program management, and then by organisational ‘line management’ until the final transition to ‘business as usual’ operations.

Developing a business case to the point where it can be accepted for investment is more complex, involves a wide spectrum of managers and potentially involves a number loops.

The three elements in this section of the overall ‘value chain’ are a viable strategic plan, a realistic business case that supports an element of the strategy and an effective portfolio management system to optimise the overall portfolio of projects and programs the organisation is capable of investing in.

The key is an effective and viable strategic planning process that is capable of developing a realistic strategy that encompasses both support and enhancements for business as usual, as well as innovation. Strategic planning is a complex and skilled process outside of the scope of this post – for now we will assume the organisation is capable of effective strategic planning.

The sign of an ineffective, unresponsive strategic planning process is seeing business cases fired off by business units without any reference to the strategic plan or worse projects being started without strategic alignment. The option to bypass the strategic planning may be valid in an emergency but not as a routine option. In a well disciplined value creation process, the portfolio management team simply reject business cases that cannot demonstrate alignment with the organisations strategic intentions. The red arrow in the diagram above simply should not be allowed to occur in anything other then an emergency situation.

The Portfolio/Strategic link (blue arrow)
There is a close link between the portfolio management processes  and strategic planning – what’s actually happening in the organisation’s existing projects and programs is one of the baselines needed to maintain an effective strategic plan (others include the current operational baseline and changes in the external environment). In the other direction, the current/updated strategy informs the portfolio decision making processes. The strategic plan is the embodiment of the organisation’s intentions for the future and the role of portfolio management is to achieve the most valuable return against this plan within the organisation’s capacity and capability constraints.

Routine inputs to the Strategic Plan (light green arrows)
The routine inputs to the strategic planning process come from the ‘organisation’ and include requirements, opportunities, enhancements and process innovations (eg, new software releases). These basic inputs are the core information required for strategic planning and form the majority of the new information in each update of the strategy.

The Innovation / Strategic Plan loop (light blue arrows)
This is the first of the more complex spaces – innovative ideas can come from anywhere in the business and are actively encouraged by leading organisations such as Google and 3M. Conversely, an organisational objective may require innovation to allow it to come to fruition. One of the most challenging objectives in recent times was Kennedy’s commitment to “before this decade is out, [land] a man on the moon and return him safely to earth.” The amount of scientific innovation required to achieve this objective was incredible.

The organisation’s governance processes and strategic development processes need to both encourage innovation whilst recognising that not every innovative idea will be appropriate for the overall development of the organisation. This requires the implementation of systems to encourage innovation, collect and sort innovative ideas and move the ‘right’ ideas into the strategic plan, where necessary revising and changing the plan to grab the innovative advantage.

The Feasibility loop (orange and yellow arrows)
Having innovative ideas and creative business cases is one thing, validating the feasibility of an idea is altogether different! The ability to test, validate and work-up innovative ideas into practical project specifications is a critical organisational capability. On mega projects the pre-feasibility and feasibility studies may in fact be significant projects in their own right involving considerable expenditure, feeding back to a gateway or portfolio management process to allow the next stage of the project to commence.

Several of the ‘gateways’ defined in most standard ‘gateway processes’ precede the commissioning of the main project and the organisation needs the capability to make informed decisions based on good quality information. This aspect of the value creation chain is industry specific and may be a central function or distributed across different business centres. What matters is the capability exists with the necessary skills to validate ideas and design projects ready for the more traditional project management processes to take over once the project is formally authorised.

Conclusion
The long term viability of any organisation depends on its ability to innovate. Traditional project and program management focus on doing the selected projects/programs ‘right’. But it is the ‘front end’ processes discussed in this post leading up to the investment decision that determine if the ‘right’ project is being selected for the ‘right’ reasons!

The effective governance of an organisation should require its management to invest sufficient skills and resources in these ‘front end’ processes to ensure a steady flow of innovative ideas, feeding into an effective and flexible strategic planning system, linked to a disciplined portfolio management process; to ensure the optimum mix of ‘right’ projects and programs are commissioned and supported.


Advising Upwards for Effect

September 22, 2012

The only purpose of undertaking a project or program is to have the deliverables it creates used by the organisation (or customer) to create value! Certainly value can be measured in many different ways, improved quality or safety, reduced effort or errors, increased profits or achieving regulatory compliance; the measure is not important, what matters is the work of the project is intended to create value. But this value will only be realised if the new process or artefact ‘delivered’ by the project is actually used by the organisation to achieve the intended improvements.

The organisation’s executive has a central role in this process. There is a direct link between the organisation’s decision to make an investment in a selected project and the need for the organisation to change so it can make effective use of the deliverables to generate the intended benefits and create a valuable return on its investment. The work of the project is a key link in the middle of this value creation chain, but the strength of the whole chain is measured by its weakest link – a failure at any stage will result in lost value.

In a perfect world, the degree of understanding, knowledge and commitment to the change would increase the higher up the organisational ladder you go. In reality, much of the in-depth knowledge and commitment is embedded in the project team; and the challenge is moving this knowledge out into the other areas of the business so that the whole ‘value chain’ can work effectively (see more on linking innovation to value).

To achieve this, the project team need to be able to effectively ‘advise upwards’ so their executive managers understand the potential value that can be generated from the initiative and work to ensure the organisation makes effective use of the project’s deliverables. The art of advising upwards effectively is the focus of my book ‘Advising Upwards’.

An effective Sponsor is a major asset in achieving these objectives by providing a direct link between the executive and the project or program. Working from the top down, an effective sponsor can ensure the project team fully understand the business objectives their project has been created to help achieve and working with the team to ensure the project fulfils its Charter will maximise the opportunity for the organisation to create value.

Working from the bottom up, new insights, learning and experience from the ‘coal face’ need to be communicated back to the executive so that the overall organisational objectives can be managed based on the actual situation encountered within the work of the project.

The critical importance of the role of the sponsor has been reinforced by numerous studies, including the PMI 2012 Pulse of the Profession report. According to this report, 75% of high performance organizations have active sponsors on 80% of more of their projects (for more on sponsorship see: Project Sponsorship).

If you project has an effective sponsor, make full use of the support. The challenge facing the rest of us is persuading less effective sponsors to improve their level of support; you cannot fire your manager! The solution is to work with other project managers and teams within your organisation to create a conversation about value. This is a very different proposition to being simply ‘on-time, on-scope and on-budget’; it’s about the ultimate value to the organisation created by using the outputs from its projects and programs. The key phrase is “How we can help make our organisation better!”

To influence executives within this conversation, the right sort of evidence is important; benchmarking your organisation against its competitors is a good start, as is understanding what ‘high performance’ organisations do. PMI’s Pulse of the Profession is freely available and a great start as an authoritative reference.

The other key aspect of advising upwards is linking the information you bring into the conversation with the needs of the organisation and showing your organisation’s executive how this can provide direct benefits to them as well as the organisation.

In this respect the current tight economic conditions in most of the world are an advantage, organisations need to do more with less to stay competitive (or effective in the public service). Developing the skills of project sponsors so that they actively assist their projects to be more successful is one proven way to achieve a significant improvement with minimal cost – in fact, if projects are supported more effectively there may well be cost savings and increased value at the same time! And what’s in it for us as project managers? The answer is we have a much improved working environment – everyone wins!!


The value of stakeholder management

August 13, 2012

One of the questions I’m regularly asked is to outline the business case for using stakeholder management in a business or project. This is a difficult question to answer accurately because no-one measures the cost of problems that don’t occur and very few organisations measure the cost of failure.

The problem is not unique; it is very difficult to value the benefits of an effective PMO, of improving project delivery methods (eg, improving the skills of your schedulers), of investing in effective communication (the focus of my September column in PMI’s PM Network magazine) or of better managing risk. The costs of investing in the improvement are easily defined, but the pay-back is far more difficult to measure.

There are two reasons why investing in effective stakeholder analytics is likely to deliver a valuable return on investment (ROI).

  • The first is by knowing who the important stakeholders are at any point in time, the expenditure on other processes such as communication can be focused where it is needed most, generating efficiencies and a ‘bigger bang for your buck’.
  • The second is stakeholders are a major factor in the risk profile of the work, their attitudes and actions can have significant positive or negative consequences and understanding the overall community provides valuable input to a range of processes including risk identification, requirements definition and schedule management.

At the most fundamental level, improving the management of stakeholders is directly linked to improving the quality of the organisation’s interaction with the stakeholders and as a consequence, the quality of the goods or services delivered to the end users or client (ie, stakeholders) as a result of being better informed whilst undertaking the work.

Quality was defined by Joseph Juran as fit for purpose, this elegant definition applies equally to the quality of your management processes as it does to your production processes and to the deliverables produced. And the three elements are interlinked; you need good management systems and information to allow an effective production system to create quality outputs for delivery to the client. A failure at any point in the chain will result in a quality failure and the production on deliverables that do not meet client requirements.

Placing stakeholder management within the context of quality allows access to some reasonably well researched data that can be interpolated to provide a reasonable basis for assessing the ‘return’ likely to be generated from an investment in stakeholder management.

Philip B. Crosby invented the concept of the ‘cost of quality’ and his book, Quality Is Free set out four major principles:

  1. the definition of quality is conformance to requirements (requirements meaning both the product and the customer’s requirements)
  2. the system of quality is prevention
  3. the performance standard is zero defects (relative to requirements)
  4. the measurement of quality is the price of nonconformance

His belief was that an organization that established a quality program will see savings returns that more than pay off the cost of the quality program: “quality is free”. The challenge is knowing you fully understand who the ‘customers’ actually are, and precisely what their various requirements and expectations are, and having ways to manage mutually exclusive or conflicting expectations. Knowing ‘who’s who and who’s important’ is a critical first step.

Feigenbaum’s categorization of the cost of quality has two main components; the cost of conformance (to achieve ‘good’ quality) and the cost of poor quality (or the cost of non-conformance).

Derived from: Feigenbaum, Armand V. (1991), Total Quality Control (3 ed.), New York, New York: McGraw-Hill, p. 109, ISBN 978-0-07-112612-0.

The cost of achieving the required level of quality is the investment made in the prevention of non-conformance to requirements plus the cost of testing and inspections to be comfortable the required quality levels have been achieved.

The cost of poor quality resulting from failing to meet requirements has both internal and external components. The internal costs are associated with defects, rework and lost opportunities caused by tying people up on rectification work. External failure costs can be much higher with major damage to an organisation’s brand and image as well as the direct costs associated with fixing the quality failure.

The management challenge is balancing the investment in quality against the cost of quality failure to hit the ‘sweet spot’ where your investment is sufficient to achieve the required quality level to be fit for purpose; overkill is wasted $$$$. But first you and ‘right stakeholders’ need to agree on precisely what fit for purpose actually means.

Also, the level of investment needed to achieve the optimum cost of quality is not fixed. The better the organisation’s quality systems, the lower the net cost. Six sigma proponents have assessed the total cost of quality as a percentage of sales based on the organisations sigma rating.

This table demonstrates that as the quality capability of the organisation improves, the overall cost of quality reduces offering a major competitive advantage to higher rating organisations. Most organisations are rated at 3 Sigma so the opportunity for improvement is significant.

Within this overall framework, the costs and risks associated with poor stakeholder engagement are significant and follow the typical pattern where most of the costs of poor quality are hidden. Using the quality ‘iceberg metaphor’ some of the consequences of poor stakeholder engagement and communication are set out below:

 

Effective stakeholder analysis and management directly contributes to achieving the required quality levels for the organisation’s outputs to be fit for purpose whilst at the same time reducing the overall expenditure on the cost of quality needed to achieve this objective. The key components are:

  • Effective analysis of the stakeholder community will help you identify and understand all of the key stakeholders that need to be consulted to determine the relevant aspects of fit for purpose.
  • Understanding the structure of your stakeholder community facilitates the implementation of an effective two-way communication strategy to fully understand and manage the expectations of key stakeholders.
  • Effective communication builds trust and understanding within a robust relationship.
    o Trust reduces the cost of doing business.
    o Understanding the full set of requirements needed for the work to be successful reduces the risk of failure.
    o Robust relationships with key stakeholders also contribute to more effective problem solving and issue management.
  • Maintaining the stakeholder engagement effort generates enhanced information that will mitigate risks and issues across all aspects of the work.

Calculating the Return on Investment:

Effective stakeholder management is a facilitating process that reduces the cost, and increases the efficiency of an organisations quality and risk management processes. Based on observations of similar process improvement initiatives such as CMMI, the reduction in the cost of quality facilitated by improved stakeholder engagement and management is likely to be in the order of 10% to 20%.

Based on the typical ‘Level 3’ organisation outlined above, a conservative estimate of the efficiency dividend per $1million in sales is likely to be:

     Total cost of quality = $1,000,000 x 25% = $250,000
     Efficiency dividend = $250,000 x 10% = $25,000 per $1 million in sales.

Given the basic costs of establishing an effective stakeholder management system for a $5million business, using the Stakeholder Circle®, (See: http://www.stakeholder-management.com) including software and training will be between $30,000 and $50,000 the efficiency dividend will be:

      ($25,000 x 5) – 50,000 = $75,000
      (or more depending on the actual costs and savings).

The element not included above is the staff costs associated firstly with maintaining the ‘culture change’ associated with introducing an effective stakeholder engagement process and secondly with actually performing the stakeholder analysis and engagement. These costs are embedded in the cost of quality already being outlaid by the organisation and are inversely proportional to the effectiveness of the current situation:

  • If current expenditures on stakeholder engagement are relatively low, the additional costs of engagement will be relatively high, but the payback in reduced failures and unexpected risk events will be greater. The overall ROI is likely to be significant.
  • If the current expenditures on stakeholder engagement are relatively high, the additional costs will be minimal (implementing a systemic approach may even save costs), however, the payback in reduced failure costs will be lower because many of the more obvious issues and opportunities are likely to have been identified under the current processes. The directly measurable ROI will be lower, offset by the other benefits of moving towards a higher ‘Sigma level’.

Conclusion:

The introduction of an effective stakeholder management system is likely to generate a significant ROI for most organisations. The larger part of the ‘return’ being a reduction in the hidden costs associated with poor stakeholder engagement. These costs affect reputation and future business opportunities to a far greater extent than their direct costs on current work. For this reason, we feel implementing a system such as the Stakeholder Circle is best undertaken as a strategic organisational initiative rather than on an ad hoc project or individual workplace basis.

The path to organisational Stakeholder Relationship Management Maturity (SRMM®) is discussed at: http://www.stakeholdermapping.com/srmm-maturity-model