A CFO's Strategy for the Human Side of Change

This is the story of Tom Hastings, a recently promoted executive with new ideas on how to improve his organization. Read along, and learn how Tom led his staff on "A Journey Into the Heroic Environment."

A Sense of Foreboding

Tom Hastings was an important fellow these days, having recently received a promotion to chief financial officer (CFO) of one of the fastest rising biotech companies, Applied Industries. His financial training was pretty traditional; after his short Navy pilot stint, his early career path was through one of the "Big Eight" firms - that were now down to the "Big Three." Even with all his experience, his new job was making him uneasy. He was concerned that the company's focus was more on its stock price than on its business and customers.

In the back of his mind, he kept thinking about a passage from the book, Lasting Change: The Shared Values Process That Makes Companies Great, which he kept on his desk. He would glance at it from time to time. Having read it a dozen times, he nearly could recite it by heart. The authors had written, "In 1985, a 747 jumbo jet crashed in the mountains outside Tokyo's Narita Airport, the worst crash in the history of aviation. After an extensive probe, the investigators found the pilots had been highly skilled, and apparently no flight errors had been made. The weather had been clear, no 747 had ever had a similar accident, and no errors had been made by air traffic control. To add to the mystery, aircraft maintenance had been performed as required. Yet, a recently repaired section of the rear fuselage had ruptured, knocking out the elevators and vertical tail section, taking with it the ability for the pilots to control the aircraft."

"After the crash, an investigation ultimately placed blame on the 'system.' Put another way, the investigators concluded that the fault lay in the lack of accountability. The report said, 'In the end it seemed clear that each individual with a maintenance role had done his or her job, but that no one had been assigned maintenance responsibility for the entire plane. In their system the plane was just a number without any ownership.'

"To each staff member, this plane had been just a job, a checklist between breaks and lunch. The report went on to say that no one had taken any short cuts, but no one had owned the final outcome either!"

Tom learned that Japan Airlines (JAL) had changed dramatically since then. Each aircraft now had a specific maintenance group assigned to it. Each person who worked on an aircraft now understood that he/she shared a personal responsibility for the plane's safety. At the end of every overhaul, the JAL team assigned to that plane showed its confidence in and commitment to the work by sending one of the staff members on the plane's next flight.

Tom also knew that this team accountability concept had kept JAL free of any repetition of the Narita tragedy. Not only that, but the new approach even benefited the company's bottom line: the airline reduced maintenance costs by more than 15% annually.

Tom's recent disquiet centered on a feeling that Applied Industries might be the next 747 slated for tragedy. He worried that the reports after its crash would say: "...and everyone was doing his/her job, but the people in every department didn't own anything except their stock and stock options."

Getting Started

So, Tom decided that this day he would take the first step to putting in place a strategy to engage his staff in the ownership of their own results.

"Connie," Tom said to the departmental secretary, "I want to do something very unconventional today."

Connie had worked with Tom throughout his career at Applied, as he served as senior auditor, finance administrator, investor relations manager, and, now, CFO.

"Connie, I've been working on a new plan. Remember the story of the JAL 747 incident I've spoken to you about over the years. Well, I think I have a solution."

"To the plane crash?" asked Connie.

"No, of course not!" Tom laughed. "No, I'm talking about our plane crash, the one at Applied."

Connie was breathless, almost whispering, "Boss, is our stock tanking?"

"Absolutely not! We're fine, so relax. No, I'm only speaking metaphorically. But, like JAL, it seems we have not connected our staff to our business.

"I'm at the top of this food chain and I'm not even in control. Literally every one of us, regardless of rank, is like a puppet on a string. My string is Wall Street, and the other folks are on budgets, incentives, top-down measurement systems, and good old supervision. The only joy most of us really get is the dream to get rich on the stock and retire. Frankly, that scares the heck out of me."

"OK, Mr. CFO, what are you going to do about all of us being puppets?" Connie challenged, not sure she agreed with him.

"I'm going to start by calling a meeting."

"With your department heads?" asked Connie picking up on Tom's serious gaze.

"No, I want to talk to our people," said Tom. "I want their perspective about my fears. I want to hear what they think. I want to get them in the discussion earlier than later. I think I know what I'm going to say, and it's going to open the proverbial can of worms.

"OK Connie, you're going to be my audience. First, get someone to cover the phones. I want to bounce some information around, and we are going to be awhile."

Tom took a sheet of paper from his special file, and the first thing he showed Connie was a graphic from The Economist magazine (see Figure 1).

"Connie, here's a graphic on business profits in the past SO years. What does it mean?" asked Tom.

"This is terrible. In the past 50 years the profitability of American organizations has dropped by two-thirds, from nearly 20% to under 5%. How do companies stay in business?" asked Connie.

"They don't!" said Tom. "And, that's why the plane crash over Narita keeps me up at night."

"OK, I understand the seriousness of this situation, but what can you do? After all, you are only one person," she commented.

"You're right in one respect, but wrong in another," Tom replied. "George Washington suggested that one person who knows he/she is right makes a majority. America is all about one person making a difference. This is not an American phenomenon; it is the same all over the world." Tom paused, "Connie, I believe and have for a long time that something is terribly wrong in how we conduct business. Consider that almost 90% of the Fortune 500 operations from the 1950s are gone, and the ones that are still with us are struggling."

Focusing on the Customer Experience

"In the relationship with our customers, it is our systems and our thoughts about people's true motives that cause a disconnect. In the JAL case, the customer was a 747 that was ignored."

Tom pointed to a diagram that he withdrew from his file (see Figure 2). "Look at this," he suggested to Connie.

As Connie looked at the pyramid in the diagram, she seemed puzzled. "Tom, I know this is a pyramid and I see the people standing around and crashing into the pyramid. I understand the words that label it, but I'm not sure what it all means."

Tom explained, "Imagine that this is any operation in any industry. see all the people trying to get into the pyramid? They're all customers, but they're running into a solid wall and are prevented from entry. The employee is trapped in the pyramid and is tied to managerial strings that cause him to be controlled like a puppet. In our case, internal customers must feel this way when trying to get in touch with our finance department."

Tom pulled out a second picture (see Figure 3) and said, "Whereas the first picture shows the customer relationship to the pyramid, this second picture portrays an internal picture of our operational relationships. These include finance, operations, quality, help desk, shipping, marketing, information technology, engineering, sales, etc. Each work group operates within its own pyramid and keeps other groups from entering its pyramid. As a customer, this also suggests that change is almost impossible and that politics is almost inevitable."

Connie said, "I can see that our present systems limit interaction between each internal pyramid because we're trying to protect our backs! So, what can we do about it? Isn't this a normal organizational approach to business?"

"Not only is this the normal approach to business, it is taught and reinforced everywhere, in every book and at every university," Tom clarified. "The pyramid is comprised of rules, incentives, performance standards, processes, policies, etc.; the list goes on and on.

"It's like asbestos. In the past, we used asbestos everywhere, not knowing that it was poisoning us in our own homes. In this case, this structure is killing our profits, competitiveness, and abilities to adapt - and don't take my word on this just look at the Economist graphic. Most of all, this operational approach separates us from our passion to do our jobs. Instead of connecting people to their jobs, we spend time and resources on building better and more dynamic pyramids because we believe in trusting numbers, not people. Unfortunately that has been our focus - an emphasis on numbers and not people."

"OK, you've convinced me that there is a germ of truth in all this. So, what's your solution?" asked Connie.

A New Way of Working With Customers

For the past several months, Tom worked with the designers in the graphics department to come up with a complete description in a graphic form of the pyramid, as well as an alternative approach to the existing problem of relying on programs, incentives, measurements, fear tactics, and supervision to connect people to their jobs.

"Connie, here is a model (see Figure 4) that I believe will help everyone see the present danger. It is based on a strategy that allows and invites responsibility and accountability on an individual level to blossom," Tom began.

"The three center columns of the model show what I've come to call the control-based approaches; to me, these mean trust the numbers, inspect the documents, and don't trust people. As harsh as that may sound, that's how I managed my portion of Applied's business over the years -I trusted the numbers not the people. Now I'm the first to admit I was wrong. You'll note that the three elements to these control-based approaches are structures, incentive systems, and performance standards-things that in the past we were told were the right approach. But the financial numbers in the past 50 years tell a different story-and none of these approaches require that we trust people to do their jobs or to take ownership for the results.

"Now take a minute and look at the left column of the model. You'll see the six key design areas of any operation: how the organization approaches trust, how the organization approaches responsibility, how the organization approaches accountability, how the organization approaches front-line workers, what defines the customer transAction, and what drives the transAction.

"At the bottom, on the left side, we discuss something that we call the TransAction Zone(TM). Remember, whether we work with internal or external customers, we all make transActions many times each day and the operative idea is to take action -that's why I capitalize the "A" in the word transAction. At the lower righthand side, we introduce a new metaphor or approach, where the customer, not the process or the system, drives the transAction...the customer-and that would be new for us at Applied!

"For example, in the case of 747 maintenance, JAL restructured the transAction making the plane the customer while still focusing on the tasks. Whereas, at first, the plane was only a number and each maintenance worker did his/her job and no more. Today, each 747 is a living, breathing plane that has people assigned to its welfare and travelers that depend on it.

"Now, let's look at the top-right portion of the graphic, which talks about establishing the TransAction Zone. This describes a Freedom-Based(TM) approach, rather than a control-based one. Not only are customers treated differently, but also the key idea in this approach is that we trust people to do their best. Note how differently this approach handles accountability and how organizations which practice TransAction Zone Thinking(TM) have different expectations of frontline workers," said Tom.

"Tom, this chart explains what you are saying," Connie paused before asking her next question. "But what does the new structure look like if it's not a pyramid?"

"Let me show you a graphic that I had the design team create for me. see what you think," said Tom, showing Figure 5 to Connie.

"In these circles, people are giving gifts to each other. This represents that each customer interface should be like a. gift. The idea is that it would be like Christmas every day, and every customer would be special. In fact, if we implemented something like this, we'd conclude that: Fairness is treating internal and external customers differently!

"This TransAction Point(TM) is the defining moment of any operation. It's what makes the difference. If our actions fail to thrill the customer, we never really have a chance to regain this relationship. The TransAction Point is about taking action, which is why we also capitalize the Α' in the word transAction. When we follow this approach, we won't be kicking decisions up to supervisors' desks. We will handle it right the first time or fix it to the customer's satisfaction without paperwork and the run around.

"Tom, that's the way Nordstrom's department store treats me," Connie replied, looking forward to her next visit.

Tom smiled and agreed that Nordstrom's was an excellent example. "There are lots more cases of this approach," he said.

"Let's look at the upper-left corner of the model, where the graphic labeled TransAction Zone appears," he continued. "As you can see, we have many TransAction Points within the TransAction Zone. TransAction Zones and the TransAction Points within them are all scalable to fit the situation."

Tom explained that the people in the design department deserved a lot of credit for this illustration. He had told them about his concerns, that Applied was pushing its most talented front-line workers away from the transActions when just the opposite was needed. They had agreed and come up with the idea of repositioning the workplace upside down.

Phyllis Collins, an incredible designer, suggested that all systems should support any and all TransAction Points, not drive or impede them. This meant that all support personnel, including folks with lots of experience, and all systems and processes no longer would drive the transAction. Instead, people on the front lines would drive the transActions their customers needed, and the front-line workers would call the shots without being impeded with policies or procedures, except legal or safety-related ones. And why could they do this? It was because we would trust the workers to do the right thing!

"Phyllis also suggested that if we connected responsibility and accountability within the same person conducting the transAction, we would achieve our goal of creating ownership within every transAction. That was a breakthrough idea!" Tom mentioned. "Phyllis said if an organization could pull that off, then it wouldn't need supervision."

"Phyllis and most of the rest of the group suggested that they didn't need a boss. What they really wanted was a designer with more experience. They described this person as a Wise Counsel(TM), someone with whom they could discuss design ideas and issues; however, they were concerned about who would own the final design decisions. All six designers were adamant on this point. They wanted full responsibility and accountability for the ownership," said Tom.

Connie shook her head. "Tom, do you understand what you just said?"

"Yes I do! It means that we could do without several layers of managers and supervisors whose only job is to measure people, count paper clips, and enforce the latest program-of-the-month! Actually, supervisors slow down processes and add lots of costs," said Tom.

"Now wait, we aren't going to see wholesale slaughter out in the field by letting all these supervisors and managers go, are we?" asked Connie with concern.

"Of course not. We're going to reposition managers, giving them a new and contributing role, one that adds value to the transAction, rather than adding overhead. Here is what it might look like," Tom commented as he showed Table 1 to Connie.

Connie was impressed; she thought the Wise Counsel concept was great, and she realized Tom acted exactly the way a Wise Counsel would operate, so she understood what he meant.

Connie laughed. "I feel as though I own my job already, and it's because of the way you behave toward me. Now I know your behavior is based on your belief in people, their purpose, and their true value to the organization."

"Connie, thanks, but this isn't my list. It belongs to a group on the West Coast. After reading their books, Lasting Change and A Journey Into the Heroic Environment, I've had several conversations with the company's CEO and chairman. He does have a different way of seeing organizations and leadership," said Tom reflectively, "and today he is considered one of the top 100 thought leaders in the world."

Tom now showed Connie a new organizational design that would create a paradigm shift in the business world (see Figure 6). There were still leaders, but this design showed no corporate office at the top. It placed customers in the center and seemed to encompass every aspect of a traditional business. It identified systems and processes as important elements that were decentralized. Each TransAction Zone could define its specific needs. There would be no one-size-fits-all, corporate-wide, stranglehold system affecting any part of the business where it didn't make sense. It wasn't in the shape of a pyramid; and, it looked more like a space station than anything Connie had ever seen on earth. Yet, there was something about Tom's and the design department's ideas that she really liked. Tom pointed out that you could scale the design as an operation grew.

"OK, tell me a little more about this," said Connie.

Tom paused and then began. "Let's take a look at the elements. As you can see, each one of these TransAction Zones is connected to the other, but each also is independent. They do not compete for resources; they are very serious about cash flow and projections that they create, not ones that are imposed on them. They are encouraged to support each other because they are not pitted against each other in an incentive program or quota or measurement schemes. Their focus is on working their work, improving work flow, getting the order, and building it after the order is received, not slamming products out the door without a customer demand.

"This type of operation shares! I know that's hard to believe, but the idea isn't 'dog-eat-dog.' It's more like the JAL team that literally stakes everything to make sure of safety and effectiveness. Each product we design has a team. Each team is responsible. No longer are we on quotas, because quotas lead to cheating. Each member of a product group, from launch to production to current sales and support, owns the project and works on improving how they do things, so they can deliver to the customer on time, every time -and everyone has a say so. They are all responsible and accountable individually and collectively, and they are hard on their performances because they are 'intrinsically motivated,' not fearful. They have the option to ask non-performers to leave!

"Externally, the flow of aTransAction Zone is dependent on the same work flow, with internal customers within finance, shipping, sales, help desk, IT, marketing, design, engineering, etc.

"Front-line workers are charged with making the transAction in an ethical and appropriate manner for the good of the customer, company, and environment. In fact, this is the greatest charge for everyone on the front lines, including for you and me."

At that, Tom pulled another paper from his special file. On it were the duties of the front-line worker (see Table 2).

Connie read the list, then broke the silence by saying, "I agree with these six elements, but will top management let us do this? I mean, could we challenge everything without getting our heads chopped off?"

Tom understood what Connie was saying. In a control-based pyramid, new ideas -let alone challenges to the status quo- were only taken on by those who had a death wish! So the next list, the responsibilities of top management, was crucial to the success of this plan and to Connie's buy-in (see Table 3).

"OK, Tom, I think this will work, and I'm now all for it. How can I help?"

"You just helped a lot. I need for us to begin the campaign to get a discussion going about this new vision for our company. We can take a giant step by beginning that dialogue in the finance, IT, accounting, HR, and security divisions. If we show improvements, who knows where this approach might go from here?

Tom paused, "That's how a revolution begins!"

"I know, a journey of 1,000 miles starts with a single step. OK, now let me out of here so I can start preparing for our revolution," smiled Connie.

Tom moved around to his desk chair and placed the special file next to him. He expected he would be using it soon.

This article is reprinted with permission of the LCI (Lebow Company, Inc.)

Editor's Note: Readers of The Journal for Quality and Participation can receive a complimentary copy of Rob Lebow's third edition of the business classic, A Journey Into the Heroic Environment, by contacting Sheila Lucier at 800-423-9327 or by e-mail at contactus@lebowco.com.

Rob Lebow is chairman and CEO of LCI (Lebow Company, Inc.). In 2005, Executive Excellence Publishing named Lebow one of "the top WO thought leaders" in the world. As well, the Lebow Company was named in the top 10 leadership development companies in America. Author of six books, his latest release is the third edition of the classic, A Journey Into the Heroic Environment, which was named by Business Book Review as one of the best books for 2005. You can reach Lebow via e-mail at contactus@lebowco.com.

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