Standardization of internal business processes, like any other tool (and a concept or procedure can be viewed as a tool), can be a double-edged sword. It can have many benefits if used properly, or can be harmful if poorly designed or misapplied. One of the great challenges for any organization, especially large ones within which many divisions produce different products for different markets, is knowing when and where to standardize processes, structure, and tools. This entry is intended to address standardization in the most difficult circumstances: large corporations with many, diverse divisions. To clarify, horizontal divisions might consist of a marketing group who define customer needs, a design group who dream up products to meet those needs, an engineering group who design the parts of the products and make sure they fit together, a production group who assemble the products in quantity, a logistics group that transports products to customer locations, and a sales group to complete the transactions with customers. Vertical divisions could exist to address parallel product or customer types, or unrelated products that shared other synergies such as a common resource or common technologies. So what do you need to know to use standards effectively?
To standardize effectively requires a good understanding of the differences between divisions’ management teams, their inputs, their products and customers, and the constraints under which they work. Frequently I’ve seen corporate managers establish standards that, while working reasonably well for some divisions, are impractical or even impossible for others to follow, and may even reduce or limit the extent of their success.
It is easy to make things worse if one makes the assumption (sometimes based on what might be labeled “best practices”) that what works well for some (or even most) divisions will be equally good for all. Such assessments are almost always specific to one or a few divisions, and often fail to take into account all the conditions that permitted that “best practice” to actually work or work well in the first place. And, as always, management decisions made without the input of the people “in the trenches” has great potential for creating inefficiency at best, or impossibilities at worst.
Another pitfall is to ignore soft factors such as the operating styles, past experiences and backgrounds of top divisional managers. For instance, a standard that forces operational rigidity on a manager who has customarily succeeded with flexibility will not provide optimal results, and too flexible a standard may be a liability to a manager whose style has provided best results in more rigidly constrained circumstances. Negative impact on divisional performance is easily achieved if management gets it wrong. Unfortunately, most large organizations have such poor knowledge of their real internal operating costs that they can’t see the connection.
Poorly conceived corporate standards can have deeper impacts as well. Whole organizations often take on the character and style of their top manager(s), and staff decisions to stay or leave, which can impact organizational style and strength over time, are often based on cultural factors. The impact of standardization can be substantial in terms of employee morale and turnover. These costs are, again, hard to quantify, rarely measured, and not seen by most corporate managers.
It may be better to err on the side of flexibility and focus on standards at the information and material hand-off points between divisions, allowing senior management to work with managers who need more structure to help them manage their divisions effectively. Enforced rigidity can deter creative people from coming up with innovations that may generate additional efficiencies and progress for the company, and may ultimately cause them to leave the company and perhaps even move to the competition – a double loss for the organization.
A third error is to mandate standards based purely on what makes it easier for senior management to see and manage processes, decisions, and results within divisions. While standardization may seem like a big help to senior management who have to oversee many divisions, it can impose excessive costs on the divisions, or enable micromanagement by higher-ups that can take the creativity and brain power of a division out of the mix and worsen business results. Reporting standards (or any changes) that create redundant work discourage workers, decrease morale, and waste resources which, while often hard to quantify, are nonetheless important to divisional performance.
One opportunity for effective standardization is at the hand-off or integration points where goods, services, and information pass from one division to another. Here standards imposed from above may provide the most value. In each case, however, the standards must be designed to minimize the cost of both those meeting the standards and those accepting the materials and information that have been standardized.
Another candidate for effective standardization is a process where differentiation provides no incremental value. In many cases similar processes can be identified between divisions, but in some cases they are harder to discern, and may be more easily identified by workers “in the trenches” who can see the opportunities most clearly in the form of impediments to their efficiency. A smart manager enlists the help of affected employees to identify opportunities for standardization. The causes of differentiation should be well understood before the processes are standardized.
Smart management teams address reporting standards by identifying what they really need to know, and then convening a team of representatives from each of the reporting divisions to develop and consense on processes and formats that achieve that end. Similarly, information systems used across divisions are best developed with a agreed set of goals in mind, rather than by attempts to copy competitors or other industries, and by a team involving not just divisional management, but also the people who will create and use the information. While this is more costly than just mandating standards, it has a higher likelihood of successfully producing standards that will stick and avoid imposing needless costs, and therefore produces a net gain that, while hard to quantify, may be substantial.
To summarize, standardization of business processes can improve organizational efficiency, reduce error rates, and provide a variety of other savings, but it must be approached with care and the involvement of the stakeholders, including the people “in the trenches” who will have to implement and use the standards, if it is to be successful and produce real efficiencies.
- sources reviewed during the writing of this entry:
Business Innovation in an On Demand World, Sep 26 2005, Irving Wladawsky-Berger, Chairman Emeritus, IBM Academy of Technology
- Business Process Modeling and Standardization, Antoine Lonjon, Chief Architect, MEGA International
- The Benefits of Business Process Standards, 12 July 2005, abstract, by Thomas H. Davenport, Harvard Business School