“It is not the strongest species that survive, nor the most intelligent, but the ones most responsive to change.” Charles R. Darwin, “On the Origin of Species”
Transforming an organisation to become an industry leader is not a simple thing. With softening tailwinds in the FMCG industry, for a typical consumer goods company (Company “A”), just being in the same place requires a lot of effort. The analysis shows, that to be in a top quartile of performance leaders, Company “A” has to be better than the rest of 92% of companies in the FMCG industry. Taking into account that none of this 92% of companies is sitting idle or deliberately harming its capabilities, would mean that Company “A” has to be extraordinary, and getting there is not a very comfortable ride (Bradley, et al., 2018).
Facing the existential risks from the predators in the FMCG industry, Company “A” would have to take very bold moves – improve financial performance, increase product differentiation, and reallocate resources. A lions share of effort supporting these transformational initiatives would inevitably fall on the shoulders of Shared Service Centre (SSC) of Company “A”.
In this instalment, we continue our deep dive into the internal business model of FMCG Shared Service Senter (SSC). This time we will talk about putting the routines and practices on top of modularisation of SSC organisation design, that we have discussed in the previous episode, to take advantage of market opportunities and become the performance leader.
With that, we are going to start by trying to answer Peter Drucker’s age-old questions: Who the customer is and how to create economic value for the company by providing customers with a product or service from which they can derive benefit (Magretta, 2002). Then we are going to talk about how to make the transformation stick in the hearts and minds of Company “A” employees by introducing the performance routines. Finally, we would see what difference these routines would make to the leadership and the rest of Company “A” when they are practically applied.
Who are thee SSC customers, and what do they value?
As we have seen in the previous episode of this blog series, the front-office Business Units (BUs) are the ultimate customers of the SSC. These BUs operate in different regions and territories, serving consumers of significant cultural and economic diversity. This diversity puts pressure on SSC to differentiate their services while providing economic efficiencies (economy of scale) at the same time. Being effective and efficient at the same time is the powerful litmus test of SSC value-adding service. Failing on any of those defies SSC purpose and lead to disagreement with BUs.
The monetisation of value, the invisible hand of the price
To provide the necessary context in the previous episode, we have lightly touched the topic of how could a Company “A” organise its internal organisational structure to make them more modular and interoperable in response to the rapidly changing consumer needs. This modular architecture, consisting of much simpler individual capability building blocks operating independently from each other, will create a more complex, albeit more responsive ecosystem.
To visualise the idea of coordination system that joins many independent parties together, we might draw our attention to some of the examples in nature. Every year millions of sardines do their run around the coast of South Africa. Every fish in the school is independent, yet their instincts, as though it was an invisible hand, tell them to stay together as by doing so, there is less chance of being eaten by predators. Although the actions are simple, it creates more complex protection mechanisms. What is more, the movements of every single fish are agile and responsive to the situation, yet all fish keep the same direction. The sense of a shared mission, belonging to one massive organisation prevails.
In economics, PRICE plays the role of that “invisible hand”. The Price system in well-functioning markets is the standard interface that allows modular organisation units to coordinate with one another without communicating except on one dimension, the price (Sako, 2005). Indeed, by following the system of value contracts (albeit nominal) instead of monopolistic attribution of SSC costs to BUs would create that “invisible hand” to improve the ownership mindset and as a result enable better quality and coordination. Similarly, being agile in business does not mean each team is free to do what they want. Instead, each team is empowered to make decisions of what makes best for them and the whole organisation COMBINED.
Giving every service its price and tracking internal negotiations, service subscriptions and contracts in internal CRM system instead of tracking service issues as tickets in helpdesk system would provide the well-needed boost to the relationships between SSC and BUs. This service monetisation system would help to distribute resources dynamically by making choices whether the existing service is adding or wasting value, whether outsourcing, external purchase or sourcing internally of a particular service is the most appropriate option. Finally, the pricing mechanism would allow better BU and SSC alignment around priorities around big moves and resource allocation decisions. It would essentially drive the re-usability design of services in an attempt to save costs and reduce the price for their customers in BUs.
How to make the value delivery a good habit?
We saw the advantages of modular capability building blocks (aka LEGO system) to enhance responsiveness, we looked at the service/product internal pricing mechanisms to improve value delivery. Still, we have not looked at how independent product teams would be able to align their effort and increase the probability of their success systematically in their response to a problem or business opportunity.
It is relatively easy to make a retrospective analysis of how the company reacted in the past to the problem or business opportunity. Companies are often able to pull off the one or two transformation programmes on occasion. But, still, it isn't easy to do this consistently - select the right response to the presented business opportunity ahead of time without a systematic approach. Nearly a century ago Frank Knight in his well-known book “Risk, Uncertainty and Profit” realised that: "With uncertainty present, doing things, the actual execution of the activity, becomes in a real sense a secondary part of life; the primary problem or function is deciding what to do and how to do it” (Knight, 1921). Hence, "under uncertainty, doing the right things is more important than doing things right" (Teece, et al., 2016).
In the analogy we have seen above, fish has a much simpler brain structure. Yet, it could rely on its instincts (hardwired knowledge) when it follows simple routines (i.e. swim next to another fish). These routines are simple, yet they show signs of sophistication that even resembles a game theory, that helps protect individual fish and the flock overall from fish predators.
Einstein once said - “The definition of genius is taking the complex and making it simple”. Unfortunately, inside of many FMCG organisations, we often see quite the opposite – complicated processes, multi-layered reporting hierarchies, organisational politics, etc. Yet, the economic history shows that simple practices stick in our heads much better and encourage the proper action:
Deming circle with its simple PLAN-DO-CHECK-ACT steps aimed to improve quality,
Kaizen, from Toyota Production System (TPS), with its practice of actively taking responsibility for continuous improvements in the system, and
Jidoka, also from TPS, with its practice of providing the authority to everyone to stop a production line when a quality problem is detected.
Many people would immediately recognise what other person is talking about when they mention Kanban, even though they may not be fully aware of great details about this method themselves.
Hence, by encouraging all the independent teams to adopt and follow the simple routine aimed to improve the performance, the SSC could achieve the consistent behaviour and increase its chances of selecting the right approach for the present challenges and opportunities.
The dynamic capability framework could be the answer we were looking for the behavioural routine. It consists of the continuous cycle of three steps – Sensing (“See It”), transforming (“Shape It”) and Seizing (“Scale It”) (Teece, et al., 1997).
“See It”
Sensing routines should include activities that are performed specifically to spot trends, opportunities and threats. Often this would involve collecting and processing internal and external information and harvesting the business insights (business intelligence). The outcomes of this step would be a selection of a very few priorities, business problems or challenges, solving which would make a significant difference and help to propel the Company “A” into the top quartile (Bradley, et al., 2018).
“Shape It”
SSC of Company “A” should then support the "Shaping" routines that include orchestration of individual capabilities and building blocks into new value propositions and solutions aimed at solving a pre-selected business or customer problem. Given that technology would likely play a big part in it, this could be done through reorganisation of current information products in collaboration with infrastructure teams, enterprise architecture team, and platform teams using the existing governance and architectural guidelines.
“Scale It”
"Scaling" involves putting the newly developed solutions into business practice, collecting the feedback and feeding this knowledge back into modification and improvement of the assets. A focus here would be given to facilitation of knowledge exchange and "brokering" through communities of practice and competences (scaling across the enterprise).
Real-life example
Let’s see a practical example of how this will work combining what we have discussed in this and previous episodes of this blog – modular organisation design and 3S performance framework.
Our example is commonplace for the FMCG industry and presented here to illustrate the engagement process between Regional Sales Area team and analytical squad team. This simple illustrative example aids understanding of the concept. Yet, in reality, the problem faced by business and selected as a critical priority would likely to be much more complex and hence would require a dedicated squad team formed with specific skills appropriate for the task at hands.
Conclusion
In these two episodes, we have barely scratched the surface of what it takes for SSC of a typical FMCG company to become a performance leader. However, we have identified the key ingredients, without them, the transformation won’t be possible at all:
Be responsive to challenges and business opportunities by adding modularity into your internal capabilities
Enable individual capability teams to work independently by
Empowering teams to make their decisions independently
Creating self-regulation mechanisms through internal pricing and performance contracts
Reduce the SSC service monopoly by
Creating an internal “exchange” / market place of product and services
Demanding each service/product to comply with open interoperability architecture standards
Encourage the right culture, mindset and behaviour with the help of simple 3S routine – See It, Shape It, Scale It
In the next episode, we are going to deep dive into the internal organisational structure and governance of SSC. We will determine which capabilities need to be made stable and which one only required to match the short-lived business opportunity.