There are no simple solutions to complex problems. In an enterprise, problems are interdependent; their solutions should be, too. Interdependent problems are systems of problems and their solutions must form a system. A system of solutions is a plan and all plans are complicated, almost never simple.

The reason why most management cure-alls and quick fixes fail is their neglect of the whole system and just focusing on one part of the system. These fixes part the whole system, treating it as an aggregation of independent parts. These manipulations typically fail because the performance of a system is not the equal to the sum of the performances of its essential parts taken separately, but the products of their interactions. For that reason, improvement of the essential parts of a system taken separately often does not improve and may reduce the performance of the whole. Another common deficiency is the failure of some quick fixes to take into account a social system’s developmental responsibilities to its stakeholders and the larger systems of which it is a part.

Let’s have a closer look at some of these fixes.

Downsizing

Downsizing fails more often than it succeeds. Within a short period of time after is implementation, costs tend to rise and serious morale problems usually emerge. Since many enterprise focus on shareholder value, the enthusiastic response of stock analysts often convinces the C-suite that they have made the right decision. I would argue, downsizing treats symptoms not the disease, thereby attacking effects, not causes. How come enterprises can lay off more than 10,000 employees and never realized in the months before the actual event that they employed more people than they need?

Enterprises are social organizations that are responsible for creating productive employment. Downsizing is a clear failure of living up to that promise. The principal source of excess personnel are bureaucratic monopolies within the firm. There are no economic indicators of the performance of bureaucratic monopolies. Neither the value of of their outputs nor their costs are generally known. Because their importance is judged by the size of their monopolies, they tend to grow as much as the subsidizer will allow. When it becomes apparent that a company is not as effective financially and competitively as it should be and is overemploying, downsizing is usually the first way out. But once it takes place, the bureaucratic monopolies continue to make work out of fear and grow as much as the system permits. And the vicious cycle continues.

And internal market economy is the most effective way is the most effective way of preventing or eliminating internal bureaucracies. An internal unit that has to compete against external resources must stay lean; it must eliminate or minimize excess personnel if it is to keep costs down to compete effectively.

Total Quality Management/Six Sigma

“Quality” as applied to products or services has come to be accepted as meaning “meeting or exceeding the expectations of customers.” “Total” quality should apply to all those who are affected by what an organization does: all its stakeholders. The objective of any system needs to focus on a quality organization, not only on quality products and services.

Enterprises can gain huge competitive advantages by focusing more on quality of work life and less on quality of products or services. Most employees/stakeholders regard Total Quality Management and Six Sigma as another path to exploit them, squeezing more out of them. On the other hand, when organizations strive to to improve the quality of work life, stakeholders will find new and innovative ways showing their appreciation. Quantity and quality of output will improve, even more when they are partners in quality improvement programs. Implementing quality improvement programs should be done from the bottom up, not directed by executives. It empowers all stakeholders and provides a feeling of ownership.

The biggest problem with Total Quality Management and Six Sigma is the failure to distinguish between efficiency and effectiveness. Meaning, it does not incorporate ethical or aesthetic evaluations of the products and services whose quality it attempts to improve .

Last but not least, continuous improvement involves relatively small incremental changes made close together in time. This precludes creative quantum leaps. Creative acts produce discontinuities, qualitative changes. Creative but discontinuous improvements are usually worth much more than a string of small but continuous improvements. More often than not, creativity is often discouraged in organizations because it so frequently is destabilizing and disruptive. Creative discontinuities are required to take the lead; continuous improvement is at best a way of getting closer to the leader. One cannot pass a leader by imitation.

In our next installment, we’ll talk about leadership and how to transform it.

Previous installations can be found here: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6 and Part 7, Part 8, Part 9, Part 10.

Image: Courtesy of waxinandmilkin

For the sake of scaling, enterprises tend to create internal service divisions that are bureaucratic and monopolistic: Accounting, Procurement, R&D, Human Resources are usually run as subsidized monopolies. The pool that pays for their services is covered by an overhead charge imposed on the units served.

In general, subsidized monopolies are generally insensitive and unresponsive to the users of their services, but they are sensitive and responsive to those who subsidize them. Subsidizers are often not users of the service, hence less aware of the services’ deficiencies from the users’ point of view. In addition, bureaucracies try to ensure their survival by becoming as large as possible; they operate on the (not unreasonable) assumption that the larger they are, the more important they are and the more difficult they are to eliminate.

Centrally controlled corporations stimulate the increases in costs of internally provided products and services because the supplying units do not need to compare their costs and prices with those of external suppliers. How can you value a subsidized internal unit? It’s impossible. In a market controlled enterprise, users, not subsidizers, evaluate suppliers and express their evaluation in a way that counts – by their purchases.

As organizations of any kind become larger and more complex, the ability of centralized controllers to know all they need to know to manage their organizations effectively diminishes. Thats’s why an enterprise based on market economy works better in large systems: it disperses economic control among many enterprises that must compete with others in order to survive. And survival requires meeting or exceeding the expectations of customers and consumers.

Market Enterprise

A few requirements are important for an internal market economy to work within an enterprise:

• Every unit within the enterprise has to be either a profit center or a cost center that is part of a profit center that is responsible for the cost center’s performance. Profit Centers are not always expected profitable but they have to be accountable.
• Profit Centers have the freedom to buy any service or product they want from whatever source they want, and to sell their outputs to whomever they want at whatever price they want or are are willing to accept.
• A corporate unit that reduces the value of the corporation shouldn’t be part of it no matter how profitable it is when looked at separately. For that reason, the enterprise has the ability to intervene in a unit’s purchases and sales bot only when it benefits an organization as a whole.
• If there any executive reasons to buy services from internal resources even though outside suppliers are cheaper, the executive can force the unit to buy from within but has to pay the difference out of his own unit’s budget. This means that a selling unit will never have to sell its output at a price lower than it wants to and can.
• A manager doesn’t tell his or her subordinate units what to buy and sell unless a negative effect on other parts of the corporation or the corporation as a whole can be perceived.
• The executive units receives income from two sources: a) it charges for the operating and investment capital it supplies to subordinate units b) it imposes a tax on the profitability of each unit.
• Each profit center can accumulate profit up to a certain level that all stakeholders agreed on. Profits in excess of the specified amount will be passed up to the corporate level for its use.

Why a market enterprise?

Every enterprise unit operating within an internal market economy becomes a profit center. Therefore, for each unit the same success metrics can be applied. It allows managers to hone their skills better since they have a lot of autonomy and it gives each stakeholder an opportunity shine. Managers will be more concerned to get all the information they need to run a profitable unit and offering that information to other units to improve interactions.

The biggest challenge in implementing this system is the tendency of managers to withhold information. They fail to see that empowering all stakeholders might decrease their stranglehold on information and power but, at the same time, empowers all stakeholders to run a much more profitable organization. And an organization everybody is invested in. It is often recommended to remove managers that are more concerned with their own power base and not the overall health of the organization.

These managers often form connections with units that are unable to compete effectively or are no longer needed in the enterprise. While dealing with these challenges, the enterprise should never forget that without converting to a market enterprise, the whole organization might become extinct.

In the next installment, we will talk about organizational structures.

Previous installations can be found here: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6 and Part 7, Part 8.

Image Courtesy of Fubiz

I like people who forget about safe bets and stick their heads out, risking to have their heads chopped off. I like people who take risks. And I like people who go against the grain.

And, that’s why I like Joseph Jaffe. I especially like to spar with him (We had a few of those exchanges.), hoping I could find more reasons reading his new book “Flip the funnel – How to use existing customers to gain new ones.”

Jaffe’s premise is that companies should reverse their marketing tactics and focus their efforts on customer retention by having the highest quality customer experience. (Reminded me of the Zeus Jones vision of Marketing as a Service.) By focusing on current customers and delighting them with superior service, companies can activate happy customers to become evangelists for the brand. Customer Service, often outsourced and seen as a necessary but unloved cost center, should be at the table with R&D, Marketing and Sales when strategic decisions are being made.

These are not revolutionary thoughts for many of us but rebellious ideas for the majority of companies who are still considering their customer service as a cost center and hide behind the walls of phone trees aka customer avoidance centers. The book appeals less to people knee-deep into the evolving world of Social Marketing but it should be read by anyone starting to understand that we live in a new marketing reality with changed rules.

A few additional thoughts:

- Yes, we all love Zappos. But, we don’t need to hear about them anymore. Using Zappos as the banner child for customer service has been done by too many people too many times.

- Some of the examples (Motrin, United, Obama, etc.) are tired and don’t really need to be repeated over and over again. However, Jaffe provides new case studies that I wasn’t aware of.

- Best Buy: I don’t get the hype about Twelpforce and all these great initiatives that Best Buy is developing and implementing. My problem with all this is that Best Buy offers a horrendous store experience. I just purchased a Mac and the associate asked me at least 10 times if I didn’t want to sign up for their numerous extended warranties. I’m not the only one feeling bullied and Best Buy seems to push their employees extremely hard to make a certain quota. And the results of this bullying are even apparent in Jaffe’s book: While he writes pages lauding Best Buy’s social effort, on page 239 he shares a chart from Forrester Research ranking Customer Experience for major companies. All the tweeting and blogging of Best Buy didn’t make any difference; They are still ranked in the bottom quantile or better: the hall of shame.

Social Marketing doesn’t pack a punch when it’s just used to market to people, when it’s basically masking severe organizational problems.

Social Marketing can pack a Tyson punch when it’s used to transform companies. By focusing on effectiveness of your workforce and less on efficiency. By focusing more on human interactions and less on technology. By making stakeholder value a priority, not shareholder value.

This has to be the focus of our industry in the years to come. It’s interesting to follow the evolution of Jaffe’s thinking: From post-mass media to Conversational Marketing and now the focus on Customer Service. I wonder if the next book will be about Human Business Design? Oh wait, that’s my book.

My point: Everybody involved in Social Media understands that the challenge all of us are facing are institutionalized processes and structures. We experience these challenges each and every day when evangelizing new ways to communicate within and outside of your brand. That’s why people talk about E2.0 and Social Business Design. Jaffe’s book is a good start and should be considered by anyone interested in transforming companies.

However, all of us need to dig much, much deeper. If you thought convincing companies to tweet or blog was hard, don’t bother trying to transform a business. The former is a tiny sandhill, the latter a Mount Everest. Let’s start climbing.

No, Twitter didn’t announce their new ad platform. Yes, Foursquare and Gowalla had a breakout conference with more people checking in everywhere, annoying their friends and loved ones left behind. No, there was no new Twitter. And, yes, the future for digital technologies and Social Media is still very bright. But it’s time to shake up conferences like SXSW.

While some talks were insightful (Clay Shirky and Jaron Lanier come to mind), most panels didn’t rise above the mediocrity of typical Interactive conferences: Many unprepared panelists, content didn’t match advertised topics and, most importantly, too much talk about “joining the conversation”, “transparency”, “authenticity” and other tired buzzwords.

I went to SXSW and all I got was a Social Media 101 for beginners?

While the networking opportunities continue to be tremendous, all of us need to up the content game. We need to talk more about ROI, adoption of new technologies and Knowledge Management. We need to talk frankly about failures and successes and share them through case studies. Isn’t it ironic that everybody praises failures but nobody wants to share their failures so all of us can learn from them? And, most importantly, we need  to let people outside of the industry in. We need more input and insights from sociologists, anthropologists, psychologists, small businesses, Fortune 10 corporations and (insert your idea here).

In short, we need to leave the technology and Social Media echo chamber and let some fresh air in. The air at SXSW 200 felt stale and sometimes almost pungent with Social Media celebrity self-importance fueled by breathless fanboys and the always present booze cloud above us all. This post is not directed at the organizers of SXSW 2010. They did a fantastic job by delivering a flawless conference. A small point of criticism: Maybe less crowdsourcing panels (fueling the echo chamber), more crowdsourcing topics, themes and objectives of participants.

No, this is a wake-up call to all of us: Let’s open the echo chamber and let’s learn from and with others. The sessions from wecanendthis.com were a good start: Getting people from all walks of life together to end hunger in America. That was a good start. But while we thought, discussed and collaborated about solving a serious problem, the majority of visitors were busy checking in at various parties. While they thought they were busy checking in, they were busy checking out.