Top-down efficiency drives have drawbacks

Many growing startups need to show increasing efficiency in their results.

Often it is left to the Finance department to drive increasing efficiencies, eg by stricter budgeting and top-down budget cuts.

This can yield short-term results, but often lacks buy-in in other departments and can make people feel out of control of their own destiny.

Worse, the “across the board cuts” that typically emanate from top-down programs can sometimes cut “into the bone” enough to endanger output and growth. Thereby causing the need for additional rounds or even a spiral of subsequent cuts.

A better approach: focus on unit flow

A more effective way to drive efficiency is bottom-up: by focusing on the “unit” production of each department.

With a clear view how many units the team produces, how fast and at what quality, each department naturally focuses on doing better:

  1. in reduced error rates
  2. in reduced time lag
  3. in productivity (quantity of units produced with a given number of people)

What is a unit (or widget)?

We use the term “unit” (aka “widget”) for the non-financial work outcome that each department produces.

A good “unit”:

Some examples of good choices for units across departments are:

What is unit flow?

We use the term “unit flow” to:

  1. Paint a picture of how units flow through the organization, from one department to the other. Ideally, the output unit of department A is exactly the input unit department B expects.
  2. Reduce any friction in that flow by (1) agreeing on handover standards (2) reducing errors and (3) speeding up end-to-end time

This focus on flow ensures teams are steadily concentrating on reducing waste and inefficiencies, and overall efficiency improves sustainably as a result.

Who is responsible for good unit flow

We see the responsibility for great unit flow at three different levels in the organization:

1. Frontline managers lead the within-team procedures

  1. Ensure the quality of their team’s units handed over and track error rates
  2. Track and minimize the end-to-end time that each unit spends in their department
  3. Create team pride in team-internal metrics and encourage continuous improvement initiatives within the team

2. Middle managers lead the between-team processes

  1. Set and stabilize the standards for “a 100% correct handover” of units between all departments
  2. Minimize end-to-end time that each unit spends across all involved departments
  3. Create cross-departmental pride in overall process flow metrics and encourage continuous improvement initiatives across teams

3. Top managers clarify policy when teams cannot come to agreement

  1. Provide guidelines for which team does what, even if decisions are arbitrary. Eg, different companies can have different views on whether sales or account management should be responsible for renewal rates. But within each company, top management needs to decide what the one policy is for that company.
  2. Provide senior management owners/sponsors for all key cross-departmental processes
  3. Hold department managers accountable to unit flow budgets, tracking and improving first-time-right ratios, end-to-end speed and productivity.

How to implement unit-flow based efficiency

The next steps provide a template of how to implement unit-flow-based efficiency in a midstage startup:

  1. Have each department head come up with the one key unit/widget they feel their department produces for the company
  2. In breakout groups, have department heads draw up a flow map of units between departments. Have each group pay special attention to naming the unit being passed from one department to the other at each step.
  3. Review all draft flow maps in the management team. Bring together the best elements into a single map, optimizing for simplicity.
  4. Based on the key functional flow map, have each department head update their key unit/widget
  5. As homework, have each department head fill in for their key unit/widget:
    1. the estimated error rate of their department’s output, where errors are defined as any unit that needed any correction, completion or clarification. To be clear, they need to estimate what the next department in line thinks of their own department’s output
    2. the expected end-to-end time between the moment a new unit enters their department and the moment it is delivered ready for processing to the next department. Most companies define “expected” as the 80% percentile across units, in other words: four out of five units will be ready in this time or faster.
    3. the number of units produced per team member
  6. After all numbers are gathered, have the controlling team calculate some end-to-end numbers:
    1. The compound end-to-end quality rate, meaning the number of units that pass from beginning to end without a single correction, completion or clarification. The formula is (1-E_1)*(1-E_2)*(1-E_3)..(1-E_n) where E_1..E_3 are the error rates for individual departments and n is the number of departments involved in the overall process.
    2. The expected cross-departmental end-to-end time, between the moment a new unit enters the company and the moment it is delivered to the buyer.
    3. The number of units produced per employee cross-departmentally
    4. The hidden factory, ie how many more units could theoretically be produced if the compound quality rate went up from, say, 2% to 50%.
  7. Then (in the budgeting process), set improvement targets for one dimension at a time:
    1. Start with bringing quality under more control, so that the compound end-to-end quality rate is 80% or higher.
    2. Then (in a next time period) start pushing for reduced expected end-to-end time
    3. Both of these will have an immediate effect on productivity, without having to target staffing per se.