Organisation, the what, the why and the how

The subject seems at first uninteresting even simplistic. Indeed each company:

• is an organisation that wishes to attain defined goals,
  
• is build around its specific skeleton, its organisational chart that defines the relationships between the different employees,
  
• is defined by a set of processes that regulates its internal relationships as well as the relationships with the environment,
  
• is more or less clearly separated from its environment.

Our experience working for Bulgarian companies during the last 2 years has given us a different picture of the reality. We will address the first two of the characteristics below. The third and major issue will be addresses separately in one of our next newsletter.

Collective goal(s)?
Let us start with the goal of the organisation. The definition states that the goal should be collective, which means that it should be embraced by all the members of the organisation. We do not mean that you should run a democratic process to defines goals for your business. What we mean is that you should know where you want to go, so that others can follow and support you on your way. It is not even necessary to define a five year strategy plan. Just give your organisation a sense of purpose.

This is only rarely taken seriously by the management. What happens in the best case is that the management team and/or the owner of the company have worked together on defining what they want to achieve. The major problem is that they have probably forgotten to communicate it to the rest of the employees or did not communicate it clearly.

As a result different goals will be defined at different levels in the organisation which will lead to contra productive actions. Indeed, do not believe that your employees can read in your mind or can work without defining their own purpose. They will try to second guess you or will define their goals to defend their own interest, which may or may not be yours.

As a result, the company will be torn apart, your market positioning weakened and resources spent carelessly.

One example:
the management team may decide, after a careful analysis of the market, that the company has to concentrate on its home market. Kept without clear information, the manager responsible for the Russian market may pursue a very costly strategy by trying to increase the market share in this country.What happens in the worst case is that there are no collective goals.

We often ask the top management team members what are their major goal for the company and we almost never get a clear answer. Each of them has a different big picture. Each of them pursue his/her own strategy and pushes his/her resources in the desired direction without taking into account the wellbeing of the company. The absence of cohesion at the top of the company will be noticed by the employees. As a result they may play the management board members against each other for their own benefit, they may stop working productively, not knowing what to do, they may leave the company with the impression that their work is not valued properly.

Ask the employees and they will tell you that they do not know which war they are fighting and against which enemy.

Well designed structure?
Like so many other company around the world, your company will be ISO certified. As a result of the certification, you will proudly show us a decent organisational chart with clear roles and responsibilities and clear management relationships.We would suggest you to perform a very simple reality check.

Please chose 20 employees randomly in your organisation, ask them to whom they are supposed to report, who their colleagues are and, if they are managers, how many employees report to them.The answer may give you a picture of your organisation that is quite far away from the polished design of the ISO analysis.

Over and over, we meet with employees who do not know who their manager is, report to more than one managers and do not know who report to them. The official skeleton is in place, but nobody notices. As is for the goals, so for the structure. The skeleton is not supposed to be a decorative element in your office. It is supposed to structure the organisation in such a way that collective goals can be achieved.

One dysfunctional form of organisation that we have met on many occasions in Bulgaria, is the so-called taxi-organisation. You probably know how a taxi company is structured. The managers of the company buy cars, keep them in more or less good condition and look for drivers to rent them. The drivers generate the sales they can, pay the rental fee and keep the difference.

Adapted to a production company, the situation will be as follows: the management of the company buys some machines, maintains them properly and finds employees that are interested to produce some finished goods by using them. The amount produced is defined by the employees who get a more or less fixed salary in exchange of the production. Nobody leads them, because "they know best how to use the machine and produce. So why bother".

The major problems with this type of organisation is the lack of collective goal of course, as well as the lack of integrative structure. Each employee is treated as a separate entity. As a result, the machines are not delivering the maximum productivity. The return on investment is poor and the financial resources lack to replace the worn out machines. Moreover the production processes are not integrated which again results in a poor productivity.Please do act swiftly if you recognise your organisation in that description.

The second example concerns the absence of delegation.
Your company has a well defined management culture in place. Its structure is understood by all the employees. The major challenge that you face is that more than 80% of the decisions are made by the CEO of the company and/or the owner. As a matter of fact your organisational structure is dysfunctional. You just use your managers as wheels to deliver your instructions to the employees and to report news from the front to you. You may face two major challenges:

• You will be overwhelmed by the number of decisions that you have to make, which will slow down your organisation, and or push you to make the wrong decision (as nobody will have the courage to argue with you).
  
• You will be confronted with a dear situation on the day you will decide or have to transfer your business to the next generation. Indeed nobody will have been used to make decisions, nobody will know what to do and you act responsibly.

A successful business needs clear decision and delegation rules. Give your managers chances to made wrong decisions, so that they can learn from it and benefit from your lifelong experience. Prepare them to take over from you when the time has come and thus allow your creation to further develop successfully.

The third and more complex example is related to holding structures.
Indeed the activities of many companies in Bulgaria are regrouped in holding structures. The problem is that there are different types of holding that will deliver different results in different situations.

• A financial holding is an organisation that only manages the participations in different companies, without further involvement than buying or selling share.
• A strategic holding is trying to generate synergies in its portfolio of companies by reducing costs, increasing sales or both. This type of organisation is suitable for holding operating in different industries in similar markets for example.
• An operative holding is basically one company where the different departments (production, sales, accounting, maintenance) may be in different legal entities. In this situation most of the decisions are made at holding level. This type of organisation is particularly suitable for holdings operating in a specific industry or market.

The main issue is to define clearly what your goal is and to act accordingly. If, for example, you are an operative holding and have centralised sales, then the production units have no right any more on the sales people that formally are still employees of the production unit. These people will only be managed by the sales director in the holding. If you do not respect the rule, the whole group will suffer and nobody will understand what role this holding should play apart from generating additional costs that have to be supported by the production units.

If you decide to implement a financial holding, then do not make operational decisions. Just define financial goals for the managers of the companies you own and implement corrective action if the goals are not met (ie change the managers).

These are of course only a few of the challenges arising from a few simple questions: what type of organisation do you lead, why and how? The question is simple, the answer and the communication of the answer internally and externally is very complex.

As management consultants we are confronted daily with organisations and are used to ask the necessary clarifying questions, as well as to propose the necessary improvements. You only have one organisation to play with. Do not compromise its success by making the wrong decision. Call us for a free assessment.

Productivity, the what, the why and the how

If Bulgaria continues to lag behind the European Union member states in terms of the productivity, technological progress and innovativeness of its economy, it will stay for good at the periphery of Europe”, said the report commissioned by the Bulgarian President to outline the challenges ahead of Bulgaria’s economy until 2010.

The alarming conclusion of this report has been confirmed by the latest report of the International Labor association in its “Key Indicators of the Labor Market, 5th edition”. Bulgaria is ranked last in term of labor productivity compared to other developed countries.

These two statements do not only reflect the macroeconomic situation of the country (which would be problematic enough anyway), they also address the situation of very specific companies, your companies, which are the backbone of the Bulgarian economy.

There are two major reasons why the productivity is low. The first one is the number of hour worked, the second and more important one is the “productivity” of the hours worked. Indeed it is not sufficient for the employees to spend the requested number of hours in the factory (this would be a first necessary step in many Bulgarian companies), the hours spent should also generate added value for the company.

A recent international study about productivity has shown that, in the highly productive countries, on average 20% of the time is spent not generating any added value[1]. This means that a typical employee spends more than 90 minutes per day unproductively. If you extrapolate, based on the 500 employees in your company, you could consider that you have 100 employees too many[2].
The situation in Bulgaria is much more extreme. Since January 2006, Trust & Value OOD has analysed among others more than 10 large Bulgarian companies. The result of more than 60 detailed analyses shows that the average lost time (unproductive time) is above 40%. This translates in employees not generating value about 3 hours per day on average. In some extreme cases, the unproductive time approaches 90%.

We do not say that your employees are doing nothing. This could be one of the explanations. No, in most cases they are just working inefficiently, being trapped in a complex organisation and in unsatisfactory processes. They work a lot, but do not generate enough added value. Sometimes the situation is so bad, that they create negative added value by generating more work for their colleagues.

The situation may still be quite painless. Indeed the salaries are for the time being relatively low. But be careful, with the inevitable salary increases during the next years, it will be more and more difficult to finance such organisations. We hear many customers in Bulgaria complaining that the German customers negotiate prices that are way too low. Indeed, due to the poor productivity in Bulgaria, it is possible that they can produce cheaper in Germany than in Bulgaria.

The average salary in Bulgaria is about 30% of the average salary in Austria, for instance, and the average productivity is also about 30%. This means that it does not matter if I produce in Austria or in Bulgaria as far as the labor production costs are concerned. Due to other factors, the probability is then quite high, that I will chose to produce in Austria, rather to outsource to some partners I do not know yet.

Your choice is simple: you do something about it, or you don’t. If you don’t then the probability is quite high that your company will be acquired by some foreign competitors or will suffer heavily under their pressure and finally be liquidated. Fine you will say, I will just look for a joint-venture partner. That is what a number of companies have already decided. The result is a total impoverishment of the economical tissue of Bulgaria. Most of these international companies are not interested in investing in the long term. They are attracted by tax exemptions and low wages. If these two levers disappear, they will move to the next low wage country.

Why not redesign your organisation and processes first and enjoy the benefits of the productivity improvements. You can always think about selling your company later, a company that has a proven track record.

Trust & Value OOD is the first Bulgarian consulting company aimed at addressing the productivity gap between Bulgarian companies and companies in highly productive countries. We do not use fancy tools. We use a methodology which positive results have been proven over and over in the last 20 years in many counties around the world. This methodology has allowed your competition to move ahead.

During the next months, we will address the following subjects:

Organisation
How should I structure my company to make it more productive and accountable?

Case study:
All the decision making power and the responsibilities were delegated to the CEO of the company. This led to wrong decisions. Moreover the CEO had no commitment from his subordinates to improve the situation of the company. The proposed new organisation dramatically improved the decision processes and helped the top management concentrate on key issues.

Production function
How to measure productivity in the production department? Which indicators do I need? How can I improve my production layout?

Case study:
Due to the wrong sorting of the raw materials, the machine had a productivity of only about 50% (the machine was functioning properly only half of the time). The investment in a new production line could be successfully postponed due to the optimisation of the production processes.

Supporting functions
How can I restructure the supporting function to efficiently support the production department? Indeed the supporting function only generate added value as long as it generate value for the production department.

Case study:
The laboratory was not organised to support the production, but to act as a separate entity responsible of the analysis. Due to this situation, the results of the analyses were often too late for the production to intervene.

Quality management
How to organise my quality department? What is the role of the quality department?

Case study:
The quality management department was responsible for sorting the good products from the bad ones at the end of the production process and not for timely informing the production about the quality situation. As a result a high percentage of the production was lost as waste or re-entered the production process from the start, generating higher production costs.

Sales
How to organise my sales department to proactively generate sales? How can I improve the relationship between sales and production?

Case study:
The sales employees were not responsible for selling. They were just responsible for answering phone calls from the customers and for giving them a delivery deadline. They had no sales goals. Training and an adapted motivation system was introduced to help increase sales.

Purchasing
How should I organise the purchasing department?

Case study:
The purchasing function is basically inexistent in most company at a professional level. What is needed is just being bought without negotiating or looking for the best sourcing opportunity as a result the purchasing costs are way to high.

Employee motivation
How should I motivate my employees?

Case study:
In a number of companies the production employees are paid partially on a variable basis and get a higher salary than their managers. The managers who receive fixed loans are not interested in managing them and increasing productivity. They just fill a number of unnecessary reports.

Information technology
IT systems should only be implemented after the optimisation of the processes has taken place. By starting with the IT implementation, one just generate bad processes and bad IT systems. The IT implementation companies have no interest in optimising your processes. In most cases they just want to adapt them to their standards to reduce your costs.

Case study:
As SAP was only implemented in one company in the group, the internal paperwork could not be eliminated and the processes and organisation optimised.

Costing issues
How to define precisely the production costs of my products and services?

Case study:
As a consequence of the miscalculation of the production costs, most of the offers of the company for complex parts were too high (the company did not get the orders) and too low for simple parts generating financial losses.

The environment (relationship with customers, suppliers and the competition).
Most Bulgarian companies are still competing against their competitors in Bulgaria without seeing that the real danger comes from abroad. The lesson of the watch industry in Switzerland should be applied and collaboration strategies between Bulgarian companies developed before it is too late. Bulgaria needs a strong Bulgarian economy to successfully develop in the future. As Joseph Stiglitz mentioned in his book[3]"Countries often need time to develop in order to compete with foreign companies; to get this time, they may have to protect their nascent industries temporarily".

These are the 10 broad directions in which we can support you.
We would be delighted to get your feedback. Please do not hesitate to send us your examples, suggestions and questions so that we can grow together.

Since January 2006, we have identified an optimisation potential of about 12 Mio BGN in the 7 largest companies we have supported. Do not hesitate to call us for a free assessment of your company. You will not be disappointed.

[1] This calculation already takes into account that the maximum productive time cannot exceed 85%.
[2] (500 employees * 96 minutes)/480 worked minutes per day per employee
[3] Making globalisation work, Josehp Stiglitz, Penguin Books, 2006

Boosting productivity in Bulgaria (nothing new)

Original article

BOX-FOLDER-REPORT: 6-1-157
TITLE: Boosting Production in Bulgaria
BY: Stankovic
DATE: 1962-1-16
COUNTRY: Bulgaria
ORIGINAL SUBJECT: Research and Evaluation

--- Begin ---

CURT (B) - BOOSTING PRODUCTION IN BULGARIA F-112

Munich, January 16, 1962 (Research and Evaluation -
Stankovic) - The Bulgarian leaders are now doing their utmost to
increase labor productivity by using slogans of "moral and
political" stimulation rather than promising workers material
benefits for good work, according to Risto Bayalski, the special
correspondent of the Belgrade daily "Borba" in Sofia.

Writing in the paper's January 12 issue, Bayalski said that in Bulgaria future successes are based on two chief pillars: 1) the perfection of the process of production and 2) anticipated "patriotic enthusiasm at work" to be shown by the workers. Generally speaking, in Bulgaria nothing is said or written about material stimulus; it is not even mentioned as an element of the increase of labor productivity", Bayalski said.

Everything is done in the fashion of a mass campaign. Similar to the Chinese who once proclaimed the struggle against "four evils", the Bulgarian leaders have proclaimed the campaign called "the four bosom friends" operation. These "four bosom friends" are:

1) "the stotinka" (the hundredth part of a Lev);
2) "the gram";
3) "the centimeter"; and
4) "the minute".

• The stotinka" slogan means to avoid any waste and to save raw material;
• "the gram" calls for production of "everything" and as much as possible;
• "the centimeter" slogan propagates that "everything produced in meter form (such as textiles) should be longer than planned, even when the plan is based on the maximum possible calculation";
• "the minute" means to produce faster "thus making leaps forward in economic development".

Even though Bayalski did not mention China by name at all, his report is obviously aimed at alluding to past Bulgarian emulation of China by presenting the situation in Bulgaria as if its leaders were using certain Chinese formulas to increase labor productivity and production in general.

The title of Bayalski's report reads: "The 'Four Bosom Friends' Operation", he claims that no material stimulus is even mentioned but emphasizes throughout that "patriotic enthusiasm" is extolled instead; he further stresses that the awards for good workers are of a moral and political nature (for instance the names and pictures of enterprises and individuals who have distinguished themselves by following the line of the "four bosom friends" operation are regularly published even on the front pages of the Sofia and provincial papers); and finally his allusion to the "leaps forward" in economic development - all this gives one the impression that the Yugoslav journalist was more intent on voicing his indirect criticism of what is going on in Bulgaria, than on giving an objective picture of developments there. This is the more so if one knows that the struggle for material stimulus in Yugoslavia has taken on such proportions that Yugoslav workers would today ridicule anybody demanding that they increase their labor productivity and production simply because of "patriotic enthusiasm".

Is it really impossible to find employees in Bulgaria?

Most managers in Bulgaria are convinced that it is almost impossible to find capable employees in Bulgaria. Indeed it seems that most of them have left the country or live confortably without having to earn a salary. If today's real estate bubble is certainly one of the reasons to explain the sudden increase in purchasing power and decrease in work moral is is certainly not sufficient to give a full picture of the situation.

Most of our projects in Bulgaria have shown that it is not the resource shortage that is the issue, but the organisation of the companies and the low level of productivity. It is not an exception to find employees who generate value less than 4 hours per day, which corresponds to a productivity level of about 50%. In companies in Western Europe, the corresponding rate is at least 85% according to the annual productivity study of Proudfoot Consulting .

This means that about 30% to 40% of the employees can be made redundant without testing in any way the limits of the production processes, may it be in the manufacturing, service of public area.

It is facinating to see that companies which such a productivity level can still be profitable. In Western Europe, they would have been gone for a long time. This should of course be no reason not to address the issue. Indeed, with the growing level of the salaries and the increasing pressure of the competition, the profit margin will be squized soon.

Instead of looking for new employees, it would be more sensible to get an external view about your organisation and processes and about the quality of your workforce. Based on this analysis, you will know how to tackle the issues at hand and enhance the success chances of your company.

Companies like Trust & Value OOD have a long tradition of generating real value for their customers in Western Europe. They would be pleased to demonstrate their proven methods to you.