We don’t want to get too carried away with excitement but an article in the HBR blog gives a glimmer of hope that the folks with the big brains just might be capable of learning something after all. In The Most Common Mistake People Make In Calculating ROI, a guy by the name of Joe Knight suggests that cash is king. “Analyzing ROI isn’t always as simple as it sounds and there’s one mistake that many managers make: confusing cash and profit,” he writes.
To be sure, Knight is not a Harvard academic – not an academic at all for that matter – but the folks at HBR did publish his article, which is a positive sign. Instead, Knight is a consultant and CFO of a leanish sort of company called Setpoint Systems, Inc. He wrote a book called Financial Intelligence, which is a pretty good explanation of the accounting numbers the numbers freaks worship.
The benefit of Knight’s article and his book (which also stresses cash, rather than paper profits) is that cash flow generally aligns with process flow, and cash is a better measure of leanness. At the very least it boots aside many of the worst aspects of GAAP that present the biggest barriers to lean.
But at the end of the day, while Knight’s article represents a nice little step in the right direction it is still just that – a nice, small, first step; and a long way from where management needs to be.
What started me on the topic of ROI was a request from a blog reader who wrote: “My CEO and Operations VP are both Harvard MBA guys (literally) and it’s hard for them to contemplate anything that doesn't fit their ROI templates. I think the challenge for the Lean community is how to couch the discussion in terms that the traditionalist can relate to. They are numbers guys… If there was a Lean ROI tool that we could all use to better quantify your positions we would be more successful converting the uninitiated.”
The problem with the reader’s request, while certainly understandable, is that it is asking to use a meaningless and irrelevant measure to quantify lean. Return on a Lean Investment? What investment? The return is virtually limitless and the investment is in thinking and culture; the time and stress needed to transform hearts and minds, starting with senior management’s. How can one possibly quantify the mental and emotional stake lean leaders make that drives the transformation?
Lean isn’t for sale, therefore the investment can’t be quantified. I suppose you can add up the cost of having the likes of me or one of my friendly competitors help you out a bit, the cost of a few books or the Gemba Academy training series; or the cost of sending a few folks to a Summit or two. But none of that is an absolute requirement, and each company spends more or less on such stuff depending on its culture, leadership and how change is best managed in the particular company.
It’s a bit of a conundrum wouldn’t you say? Lean is about reaching a radically higher level of performance by engaging in a radically higher level of thinking and understanding of the business and its people, rather than managing by the numbers. The Lean ROI question is basically asking for the numbers to support, not managing by the very numbers being requested. It’s like asking the engineers who develop electric cars to quantify the benefits in terms of miles per gallon – it’s an irrelevant and impossible request because the electric car doesn’t use gallons; it uses volts.
The ROI on lean? Whatever senior management wants it to be.