Introduction.

The Goal-Achieving Continuous or Ongoing Improvement

Fundamental to the success and viability of any organization is a realization (by the management team) that improvement is not a once-off event and that continuous or ongoing improvement requires continuous change. Unfortunately, not all changes result in improvement and continuous changes can jeopardize stability. Ensuring that every significant change results in an improvement (in both performance and stability) for the organization as a whole is one of the most significant challenges faced by the management of any organization. It requires a reliable focusing mechanism to differentiate between all the many parts and processes that can be improved from those few that must be improved (to achieve more organization goal units now and in the future).

Dr. Eli Goldratt (1986) became one of the continuous improvement pioneers in the modern era with his book, The Goal. Its subtitle hints that the real goal for organizations is not just to make more money now and into the future, but simply to ensure the organization is on a "Process of Ongoing Improvement," or POOGI, to achieve sustainable growth and stability. Achieving POOGI in any organization not only requires a reliable focusing mechanism (to identify where and what to change and when and what not to change), but also a holistic decision-support mechanism (to judge the system-wide or global impact of changes). Then, a fast and reliable feedback mechanism is needed for auditing progress/compliance or for identifying other important system performance gaps or variations. Even more importantly, it requires a different mindset and thinking about improvement at all levels in the organization to systematically identify and challenge the policies, measurements, behaviors, and underlying assumptions that limit the current organizational performance.

Copyright 2010 by Dr. Alan Barnard.

In the introduction to The Goal (1986), Goldratt describes such a process: Finally, and most importantly, I wanted to show that we can all be outstanding scientists. The secret of being a good scientist, I believe, lies not in our brain power. We have enough. We simply need to look at reality and think logically and precisely about what we see. The key ingredient is to have the courage to face inconsistencies between what we see and deduce and the way things are done. This challenging of basic assumptions is essential to breakthroughs. Almost everyone who has worked in a plant is at least uneasy about the use of cost accounting efficiencies to control our actions. Yet few have challenged this sacred cow directly. Progress on understanding requires that we challenge basic assumptions about how the world is and why it is that way. If we can better understand the world and the principles that govern it, I suspect all our lives will be better.1 One of the major "inconsistencies" relating to the topic of continuous improvement and auditing is why, especially considering the advances and discoveries over the past 100 years in continuous improvement and auditing of organizations and the intense competitive pressures, so many of the changes made in organizations are not sustainable. And why do most changes "fail"-either not resulting in any measurable improvement in organizational goal units or even causing decay in performance to the extent that organizations themselves frequently fail.

Purpose and Organization of This Chapter

This chapter aims to provide a framework for designing a continuous improvement and auditing process within organizations from a Theory of Constraints (TOC) perspective and to share some of the important new TOC developments in this field since The Goal was first published in 1984. The chapter starts with the definition of key concepts and a brief historical perspective on this subject. It then provides an overview of the current gap, extent, and consequences (vicious cycle) related to traditional continuous improvement and auditing methods and mistakes (why change). We then examine, the underlying conflicts and assumptions that need to be challenged, (what to change), the solution criteria and direction and details of a solution to break these conflicts and prevent new undesirable effects (to what to change), and finally how to overcome the typical implementation obstacles (how to cause the change) to implementing such a TOC-based continuous improvement and auditing solution.

Key Concepts and Definitions

Continuous improvement (CI) is defined simply as the continual improvement (in organizational or system goal units) over time. CI can also refer to the continual improvement of subsystems, processes, or products or services provided by an organization, but with the warning that unless these "local improvements" can or will contribute to improving the organization as a whole, they cannot be called improvements but rather "local optima." In fact, the Japanese word Kaizen, made famous by Masaaki Imai's book (1986), Kaizen: The Key to Japan's Competitive Success, is frequently used today as a synonym for CI because the translation of "kai" (change) and "zen" (good) literally means "good change" (improvement for the system as a whole). In the context of this chapter, "continuous" is used to refer to all types of ongoing improvement rather than as a way to differentiate small marginal (low-leverage) improvements from large step-change (sometimes defined as discontinuous or high-leverage) improvements.

Continuous improvement process (CIP) is by definition a closed-loop cycle of sequential steps designed to bring about continual improvement through a process of discovery, application, review, and corrective action. The Shewhart cycle (Plan-Do-Review-Act), Six Sigma's DMAIC (Define-Measure-Analyze-Improve-Control), and TOC's Five Focusing Steps (5FS) are among the best known.

Change impact is classified into three types, with Type 1 referring to a change that results in a measurable improvement, Type 2 referring to a change that did not result in a measurable improvement or decay (within the "noise"), and Type 3 referring to a change that resulted in a measurable decay in performance of an organization as a whole or a specific process output.

Auditing is defined as an ongoing process of review of an organization, its process, projects, products, services, or subsystem's performance and compliance against standards or expectations. In the words of Winston Churchill, "However beautiful the strategy, you should occasionally look at the results." Auditing is an important part of CI in any organization as it provides a practical feedback mechanism for stakeholders with the objective to reduce the time to detect and time to correct performance gaps, variations, or noncompliance. It is in this more general context that the terms "audit" and "auditing" would be used in this chapter rather than the more common use where "audit" refers only to internal or external financial auditing. As part of a CIP, there are typically three types of audits that are done. Compliance auditing is the organization doing what it should be doing (and not doing what it should not be doing). Performance auditing is the organization performing as well as it is expected to perform. Potential auditing is the expectation that the organization do (much) better.

A Historical Perspective-Standing on the Shoulders of Giants

The desire and capability to continuously improve our lives and understandings of the systems with which we interact have played a critical part in the evolution of our species. But it was not until the development of the "scientific method"-initially formulated by Aristotle around 350 BC and improved upon through significant contributions by the likes of Ibn al-Haytham (9651040), Roger Bacon (12141294), Francis Bacon (15611626), Galileo Galilei (15641642), Rene Descartes (15961650), Isaac Newton (16431727), John Stuart Mill (18061873), and more recently Karl Popper (19021994)-that there was a systematic way to challenge and continuously improve our assumptions, knowledge, and methods to analyze, improve, manage, and predict causes and effects within a specific type of system. The scientific method is simply defined as a systematic or iterative method in which a problem or objective is identified, relevant data is gathered, a hypothesis is formulated, and the hypothesis is empirically tested (e.g., through validation of effect-cause-effect predictions) and then improved upon after review of the experimental test results. The scientific method allows scientists to test theory and methods with experimentation and allows them to use insights gained from experimentation to develop new or improved theories or methods.

Some of the most important discoveries to advance our knowledge and methods of CI and auditing of organizational performance have been made by the likes of Taylor, Gilbert, Ford, Shewhart, Deming, Juran, Ohno, and Goldratt, who knowingly or unknowingly simply applied the scientific method to the science of analyzing, improving, managing, and predicting the performance of organizations.

Many of these discoveries capitalized on the importance of reducing overall process time delays and later, the importance of reducing quality defects, process variation, lost time on capacity constraints and overproduction to improve the overall performance of the system. Benjamin Franklin's famous quote, which he shared with a young tradesman in 1748, "Remember that time is money," specifically referred to the opportunity cost of wasting time on something that could be done faster, with less defects or that should not have been done at all. Simply stated, slow processes (or ones that contain defects or variation) are expensive processes (George, 2002).

These discoveries resulted in powerful CI methods such as the Toyota Production System (TPS), Lean, Total Quality Management (TQM), Six Sigma, Business Process Reengineering (BPR), and TOC-each with a large reference bank of success stories and "best-practices" that could provide a baseline for auditing (e.g., the ISO 9000 family of standards for auditing TQM systems).

But with such a powerful and tested toolkit of CI and auditing methods, one would expect that the adoption rate of these tools would be very high and that the majority of those who really tried to implement these methods and tools would achieve major jumps in performance compared to past results.

Why Change?

Introduction.

Despite the impressive reference bank of successes and the powerful insights of today's mainstream continuous improvement methods, they all seem to struggle with achieving higher levels of adoption, with sustaining and expanding on initial improvements, and probably most importantly, with finding ways to reduce the significant percentage of failures and wasted scarce resources due to these failures.

This section provides an overview of the analysis for answering the question "Why change?" (the conventional way) by reviewing the typical improvement gaps within many organizations (and individuals), starting with a common improvement challenge and then a literature review to quantify the extent, consequences, and vicious cycle related to the high failure rate of most "improvement" initiatives within private and public sector organizations today.

The Improvement Gap and Challenges

There are many differences between types of organizations and within organizations from the public and private sectors. However, all goal-orientated organizations (and individuals) have two characteristics in common: 1. They are complex systems (many parts and many interdependencies between the parts) that make them difficult to analyze, improve, manage, and predict the impact of change.

2. There is continuous pressure to achieve more (goal units) with less (resources) in less time resulting in conflicts such as "do what is good for the short term vs. do what is good for the long term" and "do what is good for one part vs. do what is good for other parts (the system).

Figure 15-1 shows an example of this pressure and challenge to improve resulting from a large growing gap between stakeholder expectations (the "red" curve) and actual performance (the "green" curve).

For private sector organizations, this challenge manifests in the continuous pressure to close the gap between actual and expected short- and long-term returns for shareholders. For public sector organizations, the challenge manifests itself in the ongoing pressure to close the large and frequently growing gap between the deteriorating levels of service delivery and infrastructure and a growing demand for such services in the areas of health, safety, education, energy, and telecommunications-especially in the developing countries around the world. For individuals, the challenge manifests itself in the difficulty to maintain a balance within the various aspects of our lives-some struggle with gaps in their self-confidence, others with gaps within their health, some with gaps in their relationships, and others with gaps in financial security.

Organizations and individuals also share three types of responses to such pressure to change due to current and likely future performance gaps and unacceptably high variations that can cause system instability: FIGURE 15-1 The red curve challenge. ( E. M. Goldratt used by permission, all rights reserved. Source: Modified from Goldratt, 1999).

1. Don't change (to prevent decay or at least to prevent wasting resources).

2. Make many small- or low-leverage and low-risk changes (to maintain stability).

3. Make few large- or high-leverage and possibly high-risk changes (to achieve growth).

Figure 15-2 shows the uncertainties and the related conflict that determines which of the three responses will be the most likely for a specific stakeholder. When organizations (and individuals) are faced with the reality that their performance is no longer improving at the required or desired rate or have unacceptable high variation, they face the risk of performance decay if they don't change (the uncertainty of not changing). At the same time, if they decide to change but "play it safe" by targeting many small incremental improvements, they will probably risk not meeting their growth objective, while if they decide to target the few large step-change improvements, they risk instability and even decay, which could threaten the survival of their organization (the uncertainty of changing).

These uncertainties put all stakeholders who feel or are held responsible for the performance of the system into the conflict on the right-hand side of Fig. 15-2. In order to achieve ongoing success, stakeholders feel they must meet the required or desired growth objectives. In order to meet these growth objectives (to reduce gap or variation), they feel pressure to change. At the same time, to achieve ongoing success, stakeholders also feel they must ensure that the requirements for stability (and survival) are never compromised, which contributes to the pressure not to change or at least not to initiate any step-changes that could jeopardize stability and even survival.

FIGURE 15-2 The uncertainty and dilemma related to the improvement challenge.

The Types of Management Mistakes When under Pressure to Change

The design of a continuous improvement and auditing system (to create a learning organization) should start with classification of the types of mistakes made that can block continuous improvement. There are two types of mistakes2 (Ackoff, 2006): Errors of commission, doing something that should not be done or not doing the right thing properly; and errors of omission, not doing something that should have been done. Ackoff warned that we learn little from doing things right or even from doing the right thing at the right time. Most learning comes from doing the wrong thing or doing something wrong. However, in order to learn from such mistakes, they must first be detected, their cause or source must be identified, and a solution must be developed to prevent such mistakes in the future. Unfortunately, in most organizations mistakes (especially errors of omission) are hidden, sometimes even from those who made them.

But what percentage of the changes made by management result in measureable and sustainable improvements that meet the expectations of all stakeholders (Type 1 impact) versus what percentage of changes fail to meet measurable objectives (Type 2) or cause decay in performance (Type 3)?

The Extent and Consequences of the Failure Rate of Change

The extent of failure rates of different types of improvement or change initiatives together with the extent of organizational failures can provide a good indication of the consequences of errors of omission and commission.

The Failure Rate of Improvement/Change Initiatives

A representative sample of research studies and surveys (listed in Table 15-1) shows that regardless of the type of change initiatives, between 50 and 80 percent of these initiatives fail to meet their original objectives, are stopped before completion, or sometimes even cause the organization's performance to decay. The only study that formally reported that no failures or disappointments were reported was conducted by Mabin and Balderstone (1999) involving implementations of TOC at 100 companies.

Analysis of the studies reporting high failure rates shows that the vast majority of the changes are reported to fall into the second category of change impact-where there is neither a direct measurable benefit nor decline. Of course, the "cost" in these cases is not only the wasted costs or investments incurred (without benefit), but also the wasted opportunity costs of not applying scarce resources (especially "management" time-the real constraint in most organizations) in changes that would have improved the system performance. This also does not to mention the impact of such a high failure rate on people's reduced motivation and expectations for future changes. Considering such a high percentage failure rate of change initiatives, what is the failure rate of companies and organizations?

Failure Rates of Companies

When it comes to companies, research studies show that failures are also statistically much more likely than successes. Since the advent of the modern corporation, over 10 percent of all companies in the United States (the largest and most successful economy in the history of the world) fail every single year; 22 percent of the top 100 companies at any given time drop from the elite rankings in the next decade; and 50 percent of globally successful companies go extinct within the lifetime of a modern human (Ormerod, 2006, 13). A study by the U.S. Census Bureau (www.sba.gov/advo/research/data.html) showed that 25 percent of new businesses started in 1992 failed within the first year and by year 10, the failure rate was 70 percent.

TABLE 15-1 High Failure Rate for Various Change Initiatives and IT Projects Whenever we see such large failure rates, it is quite likely that there is some vicious cycle at work where actions taken with the intent to correct a situation have the opposite effect. The next section provides insights into the vicious cycles seen in many organizations that are not improving at the desired rate or within those that no longer exist (i.e., the ones that experienced catastrophic failures).

The Vicious Cycle Related to the High Failure Rate of Change

Many of the studies reviewed not only quantified the extent of the high failure rate of change, but also analyzed the most likely causes and consequences of the high failure rate. The consequences of the high failure rate mentioned in most studies are no surprise-higher resistance to change for future initiatives and lower expectations for the likely impact of future initiatives. What might be surprising (unless readers have experienced these themselves) is that there is also a remarkable consistency in the findings of the different studies (regardless of type of change initiative) on the major reported causes. Most of the studies list the two main causes of the high failure rate as "Resistance to change" (especially by middle managers) and "Lack of active support or under-resourcing by top managers." This is reportedly caused by the project team's relatively low expectations of the likely benefit of the proposed change (i.e., what you can't quantify, you can't justify the allocation of scarce resources). But these two factors are the same as what was identified as the consequences of the high failure rate.

FIGURE 15-3 Vicious cycle related to high failure rate of change initiatives.

When a specific behavior is both a consequence and a cause, it means the system is likely to be stuck in a vicious cycle (Senge, 1990, 8083) such as shown in Fig. 15-3. The higher the failure rate, the higher the resistance and the lower the expectations of stakeholders. Moreover, the higher the resistance, and the lower the expectations, the more likely those necessary changes will be blocked or the necessary changes will not receive the full support and resources needed to make them a success, which again increases the probability for failure. Over time, a vicious cycle such as this stabilizes and soon those trapped within the cycle conclude that a response of "it will never work" is a safer response than embracing new changes or that simply, considering the complexity and uncertainties within their system, this (high failure rate) is probably the best they can do.

This fear related to the high failure rate of changes can also explain why changes that focus on local cost, waste, or process variation reduction (low-leverage changes) are more likely to be supported because they are perceived to be lower risk and more certain. High-leverage changes that focus on "changing the rules" are less likely to be supported because they are considered to be high risk and less certain.