In the second of his series on the incorporation of lean into the professional world, Max Cardew, business productivity manager at the Commonwealth Bank of Australia explores which is better: operational risk or lean?

Ideologically, the methodologies of operational risk (OR) and lean six sigma (LSS) appear to be poles apart, with OR assuming a role around good process governance, whilst the prime LSS objective focuses on good process flow.

However, when you scratch below the surface of these institutions, we find not only do they both hail from common origins, but they share similar challenges in establishing themselves within the corporate landscape.

This article explores both the benefits business units can expect by leveraging these opposing forces, and the benefits OR and LSS can expect by leveraging the vast body of knowledge shared between them.

Organisations have long benefited from the creativity generated through healthy tensions between seasoned institutions such as sales and marketing. However, OR and LSS, who have equally competing goals, remain in their corners.

So why should we create another business arena for factional fighting when we already have so much to contend with?

Today customers demand faster, more complex products and processes to deliver these will either make or break us. By pitting the two parties responsible for liberating customer value, without compromising the risk threshold, against each other, we have created a forum where we can safely challenge reasoning to optimise the process’ ebbs and flows.

Before exploring how we can leverage these opposing ideologies, we need high-level overviews and some background on both OR and LSS in order to better position this opportunity.

Driven by globalisation pressures, LSS is a process improvement programme resulting from a fusion of lean engineering with six sigma quality.

The lean strategy is all about speed and efficiencies through waste elimination, flow, and standardisation – how do we work faster and more efficiently?

The six sigma strategy is all about process variation and customer satisfaction targeting variation reduction, rework elimination and process control – how do we eliminate process variation and defects?

Although both strategies had been around for decades, it wasn’t until Michael George coined the term in his 2002 book, Lean Six Sigma: Combining Six Sigma with Lean Speed, this marriage took off.

OR, on the other hand, was driven through a series of crises that forced organisations to rapidly batten down their hatches and review their exposures. OR, as we know it today, is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or external events. This definition includes legal, but excludes strategic and reputational risk.

Although risk has been a recognised concept for years, it wasn’t until Peter Bernstein wrote Against the Gods: The Remarkable Story of Risk in 1998, managers started to pay closer attention. This was further cemented by the number of crises during the 1990s which demolished some of the organisations considered indestructible at the time.

Contrary to LSS, which is deployed voluntarily, OR was referred to in the early Basel II consultative regulations, and then enshrined in the final 2004 version, virtually instructing financial organisations to implement an OR framework group wide.

 

What is the source of tension?

It is a combination of guiding principles and the maturity of the methodologies. With respect to guiding principles, we will first look at OR.

Given a charter of hope for the best but prepare for the worst, OR practitioners perfected the art of identifying what, where and how big risks may materialise – especially when contemplating new initiatives. The focus is primarily on people i.e. opportunistic behaviour, human error. The methodology is there to assist the business with managing their risks without compromising their risk appetite.

LSS on the other hand can be guilty of being hard-wired to seek and destroy seemingly bureaucratic obstacles under the guise of voice of the customer. Process centric – any human anomalies are generally a result of process deficiencies. Views the organisation as the sum of processes. The methodology is designed to help the business see processes for what they really are and make informed decisions on how to improve them and if doesn’t appear to add value – get rid of it.

When we think of maturity, we have two components to consider; the methodologies themselves and the practitioners.

Having been around for less than two decades, both methodologies are in their adolescence and seemingly forever in a state of flux. There is nothing novel when it comes to content, for both have evolved from best practices across multiple organisations, industries and disciplines. Identifying the right tools, techniques and procedures remains a constant challenge due to the complexities of each business requirement and therefore the methodologies can remain in a conceptual state, totally left to the discretion of the practitioner of how they apply it.

So when formulating a convincing argument, these factors can be the source of varying degrees of uncertainty when it comes to advising the business unit leaders. Choices are often swayed by who has the loudest voice.

 

Why should we encourage this?

When there is no conflict, nothing changes. Conflict represents an opportunity to stress test processes. When these methodologies are applied in the pure sense, we get a balanced view.

OR practitioners are masters at providing reasonable assurance when delivering a product or service. However, from a LSS perspective this conservative nature provides a source to challenge seemingly over controlled processes, riddled with stale, ineffective, redundant and duplicated controls inhibiting the process flow.

But LSS practitioners can sometimes be accused of being cavalier or overzealous. Often rewarded on the amount of efficiencies harvested, and in some cases, from improvements which naïvely remove key controls. OR practitioners have the best seat in the house to keep LSS teams honest to the process.

 

Are we that different?

On the surface, the respective frameworks which drive these methodologies appear to be poles apart, but ironically, as soon as you lift the lid, we find some surprising commonalities.

Both employ the tools and techniques found within the doctrine of decision science. These range from soft tools such as brainstorming, root cause analysis, prioritisation, codification, categorisation and scoring techniques to some of the more complex tools such as modelling, analytical hierarchy processing, as well as hard tools such as those used extensively in statistics such as central limit theorem, regression, Bayesian theorem and statistical process control.

As these frameworks are designed to address issues in sub-optimal processes, they follow a similar logical order of define, measure, analyse, (Improve for LSS) and control. And of course, both heavily depend on a governance structure including peer reviews, documentation and reporting. Not only are there these commonalities within respective frameworks, we have similar struggles in deploying them.

To some businesses, OR and LSS initiatives are stigmatised as necessary evils. Business leaders would much prefer to focus externally – increasing profits and building the organisation, rather than the internal distractions of whipping unresponsive processes, driving costs out and/or constantly concerned with ticking time-bombs (rear-view mirror management).

So, it is fair to say most major financial institutes have varying degrees of OR and LSS engagement. Senior leaders are always quick to embrace initiatives that add real value to their operation, the challenge is to convince what I call the frozen middle – those managers who rightfully are protecting their BAU practices to deliver their goals and objectives (set by the senior managers) within the operating model they know. They have been bitten before from those halfcocked, failed programme deployments – programme du jour.

In addition, frameworks annex a number of tools and techniques which are, to some degree, already practised within pockets of the organisation – or at least the BU leaders believe they are. The challenge we both face is convincing BU partners of the value we bring in totality as opposed to cherry-picking components of the frameworks.

Organisations are inundated with well-intended initiatives such as OR and LSS creating a scramble and competition for share of mind within the corporate landscape. Crucial to survival is having a voice in the upper echelons to secure support, funding and ultimately, resourcing. As with all cost centres, we continually need to demonstrate worth from both a value add and cost perspectives. To achieve this, both LSS and OR experiment with different operating models to try and get the right fit to raise awareness, engage the business and deliver the optimal solutions (centralised-decentralised structures, functional-operational-matrix management).

However, it doesn’t matter how polished methodologies are or how well they are embraced within the businesses, they both heavily depend of the quality of resourcing.

OR and LSS roles are typically filled from those willing to take a chance on a mid-career sea-change. It is doubtful anyone graduating from tertiary education aspired to be a LSS or OR practitioner. Therefore, when these initiatives first appear on the corporate radar, the team to deliver such an important event is either hired externally or handpicked – having previously secured the confidence of senior management. As the programme gains momentum, it quickly starts to internalise with the business units identifying the next cohort of practitioners. Often middle management does not understand the importance of the respective programmes and tends to assign these roles to those that are not their key personnel. With no prior aspiration to be a LSS or OR practitioner.

To add even more complexity, the initial training material is developed and delivered by experienced consultants. These courses are usually designed for the original handpicked team – those that are well briefed and quick learners – so the content is concept rich but application poor, due to the programme immaturity and lack of reference material.

Therefore, when the next cohort of practitioners land in the classroom, they can be like deer in the headlights. Not only are they on a steep learning curve to try and absorb the amount of new concepts, tools and techniques of their newly adopted professions (voluntarily or involuntarily), but are also expected to apply it in the complex, politically charged business environment – a clear recipe for disaster.

What frustrates the industry and practitioners even more, is the proliferation of credentials that have flooded the market with every training organisation claiming that their programme is best practice. As both methodologies have been well defined for a number of years, it is difficult to understand how they could have become so diverse.

 

What are the real synergies?

Placing ideologies aside for now, the two methodologies have so much to learn from each other that it is only limited by one’s own imagination.

 

Can OR learn from LSS?

  • How to harden up all their subjective analytics: LSS has spent a long time simplifying and building support structures so even the most complex statistical computations are available to the non-analytically minded practitioner in order to make more accurate, less biased decision making.
  • How to facilitate major group workshops: sharing the suite of soft tools and techniques to gain engagement, align thinking, extract tactic knowledge, and optimise output.
  • How to apply the customer lens – voice of the process: an end-to-end view of how the process currently performs todays and any gaps from customer expectations.

 

Can LSS learn from OR?

  • The value of assurance. No business venture is without risk. From a lean perspective, OR are the masters of establishing the tasks within a process that add real value to the business (BVA). These checks and balances are installed allowing businesses to participate in the market as a profitable entity. The control environment is to first and foremost protect us from any foreseeable event which may not be obvious when conducting a process reengineering exercise.
  • More advanced causal analysis of what drives risk to provide an alternate view when future-proofing processes.
  • How to choose battles wisely. That is, how to deliver goods and services in an imperfect world. Not all processes in the transactional world need to be operating within six sigma (i.e. 3.4 defects within a million opportunities), especially if the consequences are fairly insignificant and well within a risk appetite (cost of doing business). Sometimes LSS can be guilty of using a sledgehammer to crack a walnut. Installing a simple control regime can offer the same reliability through attention to detail as a major process re-engineering exercise.

 

The corporate pact

Equally important, collaboratively OR and LSS have an opportunity to spearhead some of the challenges we both endure.

These days, the constant wave of changes subjected on the businesses from support groups like LSS and OR, can be overwhelming – especially if there is a concentration of initiatives enforced upon single teams. By coordinating a rollout strategy, you can firstly limit the amount of distractions to the business unit and achieve a higher quality outcome, and secondly, the level of change readiness of the business units can be shared between parties to coordinate where best to spend the effort.

Young operations such as OR and LSS will continue to compete with traditional career paths though the more recognised breeding grounds or the tried and proven practice of hanging on to the right tailcoats. The old adage that like hires like is still alive and well when it comes time to filling vacancies. Middle management teams are often still swayed by those potential candidates who learnt the ropes just as they had to.

 

Would collaboration improve the struggle to attract talent?

As already identified, the similarity between these two professions suggests both are looking for similar competencies. Building a case based on how these competencies will be enriched during a tour of duty and lobbying HR, will not only create a new pathway to a valued leader, but also send clear messages to those that are frustrated with their career that a stint in OR or LSS is a viable alternative.

One by-product of this approach would be the thawing of middle management teams with respect to embedding these programmes, as practitioners begin to lead their own functional teams.

 

What does this all mean?

By continuingly challenging and securing the front and back office processes, LSS and OR methodologies have earned their place as a permanent contributor within the corporate landscape. Until now they have always been referred to as discrete initiatives with unique challenges. Establishing an open communication channel would elevate the coordinated programmes to a higher top of mind within the corporate community and expedite engagement. In addition, an understanding of the crucial roles each plays in the pursuit of the organisation’s prosperity provides opportunity for robust debate. Thus allowing these methodologies to go head to head to get their voices heard so business leaders can be smart about taking chances.

Relying on business units to appoint who should and should not join the programmes will not guarantee a quality service. Establishing a progressive development path though these methodologies will have the right employees putting their hand up, as it provides an alternative route for tomorrow’s leaders.