I really had a great learning experience at last week's LEI Lean Transformation Summit that was held here in Dallas. The event sold out six weeks in advance, so a lot of regular attendees got frozen out, unfortunately. All of the sessions were recorded and there will be a way to register to view them even if you weren't an attendee. I'll share details about that as I keep blogging about what I saw and heard from Rother, Pascal Dennis, and especially the Lean leaders from Starbucks and the great story they had to share.
I heard a profound idea from Mike Rother during his breakout session that expanded on some of the organizational concepts behind his book Toyota Kata: Managing People for Improvement, Adaptiveness and Superior Results
ROI is often a big issue when organizations start with Lean. Leaders are used to looking at a Return on any Investment. That's what we are all taught in our MBA programs – but it's often a very limiting view. “Investment” is usually much easier to calculate – and it's short-term and known. “Return” is much harder to calculate – it's long-term and going and it's often based on a prediction of the future.
I've usually coached people to not be too hung up on ROI early on – you especially cannot calculate an ROI on every little kaizen improvement that is done in the workplace. Even if you could calculate it, should you want to? Is it always worth the time? Maybe on the big things, but “don't sweat the small stuff.” As I blogged about recently (“What Are Barriers to “Kaizen” in Healthcare?“), Masaaki Imai wrote:
In Japan, the suggestion system is an integrated part of individual-oriented kaizen. The Japanese-style suggestion system emphasizes morale-boosting benefits and positive employee participation over the economic and financial incentives that are stressed in a Western-style system.”
This isn't just about ROI, it's about staff morale and engagement, giving them ownership over the process so they can improve quality, safety, and other important measures. Cost (and profitability) will follow as an end result.
So back to just one little part of Mike Rother's mind-blowing presentation:
Rother said most companies look at ROI to make “yes or no” decisions. Case in point, the American automakers did an ROI business case back in the day and decided they couldn't profitably build more small cars. So they didn't.
Rother said the Toyota approach would have been to say strategically that we HAVE to build small cars. The negative ROI calculation would have shown them how much they'd have to improve to be able to do it profitably. ROI should not get in the way of things you must do.
I had never heard that explained that way before. Does it ring true to others who have experience with Toyota?”
So back to the healthcare realm, people often assume that doing more preventive and primary care will reduce overall healthcare costs. Makes sense. Seems like the right to do for people's quality of life. There are some studies that show that, for certain preventive care – like cancer screening, doing more of it does NOT reduce total healthcare costs. But for some things, like immunizations, it clearly helps. See this Newsweek article for one view: “The Politics of Prevention: Cancer screening and other measures for heading off disease don't always reduce health-care costs.”
Maybe we should take the Toyota view on ROI. For the sake of each individual, maybe we decide we HAVE to do cancer screening. “Negative ROI” just shows us where we have to improve for it to make financial sense. Instead of just giving up after the ROI calculation, how can we innovate and improve to make it cost effective? Can we reduce the cost of cancer screening?
I think I like that view of ROI much better than what was taught in my MBA program.
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Thanks for your thoughts on this topic Mark. A very big issue in the c-suite these days, driving friction between CFO and operating exes among others. I’ve migrated many of my clients to the concept of value capture or “value release”, rather than ROI (which unfortunately has taken on a purely monetary connotation because of it’s original use as a financial ratio). I discuss this on EPMEdge quite a bit when I address things like project ROI and the need for better “back end” components to performance management (completing the “line of sight” if you will between strategic goals and specific improvement projects and actions).
Yeah, ROI seems to be a much better hindsight metric than a foresight metric. Easy to look in the rear view mirror and say what ROI was, but can you really predict ROI with enough certainty for everybody?
One other theme from Rother that merits another blog post of its own is the “fixed mindset” versus the “adaptive mindset” in people. How comfortable are you with uncertainty? If you have a fixed mindset, the idea of wanting a known future ROI is probably more appealing, but that seems like “fake certainty” in a way.
I really like this take on ROI. It is very similar to the people who say we our batch sizes have to large because our changeovers are long. Instead of saying, we need our batches sizes to be this small, how do we improve changeovers to make this feasible.
Thanks for sharing, Mark.
Yup. Agreed. Too buck backward looking metrics (here’s a post of mine on probs with “rear view mirror” management ( http://epmedge.com/2011/03/10/managing-through-the-rear-view-mirror-a-dangerous-practice-for-any-business/ ). I’d be careful not to move too quickly to dismissing ROI, but rather, complementing it with other “value measures” associated with project success or value of process innovations- in a variety of domains. What “value” has the innovation made to the business? Most CFO’s think financial ratios are the only ways to measure value. Need to climb out of the box imo. (I probably just ticked off some of my CFO clients :), but they expect my candor by now)
I’m not saying the alternative to focusing too much on ROI is to just “wing it.”
Thanks for sharing some alternatives to help provide a good middle ground.
I think it’s an interesting example you gave regarding immunizations versus cancer screenings in reducing cost of health care. Fundamentally, cancer screenings are inspections after-the-fact. The person already has cancer once it’s detected, then it’s about applying corrective actions to slow or “eliminate” the cancer, which may not have a systemic cost less than not screening. Immunizations, however, attack the root cause and prevent the disease from occurring in the first place. It is the ounce of prevention versus the pound of cure. The value that this displays is that inspections never give you the “ROI” that prevention (error-proofing) does. But try proving with traditional accounting that the $1 immunization shot prevents millions in health care costs when you haven’t yet experienced or realized the actual impact of not doing the $1 shot. Traditional ROI accounting would tell you that the screening has a better ROI until you can measure the true cost of not immunizing. Not to mention that people have to make these decisions, and they bring all kinds of biases into those decisions. The decisions are not completely based on the numbers, which is why you can show someone statistics all day long that eating well will prevent most cancers, but they will keep washing doughnuts down with mocha frappuccinos. In my experience, “show me the ROI” comes out when leadership doesn’t want to do something. I think lean is ultimately about a belief in something that can’t be measured. If you don’t believe that lean is the right thing to do, you can come up with 1000 reasons why it’s not worth it. If you do believe that lean is the right thing to do, calculating ROI should be the least of your worries.
Good point about cancer checks being “inspection,” but it’s more proactive than just waiting for symptoms to present themselves.
Part of the problem with ROI is that part of the cost (doing the immunizations) is known where part of the cost (the cost of NOT doing it or the benefit from prevented disease) might be a projection or a guess.
A secondary issue on the cancer screening topic is that, as our inspection technology improves, we’re seeing a lot of anomalies in the data that we didn’t see ten and twenty years ago.
One of the reasons some studies have questioned the RoI for screening is that a high percentage of screening leads to false alarms.
This is a real technical issue for healthcare providers and the technology companies that support them. Looking at RoI in the way that Rother suggests highlights this kind of issue in a meaningful way.
Beyond false positives, part of the issue is (from what I’ve read) that the cost of testing LOTS of people far outweighs the number of cases you catch for certain cancers. The controversy over raising the recommended age for mammograms is part of that calculus…
http://www.nytimes.com/2009/11/17/health/17cancer.html
Testing at 40 vs testing at 50… I guess the argument being made for raising the age to 50 is that you don’t catch many cases between 40 and 50.
But what seems to make sense for a huge population doesn’t seem to make sense for the perspective of an individual.
Great post, Mark.
The concept of ‘ROI’ had it’s genesis in Adam Smith’s in his treatise “An Inquiry into the Nature and Causes of the Wealth of Nations”, or simply ‘Wealth of Nations’ to us today.
Smith formed his concepts for the division of labor into smaller tasks through the example of a capitalist providing a machine which could produce more unit items per worker. Therefore, the worker and the capitalist realized an increase in their measure through the beneficence of the capitalist’s investment- a return on capital.
The concept has probably become corrupted over time and has little to do with increasing the worker’s measure.
What about this notion of ROI in healthcare.
In a system performing less than hoped for, ie an ED with long wait times, ask just what would it take in terms of staff and resources and what would it take in cost to get the service to the desired level tomorrow. If the improvements subsequently accomplished and the training and development needed cost less than this, the ROI is positive.
As in Toyota’s use of ROI, as described by Mike Rother, we all agree we have to do it; what will it take to do it in a financially acceptable way
Mark