Last year I predicted that enterprises would take an increasingly holistic systems view. I said “they will take an increasingly strategic view of improvement, coordinating change across divisions and functions to achieve a higher overall level of performance. This trend is reversing [of] short-term, every-division-for-itself fractionalization…[so that] the Enterprise, at the end of 2012, will look more like an effective, coordinated whole and less like a collection of disparate…parts.”

This happened as predicted. One of the best indicators of it is the rapid acceleration since that time of “reverse offshoring” or “inshoring.” Reverse offshoring is the return of business from lower labor-cost nations where it had been transferred in previous years.

Offshoring is a useful tactic — in some situations. Most of the time it is one of the most myopic tools in all of business. For the last 50 years, all major business schools have defined labor and overhead costs in the most simplistic and suboptimal way possible (as they still do today). They taught upcoming leaders to use the narrowly-defined “unit-cost equation” to drive critical business decisions. They ignored significant and subtle system-level costs, thereby harming many companies and entire nations. As Patrick Dixon of Red Prairie recently said, “we cannot manage supply chains …with the complexity we now have across very long distances.”

But in 2012 we also saw more and more leaders turning towards a systems approach. A 2012 EEF manufacturer’s association survey found that 40% of companies are bringing production back inhouse. Another 25% are returning to local suppliers. IBM’s famous prediction that IT would one day begin inshoring has come true as companies have realized that “new jobs being generated in the current information-intensive economy require management and analysis skills, which typically need to reside close to core operations” (per a 2012 study by The Hackett Group).

A systems perspective acknowledges the hidden and critical holistic costs and risks. It increases velocity and agility. Reverse offshoring and other signs show that more and more businesses are understanding the “extra factors” they must consider to become a more-effective business system.

The heart of a modern enterprise is the knowledgework it does. How to run a factory effectively is fairly-well understood these days. Strategy, market positioning, effective services and the like are what makes for an effective business. These are all knowledgework activities.

We will see enterprises and knowledgework leaders who began adopting the systems view in 2012 start to move it out, in 2013, from under the mass production paradigm into the Lean paradigm.

Mass production institutionalizes suboptimization through principles like maximum utilization (aka “efficiency”), large infrastructures, and technocentrism. Lean knowledgework emphasizes getting the most from people through appropriate distribution and types of decisionmaking (executives through workers); value as the key driver; flow; pull; and perfection. Lean is the natural philosophical environment for systems thinking: it enables systems holism, and is the only mental framework that is fully consistent with it.

Almost all knowledgework today is done under the mass production paradigm. Just look at the classic IT front-office/back-office divide: as sacrosanct as ever, in the name of efficiency, it is inherently wasteful. It throws an impenetrable wall between those doing the work and those for whom the work is being done. Vanguard (U.K.) and others have conclusively demonstrated that this divide is both unnecessary and inferior to Lean business-system integration.

Ten years ago the Lean paradigm began permeating software knowledgework on a large scale. Five years ago it began infiltrating knowledgework services like healthcare, government (primarily in theU.K.), and call centers. Now it is time for the Lean paradigm to percolate into the business-system level.

This is not the “pseudo-Lean” that many businesses adopted a decade ago…the endless kaizen programs and ossifying Six Sigma programs which no major player in the evolution nor front lines of Lean today accepts as consistent with the foundations of Lean. This is the revolution that is inevitable when you begin applying the root principles of the Lean paradigm to running an enterprise as a system. It is what, in just a few decades, tookToyotafrom being a tiny manufacturer in a devastated country with no resources or infrastructure, to the world’s largest auto manufacturer. Much of that transformation was due to Lean principles in its knowledgework. We will see small but growing pockets of other enterprises begin down this path in earnest in 2013.

All the signs are here that this is coming: In 2013, a second dedicated “Lean Systems” conference will be held for the US Dept. of Defense, as will two expert panels on the subject at major industry conferences. True Lean systems consultants are finally available — people with significant experience in both systems and Lean. There is enough theoretical and practical framework to make it possible for executives who have no work experience at the classic Lean companies to begin following the same path philosophically…and obtaining similar results.

Those who wish to ride this wave should gain knowledge and experience in how Lean systems thinking works at the business-system level. You have a few avenues for this: You can hire knowledgeworkers from classic Lean businesses like Toyota Motor Manufacturing Kentucky (TMMK) or Honda (e.g., the Marysville,Ohioplant). Lean Japanese-company knowledgeworkers have successfully made such a transition to other industries. Or, you can hire thought-leaders from the handful of non-Japanese businesses that have been the frontrunners of this trend. Finally, you can jumpstart your program by using qualified Lean-systems consultants to advise you on how to make the transition, and to facilitate the changes your own people must make.

The major risk in undertaking this transition is raising major resistance from the existing workers within the company. In some cases people may previously have been exposed to pseudo-Lean programs that used layoffs and major disruptive role changes and called them “Lean” (they are not). A skilled transition will lower people’s defenses by starting where people are, moving them gradually toward the improved system, and involving them in the transformation decisions.

2013 is the year in which Lean concepts such as strategic value, operational kanban and several others will begin to transform entire enterprises in several industries. This will further unleash the power of the systems thinking that gained a foothold in 2012. Lean will amplify both the effects of the systems thinking already at work, and the competitive advantages of those enterprises that choose to move further down this path.

[Editor's Note: This post is part of the annual "Cutter Predicts ..." series.]

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James Sutton

James Sutton is a Senior Consultant with Cutter's Agile Product & Project Management practice. His passion is for unleashing the power and joy of human creativity in the development of systems.

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