18 March 2016
Dear Interested Readers,
What’s Inside This Week’s Letter
The last sentence of the main portion of last week’s letter said:
I hope to continue the conversation about what Lean leadership is and what “standard work” for CEOs and senior leadership looks like as the discussion continues next week.
I do plan to do that soon but as you may remember, I began last week’s letter by warning you that I would be following a circuitous route to my objective and at times I would take a detour:
As is true with any journey, planning an itinerary is a good way to start, but the fun of the trip is in the learning that is the product of a willingness to deviate from that itinerary that you spent so much time developing. The joy of travel is in the discovery and the learning that can occur unexpectedly when you become adventurous and deviate from the tyranny of your itinerary. Some of my greatest adventures on the road occurred when I submitted to the whim of my curiosity or paused long enough to explore what was behind a door or down an unexpected alternative route that I serendipitously discovered on the way to the place that I had planned to visit. I am hoping that this journey of a few week’s letters into the heart of Lean might launch you on some side trips of personal discovery. Forewarned, I hope that you will not think I am too scattered when I go down a few rabbit holes. There is nothing that is more exciting than finding treasure in a place where you never expected it to be!
Well, here we go down a rabbit hole. I attended a meeting of Simpler executives, subject experts and account managers this week in Charlotte. The conversation was very stimulating and as the discussion was frequently about how they could better serve their customers several ideas flooded my consciousness. Most importantly, I was very impressed with the fact that the discussions were couched in the philosophy of “what part of the problem are we?”. Secondly, there was an urgency to the conversation because they earnestly believe that Lean is the answer to many of the issues that are dragging down the performance of their clients because of the volatile, unstable, complex and ambiguous world of healthcare where each market has its own compliment of special concerns that are layered over the larger changes and controversies that are national realities.
As I was struggling to add value to the conversation, a question kept coming into my head: Since Lean is such a proven asset, why is it so hard to start and sustain? As you might have noticed, I am an “Interested Reader” of other people’s ideas. I also depend on my friends to show me where to find the ideas I need to read. One “Interested Reader”, Nathaniel Foote, who lives in a dynamic relationship between Harvard Business School and a very influential consulting group, True Point, sent me a paper a couple of years ago that posed that same question and opened a big door for me in my struggle to understand how Lean works. I went back to that paper to relearn some valuable things that I share with you in this week’s letter.
I have mentioned this paper before in letters, but it has been a while. The paper, “Relational Contracts and the Roots of Sustained Competitive Advantage”, by Professor Rebecca Henderson at HBS was written in early 2013. If you click on the link you will only get an brief abstract and HBS will ask you to pay $8.95 to read the whole article. Hey, HBS is the Vatican of capitalism! There is a precursor paper that is free that I have found on the Internet. The paper, entitled Relational Contracts and Organizational Capabilities, is wonky and has equations that will excite economists but it has much of the same information. Professor Henderson published the longer paper with Professor Robert Gibbons from MIT eighteen months earlier in 2011. My goal in this week’s letter is to harvest for you what is important in this work for Lean leaders to know. My hope is that this information will enable you and your colleagues to be more effective in your pursuit of your own Lean transformation as you pick up speed on your way to the Triple Aim.
There is a second section to this long letter that is an acknowledgement of the contributions and passing of a great colleague. The letter ends with a celebration of Spring. Spring seems to be well established even before “its time” has officially come; but before getting into this week’s musings I must remind you that If you missed last week’s letter, the abridged version has been available for several days on strategyhealthcare.com.
The meat of last week’s letter can be read in just a few minutes if you do not fall asleep. Alternatively if sleep eludes you, as it did Lady Macbeth, then let me offer this week’s blog posting to you for its soporific value as you search, as she did, for “sleep that knits the raveled sleeve of care”. I will remind you once again that strategyhealthcare.com is “searchable” internally and discoverable on the Internet and might be a resource for you or your colleagues. Most of the links to literature that I have used in these notes are preserved in the edited versions that you find online in the blog version. I know that many of you forward these notes to colleagues and that is great; but your friends, in and out of healthcare, are welcome to sign up on strategyhealthcare.com to get the letter directly every Friday. Finally, I thank you again for being an “Interested Reader”.
The Continuing Search for the “Secret” Ingredients of Lean Success
Come to think of it, if you can accept the concept that without the total commitment of senior leadership, especially the CEO, Lean can’t succeed, then you do not need to read last week’s letter. Sure, leadership can launch Lean or leadership can tolerate Lean and enjoy the benefits that it offers for a while, but if leadership wants Lean to be a sustainable source of competitive advantage then it must be more than supportive. It must follow Gandhi’s advice and lead by “becoming the change it wants to see”. The C-suite must seek its own transformation and be open to continuous learning if it expects to lead an organization that has the capacity for continuous improvement.
Lean is misunderstood if it is just used as a collection of tools to solve urgent problems over the next few financial cycles. No doubt Lean can create sustainable competency with breakthrough accomplishments. Despite what Lean can accomplish an organization is wasting money if the CEO and senior management can offer no more than casual support or are just tolerant of Lean. Worse yet is when the CEO tries to tap into the benefits of Lean by proxy through others while continuing the traditional “Sloan Management” top down process of management by objective. If the reality is that the CEO and senior leaders do not effectively do the “standard work” of Lean leadership, it would be better for the organization to buy lottery tickets than spend money and effort trying to implement Lean with leadership sitting on the side lines.
I think that the problem of “detached” leadership is huge and is more prevalent in larger and more dispersed organizations. Many large healthcare systems functions as collections of independent fiefdoms and as such fail to accomplish the clinical integration that they promised to the regulators to gain approval for their existence. Old cultures continue in a dysfunctional diversity that adds waste. The effectiveness that could be achieved by creating value streams that bring care that is less expensive, easier to access and more effective for patients and families is lost. The only thing that is achieved is bargaining power for higher rates from payers.
As CMS and commercial sources of income become more and more “value based” size will move from being a way of extorting higher payment to becoming an unsustainable liability in an environment of declining relative revenue. Regular readers of trade publications like Becker’s see listings of failing hospital systems in every issue. Many of these large and vulnerable systems “do Lean” but they have not evolved a Lean culture and have not adopted a Lean based management system that supports the pursuit of objectives through a management system that focuses on improving the processes that are fundamental to the services they seek to provide.
I had struggled for some time with how hard it was to launch Lean in an organization that was dispersed and functioned on a “federalist” platform. Professor Henderson “hooked me” and began to provide me with insight with her first two paragraphs which I will abridge for you.
The search for the roots of sustained competitive advantage has occupied strategy researchers for more than thirty years. Early research focused on superior leadership and strategic fit as the most probable source of advantage, while Michael Porter’s seminal work focused on industry structure as a critically important determinant of profitability and more recent studies have focused on unique “resources” as a key source of sustained performance.
All three are clearly important....This note focuses, however, on organizational “competencies” or “capabilities” as a potential source of sustained competitive advantage. Research in this area hypothesizes that some firms outperform their competition because they can do things that their rivals cannot. Toyota…, for example, became hugely successful... Years of careful research...suggests that much of their success was rooted in their ability to persuade their employees – and their suppliers and partners -- to do things that no one else in the industry was (at least initially) capable of doing. Toyota’s development of the “Toyota Production System” [Lean]...– a system of shop floor management practices that stressed, amongst other things, employee initiative, constant communication and systematic problem solving – in combination with extraordinarily tight relationships with its suppliers allowed the firm to sell cars at levels of costs and quality that were previously unknown in the industry...was an important part of the strategy…
Professor Henderson sites the remarkable ability of a several companies, not just Toyota, to far out distance their competitors by offering better value, year in and year out, and goes on to ask some of the questions that I had been asking myself as she searched for the origin of superior performance. She does business research, so her answers, if you care to read the papers closely, are supported by data and not just intuition or bias.
The question of what, exactly, causes these differences remains highly contested, but some
persuasive evidence for the hypothesis that they are the result of persistent differences in
organizational capabilities comes from research that has explored the nature and effects of so called “high commitment work systems”. There is no single definition of such systems, but in general researchers studying them have focused on three key elements: high-performance work systems, [ high powered incentives] ,skills development and dense communication and local problem solving.
Let me be sure that you caught the three key elements of these remarkable companies because Professor Henderson’s syntax does not quite match up to the chart she presented:
- High powered incentives (not just money, but security, feedback,recognition, and an opportunity to grow)
- Skills development
- Dense communication and local problem solving
Her next question is obvious and it had been my core concern even though I did not have the language to ask it before reading her paper. If everyone knows how these great companies have succeeded, why aren’t more companies trying to get the same results? Her answer is below and this is the paragraph that where she began to reel me in.
The evidence that differences in organizational practice are associated with significant differences in performance is thus quite compelling. The puzzling question then becomes why they don’t diffuse more rapidly. Duplicating a global brand like Coca Cola or an asset like Wal-Mart’s IT system would plausibly take many years and millions of dollars. But putting in place problem solving teams, or giving employees regular feedback doesn’t sound – at least initially – either that hard or that expensive. If better organizational capabilities are behind the success of firms like Toyota …., why don’t their competitors simply imitate them? What is going on?
Her long answer to her own question is quite interesting after she says that the short answer was that we really do not know the answer. I have bolded the big points.
The long is that the current literature offers four lines of explanation. First, managers may have problems of perception —they may be ignorant, and simply may not know that their competitors have developed superior techniques. In the early seventies, for example, when Toyota was developing the Toyota Product System but its deployment was largely restricted to Japan and Toyota was not selling any significant volume in the US it is plausible that their US competitors simply did not know that Toyota was doing anything differently. The fact that many very successful firms come to believe that they have little to learn from their competitors and that they develop cognitive frames that make it very difficult for them to “see” ways of behaving or approaching the market lend additional plausibility to the idea.
I think that despite all that has been written about Lean in healthcare this may be part of the answer. Large systems which have been dominant do not have competition that drives them to be better. Virginia Mason is really a small system in a competitive environment and was already under significant stress when Gary Kaplan “found” Lean as a way of avoiding further loss. Patty Gabow at Denver Health was motivated to stretch the public dollar to provide high quality care in an environment that is always short of resources. John Toussaint was motivated to turn to Lean to provide quality and better service much more than to improve finance. What is remarkable about the Thedacare story is that it was driven primarily by true aspiration to provide the best care and to be a beacon of “the possible”. Many of our bigger systems and dominant regional systems are still getting by doing things the old way. They are quite comfortable on “curve one” and put off thinking about “curve 2” which will require competencies they do not have.
Second, managers may have problems of inspiration —they may see that their competitors are performing better than they are but they don’t know exactly what their competitors are doing that makes the difference. In the early eighties, for example, American automotive executives and their staff spent many months in Japan trying to work out just what it was that Toyota was doing that they were not. It seems to have taken them a surprisingly long time to work out. Initially many American managers appear to have been convinced that it was the tangible innovations – things like the use of the andon cord, or the kanban system – that were central to Toyota’s success, neglecting the “softer” elements of the TPS entirely.
Again, I see similarities in healthcare today. Systems that are managing by objective, driven by concerns about the bottom line, create oppressive environments of fear and make cuts that increase fatigue and burnout as they struggle to generate revenues that are slightly greater than expense with a meager bottom line. They are constantly focused on EBITDA and are not paying attention to the “softer” elements that drive success with Lean. In fact supporting those softer elements would look like avoidable overhead in a very stressed system.
Third, managers may have problems of motivation —they may know that they’re behind and they may have a general sense of what could be done to catch up, but either because of agency problems or because of strategic constraints they lack the incentive to do anything differently. Managers who have built their success on managing the firm using a more conventional style, for example, may find the suggestion that they embrace a very different way of managing people deeply threatening to their own position, and may resist the idea accordingly.
BINGO! This is the big one. You are a 59 year old CEO who wants to retire in three years. You are on the high plateau of a learning curve that has served you well. Are you open to becoming a novice in a new operating system that makes you feel like a visitor in a country where you do not speak the language or know when to bow or burp? This is an issue even deep into the management structure. If you are a local “winner” in middle management with a bureaucracy that works for you and you are meeting your set of objectives, even as the ship is taking on water, how open are you to sacrificing all of your advantage for the good of the “we”? Self interest within a large enterprise is often at conflict with the best interest of the system and those who are doing well will pull out all of the stops to maintain the status quo even while others suffer. If you do not understand that, you do must not be following politics this year.
Fourth, managers may run into problems of implementation —they may know they’re behind, they may know what to do, and they may be trying hard to do it, but for some reason they nonetheless cannot seem to get the organization to get it done. Here again the struggles of the American automobile industry to adopt the Toyota production system is a fascinating case study. General Motors, for example, announced a strong commitment to change and undertook a number of initiatives designed to change management practice across the firm, including entering into a joint venture with Toyota and building an entirely new division – Saturn – but appears to have met with only very mixed success in diffusing the new ways of managing until quite recently. All told, despite the more than 3,000 articles and more than 300 books that have been written about Toyota and its success, it has taken the global automobile industry nearly twenty five years to implement lean production – and some have argued that even now the process is not complete.
This is the point that contains the easiest solution if management and the board has insight and realizes that they need help. The good news is that there are several very very capable sources of support and guidance for those of us in healthcare who have decided that there is promise in Lean, if only we could learn the language, understand the tools and find the “secret sauce” of the “softer” components that are necessary for sustained success.
I feel very sorry for those organizations who desperately reached for Lean and hired one sensi or someone who advertised themselves as a Lean Six Sigma black belt to build an internal Lean resource. Would you install Epic alone? Would you build a new bed tower without an architect? Would you even try to cut your own hair, having never done it before and expect success? The most import point for me in Patty Gabow’s great book, The Lean Prescription: Powerful Medicine for Our Ailing Healthcare System, is that every system needs an external guide. If you want to know more about the Denver experience and insights, the link is to a review of Dr. Gabow’s book that I wrote in Healthcare, The Journal of Delivery Science and Innovation.
Professor Henderson moves on to a second key question after answering quite well the first question which had been, “If everyone knows how these great companies have succeeded, why aren’t more companies trying to get the same results?” Her next question is:
Why should implementation be hard?
Once I know what to do and I have the motivation to do it, why can’t I simply get it done? One possibility is that the implementation problem is one of “complementarities” – that high performance work systems cannot be adopted piece meal but must be adopted as a bundle, and that this is extremely difficult because firms tend to make changes only slowly and incrementally. This is certainly plausible, but it begs the question of exactly why it’s hard to adopt organizational practices in the first place. If a manager knows what needs to be done –and believes that doing it will significantly improve performance – why don’t they simply do it, even if it is a little complicated?
That is certainly the first questions most potential clients ask when they call in a Lean consultancy for a conversation about “doing Lean”. I think that this is where most Lean consultancies have failed in the past. They usually come from an industrial background where ownership is clearer than in the often non profit world of healthcare or where the “knowledge workers” do not have the professional value of intense autonomy of private practice or the culture of powerful departmental chiefs that are so intrenched across the broad spectrum of our heterogeneous delivery system. She asks another question:
Is it hard to develop new organizational competencies because it’s hard to build new
relational contracts?
Here I draw on recent research to argue that implementation may be hard because the kinds of organizational competencies that lead to competitive advantage rely on the presence of “relational contracts” within the firm, and that these contracts are hard to build and difficult to change once built.
A “relational contract” is an understanding between two or more parties that is based on
subjective measures enforced by the shadow of the future rather than by the threat of legal action. When a firm like McKinsey hires new associates, for example, they typically promise to give them “interesting work” and “exposure to a wide variety of problems”: promises that many potential employees appear to take seriously but that have no legal force.
Successful Lean organizations are built on trust and clarity between leadership and employees that is necessary if everyone is moving into the uncertainty of what transformation will mean. It is easy for the CEO to say that the motivation for doing Lean is to cut waste, not people. It is easy to announce that there will be respect and a focus on quality. It is also easy to say that those doing the work will be involved in defining standard work and creating new innovative processes of care across silos. It is easy to promise that employees can design workflows that reduce stress or burnout, but it is hard for people to understand and believe what they have never seen before, especially if they do not see any changes in leadership. Promising a “new way of walking” sounds great unless you fear it is a “bait and switch” or the “flavor of the month”. “Trust me things will be different next time” rarely works in any environment without a real demonstration that leads to assurance. Trust dies and is almost impossible to revive when violated. Empty assurance is ineffective and wins little trust in an environment where respect and civility are vulnerable to the economic weather.
CEOs and leadership will quickly hold up their hands if you ask who is responsible for contracts, but it is the rare CEO who is under the stress of a shrinking margin who will recognize that the only contracts that can’t be risked, broken or renegotiated is the set of relational contracts that exist with the people who do the work.
Professor Henderson is on a roll and gives us the ups and downs of relational contracts:
The use of a relational contract in place of an ordinary, legally enforceable contract would seem to offer a number of immediate advantages. In the first place, many of the behaviors that seem to be linked to superior performance – the use of empowered cross functional teams, for example, or a reliance on dense networks of cross functional communication – would seem to be very difficult to describe with sufficient precision that one could either reliably observe them in action or create a quantitative metric to capture whether they had occurred. When a Toyota employee pulls the andon cord to stop the line, for example, is this evidence of a deep commitment to continual learning or a foolish mistake that could cost the firm hours of lost production?
Moreover human resource professionals and organizational theorists alike have worried for many years that formal contracts in which compensation is tightly linked to quantitative metrics have the potential to seriously distort behavior. Firms attempting to reward their R&D staff by linking their compensation to patent output, for example, have found that the average quality of their patents drops significantly, and academic departments linking pay or promotion to the number of papers published by an individual run similar risks. One response to this problem has been to search for better quality metrics: citation weighted patents and papers, or the number of new products launched; but it appears that almost any quantitative metric can be gamed, particularly when positive results are driven by the efforts of a group or won’t be evident for several years…
Formalizing the problem in this way yields a number of insights. The first is that a relational
contract is a very specific form of “trust”. To the degree that we define trust as a well rooted
expectation that another person will behave in a specific way, managers and employees linked by a successful relational contract can be said to trust each other. The manager trusts the employee to do the right thing and the employee trusts that if they do so they will be rewarded appropriately.
These issues are more complicated than they appear on the service. We all think we are authorities on trust and mistrust. We prefer insurance over assurance as protection from feeling vulnerable. Once again Professor Henderson helps us.
Recent research suggests that there are two potential explanations: the problem of credibility and the problem of clarity…
Problems of credibility arise if both parties understand the structure of a potentially beneficial relational contract in principle but if they don’t believe that the other party has incentives to adhere to it. If, for example, I believe that my manager is likely to be promoted shortly, such that the future value of our relationship has very little value to her, or if I think that she may have a very high discount rate, I may not believe that it is in her best interests to adhere to the contract, whatever she says. Similarly I may be worried that her temptation to defect may be much greater than she claims –suppose that the firm enters a major cash flow crunch, for example, will they keep their promise not to lay me off?...
Think about it. How often do you “discount” what the CEO might say or what your team leader says? We certainly discount almost everything a very earnest politician says based on our view of how they performed in the past. This is the biggest issue that faces three of the remaining political candidates: Clinton, Cruz and Trump.
The problem of clarity is a concern for many CEOs attempting to lead a Lean transformation, just as it has been for President Obama, and in interesting ways for Senator Sanders and Mr. Trump. Let Professor Henderson explain:
Developing new relational contracts may be made even more difficult by the problem of clarity. So far we have assumed that a manager can communicate to employees what “cooperation” looks like, namely the kinds of actions he or she hopes to elicit and that she will reward, and that the difficulty in building a relational contract lies in the fact that she cannot credibly communicate the precise values of her payoffs, discount rate or time horizon. But in many cases it may be very difficult to communicate exactly what is meant by “cooperation”...
One can imagine asking an employee to “do a great job... in leading this...project.” But what, exactly, is involved in “doing a great job”? How do we think about this in a situation in which there are multiple relational contracts in place – between individual employees and managers and between employees and the firm? In a world that is constantly changing?
In short, building a relational contract in the real world may be a less than straight forward
exercise. Maintaining it once built may be even harder. Here again there are likely to problems of both credibility and clarity. When a new CEO takes over a firm, for example, and announces that… competition has put such stress on the firm’s finances that she has to renege on the company’s promise has she reneged on a well-established deal or is she simply announcing that the firm needs to develop a new one? Once we think about the complications inherent in building relational contracts in practice, the hypothesis that the ability to build and maintain them might be an important source of competitive advantage becomes quite plausible.
With much thanks to Professor Henderson I realized after reading this paper that as CEO of an organization at the top of the list of my “standard work” was a responsibility to develop and maintain the very essential relational contracts upon which the security of our large investment rested. Creating credibility and clarity required being authentic in my own involvement and often led to making difficult decisions in the management of my senior leadership team as well as avoiding the temptation to balance a budget with a justifiable riff. Most important to maintaining trust through relational contracts was the importance of transparency. I often failed, despite trying. I have frequently mused that “ we are defined by our failed good intentions”.
The trip down this “rabbit hole” lead me to renewed insights. I hope that is true for you as well. In fact, I had promised to make this letter about the standard work of leaders. That job has not been completed but I think we have put at least one item on the list.
A Short Obituary and a Brief Story that I Must Tell
The Harvard Vanguard practice within Atrius Health is the legacy practice of the old Harvard Community Health Plan. When I joined the practice in 1975 one of the most enthusiastic physicians who was constantly offering innovations both in our practice and in his home community of Newton was Bob Buxbaum. He was a mentor and more importantly a role model. Bob travelled to Germany on his own dime to study the German healthcare system. He created a “life course” in a park to promote health at the community level. He was a committed participant on the Physician’s Council and an effective advocate for a “model clinical unit” in the early eighties that was a Primary Care Medical Home long before one existed anywhere. When he retired from office practice he developed a home care practice and nursing home rounding program that focused on the frail elderly. He was a strong advocate for palliative care.
The fact that Lean landed on fertile ground at Harvard Vanguard is in no small way a legacy of Bob’s work. When I became CEO I could always count on Bob calling me and pushing ideas and programs that were focused on adopting innovative new ways to provide better care. Bob passed away this last week and I am sure that thousands of patients and colleagues said a prayer of thanks for having had the privilege of knowing and working with Bob or receiving the benefit of the great care that he provided and demanded of others. Bob was all about the Triple Aim long before there were words to describe it. He lived in anticipation of it and worked hard for its principles.
My wife and I still get our care at Atrius. We could find good care closer but it is worth driving 200 miles round trip for great care. Bob helped build that care and was one of the architects of a vision that has become a reality. My wife had an experience of care this week that I am sure would bring a smile to Bob’s face.
She realized late Tuesday night that she was almost out of an important medicine for her and that she not only needed a refill but that she also needed the script to be renewed. At about 1 AM Wednesday she sent a message to her PCP through the Epic patient portal asking that the script be renewed, sent to the pharmacy to be refilled, and then be mailed. She goes to the post office every day about eleven AM. On Thursday, less thirty six hours after sending an email to her doctor, the pills were in our mail box. She never spoke to a person.
That was a real example of “one piece flow” across at least two departments that probably required perfect performance of several people, an MA, the doctor, pharmacy techs, and a pharmacist, not to mention the mailroom and the US postal service. That system was built with Lean. It is maintained with Lean through robust improvements driven by “management for daily improvement”. It is possible to build such a system everywhere. We have the tools. We just need visionaries like Bob and the dedicated professionals at a place like Atrius to make it happen. At the core of such a capability is a long history of building an enterprise on a culture that has paid a lot of attention to relational contracts and has advocates for excellence like Bob Buxbaum.
A Walk in the Midst of Flowering Trees
The official arrival of Spring is just a few days away but when I took my walk through some lovely neighborhoods of Charlotte on Monday afternoon before my meetings began I was once again reminded by all of the beautiful flowering trees that I saw of one of my favorite poems, A E Housman’s poem about the flowering cherry trees in spring.
Loveliest of Trees
Loveliest of trees, the cherry now
Is hung with bloom along the bough,
And stands about the woodland ride
Wearing white for Eastertide.
Now, of my threescore years and ten,
Twenty will not come again,
And take from seventy springs a score,
It only leaves me fifty more.
And since to look at things in bloom
Fifty springs are little room,
About the woodlands I will go
To see the cherry hung with snow.
I am humbled by Housman’s math and realize that threescore and ten minus my age leaves a negative number. I hope to have Housman’s luck. He was born in 1859 and died in 1936 at age 77, so he got seven views of the cherry trees that he was not expecting. I am into the bonus years like Housman and hope to have at least a bonus of 25 like my Dad has enjoyed. Every walk in Spring is a bonus for me. No matter how many springs are left in your account don’t waste any walks in the sunshine watching basketball during daylight hours. That would truly be March Madness.
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