When will they ever learn? How KM can help our politicians....

Here in the UK, the dust is settling after the most surprising general election result for over 20 years.  All pollsters, commentators and the politicians themselves thought we were heading for a hung parliament.  But they were wrong.

The media had even set up studios opposite the Houses of Parliament that were thought necessary to cover the anticipated negotiations between parties that had not managed to win an overall majority.  The awnings and scaffolding are being taken down this weekend.

David Cameron, the Conservative Party has won a majority whilst the Scottish National Party (SNP) has taken all but 3 parliamentary seats in Scotland.  The Labour Party lost 10% of its Members of Parliament (MP), including several senior figures that had thought they would be Cabinet members by now.  The Liberal Democrats lost 47 MPs, retaining a paltry 8.  The UK Independence Party (UKIP), punished by the first-past-the-post electoral system, polled nearly 4 million votes yet now has only one MP – a perhaps unfair quirk of FPTP requiring concentration of votes more than numbers alone. (For example, the SNP polled a third of UKIP’s number of votes yet added 50 MPs to its numbers because of this clustering).

The obvious fall-out so far?

·        Ed Miliband has resigned as leader of The Labour Party;

·        Nick Clegg has resigned as leader of The Liberal Democrats;

·        Nigel Farage has resigned as leader of UKIP;

·        An independent inquiry will examine how the pre-election opinion polls got it so wrong.

Much of media discussion since the election has focused on these negative consequences (for those concerned, naturally) and speculation over what lessons can be learned.  Many presume that Labour and the Liberal Democrats in particular now have to examine what went wrong and try to put it right in time for the next election, scheduled for 2020.

This analysis is not wrong but it is unhelpful for those of us that use knowledge management (KM) in general and ‘lessons learned’ in particular to improve performance.  (A comprehensive look at lessons and what should be done with them to drive performance starts here.)

Why unhelpful?  Because it reinforces the idea that lessons are negative and that we only learn when we make mistakes.  We can and should learn when things go according to plan also.  Where outcomes exceed expectations there is surely an even greater need to learn why, to ensure that such success is repeated and not wasted?

It is not just the ‘losers’ that should try to identify lessons but the ‘winners’ as well.

So, whilst David Cameron is selecting his new Government, and Nicola Sturgeon (i.e. the leader of the SNP) plans how to use the enhanced influence her Westminster MPs will bring her, they should also set in train the processes by which we learn from recent events.

Team-based After Action Reviews should be held, as well as larger Retrospects.  Key individuals should be interviewed and the knowledge of highest value (i.e. how to campaign; how to record voting intentions; how to target key voters; how to win!), identified, captured, shared and any good practice replicated and embedded within party procedures.  Knowledge Assets and Learning Histories should be created or updated.  Party workers approaching retirement or those leaving for pastures new should contribute also.  There is much that can be done, although this may not seem necessary to some.  Indeed, whilst the ‘losers’ plainly see the need for change, those happy with the results might not. 

Moreover, there is the risk that obvious successes might obscure mistakes that have been made but which seem inconsequential in the warm glow of victory.  Failing to identify and address these now might mean victory is not repeated.

Real adaptive learning is hard enough in commercial organisations, with those implementing KM initiatives often needing to be ‘politically savvy’ and well-attuned to the dominant culture.  In the world of actual politics, red in tooth and claw, it might appear all but impossible.

Doesn’t mean it shouldn’t happen but it does mean expert advice would be useful.

If any recently depressed or elated politician wants such advice, please contact Knoco for help!

Life of a lesson #9: we're done when I say we're done, got it?

As part of a wider discussion about knowledge management (KM), we’ve recently been looking at the following ten steps in the life of a lesson:

1.       Event takes place – an experience, idea, incident or accident

2.       Analysis and capture – through interview, AAR, workshop, report-writing etc.

3.       Packaging – write-up of lessons

4.       Review for accuracy – editing and improvement by person who identified the lesson

5.       Validation – quality check, ownership assigned and upload into a management system

6.       Review for accountability – periodic checks on progress

7.       Implement recommendations – to avoid/ensure recurrence of bad/good alike

8.       Review for effectiveness – ensure that changes have taken place and/or had desired effect

9.       Closure – lesson status updated but retained in system for reference and to aid analysis

10.    Assurance – as part of risk management, periodic review to ensure closed status remains justified

 

Last time we looked at how an organisation assures itself that a lesson’s recommendations have been implemented; we’ll now look at lesson closure.

As we have already seen, robust lessons management systems have checks and balances such as periodic reviews that monitor lesson progress and hold lesson owners and other stakeholders to account.  It is during such meetings that lessons recommended for closure are reviewed and, where sufficient evidence justifies the decision, closed.

Early on in its efforts to identify and manage lessons, the British Army decided upon two closure statuses:

• Lessons were closed ‘green’ when recommendations had been implemented and no further action was required;
• Lessons were closed ‘black’ when the lesson was deemed out of date, or that other initiatives had addressed the issue from which the lesson was drawn, or that the recommendations now lacked official endorsement, or that there were neither the resources nor will to implement them.  A recent development in this area has been the continuous management of ‘black’ lessons as risks.

Once lessons have been closed, some organisations ‘remove’ them from their databases or systems but I recommend their retention for 3 reasons:

• Research - when faced with future problems, it can be useful to be able to consult historic lessons (including the commentary and audit trail) to understand how similar issues were tackled in the past;
• Analysis – trends, themes and ‘common issues’ can be detected through data-mining, taxonomy analysis and keyword searches;
• Assurance – any robust system of lessons management should include periodic review of closed lessons to ensure that the decision to close remains valid (we will examine this in greater detail next time).

For more information on lessons, lessons management systems, knowledge management (KM) and organisational learning, please visit the Knoco website.

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Learning lessons - the British Army experience, for good or bad

We read last week that the MOD is trying to prevent publication of a book that it commissioned, ‘An Intimate War’ by Dr Mike Martin, allegedly because it contains criticisms of the way the British Army conducted operations in Afghanistan.  We have been here before, with Toby Harnden’s excellent book, ‘Dead Men Risen’, the entire first print run of which the MOD had to buy and destroy because it allegedly contained details that might have compromised operational security.

Twitter and other social media have today contained much commentary regarding the Army’s failure to accept criticism which, in turn, impedes its ability to learn lessons.

I declare an interest here because, for 3 years, I worked as a lessons analyst for the British Army’s Lessons Exploitation Centre (LXC) in Warminster, Wiltshire.

The British Army has put much effort, time and resources into improving its learning capabilities but it has much more to do, as does any organisation that seeks to learn.  My article at this link here sets out how the Army developed learning capabilities but also argues, strongly, that cultural factors remain that, unless addressed, will continue to inhibit its opportunity to improve performance.  It imparts no classified information but covers the following:

• The expansion of the British Army’s KM and OL analytical capacity from 2009 onwards;
• The development of Mission Exploitation Symposia to socialise hard-won knowledge;
• The use of lessons as part of risk management;
• The endorsement of the ‘lessons learned’ approach by the Army Inspectorate;
• Small signs of progress that learning is actually taking place;

 

The article then makes suggestions on how the Army can develop a learning culture:

• Learning about learning – through study of leading KM and OL theorists and practitioners;
• Development of a lessons cadre – making KM and OL a career-stream of choice;
• Moving LXC up the chain of command, reporting to the very top;
• Revisions of performance appraisals to encourage and embed the behaviour that supports learning;
• A move towards open dialogue, not mere adversarial discussion;
• Good, old-fashioned leadership by example through self-criticism and humility;
• A move from reflexive defensiveness, currently hidden behind ‘security’ concerns;
• Recognition that rank and cap-badge inhibit knowledge-transfer and learning;
• Embracing genuine mission command – and learning by doing;
• Moving towards a just culture, encouraging honesty and intelligent accountability;
• Learning from others – armies, charities, companies, the world

 

The article then concludes by quoting Major Giles Harris DSO, who commanded the Prince of Wales’s Company of the Welsh Guards on their bloody tour of Afghanistan in 2009,

“The British are very good at whipping ourselves into a sense of achievement….we almost have to, to make it bearable.  You can’t do something like this and analyse it all the way through and think: “Actually we got that wrong.”  You just can’t.  It takes so much emotional investment.  I’m not saying we lie to ourselves but there’s an element of telling yourself that it’s all right and it’s going well, just to keep going.”[i]

Such honesty.  We need more of it.
For more information on lessons, learning cultures, knowledge management and organisational learning, please visit the Knoco website.

 

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[i] Toby Harnden, ‘Dead Men Risen’ p. 558.

Life of a lesson #3: Everything that matters and no more....

Recently, we’ve been looking at the following ten steps in the life of a lesson:

1. Event takes place – an experience, idea, incident or accident
2. Analysis and capture – through interview, AAR, workshop, report-writing etc.
3. Packaging – write-up of lessons
4. Review for accuracy – editing and improvement by person who identified the lesson
5. Validation – quality check, ownership assigned and upload into a management system
6. Review for accountability – periodic checks on progress
7. Implement recommendations – to avoid/ensure recurrence of bad/good alike
8. Review for effectiveness – observe changes to ensure they have had desired effect
9. Closure – lesson status updated but retained in system for reference and to aid analysis
10. Assurance – as part of risk management, periodic review to ensure closed status remains justified

Last time we looked at the second step – the processes used to capture lessons.  Now we’ll look at how lessons are written up.

Format

As already discussed, when capturing lessons from people in workshops and interviews, they will often be elicited using the following format:

• What was expected or meant to happen?
• What actually happened?
• How does what happened differ from what was expected?
• What were the root causes or contributory factors?
• What can we learn?  This learning comes in two forms:
  • What should we do next time round, when faced with this issue?
  • What changes should the host organisation make to prevent or ensure recurrence?
• What impact did this issue have?  How much money/time did it cost or save us?

However, regardless of whether this format was used during the capture phase, any material gained now needs to be written into this structure or an equivalent one.  This will take time as well as trial and error.

Enough detail but no more

Lessons capture will often produce more material than you need and writing up lessons requires striking a balance between comprehension and brevity.  Often, an issue will manifest itself in numerous ways but merely repetition of each adds little; instead, you should choose two or three examples that show sufficiently different ways in which the issue affected performance, for good or bad.

Clarity, clarity, clarity

As already mentioned in the last post, an over-riding principle of writing up lessons should be clarity for the end-user – namely, the people with the ability to change things, budgets, processes etc.  For their benefit, explain any acronyms and avoid any project/team/activity-specific jargon.

Value-added, not verbatim

Slavishly reproducing what was said in the interview or workshop is pointless, not least because none of us is as clear, concise or comprehendible as we would like and our musings can all benefit from ruthless editing.  Additionally, the logical flow of a lesson can be enhanced if our thoughts can be re-ordered by someone who sees what we were trying to say, if we’d had the time, training etc.

Boldness not bullshit

Whilst writing up lessons, you might spot a deduction that was all but stated but got missed; or you might think up a recommendation that was not raised in the room but might well solve everything.  If in doubt, include it.  Where judgement is required, be more forceful rather than less and produce a hard-hitting lesson that tells it how it is – it can always be amended in the next step, where we get the lessons reviewed for accuracy by those that identified them.

For more information on lessons, knowledge management (KM) and organisational learning, please visit the Knoco website.

Discipline and leadership

A recent post on this blog looked at how lessons analysis can help organisations identify some of the high-impact issues affecting their performance.  We last examined ‘knowledge gaps’ and the related problems that organisations may encounter, such as over-reliance on external specialists and increased costs.

In our final post in this series, we now look at discipline and leadership – closely associated issues as an absence of the former is often due to an absence of the latter – and the extent to which both management and workforce conform to the expectations that organisations place upon them.

What is the problem?

Organisations suffering poor leadership have management teams that fail to communicate, inspire, encourage or control.  Poor discipline often ensues, with corners being cut, deadlines being missed and control measures (if in place at all) ignored.  Team spirit is notable by its absence with few willing to help others unless formally instructed to do so.

How does it manifest itself?

Poor leaders say one thing and do another.  They expect their staff to stay late whilst they head home.  They punish transgressions in others whilst ignoring or rationalising the same misdeeds in their own behaviour.  They rely on their place in the hierarchy (i.e. their ‘rank’) instead of skill, charm, charisma or inspiration.  They don’t listen to warnings from their staff when risks are identified and fail to enforce control measures, thereby exacerbating problems. When things do go wrong, they avoid responsibility yet dishonestly exaggerate their role in success, thus discouraging their staff from being honest about mistakes and unwittingly encouraging deception which prevents organisational learning and performance improvement.

Consequently, such poor leadership usually (and deservedly) creates an ill-disciplined workforce. Employees fail to follow procedures, including those relating to safety, which puts themselves and their colleagues at risk. They arrive late for work and increasingly try to leave early.  They ‘go sick’ – often on Fridays; sometimes for weeks on end.  They steal from the stationery cupboard, use phone and email for personal purposes and browse the internet as much as possible (often looking for a new job), resulting in high staff turnover.

What is its impact?

High staff turnover is expensive and organisations suffering from this are forever enduring the costly, unproductive induction phase as it seeks to get new employees ‘up to speed’ so they can become useful.

Ignoring budgets and deadlines results in reduced profits (or even actual losses) and delays in the short-term but also impedes future planning, as few will believe the projections next time round.  This can lead to an increasingly negative spiral of non-conformance and over-runs.

Without resolution, an organisation’s reputation suffers, as investors and customers alike (or patients, students, soldiers etc.) lose confidence and take their money (ailments, study, skills) elsewhere.

What recommendations are made to address it?

Problems relating to discipline and leadership are often identified during lessons capture sessions, either in the meetings themselves or during subsequent analysis of the lessons, which reveals a common theme of non-compliance across an organisation.

Responses have included leadership coaching initiatives, reviews of terms and conditions of employment and the introduction of grievance management procedures.

KM initiatives play their part too, with cultural audits and KM assessments helping organisations uncover ‘what is really going on’ before remedies are selected.

For more information on any of the initiatives outline above, please visit www.knoco.com.

Good, good, not good, good - quality learning

A recent post on this blog looked at how lessons analysis can help organisations identify some of the high-impact issues affecting their performance.  Last time we examined the reporting of progress and performance.

We now turn to the issue of quality, defined here as performance relative to a pre-determined level of expectation; where performance meets or exceeds that level, it is deemed good quality; where it falls short, it is deemed poor quality.

What is the problem? 

The changes achieved through projects are governed by the inter-action of 4 variables: time, cost, quality and scope.  Changing one of the variables will affect one or more of the remaining three.  However, since scope, time and costs are often set many levels removed from those performing the work, it is often in quality where pressure is felt (i.e. increasing the scope of work will require an increased budget and schedule if quality is not to suffer).

However, quality issues are not confined to projects and can appear in any area of an organisation and it is important to remember that quality issues are just symptoms of other problems.  Failure to recognise this results in mere ‘sticking plaster’ solutions.  Simply employing more people to check for errors can actually increase the failure rate (since each additional check becomes less rigorous as each person presumes that any missed errors will be picked up by their colleagues).

How does it manifest itself?

Manufacturing companies suffering problems of quality may experience high mechanical failure rates; catering firms may use or produce food that is either not fresh or, in some cases, not even what it purports to be (i.e. horse-meat in burgers etc.); IT companies may produce equipment or software with bugs and glitches and any organisation at all can experience excessive absenteeism and high staff turnover.

What is its impact?

In the short-term, poor quality often necessitates re-work which increases costs and delays completion.  However, in the long-term, failure to address the underlying issues that caused the loss in quality can result in repeated poor performance, leading to reputational damage and loss of business.

What recommendations are made to address it?

Organisations identifying quality problems generally address them in one of two ways: introducing a quality control (QC) function (or reinforcing such a function if it already exists) can help identify errors, faults and glitches before the customer does. However, this does not reduce the overall failure rate, can be expensive and, as seen, can be a somewhat counter-productive short-term response. 

A longer-term solution is the conduct of root cause analyses to understand why the expected performance level is not being achieved; the use of tools such as Six Sigma may be appropriate, as will the application of systems-thinking.  Additionally, such technical interventions are most successfully implemented when complemented by cultural change, achieved through effective leadership and a review of incentives to encourage and empower everyone to see quality as ‘their’ concern and not just that of the QC team.

For information on lessons learned meetings, at which these issues have been raised time and again, please visit the Knoco website.

How are we doing? Reporting on progress and performance

A recent post on this blog looked at how lessons analysis can help organisations identify some of the high-impact issues affecting their performance.  We recently examined ‘cultural friction’ and discussed some of the problems that excessive inter-team rivalry can cause.

We now turn to the issue of reporting progress and performance.

What is the problem? 

The effective management of any organisation involves some degree of planning, which will include an estimate or forecast of how long a specific scope of work will take, how much it will cost, the level of quality expected etc.  Assessing performance against this requires the measurement of work done (and budget spent, quality achieved etc.) and comparison with the planning forecasts, with the results of these calculations often known nowadays as ‘metrics’.

Well-defined and designed metrics allow management to add, remove or otherwise adjust resources in order to achieve the desired outcome.  Poor metrics obscure the true state of progress, thereby preventing effective remedial action.  Often, poor reporting stems from the organic, uncontrolled growth of metrics (as opposed to a deliberate strategy) and a failure to ensure their continued relevance.

How does it manifest itself?

Organisations that do not report on progress and performance effectively may be unclear on ‘what good looks like’, leading to unambitious or unrealistic targets alike; there may be aspects of performance that simply don’t get measured at all, leaving management blind to issues until they become unwieldy and have an impact far greater than at inception (e.g. sickness and absence); confusing comparisons between work done and work planned (as opposed to actual work needed) may lead to false feelings of confidence; finally, irrelevant or out-of-date reporting can lead to reports that are far too long, within which it is no longer possible to find key information without excessive effort.

What is its impact?

Poor progress or performance reporting leave management with limited situational awareness, thereby unaware of what is actually going on; this may mean certain risks do undetected, let alone managed. Remedial actions are often inefficient and expensive, pushing up overall costs and are taken too late to have the desired effect within the timeframe of any original plan. Furthermore, opportunities (such as replicating good practice throughout the wider organisation) may be missed, as the better performance derived from such innovations goes unreported for too long.

Ultimately, inadequate reporting mechanisms lead to a loss of credibility for all concerned, negatively influencing employees, partners, investors and regulators alike.

What recommendations are made to address it?

Unsurprisingly, companies that learn, through lessons capture sessions, how inadequate reporting mechanisms have compounded poor performance, often decide to conduct a performance management review, to examine which areas require metrics and what kind of information will be needed and at what frequency.

Linked to this, some organisations review governance and accountability, offering those doing the work (i.e. team or individuals) an input into how it is monitored, since they will know which aspects they use to gauge their own performance.

A further recommendation is for the encouragement of greater sharing of good practice from those teams whose performance is above average to those whose performance is below average.  This requires a revision of incentives and, above all, the use of a KM framework, about which more information can be found at the Knoco website.

Cultural friction - Please play together nicely, boys and girls...

A recent post on this blog looked at how lessons analysis can help organisations identify some of the high-impact issues affecting their performance.  Yesterday we examined ‘supply chain management’ and discussed some of the problems that a blanket approach in this area can cause.

We now turn to the delicate issue of cultural friction.

What is the problem? 

Nations have cultures, as do organisations, departments and the teams within them.  Defining a ‘culture’ as the collective expression of people’s thoughts, feelings, prejudices and priorities, no-one should be surprised that where cultures rub up against one another, things happen – for good or bad. 

The smaller and simpler an organisation, the less scope there is for cultural differences to appear; however, as companies grow, specialisms develop, teams are formed, departments are created…and white space appears between them on the organisation chart[1] within which misunderstandings can grow.   

The problem for any organisation - which is an artificial creation, engineered for a specific purpose (e.g. lending money, playing football, curing disease etc.) – with competing cultures is how to manage these clashes for positive ends and not let them harm the purpose towards which they should all be working.  Some of the bonds that sustain teams can prevent effective cooperation with ‘outsiders’ and lead to inefficiency.

How does it manifest itself?

Companies that have become multinational through merger and acquisition may discover tensions between people used to doing things a certain way; some cultures encourage long lunch breaks and embrace a so-called ‘work/life balance’ whilst others consider ‘lunch is for wimps’.

Some organisations have developed hierarchies by function as opposed to rank, whereby information is judged not on merit but on the role of its originator (in the military, the ‘combat arms’ (i.e. infantry etc.) have a sense of their own importance compared to those in combat service support (i.e. logistics and administration); in banking, such delineation occurs between the revenue-generators (i.e. sales and trading) and those that measure, manage and consume said revenue (i.e. operations staff in the ‘back office’) – in either case, this is prejudice at work.

Other organisations have tensions between project and operations teams, with the former enjoying the variety and ‘expeditionary mind-set’ inherent in large-scale projects whilst the latter seek the relative stability and repetition of day-to-day operations.  Tensions occur when the competing priorities become obvious through working in close proximity (i.e. project people need systems to be shut down to enable enhancements to take place whilst operations staff need minimal interruption, if any, to day-to-day processes).

What is its impact?

Cultural frictions can lead to inefficient ways of working and poor knowledge transfer between teams and departments, as healthy rivalry descends into tribalism, back-biting and the protection of knowledge for internal political purposes; morale suffers and each party blames the other(s); retention becomes a problem, with experienced staff leaving (taking most, if not all, of their knowledge with them) and new-joiners are overloaded and indoctrinated into the internecine warfare as early as possible.

What recommendations are made to address it?

Organisations that, through lessons capture sessions, have identified cultural frictions as a problem have reviewed career structures with a view to promoting those that have broad experience across several functions, to encourage transfer between departments and discourage the ‘stove-pipe’ mentality that comes with over-specialisation.

Others have provided mentoring and coaching to leaders to help them ‘walk the walk’ of cooperation instead of relying on merely ‘talking the talk’ of ‘One Team’ etc.

To address the problem of knowledge loss upon the departure of experienced personnel, some organisations have introduced knowledge retention interviews, personal wikis and communities of practice (CoP). For information about these services and for news of our learning cultural audit, please visit the Knoco website.

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[1] Geary A. Rummler and Alan P. Brache Improving Performance – How to Manage the White Space on the Organization Chart; San Francisco: Jossey-Bass, 1995

Supply chain management

A recent post on this blog looked at how lessons analysis can help organisations identify some of the high-impact issues affecting their performance.  Last week we examined ‘contracts and incentive mechanisms’ and discussed how some companies suffer unintended consequences from their contractual arrangements with suppliers.

We now turn to the related issue of supply chain management.

What is the problem? 

Problems relating to supply chain management appear at opposite ends of the same spectrum: at one end are those companies with complete freedom to choose any supplier for any service or product; at the other end are those companies that have chosen to restrict their choices to a handful of suppliers.

At both ends of this spectrum, companies have encountered problems, forcing them to consider a different approach.  Despite the positions being exact opposites, the issue is the same; namely, that a blanket, one-size-fits-all approach does not work for every kind of operation, project or commercial undertaking.

How does it manifest itself?

The ‘free’ companies have to deal with many different points of contact, order/billing/payment processes and currencies, whilst the ‘restricted’ companies have limited choice and their chosen supplier may become a single point of failure if they are unable to meet their client’s requirements.

Other issues include perceived intransigence on the part of a ‘preferred’ supplier and an insistence that the terms contained in the ‘Master Service Agreement’ are applied at all times, regardless of relevance to changed circumstances.

Examples from the news include:

·       The British Army fitted its bases in Afghanistan with air conditioning (ac) under a contract derived from one in the UK. Under the contract’s terms, broken ac units had to be repaired or replaced within 30 days – a reasonable clause in the UK’s moderate climate, less appropriate for the 50 degrees heat of the Helmand desert.

·    Another military example: the UK Ministry of Defence (MOD) was revealed to have paid £22 for light bulbs that could be bought for just £0.65 each; screws that sold for £2.61 were purchased by the MOD for £103.

What is its impact?

The ‘free’ companies incur greater costs through having to manage a large number of interfaces and, whilst their flexibility means they are able to switch supply to exploit market conditions, they are unlikely to enjoy the discounts that the ‘restricted’ companies are likely to have negotiated in return for restricting themselves to a limited supply.

Conversely, the benefit of the ‘restricted’ companies reduced interfaces may not be sufficient to off-set the risk inherent in a limited supply (i.e. a supplier unable to fulfil its client’s requirements on time or, in the worst case, going out of business and ‘leaving them in the lurch’).

What recommendations are made to address it?

Companies that have identified these problems often implement the same solution, regardless of the bracket into which they fall; namely, they conduct a review of their supply strategy to identify where more choice is needed and where the benefits of fewer suppliers are warranted.  This may vary according to the maturity of the market for each product or service. 

Another course of action has been for client companies to seek to develop close and collaborative relationships with suppliers, in order to maximise their understanding of the client’s requirements and minimise excessive restrictions.

For more information on how lessons capture sessions and analysis can help identify the big issues faced by companies today, please visit the Knoco website.

Read the small print - contracts and incentive mechanisms

A recent post on this blog looked at how lessons analysis can help organisations identify some of the high-impact issues affecting their performance.  Yesterday we examined ‘interface management and communication’ and discussed how some companies suffer blockages in the flow of knowledge and information throughout their organisation and beyond.

We now turn to the related issue of contracts and incentive mechanisms.

What is the problem? 

Most organisations recognise the need to take time when negotiating contracts and will often pay significant sums of money for expert oversight and advice in this area.  However, when time is short, clauses or their precise meaning (as intended by the drafter) can be missed. This can expose both clients and their ‘contractors’ to unforeseen risk regardless of the contract type.

Two common types are the fixed or ‘lump’ sum contract for a defined scope of work or a ‘reimbursable’ one where a daily rate is applied to a forecast of how long the work will take.  Under the first model, the contractor is exposed to risk and thereby incentivised to work as quickly as possible to maximise profit; under the second model, the contractor is less exposed and may actually be unintentionally incentivised to take as long as possible.

Both contract types may use additional ‘key performance indicators’ (KPIs) that incentivise contractor performance through rewards and penalties but unless these are directly relevant to the specific scope of work, these can have unintended consequences.

How does it manifest itself?

Companies come to realise that they have incentivised behaviour that is unhelpful, detrimental or even potentially risky.  Under a fixed-sum model, short-cuts may be taken as a contractor seeks to ‘finish early’; conversely, with reimbursement, work may be prolonged unnecessarily as the contractor seeks to extract as much revenue as possible.

Examples from the news include:

·        The Domino’s Pizza chain’s guarantee to deliver within 30 minutes (customers whose deliveries were made after 30 minutes were fully reimbursed) was amended following high-profile traffic accidents involving Domino’s drivers.

·        Since the ‘credit crunch’, some bank bonus schemes have been revised to incentivise long-term performance since pre-2008 bonuses appeared to encourage excessive risk-taking in the pursuit of short-term gains.

What is its impact?

The skewed risk/reward balance in poorly negotiated contracts and clumsy KPIs can result in either work being performed too quickly (thereby adversely affecting quality and safety) or too slowly (thereby increasing costs and resulting in late delivery).  Failure to recognise the implications of the changed situation reduces management credibility and overall morale suffers.  Excessively punitive penalty clauses can force one side out of business, which often leave the remaining party out of pocket, without the goods or services it sought but now with the additional burden of finding a new supplier in even less time than originally.

Relations between client and contractor can become frayed as one side perceives the other to be ‘gaming’ and taking unfair advantage of clauses in the contract that are having unforeseen consequences.  In such circumstances, the long-term continuation of such business relationships is unlikely.

What recommendations are made to address it?

Client organisations that have ‘learned things the hard way’ through poor contracts and KPIs often subsequently seek to establish long-term relationships with their suppliers and contractors, dedicating time and resources to ensure they have a shared understanding over those clauses that contain rewards or penalties.  Another lesson identified from this is the need for rewards and penalties to be specific to the work in question and the avoidance of ‘one-size-fits-all’ KPIs.

These lessons were identified by clients in facilitated lessons capture sessions run by Knoco.  To learn more about these and other KM services, please visit the Knoco website.