Organizational Duty Point

The Organization Duty Point

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Over the course of my career, I have seen many companies struggle to increase profitability. They often had a great product, and sales were not too bad, but somehow, the bottom line was sluggish.

When this happens, execs get “creative”. They start moving factories to low-cost countries (which sometimes turns out to be even worse for the bottom line) or outsource internal functions, hoping it would cut costs.

Sometimes it works, sometimes it doesn’t. When it doesn’t, managers start cost-cutting by implementing a hiring freeze, firing staff, and banning corporate travel.

I’ve never seen the latter work in the long term. When all of this doesn’t work, then you really start feeling the pressure. You’ve heard it: “We need to push!!”. Or “You just need to squeeze them.” Or “push them really hard.” A certain amount of pressure (called a sense of urgency) is good, but too much is a risk to organizational stability.

So, what's the deal? Let us take a look at the Organizational (or Profitability) Duty Point. This is not a peer-reviewed article but merely a realization based on experience.

Given an organization's internal processes and procedures, the Organization Duty Point (ODP) is the equilibrium between the input (work performed) and output (EBITDA), considering moderate organizational pressure.

The company's internal procedures perform the coupling between input (work performed) and output (EBITDA). The ODP secures the highest organizational stability.

Low levels of organizational pressure may result in lower EBITDA and lower organizational stability.

Higher levels of organizational pressure will increase EBITDA in the short term but will lower organizational stability, thus putting the organization at risk in the long term.

How do I know what my ODP is? Well, that’s an art. You feel it if you have a 6th managerial sense and have been in the organization long enough. Let's investigate the different levels of organizational pressure, or “pushing”, as we call it.

No pressure – ZONE 1

This generally happens in governmental organizations, especially in underdeveloped countries. However, it is not completely uncommon to see this happening even in the Western private sector. The symptoms:

• There is no accountability for actions or outcomes; things are not followed through

• No sense of urgency

• Employees do not respect management authority because leadership is weak and soft

• Low performance is tolerated

• No incentives to work hard

• Low employee trust in leadership and organization

• Top performers will leave

I often see this in multinational corporations with tiny business units (BU) that nobody pays attention to. They have no pressure and are generally ignored. If the local head of the BU is weak, ZONE 1 usually happens.

Low Pressure – ZONE 2

Shockingly, there are quite a few companies in this zone. Face value – we do work. In reality, not so much. These organizations have a lot of “politicians”. This also happens in teams where the manager is changed every one to two years. Because bosses come and go, nobody is really able to asses the performance of the team players.

• Some level of format meetings where actions are followed up, but low performance is tolerated

• High performers are not rewarded

• No consequences for disastrous outcomes; things just move forward

• Leadership does not tolerate low performance verbally, but in reality, there are no consequences for poor performers

• Doers get more tasks while slackers keep on slaking

Moderate Pressure – Operating Duty Point - ZONE 3

This is the sweet spot. People do not slack but are not overworked. Things are achieved. There is a good balance between the performed work and the profit generated.

• There is a sense of moderate urgency from the leadership

• Projects and actions are followed through properly

• Management probes delays and expects remedial actions that are followed up

• Slackers are not tolerated

• Performers are rewarded

• Employees respect leadership and trust the future of the organization

• People are happy with their accomplishments work, but not exhausted

• People are not overworked, but they do not slack

• The leadership of the organization does not have ridiculous demands

High Pressure – ZONE 3

Things get iffy here. People feel significant pressure and anxiety. Despite following all internal processes and working hard, management demands more. This leads to frustration.

• Employees work at over 100%, but more is demanded

• Constant pressure to produce more

• Results are never enough

• Employees become frustrated, and the good ones start looking for an exit

• This approach will generate short-term growth but will affect morale

• Due to cost-cutting measures, it becomes increasingly difficult to perform one’s job

Very High Pressure – ZONE 4

This is the idiotic danger zone. Everything is frozen: you are not allowed to travel to see clients and cannot travel to train your employees. You cannot hire anyone. You need to cut costs. Hiring freeze – if someone leaves, you cannot hire a replacement. Shockingly, a LOT of companies do this to “grow”. This generally happens when you get new executives from outside of the industry / outside of the company. They come in with the mission to increase profitability. The major issue is that they have no clue about the operational details and that’s where the success is. They cannot improve any processes because they don’t know the operational details. Instead, they focus on “pushing”.

• The lemon is completely squeezed, nothing to get out of it anymore

• Employees do not trust the organization; the good ones are looking for an exit asap

• People give up, and despite the enormous pressure, some go into mental freeze mode due to the ridiculous pressure

• Frustration is very high, as well as anxiety

• People are fired for stupid reasons

 What now?

Increasing profitability from ZONE 1 (slacking organization) to ZONE 3 (optimal) will require “pushing” and pressuring the organization. But to go beyond that point and grow sustainably, pushing will not work. You have to improve the company’s internal processes. Let me give you some examples.

1.     Commissioning Pressure

I worked with a company that sold and installed industrial equipment. Commissioning was a significant effort, taking about one day per unit sold. If you count thousands of units sold yearly, the figures add up quickly.

To improve profitability, the commissioning engineers were pressured to perform the same commissioning procedure within four hours – namely, to do two units in one day. In theory, this could have been achieved. In theory. In reality, however:

• Many adjustments were needed during commissioning for the equipment to perform as required. This took time.

• Sometimes, there was no temporary power supply on-site. Commissioning engineers had to wait several hours until a diesel generator was available.

• Site access was often tricky; they had to carry tools very far.

All of this made it impossible to commission two units in one day. However, management demanded and demanded. The pressure was huge.

Guess what happened? The best guys left. The ones that were left behind could not care less and took even more time to complete the job, thus jacking up costs.

The funny thing is that the commissioning procedure was uselessly long. 30% could have been cut out without any impact on the quality of commissioning. Instead of optimizing the process, management chose the easy path of “pushing”.

 2.     Sales Pressure

Company XYZ was selling industrial equipment. To make an offer, the unit needed to be configured in specialized software – what options it should include, dimensions of the unit, etc. This configuration often took in excess of three hours only to make an offer.

The sales hit rate was about 30%, meaning that 70% of the offers were a waste of time. It would have been fine if a sales engineer took 10 minutes to make the offer. But as I said, it took an average of about three hours. That is a lot of wasted time!!

There were a lot of internal voices screaming for the configuration software to be improved. A few people even came up with proposals on how to do it to reduce the time needed to make a sales proposal. Management ignored this because it needed a capital investment of a couple of million dollars. But the rewards would have been epic.

What did management choose to do? PUSH PUSH PUSH. No process improvement, just pushing. Yes, the best ones left because they were fed up with being pushed against an inefficient process.

The Key Takeaway

If you take over a lazy organization, you must push people to increase efficiency. By pushing, you will reach the Organization Duty Point – the equilibrium point between input (work) and output (EBITDA). Pushing employees beyond this point is a short-term deal that will break the organization in the medium/long term.

To increase profitability past ODP, you need to look deep into processes and procedures to analyze how work is done and how it can be made more efficient.

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The Industrialist