by Eugene A. Razzetti
Webster’s Dictionary defines “value” as “relative worth, merit, or importance; monetary or material worth; the worth in terms of the amount of other things for which it can be exchanged.” Auditors (internal or external) can become explorers in general and “value explorers” in particular. Many auditors are value explorers now but don’t realize it. Many more don’t perform these duties but should. Top management should expect, support, and encourage exploration from everyone, not just auditors. In fact, “CEO” may need to become known as chief exploration officer instead of chief executive officer.
Here are eight areas for CEOs to consider when developing their auditors as value explorers and for auditors to consider when developing themselves as value explorers.
We all know that nothing good happens in an organization without management commitment. However, before audits can become meaningful explorations, top management must commit to and encourage exploration by its auditors and support the innovation and change based on the discoveries of their audits. Knee-jerk (emphasis on “jerk”), show-stopping responses such as “it takes too much time” or “this costs too much money” are unacceptable. In addition, top management must be willing to subject the findings and recommendations of the explorations to meaningful scrutiny. Like idea acceptance, idea dismissal must be the product of comprehensive, even exhaustive analysis.
The backpack of value explorers
Traditional explorers (e.g., mountain climbers) need properly loaded backpacks prior to setting off on their journeys. Likewise, CEOs and auditors need an innovation backpack to:
- Measure, benchmark, and optimize performances.
- Identify problems, root causes, and potential solutions.
- Monitor, defend, and implement the identified and agreed-upon solutions.
Here are some of the tools that value explorers need to have in their backpacks. These tools should be available anyway, if previous audits were meaningful and effective.
Written guidance and checklists are essential to the structure and the credibility of any audit. Validated checklists add consistency and repeatability to audits, ensuring not only that all key areas are adequately covered, but also that two different auditors auditing the same process to the same standard (i.e., using a checklist) will arrive at the same findings. Accurate audits benchmark the processes audited and are essential to ultimately adding value. You have to know where you are to arrive where you want to be.
Feedback (written and oral) is always important. Auditors cannot explore for added value without effective two-way communications with stakeholders. Customers, workers, middle managers, and sales people (maybe even boards of directors) are all part of the exploration and the discovery challenge. These stakeholders help auditors determine the root causes for their findings and help shape the potential solutions or mitigations. Moreover, auditors who actively seek feedback in their audits often discover problems in the feedback processes themselves, which can be corrected simultaneously. This is another “value-add” resulting from audit-explorations.
Metrics both frame and enable the findings and solutions for the value explorer. Measures of effectiveness (e.g., pieces per hour, pounds of scrap metal produced, break-even points, and cost of goods sold) accurately present the situation relative to established standards and often do the arguing for the auditor. They can also persuade top management to accept auditor recommendations (like capital improvements) and to incorporate them into organizational policies and procedures. CEOs must have the ability to subjectively and objectively quantify the success or failure of operations, products, or services; measure components of those operations; and compare their findings with established standards. With the right mindset and the right metrics, CEOs and managers can:
- Plan entire throughput processes based on missions, load locations, and available resources.
- Establish completion goals (pieces/day, number of days required, required deadlines).
- Evaluate operations in progress and assess the ability of assigned resources to meet the established goals and objectives.
Value explorers must ensure that the metrics and measures of effectiveness being used are appropriate, defensible, and uncomplicated. Simpler is always better.
Trend prediction is the enabler of the metrics discussed above and allows value explorers to gauge their ideas against established and undeniable historical patterns to:
- Avoid costly innovation missteps.
- Avoid being blindsided by technology shifts.
- Determine the time to shift product strategy.
- Plan for the protection of patents and intellectual property.
- Proactively align core competencies with technological imperatives.
Figure 1 describes trend prediction as an “S” curve. Trend prediction, as a valuable part of an audit-exploration, reminds top management that all products, processes, or services are subject to inevitable obsolescence and revision.
Figure 1: The Cycle of Obsolescence and Revision
An organization must locate itself on the “S” curve and must then maintain a sense of the slope. You can’t test limits until you have identified what they are, where your innovation is, and the way in which it is trending. You also need to know the upper limit, the lower limit, the comfort zone, and you must have a projection for the future. Last, you need to determine the areas in which the innovations are most urgently needed. For that you need an optimized set of metrics as described above.
Change, innovation, and exploration
Webster defines “change” as “to cause to become different; alter; transform; convert; or to undergo a variation.” Management books explain change in terms of:
- Transition and/or transformation
- Convergence of streams of thought
- Flexible and/or adaptive (organizations)
- Continuing and/or programmatic
- Intentional and/or accidental
- Internally driven and/or externally driven
Change, however far-reaching or limited, inevitably results in one of the following:
- A measurable change for the better
- No measurable change
- A measurable change for the worse
Webster goes on to define “innovation” as “something new or different introduced, and as the introduction of new things or methods.” If you’re a CEO or auditor:
- What does innovation look like?
- How do you know when the organization has been innovative?
- How do you know if the innovation (once identified) will do any good, especially if the organization is talking about spending a large amount of time and funding to develop it?
- How much good will it do for the amount of time and funding invested?
- How do you know that a gain in one area won’t result in an attendant loss in another?
- Can the innovation be quantified?
It is within these two definitions and their qualifiers that value explorers chart the course of the explorations. There is normally insufficient time or funds to be wasted on unimportant or low-priority findings or on corrective actions of questionable need, value, or effectiveness.
Testing the operational findings of value explorers
Operational findings resulting from audit-explorations should successfully pass a structured and objective scrutiny that looks holistically at the findings and the potential benefit of changes or modifications. Value explorers should develop a scrutiny structure like the one in figure 2, which lists Rosabeth Moss Kanter’s “Ten Commandments of Change” along the vertical axis.
Figure 2: Testing operational findings of value explorers
Value explorers should openly state their views and recommendations along with their findings to show as unambiguously as possible where value can be added. They should also express their findings in quantifiable terms, such as cost of goods sold, lower break-even points, or energy conserved. Processes or best management practice (BMP) revision must be done while bearing in mind the effect those revisions may have on related processes or other nodes in the supply chain.
Continuous improvement, for the purposes of this article, is the constant and ongoing search for actual and potential causes of nonconformance and following up with corrective actions that are then reviewed for effectiveness. Simply stated, it means that you can always make a process better. Continuous improvement is the theme and structure of the International Organization for Standardization (ISO) standards, such as ISO 9001, ISO 14001, and ISO 28000. Value explorers must have a continuous improvement mindset.
An audit finding that simply states that a process is “being performed in accordance with an established standard” should not be the end of the story. Rather, it should be a beckoning for value explorers to go further, do more, and seize an opportunity yet undiscovered; to take something that’s good and make it even better.
Exploration as a strategy
Forward-looking organizations that seek to reflect the aspirations of their stakeholders into their strategic plans are exploring when they translate those strategic plans into actionable and measurable goals and objectives. You can’t follow an aggressive program of setting, monitoring, and revising goals and objectives without exploring new ways to improve production, lower costs, or (in other ways) add value.
Exploration and risk
Companies that cannot tolerate failure don’t always avoid it. They often make bigger failures and learn less from them. You can’t innovate if you don’t take risks. However, how much risk is top management willing to take and at what point does the increased value overtake the increased risk? Who is exposed to the risk? Value explorers can perform risk assessment/risk management modeling before top management commits to new or modified strategic visions such as product/service line changes or reorganizations.
Although it may be the job of value explorers to identify risks as fully and as early as possible, top management must clearly state its tolerance not only of risk, but also of failures and mistakes. When things don’t turn out as planned (i.e., when there are failures or mistakes), value explorers need to:
- Determine what happened.
- Understand why it happened.
- Preclude its recurrence through either preventive or corrective action.
- Follow-up on the preventive or corrective action.
- Treat the failure/mistake as a learning experience.
Exploration accountability and ethical imperative
Webster’s defines “accountability” as “having to report to, explain, justify; be responsible or answerable… The acceptance of the success or failure to achieve the stated objectives.” Accountability often includes positive (e.g., promotion) or negative (e.g., termination) recognition. Value explorers are accountable to top management not only for the timeliness and veracity of their findings, but also for their ability to translate those findings into actionable intelligence. Similarly, top management is accountable not only to its superiors (e.g., the board of directors) but to the stakeholders to act on that intelligence.
The value explorers have an ethical imperative to develop and clearly state their findings during their explorations and top management has an ethical imperative to act on them. For one to act and the other to hesitate trivializes or nullifies both. Stakeholders expect value explorers to search for value for the organization and the community and to do it conscientiously by forthrightly stating their views as well as their findings.
Figure 3 describes the “Ethical Gauntlet of Exploration.” It starts with a set of accurate, defensible findings. The findings then undergo necessary and comprehensive scrutiny, the expectation of which is that only worthy findings will survive and contribute to the betterment of the organization. However, the diagram also reminds of the ever-present problems that can derail even the most clearly beneficial of initiatives, changes, or innovations. Value explorers and top management must evoke the ethical imperative as they run this gauntlet, especially when confronted with seemingly unassailable barriers, cons, or deceptions.
Figure 3: The ethical gauntlet of exploration
Why shouldn’t auditors be called value explorers; we’ve been called everything else! An auditor optimizes his or her contribution only when his or her explorations result in fixes for findings, solutions for situations, and rewards for risks. Top management must actively and visibly support audit-explorations and be willing to obligate the time and funding that it may take to thoroughly validate the findings, evaluate the proposed solutions, and weigh the attendant risks. Remember that it takes the same amount of effort to confirm a potential innovation as it does to dismiss it as potentially counterproductive or as a case of where risk out-weighs reward. With the optimal course of action determined, auditors and top managers have an imperative to execute that course of action in accordance the finest personal and corporate ethics.
About the author
Eugene A. Razzetti, CMC, retired from the U.S. Navy as a captain in 1992, a Vietnam veteran, and having had two at-sea and two major shore commands. Since then, he has been an independent management consultant, project manager, and ISO auditor. He became an adjunct military analyst with the Center for Naval Analyses after September 11, 2001. He has authored two management books and co-authored MVO 8000, a corporate responsibility management standard, and is an adjunct lecturer on strategic management and ethics at Argosy University. He is a certified management consultant with the Institute of Management Consultants and has served on boards and committees dealing with ethics and professionalism in the practice of management consulting. He is a senior member of the American Society for Quality and recently assisted the government of Guatemala with the ISO 28000 certification of its two principal commercial port facilities. He can be reached at www.corprespmgmt.com or email@example.com.