The Goal: A Process of Ongoing Improvement (43 page)
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Authors: Eliyahu Goldratt
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Interview with Richard Putz
, A Midwest Bank
Former CEO of Security Federal Bank.
DW: How did you conceive of applying the principles outlined in
The Goal
to the banking industry?
RP: I was flying back from Los Angeles one night. And I was remembering my days as a consultant at Coopers & Lybrand, working with the folks who were handling the manufacturing engagements. That’s where I was first exposed to
The Goal
. And I began to think that when you look at how a bank operates—for example, how it moves through the process of putting loans together—it’s really no different than manufacturing. Why couldn’t I use something that worked in manufacturing and apply it to a bank? The process is the same, we just give it different labels. So I started testing that out.
DW: How did that go over with the staff?
RP: In the beginning they were skeptical. I got all of the people who report directly to me into the board room, we sat down, I passed out copies of
The Goal
, and I said: “Guys, we’re going to come together every week on Friday. We’ll have fun, we’ll have food, the whole bit, but we’re going to discuss how to translate
The Goal
into banking terms.” I’m looking over there at my CFO, he has this constipated look on his face. I said, “Jim, is there something wrong?” He says, “Yeah.” I said “What?” He says, “There’s no index in the back of the book. How do we find anything?” I said, “You read it, it’s a novel.” He eventually became our biggest advocate. But he was totally skeptical.
DW: So how did you approach the problem?
RP: Traditionally the tough issue within banking is how you manage all the regulatory constraints that you’re faced with. Banks are just immersed in regulations. And if you actually tried to manage according to the regulatory measurements, your bank would fail. You bring that up to the regulators and they laugh. There’s just this whole slew of things, some of which contradict themselves. Some of them were created when lawmakers added them onto banking legislation because they looked good, or else to fit a particular situation at the time.
DW: You’re talking about regulations that keep banks out of certain businesses?
RP: Right, as well as those that mandate certain loan mixes, how you approach a market, that type of thing.
DW: Preservation of asset ratios and so forth?
RP: You got it. We took a slightly different approach. We decided we had to figure out what our real market constraint was. Using TOC, we found it had to do with service levels and how we were solving problems for our customers, not with the specific products we were offering. So we ended up gearing the whole bank toward solving problems for our customers. Part of the solution—the injection that broke the conflict—was the creation of personal banking for everybody, not just for wealthy people. Banks normally assume it’s not worth spending time with you if you have only $100,000 when they can spend that time with a guy who’s got $10 million. We discovered that a guy who only has $100,000 isn’t really going to spend a lot of time with you anyway; he’s just not there very often. So we stopped worrying about that and began focusing on how to better manage our customer relationships across the board. People ended up coming to our bankers anytime they had a financial problem. If we couldn’t solve it for them, then at least we could refer them to someone else, and we could give them good advice because we didn’t have an ax to grind. All we asked is that they let us manage their cash flow. Most people gave us everything in that regard, plus all their loans.
DW: You had a large mortgage business, too?
RP: Right. We had more than 300 correspondent banks, all over the country. National City and Bank of America would sell us mortgages. What we discovered—also using TOC, and this is how we expanded this business—is that most people with a loan viewed the bank that serviced the loan as their bank. So, whether Freddie Mac or Fannie Mae or PNC or any other investor actually owned the loan, we wanted to own the servicing asset. It was more valuable in terms of building customer relationships than the loan itself.
Also, these days it’s a lot easier, but it used to take forever to get a mortgage approved. That’s because there are all these things you have to have in place—again, to satisfy the regulators. We looked at that and said, “Okay, what’s the conflict here?” We built our conflict clouds, and we built a current reality tree, and we discovered there are only three things that end up deciding whether a loan is a go or a no-go. If we just focus on doing those three items, and worry about plugging everything else into the file later, we can speed things up. In fact we were able to cut the approval time almost in half. That made us really popular with realtors and mortgage brokers, which brought us more business.
DW: What effect did TOC have on customers’ ordinary day-today interactions with tellers?
RP: Most of the tellers said they wanted to do this TOC thing, too. Well, what do they really need to do? They really don’t need to know how to do future reality trees because their everyday life is not involved in future reality trees. But a teller is often dealing with conflict resolution. Tellers represent the frontline defense, especially at savings and loans. People come up to them and say: “This doesn’t work, this is out of balance, they screwed this up,” and it’s the tellers who have to solve the problem. So we taught them how to do conflict clouds. We created conflict-cloud worksheets for them, pads of 50 sheets, eight and a half by eleven. On the back side were the instructions, just in case they forgot how to do it. And the teller could actually fill in the cloud as he or she was talking to the customer, work out the problem, then rip off the sheet and do the next one. We had that going throughout the bank.
DW: It sounds like one of the main conclusions you reached was that the perceived constraint—the regulatory climate—was not the actual constraint.
RP: Correct. I would walk into the office of my compliance officer and I’d say, “Jeff, I got this idea.” And he would just automatically point to this poster on his wall that basically said: If you can dream it, there’s a regulation for it.
DW: And yet even in that environment, you found ways to grow.
RP: We did things in the banking industry that were totally unheard of. We actually had regulators visit us more often than other banks because those other banks kept calling them and saying: “They’ve got to be doing something illegal, you need to check them out.”
Interview with David Harrison
, Administrative Services,
Founder, Positive Solutions, Newcastle, U.K.
DW: Tell me about Positive Solutions.
DH: We provide management and administrative services to independent financial advisors. At present we have 755 of those people who rely upon us to help them with such things as compliance with financial services regulations, collection of commissions, and so forth. That’s the company we built, 60% of which we sold recently to the Aegon group, one of the world’s largest insurers.
DW: How have you made use of
The Goal
?
DH: In a couple of ways. First and foremost we use the five focusing steps almost instinctively now, in that we seek to identify the constraint in any problem before we do anything else. That’s sort of been my mantra, if you like—before we go any farther, let’s identify the constraint.
A South African Hospital,
University of Pretoria
DW: You’re not a typical Eli Goldratt disciple, are you?
AV: I’m a university professor with a dual appointment, head of the department of internal medicine at the University of Pretoria and head of the department of internal medicine at Pretoria Academic Hospital. In 1992 I got an invitation to attend one of Eli Goldratt’s courses in Pretoria. Not one run by him, himself, but by a subsidiary of the Goldratt Institute. At that time I knew nothing about Theory of Constraints and I had not read
The Goal
. I got myself into this out of curiosity more than anything else.
DW: Why? What kind of help were you looking for?
AV: Let me put it this way. I was literally sitting in my office, with my head in my hands, highly frustrated, with piles of paper all around me, going through correspondence. I opened a letter, saw that it was another invitation to a course, threw it away, and as I threw it in my wastepaper basket my eye caught the price of this particular course. It was the South African equivalent of about $18,000. That caught my attention. I thought if any course was worth that amount it was worth looking at. This was a two-week course in production management; the invitation was addressed to the engineering faculty. It had gotten to the medical faculty by mistake. The course was actually offered free to university professors. So because of my deep frustration with some of the management issues I had in my department, and because I had some time off the next week, I phoned. I planned to only go for the first week, because this was the time I had available. I was told that I had to attend the full two-week course. I said, “Yeah, we’ll see about that.”
DW: But you went?
AV: I went the first week. The course was taught with reference to a production environment and the logic around it. Now you don’t find much of this logic—the reality trees and that sort of thing—in
The Goal
. Quite a lot of that is in
It’s Not Luck
, which was published later. But the logic grabbed me because I was this frustrated man who was running a department of medicine and I had not been trained to do that. I had no insight into management issues. Suddenly I saw that here was a potential way of analyzing my department.
DW: What were the parallels?
AV: My department was in chaos, total chaos. Everything coming and going, not knowing what was what—much as things were in the factory that is the setting of
The Goal
. During the course,
The Goal
was mentioned. I bought it, read it through in one night, and I thought to myself, that’s
, A Midwest Bank
Former CEO of Security Federal Bank.
DW: How did you conceive of applying the principles outlined in
The Goal
to the banking industry?
RP: I was flying back from Los Angeles one night. And I was remembering my days as a consultant at Coopers & Lybrand, working with the folks who were handling the manufacturing engagements. That’s where I was first exposed to
The Goal
. And I began to think that when you look at how a bank operates—for example, how it moves through the process of putting loans together—it’s really no different than manufacturing. Why couldn’t I use something that worked in manufacturing and apply it to a bank? The process is the same, we just give it different labels. So I started testing that out.
DW: How did that go over with the staff?
RP: In the beginning they were skeptical. I got all of the people who report directly to me into the board room, we sat down, I passed out copies of
The Goal
, and I said: “Guys, we’re going to come together every week on Friday. We’ll have fun, we’ll have food, the whole bit, but we’re going to discuss how to translate
The Goal
into banking terms.” I’m looking over there at my CFO, he has this constipated look on his face. I said, “Jim, is there something wrong?” He says, “Yeah.” I said “What?” He says, “There’s no index in the back of the book. How do we find anything?” I said, “You read it, it’s a novel.” He eventually became our biggest advocate. But he was totally skeptical.
DW: So how did you approach the problem?
RP: Traditionally the tough issue within banking is how you manage all the regulatory constraints that you’re faced with. Banks are just immersed in regulations. And if you actually tried to manage according to the regulatory measurements, your bank would fail. You bring that up to the regulators and they laugh. There’s just this whole slew of things, some of which contradict themselves. Some of them were created when lawmakers added them onto banking legislation because they looked good, or else to fit a particular situation at the time.
DW: You’re talking about regulations that keep banks out of certain businesses?
RP: Right, as well as those that mandate certain loan mixes, how you approach a market, that type of thing.
DW: Preservation of asset ratios and so forth?
RP: You got it. We took a slightly different approach. We decided we had to figure out what our real market constraint was. Using TOC, we found it had to do with service levels and how we were solving problems for our customers, not with the specific products we were offering. So we ended up gearing the whole bank toward solving problems for our customers. Part of the solution—the injection that broke the conflict—was the creation of personal banking for everybody, not just for wealthy people. Banks normally assume it’s not worth spending time with you if you have only $100,000 when they can spend that time with a guy who’s got $10 million. We discovered that a guy who only has $100,000 isn’t really going to spend a lot of time with you anyway; he’s just not there very often. So we stopped worrying about that and began focusing on how to better manage our customer relationships across the board. People ended up coming to our bankers anytime they had a financial problem. If we couldn’t solve it for them, then at least we could refer them to someone else, and we could give them good advice because we didn’t have an ax to grind. All we asked is that they let us manage their cash flow. Most people gave us everything in that regard, plus all their loans.
DW: You had a large mortgage business, too?
RP: Right. We had more than 300 correspondent banks, all over the country. National City and Bank of America would sell us mortgages. What we discovered—also using TOC, and this is how we expanded this business—is that most people with a loan viewed the bank that serviced the loan as their bank. So, whether Freddie Mac or Fannie Mae or PNC or any other investor actually owned the loan, we wanted to own the servicing asset. It was more valuable in terms of building customer relationships than the loan itself.
Also, these days it’s a lot easier, but it used to take forever to get a mortgage approved. That’s because there are all these things you have to have in place—again, to satisfy the regulators. We looked at that and said, “Okay, what’s the conflict here?” We built our conflict clouds, and we built a current reality tree, and we discovered there are only three things that end up deciding whether a loan is a go or a no-go. If we just focus on doing those three items, and worry about plugging everything else into the file later, we can speed things up. In fact we were able to cut the approval time almost in half. That made us really popular with realtors and mortgage brokers, which brought us more business.
DW: What effect did TOC have on customers’ ordinary day-today interactions with tellers?
RP: Most of the tellers said they wanted to do this TOC thing, too. Well, what do they really need to do? They really don’t need to know how to do future reality trees because their everyday life is not involved in future reality trees. But a teller is often dealing with conflict resolution. Tellers represent the frontline defense, especially at savings and loans. People come up to them and say: “This doesn’t work, this is out of balance, they screwed this up,” and it’s the tellers who have to solve the problem. So we taught them how to do conflict clouds. We created conflict-cloud worksheets for them, pads of 50 sheets, eight and a half by eleven. On the back side were the instructions, just in case they forgot how to do it. And the teller could actually fill in the cloud as he or she was talking to the customer, work out the problem, then rip off the sheet and do the next one. We had that going throughout the bank.
DW: It sounds like one of the main conclusions you reached was that the perceived constraint—the regulatory climate—was not the actual constraint.
RP: Correct. I would walk into the office of my compliance officer and I’d say, “Jeff, I got this idea.” And he would just automatically point to this poster on his wall that basically said: If you can dream it, there’s a regulation for it.
DW: And yet even in that environment, you found ways to grow.
RP: We did things in the banking industry that were totally unheard of. We actually had regulators visit us more often than other banks because those other banks kept calling them and saying: “They’ve got to be doing something illegal, you need to check them out.”
Interview with David Harrison
, Administrative Services,
Founder, Positive Solutions, Newcastle, U.K.
DW: Tell me about Positive Solutions.
DH: We provide management and administrative services to independent financial advisors. At present we have 755 of those people who rely upon us to help them with such things as compliance with financial services regulations, collection of commissions, and so forth. That’s the company we built, 60% of which we sold recently to the Aegon group, one of the world’s largest insurers.
DW: How have you made use of
The Goal
?
DH: In a couple of ways. First and foremost we use the five focusing steps almost instinctively now, in that we seek to identify the constraint in any problem before we do anything else. That’s sort of been my mantra, if you like—before we go any farther, let’s identify the constraint.
Beyond that, a big part of what we do is acquire new independent financial advisors—we want people to join our organization, and the people we use to recruit them we call our business consultants. Oded Cohen, of Goldratt UK, helped us build a process for that. He broke it down into very discrete steps and helped us program software which helps us track how each of our business consultants is succeeding, or not. At any point in time they may have 150-200 people they’re having conversations with about joining Positive Solutions. We’ve got them to think of each of those people as a project. That streamlined the process and also got our business consultants to think in a more logical fashion.
DW: What distinguishes Theory of Constraints from other management techniques you’ve looked at?
DH: I think it can be very easily applied in a simple process. As I have said, the one I use more than anything else is the five focusing steps. A lot of the problems which arise in business are about lacking focus. I guess if people were to describe Positive Solutions, it would be as a very focused organization. We don’t seek to be all things to all people. We stick to what we know will be the most profitable areas to us at any point in time. We’ve been working on the same constraint for five years.
DW: And that is?
DH: Our ability to recruit the right people at a pace which fits our business plan. The more people we have, the more profitable we become. A lot of companies by now would have given up at about 300 advisors, something of that nature. And they’d say the constraint is no longer recruiting people, what we should be doing is trying to improve the productivity of those people, or trying to get a better deal out of the manufacturers of financial products. But we’ve kept the focus on the fact that as long as the people that you are recruiting are profitable, then why stop recruiting them? Just because it’s not getting any easier? Well, it’s not actually getting any harder, either. It’s just another day at the office. But we can work all of our financials back to simply the number of advisors that we have. Therefore, we don’t go any farther.
DW: That’s your focus?
DH: That’s our focus. We’ve identified the constraint, now let’s exploit it, make the most of it. Therefore we have easily one of the best recruiting machines in the UK in this sector. We approach recruitment very differently from all our competitors. Our competitors will advertise, they’ll try to acquire businesses, for example, rather than the approach that we have, which is to recruit people one by one. Our rate of growth might at first appear to be slow. But because our advisors have been recruited in the right way, we don’t lose many of them. That’s the beauty of TOC: as you really dig in to identify the constraints, you begin to understand these things.
DW: Have you thought about what the next constraint will be?
DH: Of course, at present there is still a market for further independent financial advisors to join us. There are about 25,000 of these people in the UK and we have less than 1000 of them. Now the quality of some of those 25,000, and the fact that not everybody will join us in any case, means at some point the effort needed to increase the capacity just won’t be worth it versus the energy we could put into something else. At that point, you say, “We’ve now changed our plan. What is the constraint in our new plan?” Frankly, it’s about retaining the clients’ money. At present what we do is introduce clients to a variety of manufacturers of financial services. The money goes to the manufacturers and they give some of it back to us in the form of commissions or fees. The next step really is for the clients to give us the money, and for us then to give some of it to the fund managers and the life insurers. So once we’re a certain size, the constraint will begin to move. We’ll have a brand, and the revenue needed to communicate that brand, so there won’t be quite as much effort to get people to join us. At that point the constraint shifts.
Interview with Dr. Antoine Van GelderDW: What distinguishes Theory of Constraints from other management techniques you’ve looked at?
DH: I think it can be very easily applied in a simple process. As I have said, the one I use more than anything else is the five focusing steps. A lot of the problems which arise in business are about lacking focus. I guess if people were to describe Positive Solutions, it would be as a very focused organization. We don’t seek to be all things to all people. We stick to what we know will be the most profitable areas to us at any point in time. We’ve been working on the same constraint for five years.
DW: And that is?
DH: Our ability to recruit the right people at a pace which fits our business plan. The more people we have, the more profitable we become. A lot of companies by now would have given up at about 300 advisors, something of that nature. And they’d say the constraint is no longer recruiting people, what we should be doing is trying to improve the productivity of those people, or trying to get a better deal out of the manufacturers of financial products. But we’ve kept the focus on the fact that as long as the people that you are recruiting are profitable, then why stop recruiting them? Just because it’s not getting any easier? Well, it’s not actually getting any harder, either. It’s just another day at the office. But we can work all of our financials back to simply the number of advisors that we have. Therefore, we don’t go any farther.
DW: That’s your focus?
DH: That’s our focus. We’ve identified the constraint, now let’s exploit it, make the most of it. Therefore we have easily one of the best recruiting machines in the UK in this sector. We approach recruitment very differently from all our competitors. Our competitors will advertise, they’ll try to acquire businesses, for example, rather than the approach that we have, which is to recruit people one by one. Our rate of growth might at first appear to be slow. But because our advisors have been recruited in the right way, we don’t lose many of them. That’s the beauty of TOC: as you really dig in to identify the constraints, you begin to understand these things.
DW: Have you thought about what the next constraint will be?
DH: Of course, at present there is still a market for further independent financial advisors to join us. There are about 25,000 of these people in the UK and we have less than 1000 of them. Now the quality of some of those 25,000, and the fact that not everybody will join us in any case, means at some point the effort needed to increase the capacity just won’t be worth it versus the energy we could put into something else. At that point, you say, “We’ve now changed our plan. What is the constraint in our new plan?” Frankly, it’s about retaining the clients’ money. At present what we do is introduce clients to a variety of manufacturers of financial services. The money goes to the manufacturers and they give some of it back to us in the form of commissions or fees. The next step really is for the clients to give us the money, and for us then to give some of it to the fund managers and the life insurers. So once we’re a certain size, the constraint will begin to move. We’ll have a brand, and the revenue needed to communicate that brand, so there won’t be quite as much effort to get people to join us. At that point the constraint shifts.
A South African Hospital,
University of Pretoria
DW: You’re not a typical Eli Goldratt disciple, are you?
AV: I’m a university professor with a dual appointment, head of the department of internal medicine at the University of Pretoria and head of the department of internal medicine at Pretoria Academic Hospital. In 1992 I got an invitation to attend one of Eli Goldratt’s courses in Pretoria. Not one run by him, himself, but by a subsidiary of the Goldratt Institute. At that time I knew nothing about Theory of Constraints and I had not read
The Goal
. I got myself into this out of curiosity more than anything else.
DW: Why? What kind of help were you looking for?
AV: Let me put it this way. I was literally sitting in my office, with my head in my hands, highly frustrated, with piles of paper all around me, going through correspondence. I opened a letter, saw that it was another invitation to a course, threw it away, and as I threw it in my wastepaper basket my eye caught the price of this particular course. It was the South African equivalent of about $18,000. That caught my attention. I thought if any course was worth that amount it was worth looking at. This was a two-week course in production management; the invitation was addressed to the engineering faculty. It had gotten to the medical faculty by mistake. The course was actually offered free to university professors. So because of my deep frustration with some of the management issues I had in my department, and because I had some time off the next week, I phoned. I planned to only go for the first week, because this was the time I had available. I was told that I had to attend the full two-week course. I said, “Yeah, we’ll see about that.”
DW: But you went?
AV: I went the first week. The course was taught with reference to a production environment and the logic around it. Now you don’t find much of this logic—the reality trees and that sort of thing—in
The Goal
. Quite a lot of that is in
It’s Not Luck
, which was published later. But the logic grabbed me because I was this frustrated man who was running a department of medicine and I had not been trained to do that. I had no insight into management issues. Suddenly I saw that here was a potential way of analyzing my department.
DW: What were the parallels?
AV: My department was in chaos, total chaos. Everything coming and going, not knowing what was what—much as things were in the factory that is the setting of
The Goal
. During the course,
The Goal
was mentioned. I bought it, read it through in one night, and I thought to myself, that’s
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