The Bottom Line: Necessary But not Sufficient!
“Being paranoid means looking and planning for the possible dangers, even in a situation that is good.”
– Eli Goldratt, Necessary But Not Sufficient
The first chapter of the book Necessary But Not Sufficient by Eliyahu Goldratt talks about being paranoid. That’s the first rule for success as a CEO, according to Scott Duncan, the founder and CEO of BGSoft, a leading software company. During a conversation with one of his account managers, he says that the real meaning of being paranoid is to be prepared for a danger even when everything seems to be just fine. “Don’t be blinded by the good appearance of things, take action to guarantee success,” is his motto.
It is quite a good tip for life. In regards to the book, however, it means that while other companies focus only on expanding their profits, BGSoft must focus on sustaining its growth. Since the growth history of the company has been an annual 40% for the past three years, a decline of only a few percentage points in that parameter will cause the market to react, which will probably cause their stock to dive.
Reading this book just after reading Goldratt’s first management-oriented praised novel, The Goal, I knew I could expect a writing style that would simplify even the difficult-to-understand theories.
Even CEO Duncan’s goal comes right at the beginning of Necessary But Not Sufficient — in the first chapter — which leaves the reader anticipating the process to achieve it successfully. The book combines the processes of adopting the Theory of Constraints (TOC) in a software company (BGSoft) and a manufacturing environment (BGSoft’s clients). The TOC for a manufacturing environment was broadly described in The Goal.
“The monster has become too big, too complex.”
The following chapters in the book describe the story of BGSoft from their days as a small startup to the enterprise they’ve become today, selling ERP (Enterprise Resource Planning) systems. It also explains the problem they’ve developed during those years — a software system that has grown to monstrous dimensions, which has become too complex to handle.
When the company was young, Lanny Abrahms, the co-founder who is also in charge of the R&D department, was involved with every module and feature in the code. If something was needed, he would write the code immediately himself. However, now that they’ve become an enterprise with huge libraries of software code, it is almost impossible for him to do that anymore, especially when the demand from the clients for new features continues to grow.
“I can still remember a time when each programmer knew all the modules”, Lanny says to Scott in one of their conversations. “Now I don’t think that there is one person who knows even a single module inside and out. The monster has become too big, too complex.”
Sounds familiar? It surely does — especially today, when computer software has expanded to new fields and techniques. Lanny’s point is that, since a programmer has only a rudimentary understanding of the whole program’s structure, every single feature that he programs creates at least new three bugs somewhere else. Also, not only there are more bugs because of the complexity of the program, it also takes a long time to fix each problem.
“In order to bring service back to an acceptable level, we must simplify the system. But in order to respond to the market needs, we must keep on complicating it,” Lanny explains the conflict.
To make the story short, the end of this discussion leads them to understand that resolving this conflict is not in the scope of the existing technology. They have to broaden the scope. The computer system is just one component of the game that includes not only their company but also their subsidiary, KPI Solutions, which implements their products at customer sites, and the customers themselves.
And if that’s not enough, there is one more component to the equation: In order to grow, BGSoft must penetrate new markets. Their current market — enterprises and large companies — is going to be saturated. However, penetrating the mid-sized market is not efficient, since the investment in human capital and the time to implement the system would not justify the money they can ask from the mid-market companies.
The bottom line, or what value does the system bring?
Later on, Scott and Maggie, the CEO of KPI Solutions (the subsidiary that implements the BGSoft product on customers’ sites), are called to an urgent meeting with Craig, the CEO of Pierco, one of their largest clients. During the meeting, Craig tells them about a new member of his board of directors — a “young, aggressive fellow” — who wants to know what is the bottom line their system brings to Pierco. Or as a matter of fact, what is the return on investment of $320 million in BGSoft’s product?
Though Craig thinks BGSoft’s product is important to his company, he doesn’t know how to answer these questions. Scott and Maggie try to say that the business justification for their system is in providing better visibility into the operation. Their software keeps data flowing by integrating computers into the system, so that when an order is entered in one of the sales offices it goes straight to the plant in no time. (The book was written in the early days of the internet.) It reduces the time to close the quarterly financial reports by getting the actual financial results as close as possible to the end of the end of each quarter. (What used to take 45 days, thanks to the BGSoft system, takes only 10 days), and so forth. All those things save time — but does that translate to cost-efficiency and profitability?
Scott and Maggie promise him to examine his books and find the bottom line. On their way home, they try to digest what happened at the meeting with Craig. That leads them to the conclusion there are three languages that different people relate to.
1. The computer system language: the configurations and data flow. This is the language they have tried to speak first with Craig when he brought up his problem.
2. The client language: middle-level management language. This includes cost reduction, productivity improvements, lead time reduction, etc.
3. The language of top-level managers, which is the bottom line language — dollars, net profit, return on investment, and so on.
These languages are interconnected, but Scott and Maggie have realized that the translation is not trivial.
These problems drive the search for the process both Pierco and BGSoft will follow to find the bottom line, which apparently leads to the key to sustaining growth — penetrating the mid-sized market. During that process, they meet with one of their small clients, Stein Industries, which, since the implementation of BGSoft’s ERP system, has managed to grow from a $50 million company to a $200 million company.
Gerald Fish, the CEO of Stein Industries, introduces them to the Theory of Constraints. He tells them how he managed to transform his company according to the theory and how BGSoft’s ERP system helped him do that. He started by analysing his company’s situation from his customers’ point of view. What will be important to them, what are their problems, and how he can help them solve them? After a long thinking process, he reached the conclusion that short lead time was a critical factor to his clients and would give his company a competitive edge. He also explains to them all the processes and how the ERP helped him address the bottlenecks he had found in his company. (The process Stein Industries followed is a short version of the process described in The Goal.)
Technology is important but not enough.
Only in Chapter 12 comes the first mention of the book title — Necessary But Not Sufficient — as BGSoft management reaches one of their conclusions. The technology, important as it is, is just a necessary condition for growth and success, but it is not sufficient if the rules that were dominant before the technology haven’t changed and have begun to impose limitations themselves.
To demonstrate his new theory, Scott gives the example of his secretary, Mary-Lou, and the letters. Suppose that Mary-Lou gives Scott a letter that has to be signed and sent to 20 people. A few decades ago, when they used to write letters on typewriters, if Scott had found a major mistake, he knew his limitation: it would be impossible for the 20 letters to be sent in the next hour, and he would not consider it as bad performance on Mary-Lou’s part. Back then he wouldn’t have thought of the typewriters as a limitation — and that’s what also defines the rule. “Our habits and measurements accommodate the existence of a given limitation,” Scott explains to Lanny and Meggie.
New technology came and made it easy to make changes to letters in five seconds. The limitation diminished, but what if the old rules that related to the typewriter days did not change? “The rules themselves will impose a limitation,” Lanny answered Scott’s question. In our simple example, that means that Scott will not expect to send the letter in the next hour and also would not consider it bad performance, even though the technology enables it. “To get benefits at the time that we install new technology, we must also change the rules that recognize the existence of the limitation.”
And though this letters example makes it sound very simple and even trivial, many companies fail to change the rules that are already linked to the old limitation. When Scott and Lanny started their company, they first came up with a new MRP (Material Requirements Planning) package, and their target market was clear. Up to that time, their customers used to calculate their ‘net requirement’ manually — a difficult and a time-consuming task that involved too many people in the organization working just on that. That’s why companies calculated ‘net requirement’ only once a month, even though it slowed the reaction time for new orders.
Their MRP package — the new technology — completed a job overnight that used to take 20 people several days. However, most of their customers were not thrilled with the outcome. Fewer people were needed to calculate, but more people needed to maintain the data accurately on the computer. Only the customers who made adjustments to their operations with the arrival of the new technology were able to gain the benefit the system offered. Most of their clients continued to run ‘net requirements’ only once a month. Even though the technology moved, the limitation of the rules stays in place. Back then they didn’t recognize it, either.
But that thinking led them to the question, what is the limitation that their current ERP system diminishes, and what about the rules? I will leave you here to explore the thinking process that will lead eventually to the bottom line of Pierco, their complex system, and the growth and the value. They will re-evaluate the change they were forced to make in their mind from selling technology to selling value, and what rules they will have to change in order to be sufficient and eventually achieve their goal.