July 26, 2013

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The Case against “Best in Class”

How business process standardization can undermine business performance

If you are a regular at industry conferences, you’ve probably had your fill of business practitioners, consultants, and ERP or other packaged software vendors who extol the virtue of standardizing business processes — usually by adopting “best in class” processes supposedly embedded in market-leading ERP or niche packages. Clearly, standardization has its benefits, particularly within an enterprise and, to a lesser extent, in certain pockets of an industry. But my conversations with clients and prospects have convinced me that you can end up doing serious harm to your business if you jump on the standardization bandwagon without asking the following questions.

Is standardization the proper yardstick for measuring “best in class?”

Organizations differentiate themselves from competitors in countless ways. Some focus on the efficiency of their supply chain; others distinguish themselves on the basis of their assortments, their customer service, or their product. The processes that successful companies have developed to successfully differentiate themselves from rivals are, by definition, “best in class.” Implementing some standardized process in those areas would be a mistake.

In fact, the “best in class” catchphrase, heard so often that people rarely question it, usually is used in the wrong context. All organizations that are best-in-class in a process area have achieved that status not because they have standardized but because they have innovated. Innovation leads to differentiation, but maintaining differentiation requires continual innovation – what was best in class yesterday will be standard tomorrow. So if an organization stops innovating, others quickly overtake it. Hence the focus should be to innovate around anything that can lead to differentiation.

Where do I differentiate and where do I standardize?

This leads me to the natural follow-up question: What makes my business unique? Where are we already successfully differentiating ourselves? Look elsewhere for processes to standardize. Instead of looking at ERP or other packages as a way to improve differentiated processes that already are industry leading, use them as a way to create superior processes in non-differentiating functions.

Business should drive standardization, not vice versa. If you let your standardization program drive your business, you will never succeed. Either the business people will continue to disregard the program because they know that it is a mistake to replace truly unique and best-in-class enterprise processes with standard, non-differentiating processes, or they will follow your lead and ultimately drive all differentiation out of the organization.

Then why do so many companies seem to adopt just these sorts of standard packages?

Well, in fact, most companies don’t. Think about it. Most businesses end up customizing the heck out of “standard” packages. According to a 2012 report by Panorama Consulting, only around 11% of ERP and package implementations have no customization. What starts as business process standardization exercise ultimately ends up as a massive implementation, configuration, and customization exercise, in which the business loses all the advantages of implementing a standard, off-the-shelf solution.

No ERP or package solution knows more about your business than you do. You understand the core elements that allow you to deliver value to customers. There is no way that an industry best practice will enhance one of your differentiating process areas. And the better you understand your business, the more you can make an informed judgment about what processes are good candidates for standardization.

What will be the total cost of the standardization program I am considering?

All major standardization exercises are ultimately a painful experience because (a) you are trying to change how things get done; (b) some of the changes affect core business areas; (c) even with an intent to go “vanilla” in case of ERP or package implementation, you end up significantly configuring and customizing to differentiate some of your processes; (d) you usually end up engaging significant external effort to drive this change, and this raises longer term issues about maintainability, TCO, and ROI; and finally, (e) you have to rigorously quantify and showcase the benefits of the standardization exercise – a tall order.

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I realize my argument runs counter to the thought process in many IT organizations today. But we need a different approach to improving business processes – an approach driven by an understanding of what makes a business unique. It’s increasingly clear that the business should drive standardization, not the other way around. After all, our ultimate aim is successful performance. And focusing too much on standardized “best in class” business processes can easily distract us from that goal.