Principle-Driven Operations:
Clarifying and Challenging the Basis of Work and Change

By Dr. Robert H. Reck

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Organizational conflicts, unclear roles and responsibilities, inconsistency in operations across the business, and inability to implement needed changes are problems plaguing many organizations today. Many of these problems could be avoided, however, by creating and gaining commitment to a set of operating principles that would guide decision-making in problem areas.

Organizations that articulate basic values and philosophies about its work, people, technology, and operations conduct their business more effectively. In these companies, valuable time is not wasted dealing with conflicts that arise during projects when employees disagree on the interpretation of corporate strategy. Successful companies have a set of "principles" that guide how the resources and operations should contribute to the company's goals and strategies. Thus, if a principle is applied to a particular decision, that decision should support the company strategy.

What are Principles?

Principles are the "rules of the road," which help managers steer corporate operations. They are simple statements for each business function that describe the company’s fundamental beliefs and how it wants to conduct its business. Principles are rules, guidelines, or methods for action, and thereby form the basis for decision-making and conduct. They are the articulation of business strategy in a particular area of the business, such as information systems or human resources.

Principles are not generalizations or statements of the obvious; they provide direction where equally viable alternatives exist. Principles seldom describe routine or non-mission critical procedures. Rather, they describe an organization's unique approach to "front burner" issues such as technology deployment, staffing, investment, and financial management. Principles are best stated in the positive, present tense, and can be prefaced by "We believe..." They supplement the formal methods and policies stated in corporate manuals by making the implicit explicit. A good set of principles generates energy, discussion, and group focus and alignment. Ultimately, principles are the basis by which many issues facing particular areas of a business are resolved.

Every business or organization operates according to some set of core beliefs or values, even if they are not explicitly stated. In some companies, the business operates smoothly and employees and managers have close working relationships, despite the absence of a formal set of principles. Typically in these organizations, however, managers have discussed and agreed upon what are priorities, how the business should operate, how employees and managers should behave, and what employees should do in particular situations. Although the principles have not been written, the employees of the organization know what they are, and make decisions and operate accordingly.

Problems occur when an organization has no agreed upon set of principles, and has a working environment characterized by inconsistent behaviors, distrust, and frustration among employees and managers.

Life Without Principles - Four Case Studies

The following case studies highlight some common, challenging situations where principles can have a positive impact. The outcomes of these case studies will be revisited later in the article.

Information Systems

A vice president of sales was shocked by the limitations of her company’s expensive, new database. It could not track customer orders or shipments because the system did not connect to key manufacturing systems. In addition, revenue and profitability figures had to be manually loaded each month from several other financial systems. The company continued to be impaired in dealing with its customers. The head of corporate information systems responded to her complaints, "Our job is to support the technology needs of all corporate divisions, but each division has very different needs. We can't dictate how one division should run their business in order to get efficiencies in another. We're spread very thin and can’t even support every request we get."

Human Resources

A vice president of human resources faced many problems and ambiguities within his company. Senior management wanted the company to be managed more consistently, yet each division managed employees in its own way and with very different styles. Compensation and commission plans were considered the province of the division managers, yet corporate frequently overrode those plans with special bonuses. Staff mobility was driven by the salary and location offered by each division, rather than by overall company needs. Managers recruited and fired staff inconsistently, and several times, the company faced legal action for the improper actions of a manager. Several divisions offered no training or career development, while others offered formal development programs. Executives voiced concern over these inconsistencies, but there had never been a basis for aligning or reconciling the differences.

Project Management

A CEO asked one of his top performers, Dana Williams, to lead a project renovating the company’s distribution channels. Project 2000 was launched with a great deal of anticipation and fanfare. Six months later, a comprehensive plan had been prepared. However, management was disappointed with the lack of operational results. The project sponsor/CEO was putting increasing pressure on Williams to deliver results. Proposed impacts of Project 2000 on various divisions were criticized by the divisional management, and some executives stated that they would resist the planned changes. Executives asked when they would be asked to ratify the plan and cost estimates. However, cost and benefit estimates had not been prepared in the project’s initial stage, and there was no project budget for systems software or consultants. Williams felt that doing a cost justification and project budget would slow down Project 2000 just when it needed to begin implementation.

Financial Processes

The financial systems of a medium-sized service company needed to be replaced due to year 2000 challenges and notification by their software vendor that key application support would cease on several critical applications. The management in the finance division wanted to use the change as an opportunity to update the financial management processes for the entire company. However, several key managers wanted to duplicate the old functionality in the new systems and leave operations unchanged, thereby continuing the existing financial practices, including fragmented financial management approach across divisions, inconsistencies in the financial responsibilities of line managers, outdated approval levels that inhibited mission execution, and compartmentalization of performance data in the organization. In addition, the proposed changes triggered various parts of the company to start jockeying for position and power as the systems' definition process started. Overall, the financial strategy of the group was not clearly defined or well understood.

Lessons From the Case Studies

The failure to articulate and align key managers around the basic operating rules of a business was detrimental to each of these companies. The situations summarized in the four case studies could have been avoided, had the business managers agreed to a set of operating principles in the areas under pressure. For instance, the lack of consensus and shared understanding of technology deployment guidelines can lead to problems similar to those in the information systems example. Principles would have provided the information systems group with a clear direction and strategy, especially involving customer data and support, for connectivity and integratability of their new system.

In the human resources case, principles would have provided the human resources group with a set of consistent operating practices that the management agreed to uphold and support. In the Project 2000 example, Dana Williams and his CEO would have clearly articulated the operating principles for their project, including major milestones and how the business units were expected to participate. Further, they would have discussed with the other executives and honed these principles until they had alignment and readiness to proceed with the project. Finally, the services company in the last case would have had a set of principles for the financial management of the company that supported its overall financial strategy. Principles around change and renovation of the company's financial control environment would have been instrumental to directing the types of changes needed in the business.

When Do You Need Principles?

A written and agreed upon set of principles is necessary whenever a particular area of the business has no formal or explicit rules and consequently, policy and direction are open to individual interpretation. This often results in conflict, disagreement, or unsatisfied expectations around decisions that relate to the business' strategy. While each area of an organization will benefit from clearly articulated principles, they are especially important for those areas under strategic pressure or central to a strategic change.

Staff functions, such as information systems, human resources, and accounting, especially benefit from principles. These departments have many conflicting demands from their business unit "customers," as well as from outside the corporation. Yet these departments can have significant impact on the performance of the company. These departments wrestle continually with issues regarding who receives immediate service and under what circumstances, how service is delivered, whether outsourcing should be used, who is responsible for decisions and actions, who has the authority to act independently, and how priorities are set and implemented when conflicts or excessive demands emerge. These issues are critical points for discussion in the creation of principles.

Cross-functional processes, such as order fulfillment, also benefit from principles. The interdependence of business departments is evident in most business processes. For instance, an order fulfillment process cuts across marketing and sales, manufacturing, purchasing, distribution, and service. Issues and questions for these departments include what and how critical information will be managed and shared; how conflicts are escalated and resolved; and how work will flow and be managed when it extends across divisions, geographic locations, or processes. Principles in such areas will materially speed up operations, reduce costs, and smooth the conflicts often prevalent in cross-functional processes.

Projects, which are often structured like organizations, can significantly improve performance with the use of principles. Projects face questions and issues including how a project is managed, staffed, and resourced; the length of time resources will be used; the approach to the work; funding and expense management; major milestones and deliverables and their timing; and communications with the rest of the organization.

How Do You Define Principles?

Principles are driven by the values of an organization. For example, how do we want to treat our customers, our employees, the company assets, capital expenditures, and technology? What degree of individual autonomy in decision making do we want? How do we want to see people treated? What management style do we want to see consistently used across the business? What are the values regarding control, trust, structure, hierarchy and empowerment? Values in these areas form the basis for a consistent and practicable principle set that the business can use to guide its decision-making.

The greatest value of principles is often the dialogue and discussion that occurs as the principles are defined. For this reason, we discourage one or two people drafting the needed principles and announcing them to the rest of the company. The result is passive acknowledgment of the principles with no imperative or desire to follow them. Consensus and understanding can best be achieved when a number of people throughout the organization participate in the definition of principles. One successful alternative to managers dedicating hours to frame principles is for a representative group to draft a principle set and a set of business implications. These two items communicate to the management group the full spectrum of thinking around key principles.

The best approach for defining principles is when the management team or cross-organizational team gathers routinely to identify and assess the current and future "front burner" issues. The team then defines principles for how those situations will be handled. The meetings should encourage give-and-take discussion and negotiation to help the group align on a common set of principles that everyone in the company can support. As valid alternatives exist for each issue, disagreement is inevitable but consensus and sponsorship is critical.

During the process of defining the principles, the implications of the principles on the business and operations must be openly discussed and assessed by the framers as well as the stakeholders who will be affected by the new principles. How will the principles impact both the determination and implementation of the business strategy? Will special actions be required or costs incurred in order to implement this principle? Identifying and understanding the implications of the principles are important to developing a usable set that doesn't have hidden consequences or disappointments.

Living With Principles

The case studies presented earlier each had successful outcomes due to the framing and use of principles. This review of each case shows a few of the principles each organization defined that helped them work through their impasse.

Information Systems Example

The business unit heads, including sales and information systems, worked for several months to define more than 30 principles that addressed their organization’s technology infrastructure, applications, data, and information systems’ organization and management. Several key principles included:

• "Applications dealing with customer information will be integrated, connected and technically available to all parts of the organization."

• "Customer information must be accessible from any part of the organization within seconds."

• "A steering committee appointed by the executive committee will create the information systems strategy and approve specific information systems projects. The committee must ensure that the information systems strategy supports the company strategy."

Because of the importance of the customer database to this company, the application was changed and real-time links were created to the systems that contained customer order, service, and financial information. The customer database has become a model for future applications, and the new steering committee ensures that resources are available to continue the new information systems strategy.

Human Resources Example

Based on interviews with most managers in the organization, a set of 35 human resource principles and implications was discussed, drafted, edited, and adopted by the senior executives. These included the following key principles that materially changed the role of human resource management in the organization:

• "Human resources is facilitator, coach, educator and consultant - not cop."

• "Unit managers must learn their roles, functions and responsibilities in human resource management."

• "Business unit/human resource partnerships are required to effectively manage human resources and ensure uniformity of approach."

To help implement the principles, the company launched an aggressive management education program on human resource practices and created the new position of executive vice president of human resources that sat on the executive committee. With the adoption of "uniform approach" principles, the organization started resolving many of the human resource issues plaguing the company.

Project Management Example

Dana Williams and the CEO listed the problems and issues facing Project 2000. They then drafted 21 principles and their implications on the project and business operations. The consultant to the project helped facilitate buy-in and alignment on the principles. The following principles especially helped get the project back on track:

• "The project team will be comprised of full-time staff appointed by the Executive Committee. Their tenure on the team will be a minimum of one year."

• "The project's sponsor is the CEO. The project leader is Dana Williams. He reports to the CEO and acts on behalf of the CEO and Executive Committee."

• "The Executive Committee will serve as a project steering committee, approving plans, resources, and funding."

The Executive Committee completed full-time staffing of the project. Plans and resources for Project 2000 were approved in one of the meetings to specifically demonstrate committee commitment. Responsibility and authority surrounding William's job and roles were clarified to the rest of the company, and especially to his peers who were serving on the project team. The project quickly moved into implementation.

Financial Processes Example

The confusion about the financial strategy of the company was clarified by the creation of 20 key principles by senior executives. In a company-wide meeting, the principles were endorsed by a majority in order to add momentum to their use in the organization. Some key principles that helped pull the diverse parts of the business together included:

• "Enterprise-wide controls ensure consistency throughout the organization."

• "Authority and accountability are aligned in all parts of the company."

• "Line managers can implement approved plans without further approval."

• "Information (with a few exceptions) is shared and available across the enterprise."

Financial policies were issued based on the principle set and used to standardize operations across the company. One of the most helpful changes was the raising of expenditure approval limits for line managers. Also, the widespread sharing of information had significant impact on both internal operations productivity and on customer service.

Summary

Many organizations "make up the rules" as they go along. Each situation and decision is evaluated independently in terms of how well it fulfills the corporate strategy. This is sometimes effective for companies in the short term. However, managers of these companies report being consistently reactive to situations, having little time for strategic thinking or planning, and feel they deal with some issues over and over again as though they were unique each time. All organizations face problems, issues, and competitive threats. However, those that are successful and nimble in the face of competition, create mechanisms to successfully anticipate problems and decide in advance how they will be handled. They agree upon the "rules of the road" and ensure that they are communicated to the rest of the organization. Finally, they keep their principles alive and current by frequently revisiting, debating, improving, and aligning around their principle set.

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