How Deming would have loved Private Equity

Private equity fulfills one of Deming's key ideas - that profound knowledge generally comes from outside the system, or the business, and is only useful if it is invited and received with an eagerness to learn and improve. 
When private equity is invited into a business, the owner-operators are ready to hear suggestions on how to improve. New comments by the Private Equity team will be anticipated and absorbed. This power to influence is one of PE's main differentiators from the public market financing where faceless investors have little impact on strategy or operational priorities.
Deming believed that a system (business) cannot understand itself without help from outside the system, because prior experiences will bias objectivity, preventing critical analysis of the organization. Critical self-examination is difficult without impartial analysis from outside the organization. Also, insiders can rarely serve as hostile critics who speak frankly without fear of reprisals.
According to Deming, the journey from the prevailing management style to quality requires the understanding of systems. A system is composed of interrelated components. Quality is the optimization of performance of the components relative to the goal or aim of the system. Individual components of the system will reinforce, not compete with each of the other components of the system to accomplish the aim of the system.
Surprisingly, a lack of clearly defined purpose is common in U.S. organizations, particularly long-range purpose. Short-term thinking, quarterly and annual performance evaluations, and bottom line thinking forces attention to quick-fix solutions. Even if long-range plans exist, prevailing short-term thinking distracts from long-term behavior toward real solutions.
Quality is a systematic process: 

1. First, establish the aim: vision, mission, goals or constancy of purpose of the
2. system. According to Deming, without aim, there is no system (Identity).
3. Identify the components
4. Map the processes 
5. Examine the interrelationships of the components within the system (relationships).
6. Constantly improve on the processes of the system (Information/Learning/Knowledge.)

Why every private equity firm should read Deming

The best private equity partners strongly support that management must be judged not only by the quarterly dividend, but by innovative plans to stay in business, protect investment, ensure future dividends, and provide more jobs through improved products and services.
It is recognized that Private Equity is about the deal and, although they do leave the people side to the owners running the business, the best PE guys know operations and long term success do not flow from the numbers but from the passion of the people.
Talking about Deming in my past blog, and how much he impacted on my approach to strategy for growth, made me stop by Wikipedia and read about this extraordinary man who was honoured by the Japanese with the Deming Prize.
It took me back to my MBA days to review Deming's extraordinary impact that he made in the late 1980's. His focus on the people, despite being a statistics and measurement boffin, did inspire me to write my first book: "Long-term commitment to new learning and new philosophy is required of any management that seeks transformation. The timid and the fainthearted, and the people that expect quick results, are doomed to disappointment."
Deming had such an impact on humanizing business as his 14 points focus on how to motivate the brains in your business. Too many managers ask their team to check their brain at the door. Ford took over the world leader in cars - GM - after consulting help from Deming. 

Ford Motor Company was one of the first American corporations to seek help from Deming. In 1981, Ford's sales were falling. Between 1979 and 1982, Ford had incurred $3 billion in losses. Ford's newly appointed Division Quality Manager John A. Manoogian was charged with recruiting Dr. Deming to help jump-start a quality movement at Ford.^[17] Deming questioned the company's culture and the way its managers operated. To Ford's surprise, Deming talked not about quality but about management. He told Ford that management actions were responsible for 85% of all problems in developing better cars. In 1986 Ford came out with a profitable line of cars, the Taurus-Sable line. In a letter to Autoweek Magazine, Donald Petersen, then Ford Chairman, said, "We are moving toward building a quality culture at Ford and the many changes that have been taking place here have their roots directly in Dr. Deming's teachings."^[18] By 1986, Ford had become the most profitable American auto company. For the first time since the 1920s, its earnings had exceeded those of arch rival General Motors (GM). Ford had come to lead the American automobile industry in improvements. Ford's following years' earnings confirmed that its success was not a fluke, for its earnings continued to exceed GM and Chrysler's.

In 1990 Marshall Industries (NYSE:MI, 1984-1999) CEO, Robert Rodin, trained with the then 90 year old Deming and his colleague Nida Backaitus. Marshall Industries' dramatic transformation and growth from $400 Million to $1.8 Billion was chronicled in Deming's last book "The New Economics", a Harvard Case Study, and "Free Perfect and Now".

In 1982, Dr. Deming, as author, had his book published by the MIT Center for Advanced Engineering as Quality, Productivity, and Competitive Position, which was renamed Out of the Crisis in 1986. Deming offers a theory of management based on his famous 14 Points for Management. Management's failure to plan for the future brings about loss of market, which brings about loss of jobs. 

Why "Hey, I'm in a community" makes people work

In baseball, a guy hits a home run, goes around the bases, and all his teammates come out and they give him a high five, and that’s awesome. And then every time somebody hits a home run, they do that.

In private equity, people tend not to do that enough, so when Loewen & Partners achieves a goal, we have to go celebrate. When I did my MBA, we had a third of our mark based on a proper Masters' thesis, which was the best part of the MBA for most of us. I wrote my Masters' thesis on Total Quality Management, TQM, which the Japanese had embraced to leap frog themselves ahead of the Americans. I discovered the writing of Deming and his 14 points to achieve TQM. The last point stunned me - celebrate!

And there are two reasons why we need to do just that - throw a party. As human beings, we’re not emotionally and anthropologically different from who we were on the plains of Africa 100,000 years ago. We need to feel that "hey, I’m in a community."

The second reason is that out of everything that I could be focused on during a year, the thing that gets rewarded with a party will be the thing that I really focus on. So I’ll tell everyone, if we hit this mark or we hit that mark, we’re having a party. Then it’s been concretely expressed to the employees that that must be the important thing. So it’s a way to double and triple underline the really important goal.

Morley Salmon passes leadership of EMDA to Brian Koscak

How to get more from your people

I came out of Business School having used the case study method, where the professor speaks 10 percent of the time, and the students do the rest. It’s tremendously valuable in private equity to ask questions rather than do all the "telling". When you need the company to grow, you’ll get better answers than if you, the C.E.O., try to come up with most of the ideas and impose them. You actually get better work out of folks as a result of asking them to bring more to the strategy of the business.
Let me say something that’s going to sound surprising. As C.E.O. today, you actually can’t get anything done without your people. 
Fact. 
We can all understand this as we have all been at the bottom of the ladder, with bosses who inspire and some who do not. As a leader, if I have a really good idea and I go tell people, “Hey, you have to go do this,” or I impose it on them, people wonder, what does she really mean? It’s open to so much misinterpretation and confusion that actually you’re doing more harm for the organization than you are good.
So the job of the C.E.O. becomes, “Hey everybody, what are everybody’s good ideas? O.K., and what’s yours? That’s awesome. What do you think of that? Hmm,.."
Now, anybody can have a different view and it strengthens decision making.
I was reminded of this by a book recommended to me by one of Canada's leading coaches, Sharon Ranson who runs The Ranson Group, coaching executives in the financial industry. The Leadership Challenge is written by Kouzes and Posner and I assumed it would be a quick flip book but slowed down to appreciate the detailed examples. The Leadership Challenge is well worth a read over this holiday season, perhaps with a glass of eggnog?
You can reach Sharon Ranson at sranson At theransongroup.com