Do you believe tech is accelerating your business operations or is it getting in the way? In 2023, many companies started to use more technology in their business operations, such as AI. Today, you will get a better understanding of operational excellence.
As reported by McKinsey & Company on January 19th, 2024, by Ian Colotla, William Fookes, Ted Iverson, Erik Schaefer, Richard Sellschop, and Joris Wijpkema.
Today’s good to great: Next-generation operational excellence
Any business that’s still standing after years of disruption has good reason to feel a sense of achievement. Only by learning, adapting, and getting really good at things that didn’t exist five years ago—such as the collaboration technologies and hybrid workplaces that have spread almost everywhere—could a company survive.
There’s no stopping now. Not with macroeconomic pressures rising and climate commitments coming due for everything from the energy transition to reducing emissions across the end-to-end supply chain.
But what will it take to get ahead? Companies are jumping into new opportunities: by mid-2023, one-third of global survey respondents reported that their organizations were using generative AI (gen AI) regularly in at least one business function—and 40 percent said that gen AI advances were prodding their organizations to increase overall AI investment. At the same time, the industrial robotics industry is projected to grow by more than 10 percent annually through 2030.
Whether that investment will pay off, however, is far from clear. So far in this millennium, many of the technological innovations leaders thought would accelerate productivity have instead barely touched it. This is in sharp contrast to 20th-century breakthroughs such as the moving assembly line, the shipping container, or just-in-time lean production (Exhibit 1).
But a few companies, in both the manufacturing and service sectors, are sailing past these obstacles. They’re achieving major gains year after year not just in productivity but also in metrics ranging from time-to-market to customer satisfaction and employee engagement.
What these organizations have in common is a renewed and expanded understanding of operational excellence. They aren’t simply grafting technology onto existing operations. Instead, they recognize that technology has changed fundamental assumptions about what operations can (and should) achieve—in much the same way that lean management and agile operating models challenged how leaders thought about waste, variability, and flexibility.
Crucially, the high performers routinely review and reimagine how their business generates value, reexamining all five elements of operational excellence (Exhibit 2):
- crafting a purpose and strategy that are clear to the entire organization
- articulating a set of behaviors and principles that put the strategy and purpose into effect
- building a management system that reinforces the behaviors and principles through a holistic set of processes
- refining the technical systems associated with value delivery to eliminate waste
- applying technology to augment human capabilities, rather than simply replace humans with machines
This approach can turn a challenged organization into a competitor, or a strong performer into a benchmark-setter. It’s how a mining company boosted output at its “fully optimized” facility by 25 percent in year one—and an additional 15 percentage points in year two and a further eight percentage points in year three—even as capital and labor costs remained flat. It’s how a financial institution reduced the cost of poor-quality outcomes by 30 percent and rework by 60 percent, while reversing pandemic-era troughs in customer and employee satisfaction.
Real operational excellence takes effort. But the results pay off.
Productivity and excellence depend on people
The payoff that matters is sustained, higher productivity to fuel innovation and growth. That’s true for a company and even more so across an entire economy. The McKinsey Global Institute estimates that for the United States alone, the difference between high and low productivity growth would amount to nearly $50 trillion in wealth by 2030.
Technology has been a tempting productivity shortcut for companies trying to find value from the latest innovations. Survey data show widespread disappointment at the returns from technology transformation, however, with most organizations achieving less than one-third of the impact they expected.
Even when technology efforts achieve good initial results, the success isn’t likely to last long. A 2022 survey on implementing transformations found that only 12 percent of transformation programs (across all types of transformation) sustained their performance gains for more than three years.
What’s missing from these change efforts, according to survey findings from 2010, 2015, 2017, and 2021, is a focus on the people side of productivity, performance, and technology. The elements of operational excellence fill that gap, acknowledging that solving a problem that appears to be technological—whether reengineering a factory or optimizing a generative AI prompt—usually requires a human touch.
An opportunity in operational excellence
While many are falling short, some are getting operations right—and reaping disproportionate rewards, as illustrated by examples from a multinational mining company, a North American financial institution, and a natural-resources conglomerate. All three started from positions of strength: high-performing and innovative, with fewer problems concerning legacy systems or brownfield sites than their peers. None was facing a crisis, only a sense that if they could get more out of their technology investments, they could pull even further ahead in their respective industries.
Sustained productivity and cost improvement. At the mining company, the most tangible improvements were direct productivity increases from tech optimization. Executives had estimated that its top-performing, most technologically advanced location could increase output only by about 7 percent, but within one year, output increased 25 percent despite no additional capital investment by the company. Two years later, output was nearly 40 percent higher than the starting point, still with minimal investment but with technology now yielding far greater impact. And at the financial institution, costs fell by more than 11 percent thanks in part to a 25 percent reduction in quality issues, together with judicious deployment of technologies that helped employees notice performance issues and make corrections in real time.
Improved organizational health. The natural-resource conglomerate’s operational-excellence transformation started with a single division, whose organizational-health scores rose by 11 percentage points above the rest of the organization. At the financial institution, employee turnover has fallen by about 15 percent. Both companies reported more success in finding latent talent in their organization: “People who said they never saw themselves as manager material are now running whole departments. That fills crucial gaps that we had a tough time filling through external recruitment—and it helps boost our employee satisfaction scores.”
Stronger resilience. The mining company credits its operational-excellence practices for its survival during the COVID-19 pandemic, giving its managers the flexibility they needed to respond to severe limits on transportation and staffing. Quick deployment of technology meant that managers who couldn’t legally be on-site could nevertheless conduct in-depth examinations of local processes to find new improvement opportunities.
Achieving operational excellence
McKinsey’s assessment of operational excellence, the Operational Excellence Index (OEI) (see sidebar, “Measuring operational excellence”), evaluates organizations on their level of adherence to more than three dozen management practices. Few start out scoring well. But the exceptions, such as the companies documented here, show that it is possible for organizations to sustain performance improvement. An analysis of organizations that have repeated the OEI assessment over the course of a transformation finds a crucial inflection point: once an organization sustains a score of at least 40 (on a 100-point scale) for 18 months, it is much more likely to retain a score of at least 40 even after an assessment gap of several years. In short, by adhering to OEI practices for 18 months—even if its adherence isn’t perfect—an organization is substantially more likely than its peers to sustain improved performance.
What it takes is leaders who continually monitor all five operational-excellence elements as the operating context evolves and have the courage to make changes wherever needed. That doesn’t mean tackling all five elements to the same degree at the same time. Instead, it requires an openness to addressing all five to solve the root causes of a problem that might initially appear much narrower.
Renewing corporate purpose and strategy
The first element for achieving operational excellence—and the most important for sustaining improvement, year after year and decade after decade—involves reexamining how well the company’s purpose meets current reality. Do the company’s operations today reflect its unique reason for being and how it says it wants to contribute to society? Do they align with its strategy? Most important, are they understood by the whole organization? At the most effective organizations, the leadership team finds ways to translate the corporate purpose into employees’ day-to-day work, from the front line on up. Only then does purpose truly activate the whole organization to deliver on its goals.
In assessing the mining company’s improvement potential, leaders recognized that the previously defined purpose, which emphasized performance excellence, no longer engaged the entire organization. The management team therefore gathered representatives from throughout the company, from the front line to the executive office, to understand how the purpose could evolve.
Only by taking the time and effort to incorporate hundreds of ideas from thousands of conversations could the leaders feel confident that they had arrived at a genuine consensus on purpose that would inspire everyone. The new purpose reached beyond the company to embrace societal impact, with employees understanding that the minerals they extract go into mobile devices that their children use for school and into cars that reduce carbon emissions.
That purpose now informs every aspect of how the company works, including how it measures success, shapes strategic choices, and thinks about technology: not as a tool for making current operations more efficient but as an opening for new levels of aspiration.
Recommitting to principles and behaviors
In most companies, it’s not just internal functions that are siloed but sites as well. Each has its own culture, principles, behaviors—and performance, often with stark differences between high- and low-performing locations. Operationally excellent organizations not only attain higher levels of average performance but also do so with far more consistency across their entire networks.
That’s typically thanks to a clear set of fundamental principles, which in turn guide a set of behaviors that everyone in the organization is expected to adopt, from the CEO to the front line. It’s how the organization builds a culture that helps the business thrive regardless of external conditions—and that can flex as conditions change.
The example companies illustrate behaviors that are essential to operational excellence. A relentless focus on waste enabled the mining company to squeeze more value out of its best-performing site, and the financial institution to break long-standing internal silos between its functions. Root-cause problem solving revealed that the mining company’s training technology could pay off with only a small additional investment, not wholesale replacement. Leading with humility allowed both companies’ leaders to empower frontline employees, recognizing that their experience gave them the deepest, most immediate understanding of operational challenges and opportunities.
Equally important, all three companies have made substantial commitments, through communications and capability building, to embed the principles throughout their organizations. From the first day on the job and through to executive development, all of the company’s employees are constantly learning about how to put principles and behaviors into action. At the mining company, senior executives received extensive coaching on developing a more open problem-solving environment and then coached their own reports on how to make similar changes in their management approaches. The financial institution built an entire academy of behavioral learning programs, with many offering certifications for career advancement. All three companies have democratized access to data, enabling frontline employees to make real-time adjustments to their work and try new ideas under an agile test-and-learn model that sees failure as a necessary step toward innovation.
Modernizing management systems
The management systems that companies adopt to reinforce new behaviors—the visual-management tools, performance boards, skills matrices, and standard operating procedures that together guide day-to-day activities, especially at the front line—are often the most visible legacy of an operational-excellence transformation. They’re also vulnerable to depreciation. Too often, a crisis or change in leadership provides just enough distraction to cause people to stop maintaining them, or even using them at all.
Yet management systems also represent an extraordinary opportunity for reinvention: technology has dramatically reduced the time and resources the tools require while at the same time expanding their potential results. In an era of flatter organizations and fewer management resources, that’s a particularly important boost for increasingly stretched middle managers. It also points to critical investments the companies made in helping leaders and managers learn new digital skills and in setting new expectations and metrics for innovation.
For the financial institution, a crucial change has come from new forms of AI and process automation. An immediate effect was to reduce tedious, manual tasks, but the more significant outcome was to give frontline workers complete, real-time transparency into their work, reducing their dependence on (often-delayed) reporting or manager feedback. Instead, they can immediately see what’s working, benchmarked against their team or against the client’s previous experiences. At the mining company, standard operating procedures are now in electronic form. Rather than taking months to update written manuals—and, in effect, hoping workers would tell one another about how to deal with changes that weren’t yet in training materials—employees can now see new procedures in video form, often at their workstations.
Sharpening technical systems
The next element focuses on the nuts and bolts of how work gets done: the technical systems that process work from start to finish, ideally in a fully integrated, streamlined way. Because technical systems tend to be where problems become apparent—the production line whose maintenance costs keep rising, the customer onboarding processes whose error rates spike—they can easily absorb most of a management team’s attention.
What the operationally excellent companies recognize is that problems in the technical system are almost always symptoms of larger issues that can’t be solved by technical solutions alone. Deploying technology without understanding the real sources of an issue is a recipe to make matters worse rather than better. Automating a low-productivity assembly line can simply speed up poor quality: leaders may discover that human workers can compensate for variability and instability, whereas sensors and software can’t.
For the mining company, a critical root cause of performance issues proved to be a top-down culture in which workers rarely felt encouraged to share their improvement ideas. Creating new space for bottom-up innovation revealed dozens of small process changes that cumulatively have had a huge effect: for each of the past three years, improvements to the technical system helped raise production by at least 10 percent, even as water usage fell by 7 percent—significant in a drought-prone region.
The financial institution faced a very different situation with its problem-resolution team, which struggled to get customers’ issues fixed if doing so involved even a small technology change. Crucially, leaders saw that the team didn’t need better IT or new tools: what they needed was a better collaboration model with the IT department, which prioritized larger projects. A new, faster escalation track for minor IT issues meant that anyone could get budget and IT support for a quick resolution. The result was 30 percent faster problem resolution and no extra cost.
Generating lasting value from today’s technology
Technology permeates operational excellence—but it isn’t the primary answer to operational issues. Instead, it’s a launching point for three questions that focus on how technology serves people:
- What unique new value could this technology create that otherwise would not be possible?
- How could this technology enhance our organization’s overall operational excellence?
- Will this technology augment our people and enable them to engage in a safer, more productive, more satisfying way?
This framing reinforces an end-to-end value stream perspective that is missing in many organizations. The mining company, for example, was fairly typical in that it had deployed tablets and connectivity applications for frontline employees to use in maintenance work. But doing so created little lasting value because the company started with the technology rather than the problem that the workers were having.
Once leaders could see the problem—even with the tablets, training workers on equipment updates took too long—the company could rethink its approach, understanding that the immediate training issue affected a much larger stream of value centering on major capital-equipment investments. The company can now update maintenance processes as soon as new or modified equipment comes online, with training modules delivered instantly to the right personnel.
For the financial institution, the ultimate outcome of its technology investment is data-driven decision making everywhere in the organization. Rather than build a large team of people—at high stress and turnover levels—to deal with quality shortcomings, the company is using AI to overcome data issues that were often the root sources of errors and customer complaints. For the remaining issues, AI is expanding worker capabilities, letting them trawl through previous resolutions to find answers that otherwise were sought over and over in manual processes.
Achieving operational excellence isn’t easy. Leaders will need to reassess the organization’s purpose and strategy and introduce new principles and behaviors—essentially, they will need to rewire the organization’s DNA. They will need to rethink their management and technical systems, and the supporting structures, processes, and objectives, with a ruthless focus on value creation.
Operational excellence is not something that leaders can whip up in time for the next quarterly report. It may take years—even decades—to unlock all the latent talent in an organization and deploy it to its fullest possible effect. If leaders take shortcuts and decide that “the tools alone will get us where we need to go,” the impact will likely evaporate in months.
It’s imperative—and an enormous opportunity—to blend stewardship and striving for excellence into an institution so that it keeps improving indefinitely.
Additional Technology Resources
Leveraging Artificial Intelligence and Machine Learning in Operations Management
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