Is cross-functional collaboration finally becoming a key operational priority for companies, after years of talking about and toying with it while functions mostly stayed within their silos? Perhaps, suggests new research from PricewaterhouseCoopers.
To some extent, the shift is being driven by changing customer behaviors, according to PwC. The study report presents a not-uncommon type of scenario, where a company takes a cost-driven step like reducing inventory or customer-service staffing. Too often, customers then see empty shelves or suffer frustratingly slow response times, and in today’s world they’re not going to be patient in the face of such negative experiences for long.
There are risks, PwC says, when “each function improves its own performance without thinking of cross-functional tradeoffs and customer impacts first.”
Gaining an understanding of what customers value increasingly demands function-to-function collaboration. Customers are perceiving value not just in the product or service per se, says Rodger Howell, a principal at Strategy&, the management consulting firm (formerly Booz & Co.) that PwC acquired last year. Their assessment of value takes into account questions like: Is it easy to understand what’s being offered? Is it easy to buy? If I need service, are there self-service options?
“A cross-functional connection of different entities of the business, tying them together to get a crisper customer journey and a more holistic understanding of the customer, is something we see businesses really start to focus on,” Howell says. “It’s driving real change in the way companies operate.”
Still, there’s often a lag between gaining that understanding and building effective responses. In a PwC survey of 1,262 operations decision makers across geographies and industries, 61% said changing customer needs will be a disruptive factor in their industry over the next five years. And 63% said understanding what customers value is already an operational challenge. Yet only 25% felt very confident that their operations are designed to give customers value and a distinctive experience.
True multifunctional collaboration has been a long time coming. “There’s certainly been talk of cross-functional cooperation for 15-plus years,” says Brad Householder, a PwC principal and the firm’s supply chain leader. “But until [relatively recently] there was enough slack in the system that functions could drive cost improvement without necessarily impacting service or drive product proliferation without adding a lot of extra inventory.”
In recent years of post-recession cost cutting, most of that slack has been driven out. Heightened cross-functional collaboration “is absolutely forced,” Householder says, “because now when you do something in one function it can cause an adverse reaction in another function.”
PwC’s research found that 61% of operations leaders believe cross-functional collaboration has the greatest potential for helping their company reach its strategic goals for operations.
In many companies, finance must lead the way to this promised land. Looking at the matter through a CFO’s lens, say the company has been through a couple of cycles of aggressive balance sheet pressures. “If I’m that CFO and don’t really have customers’ interests in mind, I’m going to take an ax to inventory and pretend as if there’s not a tradeoff on the customer-service side,” Householder says. “But now we’re seeing an emerging sensitivity around those kinds of tradeoffs, partly because that slack is gone. Before I take an ax to inventory, I better understand the customer impact.”
But, according to PwC’s report, only about a third (36%) of companies prioritize even a few cross-functional capabilities at the company level and expect functional leaders to identify how they contribute to the joint mission. “Most of the rest (55%) work in silos, with each function making its own decisions on which capabilities matter most,” the report said.
Where to Start?
How do you get out of the silo operational mentality?
“Looking at the information flow in the business, and then what decisions you’re trying to make around that information, usually dictates where in the business you need to start building cross-functional collaboration,” says Howell. “If you’re launching a bunch of new products, say, that might necessitate engineering and sourcing to work more collaboratively around getting suppliers on board [to support] rapid product launches.”
Cross-functional rotation of high-potential leaders can be an effective strategy. More companies are instituting rotation programs, Howell says. When executives from functions with more operational discipline come into those with less discipline, “they start talking about KPIs, time performance, financial value, and creating a more organization-centric set of capabilities,” he notes. “It drives some of those themes across the business.”
PwC also suggests refining the capital-allocation process to reflect priorities that are company-wide, and not merely functional.
Meanwhile, where companies are really showing improvement within operations is in innovation. Study participants were asked whether their primary purpose in operations is continuous improvement of existing processes (42% selected that response), new ways of creating value (37%), or a mix of the two (21%).
“From anecdotal experience, I would have expected continuous improvement to be higher,” says Householder. “I was pleasantly surprised at the number of companies that said they were focusing on new ways of creating value. Companies where there’s a sole focus on continuous improvement without rallying around creating new value are at risk.”
Not that companies should stop trying to improve their operational process. But doing so is now table stakes, the way progressive companies do business, Householder notes.
The degree to which a company can afford to pay attention mostly to improving existing operational processes depends on the rate of change in its industry, says Howell. In industries undergoing substantial changes in a short time period, like retail and health care, companies that don’t invest in new capabilities and operating models are in trouble for sure.
But doing so probably requires a good mix of continuous improvement and innovation. “One of the key things is, how do you pay for [innovation]?” Howell says. “We call it getting fit for growth. You’ve really got to lean out some areas, and that’s where continuous improvement can help.”