Adjusted Winner & Peace in the Middle East

In 1962 Brams and Taylor developed what is now known as the “Adjusted Winner” where two parties need to distribite assets that can not be divided. The authors suggest it produces solutions that are envy-free, efficient and equitable. It has far reaching implications on Joint Ventures, Asset liquidation and even sensitive geopolitical processes such as peace in the Middle East. I will walk you through the process via a (albeit hypothetical) real-world example.

Adjusted Winner
Under adjusted winner the parties start with 100 points and divide these points among the asset(s) being challenged. As our hypothetical example we will look at the circuit city liquidation and examine how adjusted winner could be used for a fair distribution of its assets.

For simplicity purposes we will focus on the following liquidatable assets: the real estate portfolio, brand name, credit card portfolio, circuitcity.com and the corporate jet.

Now lets look at two imaginary debtors for these assets: Debtor1 and Debtor2. Under adjusted winner they would have to allocate 100 points across the 5 assets.

Supposed they distribute their points as follows:

Asset	Debtor1	Debtor2
Real Estate	40	15
Brand Name	25	30
Credit Cards	10	10
CircuitCity.com	10	40
Corporate Jet	15	5
Total Points	100	100

Here is how the process works: Each debtor is assigned as a "winner" for an item in which they allocated the highest points. In our case (marking in red indicates winner)

Asset	Debtor1	Debtor2
Real Estate	40	15
Brand Name	25	30
Credit Cards	10	10
CircuitCity.com	10	40
Corporate Jet	15	5
Total Points	100	100

So in the first round Debtor2 would get the Brand Name & CircuitCity.com and Debtor1 would get the RealEstate portfolio and Corporate Jet. The Credit Cards remain undivided (because the points are a tie).

Because Debtor2 has more total points (30+40=70) than Debtor1 (40+15=55), we now award the Credit Cards to Debtor1.

Asset	Debtor1	Debtor2
Real Estate	40	15
Brand Name	25	30
Credit Cards	10	10
CircuitCity.com	10	40
Corporate Jet	15	5
Total Points	100	100

That Brings Debtor1's points up to 65 (55 + 10 for the Credit Cards) still five points less than Debtor2. This is where the adjusting phase begins in which items (or fractions of them) are transferred between the parties until they reach an equillibrium of points.

We now need to shfit assets (one or more or fractions thereof) to Debtor1. For each item Debtor2 won we look at the following ratio: # debtor2 points/# debtor1 points. For Brand Name that ratio is 30/25=1.2, and for CircuitCity.com is 40/10=4. Adjusted winner establishes the ORDER in which the items are transferred: from low (ratio) to high.

So the Brand Namewill be the first to be transfered (with a 1.2 ratio) but we can not transfer the entire Brand Name asset to Debtor1 because then Debtor2's points will go down to 70-30=40 and Debtor1 will go up to 40+10+15+25=90. So we need to distribute the Brand Name between the Debtors.

We need to transfer a portion (p) of Brand Name from Debtor 2 so that the Debtor2 points and Debtor1 points are equal. In other words:

Debtor1 Points (65) + Debtor1 value of Brand Name portion (25*p) =
Debtor2 Points without the Brand Name being transferred (40) + Debtor2 value of whats left of Brand Name ( 30*(1-p))

65+25p=40+30(1-p)

65+25p=70-30p

55p=5

p=1/11

So Debtor1 will get 1/11th share of the Brand Name, driving Debtor1's points up to: 65+25/11=67.27 and Debtor2's points end up being 40+30*10/11=67.27.

Knaster "Inheritance procedure"
When there are more than two parties involved, the Knaster Inheritance procedure can be used. Here is an example: In April 2008 Nielsen acquired IAG Research for $225m. The prior owners consisted of a group of six PE firms (AlpInvest, Blackstone, Hellman & Friedman, Kohlberg Kravis Robert, Carlyle and Thomas H. Lee Partners).

Assuming each partner had the first right of refusal, what would be the most fair way to open IAG for an internal bid amongst the six PE firms to buy the rest of the group members out before opening the bid up for outside contenders?

Commonly it works this way: the investment is valuated (by the partners or by an outside audit). Each partner decides how much they will “bid” for the buyout and the highest bidder wins and pays the others out.

The problem with simple bidding is that we all perceive an investment differently. An iPhone is a status symbol to one person and a necessary communication and productivity device to another. I might not be willing to spend $200 for the same product you are quite comfortable shelling twice that amount.

Similarly the value of IAG is different to each of the PE firms invested in it. Blackstone, for instance, is an investor in other media holdings that may find IAG worth much more than its book value because of its audience research capabilities. Other PE firms might look at IAG solely from a debt leverage perspective and be content with unloading it off their books.

Adjusted Winner & Knaster Inheritance are two methods that help solve the dilemma how interested parties can compensate each other for their perceived value. Here is how the Knaster Inheritance procedure works:

Suppose the partners write down their bid offer in a sealed envelope with the following bids:

AlpInvest	$180m
Blackstone	$210m
Hellman & Friedman	$198m
Kohlberg Kravis Robert	$114m
Carlyle	$144m
Thomas H. Lee Partners	$126m

Assuming they all have equal shares (i.e. 1/6th of IAG):

The winning bid seems to be that of Blackstone at $210m. They have a claim to 1/6th of the company which they value to be (1/6) of ($210m) or $35m.

Because Blackstone has a fair claim to 1/6 of IAG they will compensate the other partners with the remaining 5/6th of their perceived value of IAG (5/6) of ($210m) or $175m and deposits it into a “kitty” account.

Now each of the other 5 partners withdraw 1/6th of what they estimated as the value of the company from the “kitty”:

AlpInvest	Withdraws 1/6 of $180m = $30m
Hellman & Friedman	1/6 of $198m = $33m
Kohlberg Kravis Robert	1/6 of $114m = $19m
Carlyle	1/6 of $144m = $24m
Thomas H. Lee Partners	1/6 of $126m = $21m

The total withdrawal from “kitty” account is 30+33+19+24+21 = $127m

The difference between $175m and the “withdrawals” is a surplus of $48m. That surplus is equally divided among the 6 partners (including Blackstone) so each partner gets $8m.

So (if this example were not as hypothetical as it really is):

Blackstone Gets IAG and pays $175m less the $8m back = $167m
AlpInvest Gets $30 + $8m = $38m
Hellman & Friedman Gets $33 + $8m = $41m
Kohlberg Kravis Robert Gets $19 + $8 = $27m
Carlyle Gets $24 + $8 = $32m
Thomas H. Lee Partners Gets $21 + $8 = $29m

Adjusted Winner and the Middle East Peace Process

Moshe Hirsch, Vice Dean Faculty of Law at the Hebrew University of Jerusalem published an article in which he suggests applying the same logic to the equitable division of East Jerusalem as part of a middle east peace settlement.

Jostein Tellne (of the University of Oslo) offers Adjusted Winner as a way to help wealth sharing negotiations in Sudan.

30 Rock Lean Six Sigma

The last episode of 30 Rock puts Lean Six Sigma front and center. If you haven't seen it, here is an excerpt, curtesy of NBCU's Hulu, including Jack's meeting with "the six sigma guys", a crazy lego game in which Liz becomes a major embarassment and more! (A must-see for Lean Six Sigma practitioners).

So without further ado, here you go. To view the entire episode, click on the video and a new Hulu window will open:

IQPC Conference in January 2008

In Jacuary 19-22, 2009 IQPC will be holding the 10th Lean Six Sigma & Process Improvement summit in Orlando, Florida. Over 1000 people are expected to attend from both manufacturing and services organizations. I am honored to be one of the guest speakers at the conference. The title of my presentation is: "Driving change with Lean Six Sigma without alienating jargon".

Don't Judge Me...

I was asked to be a panel judge for the Global Six Sigma & Business Improvement Awards 2008, which celebrates outstanding organizational achievements.

The Global Six Sigma and Business Improvement Awards are given to the most outstanding organizational achievements through the deployment of business improvement programs.

The focus of this elite awards program is to demonstrate to the global business community the real results and excellence which organizations achieve through the successful deployment of Six Sigma and other business excellence programs.

The Awards present a great opportunity for organizations to win recognition for the great work that their Six Sigma and business excellence people are delivering to customers, shareholders and other key stakeholders.

Visit the award website http://www.tgssa.com/judging-panel.html for more information.

Pockets of Knowledge, Islands of Excellence

When I am asked to help with a strategy transformation I commonly encounter what I would call process entropy: the notion that "this is how we have always done it" compounded with the knowledge that things need to change so please, oh outsider, come and help us.

The surprising, and little known, fact is that there are certain individuals in every organization that know the ins and outs of your process, can pin-point the process breakdowns and help avoid making the wrong turns in designing a new process.

I am reminded of a former financial services organization which asked me to help with the requirements for an enterprise fulfillment solution. Our business sponsor was astute to recognize the need to "Lean" out the process first. The difficulty was that each line of business seemed to have their own process for accomplishing the exact same thing and they dreaded at the thought that anyone would take away their "uniquenesses". So we started out by creating process maps for documenting the "as-is" state. We quickly realized that there are similarities that can not be refuted. These similarities were easier to depict at a higher level view of the process than at the task level. Clearly the activity level for one LOB differed from another. If you pull back and take a holistic view then everyone pursues the same common purpose they go about it in different ways.

This similarity is covered by Cedric Tyler and Steve Baker in their book "Business Genetics", where they suggest a comprehensive view of an organization consists of pursuing the five "W"'s: Why, What, Where, When and Which. These pillars can be posited as follows: understand WHO is doing WHAT, WHEN are they doing it, WHERE are they doing it and WHICH information do they need to do it. They suggest simple mapping efforts to accomplish this.

Funny - every time I start a project I always chart out the territory by building my own "org" chart of sorts: not a traditional who-reports-to-who but a hierarchical diagram of functional ownership. I usually use a tool such as Freemind (a mind mapping tool)

Pockets of Knowledge
So after you interviewed and built an "as-is" understanding of your process, the next step is to "improve" it. You might be following DMAIC if you are executing your project as a Six Sigma effort, or have Lean Action Workouts to let the business drive the change if you are executing Lean/TPS.

What I would like to draw your attention to is the "pockets of knowledge" that exist within the process. These are individuals, from the most unlikely places in the organization, who possess the most extensive amount of knowledge about the business process.

In the past, I have found certain IT people, who were so experienced in responding to system enhancements and had been with their organization for long enough, that they understood the most intricate process challenges and gaps across functional silos. I have encountered these "local experts" at every part of the value chain and they always surprise me with their directness, non politically correct depiction of the present state and their eagerness to help move the organization to the future state.

At NBC I found people who came from accounting and moved into operational roles to have similar insights into revenue generating processes. Sometimes it is simply a user of a system that is part of the workflow of a core business process - someone who had to "invent" ways to interact with the system that were not thought of when it was originally designed.

These experts do not live in constant fear that their job might be made redundant by improving the process, the kind of fear that can put the Kibosh on any well intentioned process improvement initiative. Some organizations even hire FUD managers (Fear, Uncertainty and Doubt) to handle those aspects of organizational change.

Pay closest attention to the local experts of your process. They have been through many previous attempts to make change, and if you establish a reasonable amount of trust and are sincere about your desire to help the process (and not just cut "heads", or as it is known in corporate lingo "cost-out") - then you will find them a wealth of information to understand the gaps between the current state and help you build a transition plan.

How do you identify a local expert?

The most direct answer to the question is unequivocally simple: Walk the process! Take your but out of the chair, out of the constant meetings (even action work outs) and go walk the process. This means you need to meet with people at their desk, see with your own eyes their problems, understand what they go through to deliver what they are expected to deliver and "feel their pain". This pain might be a cumbersome system they need to interface, or an unbelievably complex process that boggles their minds each time they need to work through it.

Here are my persona experiences of "walking the process" and the surprising results they yielded:

By walking the process I learned that although a system was available to complete a task, the person was so frustrated from trying to get real results that they walked one flight up to another department each time they needed materials, and brought them back downstairs to their working area.

By meeting with an individual in their working area I was able to observe an enormous pile of folders on their desk. I drilled down into the root cause of this "stockpiling" and 6 months later that person's desk is not littered with photos of the family and excellence awards...

By "shadowing" another person to meetings with their internal stakeholders, I was able to observe a pattern of communication breakdowns that was causing misunderstanding between functional areas. After a few facilitated sessions, the participants adopted simple prioritization tools and collaboration techniques that helped deliver high performance results, increase in sales and reduction of process defects that they were previously unable to address.

Quick Food: Voice Of The Customer

Voice Of The Customer

One of the training offerings we have at CC Pace is the "Lean Six Sigma Interactive Orientation". In this one-day interactive training program we introduce participants to the concepts of Lean Manufacturing and Six Sigma Quality and how these tools can be applied to their.

As one of the trainers in this program I find the most interesting part to be the one which focuses on the Voice Of The Customer (VOC). VOC is the driving force behind any business process improvement initiatives. If you have read my post "Supply Chain Management: Who are your customers?" then you may be familiar with the differences between internal & external customers to a business process.

In one of the exercises we conduct in our orientation we ask participants to imagine they owned a restaurant and to list the things they would want to know about the restaurant if they were gone for a week. We then have them reverse their role and list their expectations from the restaurant as potential diners.

This theoretical exercise demonstrates the disparity between our expectations and customers and the things that are typical priorities to the businesses we visit. In our training I often see lists that have little correlation to each other: the owner is interested in financial performance, number of diners, number of reservations, wasted food, etc. The diners are more interested in food quality, ambience, service and efficiency.

Motorola and GE, the de-facto powerhouses of quality, had come to recognize that Six Sigma process improvement projects must be preceeded by a determination of the VOC or "What are the key process characteristics that are important to my customers?". Without understanding the VOC, you may go on investing significant effort and capital to improve something your customer does not care about.

Quick Food

QSR Magazine is the leading Quick Service Restaurants industry publication. Each year they review the performance of drive-thru establishments (such as McDonalds, Burger King, Dominos, etc) and publish them on the QSR homepage. The QSR 2006 survey had some suprizing results and serves as a great lesson in listening to your customers. During the survey they asked quick-serve consumers what they value most in the drive-thru. Next they posed a comparable set of questions to quick-serve companies. Here are the surprising results of the two surveys:

Consumer VOC 1. Order accuracy 86% 2. Easy-to-read menuboard 79% 3. Customer service 77% 4. Speed of service 74% 5. Length of the line 71% 6. Menu variety 52% 7. Hours of service 47% 8. Drive-thru appearance 41% 9. Credit/debit card acceptance 28% No answer 1%

Industry VOC 1. Order accuracy 85.2% 2. Speed of service 81.5% 3. Menuboard readability 66.7% 4. Customer service 59.3% 5. Length of the wait 55.6% 6. Credit Card acceptance 48.1% 7. Menu variety 44.4% 8. Clarity of audio/speakers 33.3% 9. Hours of service 11.1% 10. Wireless payment options 3.7%

Though both Consumers and industry value order accuracy that is where the similarities end. Consumers ranked easy-to-read menuboard as #2 (77%) while industry ranked it #3 and only 67% of industry has launched menuboard improvement efforts to drive sales.

Consumers ranked speed of service as #4 while industry ranked it #2; Industry ranked length of wait #4 while consumers ranked it #5.

When a business does not properly understand what is truly important to the customer, there is a potential for misplaced investments. In this case efforts to reduce the length of wait at the drive-thru are costly since they require drastic changes to the way the line is configured. However the industry would be better served by the less-costly improvement of the menuboards.

By listening to what your customers care about, you will find the your improvement efforts are better focused and yield better return in the one thing that is the most important factor in driving new business:

The overall value that you deliver to your customer.

It is the customer experience, the cost of your product and the value of your service that must be all factored in to your improvement initiatives. So make sure you properly collect the VOC before you put your hard earned money into lower priority efforts.

Business Process Mapping: A deep dive into the weeds

Having just completed a large scale enterprise-wide process mapping initiative for a financial institution I thought it would be helpful to post some ideas and suggestions that may help you in your process mapping initiatives in your organization.

Who would benefit from this information?
Any process engineering group, Six Sigma practitioner or person in Enterprise IT who are being tasks to help the business create an "as-is" (current state) of the business processes.

Why this post?
There are many books and articles written on the subject of process mapping, Lean Six Sigma current state, etc. You might find it helpful to get a view "from the trenches" of tackling a complex set of process in your current state documentation.

How do you capture current state?
Many financial organizations, especially those contending with the Sarbanes Oxley requirements, have begun capturing their transactional activities from a compliance standpoint. In most cases this consists of "process documentation" documents which are usually in text form.

The "current state" of core business processes that I refer to here is an entirely different beast. It is the shift from functional-area optimization to true business process management (BPM). BPM is the meta-framework which envelopes common business tools such as Lean Six Sigma, Balanced Scorecard, TQM, etc. It is the state-of-mind shift from "I am responsible to get my department to work in the most efficient manner" to "I am responsible to deliver a streamlined efficient experience and the value demanded from me by the customers of the process I am in charge of".

This means that production managers can not be solely interested in efficient production processes. They are a part of the larger value chain. In a Lean manufacturing environment which produces on-demand they are part of the order delivery value chain. This value chain begins in the order taking (call center, sales reps, etc), through order assembly (create order, order parts, order assemblies) continues through production processes and ends in the order being delivered to the requester. Does this sound too "manufacturing-ish" to you? Not at all! A custom life insurance quote could follow the same value chain. A custom marketing material as well. What about the order for a new custom hosting services from an ISP?

All of the above examples are transactional in nature and help illuminate one key point: If each of the individuals who participate in the entire value chain is only interested in the optimization of their work area then who is looking out for the customer between the hand offs? How can we assure timely delivery if requests are queued in the inboxes of each department tasked with requests for the next phase of the value chain? Who is asking the most fundamental questions about the customer's true needs?

If this all seems to digress from the topic at hand, mind you it is not! Business process mapping requires that the "mapper" align themselves to the value chain which they are documenting. This means that if you are being asked to map a narrow aspect of a much larger value chain, stop and think if you are not erring in a too narrowly defined scope.

The importance of a model
So you have properly defined the scope of the business processes you will be mapping. Perhaps this was done in the context of a Lean Six Sigma Define Phase, which creating a project charter. Next you next to determine how will you present processes that span multiple functional areas.

A hierarchical representation of these processes is essential to the success of your effort. This allows you to create a top level enterprise wide model, and drill down levels of detail before you even start tracking the activities and hand-offs that are part of your business processes.

Example 1:

You are capturing the core business processes for the credit card operations of a financial institution. At the highest level you will probably list the following possible core business processes in what we, at CC Pace, like to call "Level 0":

1. Product Management: This would include the creation and modification of new credit cards and account types, including all benefits attached, regulatory filings, SarbOx requirements, etc.
2. Application Processing: This high level process would incorporate all the processes that begin with an individual or business entity applying for participation in one of the product groups managed by Process #1
3. Account Servicing: Sending out statements, handling inbound calls/customer service, web account services and contested charges processing.
4. Funding Processing: Processing of check payments, roll-overs from other credit card accounts, online payments, etc

This would be a great opportunity for you to create a nomenclature for designating a code to each business process. If we are capturing the as-is state of a credit card LOB within a banking organization, perhaps we would call these CC1, CC2, CC3 and CC4. Whereas retail banking Level 0 processes would begin with RB1, RB2, etc.

You might come up with more examples, but the ultimate result is a limited inventory of very high level processes without which your line of business would not be operating as a credit card company.

Once you have created the Level 0 diagram you are ready to inventory all the processes underlying the Level 0 core processes in a Level 1 diagram. What does account servicing exactly entail? Should we group or bundle similar processes? Level 1 processes for CC3 - Account Servicing would possible look like this:

• CC 3.1: Statement Handling
• CC 3.1.1: Paper Statement Generation
• CC 3.1.2: Paper Statement Mailing Consolidation
• CC 3.1.3: Electronic Statement Generation
• ...
• CC 3.2: Customer Servicing
• CC 3.3: Web Processing

At this level (Level 1), you are still creating an inventory of business processes.

It is at the next level - Level 2 and beyond where you will start creating process flow swim lane diagrams. Swim lane diagrams represent how activities within a process are organized by roles, systems, and business units and are useful for understanding the hand-offs between and among people and systems.

You might want to check out Laury Verner's article posted on BP trends: The challenge of process discovery.

One picture is better than a thousand words

The most imporant part of your process mapping initiative lies in your presentation. Many people have tried to capture business processes and the chances are someone has already done so in your organization. What you may be doing differently is in helping create an enterprise-wide view of the core business processes, break it down to a layered structure (Level 0, Level 1, Level 2) and only then start capturing the actual activities that these processes consist of. How you represent Level 0 and Level 1 is up to your creative ingenuity. The more thought you put into migrating away from text towards graphical objects, the easier it will be for others to understand your thinking.

Using a reference model

When you embark on your journey you will be asked for the methodology driving your implementation. Aligning yourself to an industry standard can go a long way to creating a common understanding that is supported by benchmarks and best practices that were developed by an industry group. There are great reference model out there that you can align your project to, which will help you to quickly populate your Level 0 and Level 1's in addition to the benchmark/best practices benefits. Here are a few examples:

Supply Chain Management Reference models: SCOR, DCOR, CCOR: These standard frameworks are high-level supply chain definitions used by over 700 members of the Supply-Chain Council. Using standardized supply chain process definitions and their associated performance metrics allows your organization to identify and benchmark your processes with the same processes of another Supply-Chain Council member

Open Standards Group (OSG) ITIL: an industry standard source for information technology activities and best practices which facilitates the strategic management of IT by identifying strategic objectives for IT. These objectives define the different perspectives for how the business views the overall value delivered by IT.

TelManagement Forum (TMF) Telecom Operations Map® (eTOM): is the TeleManagement Forum’s industry standard business process framework used by telecommunications service providers and their suppliers of all kinds.

Good luck in your work! Let me know how I can make this information more helpful to you in the future!

Tiran