President Kaler’s Operational Excellence Presentation to the Board of Regents
SLIDE 1, TITLE SLIDE
Thank you, Madame Chair.
On September 22, 2011, the day of my inauguration as this University’s 16th president, I said these words: “Driving excellence in our mission activities is not enough. We must also be excellent in our operations. In every aspect of University operations, we need to question what we do. We need to know if it has the intended outcome, or if we could do it better, or not at all.”
And I added: “This institution needs to have an administrative backbone that is effective in supporting teaching, research, and public engagement.”
Since then, I have repeatedly emphasized Operational Excellence as one of my top priorities. Through this work we are linking the efficiency and effectiveness of our business operations to the excellence and accessibility of our University.
Over the past 18 months, I have convened 60 operational excellence meetings with my senior leadership team. In your committees, many of you have heard reports on various aspects of this work and culture change. Now, for the entire Board, I am excited to tell you more about Operational Excellence and where we stand.
I want to show you why and how we live it and breath it every day, to share with you success stories, challenges, and next steps.
I also want to preview for you the interim report that we will be presenting to the Legislature next week. This report includes an initial analysis of our management structure—that is, our spans of control and organizational layers—and also our plan to benchmark our costs and operations against peer institutions.
SLIDE 2, So, what is Operational Excellence?
First and foremost, to mitigate the impact of state budget reductions and to keep a lid on tuition, Operational Excellence is a long-term commitment to work smarter, reduce costs, enhance services, and increase revenues throughout the University.
It’s using our resources—people, money, time, facilities—to the highest purpose possible.
It is not just about saving money, although that’s an important goal.
As importantly, it’s also about getting more out of our limited resources.
It’s about realizing a better way of doing things. It’s about change.
Why Operational Excellence?
Because, as the state disinvests, as our students and families pay more tuition, and as research dollars become scarcer, we need to reduce our administrative costs so we can reallocate resources to what’s most important: teaching, research, and public engagement missions.
How are we making it happen?
In every way we can…small and large…from our ambitious Enterprise System Upgrade Program, to a reduction in cell phone subsidies for employees, to voicemail efficiency, to IT reorganization, to risk recalibration, to changes in procurement, to the closing of administrative offices, to tightening reporting lines…WE ARE BECOMING MORE AND MORE OPERATIONALLY EXCELLENT.
So, let me tell you about our approach, and how we’ve set priorities and measured progress. I’ll even share some success stories!
I convened the first meeting of our Operational Excellence Group of senior leaders and senior staff on September 6, 2011.
That was the first day of the first week of the first semester of my presidency.
I walked into the room with reports in hand from the consulting group, Bain and Company, and my experience working with them at Stony Brook. I asked the group if we should pursue a similar engagement here. At a minimum, I suggested, we review the Bain recommendations and track them against U of M operations.
I also mentioned the words, “spans and layers” for the first time, suggesting we complete an analysis of how many layers of management we had and how many employees report to each manager. Even before the current request from the Legislature, it’s been a priority of mine.
Quickly, I got a thoughtful, educated earful from my senior leaders.
I was told: “Mr. President, we’ve already done many of the things in these studies and, for many functions, we’ve completed similar analyses. We have a number of reports on shelves gathering dust, and they include recommendations that have not yet been implemented.”
Yet, some leaders argued that only by using a third-party expert would our work be credible to the broader public. Others were concerned about spending hundreds of thousands of dollars for a consultant when we had both external and internally generated reports still at our fingertips to implement. Ultimately, we decided to work through those existing reports as a first step.
And, we established guiding principles to set priorities:
- We want to achieve administrative cost reductions and/or productivity improvements.
- We want to reduce redundancy and duplication.
- We want to promote entrepreneurialism, seize opportunities, and enhance organizational flexibility and adaptability.
- And we want—and are already beginning—to recalibrate the University’s risk profile to achieve greater efficiencies while enhancing service.
As ideas came forward, and we reviewed recommendations already developed, we asked whether they achieved these goals.
Meanwhile, as we implement Operational Excellence, we want to do it in a way that:
- Manages both the operational and cultural aspects of change
- Adopts and shares best practices across the University
- Develops core competencies across the organization, encouraging the breakdown of silos
- Adopts sustainable, replicable business models
- Develops qualitative and quantitative measures of effectiveness
With those principles in mind, from September 2011 to December 2011, we all examined all of the reports that were produced in the previous six years.
In looking at what had already been done, we came to a stark realization.
In recent years, this University had done a lot. It closed and merged colleges, implemented an enterprise-wide energy reduction program and purchasing initiatives, and improved processes in many functional areas.
That was the good news.
The bad news was that there was NOT a lot of low-hanging fruit left to pick.
That meant moving the U to the next level of Operational Excellence would require more data, thoughtful analysis, consultation, and tough decisions. And, it probably would take longer.
Our first action was to review and prioritize our opportunities:
Among the actions:
We held listening sessions to gather input about making change at the University from front-line operations managers.
- The University is too risk averse and too regulatory, more mired in saying “no” than in finding ways to say “yes.”
- The University can do more to unleash entrepreneurialism, and identify best practices for achieving efficiencies and scaling them up where appropriate.
- The University needs to improve its change management and problem-solving skills.
- Consultation is important, but there are pitfalls to overconsulting, especially as it affects speed of innovation. Moreover, participants felt that the University does not always consult in the right ways.
We also learned that being highly decentralized gives units autonomy and nimbleness, but it also can promote redundancy, institutional silos, and lack of alignment.
And we learned our Human Resources information system is out-of-date, hampering our ability to accurately benchmark or make data-driven decisions.
We also launched a risk recalibration effort to change our very risk-averse culture. During that process, we identified more than 220 policies and processes as candidates for recalibration in eight “areas of opportunity:”
- Administrative Optimization
- Compliance and Policy
- Human Resources
- Information Technology
- Physical Environment and Service Culture and
- Research Infrastructure
While we’ve made much progress in these areas, I’ve come to see the “areas of opportunity” paradigm as somewhat limiting.
Operational Excellence doesn’t simply drop into an area of opportunity. It cuts across areas of opportunity. It cuts across campuses, colleges, and across units within central administration. It does not occur in silos.
Let me give you a real example that illustrates the opportunities, the challenges, and the complexity of change.
Craig Bantz is the director of technology innovation with our College of Biological Sciences. Finding and developing innovative technology solutions for research, education, and the day-to-day work of CBS is at the core of what he does.
But the problem is that too much day-to-day work can overwhelm and bog down innovation.
So Bantz and CBS IT made a number of moves recently to put the core of IT back into the hands of the college.
They transferred the position responsible for installing updates and software on CBS computers—that is, computer management—to central OIT.
The move saved the college about $90,000 per year, while freeing CBS-IT staff to work on research support and educational endeavors such as instructional technology.
But it’s not just a shifting of costs. Because of the nature of the work, the position is scalable.
As CBS was moving some administrative IT work to our core mission, our central Office of IT was also consolidating our Help Desk operations.
The same amount of work that an IT specialist needs to do to manage five hundred computers might scale up to having him or her manage FIVE THOUSAND computers.
That puts the CBS-IT staff member who transferred to OIT in a position that can now benefit others at the University.
Big savings in time and money also came to CBS when the college moved its 3,000-plus web pages to a new web content management system.
Plus, when CBS lost a web manager to a new job, they took the opportunity to evaluate the primary responsibilities of the position. By moving to that user-friendlier content management system, they avoid rehiring, save $75,000, and end up with a more efficient process to boot.
Together, these two steps have saved CBS about $165,000, or approximately 5 percent of the $3 million CBS administration budget.
Bottom line: CBS is spending less now on information technology services than it has at any time in the last decade, while at the same time getting more out of IT than ever before.
That’s a great success story, and it demonstrates so much of what needs to change operationally—and what we’ve been able to change so far—hits on all cylinders ACROSS siloes.
So, while we have those eight “areas of opportunity,” we have begun to see patterns develop, or baskets in which we can place the fruits of our opportunities.
They are, more simply:
- Standardization and centralization
- Cost cutting and cost containment
- Business efficiency
- Shared services, and, finally,
- Revenue generation…
Which leads to next week and the interim report we will be making to the Legislature on our Administrative Structure Analysis and Key Cost Benchmarking.
To review, on January 8, 2013, Senator Terri Bonoff, chair of the Higher Education and Workforce Development Committee, and Senator Tom M. Bakk, majority leader, wrote to me requesting a “data-driven approach to analyzing the cost of delivering educational services” at the University of Minnesota.
Senators Bonoff and Bakk called for a short-term analysis, such as a “spans and layers” study, as well as an in-depth, longer-term examination.
Asking for an interim report no later than March 15, 2013, Senators Bakk and Bonoff requested these studies to “develop clear and measurable analytics so that efficiency goals can be met.”
The University of Minnesota retained Sibson Consulting, a division of the Segal Company, to conduct a spans and layers analysis of four central administrative units:
- Office of Human Resources,
- Office of Budget and Finance,
- Office of Information Technology, and
- Purchasing Services, which performs procurement functions for the University.
Given the breadth of these units and the short time frame under which this work was to be accomplished, these four units were the only ones that could be adequately assessed; however, the University is committed to completing spans and layers analysis throughout the remainder of the administrative functions across the organization, with an anticipated deadline of summer 2013.
The scope of Sibson’s work for the report was shared and submitted with the senators as well as the legislative auditor on Friday, January 25, 2013.
First, let me briefly walk you through the concept of spans and layers, which Sibson here refers to as levels.
A span is the number of employees who report to one supervisor…sort of that supervisor’s wingspan.
A level is the number of people between an organization’s leader and his or her first-line staff.
There are two methods to assess an organization’s spans and levels.
The Management consulting firm Bain & Company provides one way of understanding this data based on benchmarking numbers.
According to Bain’s approach:
- These four units are close to alignment with best practices related to levels in the units assessed.
- Bain generally recommends no more than five or six levels in an organization from an organization’s leader to front-line employees.
- Three of the central administrative units examined are in alignment at six levels.
- The fourth, Finance, has seven.
- If you look at this slide, in Finance, counting the Office of the President, we have seven levels.
Bain generally recommends spans of control of approximately seven direct reports or higher, depending on the type of work being done in the unit in question.
Average spans of control in the four units analyzed range from a low of 3.63 direct reports per supervisor in Procurement to a high of 9.53 direct reports per supervisor in OIT.
According to Bain’s analysis, the University could do more to increase the number of direct reports per supervisor across three of these four areas.
This work will require careful analysis, position by position, to ensure that potential changes make sense.
So, I’ve discussed the Bain approach. Now, let me talk to you about the Sibson methodology.
Sibson begins its analyses with a starting hypothesis that the ratio of average spans of control to levels in the organization should be 1.0 or higher—meaning that an effective organization is at least as broad as it is deep.
This ratio is an emerging industry standard, but it is also a starting point, not an end in itself.
Extremes in either direction can be problematic—more narrow and vertical organizations can be top heavy, sluggish, and expensive; while extremely flat and broad organizations can be disorganized and difficult to manage effectively.
Organizations that have a ratio of spans to layers below 1.0 should examine the organizational structure and the work being done in these areas more closely to determine whether change is needed. The same holds true for ratios well above 1.0.
According to Sibson, the four units assessed, in general, are starting from a solid organizational foundation.
In this slide, the “stepped” lines indicate the 1.0 ratio of spans to layers—Sibson’s baseline criterion.
Numbers that appear to the right of the line indicate an appropriate ratio of spans to layers (1.0 or above; broader rather than deeper).
For example, in the case of the Office of Human Resources, 129 people have no layers beneath them (or have no direct reports), so their span of control is appropriately zero.
However, eight employees have supervisory responsibilities for just one person each.
Any supervisor at the top of two layers should ideally be responsible for two or more direct reports at a minimum—so an opportunity exists to streamline the organization in this specific area.
The pie chart illustrates the percentage of the OHR organization this represents; i.e. 5 percent of the OHR organization does not meet the baseline criterion in this respect.
- We don’t have an excessive number of layers.
- We could do more to increase the number of direct reports per supervisor across the units assessed.
- Our ratio of spans to levels are appropriate, but we could improve them in select areas.
- As always, we have work to do.
In addition to the spans and layers analysis, at the request of the senators, we will complete the benchmarking and diagnostic study.
The University has retained Huron Consulting Group, a global consulting firm that has worked with 94 of the top 100 research universities, to benchmark University administrative costs across the four functional areas of finance, human resources, information technology, and procurement.
The benchmarking study will provide an independent, third-party benchmarking of operations in the four functional areas against peer organizations to identify:
- Opportunities for improvement
- Barriers to optimal performance
- Leading practices at peer institutions the University should consider
The project will be completed by May 31, 2013. We eagerly await Huron’s findings and will make them publicly available.
The University will use the data from these reports to reduce costs, improve operations, and better align human and other resources to advance teaching, research, and outreach.
- I am committed to improving operational excellence in all that the University does.
- We expect changing some alignments will require tough decisions. However, we are committed to making changes transparently and fairly.
- I have repeatedly said I will reduce administrative costs and move those dollars to core mission activities.
- However, it is premature to declare a specific cost reduction target that will result from this work.
- We must first complete the data collection and see where the organization as a whole sits.
Once we have all the data, the University will make changes to move to a more optimally aligned organization.
Specific next steps will include:
- Complete the spans and layers analysis organization-wide and complete the benchmarking study
- In all areas in which the ratio of employees to supervisors does not appear to be optimal, the University will further analyze the function and work to determine the optimal ratio and we will set near-term goals for reducing layers, as needed, and increasing spans of control.
- To prevent additional spans from creeping back into the organization over time, we will ensure all non-academic positions are properly classified and fit with the optimal spans and layers structure.
- We are expediting our job family studies and job classification redesign, which will complement and strengthen the spans and layers analyses and help to ensure that employee classifications accurately reflect the work being performed and that we are organized to work and make decisions effectively and efficiently.
- Adopt policies and guidelines to achieve these goals.
This is not easy work, and typically, universities embarking on this level of transformation take three to five years to fully implement changes.
We are committed to undertaking our transformation on an expedited timeline over the next two to three years.
That’s where we stand with the legislative request on spans and layers and benchmarking.
Where we stand on Operational Excellence progress is, I believe, impressive and encouraging.
As I said, there’s no finite checklist. Op Ex is a new way to do things, always keeping in mind our stewardship of this University.
But let me briefly review our progress to date.
As I said when I began this report, we’ve been talking to leadership and to staff about Operational Excellence since the day I was hired.
And I’ve also been talking with you, this Board, about Operational Excellence.
For example, we completed two first-of-their-kind studies to assess the full cost of mission activities and define administrative costs at the University.
Last summer, we completed a study on the cost of instruction, research, public service, and student aid.
That is the essence of Operational Excellence.
Last fall, we completed a groundbreaking administrative cost study, detailing where we spend our funds for direct mission, mission support, and administrative leadership.
We found that 9 percent of our fully allocated costs are for administration and management.
Again, they might not be defined as Op Ex, but they are in that basket.
- Meanwhile, we are implementing an Enterprise Systems Upgrade Program for our human resource, student, and financial systems.
- We eliminated the Office for Academic Administration. Cost savings associated with this transition are estimated to be close to $1.6 million: $1.1 million of recurring funds and $500,000 of non-recurring funds.
- Last month, pursuant to this Board’s direction, the University of Minnesota Foundation and Minnesota Medical Foundation merged, improving donor relations and reducing “back office” costs by up to $1 million annually.
- In September 2012, to better align and streamline our operations and reduce duplication we implemented a dotted-line reporting relationship between central administration and four functional areas: human resources, IT, budget and finance, and communications.
- In May 2010, a system-wide inventory project found nearly 4,000 servers from 50 different hardware manufacturers located in more than 225 locations across the U of M system. Since then, we have reduced the number of physical servers by half, and approximately 40 server rooms have been closed
- Ongoing cost savings continue to be realized to the tune of approximately $1.5 million. $1.5 million in one-time cost avoidance has also been achieved due to server room closings and leveraging central virtualization service.
- Meanwhile, IT professionals across the U are working together to consolidate over 70 independently-run “help desks” into a single point of contact for technology support needs.
- Several years ago we became the first major public research university to tap Google for its ever-evolving suite of applications. We were one of the first higher education institutions to offer the entire suite of apps to faculty and staff—not just students. Analysis by technology research firm Gartner Inc. estimates the move is valued at more than $15 million a year.
- We’ve improved accounts receivable billings and collections, reducing outstanding balances for 39,000 invoices with cash activity totaling $769 million.
- We closed the Bursar office, with savings of more than $775,000 annually.
- With strategic sourcing and e-procurement, we are saving $7.6 million a year system-wide in purchasing.
- Extending across five campuses and 19 research and outreach centers, the University is home to more than 850 buildings covering over 29 million gross square feet. Each day, well over 100,000 faculty, staff, students, and visitors use University facilities across the State. Since the start of the Space Utilization Initiative, more than 320,000 gross square feet of space has been decommissioned, reducing annual operating costs by over $1,480,000.
- In 2010, the University launched It All Adds Up, a system-wide conservation and sustainability effort. We’ve saved $4.6 million annually.
- In 2011, the University implemented a new custodial program on the Twin Cities campus featuring team cleaning. This has allowed Facilities Management to clean the same amount of space with fewer employees—saving the University $3.1 million annually.
- Over the past two years, the University has been transitioning to an automated parking payment system. By eliminating parking attendants in lots and ramps across campus, the University is projected to save $1.35 million annually in personnel savings and generate an additional $180,000 annually in increased revenue.
It is always difficult to eliminate jobs but we are clearly being asked by the citizens of Minnesota to do more with less. When we have to eliminate jobs, we strive to place people elsewhere and do it fairly and with compassion.
So, we have done much on Operational Excellence.
Much remains to be done.
Beyond the spans and layers and benchmarking work described earlier, our next steps in Operational Excellence include:
- Developing metrics and a dashboard to better track and communicate our progress
- Aligning our work to the strategic priorities identified through a strategic planning process later this year
- Continuing to drive alignment across this very decentralized organization by standardizing processes across units and
- Continuing to keep our eyes on the ball every day for ways to work smarter and reduce costs.
As the record of the past 20 months shows, I am committed to that, as is our senior leadership team.
There is no finish line here.
With new technologies, new teaching methods, uncertain economic times, and improvements in everything we do, we will never rest in striving to make this University as efficient and effective as it can be so we can carry on our mission of teaching, research, and solving this state’s most pressing problems.
In closing, this Board has critical and fundamental oversight responsibilities for the operations of this University.
As outlined in your policy titled, “Responsibilities of the Board and Individual Regents,” among others, you accept fiduciary responsibility for the long-term welfare of this University, and you ensure adequate resources—human, financial, physical—and effective management of these resources.
With that in mind, as we begin our conversation on Operational Excellence, I think a few relevant questions would be:
In what ways will these efforts be benchmarked and measured so the Board can monitor the performance of the institution?
How will the administration use these reforms to enhance the public image of the University?
How can operational metrics be incorporated into the Board’s annual University Plan, Performance & Accountability Report?
With that, Madam Chair, I conclude my report.
Progress Report to the Minnesota Legislature (3.98 MB PDF)
Operational Excellence website