Debate: Six Sigma vs. Innovation

The system for boosting quality may seem to run counter to disruptive changebut companies can have it both ways

"I can't stand this," said a senior manager of a Standard& Poor's 500 company recently. "One minute the management team is telling us to innovate, and the next minute they are giving us our marching orders in deploying Six Sigma. It's crazy to tell people they should be focused on becoming more efficient while at the same time you want them to explore untapped growth potential. This is making me nuts."

An outgrowth of the quality movement, Six Sigma was first applied in manufacturing—the greater the sigma number, the fewer mistakes—but has since found its way into service businesses and functional areas such as human resources and finance. According to Mario Perez-Wilson, a former manager of statistical methods at Motorola (MOT), the average defect rate at most major companies hovers around four sigma—6,000 defects per million (or 1/200). At the Six Sigma level, there are 3.4 defects per million, a significant step up in efficiency that is hard for any organization to achieve.

Six Sigma has therefore become management shorthand for "continuous improvement." Ask anyone who leads these efforts and they will be quick to add, "continuous improvement with goals, a defined process, and with metrics at its core."

Low Tolerance for Risk

The objectives of Six Sigma seem noble enough for any organization. So what's the rub with simultaneous efforts to innovate?

Six Sigma is designed to inject more efficiency and productivity into a company's systems. It focuses the organization on operational excellence and on "doing things right." By its very nature, Six Sigma fosters a very low tolerance for risk because risk increases variation.

Innovation, on the other hand, seeks to brave undiscovered, uncertain territory. Such fledgling efforts are inherently inefficient as they ramp up. To be in the game, innovation requires a tolerance for failure and risk-taking. Especially when design methods are deployed to reframe the problem, innovation seeks to "do the right thing."

Innovation Equals Change

A corporate culture dominated by Six Sigma management theory will be primarily inclined toward inwardly focused, continuous improvement types of innovation activity—process, customer service, systems, operations, and so on. The objective is small, incremental innovations that add up.

A culture that fosters disruptive innovation is going to be more entrepreneurial, more outwardly focused on new markets, technologies, and business models. The objective is to find big new growth platforms that add significant chunks of revenue and profit.

The obvious conclusion for many companies is, "We need both!"

The Ambidextrous Organization

Given the different change management implications inherent in either approach, it would be pure folly to launch both efforts at the same time. Most organizations, like General Electric (GE), for example, get grounded in one, then attempt the other. In GE's case, Six Sigma came first. The trouble is that the business culture that emerges once the former has taken root is hostile to the growth of the latter.

In their Harvard Business Review article, "The Ambidextrous Organization," Charles O'Reilly III and MichaelTushman, business-school professors at Stanford and Harvard, respectively, acknowledge the paradox of exploitive vs. explorative efforts. Their conclusion is that smart companies separate the more ambitious efforts at innovation from ongoing efforts at continuous improvement, allowing for different processes, structure, and cultures to emerge within the same company.

They define an ambidextrous organization as one with structurally independent project teams that are still integrated into the existing management hierarchy. They say the separation is best orchestrated through a tightly integrated senior team responsible for making sure that the activities of the right hand don't work at cross-purposes to the goals of the left hand. Both the traditional business and the fledglings report to the same executive team but are managed under a very different set of rules, depending on where each is in its maturity cycle.

The Case for Simultaneous Efforts

Remarkably, in their study of 35 attempts at breakthrough innovation, ambidextrous structures were successful 90% of the time, whereas other cross-functional teams, unsupported Skunk Works–style groups, and other models were successful less than 25% of the time.

Jim Burnick, senior vice-president for quality and productivity at Bank of America (BAC) and leader of the bank's innovation efforts, couldn't be more enthusiastic about the commitment the bank has made to its simultaneous Six Sigma and innovation efforts. The Six Sigma Black Belt, trained at GE Finance, says that if managed properly, Six Sigma and innovation can go hand in hand, especially in a business such as banking.

"Our business favors consistency. Because of our success and the significant changes we can make within our system it is now possible for us to think as one organization across fiefdoms and business units to improve every type of customer's experience. This ends up looking like business model innovation, which in the banking business is very uncommon."

Starwood Hotels (HOT), which is widely known for both its Six Sigma and innovation prowess, notes that similar cross-business unit success has added significantly to its top line. Management at several of its Atlanta hotels used Six Sigma principles to develop a system to redirect conference customers to one of its nearby sister hotels when the original hotel was full or too small. Dawn Truemper, director of sales and marketing at the Westin Buckhead, said as a result, "the group's lead conversion rate jumped from 8% to 33% during the first month of the new sales system's operation."

No doubt this is innovation, but of an incremental nature. The conclusion here is, for large-scale systems that share customers across business units, Six Sigma can have a big impact when it comes to innovation. In systems that that don't share the same customer base and operational backbone, the use of Six Sigma in an innovation context can be a waste of time.

Rules of the Road

There is much to learn about how to successfully manage simultaneous continuous improvement and innovation initiatives. Here are some of the big themes associated with successful strategies:

Communicate a compelling mission. For employees, understanding the big picture and how leadership aims to achieve its strategic goals is critical to readying the organization for change. It's when management doesn't link the big picture with a credible implementation plan that valuable people are driven "nuts"—and often go elsewhere.

Separate the efforts. Don't expect people running mature businesses to behave the same as those running startups. The ramp-up phase for newer efforts is especially tenuous due to the inherent instability of rapidly evolving enterprises.

Appoint an "ambidextrous" senior manager to oversee both efforts. Staff the position with someone who has the ability to understand the needs of very different types of businesses. It helps if that person possesses deep organizational knowledge. A general manager with responsibility for both the traditional and new businesses will foster efficiency by sharing functional resources (HR, marketing, finance, e.g.) and promoting integration of the initiatives when the time is right. This is particularly critical in businesses that are being disrupted at a rapid rate. If what happened to AOL (TWX) is any indication, traditional business models can find themselves dead in the water almost overnight. Experienced leaders at the helm who are intimate with the innovation effort can weather the storm best when a new business model must carry the company forward.

Support both teams appropriately. Don't shortchange one effort over another. Innovation methods and processes may be lesser known than Six Sigma but that doesn't mean they don't require an equal level of investment in training, resources, and know-how. It kills me to see so much investment in reengineering, training, and employee time being poured into Six Sigma initiatives in the name of cost savings when innovation gets starved for critical research requirements like white-space analysis, ethnographic research, or prototyping. It's as if leadership teams truly believe their companies can shrink their way to greatness. Or is it ignorance or fear that accounts for so many companies, particularly in the services sector, underinvesting in their futures?

Change the incentive system. The best systems reward overall company performance to keep everyone focused on the larger mission. If there is one way to foster employee empathy and support for company initiatives, especially in light of the inertia so commonly associated with change, it's through their paychecks.

Innovation and Six Sigma are different methods that beget different types of results and require different management styles. Companies don't have to choose between the two—innovation and Six Sigma can coexist.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE