Why a Silo Mentality Stifles Progress in Companies

It is common knowledge that strong departmental thinking and a lack of willingness to see beyond one’s own nose are not exactly beneficial to companies. We also know how essential it is to work together towards achieving a common company goal. However, unified cooperation, not only between departments but also with the executive team, still presents a major problem in many companies. 


Blue Yonder Gründer Prof.Dr. Michael Feindt

 

A plea for teamwork when introducing innovations

Change is always difficult, because it means rethinking and reorienting. And a strong innovative culture can only function if all involved pull in the same direction. If individual departments pursue different objectives, it hampers innovation and therefore company success. Life writes the best stories. Let me tell you one of these stories, which illustrates a common phenomenon in companies today.

A department head, open for new technologies, starts using innovative software with the objective of increasing the company’s revenue. The software is introduced and has a positive effect on the revenue. Moreover, with this, the department head achieves a small miracle and obtains more sales, a higher turnover and a greater gross profit in a saturated market. Nevertheless, it may very well happen that he loses his bonus even though the company has an excellent controlling in place and is driven by the numbers. Hard to understand? Yes, but unfortunately all too common. And it is because many bonus programs in companies with several departments are structured pursuant to old designs.

As a rule, the calculated gains in the respective department are rewarded. This is calculated from many factors, including the revenue, the purchase price, the gross profit, the handling and fixed costs of personnel, etc. Using innovative technology and a new pricing policy, the department head manages to increase the sales and therefore the market share, revenue and gross profit, without increasing the fixed costs. So the calculated gains are thus higher. That should make any management happy. Even so, it may arise that the department head – instead of receiving praise – puts his bonus in jeopardy when the company stands by its old pricing policy and renounces the obviously better result.

Why does this happen? Because the current hierarchical ‘divide and conquer’ structures in companies, along with local departmental optimizations, return good, but not optimal, overall results. Also, small mistakes in incentive policies can lead to absurd situations that hinder progress for the whole company.

Often, for example, a company offsets its fixed costs according to its revenue between the departments. This causes a big problem. In this particular model, if one department focuses on innovation and optimization, it can have higher fixed costs allocated to itself, because it achieves more revenue, although the actual costs may not have increased at all. Curiously, at the end of the year, a different department may be better off although it never contributed anything to the company’s optimization.

Of course it is not particularly motivating for the responsible department head, because then he’d rather blow off the innovation plans. To the detriment of the company. And who’s to blame? The accounting system and the incentive system. Thus, ultimately company policy.

 

No company ever progressed by doing nothing!

Instead of remaining passive so as not to lose a bonus, it would be more sensible to get the less innovative department on board with new ideas. Then they and the entire company profit twice over. In short, communication exchange between departments is required, and senior levels have to understand this and provide the proper incentives.

A positive example of one of our retail customers will show us how important the upper echelon of decision makers is for change management. This retail company was looking for an easy-to-integrate predictive analytics solution to precisely plan sales and automate goods planning for around 3,000 subsidiaries in Germany. The company chose Blue Yonder. From the very beginning, the most important decision makers from various departments were deliberately brought on board and convinced about the innovation project. The focus was on automating decisions and easy implementation. In the next step, all the relevant stakeholders were brought on board. This is an important step so that everyone is moving in the same direction, which gives an innovation project the chance to succeed. Known critics of innovation were appointed to the project team and in this way were also integrated. At the same time, the company informed its employees about the project and the vision behind it, along with the expected benefits. Weekly meetings in the subsidiaries with department heads were established for trainings, support and gathering feedback. Afterwards and before the whole roll-out, there was a company event at which the branch and department heads got on stage and presented the first successes to their colleagues. This is a good example of successful innovation management.

 

Pilot projects: yes. But properly!

It’s perfectly normal to pilot innovations in one department first and then, if successful, roll-out to the others. Assessing such pilot projects should definitely take place from a higher level, one with the overall company well being in mind. Never allow assessments and incentives to occur so that shifts in accounting costs are considered as in the example made clear at the beginning of this article (a simple model that has nothing to do with the real costs of the department). Departments that actively engage for innovation and the overall well being of a company and that are prepared to do pilot projects should not be prevented from doing so by an antiquated bonus policy.

This is a plea
• for optimizing the overall company well-being and unified company mentality,
• against silo mentality and localized optimization,
• for modern incentives,
• for better, realistic cost distribution, not political or historically increased.

Introducing predictive and prescriptive analytics in companies requires a company-wide unified mentality. What kind of mentality does your company have? Do you recognize the scenario described above from something that happened in your company? Are you ready for innovation?

Prof. Dr. Michael Feindt Prof. Dr. Michael Feindt

is the mind behind Blue Yonder. In the course of his many years of scientific research activity at CERN, he developed the NeuroBayes algorithm. Michael Feindt is a professor at the Karlsruhe Institute of Technology (KIT), Germany, and a lecturer at the Data Science Academy.