Why Operating Rulez!

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Chris Beckers Published at

Recently I attended the training ‘Finance for non-financials’. I found the difference between the international and the American accounting rules especially interesting. These are two completely different approaches to control the accounting process, I recognized a clear parallel with business process excellence.

Principle versus rule-based

The international IFRS is principle based. It describes a direction. The interpretation of this principle depends on the context. This results in a grey area and is harder to control. The American US GAAP is rule-based. It specifies exactly what to do. This makes it black and white. However, does it cover all the contextual possibilities? And do you want it to cover all these possibilities, resulting in a huge number of rules, possibly even contradicting?

Let me give a practical example of principle versus rule-based controlling. A principle in the workspace might be: we treat colleagues with respect. In a rule-based world, this might be translated into: we do not hit our colleagues, we do not yell at each other and we greet each other at the beginning of the day. Now imagine you give a colleague a pat on the back. Would this count as hitting a colleague or as a sign of respect?

In business context

R&G has a background in American business culture and a tendency to use operating rules to control processes. I actually never gave this much thought. Up to this training. Now I started wondering. Why do we use operating rules? Could we also use operating principles? Especially since the culture of our clients is most of the time not yet that rule-based.

Then I remembered a social experiment. Machine operators were frequently changing settings to increase output. Only to find out afterwards that their control panel was not linked to the machine. And still they were convinced they had a positive influence on the output.

We see this often in companies. People want to use their influence. It is not in our nature to stick to standards. For this reason, machine operators often use their own machine settings to run the same product. We want to individually contribute, matter. However, we overestimate our ability to control variation. Years of experience have shown that deviating from the standards more often harms then helps process stability and with that the output.

So here’s my conclusion. Operating rules will leave no room for personal interpretation and will give me the ability to control. At the same time, I want to avoid creating a jungle of rules that are impossible to follow. For this, I see the following alternatives:

  • Do nothing; the data shows a process that is in control. Never change a winning team.
  • Redesign the process. If you need too many rules, maybe the process is too complex.

And thanks to my finance training, I can add to this list:

  • Create an operating principle. Control the underlying vision instead of specific actions. If you try installing an operating principle yourself, please be aware. The principle-based approach requires auditing as much as the rule-based approach. You can do this by group discussions on how to interpret and apply the principle to a specific situation. And although this may be time consuming, it can be a great culture building exercise!

Chris Beckers is Business Process Consultant at R&G Global Consultants in the Netherlands

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