Shownotes
Jay Arthur, President of KnowWare International, has 21 years of experience helping companies solve problems of delays, defects, and deviation using Lean Six Sigma. Jay shares it’s a journey of learning how to make improvements. To take your business to the next level, you’re going to need some data about defects, delays and deviation, which are the silent killers of productivity and profitability. Once you start to analyze and start to be able to pinpoint exactly what’s broken and where to fix it, your business smooths out and gets better.
Using Lean Six Sigma To Solve Problems Of Delays, Defects And Deviation with “The KnowWare Man” Jay Arthur
We’re here with Jay Arthur known as the KnowWare Man in Denver, Colorado. He’s the President of KnowWare, a Denver, Colorado-based company with 21 years of experience helping companies solve problems of delays, defects, and deviation using Lean Six Sigma. He’s the author of Lean Six Sigma Demystified, Lean Six Sigma for Hospitals and QI Macros Lean Six Sigma SPC Software for Excel. Jay, it’s a pleasure to have you on Business Leaders Podcast.
Thanks for having me.
How did you get started?
I spent 21 years in the phone company building software and everything from mainframes to mini computers to microcomputers. About 1989, our VP of Technology decided that he wanted to get involved with Total Quality Management, which was the early version of Six Sigma, so that’s what we did. It turned out it was a journey of learning how to make improvements. Most people think of Six Sigma as performance improvement. It’s really what it is. The “Six Sigma” word came out of Motorola. They invented that term. Over at Motorola University, it says, “In God we trust. All others must bring data.” Most people get successful in business through gut feel, common sense, trial and error. Consequently, they get good at it through just nuts and bolts stuff, but to take your business to the next level, you’re going to need some data about defects, delays, and deviation, which I call the three silent killers of productivity and profitability. Once you start to analyze and start to be able to pinpoint exactly what’s broken and where to fix it, your business smoothens out and it gets better.
Lean Six Sigma: Combining Six Sigma Quality with Lean Production Speed
In the phone company, the odd thing was Six Sigma was always considered to be about the manufacturing, not about service industries like telephony or healthcare, whatever it is. One of the biggest complaints I get from people is they say, “Six Sigma, isn’t that just for manufacturing?” I go, “No.” “Do you have a process? Does it do things? Do you have errors and mistakes and stuff?” “We can fix all that with a little bit of data.” I got involved with that and we learned how to not successfully implement Total Quality because after five years in the quality department, they shut down the quality department because most of them weren’t delivering any returns. I’ve been working with the head of finance and she had this problem. All of a sudden postage costs went up $20 million in one year. I got a little bit of data and started to do some analysis. I don’t know if you remember back in the ’90s, everybody was putting up their own little mom-and-pop long distance company, and we offered to put that on our bill. If you put enough mom-and-pop things on a bill, the bill increases in price by $0.23 or whatever it was back then.
Those $0.23 and three-ounce rates added up to $20 million in a given year because we send out like 20 million bills a month. We’ve got 150,000 of them back because they had the wrong address. That’s a different problem. That’s a type of waste and rework. Even in my little company, we have things that come back because we don’t have the right address. All of these things start to add up and they devour profits. I helped her figure out exactly what was going on over there, and we redesigned the bill so it was lighter weight and fixed some of those things. We were doing adjustments on customer’s bills for $1 or $2 or whatever. For $1 or $2, we had this thing where we wouldn’t let a service rep issue out a $1 credit to a customer. You had to write it all up and that had to go through a whole process, a rigmarole and then it had to be taken care of. That costs $25, $50, $100 to do one $1-credit. They said, “Maybe we can let the service reps go up to a $25-credit, and if they start doing nefarious things like issuing it to family and friends, we go slap them but let’s not torture customers.
The other thing that happened was those customers would wait a month and their bill would not show their credit, so they’d call us back, which was another $9, $10 or $12 for the phone call. It cascades and it’s hard to tell how much your little mistake and error costs you in total, and then you lose customers and things of that nature. I got involved in all of that, but then in 1995, because most of us hadn’t delivered any return on investment, they shut down the quality department. I had the chance to either stay and work for the VP of Finance or go out on my own, and so I did.
When people hear that and let’s say that they’re in a circumstance and they go, “I’m trying to figure out whether I want to stay or leave,” what was that decision process like for you?
For me, the last two years I was there was just painful to walk in the building.
So it’s easy?
No, it was hard. It was impossible. They have a saying for a company. “Hire when it hurts.” You know it’s time to leave when it hurts too much to walk into the building. I was pretty ruthless because I knew that at some point they’d offer a management buyout and I’d get some real money to leave, and so I waited for the management buyout. I had a friend of mine who worked at AT&T in New York and she told me, “I know how much the price of my soul is worth.” She said, “Five more years.” If you feel like you’re paying with your soul, then it’s time to leave. Some part of you is nagging you to go out and try and reinvent yourself, which I decided I had to go do. I had to go see if I could make it happen. For the next year after that, the VP of Finance loved me so much, she brought me on as a consultant and paid me more money than I was paid in salary to help her solve other problems throughout finance and throughout the company.
You know it's time to leave when it hurts too much to walk into the building.
Were you known as KnowWare Man then?
No. I went out and I worked for her for a year. Then I had to go figure it out on my own. The next year, my income fell and I started thinking about it. This was 1997, so as a programmer, I knew that Microsoft Excel could start to draw some of the charts and graphs that I needed to do this Total Quality Management stuff. It wasn’t until about that time that Six Sigma started to find its way out of Motorola, 1988.
Was that the Jack Welch?
Jack Welch picked this up. This started at Motorola. The head honcho, he said we produce a million phones and twelve of them are defective. He had all those twelve phones shipped back so they could figure out why they made twelve defective phones. He wanted to know how to produce a million phones that always work. Zero mistakes, zero waste, zero rework, zero harm, zero. Crosby had that whole book about zero defects and everybody thought he was out of his mind, but I don’t think he is. That’s the new standard in America.
One of the things I’ve observed when I first started doing this quality improvement training was people said at the phone company, and I told my boss, “We want to be better, faster and cheaper.” He said, “I can give you any two of the three. I can give you better and faster, but not cheaper. I could give you cheaper and faster, but not better.” “I’m sorry. That’s no longer acceptable.” Amazon, Apple and Google have taught us we can get whatever we want right now for free often. You want to know something? Google. If you want to make a phone call, make a phone call. If you want to listen to any kind of music that you’ve ever owned on your iPhone or iPod, go for it. You can download that right now off of the iTunes store.
It’s the same thing with Amazon. Do you want to read a book? I can download that right now and I pay whatever a cheaper cost than buying a printed book. I can get it right now and I can start reading it right now. I want it now. The new expectation is free, perfect, and now. That’s what everybody wants. If you can’t deliver that, you’re coming in second. You can’t get there on gut feel, trial and error, and common sense alone. You have to start to use some data to figure out exactly where those little mistakes and errors are and eliminate them from your diet, eliminate them from your customers’ experience.
In the consulting space, you’ve left AT&T, you dropped off US West. You were now off the favorites list. Now you had to make a run at your business and make it work. What was the biggest impediment or misconception about your business that kept you from getting fired off?
I don’t know if there was a misconception, but when you’re an employee in a company, somebody tells you what to do. When you own your own company and you’re a sole proprietor like I was when I started, you have to tell yourself what to do and then you have to make yourself sit down and do it. I’ve written twenty odd books and people ask me, “How do you do that?” I say, “It’s BIC. It’s button share. You have to sit down and you have to write the book. Then you have to edit the book until it’s readable. Then you have to find somebody to publish the book.” When I started, first of all, I had to learn how to lead myself or manage myself. At the time, Excel, Windows 95 was out.
I remember when Excel didn’t charge.
We had Windows 95 which Job always says was Mackintosh 84, and he wasn’t wrong. Then Excel 97 came out and I said, “I can start to program Excel to do some of these charts.” I started going out and doing consulting work with clients about quality improvement. That was the early days and not everybody was a quality consultant. I would sit there with my little laptop. Laptops were very expensive back then, but I had to have one. I would draw a little chart and people go, “That’s cool. How did you do that? Where can I get that?”
It’s what they call BFO, blinding flash of obvious.
I go with “brilliant” just because “blinding” is a bad metaphor. It’s a brilliant flash of the obvious. I said, “I got to turn that into a product.” I made my crappy first draft of this software. Now I have to figure out how to sell it. There’s the American Society for Quality. They have so you could buy their mailing list. I bought like 5,000 names and I started having to study direct mail because there was no internet. All this internet stuff that we all take for granted now, that didn’t really exist in 1995, 1996. It was in its infancy. I would hate to show you my original crappy website. It was awful. A friend of mine nagged me into building a website. It was awful, but I had a website and then I started learning direct mail. I read every book I could find on direct mail. In direct mail, the simple answer is the headline determines 80% of your readership. If you get a good headline, they’ll read the next line and everything below that. I remember I sent out 100 pieces first. I printed them and folded them up on my kitchen table, licked them and put a stamp on them and sent out 100. Crickets. Mom didn’t even call.
Out of that, I kept iterating until I found a headline that worked for quality people, Control Charts for Excel or something, but whatever, they want it. Then I got an order. One out of 100, I was rocking. I started to do that and I started to ship this out on little 3.5-inch floppies. I actually duplicated those on my home computer. It’s this whole journey of discovery. You just have to keep learning. It’s just like a flood of learning and discovery. Some people hesitate to send stuff out, but if you don’t do 100,000 pieces because you think your first mail piece is great, I sent out 100 and didn’t work, but I learned something and sent out some more. Eventually, I found things that really did work. It started to scale up, and then the people who are using the product gave me feedback, “You need to have a menu, not just control keys to run these tons.” How do I make a menu? I had to go figure out how to make a menu that would drop down on Excel. There’s a way to do that. Who knew that? I had to go learn all these things. Out of that progression, iterating the product, iterating my marketing, I slowly ramped it up. In 1999, I sent out a quarter of a million pieces of mail and did almost $750,000 in business to cover postage and then some. I have outsourcing people who actually did the fulfillment for me.
Then it started to grow a little bit too big to manage all of that stuff all by my lonesome with just one outsourcer. In 2001, I hired my first employee. I got a call from Adrianne who’s our COO. She left the phone company and she wanted to know if I knew anybody that had a job. I said, “I might.” It was painful to decide to hire that first employee. That was the starting point. We’ve got an office and moved the furniture in September 1, 2001. Then 9/11 happened and the whole country froze up solid for a period of time. I just kept marching forward and eventually America woke back up. It’s been an endless churn. Way back in ’97 and ’98, Excel for the Macintosh, Excel 98, I actually built the original version of the software. The Mac was where Excel was developed originally. I built it there, ported it to the PC and then started selling both versions, although the PC outsold the Macintosh 99 to 1 for the last fifteen years. The last few years, the Mac has risen, so it’s about 10% of the business now, which is a testimony to whatever’s going on out there in terms of people using the Mac.
The Macintosh is also starting to have its little glitches. When you go in and they file an insurance claim, it has to go out to an insurance company. When it goes out the insurance companies, sometimes it bounces right off because you haven’t filled in all the blanks. That’s an IT problem. We ought to be able to fix that. Then it gets in there and sometimes it’s fine and it goes right through. At other times it goes into some analysis, and then you have to respond to their analysis. If you don’t respond in a period of time, then it gets rejected, and so you end up with a loss of money. They were losing about $12 million a year and denied insurance claims. I sat down and we started doing some data analysis on denied insurance claim, some 47,000 different kinds of rejected for this or that, or the other thing, or they bounced off. We did an analysis on all that and it turned out that one insurance company decided to drill down.
Lean Six Sigma: 20% of what you do causes 80% of your mistakes, errors, waste, rework and loss of profit.
We used what’s called a Pareto chart. A Pareto chart helps you narrow your focus on the one thing you wanted. Most people have probably heard of the Pareto Principle of Vilfredo Pareto that 20% of what you do causes 80% of your mistakes, errors, waste, rework, and loss of profit. It’s the same thing on the other side, 20% of your customers account for 80% of your revenue. You spend more time with those 20%. I also found that Pareto’s loss is also a power loss. It applies within the 20%. As little as 4% of what you do produces over half the mistakes, waste, rework, loss of profit.20% of the 20%, 80% of the 80%, 64. The 450 Rule just sounds bad. If we can use data to narrow down and pick that one thing that’s really going wrong, we can fix that. In their case, we had this nice chart of $1 million a month going down the toilet. Then we looked and we split that up. Why is it going down the toilet? About two-thirds of it was for timely filing. We’re just not getting it filed in a reasonable length of time. Then we drilled down into timely filing. It turns out one insurance company was two-thirds of the timely filing denials. It was a function of they weren’t living up to the contract and censure wasn’t doing everything it could do to make sure all that stuff went through. I did the data analysis in a few days. I’ve actually changed the software so I could do the same thing I used to do in 30 seconds instead of two to three days because I was still figuring out how it all works.
I figured that out. We got a team together. The team looked at that and said, “Number one, we need to go fix the contract. Number two, we can change how we do all this stuff.” They figured out how to fix it on a Friday afternoon, started that the manual change on Monday, save $5 million a year. Then we found some other ones where they had misread it. There was another $24 million that had been miscoded that’s not paid. We figured out we need to code it correctly so that we know that we got paid for it. Then we started working through some of the other things. I helped them find the money, but if you think about it, just like the phone company with a 150,000 bills returned. While we fixed all of that, they’ll stop coming back. We’ll stop issuing things to chase down non-payment, and all of this churn will stop. The same thing would happen with the healthcare system if we could just get those transactions, those things to go through first time. If they just slid right in, if we changed all this
Will this also apply to individual physician practices?
Sure. Physicians have the same problem or they don’t actually bill for the things they’ve given a patient. If you look at the amount of all these drugs that we buy, we’re only billing for about two-thirds of the drugs. Other hospitals have seen things where they had all these cardiologists and they had four or five different kinds of stents. Some of them are very expensive, some of them not so expensive, some of them were better in terms of how they perform than others. For a lot of these hospitals, they just said, “I’m going to
