Simple Rules for Resource Allocation

By HPA Senior Advisor Alex Nesbitt

Resource allocation decisions are pervasive in companies, from top to bottom. 

At the top of the organization formal processes drive decisions: strategy, capital planning, budgeting, and the like all focus on how best to allocate resources.

And at the individual level, we are all involved in a continuous stream of decisions about how we allocate our time and attention: Which task do I focus on? Which email do I open first? Should I finish what I’m doing or start something new?

Like all complex dynamic systems, organizations are driven by energy. And these resource allocation decisions channel our energies and efforts to produce and change. When people are making decisions in a collectively coherent way, the organization maximizes progress.

This is conceptually easy to understand, but too ambiguous to implement. We need to define what we mean by coherency and understand how to go about creating an environment where coherent resource allocation emerges.

Principles for More Coherent Resource Allocation

  1. Manage for the win
  2. Concentrate your effort
  3. Validate that people understand your strategic priorities
  4. Focus on executability
  5. Stop generating unproductive complexity
  6. Organize decisions around constrained resources that produce goals
  7. Identify simple rules that maximize value created by the governing constraint
  8. Ensure people know what they need to know to make a good decision
  9. Document, measure, learn, improve

1. Manage for the Win

If you’re not managing for the win, it’s hard to get a winning outcome.

In competitive sports like baseball or football, it is clear what winning looks like. When it comes to strategy execution, the definition of winning can be more ambiguous. Does it mean growth, profitability, market share, or some other metric of success? Many companies fail to establish clarity about what winning looks like and how you measure it, and if you don’t know what the definition of winning is, it can be very hard to manage for the win.

Companies that manage for the win establish clear goals and metrics that define winning for them. They then identify leading indicators that predict or lead directly to success. These leading indicators define what it means to win on a daily, weekly, or monthly basis. This gives managers the ability to monitor progress, take quick corrective action when needed, and improve the probability of achieving their overall goals.

2. Concentrate your effort

Many companies spread their talent around, hoping that will improve the organization’s overall effectiveness. Unfortunately, that doesn’t work very well.

Talented people are more productive, especially when it comes to getting complicated things done. Surveys by leading consulting firms show that high performers can be over nine times more productive when engaged in complex activities, and strategy execution is almost always complex.

Concentrate your best people on getting the most important things done. You get dual benefits from doing this. You will get important things done more quickly, and your most talented people will be more engaged and productive when they get to work closely with other talented people.

3. Validate that people understand your strategic priorities

People systematically overestimate their communication effectiveness and overestimate what other people understand, particularly people close to us.  As a result, leaders of companies tend to overestimate how well their organizations understand strategic priories and the intent behind those priorities.

Executive teams may strongly indicate that they understand and support the company’s strategy. However, when asked to list the top three strategic priorities, vast differences are uncovered. In one survey of 124 companies, only 51% of the top team members could list their company’s top three strategic priorities. The data gets even worse when you go deeper into the organization. Only 22% of executives who report to members of the top-leadership team can correctly list their company’s top three priorities.

Close communication bias is partly to blame. Close communications bias happens when we under-communicate with people close to us because we think they know what we know.

The larger problem is that we confuse communication with understanding and fail to test whether our communication translates into understanding.

Avoid this mistake by being aware of the problem and validate how well the organization understands your strategy and overall priorities.

4. Focus on executability

Management teams are always asking for more money so they can get more done. And they think of money as the constraint on their ability to get things done. As a result, most resource allocation discussions become very money-centric. We create lists of potential projects and rank them based on their financials.

However, money is rarely the scare resource when it comes to execution. Talent, knowledge, equipment, and systems are essential for getting things done, and the critical resources that constrain your ability to execute are very hard to procure on a timely basis.

When you make resource allocation decisions based on a resource that is not the core constraint, you overestimate the organization’s ability to get things done and saturate the organization with work it cannot complete in a timely manner. And in the process, you generate unproductive complexity that further limits the organization’s ability to execute.

5. Stop generating unproductive complexity

Many resource allocation decisions are made necessary by poorly regulated workflows that saturate resources with work. When a system is saturated with work, every resource becomes a potential constraint on throughput. The saturated condition creates competition for the resource and the variability in the decisions about resource allocation increases the complexity of the system – it becomes more chaotic.  This phenomenon is often called a roving constraint and makes the business much more difficult to manage because the limiting factor on performance is moving faster than management can adapt. 

The best way to deal with this problem is not to become more agile. The best way to deal with the problem is to dissolve it.  Regulate the workflow to prevent saturation conditions, then stabilize and protect the constraint.  This restores simplicity to the business.

Management tools like Kanban and Drum-Buffer-Rope are designed to regulate workflows and stabilize the constraint. When supplemented with simple, and ideally visual, rules for prioritization the system works much more smoothly. The constraint is protected and focused on generating value. And the value generated by the system increases as throughput through the governing constraint increases.

6. Organize decisions around constrained resources that produce goals

The resource that acts as the governing constraint (a physical or logical bottleneck) for a system limits the system’s ability to produce whatever it produces.  The system cannot produce more than the governing constraint.

Intuitively we don’t like governing constraints. Our normal reaction to break them; to find some way to remove limitations.

However, making a strategic choice about where to place governing constraints is enormously helpful. You capture the benefits of complexity without incurring the messiness of complexity.  You get more signal and less noise.

And when you subordinate all the other resources to the governing constraint, the constraint becomes a single focal point for managing the systems performance. You can use the constraint as a leverage point for the whole system.  Instead of trying to optimize resource allocation for every resource, you focus on optimizing the constraint and all the other resources are automatically synchronized for global optimization.

7. Identify simple rules that maximize value created by the governing constraint

When you understand your goals and constraints on realizing the goal, resource allocation becomes much easier. The key question becomes how to use the constrained resource most effectively.  How do you maximize the value of the throughput?

High quality decisions can be made using simple decision rules. In practice, you often need three types of decision rules: boundary, prioritization, and stopping rules.

  • Boundary rules help you decide whether something is in scope or out of scope.
  • Prioritization rules help you rank alternatives based on criteria defined by the rule.
  • Stopping rules help you decide when to stop something that is already underway.

These rules are not one size fits all rules.  They need to be contextually relevant and incorporate both the local context and the global objectives.

Crafting these rules is an iterative process that involves people who understand the local context, supported by coaches who help provide more global context.

8. Ensure people know what they need to know to make a good decision

When simple rules are well crafted, they carry with them implicit information about what’s important from both a global and local perspective.   

These rules also help define the minimum information set that people need to know. You need to ensure that people have the information they need to process the rules effectively.

Develop, document, and implement the necessary processes for capturing, collecting, and presenting the information needed for making good decisions. Audit to validate that the process is effectively delivering the necessary information in a timely manner.

9. Document, measure, learn, improve

Making effective resource allocation decisions is a skill that can be learned and developed through deliberate practice coupled with structured feedback and review.

It starts with documenting the standard practice of decision-making – goals, constraints, decision-making process, and simple rules. Define what standard work looks like.

In parallel, baseline your current performance. What is your current throughput rate? How well are you producing your goals?

Put the standard work into practice. Practice with focus. Measure your process to make sure you are following standard work. Leverage coaches to help with rapid feedback.

Track your progress. Are you seeing improved outcomes?  Evaluate and reflect on the performance of the decision-making process.

Couple deliberate practice with ongoing Kaizen and your decision-making will get better and better.

Implementation Considerations

Big top-down transformation programs rarely succeed. Big projects almost always lead to complete failure or disappointment. Small to moderate-sized transformations are over 11 times more likely to succeed than very large efforts.

The key to a better way forward is to embrace the idea that substantial changes can be triggered by small, focused actions that can be replicated to produce change.

With that in mind, we recommend developing an implementation plan that uses a bottom-up Kaizen like approach to improving resource allocation decision-making

De-risk your transformation. Start small. Figure it out. Make it work better. Replicate what works.

Start with a value stream where improved resource allocation will make a difference quickly. Pilot a program to implement the key principles outlined above within that value stream.

Once you’ve made it work in one value stream, you can repeat the process in other value streams.

These better bottom-up processes will start to feed the backbone resource allocation process with better and more trusted information.

As the transformation unfolds, these more trusted bottom-up processes will increase the amount of decentralized power in the organization, allowing you to re-architect the backbone resource allocation processes and make them more strategic.

Article Author

ALEX NESBITT is an HPA Senior Advisor with 30+ years of management consulting experience and a strong track record of partnering with CEOs to tackle issues related to strategy, organizational and operational effectiveness, and performance improvement. Alex is a former BCG Managing Director who led the firm’s West Coast Industrial Practice. After leaving BCG, Alex founded a third-party logistics firm, which he later sold to Ryder Logistics.