A software company takes a page from Toyota's playbook

Using a combination of Toyota-inspired lean manufacturing principles and an open office atmosphere, Menlo Innovations' work environment is attracting attention.

This article was originally published by Fortune.com on Thursday, Oct. 6, 2011.

By Katherine Reynolds Lewis, contributor

FORTUNE – At most white-collar job offices around the country, workers scurry from cubicle to cubicle, speaking in hushed tones. Take a step into software firm Menlo Innovation's offices in Ann Arbor, Mich., and it's clear that this firm is more cotton mill factory floor than monastery.

Instead of rows of cubicles, visitors enter an open space that calls to mind an artist's loft or an industrial warehouse that is filled with the sound of a dozen overlapping conversations.

"A lot of people don't believe software development can be done in anything but library quiet," says CEO Rich Sheridan, during a tour of his company's space. "I have 12 years of experience that says differently."

Sheridan and his co-founders built Menlo's work culture with a great deal of intention, and with the modest aim "to end human suffering in the world as it relates to technology." The free-form floor plan was inspired by Thomas Edison's Menlo Park, N.J., laboratory, which had an open and collaborative workspace that in turn drew inspiration from the machine shops of the day.

"There are no rules around here about how the space is formed," Sheridan says. Network and electrical cables are pulled down from the ceiling, rather than from a wall or pillar, so lightweight tables can be pushed together in the center of the room, or moved around as needed. The staff put the CEO's desk wherever in the room is convenient -- rather than in a glass-walled corner office.

But arguably the most novel element at Menlo is one that put southern Michigan's auto industry on the map decades ago. Just as Kichiro Toyoda standardized the manufacturing and quality control processes for car production, Menlo has created its own standardized process for making software. Thousands of companies have attempted to duplicate Toyota Motor Corp.'s (TM) success when it comes to quality and culture, but Menlo is one of the few that captures the core principles, says Jeffrey Liker, an engineering professor at the University of Michigan and author of The Toyota Way.

"The concept of lean production was introduced in the 1980s and that was considered as big a revolution as moving from craft production to mass production," says Liker, who has studied Menlo's operations. "Any piece you see in Menlo you'll see somewhere else. What you won't find [elsewhere] is all the pieces working together…."

Menlo's approach seems to be paying off. The software company has been on the growth path ever since it was founded in 2001 and has regularly made Inc. magazine's list of fastest-growing private companies.

So what exactly makes Menlo such a well-oiled machine? Here are a few things that certainly help:

Assigning bite-sized pieces of work

As Menlo programmers map out their work on a project with customers, they estimate how many hours each step will take and write it on a card. They then assign the cards to a given day of the week, ensuring that the eight hours of each workday are filled -- but not exceeded. "They know what's expected of them," Sheridan says. "They don't have to go around asking, 'Boss what do I have to do next?'"

Keeping projects in plain sight

Just as Toyota believes you must see the problem to solve it, Menlo tacks these task cards onto their office walls. Each project has its own code name and the project boards are broken down by day, with a piece of yarn across the current day and a yellow sticky dot indicating the current card. When the programming team believes a card is finished, they replace the yellow with an orange one.

If Menlo's quality assurance specialist agrees that the given task on these cards has been completed, she will place a green dot on top of yellow; if not, a red dot sends the task back to the developers. "When the string moves down on the next day, you would expect to see green dots above the string but none below. That tells us we're exactly where we expected," Sheridan explains.

Menlo takes a page from the doctrine of agile programming -- which itself stems in part from Toyota's production system -- by focusing on continuous improvement and feedback. "A lot of people labor away for months or years and are never sure, [asking themselves] 'does anyone care what I'm doing?'" Sheridan says.

Observing the customer in action

Menlo has a "high-tech anthropologist" (a term the company coined and trademarked) on staff who visits customer's offices and observes the people who will be using the software and how they actually work, using that information in the software design process -- rather than just working from the abstract descriptions of customer requirements. "They don't want to develop software that implements bad processes," Liker says.