The Role of Economic and Performance Analysis in Process Re-Engineering
Sharman, Paul A., CMA - the Management Accounting Magazine
Here is a way to ensure that process re-engineering will produce positive bottom-line benefits in terms of customer service, employee behavior, cycle-time reduction, and cost savings.
Thousands of organizations have attempted to use process re-engineering techniques during the past five years, but many applications are considered to be failures. This is often the case because of unrealistic expectations, inadequate analysis, and a lack of understanding about human behavior.
Two years ago a Business Week magazine article chronicled the woes of consultants Hammer and Champy as they blamed middle management for the failure of process re-engineering. The argument in the article implied that it was not the fault of the consultants who were responsible for providing advice to management. But, shouldn't the consultants have anticipated the problems? What they lacked was an adequate measurement framework with which to plan re-engineering work, and monitor implementation, performance, and results.
Measure performance to manage performance
On occasion, I have been asked to evaluate the benefits of planned process re-engineering projects, where the design work is complete, but initiatives are not yet fully implemented. One recent example of this serves to illustrate the theme of this article. It relates to a company that had a team of employees working for a year to re-engineer what had been identified as "the critical process." It was called the "order-to-cash process," which began with customer-order generation, and ended with cash being received. Expected re-engineering benefits included improvements in cycle time, accuracy of order fulfillment, consistent on-time performance, and substantial savings. Management's goal was to reduce division payroll cost by 20 per cent. This expectation was based on an analysis of strategy that was used to identify the critical process. It appeared reasonable to everyone that because the "order-to-cash process" was the critical process, then, by definition, it was the one that consumed the vast majority of resources employed by the company.
In spite of this perceived logic, the vice-president responsible for the project, who was a canny numbers person, made this request of the team. "Before I approve implementation of your re-engineering recommendations, prove to me that we will achieve the cost-improvement goals."
"Well," the team members sputtered, "we didn't do any analysis of costs. But we know from our process maps that the identified critical process touches every major department - the changes we have suggested are significant, and so it follows that cost will reduce."
The team members knew that to determine the cost benefit of their recommendations would be difficult, subjective, time consuming, and maybe costly. It would certainly require them to go over stuff they had already covered and were already convinced about, and, moreover, they felt it would be boring. After all, the interesting work would be implementation!
Fortunately, the VP prevailed. She instructed the team to hold off while the corporate controller conducted an economic analysis to determine the costs and benefits of recommended process changes.
The controller knew that, to determine the cost of the process, he would have to calculate the cost of the resources consumed by that process. Because steps in the process were performed in virtually every department, a question was raised on whether asking people how much time they spent working on the process, would be adequate. "Will we reconcile to the books?" asked the controller, and, "How will people know when they are spending time working on this process versus others? What about the other things they do, like administration, training, attending meetings and supervising staff? Most people perform all sorts of activities."
After some consideration of these matters, it was decided to undertake a complete analysis of all of the activities that were performed in all of the departments. …