By William Heitman, Philip Spencer and Richard Hagey
Most companies focus on new technologies to deliver productivity gains. However, research shows that many small changes - involving no new technology - can dramatically and cost-effectively increase productivity.
Finding itself lagging its peers, who had years earlier migrated from manual ledgers, one of the largest international insurance companies began deploying technology in 1999 to automate its general ledger - a move driven not by actual operational problems, but by potential ones. The manual ledger system relied on numerous handoffs of spreadsheet data, and with each handoff the probability of human error increased.
With implementation of the electronic ledger system completed throughout the company's U.S. and European operations a couple of years later, the finance group experienced modest productivity gains. But where, questioned executives, was the great leap forward? While acknowledging the modest gains, senior management still saw room for significant improvement.
So, in 2001, the company initiated an intense, two-month effort to analyse its key finance processes, to develop a list of best practices based on external benchmarking, and to design a plan to implement those improvements that would result in the largest, quickest productivity gains. The result was a list of 172 best practices, based on benchmarking research involving 40 of the company's peers, that served as the foundation for hundreds of specific, activity-level improvements. The most striking result, however, was that the great majority of improvements required no additional technology - and within a year, the finance group had reduced costs by 17 per cent.
This is not an isolated experience. Lower-than anticipated returns on large technology projects have many CFOs asking the dreaded question, 'Is that all there is?'
Until recently, investment in new technology was regarded as the primary way to increase productivity. Now, however, strained budgets have placed CFOs under the gun to streamline operations, cut costs and enhance service levels without spending a lot of money up front. This is putting enormous competitive pressure on companies and the senior managements charged with holding down costs.
One effect of all this attention on cost control is that managers are becoming much savvier about how they spend their limited dollars earmarked for productivity improvement; they are less prone to invest in projects when the outcome is unclear. Despite the recent recession, business productivity has been growing at historically high rates. Nevertheless, plans for many large, capital-intensive projects wither under the white-hot spotlight of financial and risk analysis. With new impetus, managers are now demanding improvements that can be implemented faster, and with lower risks and higher return on investment (ROI), than most technology-based initiatives.
From their experiences, the authors have found that most businesses have a large number of 'non-technology' improvements available to them that, taken together, can deliver substantial gains in productivity. Within finance and other business-support groups, productivity gains of 10 per cent to 30 per cent are typical. Non-technology improvements have the advantage of being easier to implement in a shorter period of time, requiring minimal investment and creating less organisational upheaval than technology implementation projects. In addition, they do not depend on changes to existing products, services or distribution strategies.
Non-technology improvement programs generally produce results in weeks, and reach breakeven in months - not the multi-year timelines typical of technology projects. This makes them truly 'self-funding' in nature (see Figure 1).
We refer here to 'non-technology productivity' improvements simply as 'Class I' improvements. Although Class II improvements (those that require significant technological investment) enhance productivity, the authors find that roughly two-thirds of all improvement opportunities do not require new technology. Enhancing productivity is chiefly a management challenge, not a technological one.
Opportunity: an embarrassment of riches
The wide scope of operations improvement benefits available without technology is neither widely recognised, nor well understood. Perhaps this is because most organisations are reluctant to consider their non-technology (such as people-related) aspects as candidates for breakthrough levels of improvement. Consequently, when the substantial benefits of Class I improvement are first introduced (productivity gains up to 30 per cent or more), the response is often swift and skeptical - particularly from operations managers, internal improvement teams and IT specialists.
However, more-seasoned executives will correctly sense opportunity behind an organisation's initial reluctance to look inward for major improvement benefits. These executives use fact-based, activity-level analysis to guide their improvement efforts, achieving breathtaking productivity gains.
Consider the monthly financial close and management reporting process. A typical large company can identify two hundred or more distinct activities within this process. At a general level, these can be classified into three categories: data gathering, analysis and reporting. On average, data gathering (including collection, entry and scrubbing of data) accounts for three-quarters of the staff time expended, whereas analysing and reporting each constitute only 10 per cent to 15 per cent of the time spent.
Why is this significant? It provides a clear indication of where to look for improvement opportunities. Even modest improvement in data-gathering activities can significantly boost the finance group's overall performance.
The improvement blind spot: a lack of facts
When looking at a process map depicting two hundred closing activities, managing the process of Class I improvement may appear complex and mired in arcane, operational detail. And, after being informed by operations staff and technology vendors that few non-technology improvement opportunities are available, many executives might be tempted to delegate sponsorship of these seemingly low-payback projects to others. This is a costly mistake.
The managerial challenges of Class I improvement are no more difficult, nor time-consuming, than those routinely addressed by executives in other parts of their businesses, such as product/service delivery or distribution channel management. Rather, it is the virtually complete lack of objective, fact-based information that makes Class I opportunities so difficult to evaluate and to manage in a conventional, time-effective manner.
In research conducted by the authors, operations employees at large (Fortune 250) companies routinely identify two major sources of operations improvement as most valuable to the company:
1. Eliminating waste
Frequently, a large percentage of an organisation's activities are routinely devoted to error correction, rework, or creation of unnecessary intermediate 'products.' At the activity level, inefficiencies that cause this waste are often so embedded within existing operations as to seem invisible to the organisation.
2. Better understanding of customer needs
When operations organisations are unclear about customers' service priorities, the result is often a service imbalance. Customers' high-priority needs are often underserved, while their low-priority needs are invariably overserved. Precisely calibrating the scope of services provided to align more closely with customers' priorities can deliver major, near-term benefits.
When examining data-gathering activities within the financial close process, a startling conclusion is that up to 40 per cent of the effort can be described as 'non-value-added.' More troubling is the fact that error correction and rework are so commonplace that the organisational structure and day-to-day work flows have evolved in recognition of this fact. This part of the finance group has become, in essence, an 'error factory,' where mistakes are created, resolved and recycled!
When faced with these facts, the first reaction of many executives will be, 'Automate!' But, non-value-added work is present regardless of the level of automation
A few examples:
There are too many charts of accounts. Standardisation can significantly cut time spent on manual adjustments and data scrubbing.
Different steps in the data scrubbing process require different levels of detail, much of it unnecessary (such as a different number of decimal places).
Data sets with missing fields are entered and accepted into whatever automated system is in use; this is later detected as an error, requiring manual correction. Numerous iterations may delay the closing process.
A lack of capacity modeling and skills cross-training prevents management from reallocating employees during peak cycles.
When a department sends finance a spreadsheet, instead of directly inputting data into an electronic data warehouse, the result is a manual handoff with large potential for error.
Taken individually, these rather mundane problems are more likely to provoke a big yawn than a big effort to resolve them. But when 300-such problems are identified, prioritised and addressed, the impact on productivity can be substantial.
The improvement opportunities described in Figure 2 are typical for productivity improvement programs in the financial close process. One-third of the Class 1 opportunities identified would require less than two months to implement; an additional third could be implemented within six months. To achieve the majority of benefits, it is usually only necessary to implement a fraction of the Class I improvements. Most executives discover that a traditional '80/20' management approach works as well for sponsoring Class I improvement projects as it does for managing their sales or product-related initiatives.
Management rules for self-funding improvements
Three fact-based insights can enable senior executives to play an effective sponsorship role and ensure that their company's resources are focused on the critical few, non-technology improvements that deliver the 'lion's share' of the benefits:
Fact #1: Most improvements require no new technology. In most organisations, Class I improvements typically represent over two-thirds of the total set of available operations improvement opportunities. If your company's improvement teams have not yet found all of these, don't be discouraged; even the best internal teams typically find only 20 per cent, or fewer.
Several factors contribute to this shortfall. First, most analysis is insufficiently detailed. Successful Class I improvement occurs at the work-activity level within business processes, and few teams are prepared to drill that deeply.
Second, internal teams lack sufficient analytical scale and are unable to develop the large number of industry-wide, activity-level comparisons needed to generate the insights essential for successful Class I improvement. Finally, the persistent promotional efforts of technology vendors and consultants often divert attention from more mundane, Class I opportunities.
Management rule #1: Direct a portion of your internal teams to focus exclusively on non-technology improvement. Have them analyse each activity within business processes. Insist that their investigation efforts continue until Class I improvements outnumber Class II (technology-driven) improvements by 2-1.
Fact #2: Class I improvement benefits are highly concentrated. Typically, the '80/20' rule applies to Class I improvement benefits. That is, a small number of improvements, say 20-30 per cent, will deliver the majority of the benefits available.
Because these high-payback improvement opportunities occur with predictable regularity in similar processes and organisational groups, the benefits of the 'experience curve' can be exploited. This means that the Class I improvement process used in finance can be standardised and used to sharply reduce costs and enhance service levels in other support groups such as procurement, human resources or marketing.
Management rule #2: Use objective, fact-based analysis to focus resources on the top 20-30 per cent of Class I improvement opportunities that deliver the bulk of the benefits. Instruct your teams to ignore the larger number of lower-value improvements.
Fact #3: Success is time-sensitive. In successful initiatives, non-technology productivity improvements are identified and implemented quickly. Improvement teams that fail to deliver measurable benefits within eight months probably never will.
Management rule #3: Set short-term milestones for delivering measurable benefits and achieving breakeven. When progress lags, make changes promptly.
Clearing the path for gains
Savvy executives will recognise how to put the above rules into practice. However, as a first step, executives should separate the activities of their non-technology improvement teams from their technology-driven efforts.
If improvement teams are not segmented, then technology-driven activities tend to 'crowd out' the non-technology improvement opportunities, monopolising scarce resources and de-emphasising near-term, high-value Class I opportunities. This segmented approach also allows the sponsoring executive to address the radically different needs of each team (resources, skills, timetables).
Second, in addition to examining key internal processes at the activity level, the non-technology team must seek the best external information available. Without knowledge of external benchmarks and best practices, it will be difficult to specify what should be changed, to calculate possible improvement (and how much is enough) and to understand how to implement the changes.
Finally, all internal improvement initiatives require strong sponsorship and management. Establishing goals, adhering to schedules, and, most importantly, maintaining separate missions for the non-technology and technology teams are essential. When segmented and managed properly, the improvement benefits delivered in the first 12-18 months by the Class I team can typically fund a large portion (even 100 per cent) of the investment required by the technology-driven team, simultaneously creating both near-term and long-term value for the company.
William Heitman and Philip Spencer are managing directors and Richard Hagey is vice president of The Lab, a management consulting firm based in Jersey City, New Jersey, that is dedicated to implementing 'non-technology' productivity improvements for clients in a wide range of industries.
CPA Australia thanks Financial Executives International (FEI) for permission to reproduce this article, copyrighted by FEI (published in October 2004).
