A Three-Word Phrase That Destroys
Service Systems

Designing systems for special causes increases costs

Published: Monday, June 27, 2011 - 11:00

If a service company has been around long enough, there will be some story about how someone manipulated the system and embezzled money or committed some type of fraud. The story is often anecdotal, and the longer it has been since the actual criminal event, the bigger the tale becomes. A thousand dollars becomes a hundred thousand dollars, and as time passes, a million dollars. Pinocchio would have a hard time with some of these stories of manipulation.

However, an embellished story (or not) misses the point. What’s important is how service organizations react to such events to prevent them. Executives who have been burned commit themselves to a knee-jerk reaction. Fraud, whether it happened to them directly or to another service company they read or heard about, becomes something to prevent. Audits and inspections are implemented with the executive’s hope that “this will never happen under my watch.”

In search of a solution, a predictable outcome from an audit is that too much control is put in the hands of one individual. This control can be over computer systems, processes, people, money, or any combination of these things. Sometimes you may get “scientific evidence” for such activity, along with sayings like “an ounce of prevention is worth a pound of cure”—except that prevention too often ends up costing many pounds worth of cure.

Auditing and inspections are expensive, but they are not the worst effects of fraud. The worst is when financial and auditing imperatives are engaged in the design of our service systems.

So what three words are so egregious they destroy service systems? Segregation. Of. Duties. This is also also called “separation of duties.” Designing a service system to prevent fraud seems reasonable and plausible, but the costs and risks inherent in such a system usually remain hidden.

In an already functionally designed service system, is it really necessary to separate service duties? Many service organizations believe front-line service workers can’t be trusted to write checks or take on other duties because that is just “too risky.” Those tasks are often left for the finance department. This works well until a customer calls, and “finance” won’t talk to him. Even if it did, why must the customer chase through the system to have his questions answered? The more separation of duties, the more chasing a customer must do to find answers.

SPC and control charts (or “process behavior charts,” as Donald Wheeler calls them) teach us that everything between the control limits comes down to the system. So why is it when we have a special-cause event (like fraud) that we redesign our systems for that special cause? W. Edwards Deming warned against doing such things unless lives were at stake. Audit the money trail, by all means, but stay away from designing a service system based on anecdotes and fear. Design of systems should be reserved for those with knowledge of all aspects of a system.

Lack of accountability is an unintended consequence for those who advocate separation of duties. Separation and accountability are polar opposites; accountability fades with each separation. For instance, in banks, there are front offices and back offices (and now middle offices) that make accountability virtually impossible to find. Besides accountability, separation and optimizing disconnected aspects of any service system causes suboptimization and massive waste.

Just as quality can’t be inspected into a service, neither can a service organization increase economies of flow by ruining it with segregation of duties. Separating work should only be done after studying the flow from the outside-in, from a customer perspective. Doing it to avoid risk based on anecdotal stories and assumptions just increases costs and makes service to customers worse.

The next time someone tells you that your service organization is at risk, and segregation of duties is the best practice to avoid risk, get the evidence to back that up. Take a look at customer demand, work, and flow—in other words, get knowledge of the system. You may find that the price you’d be paying for separation is too high.

About The Author

Tripp Babbitt

Tripp Babbitt the managing partner for The 95 Method - Executive Education and Advisors. The 95 Method is about giving organizations a method to use new theories to grow business.  Babbitt can be reached at tripp@the95method.com. Reach him on LinkedIn at www.linkedin.com/in/trippbabbitt

Tripp also has a podcast and YouTube channel called, The Effective Executive.