The recession has been an extremely disruptive event for many organizations. Many bear relentless pressure to identify new market needs, create appropriate products and services, become more effective and efficient, and develop and modify systems and processes to meet and deliver those goals. In short, the economic downturn has put the spotlight squarely on how an organization creates the value needed by its markets and customers.
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Note that I said “creates the value needed.” Creating value is different than eliminating waste. Eliminating waste, while necessary to improve productivity and efficiency, does not necessarily result in value creation. At best it might enhance the value that is already being provided. However, if that value is not the one sought by an organization’s markets and customers, then pursuing waste elimination may not ensure continued sustainability of the enterprise.
If we consider a business enterprise as a system, it might look like the illustration in figure 1 (click on the image to enlarge it):
A narrowing perspective
A business system is made up of elements such as markets and customers, competitors, suppliers, shareholders and investors, and general environmental influences including the economy, government policies, and regulations. Due to the interaction and interdependency of all these elements, improving an organization’s performance must be approached from a systemic, as opposed to a local, perspective.
Unfortunately, when many organizations consider improving performance, invariably a much narrower view of the system described above is taken. Local process improvement initiatives become the order of the day. Typically, these are aimed at reducing costs through waste elimination, rationalized by the assumption that to remain profitable, the organization must strive to become more efficient at what it has always done. The larger systemic issues of what value is needed now and in the future by markets and customers, what capabilities and processes are needed to provide that value, how the firm may better compete with rivals, how supplier interfaces may be better managed, and how the general environmental influences might be better understood and managed, are largely left ignored. Because the focus is mainly on cost reduction through waste elimination, and not on revenue-generation through value creation, the long-term performance of the organization suffers as a result.
The assumption that underpins many process improvement efforts is that the value an organization is currently creating and providing is the value that will always be needed: The company just needs to become better at what it does. This assumption ignores a system’s dynamic nature; factors are always at play that might render today’s value obsolete.
Economic value-added
A process management approach can help avoid some of the pitfalls associated with taking a narrow view of a business system. An organization wishing to improve its economic performance might begin by linking proposed improvements to strategic drivers. This would begin by asking the following questions:
• What are our businesses?
• Who are our customers?
• What do they do, and what do they need from us (i.e., value)?
• What do we need to be uniquely good at (i.e., capabilities)?
• What is essential and what is secondary?
• What are the critical processes that will enable and provide our needed capabilities?
• Which processes do we need to create, which do we need to improve, and which do we need to better manage (i.e., a process management plan)?
• Why do we need to do this (i.e., the economic rationale)?
The last two questions are particularly important. First, process improvement activities often take place in an economic vacuum where the economic effect from improvements cannot be quantified. A key measure of value creation is economic profit (sometimes called “economic value-added” or EVA). Economic profit differs from accounting profit in that it considers the cost of the capital employed to produce the profit. Economic profit goes beyond accounting profit to measure how well a business is performing by considering how effectively the firm is using its capital to create value.
Engaging the drivers of economic profit to enable superior value creation is the key to building business sustainability. Thus, an organization that shows a positive economic profit is an organization that is creating wealth. It is creating a surplus net of costs and expenses plus a charge for the capital employed. Process improvements that positively affect economic profit are preferred over those that simply reduce costs because, by definition, such improvements are creating value and not simply decreasing costs.
Second, a process-based system is the means whereby an organization creates and delivers value. Processes are how the work gets done, but more critically, they also enable the capabilities needed for the organization to compete effectively in the marketplace. Identifying the critical processes that need to be either created or improved to provide the needed strategic capabilities should drive the overall improvement effort. This is the essence of process management.
Filling process gaps
The quickest way to improve the performance of any business system is to create and install any missing and essential processes that create value and drive revenue creation. For example, in the book, The Practice of Management (Harper and Row, 1954), Peter F. Drucker wrote, “Because the purpose of business is to create a customer, the business enterprise has two—and only two—basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”
We can rightfully ask, “What are marketing and innovation but processes (or more properly, processes with attendant subprocesses)?" Each takes inputs of some kind and transforms them into outputs for some customer (external or internal). Each requires resources (e.g., people, technology, skills, and competencies) and a method to carry out the work. And each requires an effective process design to achieve its process goals, together with a set of metrics to provide feedback on how well those goals are being achieved. Finally, these processes may connect up with other core processes within the organization, and these connections or pathways must be fully present and functional.
While few would disagree with Drucker about the importance of marketing and innovation as value-creating processes, the fact is that these key processes are often nonexistent or only marginally present in many organizations. As such, they represent significant process gaps in the organization’s system. Filling these gaps by designing and implementing the needed processes is the quickest way to improve the system’s revenue-generation capability and economic performance.
With the lean movement, we have heard a lot in recent years about managing and improving processes horizontally in product-oriented value streams. Although the value stream approach is one way to adopt a more horizontal process focus, it does not always adequately represent how organizations function in their manifold customer interactions.
When one considers an organization from a customer perspective, there are many types of interactions that define a more complex process geometry than that conveyed by the notion of horizontal value streams. For any organization, certain core processes must be in place to support its interactions with customers. Each of these core processes will support customer interactions by providing an output of some kind in response to an input trigger or request. Many of these processes will be cross-functional in nature, drawing upon resources from multiple functions across the enterprise. Examples of such processes are product development and design, quoting, customer acquisition and sales-order processing, procurement, production, delivery, customer service and support, and payment. Outputs from these processes may go to the external customer as well as connect up with other core processes within the organization, creating a complex geometry of interactions.
What does this complexity in process interactions mean for organizations? Simply that processes and their cross-functional interactions must be defined, understood, and managed through 360°. Process ownership must be assigned at a sufficiently high level in the organization. Collaboration between process owners to improve “connectedness” and interaction within the system across multiple directions must be the order of the day.
Five common gaps
The five most common gaps I often see with respect to organizations and processes are:
The system is not known or defined. The process system for value creation is not defined, understood, or managed. As a result, the organization does not know how work gets done, what to change, or why it should be changed.
Critical process gaps are present in the system. The process system has serious gaps that must be filled. These are often related to core processes needed for creating value, conducting external customer interactions, and supporting revenue generation. Designing and implementing the missing processes can often be the quickest single way to improve the system.
Form is driving function. The organization manages its business according to the organizational chart, and not according to how the work gets done. Processes are a secondary consideration. Such an organization will benefit from letting function drive form to establish the primacy of process and allow the process system to determine an appropriate organizational structure.
The system is not connected. Processes may be defined, but process interactions across the enterprise are poorly executed. In such a system, process hand-offs are areas of failure and work stalls or flows backwards for rework and correction as a result of the poor hand-off. Usually, the cause of such failures is insufficient understanding of internal customer-supplier relationships, lack of understanding about process goals, and failure to measure and manage process performance in terms of satisfying internal customer requirements.
Process improvements are not linked to strategy. The organization has not linked its process system up to its overall strategy for creating value and competing effectively. As a result, the key capabilities for value creation that must be enabled through processes are not known, implemented, and managed. Process improvements are unfocused and consist mainly of firefighting actions and cost-reduction initiatives.
In summary, to be successful, an organization must manage and continuously improve all its essential core processes to provide value and satisfy customer requirements and expectations in every transaction. Critical to this improvement effort is the need to strategically prioritize the core processes requiring improvement, and to ensure that the needed support and management processes are in place to support the direct customer interactions enabled through the core processes.
The economic downturn has wrought much hardship for many organizations. It has brought to the fore, as W. Edwards Deming said, the need for businesses to include the future in their planning and to consider how they will remain sustainable over the long haul. It has exacerbated the lack of focus on processes and managing them to compete effectively by creating value and satisfying customers. Getting back in touch with the basics of processes and their management within your organization is a good start toward building for the future.
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