Introduction
If you are one of the do-it-yourself types and just completed your taxes, the IRS estimates that you probably spent about 44 hours preparing it. It’s no wonder that 80% of U.S. citizens believe that our tax code is too complex and has to be simplified. If you were in charge of fixing the tax mess, where would you start?
Business process management can be as overwhelming as well. As a solo consultant, I have at least ten different business processes going on at any one time in the areas of speaking, writing, teaching, marketing, implementing, billing, etc. A small company with, say, six departments, each conservatively with five processes, will have thirty processes. A relatively large organization may have over a thousand business processes. Which of these is the best candidate for business process management to increase profitability?
First, let’s look at why there is a need for process management in the first place. Whether a company sells a product or service, all of its business processes exist for one primary reason, which is to drive the sale. In other words, the cost of any sale is the cumulative effect of all the business processes in the organization. For instance, if the cost of hiring an employee is high, then the cost of the sale goes up.
Assuming that the price of the product or service cannot be increased due to factors such as market conditions and the competitive landscape, the only variable under management’s control to increase the profit margin is to reduce the cost of sales. How can this cost be managed well? The answer lies in effective Business Process Management (BPM) implemented through the right choice of technology.
Managing business processes is critical to the health and future growth of the organization.
Problem Analysis
Let’s say that your company sells a widget, and that you have thirty processes in your organization to support the sale of this widget. If each process contributes $1 to the cost of the sale, you then have to mark you widget to be more than $30 to make a profit. Of course, this scenario is too simplistic, but the point is that each process costs you money and contributes towards the cost of the final product. The higher that cost, the lesser is your profit margin.
We need to work backwards to find out which process contributes the highest cost to the sale and why. These high-cost processes are candidates for tuning. For example, in working backwards, you may find that your R&D contributes to the highest cost. Perhaps that is justified because that is what gives you the competitive advantage. On the other hand, if you find that the marketing costs are high, perhaps you are spending a disproportionately high amount on advertising.
The basic formula for profit margin is: PF = (selling_price – cost_price)/selling_price. This means that the maximum profit occurs when the cost_price is the least. A high profit margin alone is not sufficient. The sales volume is also a factor in determining the dollar amount of profit. Working backwards, this means that if we want $X in profits this year, anticipate selling Y units, and the selling price is fixed, then we can calculate the maximum cost price we can incur per unit. Working backwards you can identify the business processes that have to be tuned for effectiveness.
The Solution
Typically, to create a widget, you spent time, material, money, and resources. If you are able to determine all the parameters that go into making the widget, and cost them appropriately, then you have a good model for your business process. However, that is often very difficult to do because financial accounting systems have been set up in a hierarchical manner that is broken down along departmental boundaries. In other words, the marketing department gets a certain budget, sales another budget, and so on. A business process on the other hand spans horizontally across multiple departments. The cost of the business process then comes from the costs incurred for the specific activities within those departments. The ability to cost a business process based on activities is called “activity based costing,” or ABC. ABCs can be useful in determining the cost of your final sale.
As information flows through your business process, different activities are performed, and the costs are computed. However, the “amount” of information that flows through the different paths can be different. Say that along one path the cost is the least, but the bulk of information and processing is done on another path that is more expensive. This means that it is also necessary to capture the “volume” in the business process to determine where you are losing money. Therefore simply modeling a business process in isolation is not effective. Rather, the cost and the volume have to be factored into the model as well.
The analysis has to be followed up with effective implementation to ensure the best business process management. The principles of Service Oriented Architectures (SOA) can be used to leverage existing IT investments along with an incremental development approach to both reduce the risk of the BPM implementation and ensure a smooth transition to the updated optimized process.
Summary
In summary, for a complex BPM projects, it is best to adhere to the following criteria:
- Perform a thorough analysis to identify the right business process to tune.
- Beware of “analysis-paralysis” wherein you spend most of your time in the analysis and never get to the implementation stage.
- When analyzing the business process or implementing its optimization, go from simple to complex.
- On the implementation, try an incremental approach rather than an overhaul.
- In analyzing the process, be sure to factor in the variables that are important to you, including cost price, volume, quality, and so on.
- Finally, for analysis, use a high-level view of the domain to identify one or two specific business processes to focus on. For implementation, understand the details of the process and optimize it from the bottom-up. Analysis is done top-down and implementation is done bottom-up.
