Process is one of the most misunderstood and misused words in the English language. Is a checklist a process? How about a procedure manual or flowchart? A ritual or habit?
All of us have some kind of experience with “process” – much like anyone who’s gone through school has some experience with art. Arguably, the Mona Lisa and a kindergartener’s finger painting have common elements. There’s paint, a painter and something that was painted on; however, there’s obviously a difference in the results between a priceless work of art and a piece of art ideal for your refrigerator.
The phrase, “I can’t define it, but I will know it when I see it” has become cliché when it comes to conceptualizing an art project. In business, the concept of “a broken process” as an excuse for poor results is becoming a similarly accepted cliché. When recognizing business clichés, I think of “Dilbert” by Scott Adams. Adams is a true genius/artist with drawings and words, especially when Dilbert’s “pointy-haired boss” proclaims, “In order to avoid shoddy mistakes, everything we do from now on will be part of a documented process.” Dilbert’s bespectacled friend, insightful chap that he is, asks, “What documented process did you use to decide what documented process to use? Or, is this one of those shoddy mistakes I keep hearing about?”
This year, the AICPA’s Top Technology Initiatives identified Business Process Improvement (BPI), Workflow and Exception Alerts as #5 on the list of the 10 most important technologies affecting the accounting profession in the next 12-18 months. The official definition used for this year’s program was: “Methods used to enhance business and transaction processing through a continuous cycle of modeling, execution, monitoring and improvement. Workflow involves the operational aspects of a work procedure and process exception alerts notify users when attention or follow up is required. BPI employs real-time monitoring tools that provide exception alerts to automate business processes on triggered events, identify problems or new opportunities in a transaction before a transaction is complete, or better control quality issues by catching problems more quickly. Workflow involves how tasks are structured, who performs them, their relative order, how they are synchronized, how information flows to support the tasks, and how tasks are tracked. Through the use of these tools, an organization can make significant improvements in the way it does business.”
Why all the hoopla about BPI?
The concept of process is becoming increasingly important to understanding risk, designing an evaluation of controls and managing for superior performance. An understanding of process is critical when considering the automation of controls and alerts. This understanding also provides value when interpreting financial impacts of operational elements and establishing appropriate measurements to support improved management decision making.
Since process is often misunderstood, yet critically important, CPAs and finance professionals will want to understand the foundational context for understanding process, while learning the considerations for successful process design, implementation and improvement – especially where initiatives often fall short or fail outright.
Context – Some Basics
How does a business keep from committing yet another “shoddy mistake” when developing a business process? When studying art, we look at composition, line and color as a good starting point. When learning music, scales and chords are the basics that must be mastered in order to progress. When it comes to studying process, it’s critical to first arrive at a definition and then devise a simple framework.
In 2001, Michael Hammer and James Champy, authors of Reengineering the Corporation, offered a very useful, basic definition of “process:” A business process is a set of linked activities that creates value by transforming an input into a more valuable output. Both input and output can be artifacts and/or information, and the transformation can be performed by human actors, machines or both.
The notion of “a more valuable output” is important. It is vital that the value determination is made by the “customer” receiving the outputs – not the owner or performer of the process. For example, as much as I admire the Mona Lisa, I wouldn’t trade it for one of my children’s finger paintings. You might disagree, but I’m the process “customer,” so of course, I’m always right. Either way, once my child or Signor da Vinci perform the “linked set of activities,” the result is far more valuable than the “inputs.” In other words, paint, a panel or construction paper existed prior to either artist’s performance.
The SIPOC framework – Supplier <> Input <> Process <> Output <> Customer – attributed to Peter Scholtes, provides a fundamental understanding for process. Note the connection of Outputs and Inputs to Hammer and Champy’s definition. Figure 1 offers a visual example of a very simple SIPOC diagram to further illustrate the concept. Here’s how the framework is structured:
- A (P)rocess exists to create the (O)utputs necessary to meet the requirements of the customer of that (P)rocess.
- (I)nputs for the (P)rocess come from a (S)upplier.
- Sometimes, there are (O)utputs from a (P)rocess not required by a (C)ustomer (waste).
Figure 1
A “process” that does not clearly identify each SIPOC component is potentially problematic. For example, one area in which this often manifests itself is when we create financial reports. Not surprisingly, the “O” (Output) of a Process is often a report. One of the steps in the “set of linked activities” creating that report is sorting the data a certain way. It is all too common to see that the recipient of the report, i.e., the “Customer,” upon receipt, sorts it again, often back to the way it was prior to the time it was sent. If the Customer’s requirements were clearly communicated and well understood, the “non-value-added” step that sorting represents could be eliminated. This reduces cost and potential errors, and increases process speed.
The abundance of spreadsheets in financial reporting creates several challenges to follow the guidelines in Sarbanes-Oxley and the new SAS’s (104-112 and 114). These are a symptom of looking at financial reporting processes primarily as a checklist, rather than in the context of the SIPOC framework. Literally translated, there aren’t many companies that haven’t seen the “shoddy mistake” of a spreadsheet error impact their financial reporting.
A Process Improvement Example – Septic Tank to St. Augustine
Although we must consider Process Improvement in the business setting, it is also applicable to our daily lives.
My family moved to a home out to the suburbs a few months ago – so far out, in fact, that we are not on a traditional sewer line, but instead have an in-ground septic system. Ownership and oversight of such a system is a new experience for me, so I did some research. I found there is definitely a process and even some science involved.
Basically, the Inputs in this model are the water and waste that goes down the drains of the house. The Process then starts. The drains empty into an underground tank. In that tank, bacteria digests the waste products in the drainage and turns it into a nitrogen-rich liquid. The tank is set up so that the good liquid, the process Output, slowly releases into the surrounding soil. The Customer turns out to be the plants living in the surrounding soil. The plants use the Output as fertilizer. When the Process works correctly, the fertilizer keeps the liquid from reaching the surface, which we all know would be less than ideal.
To summarize how the SIPOC model worked in this scenario, there is:
- a Supplier (my family);
- Inputs (water and waste);
- a Process (the tank, bacterial action);
- Outputs (nitrogen-rich water/fertilizer – remember the “more valuable” concept from Hammer and Champy?); and finally,
- a Customer (plants, or in my case, St. Augustine grass).
Just for fun, here are few facts to consider. Since bacteria are critical to the process, it’s important that chlorine products and other bleaches are not introduced into the system, except if they kill the bacteria. Apparently, the bleach results in outputs in their pre-process state rising from the tank and into the lawn, creating quite an odiferous, quicksand-like situation. Talk about a shoddy mistake!
Another interesting fact is that the bacteria, while very effective, cannot Process every component of the Inputs. Luckily, these components are heavier than water and fall to the bottom of the tank to create “sludge.” As the sludge builds up over time, it takes up room in the tank. This decreases the ratio of water to other components of Input, making the processing job of the bacteria increasingly harder.
As a result, another process requirement is that every few years, the sludge layer on the bottom of the tank needs to be pumped out. It turns out there is a service for this. There exists a truck with a long hose, vacuum pump and holding tank. It works a bit of magic that apparently must be seen to be believed. The fee for this additional process step is roughly $800 in case you’re wondering. So arguably, since there’s no “Customer” for this sludge, it’s waste … or so I thought.
In addition to learning about a new septic process, I am also now the proud owner of a fine St. Augustine lawn. For the uninformed (as was I before a late night Google session), St. Augustine is not what it appears to be. Instead of a grass consisting of fine shoot-like blades, it’s more like a vine that hugs the ground with long slender leaves. Suffice it to say, traditional lawn weed killers and fertilizers won’t work. A lawn service technician had to come out and recommend a solution. Turns out that the recommended fertilizer is, who would have guessed, septic sludge, which must be applied once a quarter, at the low, low price of about $300 per application! Apparently the acquisition, storage and transportation costs of septic sludge are substantial.
From a cost perspective, these two Processes have a five-year combined Total cost of Ownership (TCO):
- Sludge removal = $800
- Sludge application - $300/quarter x 4 q/yr x 5 yrs = $6,000
- Total five-year estimated TCO = $6,800
- That’s $6,800/5 = $1,360 per year
It turns out that there is an alternative technology that consists of a septic tank with an internal pump that liquefies the sludge. At just the right time in the bacterial “magic cycle,” it pumps through an above-ground sprinkler system that showers the lawn with the perfect fertilizer. Cost for this system is about $10,000 with an expected life of 20 years. Yearly, that’s $500.
The ROI calculation might seem like a “no brainer” and you might imagine I should implement the new system immediately. Quite humorously, as it turns out, as with most systems and organizations, there are implementation risks to consider. Apparently, the Texas summer heat creates challenges with the runoff that can occur during system installation, testing and operations. The winter is apparently much less problematic than summer.
What does this have to do with business process? Just think of the parallels we could draw to ERP implementations in some organizations. It could be almost as funny as a Dilbert cartoon!
Considerations for Getting It Right
So enough fun. Let’s get back to business. Embracing a common definition and a framework is a big first step an organization must take when embarking on the process improvement journey. Here are a few suggested dos and don’ts to consider as your organization moves forward.
Do consider your process names carefully. Generally an “and” or an “or” in the process label is a yellow flag. Instead, a “verb/noun” naming convention can help. For example, accounts payable as a process label has proven problematic in my past projects. The number of inputs and outputs can get so large that it is hard to document these legibly. I’ve found that pay vendors and match invoices provide a much more manageable level of detail. There are dozens of opinions on this subject, each with merit, so if I’ve offended your particular group, my apologies.
Don’t fall into the trap of “what we want to be doing is …” When you start, it’s important to document what is really happening, not what should be happening. When improving their processes, many companies declare they will skip documenting the current state because they say, “If our current processes were any good, we wouldn’t need this process improvement project.” True as that may sound, not knowing in detail what is currently happening makes changing to a new process next to impossible.
Training, measurement, evaluation of people performing the process and changes to software become impracticable. Make sure you capture the good ideas that are generated in the current state phase. Your people will likely disengage from your process improvement project if they feel their ideas are not being considered. Just make sure that they know their ideas will be held for a future state phase of your project, even if these ideas are not the focus of the first phase.
Don’t have decisions with only one branch. In other words, make sure you don’t assume the answer to a question is always yes. I’ve seen numerous occasions where “check stock” is followed by “ship order.” The exception of “out of stock” isn’t considered. Instead, if “we’ve never been out of stock” is true, the “of stock” may be performed in a previous process and the check at this point may be redundant and may be eliminated. Processes beginning with “check,” “evaluate,” “review,” “test” and “search” that aren’t immediately followed by a decision are great areas to focus on as the potential low-hanging fruit for improvement gains.
Do adopt the notion that “if it’s not in writing, it didn’t happen.” If a process is completed without a recorded measurement, communication or other evidence that is recoverable and reviewable (i.e., an audit trail), you have a potential issue. In today’s environment of litigation and compliance, it is likely that the process will come under some future scrutiny. If the process is not important enough to measure and retain evidence of having been completed, it may be a great candidate for elimination.
There are countless other dos and don’ts, often conflicting depending on the process “science” to which you subscribe. Just remember that most process improvement initiatives fail at the start when organizations get too wrapped up in the scope and definition. Companies do not tend to fail at the end in an argument over details.
Try and Try Again
As a budding child artist, da Vinci probably had many finger paintings hanging from the household refrigerator. As much as they were admired and cherished, the paintings probably weren’t worthy of the Louvre’s collection. Many leaders feel they have to have a masterpiece on their first attempt. When they fail, they give up. Remember that a “shoddy mistake” is only fatal if you don’t learn a lesson from it and resolve to try again.
Thomas Edison said, “Many of life’s failures are people who did not realize how close they were to success when they gave up.” I believe this is true with businesses. Business process improvement should start simply, with a definition and a framework. As you build on that, you can grow and learn from experience. With persistence and experience, you can paint your organization’s masterpiece.
Contact Chris Spivey at chris.spivey@misgroupusa.com.
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