December 2015 Vol. 4 No. 12

Understanding The Need For Process

Many entrepreneurs hate process. They thrive in a world of rapid change and few rules, and so when it comes to running their business, there is a tendency to just wing it.

But even for these folks, and while little thought may have been given to how things get done, there is a series of steps taken. This series - something I have written about before - is a process, and therefore in need of being managed, particularly if the same work will be done again.

Large companies run on process too. Unfortunately, sometimes things don't get done in these companies because too much effort is expended on the process itself.

In short, everything gets done by way of a process. A good process means things happen consistently and efficiently, and with no surprises. For smaller entrepreneurial companies, the challenge is consistency and efficiency. For larger companies, the challenge is often just making the decision and managing the cost of the process.

Some things to consider to improve business processes:

• Be clear about what the process is trying to achieve.
  
  For example, as I explained in my newsletter on how to fix the annual plan process, you need the right process for the right purpose. A detailed, bottoms up process is not a good way to develop annual financial goals for operating groups. However it can be a good way for operating groups to financially validate their operating plans to achieve financial goals.
  
  Alternatively, consider whether you are trying to do too much with a given process. Is the process of recording sales transactions intended to make sure the customer is satisfied; that the company gets paid the proper amount; to obtain market research information; or some combination of all three? Understanding what the output of the process should be can eliminate work that is not needed or that conflicts with more important objectives, such as customer satisfaction.

• Understand and lay out the critical path.
  
  Determine the work that needs to be done and look to remove bottlenecks. Why are we doing the steps? Are all the steps still needed? Where are the log jams? Understand the critical path.

• Determine the type of process that you are dealing with.
  
  Processes for transactions (e.g., processing a sale to a customer) should be different than processes employed for decision-making, such as how to allocate resources, grant credit, etc. For transaction processes, think about what works best for the customer. This may not always be obvious, but if done well can result in freeing front line employees to better serve customers.
  
  Processes related to decision-making require that we first focus on the decision to be made, as I explained in the Plan example above.
  
  It's important to note that transaction processes are usually highly automated and performed constantly by lower level employees. Decision-making processes, on the other hand, are far less automated and intended to support decisions by middle and senior management that are made on an as needed basis.

• Decide where in the organization the process should occur.
  
  It is often the case that those closest to the initiation of a transaction are most knowledgeable and therefore most qualified to process it. On the other hand, if a given type of transaction doesn't happen often enough for a front line person to process it reliably and promptly, then some centralization may make sense.
  
  When I was in the rent a car business, for example, credit card charge-backs were originally handled by accounting clerks at the airport. After all, they were closest to the paper records and the customer transaction happened only a few feet away at the front counter. But back then, charge-back notification from the credit card processer was by fax. And while every airport experienced charge backs, the flow was sporadic (it is a bad thing if the flow is steady). The credit card processers imposed short time lines to respond and the airport clerks weren't responding. In this case, it made sense to centralize charge back processing in my regional office.
  
  Additionally, if management wants front line staff focused on something else, such as customers, manufacturing, etc., then that too can be a reason to centralize the activity.

• Determine which processes need to get done (and which don't).
  
  Doing unneeded work often happens in the control aspect of processes or in decision-making support processes as the nature of decisions and how they are made changes over time. This is particularly common when a process is the subset of a larger, unnecessary process.
  
  For example, when I worked at State Street Corporation, I had a group that processed the annual budget. One subgroup of five did nothing but make sure that budgeted inter-company transactions netted to zero on a consolidated basis. We were able to streamline the process a bit, but the bigger issue is that none of the work should have ever been done: Why budget something that is supposed to net to zero?

• Establish a means for handling exceptions.
  
  Establishing exception-processing rules beforehand will streamline their handling when these inevitably occur. Determine which criteria must be met (or not met) as a tripwire for staff to consult with a manager. For reoccurring exceptions, such as when limits of authority are exceeded, have a process that defines what to do.
  
  Finally, keep in mind that part of a process should ensure that the process itself is followed. Part of the reason Target became a target is because it did not follow its own processes regarding when security alerts are enabled.

• Institutionalize the process so it happens consistently.
  
  Document the work flow in writing so employees can reference how to do it. Otherwise, the process will change slowly over time, often not for the better. Documentation also helps new employees get up to speed and serves as a guide for vacation relief and so forth.
  
  And don't forget to audit the process. After all, what is expected is what is inspected.

• Remember that process is not free.
  
  All of the above costs time and money; process is certainly not free. Which leads to an important question: How much time and money should be spent on a process?
  
  In general, the more often the same work is done, the more it will benefit from thinking through how to do the work - and institutionalizing that how. Payback also increases when the dollar value of the outcome increases, be it the number of times the process should be done or the dollar value of each process.
  
  Not surprisingly, the bigger the company or the more transactions involved, the bigger the payback on process investment. That's part of the reason that when big companies buy little companies the buyer sends a team into the acquired company to teach them the BigCo way. The same applies when investors buy a smaller company and grow it through acquisition. One of the purported value adds of these investors is helping the acquired company grow up with better processes. However, when investors buy divisions from big companies, they often forget to scale back the scope and cost of business processes to match their new smaller scale.

In short, the more often something is done, the more it will benefit from a thought out process. That guideline, followed by an assessment of the importance of the outcome in dollars, will guide you in the decision to implement a process within your organization.

Heard on the Street

Economists from both sides of the political spectrum agree on one aspect of income inequality - that zoning laws help create it.

Read a short synopsis of the issue by John Cochrane, a Senior Fellow at the Hoover Institution at Stanford, here.

About Us

Goodrich & Associates is a management consulting firm. We specialize in helping our business clients solve urgent liquidity problems. Our Founder and Principal, Charlie Goodrich, holds an MBA in Finance from the University of Chicago and a Bachelor's Degree in Economics from the University of Virginia, and has over 30 years experience in this area.

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