Key factors to consider when making these decisions.
August 2017 Vol. 6 No. 8
Hello,
You won't be surprised to hear that there is no "one size fits all" solution for the location within a business of a given task.

And yet this is a nontrivial question, given the significant impact on both profitability and customer experience that task location can exert. Today's newsletter considers several key factors to consider when making these decisions in your organization.
Regards,
Charlie Goodrich
Founder and Principal
Goodrich & Associates
In this issue...
Process In Your Organization: Where should the work be done?

I have written quite a bit about process in past newsletters. At its most fundamental, a process is simply a series of tasks supported by people, procedures, systems and so forth.

In today's edition, we take a closer look at one particular aspect of process - where in the organization should a given task be done? This is a nontrivial question, since there are several key factors to consider:

How to minimize the cost of the task or entire process.

How to minimize the cost of failure of the task or process.

How to maximize the customer experience or some other non-financial objective.

Consider, as an example, all the tradeoffs involved in vintage check processing.
In the days before ATM machines and debit cards, if someone wanted cash they went to their bank and presented a check. A teller checked that the customer had an account, validated identification, put a hold on the account against the check amount (perhaps), and gave the customer the cash. 

Because banks (sort of) competed on customer experience back then, in most states, banks had many branches, in order to be accessible to their customers. As much consumer facing processing was done by the teller as possible; again, to maximize the customer experience. Banks preferred not to force customers to one large central location, even though it would minimize cost.

If someone wanted to cash a check for a large dollar amount, however, approval from a manager was needed. Why? Because the cost of failure to the bank in cashing a bad check is very high. But here again, authorization from a central location was not required, as banks attempted to balance the bad debt risk against decreased customer satisfaction.

Next, the bank had to collect the funds on the check. That means the bank had to present the check to the bank from which it was issued. Banks have to collect on lots of checks every day, so speed and cost of processing are important. The checks from the local branch were rushed several times a day to a central site for processing, where economies of scale took over. Large banks had multiple sites for this. Why not just one, super-efficient site? Delays in processing due to transporting checks were costly too, so banks balanced collection speed with economies of scale.

Finally, note that banks never dreamed of having each branch collect checks at the branch level. That would be both slow and costly, and since the customer is not involved with this part of the process, there is no service quality benefit in such a decentralized approach.

Clearly, there is a lot to consider in deciding where to locate a process. Let's look as some additional factors.
  • How is the process best controlled? Centralized processes are easier to control (although automation can help control processes done in remote locations). For example, when I was in the car rental business and a department that settled auto accident claims reported to me, part of the control process included the requirement of my signature on all settlement checks in excess of $100,000. That effectively meant that those claims adjusters needed to be physically near me, so I could review the file and discuss the claim with the senior adjuster before signing the check. Note that today, scanning and other technology would make it easier to review a claim remotely.
  • Are you constrained by your current organizational structure? Rather than assuming your current structure as a given, imagine how different structures might better achieve the goals discussed earlier. For example, when I was in the rent a car business and prior to my arrival, senior management decided that the structure of 44 general managers - each with their own controller - was both costly and ineffective. Charge backs were not being processed timely; cars went missing for an extended period of time; and so forth. It was just too difficult to have 44 accounting offices operating on all cylinders, all of the time, not to mention fleet managers, pricing specialists, and so forth. So, senior management put those 44 general managers and their accounting and other functions into five regions and moved most of the non-customer facing work from the general manager to the regional offices.
  • What is the frequency with which a given task is completed? Even if there are no economies of scale, infrequently performed tasks lead to delays, neglect, and costly errors. In the car rental example, credit card charge backs had been processed at the renting location, because that is where the paperwork was. But in medium and small locations, charge backs happen sporadically (as one would hope!). The result was that in many instances, the company did not respond to charge backs before they came final - a costly failure. Realizing this, we centralized charge backs to a staff that processed them regularly. Due to poor technology at the time, we didn't save money from reduced headcount. But, with the processing delay removed, the company won most charge back battles, and that improved profits.
  • Do changes in technology suggest changes in process location? As you've no doubt noticed in these examples, many of the constraints of time and distance that we had to work around in prior decades are now gone. Checks are sent via an image; signed rental agreements are digitally captured on-site; meetings are held via videoconference; and so forth. Yesterday's "best location" may no longer apply, and it's important to stay abreast of the latest innovations and adjust accordingly.
  • What are your competitive advantages? When I was in the corrugated box business with Container Corporation of America, the company's heritage and strength was in packaging design and harder-to-make boxes. We had a few paper board mills to supply our needs, but we bought roll stock on the outside too. So, we had strong, local, sales, design and accounting functions at all of the plants.

    Many of our competitors, on the other hand, began life as paper mill companies. They built corrugated box plants as a way to move paper and keep their mills running. As a result, they were able to bid aggressively on easy-to-make, long production runs, and they had no local design, accounting, or finance staff, and no local general manger. My company could have saved lots of money in finance and accounting by centralizing too. But doing so would have robbed the local general managers of needed finance and analytical support. We centralized what we could (payroll, accounts receivable, etc.), but stayed local when it was to our advantage.
As you can see, where the work is done matters. There is no one size fits all answer for the location of a given task, and even today's best answer can change over time. The implications of optimizing these decisions are large, and it's critical to invest the time and effort in making the best decision possible in your organization.
Please share with your colleagues
Heard on the Street

Recent economic statistics for the second quarter showed a spurt in GDP growth, at 2.6% (remember when that was anemic?), up from Q1 GDP growth of 1.2%. 

Better times ahead? No, says Paul Kasriel, the retired chief economist for the Northern Trust Bank. Read Kasriel's short post 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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