Driving Operational Innovation and Change across the Organization to Realize Business Results from Business Processes

“Process is a construct for organizing value-adding work to achieve a business-value milestone in a way that meets three specific criteria: 1. Effective and Efficient Performance 2. Effective Management and 3. Competitive advantage”

― Geary A. Rummler

Rediscovering Value: Leading the 3-D Enterprise to Sustainable Success

In many of our interactions with CXOs in India and overseas over the last 5 years, we have encountered situations where we have a combination of responses on their focus on business processes – few are passionate or conscious and driven by the importance of processes for delivering effective products and services, few feel that it is not their strategic priority and it goes lower down the hierarchy or at best resting with the CFO or CIO and few others feel that it is totally operational and not strategic , leaving it for people lower down the order to take care or fixed by technology or automation. Given that all CXOs have the priority of achieving their mission of shareholder and customer value creation, if the message and actions of process - centred enterprise are well understood and articulated to demonstrate their direct connect to the outcome of such business performance, it is evident that the chances of this variation will significantly diminish.

Process Centred Enterprise

Starting in the Eighties, with Michael Porter, Edwards Deming, and Geary Rummler, the focus began to move towards thinking in terms of value chains and processes. More than 2 decades back, Dr Michael Hammer, the renowned Management Guru, changed forever how ‘businesses do business.’ He was the originator of reengineering and the Process-Centred Enterprise (PCE). His path-breaking research and visionary leadership galvanized several leaders of the business world and they continue to retain and enhance their relevance in today’s challenging economic environment. For many global corporations, his ideas on business process have even become integrated into the DNA of their businesses.

If the shareholder and customer value are the 'whys' of a business, the business process is the 'how' of the business.

Globally, the most notable example of economic value driven by business process focus comes from General Electric, under the leadership of Jack Welch. He considered business processes as a strategic priority to create competitive advantage and making GE one of the top 2 companies in every sector they operated. GE has even made business process management a core part of their corporate culture from the CEO down. Having said, Dr Hammer himself has acknowledged that just about 10% of the large organizations have been able to make such a commitment since the requirements to create a PCE is not fully internalized within these organizations. As per the Technology CEO Council of US, just for the Fortune 500 Corporations, there is a staggering amount of over US$ 500Bn in business process inefficiencies and business process improvements can yield a savings of about 5% of sales- a direct accretion to the bottom line.

There are four key features of a PCE:

1. End-to-End Process across the Organization: The process centric approach has clearly two dimensions – focus on process alignment in line functions, largely in sales order, production, development, procurement, inventory and distribution related areas, and focus on process improvements possible in sales and marketing support functions as well as in staff/ support functions like IT, F&A, HR, Supply Chain etc., (referred to as ‘white collar roles’). However, the degree of focus and emphasis substantially varies between line and other functions, and hence, yields ‘sub-optimal’ benefits to the organization. Dr Hammer has clearly emphasized that this linkage is integral to establishing the ‘end to end process across the organization’ and this is a specific requirement for Corporations to adopt the process-centred enterprise model.

2. Functions & Processes Coexist: New research has emerged that presents the model of the integrated enterprise that simultaneously addresses business functions and processes, and defines a new role for the functions in a process-centred organization. This approach, which is also called the `Enterprise Model', emphasizes the linkages between the traditional business functions and the needs over time of the business processes. This enables vertically integrated functions (functional competencies) with horizontally integrated processes (process capabilities). It is not one or the other! In fact, business processes are, by design, cross functional and will require that acknowledgment and recognition to deliver value. This integrates the enterprise as a whole and links the company’s operating decisions to its strategic direction, thereby driving enterprise performance.

3. Enterprise is a combination of four capabilities: The term ‘Enterprise’ is about companies need to offer supportive environments by way of possessing or developing organizational capabilities in Leadership (senior executives who support creation of processes), Culture (values of customer focus, teamwork, personal accountability and willingness to change, not just as statements but right kinds of behaviour to describe “how we do things here”), Expertise (skills in and methodology for process change) and Governance (mechanism for managing complex projects and change initiatives).

   

   Unless these four capabilities are in place across a company, it will be impossible for the organization to institutionalize the process centred performance. The co- existence of functional competencies and process capabilities is very much an integral part of the Enterprise.

4. Process redesign does not just change processes – it changes everything: Redesigning processes entails driving out the non-value-adding work that is the root cause of performance problems by rethinking the fundamental assumptions that underlie how work is performed. It is necessary to assess and ensure that processes are understood and used by the people who execute them. Too often there are examples of extensive process documentation, without any one having real knowledge or refusing to change the way they have worked! Hence, PCE is not just about adopting a process-centred strategy, but much more. It calls for change in management and social behaviour, including how people from different functions collaborate. Careers are restructured, performance is measured and rewards are determined. It is not just about change in the process but also about changes in the enterprise.

In many ways, subsequent to this innovative approach to effective enterprise, in mid 1990s, several global organizations like American Express and GE began to understand the 'end to end' nature of a business process, focused on staff/support functional processes, classified and segregated processes according to complexity, risk and value, and even considered off-shoring of processes as a way to redesign their processes and operational effectiveness. India has been a significant beneficiary of this 'globalization' of operations, hosting 1000+ Global In- house Centres (GICs) and many of the Indian MNC, Family led or professional organizations have triggered the momentum in this direction. In a way, we can say that the term Business Process Management (BPM) or Process Based Management (PBM) acquired its due importance in India, when the off shoring brought this understanding of 'end to end’ process focus covering both line and staff functions!

Benefits of Process Based Management (PBM)

Today, most CEOs believe that their companies can be more adaptive or agile to cater to changes in their current markets and at the same time pursue emerging opportunities. CEOs urgently want to implement a competitive intelligence capability that allows the organization to react quickly or anticipate and respond almost intuitively to changing customer needs. The production functions are mostly equipped to deal with competition or agility requirements appropriately (e.g. mass production, mass customization, on-demand production etc.). However, staff and support functions in the manufacturing sector or all functions in the services sector, be it operations, finance or sales or customer service, are not equipped or often overstrained by trying to react to fast changing requirements. Subsequent to focus of services sector to implement GICs or as Shared Services or outsourcing, their line processes have been largely redesigned over the last two decades. Such PBM is required to effectively address the above CEO mission objectives while redesigning business processes.

Business strategy gets executed through Business Processes. If the shareholder and customer value are the 'whys' of a business, the business process is the 'how' of the business. The focus in a process is not on individual units of work, which by themselves accomplish nothing for a customer, but rather on an entire group of activities that, when effectively brought together, create a result that customers value. A customer does not care that we have allocated inventory; the customer only cares that he receives the goods he has ordered in a timely manner. The difference between process and task is the difference between whole and part, between ends and means.

Multiple research studies have confirmed the PBM must be aligned to strategic objectives, to deliver business results, to get the attention of CXOs. It is essential that the outcome metrics of processes (simple to refer as business metrics) are clearly understood and spelt out as goals for PBM to be effective. The key outcomes that can be achieved through PBM are focused on FIVE key clusters of 'effectiveness' measures:

What attracts the attention of CXOs is only when the business process delivers on outcome metrics that deliver business effectiveness to reduce costs and/or improve business results, and equally important, ensuring risk management measures to sustain current business opportunities/future business potential.

Power of Operational Innovation

Operational Innovation should not be confused with improvements or excellence. Those terms refer to achieving high performance via existing modes of operation: ensuring that work is done as it ought to be to reduce errors, costs and delays but without fundamentally changing how 'that work' was accomplished. While these are clearly the starting points or indicators of 'best process alignment' with internal stakeholders, it is the 'operational innovation' that generates maximum value to business and is directly linked the CXO mission of shareholder and customer value creation. Mere Operational improvement is not enough to win the game. Excellence in execution can win a close game, but can’t break a game wide open and turn into a rout. The only way to get and stay ahead of competitors is by executing in a totally different way through operational innovation.

Excellence in execution can win a close game, but can't break a game wide open and turn into a rout. The only way to get and stay ahead of competitors is by executing in a totally different way through operational innovation.

There are few great examples of operational innovation:

1. Progressive Insurance, a US based Auto Insurer, reinvented its 'Immediate Response' claims handling by which they reduced the cycle time to inspect and settle claims from 7 to 10 days to just 9 hours! It also implemented an innovative customer risk profiling system, factoring credit scores into its pricing calculations. By these, the company, brought their combined ratio down to 96% as against the competition at 102%, directly leading to outstanding results as well as grew the revenues from about US$ 1Bn to US$ 10 Bn.

2. Another success story is Walmart, now the largest organization in the world. Between 1972 and 1992, Walmart went from $ 44Mn to $44Bn, powering past Sears and Kmart, with faster growth, higher profits and lower prices. It pioneered great many innovations in how it purchased and distributed goods, best known as cross-docking and companion innovations.

3. Similar observations for Dell and Toyota, whose operational innovations have become proper nouns: Dell Business Model and Toyota Production System, dislodging some of the mightiest corporations in the history - IBM and General Motors.

4. Shell Lubricants reinvented its order fulfillment process by replacing a group of people handling different parts with one individual who does it all. As a result, Shell has cut the cycle time of turning order into cash by 75%, reduced operating expenses by 45% and boosted customer satisfaction by 105%- all by introducing a new way of handling orders.

Time, cost and customer satisfaction, the dimensions of performance shaped by operations, get major boosts from operational innovation.

Barriers to PBM

Despite all these benefits from PCE and Operational Innovation, business process design has traditionally been simply about operating efficiency and so, has often been delegated down the organization by CEOs. The demands of today's business, however, have seen business process design or redesign emerge as a much more strategic need. Increasingly companies understand that success in strategic objectives, such as a superior experience for customers, or a shift from fixed to variable costs, all critically depend on having the appropriate business process as well as organizational capabilities. CEOs today need to understand what processes are critical to their organization and why, how they can source the process capabilities they need, and how they can best implement their process redesign projects.

But even when an organization is convinced that improving certain key processes is a source of competitive advantage or customer value, too many CEOs don't get adequately involved. This jeopardizes success, because biggest process problems in any company extend across functional and divisional boundaries. Fixing them requires that managers make alignments or sometimes even compromises between the conflicting objectives of different functions/ divisions. Ultimately, only the CEO, or possibly the COO, can resolve these conflicts. If the CEO isn't involved, functional optimization will trump cross-functional process optimization, and the organization will be at a competitive disadvantage.

Some of the key barriers for implementing process based management are:

1. Functional Silo Culture: In a survey conducted by Capgemini, 55% of the respondents identified the functional silo culture as a barrier for process improvement at their organization, making it the most frequently cited obstacle. This method of working promotes efficiency within a particular silo, but undermines the possibilities of the real business process flow across the organization and even affects working collaboratively. The attempt to introduce cross functional BPM (or even cross BU within the same function!) leads to internal politics. For example, when a Retail organization attempts to improve cross-channel access, addressing the issue is immediately problematic because the online-channel owner, in-store channel owner, telephone channel owner and customer service team, all have their own targets and priorities.

2. Shared Services is for Transactional Processes: The concept of Shared Services (GICs for global off-shoring) is communicated as only for transactional processes. This is a myth. In fact, global leaders describe shard services as one of the most sought after business model Innovations in 21st century! Many of the Indian SSCs have proved this beyond doubt to handle investor related queries or R&D related support processes from the SSC. In fact, Shared Services can comfortably handle both 'rule based' transaction processes of all staff/ support functions and 'knowledge based' decision enabling processes like analytics, planning and forecasting, and leave all the judgment and decision processes with Business.

3. Efficiency vs. Effectiveness: While the CEO and CFO want to see both the efficiency and effectiveness metrics on their dashboards, they are likely to pay more attention to effectiveness measures. Process efficiency can be improved incrementally but almost all business decision making is to make the process more effective. Strategic objectives are translated into measurable targets and then need to be linked to measure business process metrics. BPM will not get the attention it deserves because it is initially not set up to generate the sought-after effectiveness metrics.

4. Not a Strategic Priority: Quite often, CEOs believe that their time should not be directed nor it is their role to streamline operating procedures! It is lower down the order. In addition, the contemporary business culture undervalues operations. Ironically, the core value-creating work of enterprises has become low status.

5. No one person owns it or Narrow Scope: Redesigning processes or Operational innovations cuts across departmental boundaries, and hence, organizationally, it is homeless. This challenge leads to making operational innovation opportunities to decay into dozens of operational improvement projects, sometimes even using tools like six-sigma, lean or automation. Each project has a narrow scope, without the ability to aggregate the benefits that might accrue if it were one large initiative. This way, what could have been an impactful operational innovation becomes asset of incremental operational improvements.

6. Shareholder superseding Customer: A key point is that often a lot of processes improvements are done purely from the organization’s perspective - the customers’ needs were often a minor consideration! The focus was on reducing costs, and making it less flexible and responsive for the customer! But the companies that are doing this well now are recognizing that the customer’s perspective is decisive, while delivering cost saves.

7. Absence of Metrics: If Business process redesign is carried out without being able to collate or track metrics to compare or monitor the efficiency and effectiveness of such a process, it can lead to mismatch in expectations (time, cost, accuracy, functionality and flexibility) and hence may lead to customer dissatisfaction and challenging the redesign or worse, to revert to the old design.

The Pathway for Process to Performance

1. First, few mis-perceptions that prevent or affect organizations in adopting or implementing PBM or PCE need to be addressed:

   1. Process is enemy of creativity: As Dr Hammer puts it, “this is a misperception, that 'process' implies routinization and automation, it may be relevant for transactional work but not such innovative work as developing products and marketing them. Process is not the opposite of creativity; it is the opposite of chaos. Process creates discipline and repeatability by putting individual activities into larger framework. When they have a process perspective, people can focus on the creativity where it belongs, on the content of their work, rather than its structure.

   2. Process takes away the focus on innovation: This is a corollary to the first misperception. Just as creativity, organized process understanding in fact enables innovation as termed 'operational innovation', where core value gets generated through cash to cash cycle – be it a new business model or competitive advantage.

   3. Process makes things rule based and hence, loses flexibility: This is untrue. McKinsey, in their December 2015 issue of McKinsey Quarterly, confirms through their research that if organizations want to develop agility, besides structure and governance, they require a stable backbone for key processes. This enables agile organizations to 'paradoxically' combine speed with stability.

   4. Process overtakes the customer in terms of priority: This is a challenge in practice, than a real issue. People need to practice application of processes with the very purpose behind any process, i.e. to create customer value. Our experience has confirmed that for effective BPM adoption, customer needs to be the focal point in the form of 'service with control'. This is a clear behavioral change requirement while adopting BPM. This is all about how to deal with exceptions while interacting with an internal or external customer. It is not about beating the process, but how well the customer needs are kept in mind, and the process requirements are articulated in a ‘responsive’ manner for the benefit of all including the customer.

   5. Process is doing things right and loses focus on doing the right thing: This is efficiency vs. effectiveness connect in PBM. The tendency of redesigned business processes is to first focus on efficiency related areas that require less cross functional collaboration but along the way, 'doing the right thing' gets a back seat. It is best to acknowledge and proactively communicate this to the stakeholders as part of the stabilization process, and progressively move towards effectiveness, the key for a PCE. In fact, this provides huge opportunities for operational innovation, scaling from operational efficiencies to operational excellence.

   6. Process Redesign needs to be replication of best in class: Quite often, companies aspire to jump to best in class processes during consolidation of processes from multiple locations that are non-standard, without adequately giving time for redesigning the process in the context of the company. Any out of context replication of processes is wrong and leads to unintended disruptions during transition, and lengthens the time for stabilization. It is best to work on what works for the company.

    

2. Second, summarizing the approach articulated above for Process Centred Enterprise and Process Based Management, the organization needs to be in a position to follow a 10 Point Charter to overcome the challenges and realize BPM Promise:

   

3. Third, the analysis and approach outlined here to realize the power of PCE and Operational Innovation is applicable to all types of organizations, whether they are a long way into their journey of BPM or they are yet to start; whether they are private sector, or public sector or even NGO sector; whether they are large Fortune 500 company or an established GIC, or a BS 1000 or ET 500 organization in India; whether they are a growing Medium size enterprise globally (under USD 2BN) or locally (under INR 1000 Cr). The caution is to ensure that each of the organizations follow the above 10 Point Execution in their context and not just decide to replicate best in class practice worked for another organization!

In summary

In order to achieve Process to Performance and become an Effective Enterprise, organizations need to first create the conditions for success. This will mean gaining and securing sponsorship, buy- in from senior leaders; defining organization-wide strategy, business case and phased implementation, putting in place the right direction, right governance, right operating model, right people, right metrics and right technology. Actions need to be purpose oriented right through in a collaborative way across the organization, to ensure the intended benefits are realized and communicated. At the cost of repetition, it needs to be emphasized that CXO level commitment, extensive change management skills and cross functional collaboration are the pre requisites.

This is a journey that will make Global India retain its competitive advantage and create the right environment to take the next leap in Business Process, in this VUCA world.

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