May 2008

Process Holes - The Unseen Risks and Rewards

How Repairing Process Holes Can Dramatically Benefit Your Business

An Unexpected Collapse

It was a quiet morning in a Central Florida household as a husband and wife fixed breakfast in the kitchen of their single story cement block home. They were preparing for work as they had done each weekday since they built their home when suddenly and without warning the house began to collapse around them. Unaware of the cause, but knowing their lives were at stake, the couple sprinted out of the house and into the street. Within seconds their home, their cars, and their possessions were swallowed by a giant hole which opened in the ground under them.

Under the sands of Central Florida lie huge deposits of limestone. Underground rivers flow though the limestone carving it into caverns through the acidic interaction of the water. The Florida water table is extremely high, typically only a few feet below ground, so during periods of normal rainfall the water table provides support for these underground caverns. But, during a dry spell, the caverns empty and if the weight above is too great and the ceiling of the cavern too thin, it will collapse. This unfortunate couple built their home on the roof of one such cavern.

Dangers for the Business Organization

Collapsed caverns, known as “sinkholes,” dot the Florida landscape, invisible to those who build above them. With care and extra effort, they can be identified and disasters avoided. In the business world we see similar disasters: companies whose stock drops to a fraction of its former value, organizations unable to adapt to new competition, departments that implode through a failure to execute and projects that seem to seriously under-perform or never deliver results. They were destroyed or seriously damaged by unseen or unidentified forces to which they seemed unable to respond or control. To them, the forces were invisible until a seemingly inevitable sequence of events created a “hole” which swallowed their ability to perform or even survive as an organization. Very often, the sequence of events leading to the collapse was only recognized after the events had occurred.

In reality, the hole always existed, hidden away from view. The organizational “collapse” came when whatever was supporting it went away. In some cases, it was large amounts of cash, in others, a lack of competition. Often the collapse is caused by a failure to address an important decision or problem issue. No doubt, each of us can look back on events of the past we consider failures and see the errors made. But what if it were possible to identify potential “holes” and repair them prior to a collapse? Or what if “holes” could be repaired to increase the efficiency and effectiveness of the business?

Repairing Process Holes

In reality, the work of the organization is a composite network of processes (structured or ad hoc) governed by rules (formal or informal). Potential failures or collapses can be viewed as “Process Holes” existing within this network of activities. Organizations with complex, repetitive processes recognize the need to improve these processes. Traditionally, Business Process Improvement (BPI) initiatives have examined the work activities of the business to create greater efficiency (less time, lower cost) and effectiveness (greater value for the customer). However, very few of these initiatives are structured to identify potential Process Holes.

Since the work of Process Improvement is often viewed in the context of small incremental gains across large numbers of repetitive tasks, organizations which do not have high volume repetitive tasks or which have custom processes, often see little value in Process Improvement Initiatives. The organization will resist BPI initiatives since it sees little return on the effort. However, the contrary is true. A BPI initiative which clearly identifies Process Holes can dramatically benefit your business by exposing unseen risks and rewards.

This article focuses on the significant benefits to the business of identifying and repairing Process Holes. Identification of Process Holes requires special effort. They are often “Big Picture” items which are easily missed or ignored because they do not lend themselves to simple analysis and often necessitate challenges to “the way we’ve always done things.” At the other extreme, they may be “easy-to-fix” issues (with major business impact) which are overlooked because they fall between boundaries of process activities or organizational responsibilities. Examples of process holes which have been fixed include:

A media buying company increased its billable hours fifty percent by requiring employees to complete billing timesheets daily instead of monthly. By completing them daily, the employees could accurately record the actual hours worked for each client instead of estimating hours at the end of the month.
A software company increased its sales opportunity profits tenfold by focusing only on those customers that fit a profile which generated acceptable profits for the organization. Previously, any opportunity for a sale was pursued without evaluating the profitability of the customer.
A medical insurance compliance firm reduced its paperwork processing costs in half, increased the speed of processing by a factor of twenty, and created the ability to add new business without adding headcount. They accomplished all this by outsourcing their manual paperwork data entry work to a company using advanced Optical Character Recognition tools and highly experienced data entry resources for data quality assurance. This enabled them to focus on analysis of the data and customer service: the key deliverables their clients wanted.
A “low-fare” airline posted significant 2008 Q1 profits when virtually all other airlines were losing millions and even billions. They did so by the long-term practice of “hedging” oil costs through contractual agreements which fixed their costs at a third of what other carriers were paying.

What each of these scenarios has in common is a significant change in the way these companies do business or a significant difference in the way they do business as compared to their competition. Prior to making these changes, these companies had Process Holes which significantly impacted or had the potential to impact their business capabilities. However, the Process Holes were not readily seen or identified through regular Process Improvement initiatives. Identification of these Holes required an “Aha” moment that took a larger view of the business processes and asked important questions about how and why they did business. This leads us to the first characteristic of Process Holes.

Characteristics of Process Holes

Process Holes typically are “Big Picture” Issues.

They are not redesigned business processes, but rather are major changes or have significant impact on the way business is done. Process redesign can significantly increase efficiency and effectiveness, but it can also easily miss “big picture” issues which can dramatically affect business performance.

The media company mentioned above made what appears to be a small change which created significant revenue increases. In reality, the change was significant. The company was experiencing significant cash flow and revenue issues. New clients take time to develop, so management looked internally to see what could be done. Expenses were fixed, but it was clear after a brief analysis that the number of billable hours for clients fell far short of the potential. Everyone had been working very hard, but no one had taken the time to step away to look at the big picture to make sure they were being paid for their efforts.

As you might expect, the media buyers and planners completing the billing timesheets strongly resisted the idea of completing the sheets on a daily basis. They viewed the requirement as a challenge to their ability as a professional to manage their schedules. They also resented being held accountable on a daily basis, especially to a resource they viewed as having only administrative responsibilities. The big picture was not the change in the frequency of the reporting, but rather the need to change the attitude of the employees and how to accomplish the change. The need to accurately capture billable hours became a focus of executive communications. It was given a high priority in staff meetings. After the first month, when the number of billable hours captured increased so significantly, management shared the success with the professional staff who then saw the benefit of the process change.

Process Holes Have a Major Impact on the Profitability of the Business.

Process Holes can drain the profitability of a business long before their impact is clearly visible. The software company mentioned above had a clear sales process in place. The hole they were not seeing was the focus on sales activity, rather than sales profitability. To them, sales activity was important. No one had taken the time to evaluate the actual profitability of each sale. Companies often focus too much on revenue and fail to take the time to look at how expenses and types of sales impact the bottom line.

A manufacturing company was too busy generating sales and building its custom designed equipment to review medical costs. When it did, it cut its costs in half while providing equivalent coverage for its employees. While the amount of savings compared to revenue seemed small, it was actually quite large. Here’s why: Most manufacturing companies experience a net profit of five to ten percent of revenue, so the reduction in expenses actually represented the equivalent of a revenue opportunity ten to twenty times the value of the savings. With that perspective, the savings on medical insurance represented for this company, the equivalent of a ten percent increase in total revenue.

The low-cost airline mentioned above took an even bigger picture view of their process in acquiring fuel and it created a huge profitability advantage. Given that fuel is a major part of their expenses and fuel costs continue to rise they “hedged” their fuel costs by signing long-term contracts to pay in the future prices for fuel which were higher than those at the time of the contract signing. If fuel prices went up, they came out ahead. If fuel prices went down or stayed the same, they would lose, but their low costs for the remainder of their operations would enable them to absorb those costs and still stay competitive. As we all now know, the risk paid off in profitability far beyond what anyone could imagine. This airline is posting profits without raising airfares while virtually all other airlines are losing millions or going out of business.

The process decision the airline made was a “Big Picture” effort. It refocused a significant amount of the work activities of its CFO on managing its fuel contracts. By focusing its chief financial decision-maker on what could be the major factor in its profitability, it plugged a Process Hole that could have swallowed them completely. Why didn’t the other airlines employ a similar strategy? Perhaps it was the concern over stockholder reaction if it “lost” the bet and paid more for fuel than necessary in the future. Perhaps it was the inability to commit to that higher price (if prices stayed low) and still stay competitive due to higher operating costs. Or, perhaps they took only a short view of profitability since Wall Street rewards or punishes on a quarterly basis with no reward for the long term. Regardless of the reasons, in the first quarter of 2008 four airlines filed for bankruptcy in less than two weeks, each citing the high cost of fuel as the reason for their demise.

Fixing Process Holes Requires a Willingness to Make Major Changes in the Way Business is Conducted

Meaningful change in the workplace is by far one of the most difficult activities to effectively accomplish. Since Process Holes can have a major impact on the business, fixing them usually requires major changes in the way business is conducted. This is not to say the change is unwelcome. Change, managed properly, can have the full support of those impacted. The key to change success is wholehearted support of the stakeholders in the affected processes. Executives and senior management must be committed to making the necessary changes. Band-aid approaches to fix identified issues will only delay the inevitable and will create cynicism within the organization regarding the meaningfulness of future change initiatives.

The medical insurance compliance firm mentioned at the beginning of this article was forced to make a major change in their business processes in order to capitalize on new market opportunities. Their work activities were extremely labor-intensive so it was very challenging to manage rapid growth. Additionally, the work activities peaked during specific portions of their processes. As a result, paperwork backlogs would accumulate which caused them to miss client deadlines.

They sought to streamline their processes, but quickly realized the marginal gains achieved would not meet their requirements. They then examined the core services their clients wanted. In doing so, they realized their clients did not care about their paper processing capabilities, but rather their data analysis and customer service capabilities. Realizing this, they decided to outsource their data entry work activities to a firm with the software and people skills to complete the work at significantly less cost and with highly scalable processing capabilities. This enabled the organization to focus on growing their business and rapidly delivering value to their customers. The decision to outsource created a major change in the way they did business which resulted in dramatic growth and profitability.

Identifying Process Holes

How do we go about identifying Process Holes? How do we know if they even exist in our organization? Rest assured they do exist. Even organizations that regularly conduct BPI initiatives, and consistently challenge their own traditions and conventions, are vulnerable to experiencing new process holes. New competitors, breakthrough innovations, market demands, and globalization changes can rapidly change the dynamics of business.

So, how do you go about finding and fixing these potentially devastating or profitability draining dangers? The list below is by no means complete, but it provides some important actions you can take.

Identify Your Core Business Issues, Not the Details – Not that details aren’t important, they are. But to discover process holes ask questions like: What does the customer want? What is the result we are looking for? Why are we doing this? These questions step back from the details and a take a larger view of your processes.
Think New – If we were starting from scratch, what would we do? Too often work activities become an end in themselves. Processes may have been created by different people at different times without a comprehensive view of the business. This approach creates disjointed process flows and makes the organization much more susceptible to process holes. If you were an entrepreneur starting your own business, how would you do it? Would it be different than what you are doing now? Why?
Look Between the Cracks – Explore the handoffs between groups and departments. A process does not end at the organizational boundary. Process flows between departments require attention to ensure smooth transitions. What type of communication exists between groups in your business? Are downstream groups aware of new products and services being offered? Does Finance know when contracts are changed? Is Sales aware of renewal dates for contracts? How do Sales and Finance work together to manage receivables? Does Support have the resources to meet customer demand for new products? Is training adequate for users or new systems? Organizational boundaries are replete with opportunities to miss the mark and frustrate business objectives.
Soar Above It All – Move out of the weeds into the big picture and see how everything fits together. With the speed and demands of business today it is easy to stay heads down and not invest the time to look at the big picture. Most organizations have strategic goals and initiatives. But most don’t have the business intelligence capabilities to tell which tactical initiatives produce the desired outcomes for their strategic goals. Do you have feedback loops in place to understand the impact of daily operational issues, changes, and initiatives on your strategic goals? Do you know the value stream for your clients for each business process in your organization? Have you investigated how to turn cost centers into profits centers? Do you invest the time to model new processes to increase efficiency and effectiveness? Does your organization investigate new technologies such as centralized Business Process Management tools? Are you able to conduct real-time Business Activity Monitoring to identify and understand bottlenecks and service delivery issues within your organization? Taking the time to look at the big picture will pay off with big rewards in profitability and your competitive position in the marketplace.
Think Collapse! – If what is supporting you now (i.e. making you comfortable) went away, what changes would you have to make? For example, if a new competitor began reducing your market share what would you do? If your budget was cut, but your output had to increase, how would you manage? Thinking creatively about worst case scenarios can help you understand ways to improve your current processes and help protect against future dangers. It is vital not to rest on your accomplishments and lose the focus and energy that helped you achieve them in the first place.
Explore with Freedom – Encourage the idea that every idea is good. Be willing to explore them and see which are realistic and bring reward or reduce risk. Some of the best ideas come from failure. Since failures continually happen in the enterprise you can choose to learn from them or hide them. An excellent method to discover Process Holes in your organization is to reward what is called “fast failure”. Organizations that punish failure encourage their employees to hide mistakes, so they are often repeated. Fast failure doesn’t reward incompetence, neglect, or repeating the same mistakes, but it does encourage team members to share mistakes, or just plain old screw ups in order to learn from them. Some have even chosen to give a “failure of the week” award to encourage the sharing of what doesn’t work. Doesn’t it make sense to have a failure happen once in your organization rather than repeat it across multiple team members or processes? Does your organization encourage creative thinking? Does it explore new ways of doing business? Does it encourage its team members to share their ideas?

Conclusion

Process Holes are present everywhere. They can drain profits and even cause the collapse of an organization. You can choose to ignore them. Or, you can choose to use them to create a competitive and profitability advantage for your business. Investing the time, effort, and resources to identify and repair the Process Holes in your organization will pay for itself many times over in customer value, process efficiency, and the overall health and future growth of your company.