Factors to consider when redesigning a finance operating model
While consultants highlight frameworks and best practices that could address the challenges that organisations and businesses face with their operating model and associated processes, it seems that few offer real guidance specifically on how organisations could implement the best practices that they promote. The emphasis is more towards providing guidance on a tactical level rather than how to strategically implement a new operating model.
However, there is a school of thought that, to achieve a better alignment between strategy and the finance operating model through process redesign, one should first take an operating model approach and then apply Lean Six Sigma to improve existing processes - for example, assessing whether process improvements could be achieved by changing or upskilling the personnel working on the process, or changing the decision authorities or suppliers integral to the process, as well as automating or combining various steps in the process.
What are the risks?
Changing an operating model is thwart with risk. Getting it wrong could make matters worse - higher costs, raised political tension between internal teams and ambitions not being met. However, the risks can be addressed and mitigated through a set of strong design principles which collectively underpin all successful operating models. Those design principles should be grounded in facts; kept to a small number so as not to confuse the importance of one over the other; and should pass the ‘dog food test’ - meaning they are not so general that they could equally apply to a company making dog food.
Where to start?
To develop design principles, critical to good design work, it is best to start with the stakeholders of the ‘thing’ - the customers, suppliers and employees etc. - that is being designed or redesigned. An understanding of stakeholder expectations and promises to others of the ‘thing’ will help to develop strong design principles and if the design is good, then stakeholder expectations could be exceeded.
One approach to operating model design includes the application of a lean methodology, that sees the streamlining of processes, waste being eliminated and the fostering of a culture of continuous improvement, all of which are key benefits obtained from following a Lean Six Sigma approach to improving processes.
What methodologies exist to determining the right principles to have in place?
There are several methodologies that share a common philosophy of improving operating models and processes. Understanding which methodology to adopt will give an organisation a competitive advantage.
A good place to start is orient towards the ‘voice of the customer’ and meeting their needs. Four methodologies exist with this in mind - Business Process Management (BPM), Total Quality Management (TQM), Six Sigma and Lean – each with their own merits.
While each method, if applied correctly, could decrease inefficiencies in processes and improve workflow for an organisation, choosing which to adopt is dependent on the need and best fit to the situation. A less evasive and costly approach is a combination of Lean and Six Sigma and one that provides a versatile methodology to follow in the pursuit of identifying improvements in an organisation’s operating model.
So what is Lean Six Sigma (LSS)?
LSS combines the philosophy of a ‘lean’ manufacturing concept, a key component to operating model design, centred on efficiency, with ‘Six Sigma’, focused on quality. It is essentially a strategy and methodology for businesses to improve their bottom-line results, and to ensure its operating model does what it is supposed to do, by increasing process performance, improving the deployment and management of capabilities and focusing on customers to enhance their satisfaction.
Essentially, LSS seeks to focus on the ‘ultimate goal’ of creating value for the customer, with ‘everything’ beginning and ending with the customer. It provides organisations with a full inventory of tools and methodologies aimed at reducing waste within, and increasing effectiveness of, the flow of an organisation’s processes, all of which lead to the benefits of not only greater customer satisfaction being achieved, but also improving quality and reducing cost for an organisation. In some cases, the intangible benefit of improved levels of employee satisfaction and emotional rewards, gained from LSS application, may be greater than the achieved saving in costs.
The primary focus for an organisation is therefore, to begin by considering the processes that address the needs of its customers. By seeking to identify and correct the causes that lead to errors or defects in their processes, businesses can focus on improving both output and quality, seen as critical factors for customers. Additional benefits that organisations could achieve from adopting and applying LSS methodology include: increased productivity (less need for rework and fixing errors); improved motivation in employees (less time spent by employees battling with inefficient processes); greater customer loyalty (through greater customer satisfaction achieved); and more effective strategic planning (increased speed in achieving business objectives).
However, draw caution. Streamlining processes within the Finance function in isolation of the bigger picture can create an ‘efficiency paradox’. One where Finance operates in a silo such that the ‘flow’ between other parts of the business is ineffective. The system, comprised of methods, tools and activities - the key features of an operating model - should centre around an operating strategy that seeks efficiency flow, the absence of which could have a detrimental impact on an organisation’s ability to meeting customer needs in a lean and efficient manner.
Conclusion
Combining and centering customer needs with target outcomes helps businesses with the design of an effective operating model.
Strong evidence and several case studies exist that demonstrate that applying Lean Six Sigma methodology has helped organisations to identify and shape the changes that are needed, with the benefits vastly outweighing the cost of implementing change.
However, for any change to be successful, several critical success factors exist, including the need for commitment from top management and those involved within the organisation, to make the necessary changes and improvement.
Author: Mark Trenavin-Body EMBA, CMgr FCMI, FATT
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