How
can we apply the three stages of consciousness we outlined in the previous post
to some specific problems? Let’s
discuss, first, a fundamental finance process—accounts payable—and then what
appeared to be a simple problem to a client—what software package should I use
for work scheduling?—that turned out to have far greater ramifications than it
at first appeared.
Accounts
payable, as one of the most resource-intensive and visible transaction
processes in finance, is almost always a target for improvement in any attempt
to improve cost and quality in the function.
(In the many finance re-engineering engagements I have led, it has
always been a significant target.)
Recall the general model:
When
mountains are mountains, and the process is the process, this is what we
usually see:
·
Accounts
payable (AP) in many different locations;
·
Manual
three-way match (Purchase order, invoice, receiving document;
·
Numerous
approvals at every stage with low dollar thresholds;
·
Poor
documentation of purchase orders; little purchasing discipline;
·
High
degree of manager involvement. (I like
to call this the “Mary down the hall” syndrome, as in a manager saying, “I want
to be able to know that Mary down the hall is paying my invoices.”)
Invariably,
this is highly inefficient.
What
do we get when we see the process no longer as a given, and the mountain is no
longer a mountain? The first thought is
to automate the existing process in some way—perhaps by creating electronic
workflow for approvals. This makes an
inefficient process more efficient—but only marginally.
Canned
best practices increase the efficiency considerably. These would include:
·
Shared
services—consolidating AP in a single, or a few, locations;
·
Automating
three way match, using electronic receipt and PO records, potential electronic
invoices as well;
·
Reducing
or eliminating manual approvals by raising materiality thresholds.
Logical
and proven as these practices are, they can be difficult to implement. Why?
Many managers remain in the mountains are mountains state of
consciousness, and find it difficult to move beyond it. Anyone who has ever worked on a change
project will recognize this.
Many,
if not most, large firms have made it to the second, analytical, stage of
consciousness. Another widely understand
practice takes thing a step further—two way match, or evaluated receipt. The concept here is simple: if there is a
purchase order, when the item is received, pay to the terms on the purchase
order. Instead of three way
matching—invoice, PO, receipt—we match two—PO and receipt.
This
is a radical simplification—it eliminates one document entirely. It does far more than that, however.
In
conventional thinking about business process, each stands alone, receiving
information from one, and passing information along to the next. Evaluated receipt changes the nature of the
processes. It shifts the point of
control from payment to the decision to buy.
If the decision to buy is on record, you pay.
We
are now on the brink of a satori.
Instead
of three mountains with an unacknowledged common base—procurement, receiving,
and accounts payable—we can now see one mountain with three peaks—a single
process of procure to pay. This is not a
trivial insight.
Before,
we had three possesses with individual control points, but (in practice) loose
connections with informal handoffs. Most
companies have undisciplined procurement practices, full of exceptions. In consequence, when a shipment arrives without
a purchase order, receiving does not reject it, but treats as an exception. When we move to accounts payable, we have many
transactions with exceptions—missing one, or two, of the criteria for a 3 way
match (PO, receipt, or invoice) or, since the shipper may vary on invoiced
price, undershipment, or overshipment, we have numerous other potential error
conditions—all of which need to be reworked.
Everything piles up at the end. (I
am not even taking into account the common practice of requiring multiple
approvals to make a payment, even when all three documents are in place.)
If
we look at a single process of procure to pay, the key control point shifts to
the beginning of the process—ordering—instead of the end—paying. We create a simple rule—if a valid order is
in place, pay for the goods received within terms. If there is an undershipment, pay for what we
get. If there is an overshipment, return
the overshipped quantity.
In
practice, of course, it is never quite that simple. Other means, like procurement cards and
catalogs, make sense for certain items.
One needs to define a slightly different process to define receipt of
services. One further needs to build in
a certain tolerance for exception handling.
But things become much simpler.
The
real difficulty, of course, lies in convincing those involved that there is one
mountain, not three. Organizational power
changes—procurement suddenly becomes far more important than before in most
organizations. To those for whom the
mountain is not a mountain, this can be tremendously threatening. It requires an insight that is difficult for
them to understand. It requires them to
think, “Why have we been doing things this way?”—and the WHY question is
enormously difficult, since organizations are in general focused on HOW.
As
a final example, I’d like to talk about a specific consulting assignment for a
natural gas utility. (I am simplifying
and disguising the case.) Let’s call
them GasCo. GasCo’s business is
distribution in a large state. They
maintain the infrastructure to deliver gas to end customers, both industrial
and residential. They are responsible
for hooking up and disconnecting customers, reading the meters, and supplying
billing information to providers of natural gas.
In
order to do this, they have two different service organizations. (There are several other smaller organizations
dealing with some highly specialized issues.)
The first, called field service, deals with aboveground issues, like
connecting and disconnecting service.
The second, called distribution, deals with maintenance and repair on
issues below ground-- the network of pipes that distributes gas to residences
and businesses. Both work out of the
same physical service centers, but are organized separately and use different
scheduling software.
The
initial question was simple: should the field service organization upgrade to
the next release of the current scheduling software? Using our framework, upgrading the software without
question would be a mountains are mountains decision; asking the question moves
it one stage along in consciousness to mountains are not mountains.
That
is by no means the only question we can ask.
Examining the situation in more detail raised many more, among them:
·
Should
both organizations be using the same scheduling software? (They were not.)
·
Does
the new software provide a path of wider functionalities, including better
route optimization and improved asset management and GIS?
·
What
is the incremental benefit of combining process change with new software?
·
Are
there opportunities for cross training between the two organizations?
GasCo
had already articulated a very high-level vision for long-term work
management. In the course of a few weeks
work, the initial question—upgrade software or not—morphed into a complex set
of alternatives. The chart, below,
summarizes the potential paths as a decision tree:
As
it turns out, when one evaluates all the options, 1A—the base case—has zero
incremental value; 1B is negative; 4 is always lower in value than 3; and the
value of 3B is three times of 2A.
At
this point, we gain an insight, and the mountain is a mountain again. The mountain is not the software for one
particular process and organization—it is the best way to organize and deploy
field organizations. Another six months
of work resulted in a comprehensive 10-year plan for reshaping all field
operations and supporting physical and technology infrastructure.
To
summarize:
1. Our first reaction
to any situation is that a mountain is a mountain and the river is a
river. Things are what they are, and we
keep them as they are. This is a primitive
type of consciousness.
2. When we begin to
ask, “How can we do something better?”, the mountain is no longer a mountain
and the river, no longer a river. We
admit the possibly of change; we are in a more advanced stage of consciousness,
but we are hampered by looking at pieces, rather than the whole. Most of us can move into this stage of
consciousness.
3. The next stage is quite
different. When we ask-- “Why are we
doing this at all?” “Can we see things
as a different whole?”—we open ourselves to insight, satori, the discontinuity. It is difficult for many to do this—but it
can be learned. The reward can be extraordinary value.
Where
have you seen situations like this? Are
you facing something similar? I’ll be
glad to talk with you about it. Comments
are welcome, and add an email contact.
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