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Driving Operational Effectiveness through Better Use of IT (Article)
Date: Jul-2009 Sector: News
There can be few companies that do not have scope for improving their operational effectiveness but the day-to-day priorities of running the business often mean that these opportunities go unrealised. However, there can be much to be gained from a short and targeted review of areas in which timescales can be shortened, costs can be saved and accuracy improved through the implementation of improvements to IT systems. This article suggests areas for investigation and specific actions that can be taken to assess the opportunity for improvement.
The first step is to identify those areas that could be improved. A detailed understanding of this would require process analysis and modelling, which would be a time-consuming process. However, there are a number of questions that can be asked at the outset that will quickly provide a high-level view of the potential for improvement within a business.
The more systems in use, the greater the likelihood that multiple copies of data items are being stored, probably in slightly different ways, with the result that effort is required to consolidate or interpret the data and that different people within the business will have different views about the state of the business. A single view of the truth is a powerful contributor to clarity and effective decision making and execution.
Action point: Use a simple grid (such as illustrated below) to analyse which systems support which business process(es) and thereby identify areas of duplication or overlap.
Clearly the need for manual data entry via keyboard varies between different types of business but very similar businesses can have significantly different staffing requirements depending on the level of automation of data capture that has been implemented. Dependence on manual data entry also carries risk of delays or inaccuracy in the presentation of data to other parts of the business. Where data entry is carried out manually there is a further impact on the ability of the business to scale as data entry costs rise in proportion to volumes of business. On the other hand, with automated data capture, these costs are generally not linear and significant increases in scale can be achieved with proportionally less cost overhead.
Action point: Identify the number of FTEs involved in manual data entry or processing and compare to industry best practice to identify potential for savings.
If there’s one thing worse than entering data by hand, it’s entering the same data by hand two or more times! All the problems of manual data entry are multiplied any time there is a requirement to print out the data and rekey it into another system.
Action point: Identify any data that is entered into more than one system and assess potential for automation of data transfer between the systems concerned.
In addition to movement of data within the company, another area for assessment is the exchange of data between the company and its customers and/or suppliers. The information that is transferred may be related to orders, customer service, product delivery, etc. In addition to the benefits of reduced cost and potential for error, the use of electronic communications can be beneficial for traceability and in reducing the overhead associated with maintaining audit trails.
Action point: List the top ten external parties with which the company deals and assess the volume of information transferred to and from them. Then assess the potential for automation.
Any modern EPOS and stock control system will have mechanisms for the transfer of data between the units in store and the back office system. These will update stock information on the basis of daily sales and report sales figures, etc. However, many companies’ transactional web sites have completely separate stock control and reporting capabilities. At best they may have the ability to transfer orders via a file upload into the back office system at regular intervals. The lack of connection between this increasingly important sales channel and the core systems of the business can cause many issues including inaccuracies in stock data, lack of visibility across the business on the status of customer orders or purchases, difficulty in tracking the impact and effectiveness of promotional activity, etc.
Action point: If online sales are or will become a significant proportion of revenue, develop an explicit strategy (potentially as part of a broader IT Strategy) for the integration of web-based and back office systems and a move towards true mutli-channel capability.
Excel provides a very flexible analysis and reporting tool but this is both a strength and a risk. While the ability for end users to summarise and analyse data via Excel is valuable, it can soon evolve from simple data extraction from operational systems to the development of increasingly complex and potentially fragile data manipulation models that are understood only by their original author. Moreover, the need to repeat the data extraction and manipulation processes every month can lead to significant time and attention being paid to this process at the expense of time spent reviewing the outputs and making decisions based on the information.
Action point: Review the key operational and management reports created in the company to understand the extent to which these are dependent on spreadsheet data processing.
Multiple stores of customer data lead to inconsistent and/or inaccurate customer data. This both frustrates customers in dealing with the company and introduces inefficiency in processing and updating the data. For example, if a customer record is updated in a front office system but not in a back office system, goods may be delivered but invoices may go to the wrong address, resulting in delays to payment and more effort being required in credit control. In many companies manual procedures are used to make sure that updates happen across systems with the attendant personnel effort and risk of error that this implies.
Action point: Identify all systems (including spreadsheets, Outlook contact lists, etc.) that hold customer data and review processes for maintaining the data. Seek to minimise duplication and where it is unavoidable look for opportunities to automate updates across all systems or implement a single reference data store that can feed all other systems.
In many businesses, the workforce is one of the largest single expense items. Where the workforce is distributed, for example a company with field engineers, remote sales staff, etc., keeping track of time and attendance data and productivity information can be difficult. If the business is still relying on manual timesheets and job records there is considerable potential for error and overhead in entering the data into the central systems. Automated systems for capturing such data are now considerably more affordable than was the case even a few years ago and are well worth consideration.
Action point: Compile a list of key staff-related data that is handled manually to identify any overhead that could be reduced. Investigate industry best practice to understand what can be achieved in reducing this overhead.
Stock data is of key importance to many companies and unless there is a single ERP system in place that covers all business processes it is likely that there are inefficiencies in the way in which information is transferred between the systems, e.g. the sales and stock control systems and the finance system(s). Not only does this result in unnecessary overhead, it can also lead to significant inaccuracy in the data in one or other of the systems. Poor stock information generally results in excessive stock holdings to reduce the risk of out-of-stock situations and avoid lost sales. This inevitably means that working capital is tied up holding more inventory than would be required if the systems were operating efficiently and in an integrated manner.
Action point: If stock variances or high inventory levels are a significant issue in the business, identify sources of error or delay by conducting an analysis of how data moves between systems as physical goods move around the business.
The items listed above give some pointers as to where to look for opportunities to use IT systems more effectively to identify and eliminate operational inefficiencies. The practical steps outlined as action points can be implemented quickly to give an assessment of the potential for improvement and a prioritised list of where effort should be focussed to bring about better operational effectiveness. The skills to do at least this initial assessment may well exist within the business and involving the staff in the process will get their buy-in to any changes that follow. If the skills do not exist, a review of all these areas could be conducted as a short focussed exercise using external assistance, which could come from other parts of the group, other portfolio companies, or advisers.
The topic of operational effectiveness is highly germane to all businesses and, while the details may vary, is an ideal subject for the sharing of experience and expertise between portfolio companies. Moreover, explicit consideration of operational effectiveness issues during due diligence or in business planning can set the tone and mindset in the company at an early stage such that the results are delivered early in the investment cycle benefitting both operational performance and exit valuations.