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Using APQC Metrics

As we explained in the article Measure Before Deciding, it is essential to measure the effectiveness of a process during a modeling exercise.

But why should one start from scratch? The APQC Process Classification Framework (PCF) provides practical metrics for each activity, within a process or a workflow, throughout their four level of classification.  Basically, for more than 1,200 activities, the list of metrics offers around 1,700 metrics (formulas). It is a great starting point, instead of tinkering randomly. This is an immediate incentive to download it (1).

Starting from this, you can quickly earn value from your measurement exercise, when stakeholders want to quickly evaluate the process efficiency or the productivity of resources.

Measuring
Simple Rules – by Claude Lanouette (c)

Be forward looking

Even if this exercise does not appear as something to do on the first run of your modeling workshop, the suggested metrics shown below take into account the income of the business entity and the value of materials purchased, in the case of the Purchase Order process for example. This provides a different perspective, depending on the volume of business of the company.

If the enterprise has an annual revenue of $ 20 million and carries 11,700 PO per year, it is a very different challenge for a company that has an income of $ 200 million.

Also note that one can also evaluate the process according to a group of higher processes; in this case, one may wonder what percentage of the time is dedicated to fulfill Purchase Orders on the overall procurement process (line 101455).

PCF Metrics example (click for details)

This table enumerates different metrics that could be used to explore financial perspectives that were not part of our original calculation model. These are the suggested metrics for the 4.2.3 Order material and services, from the previous article.

4.2.3 Order material metrics in PCF

Going further :  Process performance measurement

Measuring a process can be considered as a benchmarking activity, either by providing data for the current state or for the desired state. The previous articles focused on the process costs itself, including the duration of the activities and the cost of the resources involved in the execution.

Process benchmarking can also be used for process control or for process performance monitoring, and as suggested by the ABPMP (2). The process performance management is also a business activity when it is time to implement a business process management discipline within an enterprise. We will come back later on that specific topic.

Getting lost into figures

As you saw in this series of articles, we could lose the focus of our audience while measuring, given the variety of data that can be put on the table to obtain a better understanding of the business processes and their related workflows in different business units.

At the beginning of this exercice, we looked at the process itself to evaluate its costs and eventually evaluate how it could be streamlined to bring some savings and gain efficiency.

Furthermore, if we want to set some goals and some standards to attain and maintain, the measurement will need to be refined not only for the process itself, but also for quality, cycle time, delays or errors, likely to control the process.

Thus, we will need to define the goals of measurements, the things to measure, against what we will measure, where we will measure and who will be responsible to measure.

We will have to keep this in mind :

– The measurement itself is directly related to the quantification of data including in an accepted standard and quality (accuracy, completeness, consistency and timeliness).

– The metric is a quantitative measure that a system, component, or process  has a given attribute. Metric represent an extrapolation or a mathematical calculation of measurements resulting in a derived value. The APQC PCF metrics act as such, by suggesting a good set of measures that are adding value to the understanding of the processes and the workflow.

– Finally, the indicators would be a representation of a measurement or a metric represented in a simple or intuitive way, to facilitate its interpretations against some goals when it is time to address performance or quality issue. The common green, yellow or red flags are a common example of measures set against a standard to reach.

In the next article, we will discuss about process simulation, to allow you to surprise your PMO, your CIO or you CFO.

Reference :

(2) The ABPMP (Association of Business Process Management Professionals) provides a framework for a comprehensive business process management practice and for process performance measurement practices,

(1) The APQC Process Classification Framework is used worldwide to provide industry standard benchmarks, and members can gain access to benchmarking results when it is time to compare with other companies in a similar business activity sector.

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Measure Before Deciding

As we discussed in Modeling: A Decision Taking Asset, a process model should include an estimate of the execution cost, adding value to any business case. Focusing on the importance of measuring while modeling, this approach is an invitation to conduct a team review of any initial calculation model with the Stakeholders, before submitting it to the Executive Board.

Understanding the current state (click for explanations)

12.4.1.7 Understand Current State
12.4.1.7 Understand Current State

Managing change and planning change involves understanding the current state and defining the future state of a business process.

At an early stage of any process improvement initiative, it is the best time to provide a first calculation model of the current state.

If you are brave enough and visionary, and the process is straight forward, it is a good idea to provide at the same time some initial thinking about potential savings along the process.

Calculation model (click for explanation)

4.2.3 Order Material Initial Benchmark
4.2.3 Order Material Initial Benchmark

Let us review the variables used for this calculation and evaluate how it adds value to the modeling exercise.

We estimate the annual expenditure to transmit daily 45 Purchase Orders at $790,000. It does not assess yet if the process is effective, but provides us a first dimension of the current cost.

One could infer that a 10% efficiency improvement would represent an annual saving of nearly $80,000. However, is this enough to trigger a process improvement initiative? Can we achieve this improvement with a minimum expenditure, to ensure a return on that investment?

By establishing a first measurement, it is easier to engage in this discussion with stakeholders, much better than presenting a process diagram alone.

In a second iteration of the calculation model, we might examine the process in term of transaction volume; we can already communicate to the process owner a cost per unit. Using the calculation model, we learn that for 11 700 Purchase Orders over a year, this output of the process each costs $67.60 to the enterprise. It is almost evident that the process owner never had an opportunity to figure it by himself in most cases.

Consider the real costs (section 1)

How can we establish an hourly rate beyond $90, in our calculation?

Payroll and Availability

The average earnings of a resource might seem the best way to pursue the calculation of a business process cost. However, is it enough? One must equally consider the social and side benefits paid to employees, to achieve a fair real-time rate. In that case, it is best to refer to the Human Resources Manager to agree on a factor across all processes.

One must additionally consider the number of weeks available to work, when resources are engaged in the execution of process activities. One could even subtract from the current 37.5 hours a week the different breaks and factor in absences, which will establish a realistic hourly rate.

One can even establish a full-time equivalent (FTE) to estimate the number of busy resources executing the process. This equivalent is particularly important when evaluating any process improvement requiring a reorganization of tasks, roles and responsibilities.

Consider the indirect costs (section 1)

We often overlook at the overhead allocation. There is a basic rule of setting it to 150%, which generally represents the enterprise’s operation costs such as rental space, amenities like energy and telecommunications, supplies, taxes, insurance and equipment related to IT systems (see reference in the bottom of the article for more details). There is a cost to maintain facilities where real people are working, want it or not.

Why must we consider these indirect costs?

As a plain vanilla example, an enterprise employing 200 employees, each earning $50,000 a year, will spend around $13 millions a year for the resources, available 1800 hours over that time period. In fact, it would make up to 360K available hours to execute all operational, support or administrative business processes.

Applying the 150% standard across all processes would represent an annual expenditure of approximately $ 20 millions, to convert into an hourly rate to fit in the calculation model. This expenditure is also a part of process execution cost, we must insist. In that case, it is best to discuss with the Financial Controller, to agree on a standard rate across all processes.

After establishing this standard rate, use it in all your process models. It is unrealistic to believe that one can model all business processes; in principle, if that were the case in our example, we would have 36,000 hours available, excluding outsourcing.

Efforts by activity (section 2)

This section presents no particular problem; however, why would we calculate the volume of activities on an annual basis? This is to answer this very relevant question: « But how much it cost us?” Implicitly, Enterprise CXOs are very close of their annual planning – both for income and expenditure.

Impact on decision-making

What we all learn from this exercise is that Stakeholders and Executive Boards too often underestimate the real cost of most of their business processes. As an indirect consequence, they may be reluctant to promote improvement initiatives because they underestimate costs and cannot envision big savings.

Relying on a standard calculation model attached to each process diagram becomes an additional incentive to encourage change initiatives. In fact, this is one good reason to believe that process modeling is more than process diagrams. There is often confusion between these two levels, as we already discussed before.

This first exercise is a good starting point, but to engage in a thorough discussion and set targets for improvement, it is also important to provide accurate measurements, much more to benchmark against standards of excellence.

In the case of Purchase Orders, to use our example, how can we investigate a little more? Using the metrics proposed by APQC, in the next article, we will review and evaluate if our calculation model can be refined to answer more questions from CXOs or Executive Boards, if any.

Reference:

The Power of Business Process Improvement – The Workbook, section Estimate Time and Cost, chapter 5, for a detailed review

APQC  PCF Video Gallery:

Modeling : a Decision Taking Asset

French version

In any business transformation project, the business analyst must quickly provide crucial information to stakeholders, assisting them in their business decisions, while avoiding disproportionate investment efforts in this exercise. A systematic approach to process modeling achieves this objective, provided that it is not only limited to a simple diagram intended to visualize what is at stake. To be complete, a process model should also include quantitative data.

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Although the business case might bring a solid argument about the benefits of transformation, including the process diagram, the financial part is often seen as the ultimate priority. To make an analogy, when you need to choose a model home or a car, you do not limit yourself to their visual representation (the diagram); the financial aspect is a key part of your decision making.

Accordingly, one must quickly identify the following dimensions: the workload, the direct and indirect costs and the volume. This will lead to this very significant information for managers: the annualized costs. In some cases, it could be the monthly cost or the quarterly cost that could be a good narrative too. Quickly providing a first estimate of the total cost of the process, the modeling exercise will be better perceived and appreciated.

To measure adequately, remember that a business process is a repetitive sequence of activities, performed by people or systems connected by communication links and including associations with data objects. An initial trigger and one or many end point if the process splits,  must be clearly identified to properly define the scope of the process. These pieces of information are essential to quickly establish a good measurement. A complex process must be decomposed into sub-processes that are themselves also measurable models. Not surprisingly, if a process does not fit on a page, there is a good chance that you cannot measure it effectively.

Standard process diagram

The process example below, 4.2.3 Order Equipment and Services, illustrates this principle (click to enlarge).

APQC PCF standard descriptions to depict a processs
APQC PCF standard descriptions to depict a processs

You can use the standardized descriptors from the PCF – Process Classification Framework – provided by APQC, which applies to most businesses. The PCF is an excellent starting point to quickly create a diagram that can then be adapted to most operational contexts, when you need to explore and discuss with subject matter experts . In fact, the PCF is a checklist of 1,200 standardized activities that can be used to conduct a first audit of the activities to include in business processes diagram.

We underline again that a process is a repetitive activity that can be quantified, in this case producing and transmitting an order. The calculation unit here is 1 order – a basic unit on which we establish an annual volume.

The total quantification is a process instance repeated several times; just imagine that the first green circle is a token that will cross the process each time that an order will be processed. In this example, there is 2 end points. If 95% of the orders are approved, for 100 tokens, 95 will finish in the top red end event and 5 in the bottom red end event.

Standardized metrics model

Use such a standardized calculation model to quickly estimate the annual cost of this process (click to enlarge).

XLS Spreadsheet illustration

4.2.3 Order Material Initial Benchmark
4.2.3 Order Material Initial Benchmark

Applying this simple calculation model calculation, which takes into account the average wage and the actual availability of resources involved in the process, it is estimated that 45 purchase orders are issued daily through 3 administrative regions – east, west and center – of the company. Generally, the purchaser is seeking for 2 quotes for each good at competing suppliers.

To ensure greater accuracy, in cases where the practice is to request 3 quotes, one should change the measure reflected in the line « Solicit » 1 or more quotes, which would affect the cost execution of the process.

This is precisely the function of the calculation model to quantify as precisely as possible the identified activities.

The allocation of indirect costs is included in the calculation for a felt covering not only labor, but also the company’s operating costs, distributed on staff time. The norm is usually 150%. The process is equivalent to nearly 5 FTE (full time equivalents).

Thus by using a pragmatic approach, you quickly realize that this process of production and shipping vouchers would cost a nearly $800,000 per year to the company.

Of course, these figures must be based on the volume of sales and purchase volumes.

In short, this approach allows you to examine a process and provide rapid first financial data that will initiate a conversation about the different solutions to ease the process of evaluating whether the transformation is a priority.

If you were approached to meet subject matter experts, to clarify a situation and provide an executive summary, you will have invested a minimum of time and present your first investigation at the project board meeting without delay.

Your process model may be more appreciated than a simple diagram, to engage in a real business discussion.

In the next article, we will discuss about the calculation model, including costing and other metrics that can be used to establish the effectiveness of this process.

Reference: