The True Cost Of Business Processes

What percentage of a company’s revenues are spent in Business Processes - 5%, 10%, 15%? Guess again. It may be more like 30% to 60%. I did a little study about two years ago and wrote about it also here.

The traditional knee jerk approaches to increasing a company’s profitability are typically to stop buying tea and coffee for employees or to send all employees to the latest out-of-the-box-ideation-with-inspiration-from-Yoga workshop in an off site location, hoping to hit the next ’iPod" hit of your company’s industry!

While the answer is right under your own nose and you don’t see because it is hidden because of historical reasons!

Business processes consume a large portion of operating expenses and hence of revenues! Sometimes as much as 30% to 60% depending upon how process intensive your industry and vertical is! Service industries are traditionally more business process intensive as opposed to non-service industries. Healthcare companies may spend a lot more on business processes than a computer chip manufacturing company. In both cases however, the true costs of business processes is never calculated, much less used as a way to focus on cost reduction!

In some industries and some companies profitability is about 5 to 10% of revenues. If you can effect continuous improvement in business processes and reduce their costs by even 10%, you may make your company profitable by an order of magnitude!

And end-to-end Order-to-Cash supply chain process may consume a large portion of a company’s expenses on business processes. Companies hardly ever have a precise handle on these business processes, much less their true costs to the company.

This is more due to historical reasons than anythingelse. Traditionally, companies have used functional specialization like Design, Manufacturing, Finance, Sales, Marketing etc to apportion their budgets and costs, never in the context of how much does it cost me to process one order through the entire cycle.

This is not some nit! In order to improve the financial performance of your company, you cannot walk away from improving business processes if they form a large portion of your costs, Of course, you can innovate totally new products like the iPod or the iPhone and change the fortunes of your company but if you are in the business of mining Iron Ore or Bauxite, innovations don’t come along that often. Or a supermarket or a furniture manufacturer! In 95% of the cases, companies’ margins are so small that it is nose-to-the-grind wheel cost cutting that will increase your profitability.

Of course you simplify business processes and provide better, faster and cheaper services to your customers, you will gain more business from loyalty and referalls, whether you are healthcare, insurance or banking!

Continuous process improvement of business processes is inevitable and for that, you need to have a true sense of your process costs. Many companies’ IT systems and internal systems are set up for the last century’s functional specialization world. They don’t give you a precise read on your process costs, just because of past thinking and how the data is structured!

Funnily, new, and completely online players like E-Loan, Amazon.com, Dell.com and relatively more online Insurance companies like Progressive and GEICO, all have completely automated online business processes. Consequently a lot of the functional breakdowns do not affect getting and using data about end-to-end customer facing business processes!

The new century and increasing linkages of all internal systems in companies enables this making explicit of the true costs of business processes.

And Continuous Process Improvement requires full time attention as this note from Gartner attests!.

Understanding the true costs of business processes and liberating them from the clutches of functional silos will help achieve order of magnitudes improvements in efficiency and effectiveness!

More important than the quest for certainty is the quest for clarity - Francois Gautier