Key Concepts for Business Process Optimization

By Phil Gilbert

Fortune 500 companies must face the facts: Their ability to generate
shareholder value depends heavily on how effectively they execute business processes. The more efficient their processes, the more revenue and profit they generate. But they face a huge challenge.

onsider what the typical Fortune 500 company is up against. They must manage and optimize more than core processes and more than 2,000 related subprocesses that run their businesses. Theyve spent millions of dollars acquiring enterprisewide systems aimed at planning, budgeting, forecasting, managing, and analyzing their businesses. Theyve spent additional time and money training their employees to use these systems. According to Aberdeen Group, a typical $10 billion Fortune 500 company spends more than $250 million annually to acquire, implement, and support more than 30 enterprise applications across its business, including Enterprise Resource Planning (ERP), Enterprise Application Integration (EAI), and Customer Relationship Management (CRM) applications.
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While these systems might have produced increased operational efficiency, many business processes werent fully optimized as part of the enterprise system implementations. Then, changing business circumstances, such as acquisitions or mergers, caused many processes that were initially improved with enterprise systems to become outdated. As time passes, efficiencies begin to wane. Theres still plenty of room for improvement. In fact, AMR Research estimates that less than 10 percent of enterprise processes are integrated into a dynamic framework that lets a company quickly respond to market condition changes. Additionally, Gartner reported that typical ERP systems cover just 30 percent of the business processes in an enterprise. As todays earnings reports attest, many companies miss their performance targets by a wide margin, despite their

eAI Journal August 2002

major investments into technology. Todays uncertain economy, which continues to introduce new process issues, is partly to blame. For example, an energy companys mergers and acquisitions force the merging entities to agree on a common way of doing business, despite their different underlying transactional systems and business processes. Or, a supplier must change how it responds to requests for parts when the manufacturer begins to post its forecasts online (opening the forecasts to all its suppliers and giving its business to the first respondent). These situations require a rapid change in process execution. In todays demanding commercial arenas, enterprises that expect to be profitable must have their business processes flexible and running in top form. Widespread use of outdated processes damage their competitive standing or hold them back. To be effective, enterprise systems must address these issues strategically and systematically. The good news is that companies can identify process inefficiencies and apply a strategy and a technology to effectively improve them.

to manual processes to bridge gaps between the applications. For example, one large corporation consolidated several purchasing organizations into one shared service organization. Not wanting to wait for an ERP implementation, personnel from the new organization needed to be trained to perform multiple tasks on multiple systems: Material code look-up Inventory balance verification from multiple warehouse systems Purchase order entry into multiple purchasing systems. Since the personnel werent proficient with the user interface for each of these systems, incorrect purchase order entries often werent discovered until the goods failed to arrive on the expected delivery date. Business change Business change compounds the inefficiency of enterprise applications by introducing new exceptions and requiring new business processes. For example, many multi-national corporations are now requesting global account information from suppliers. The suppliers must be able to aggregate information from disparate systems, sometimes dedicating several full-time analysts for this manual effort. Process exceptions Many software applications automate the normal execution of a process, but dont address process exceptions, or circumstances outside the typical execution of a process. To resolve an exception, employees often are left with manual processes filled with inefficiencies that drive lost profitability. An example is the monthend closing process for a multi-divisional corporation. When accounts accurately reconcile, everything runs smoothly. But when they dont, the reconciliation process between multiple systems can be tedious and timeconsuming. Some major corporations require sifting through hundreds of thousands of transactions, looking for the discrepancies. Removing the burden of research can accelerate this process by several days. Non-automated or non-optimized processes These processes arent automated by the existing enterprise applications. They are manual or

Enterprises that expect to be profitable must have their business processes flexible and running in top form.
semi-automated and present significant opportunity for improvement. For example, many corporations continue to transmit purchase orders via fax machine. Even if the order is accepted electronically, companies may still need to manually transcribe the order into another system. The manual entry into the order processing system is inefficient and presents a potential for typographical errors. Allowing the authenticated customer order to be transmitted directly into the order transaction system could greatly improve this process.

Uncovering Process Breakdown

Simply put, business processes define how employees perform their daily tasks. Many commercial transactions involve a complex flow of information and decisions and each employee action affects further decision-making down the line. Because processes build on each other, even minor process inefficiencies can be costly. For example, a process inefficiency in one companys order-to-cash procedure caused their days sales outstanding to be significantly higher than those of its competitors 40 days vs. an industry average of 30 days. The various inefficiencies from the order-to-cash process cause a 10-day difference in operational efficiency, translating to hundreds of millions of dollars of lost value. Business process inefficiencies such as these typically occur at the intersection points between people, processes, and systems. Causes for inefficiencies fall into these categories: Silo applications and processes Complex business processes span multiple applications that often arent integrated with each other. Employees turn

Business Process Optimization Principles

Once companies uncover process breakdown and identify its cause, they must improve the process and maximize its value to the company (see Figure 1) with a strategy based on simple principles for process optimization. Although its a developing area, software-based business process optimization is founded on successful business principles: Optimize processes to reduce response time and expedite decision-making. Processes should provide decisionmakers with the necessary data to make quick, informed decisions. They should keep pace with todays accelerated business environment and reduce the need for time-intensive research. Recognize the cross-functional nature of most business processes. Many
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eAI Journal August 2002

automated business processes. Treat business processes as valuable knowledge capital. An effective business process is a valuable piece of intellectual capital a competitive advantage that boosts the bottom line. For example, order cancellations or return requests present an opportunity for a company to negotiate with the customer. Perhaps the customer will accept the product at a lower cost, ultimately saving the company the cost of a return shipment, receiving, reimbursement, and reselling. Processes such as these can be handled effectively only if customer service representatives are guided through a process, having accurate, real-time data (usually from a variety of systems). Leverage existing infrastructure whenever possible. Since the goal of process optimization is increased efficiency and increased profits, redesigning processes to work within the existing IT infrastructure just makes sense. For instance, many companies made large investments in upgrading their transaction systems in preparation for Y2K. Those corporations should not be required to make significant changes to those systems to accommodate business process solutions. Apply principles of continuous improvement. A business process solution should let users track the progress of a process in which theyre participating and let personnel monitor process performance, uncover bottlenecks, and improve processes in

real-time. This ensures the company has the chance to operate efficiently, despite changing business conditions.

BPM operates under the premise that people should not be engineered out of business processes.
enterprises fail to recognize the reach of their business processes, which straddle business functions as well as divisional, geographic, and corporate boundaries. For example, a manufacturing company ships directly to its customers. Communication between the order processing system and the shipper is automated with Electronic Data Interchange (EDI). At least 95 percent of the time, the shipment is correctly delivered, but resolving the 5 percent product delivery problem requires swift, accurate, and easy-tounderstand collaboration between the manufacturer, shipper, and customer. This collaboration must occur with a non-intrusive application. (The manufacturer cannot impose an application implementation on their customers and shippers systems.) These disconnects often slow transactions possibly resulting in cancelled orders and customer defections. Automate processes to increase the consistency of high-quality service delivery. Since many critical business processes are complex and embody decisiontree characteristics, they should include system-to-system, people-to-system, and people-to-people integration. Many EAI vendors already focus on systemto-system, or lights-out automation, but huge efficiencies can be realized by also addressing the exceptions (such as manual processing required for resolving EDI exceptions or issues) within
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BPM: Improving Processes for Profit

Improving and managing business processes can be complex. The key is to accomplish this optimization while leveraging all past investments in enterprise system infrastructure. Business Process Management (BPM), a term AMR Research defines as software that integrates data, applications, and people through a common business process, is an emerging layer of software that helps companies execute the key concepts of business process optimization. It coordinates and manages the business relationships among a companys existing software systems as well as across company boundaries. EAI vendors often include some BPM capabilities. Several companies focus their BPM products to add value to existing EAI technology rather than trying to replace the technology. In either case, the fundamentals of the BPM platform should include: Process modeler An environment where companies build and modify their processes graphically, and define user roles, business rules, and process relationships. If a company must change a process quickly to respond to a changing business condition, it can easily build process guidance within the process modeler so that the the process change doesnt stymie the employee.

Figure 1

eAI Journal August 2002

 Process engine An execution environment for the process defined in the process modeler. It should kick off processes on timed or process-driven events. The process engine controls the process behind the scenes, then includes the appropriate people in the process at the appropriate time. This includes much more than merely sending an e-mail notification, which notifies the user that theres a problem but doesnt include information needed to quickly fix it. Process manager A user environment in which users are given tasks, information, and process steps, so they can execute their individual pieces of a process with no need for additional research or help request. The process manager must be able to include employees, business partners (such as shippers, suppliers, etc.), and customers. Process monitoring Captures process and user performance data for business process analysis, providing different views of the process for personnel executing the process as well as managers overseeing the process. This provides visibility into process effectiveness and delivers the information needed for continuous improvement. BPM moves beyond process automation, which usually attempts to remove people from the business process by managing only system-to-system processes. BPM operates under the premise that people should not be engineered out of business processes effectively managing not only system-to-system communication, but also people-to-people and people-to-system communication. A Web-enabled business process easily enables personnel as well as suppliers and customers to fully participate in the business process. The point is to effectively recognize when peoples knowledge will add value to business processes and design processes to leverage this knowledge as effectively as possible. When executed correctly, BPM software is more than just a simple workflow tool or a document router. It automates processes and manages exceptions when circumstances fall outside the normal process pushing information to the right people at the right time so they can work efficiently to solve problems and get processes back on track. Typically, when an exception occurs

in an automated process, the process stops and costs escalate. This includes hidden costs such as increased inventory levels, delayed cash cycles, and increased cost of goods sold all detrimental to a companys bottom line. In addition, there are direct costs associated with the labor required to manually resolve the exception. BPMs goal is to: Automate processes when it makes the most sense Remove process delays Expedite decisions by providing process guidance and real-time access to the required supporting information. Some EAI vendors offer process management functionality, but when exceptions occur, they typically send an e-mail alert to an employee, notifying them of the exception. Rather than simply alerting an employee that an exception has happened within an automated process, or waiting for an employee to go to a process portal, BPM software should proactively push whole processes out to employees. It should serve up information from the multiple data sources needed to make each decision plus process guidance that steps the user through the process. This keeps processes moving and helps companies handle all their business processes in a consistent, documented way. The ideal BPM platform assures that the process is optimized by capturing process and user performance data for business process analysis. Business process analysis lets companies improve their processes based on concrete data instead of hunches. The BPM platform should be able to expose the data to a third-party reporting application to show the key metrics that represent the bottomline value added to a company after the implementation of the optimized process. BPM software also should be designed to integrate easily with a companys existing enterprise systems. It should not interfere with these IT systems, but drive business processes on top of them tapping into them to deliver important information to employees within the context of business processes. This ensures optimization of a companys existing investments in enterprise software. As an added benefit, the open architecture protects the time investment in employee training. Rather than teaching

Business process analysis lets companies improve their processes based on concrete data instead of hunches.
employees a proprietary technology one that wont be used should the company one day abandon that technology the company can invest time and money training employees in an open environment that will endure.

Optimizing Business Processes for Profits

Though most large companies have implemented enterprise software applications, most still have room for vast improvement surrounding their business processes improvements that ultimately will have a positive impact on their bottom line. By using the key concepts for process optimization executed in a BPM environment, a company can interlace their software packages into an infrastructure that more closely represents its way of doing business. Using this approach, companies will be more responsive to changing business conditions, will optimize their investments in enterprise software, and will see quick, positive results in their bottom line.

About the Author

Phil Gilbert is chief technology officer of Lombardi Software. He has more than 20 years of business and technical experience. Voice: 512-382-8200, ext. 231; e-Mail: pgilbert@lombardisoftware.com; Website: www.lombardisoftware.com.

eAI Journal August 2002

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