What are the challenges in integrating Lean and financial planning analytics to achieve breakthrough process improvements? Brian Higgins, Principal at Management Resource Technologies talked to APQC about that and how Management Resource Technologies created over create over $30 million in financial improvements.
Brian Higgins will be presenting “Integrating Lean & Financial Planning & Analysis to Achieve Breakthrough Improvements” a breakout session at APQC’s 2015 Process Conference on October 29-30.
What is the key to make sure financial and operational performance is linked to the business strategy?
Brian: Conceptually, it is as simple as ensuring that the things your organization does align with the strategic direction of the organization and those that do not are targeted for elimination or reduction. Sounds simple, but it is a bit more complicated. First, all organizational processes and activities (at least at a high level) should be identified and costed with experiential information captured and assigned. Then you can determine which processes either align or do not align with the strategy and understand their financial impact.
How does integrating Lean with financial planning & analysis (FP&A) achieve breakthrough improvements in financial and operational performance?
Brian: The basic tenets of Lean are conducting work using less resources and/or time, eliminating waste, and aligning with the production of customer (internal and external) value—unfortunately, often without adequate information to measure the financial impact. Conversely, FP&A often focuses on costs without the criteria as to whether the expenses are economically creating value. Also, FP&A focuses on cost reduction and may exclude enhanced revenue generation created by improving customer value. Each viewpoint - Lean and FP&A - can mutually benefit from the tenets of the other—enhancing the value proposition in the most economical fashion.
What is the main reason companies hesitate to integrate Lean with financial planning & analysis?
Brian: Not sure companies hesitate as much as they may not know the combined benefits of integrating the two methodologies to achieve improved performance—producing outcomes that exceed the benefits produced individually. Lean is often applied at the operations level whereas FP&A may be more overarching and focus directly on costs. Lean practitioners often rely (unquestioning) on FP&A personnel to provide needed financial information – information that may be faulty and/or misleading. Lean projects are often selected based on intuition or the “squeaky wheel” rather than a thorough financial and operational diagnosis—there is little benefit in improving something that should not be done in the first place.
What specific part of Lean management in financial planning is the biggest challenge to integrate with stakeholder experiential data?
Brian: Capturing experiential stakeholder data (e.g., employee, customer, and competitive customer) can be a challenge because the concept of gathering such qualitative data is often foreign to finance personnel, much less linking this information to internal processes. Additionally, understanding the real value of such information as compared to focusing on what makes finance personnel feel most comfortable—financial data. Costs have little to do with value, but tying customer input with process/activity costs helps define mismatches between the level of value created and the costs to create that value. Such mismatches pinpoint areas of opportunity to achieve the tenets of Lean at optimum costs.
A recent APQC survey regarding barriers to improving FP&A indicated that finance personnel are consumed by basic tasks, they may have insufficient access to operational metrics, and insufficient knowledge of strategy. As a result, they need an efficient and effective tool that addresses these barriers—a combination of Lean and FP&A that quickly identifies breakthrough opportunities for improvement.
You were able to create over $30 million in financial improvements. How did you identify the key areas necessary achieve maximum improvements? What advice would you give another company trying to do the same thing?
Brian: The method used to identify the most opportune improvements is through a number of diagnostic tools. First, the profitability of each line of business (LOB) is assessed, focusing corrective action (or elimination) on those LOBs that are not performing as expected. Then unnecessary overlap and duplication is identified—$12 million was identified because one department duplicated the work of another. Next match compensation to job requirements (e.g., highly compensated employees performing tasks that could be performed by less-expensive personnel)—having people do more of what they should be doing and less of what they should not be doing (a Lean concept). After that eliminate non-value-added activities – from sales alone, allowed greater concentration on their mission of “revenue generation” that produced a 15 percent increase in revenues; resulting in a projected net increase in profitability of over $9 million. Finally there is re-pricing the LOBs based on the value provided rather than on the costs of production or competitor’s pricing which added millions to the bottom line.