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Project Benefit Validation - Lean Six Sigma

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Business Improvement initiatives are getting a lot of press these days: “..our projects saved over $10M in the first 12 months of deployment using BPM” . It seems logical for an organization to jump …

Business Improvement initiatives are getting a lot of press these days: “..our projects saved over $10M in the first 12 months of deployment using BPM” . It seems logical for an organization to jump onto the process improvement bandwagon. Much is promised of business improvement efforts, and there are many capable consultants and companies willing to support a company’s BPM deployment that can last months to years. But how does an organization know that the business improvement efforts will really result in a quantifiable benefit to the business? Process improvement initiatives are not inexpensive to start or sustain over many years, and most executives require the clear identification of benefits to justify the expenditure of training resources and driving project work before approving a long-term initiative.

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  • 1. Project Benefit Financial Validation Brings Rigor and Credibility toProcess Improvement InitiativesBusiness ChallengeBusiness Improvement initiatives are getting a lot of press these days: “..our projects saved over $10M in thefirst 12 months of deployment using BPM”1. Thus, it seems logical for an organization to jump onto theprocess improvement bandwagon. Much is promised of business improvement efforts, and there are manycapable consultants and companies willing to support a company’s BPM deployment that can last months toyears. But how does an organization know that the business improvement efforts will really result in aquantifiable benefit to the business? Process improvement initiatives are not inexpensive to start or sustainover many years, and most executives require the clear identification of benefits to justify the expenditure oftraining resources and driving project work before approving a long-term initiative.Identifying project benefits and estimating an accurate return on investment (ROI) can be very challenging formost organizations. There are several possible reasons why ROI often goes unmeasured. First, someorganizations are satisfied with the general improvement in their financial statements after implementing aBusiness Improvement methodology, such as Lean Six Sigma, and have not deemed it necessary to reconcilethe benefits to the company financials because the company is holistically performing better. Secondly, somecompanies focus intensely on training resources and executing projects in the early stages of a processimprovement initiative, and place secondary emphasis on measuring ROI, believing that the benefits will come.Lastly, some companies attempt to measure ROI, yet they are unsure how to quantify project benefits,especially if their business is focused more in a services industry. In any case, it is evident that even after 35+years after Six Sigma was introduced to the world by Motorola, there is still a significant knowledge gap in howto quantify project benefits and truly link them to a company’s financial performance.As Business Improvement efforts have matured and become more commonplace over the last few decades,many companies assume that simply learning the tools and driving the project to completion will deliver thedesired benefits. The well-reported results of industry pioneers, such as General Electric, Honeywell andDuPont, as well as the pressing need to reduce costs and improve productivity, have encouraged companyleaders to push their teams to undertake process improvement initiatives. Sometimes, after an initial burst ofenthusiasm, these efforts languish over time, because benefits have not been accurately estimated or verifiedas impacting the bottom line. When it comes time to reduce costs quickly, the process improvement initiativemay give way to immediate cost cutting pressures. Sadly, in many of these cases, the process improvementteam has missed an opportunity to bring true credibility to the Business Improvement effort by implementing aprocess that directly reconciles project benefits to the company’s accounting and reporting systems.In some cases, benefits can be reconciled as tangible contributions to the income statement; but in others,benefits may not be so evident during a reconciliation process. In any event, establishing a rigorous projectbenefit validation process is a critical factor in the success of the initiative, ensuring that there is no questionas to the financial impact and effectiveness of the process improvement program.Project Selection and Overall GovernanceIt is widely understood that a strong project governance process is key to the successful execution of projects.An overall project governance process is how projects are identified, selected, executed and reported.However, in most project governance processes, a key element is often forgotten, especially in the earlystages, which typically represents how projects are selected. That key element is Benefit Estimation.Figure 1 below represents a Project Selection Process, which is the front-end of an overall governanceprocess, where we incorporate the critical step of Benefit Estimation: 1
  • 2. Figure 1: Project Selection Process, incorporating a Benefits Estimation stepWhile most organizations recognize the value of properly vetting project ideas and opportunities prior tolaunching a project, many fail to follow the process for every project. Some may launch projects before aproper prioritization effort has taken place, or others may spend too much time in the idea generation phase.Often, organizations fail to estimate potential benefit prior to project chartering or prioritization of projects.Experience has shown that the pressures to get started, or to drive quick results, pushes teams to launchprojects without taking the time to adequately plan or determine probable benefits. This ineffective approachto project selection and prioritization means that projects are often executed without being fully linked to theorganization’s overall strategic goals, and as a result, too many projects are chartered, and few are completedto the company’s expectations.2To understand the value of benefit estimation in initial project selection process, we should consider the valueof a strong benefit validation process throughout the rest of the governance process. Figure 2 illustrates anend-to-end governance process, from project selection through execution and post-project reporting: Figure 2: End-to-End Project Governance Process, highlighting Project Benefit Validation elementsThe circled steps in the process are where a project benefit validation process adds incremental value. Notonly does a project benefit validation process help with initial benefit estimation during project selection, it addsrigor during project execution by defining project benefits with more accuracy and clarity. This facilitatescredible benefit reporting, and establishes a foundation for post-project benefit reconciliation, where benefitscan actually be reconciled to the organization’s financial statements. Simply stated, the benefits driven by theBusiness Improvement effort can now be fully understood as to their impact to the business.While the quick implementation of projects may create energy and short-term gains, the long-term impact isusually negligible, at best, without a benefit validation process. The “quick hits” and “low-hanging fruit” producerapid, easy results for the organization, but without having implemented a true benefit validation process, itbecomes more difficult to quantify more challenging or complicated project efforts.A strong project benefit validation infrastructure can support the business improvement initiative as it maturesand takes on more challenging aspects of the business. It can provide not only the basis for identifying and 2
  • 3. approving projects, but serve as a way to maintain the momentum of the initiative and retain ongoingmanagement and stakeholder support.Our Approach - The RoSS Model™WTA, in conjunction with QuantumSix Solutions, Inc., offers a straightforward approach to project benefitvalidation. Over many years of working with process improvement initiatives, Julie Brignac, a Lean Six SigmaMaster Black Belt, has developed and honed a process and a set of principles to address the challenge ofproject benefit validation. This unique method, The RoSS (Return on Six Sigma) Model™ is an end-to-endfinancial tracking and reconciliation process that delivers the following results for companies striving to betterunderstand and quantify the benefits that their projects are delivering: Ability to customize project benefit financial rules, regardless of the type of project (Six Sigma, Lean, Business Improvement or otherwise) in accordance with specific company financial policies and guidelines; Integration with the company’s general ledger and financial reporting system; Reconciliation of calculated savings with actual financial movements and transactions within the general ledger and reporting system; Integration and comparison with the company’s financials, as included in the project governance process, with the real financial transactions going through the accounting system; Output reporting for key schedules for Management Accounts relating to the improvement program; Ability to quantify and measure benefits that are often regarded as “un-measurable”, which are often critical measurements in terms of productivity gains, and can, in some cases, be quantified as tangible, reconcilable benefits; and, Direct control and governance of the Business Improvement program, including more accurate project benefit ROI, in a way that directly and auditably reconciles to the company’s accounting and reporting systems.The RoSS Model™ integrates guidelines, tools and templates for each step contributing to the project benefitvalidation process, as illustrated in Figure 3: Figure 3: Project Governance Process, incorporating The RoSS Model™ elements 3
  • 4. The key tools of the RoSS Model™ are: 1. Project Benefit Validation Guidelines 2. ROI Benefit Modeling Template 3. Auditing Parameter Template 4. Project Benefit Report 5. Post Project Benefit Reconciliation TemplateLet’s explore how each tool drives a strong project benefit validation infrastructure.Project Benefit Validation GuidelinesDeveloping rigorous Project Benefit Guidelines is key to a successful project benefit validation process. It iswithin this development exercise, and subsequent guideline implementation, that all the project benefit rulesare defined and set. The guidelines house the benefit definitions, project categories, examples, tools andtemplates needed to execute a strong project benefit validation process. For example, while we cannot detailall the elements of the guidelines in this publication, we can introduce the foundational definitions that feed therest of the RoSS Model™: Tangible and Intangible.These terms are mildly different in definition than terming benefits as “hard” or “soft”. Where tangible andhard benefit definitions are virtually the same in that they represent actual savings to the bottom line,intangible benefits are more than savings that are deemed as “soft”. In fact, intangible benefits can often bequantified via margin moves or significant shifts in business metrics, but are usually not reconcilable to thefinancial statements.The RoSS Model™ represents significant advances in the discipline of defining intangible benefits fororganizations, especially service-related organizations. Our approach can define and quantify benefits thatwere once thought to be “un-measurable”, and hence, insignificantly regarded by the financial community.Furthermore, because of our knowledge in measuring intangible benefits, those can often turn into tangiblebenefits, depending on the circumstances of the project and the data that is gathered and measured.In summary, the guidelines are the backbone of the project benefit validation process, and act as anoverarching umbrella through the various stages of project definition, benefit definition and benefitidentification and reconciliation. The guidelines are unique to The RoSS Model™, as they include benefitdefinitions, project categories, financial modeling examples and any reference necessary to accuratelyestimate and report project benefits. This alone saves organizations time and effort in building the guidelinesfrom scratch.ROI Benefit Modeling Template (Benefit Assessment)As previously mentioned, performing a benefit assessment prior to the prioritization and approval process iskey to ensuring that the organization is choosing projects that are aligned with the company’s strategicobjectives. An initial benefit assessment after the project chartering stage also allows proper selection ofprojects to be executed, supports the alignment with the overall strategic objectives of the organization, andallocates resources internally to drive the projects to completion.The RoSS Model™ customizes ROI Benefit Modeling Templates that incorporate the key project benefitdefinitions and categories defined in the guidelines. Furthermore, we work with your organization to transferknowledge so that the financial representatives in your business can build benefit models consistently andeffectively in support of the Business Improvement effort. And, in order to build an effective benefitassessment model, one has to consider three key pieces of information that are incorporated into the benefittemplates: time, resources and volume.The finance representatives, in partnership with the project leaders, can obtain this relevant information froma SIPOC or any process maps, as well as from the strategic objectives set forth by the business leaders. As aresult, we can estimate effectively the amount of time; resources and volume exist from both the current andfuture states. We can then refer to our customized project benefit definitions and project categories (definedin the guidelines), and determine whether the benefits to be derived from this project will be tangible or 4
  • 5. intangible. This initial benefit assessment is powerful information, and allows us to make the best decisions inprioritizing and approving our project work.Auditing Parameter Template (Project Work/Execution)Periodic auditing of project benefits is necessary during the course of the project work so that accuratereporting occurs during the realization phase. A required element to ensure proper review of all activeprojects is to establish auditing parameters for the portfolio.Parameters can be established based on several different factors, such as estimated benefit contribution atrealization or project duration. It is important, however, to establish a rigorous audit schedule that will lendcredibility to your benefit reporting.It is also important to note that periodic auditing facilitates more accurate estimation of project benefits to bedelivered, since better data is gathered during the project execution stage. This, of course, enables morerefined tracking and reporting of benefits, so that an accurate impact to the business, as a result of theproject, can be determined. This process enables significant confidence of project benefit reporting anddelivery to the organization.Project Benefit Report (Track and Report Benefits)The most significant result of implementing the RoSS Model™ is to guarantee accurate reporting of projectbenefits, since the RoSS Model™ defines financial tracking and reporting to a level that fully integrates with thecompany’s financial infrastructure. The implementation of the RoSS Model™ also drives an appreciation forbenefits that impact the company’s objectives – and whether they are tangible or intangible in nature.For example, if a company’s primary goal is to improve customer satisfaction, the RoSS Model™ enables thequantification and reporting of this intangible benefit. The benefits will not be directly reconcilable to thefinancial statements, but it does not mean that the projects driving the improvements are any less importantto the organization.It is important to note that while the initial benefits in some scenarios are deemed intangible, the RoSSModel™ can assist in the determination of related benefits for an intangible-focused project that may indeedaffect the financials with tangible benefits. For example, those projects focused on productivity related effortsinvolving headcount can initially be identified as intangible if the organization does not plan to remove theassociated costs of the headcount. In this case, the benefits are certainly intangible, yet can be quantifiedbecause we understand that we are doing more work with the same amount of people. However, if a decisionis made to remove that headcount from the organization, those costs are now removed, and become tangiblesince the RoSS Model™ can track the removal of those costs directly to the profit and loss statement. Insummary, the RoSS Model™ facilitates important discussions and allows the organization to make betterdecisions based on better data – driven by improved financial rigor.Post Project Benefit Reconciliation for Tangible or Intangible ResultsOne of the most significant features of the RoSS Model™ is the ability to reconcile tangible project benefits tothe company’s financial statements, or determine that projects are driving benefits that are not reconcilable.In the case of reconciling tangible benefits, we design a specific template that mirrors the organization’s profitand loss statement, while feeding the tangible project benefits into the reconciliation process. As a result, thecompany can clearly identify benefits derived from the projects, and has access to an estimation tool thatdetermines future fiscal year goals and deliverables.ResultsThe implementation of the RoSS Model™ drives significant improvement in ROI accuracy, project reporting andfinancial internal controls for Business Improvement projects. The model can be implemented during anymaturity stage of a Business Improvement deployment, and is effective regardless of whether or not thecompany uses a project management portfolio database. When the model is paired with a portfolio database 5
  • 6. solution, a deployment has all the necessary elements to drive world-class project governance and thesuccessful completion of Business Improvement projects.The RoSS Model™ can be implemented effectively and efficiently with little to no onsite consulting time. Anorganization benefits from the implementation of the process – not solely from customized guidelines ortemplates. It is this financial process and the knowledge driven through the project governance life cycle thatbrings rigor and credibility to the benefits of a business improvement initiative.Our Value PropositionThe value proposition of QuantumSix Solutions, Inc. is to save organizations time and effort in implementing astrong project benefit validation process. We do this by customizing our intellectual property for anorganization, based from our standard, pre-authored guideline documents and benefit measurementtemplates.We offer standard Project Benefit Validation Guidelines for both product and service related industries, as wellas specifically crafted base guidelines for the utility, banking, financial services and manufacturing verticals.We offer customized templates for tangible and intangible project benefit modeling, auditing documents forproject execution benefit tracking, financial statement reconciliation templates, and a series of trainingdocuments on The RoSS Model™ for both finance representatives and project leaders.The RoSS Model™ has been successfully implemented in various industries, including mining, manufacturing,television media, government, hospitality, banking, utilities and financial services. The RoSS Model™ can alsobe implemented for any projects within operating functions, such as strategic sourcing, operations, logistics,finance, sales and legal.Footnotes:1 Actual performance from a Lean Six Sigma effort for a document management company located in Atlanta,GA2 QuantumSix Case Study of selected Fortune 100 companies, published October 2009 About WillowTree AdvisorsWillowTree Advisors is a consulting firm based in Denver, Colorado and providing business transformation and globalization services to commercial businesses, state and local governments, and the Federal government. We specialize in helping clients achieve outstanding results with their existing resources and to build new service delivery models to meet the challenges of their business. WillowTree Advisors utilizes the RoSS Model™ in its business transformation initiatives. About Quantum Six QuantumSix focuses on helping organizations implement a Project Benefit Financial Validation Process for all project efforts. QuantumSix has implemented the RoSS Model™ in various industries for clients such as the Federal Reserve Bank of New York, PNM Resources (the largest utility firm in New Mexico), Sandvik Mining, Honeywell and Brambles Limited. Other clients include Nestle Purina, Bloomberg Television, Orica Manufacturing and Space Florida. 6
  • 7. WillowTree Advisors, LLC3773 Cherry Creek North DriveSuite 575Denver, Colorado 80209P: 888.998.0008E: support@willowtreeadvisors.comwww.willowtreeadvisors.com 7