How To Estimate How Much Cash a Process is Leaking
The simplest tasks at high volume become ridiculously complex.
Compute the commission on a few sales transactions is stubby pencil work. Try running a commissions payroll for 19,000 sales people selling hundreds of items, each with its own commission schedule because marketing wants to incentivize the sales force? Best swap pencils for an Oracle or Teradata platform. Which is what a company I triaged a few years ago did over a decade of solid growth. Did I say it was hemorrhaging cash? It had to process over a million point-of-sale records per month and was creating over a net 100% paycheck errors.
So we know a process at some volume will need oversight and end-to-end monitoring. When should we think about biting the bullet and buying some dedicated process metering and management? Some continuous process improvement?
Here’s a simple calculation to indicate when you need to deliberately manage a process and put it into a state of continuous improvement.
Step 1: name the process and set its boundaries, from what triggers it to its final work products:
- Manufacturing from Factory Order Received to Installed and Accepted.
- Loan Processing from Loan Submitted for Processing to Cleared for Close
- Site Construction from Design Finalized to Client Accepted
Step 2: Estimate how much cash this process is consuming per month. Include direct and indirect costs, such as labor and floor space rents. For labor, use a loaded labor rate, which is base salary + 20% (for benefits and some office automation). Round it to the nearest $5K — just ball park it. If the process generates revenue, add the average monthly revenue (before accounting adjustments) on top of the expense amount.
Step 3: Consider how capable this process is, in terms of how well it runs. Is there a lot of rework or rejects? Is there a lot of employee turn over? If this process is not running effectively and efficiently — whatever those terms mean in your context, then what percent (%) is it under-performing? 10%? 15%? 35%? A SWAG (Scientific Wild Arse Guess) is okay, but be conservative.
Step 4: Multiply the amount of monthly spend (from the second step) by the previous percentage. That’s how much cash your process might be bleeding monthly. So multiply that number by 3 to see how much you’re spilling per calendar quarter.
For example, a $2,000,000/month process that is 15% not capable enough suggests $300,000 x 3 = $9ooK could be put to other use if we could see and stop the leakage.
So now you know if you need to buy some deliberate process management — if your estimate of the process’s capability shortfall is greater than the cost to make it capable.
The ability to not spill this$300K/month (insert your cash amount here) will cost two things:
- The cost to know what the best capability improvements might be — the Cost of the Improvements List, and
- The cost of improvements on the list your team cannot get to, taking nothing else off their plate — the Cost of Not Yet’s.
Our flagship service, the Process Triage Immersion Workshop, generates this list of typically 20 improvement proposals that:
- Have the absolute buy-in by the producer / performer experts that must implement and live with these improvements AND…
- Will improve the process’s capability (speed, use of cash, work product quality, scalable volume, better cross-silo work flow, etc.). AND…
- Thereby better deliver the process’s share of your overall financial goals, AND…
- Will specifically consider the impacts to your customer’s experience and your (CEO’s) bottom-line impact, AND…
- Based on a completed staff work recommendation by the manager I choose, be achievable in the next 90 days, or have a price tag for what can’ be delivered that fast, AND…
- It will only pull my best expert producers off the line for only one day, as a team, to deliver this raw, unassigned and unscheduled list for my manager to analyze and submit in an execution plan with10 days afterward, AND…
- The immersion experience of producing this first list is absolutely repeatable if I need this team to refresh the list with minimal, optional outside facilitation.
So the kind of list we’re talking about is not your grandpa’s Suggestion Box, or organization survey. Our Process Triage Immersion Workshop produces this list with your own process experts in ONE DAY of their time (and about three days of our certified facilitator’s effort).
What would you pay for this ProcessTriage quality list?
You will continue to bleed this much cash, monthly, until you do something about it.