Companies seem to go through an irreversible life cycle that leads them towards specialisation, complexity and functional parochialism. However hard a business tries to avoid the situation developing, the entrepreneurial start of the business, where everyone can virtually do any of the necessary tasks within it, slowly evolves into functions. Is this a barrier to improvement? In his fourth article for FSN Brian Plowman, contributing FSN author and managing director of Develin & Partners suggests that processes not functional hierarchies need to prevail if businesses are to perform efficiently and keep a lid on costs.
Functional fiefdoms are clearly a barrier to performance improvement. As functions clone staff together over the years, the rigid development of formal functional structures leads them to become fortresses, the contents of which become the jealously guarded property of the occupants. Inside each fortress allegiances are high and people speak their own language, a mechanism to spot intruders and confuse communication.
Organisations are hierarchical, although the transactions and workflow that provide services and products to customers take a horizontal path through the business. The traditional management structure causes managers to put functional needs above those of the multi‑functional processes to which their departments contribute. This results in departments competing for resources and blaming one another for any of the company's inexplicable and continuing failures to meet or exceed current customers' needs efficiently.
In highly functional organisations the different lines of command inside the 'functional silos' create conflicting priorities along multi-functional processes. The performance measures are functional and tend to make functions compete, often at the expense of the customers. There is poor end-to-end visibility of what drives what inside the business. In these circumstances, management loses confidence in the decision support information if it is based on mirroring the functional structures.
ABM can be helpful because it takes a process view. Internally, the delivery of products and services to customers is the end result of co‑ordinated activities by different groups working within the business. A process can be identified at many different scales. At the two ends of the scale we could have the process of building a ship and the process of authorising an invoice for payment. Conventionally, a process is defined as a set of linked activities across a number of departments. The 'Purchasing Process' shown in the figure below is a typical example.
A list of all the activities found in an ABM analysis may be interesting in its own right but the primary objective should be to examine all or part of the company's processes to develop implementation plans to improve efficiency and effectiveness. In overall terms, a key driver for change could be that costs must reduce while simultaneously improving quality and customer service.
A fundamental requirement for success of any process improvement programme is the notion of internal customers and suppliers working together in cross-functional processes. An ABM database of activities showing the activities in processes provides this perspective and is an objective basis for:
- understanding any current failures to meet external customers' needs;
- challenging the existing output or levels of service, both externally and internally;
- evaluating the benefits of improvements of methods;
- understanding cross-functional organisational relationships;
- understanding the interactions within multi-functional processes;
- and identifying and evaluating systems opportunities.
ABM helpfully provides a simple technique to look at processes. Process mapping is a powerful method of tracking the cross-functional flow inside a business process. Such maps quickly highlight failure feedback loops and potential over-complication within a process. The emphasis needs to be on understanding the interaction between the people and the processes in which they work particularly the points where the processes cross-functional boundaries.
Process charting will also raise a number of issues concerning conventional departmental and functional budgeting procedures. In a typical budget statement for a purchasing department, extracted from the monthly accounts, one finds that the accounts headings are to do with the resources that go into the department. The headings would include such things as staff costs, travel, telephone, stationery, and premises, computer charges and so on. However, the ABM activity analysis raises questions around the type of activities and why they exist.
One of the activities of a purchasing department is 'assessing needs'. This involves deciding which supplier should quote for the component. The process defines how activities in one department are driven by the outputs from another. If there were no new parts coming from the Design Department then there would be no requirement for the activity in Purchasing. If the activity were associated with finding suppliers or prices for a part that was on its third modification in three months, then we would focus on what is now driving the activity. The design office may have rushed an inferior design into production and the rate of design change reflects putting the subsequent problems and warranty claims right.
A key aspect of ABM is the emphasis that is placed on achieving a process perspective of the organisation and constructing the model in a way that focuses effort on finding ways to improve processes and make it transparent how costs within processes are driven.
The next article in this series challenges the way organisations look assess the usefulness of business activities.
Related FSN reading
Why Activity Based Costing may be just the tonic in a downturn
