Benefit Realization, Accountability and Governance
To realize cash benefits, action must occur. With each action, there should be a plan that will document the steps needed for value realization. This will include the activities involved, the responsible individuals, comparing actual value realization to projected, and managing the inevitable variances that will exist.
As mentioned in Chapter 1, arguably, the most important step with improvement projects and realizing cash benefits is execution. Without execution, activities necessary to realize the benefits will not happen. With poor execution comes the potential for poor results. This chapter focuses on how to execute to ensure benefits will be realized to the greatest extent possible. The five steps that will help improve the quality of the execution and to help ensure that desired cash benefits are realized are:
1. Identifying the steps to value creation;
2. Identify responsible party or individual;
3. Determine cash value realization;
4. Assess and manage variances;
5. Capture positives and negatives for use with future project.
Identifying Steps to Value Realization
To this point in the book, we have discussed what is necessary to ensure cash value realization with our implementation projects. It starts with documenting, specifically, how the project increases the efficiency of capacity. As mentioned previously, there will be steps that must occur to realize the cash value by taking advantage of the efficiency improvement. With the improvements and requisite steps to improve business performance documented via capacity maps in the OC Domain, we look for the excess or residual capacity that may exists to identify ways to either reduce cashOUT or increase cashIN.
These steps need to be included in the final project implementation plan and have to be acted on to realize improved cash value. One of the challenges I’ve made to those practicing lean, for instance, is that the programs do not go far enough in terms of realizing cash value. Most implementations stop at the business value step.1 Lean focuses on the elimination of waste. This will increase the efficiency of the input capacity but unless specific steps are taken to change input capacity levels or what we pay for input capacity, companies are primarily just moving down the isocash curve, thereby realizing cost savings without necessarily achieving cash savings. What is necessary, instead, is to determine what improvements to capacity can be made as a result of the elimination of waste, and describe the steps necessary to realize the improvement. Lean typically does not go so far as to focus on reducing cashOUT.
Say, for example, you want to get rid of excess slow moving and obsolete inventory for space purposes and to get the inventory off your books. There are several steps involved including, but not limited to activities such as identifying the criteria for inventory to be considered slow moving or obsolete, identifying the inventory that meet those criteria, identifying disposition options, modeling the financial implications of the disposition options, identifying demand for the inventory, agreeing on the transaction, agreeing on the timing and method of the inventory transfer, executing the transfer, organizing remaining inventory to take advantage of the extra space capacity created, and capturing the transaction in the company books. This would be an example of the steps involved in value realization from reducing slow moving and obsolete inventory.
Once we’ve identified the steps in detail, we will need to identify the person who is responsible for executing the steps. Most ideal is when they are a part of the process of scoping the management action, but even when they are not, we want names to assign to actions as soon as possible. Too often, not only are the steps to achieve value not identified, when they are identified, there is initially no responsible person chosen to lead the effort. Many steps to handle inventory disposition, for example, should fall under the supply chain group while others may be tied to accounting and possibly sales. The individuals responsible for managing the disposition activities should be selected well before implementation. This is important for the following reasons:
1. When the project is being scoped this person can ask clarifying questions, challenge assumptions, and help set the direction and the action plan;
2. To assist defining governance;
3. The implementation team can get commitment from those responsible for the implementation.
Scoping
As steps to achieve changes are being identified, the person responsible should be actively involved in validating the steps and defining how the changes will be executed. They will be the person making the decisions, coordinating activities, and who understands the risks, so their input should be sought regularly here to execute the changes properly.
Governance
Resolving governance issues is critical when it comes to execution, and the responsible individual can help with governance strategy. One of three situations is often the case. The first is that the person responsible for making the decision does not have the authority to do so. They may find an inventory disposition partner, but does not have the authority to conduct a business transaction with them. The second scenario is when a decision needs to be made but no single person has been identified to own the action. For instance, an agreement is made for there to be a transfer of inventory, but no one with knowledge of how to make this happen has been assigned the task to do so. The third is when there is an overlap in governance, where multiple people or groups may be responsible for management action or execution. What if, for example, both merchandising and supply chain were responsible for managing inventory in a retail setting? These two groups may have opposing performance metrics, as merchandising may want to maximize gross margins while supply chain wants the inventory gone. If both are partially responsible for managing inventory levels, how are decisions made and executed? What may be good for one may be detrimental for the other.
There is a risk associated with inaction here. By not establishing governance, steps involved in value realization may meet with resistance or inaction, and that will create more risk, which puts cash value realization in jeopardy. With establishing ownership and discussing challenges associated with executing the plans, risk mitigation plans can be put in place. For example, if the organization realizes that, by reducing inventory via reducing prices to increase demand, certain merchandising metrics may be affected negatively, the organization may suspend the impact of the negative metrics for merchandising personnel for the overall good of the firm. This happened at a customer who was a large computer manufacturer and whose inventory turns policy became a constraint for a solution deployment group’s ability to deliver solutions. This constrained revenue. After showing the operational, cash, and accounting impact of relaxing the requirement, we were able to increase the deployment rate by 150 percent, thereby increasing sales and cashIN.
Commitment
The final step is the commitment to action by documenting ownership of the various steps. Once defined, we can create plans to execute the project and assess progress on the managerial steps. Figure 9.1 represents an example of a chart that has been used successfully to represent the steps necessary to achieve the value, the responsible individual, and the rate of execution. A chart like this can be used by project managers to assess the progress toward executing the necessary steps by the responsible individual. To assess progress, for example, you can use percent complete and fill in the boxes with green, which means the activities are on task, yellow, which is caution suggesting there is a risk of missing deadlines, and red, which signifies a problem, so that attention and resources can be applied to the issue to ensure progress can continue in an effective way.
Figure 9.1 This is an example of how we can document the management actions required, the person responsible, and their progress toward completion
Determine Cash Value Realization
As the steps are being executed, progress toward realizing value is occurring. Teams should document when this happens, and the size of the value realized. As such, a cumulative tab for the amount spent and saved can be kept and reviewed, and the information can be represented as a curve representing cash value realization (Figure 9.2).
Figure 9.2 Through implementation, cash value will be realized. This value can be shown in a cumulative value realization chart
In this step, we then compare the actual realization to the projected realization via reviews and audits (Figure 9.3). When comparing the two, we will likely come across variances, differences between what we expected to happen and what did happen. There are four key factors that lead to this variance:
1. The value opportunity is larger or smaller than expected;
2. Activities happened earlier or later than expected;
3. Value realizing activities did not occur at all;
4. Additional value realizing activities were identified and executed.
As you go through key milestones, it will be important to note the variances and the cause of the variances. If the variance is a timing issue, overall project value realization may remain the same, but the realization schedule may be accelerated or delayed. If the variance was caused by incorrect assumptions, these assumptions should be documented. This will allow the team to explore other options in the hopes of salvaging some of the initially defined cash value if the impact of the incorrect assumptions is negative. When positive, the assumptions can be shared in case they can improve performance on other projects. Either way, the expected cash value should be adjusted accordingly. It is important to note this may affect other areas of the project, so those, too, should be updated as appropriate.
Figure 9.3 When we have our projected benefits, we can compare the projections to actual value realization. The variances can be discussed to understand the sources of why reality differs from the original projections
After discussing variances, there should be a set of activities identified to improve or document the variance.
Capture Positives and Negatives
Throughout the entire improvement project process, several assumptions have been made and many activities have occurred related to the project and project management activities. Some of these were good and should be incorporated in future projects or with project management activities. Some were not and should be excluded from future projects. These learnings should be documented and shared so that future projects can realize greater benefits in the future.
Key Takeaways
1. Execution is key, but it is beyond just execution. We should diligently plan our benefits and compare our realization rate to what was planned.
2. It is important to identify the owners of the managerial actions. This will ensure you have someone who owns the process when implementing and that you give them the ability to provide input to the activities they will be leading.
3. Governance is important. Ensure those responsible for implementing have the ability to act and that their ownership is clear.
4. Variance management is also important. Value opportunities can slide or, worse, disappear when not managed and the leaders are not held accountable for their realization.
1 R.T. Yu-Lee. 2011. “Proper lean accounting.” Industrial Engineer (October): pp. 39-43, R.T. Yu-Lee. March-April, 2006. “Determining the Financial Value of Implementing Lean.” Journal of Corporate Accounting and Finance, pp. 79–88.