Figure 1: Revenues and Operating Expenses by Industry Vertical in the U.S.
Operating expenses as a percentage of revenue varies from a low of about 30 percent to as high as 80 percent. Internal business processes contribute almost all or at least a large part of the operating expenses in any company. Even a 10 percent reduction in business process costs, reduces operating expenses and increases the bottom line directly. Quite often, it doubles or triples its profits right away! More efficient and effective business processes delight customers, increasing sales, contributing even more to the bottom line.
Process improvement is no longer a luxury or nice to have. If a company does not do it, its competitors will. Online mortgage lenders have cut down the cycle time for mortgage lending to around 10 days or so. It used to be three weeks or more. Traditional mortgage lenders have to improve their mortgage loan processes to match or exceed these cycle times. Businesses such as Dell Computer Corporation are using the Internet to execute their order-build-deliver models for sales, often completing the whole cycle in 10 days or less. Its competitors have been forced to radically change their own business processes to compete with them on an even footing. The key questions then to ask are:
- Do you even have a precise list of key business processes in your company?
- Do you know how well your business processes are doing with respect to quantitative and qualitative measures?
- How did they do last week, last month, last quarter and last year? Are they improving? Deteriorating? Or in steady state?
The Balanced Scorecard and Process Warehouse
The Balanced Scorecard3 outlines four sets of measures of a company's performance:
- Financial Perspective - This pertains to the financial performance of the company. What are our financial objectives, measures, targets and initiatives? How did we actually do financially when compared to targets? The financial and accounting systems and the financial data warehouse help assess this perspective.
- Customer Perspective - This pertains to the customer. Who are our customers? How did we do with respect to them? What are our objectives, measures, targets and initiatives? How did we actually do sales-wise, when compared to targets? The sales reporting systems and the sales data warehouse help assess this perspective.
- Internal Process Perspective - This pertains to the business processes of the company. What are our processes? What are our objectives, measures, targets and initiatives in the area of business processes? How did we do with respect to them? The process warehouse will provide us this information.
- Learning and Growth Perspective - This pertains to the learning objectives of the company and its employees. Is the organization improving and learning to improve? What are our objectives, measures, targets and initiatives in the area of learning and growth? Currently few organizations have formalized and are tracking this area. Kaplan and Norton acknowledge this in their follow-up Balanced Scorecard articles and books.
Figure 2: The Balanced Scorecard and Process Warehouse
What is a Process Warehouse?
Bill Inmon coined the term "data warehouse" in 1990. His definition is: "A (data) warehouse is a subject-oriented, integrated, time-variant and non-volatile collection of data in support of management's decision making process."
- Subject-oriented - Data that gives information about a particular subject instead of about a company's ongoing operations.
- Integrated - Data that is gathered into the data warehouse from a variety of sources and merged into a coherent whole.
- Time-variant - All data in the data warehouse is identified with a particular time period.
- Non-volatile - Data is stable in a data warehouse. More data is added, but data is never removed. This enables management to gain a consistent picture of the business.
This definition could not be more appropriate in the context of processes in an organization (see Figure 2). The process warehouse is a process-oriented, integrated, time-variant and non-volatile collection of data that helps management get a handle on its internal processes. Given the enormous amounts of its money it spends on processes, the first step toward improving them is to create and utilize the data that can support it in its efforts.
