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Activity Costing, Process Improvement

Removing cost is not the same as adding value!

I had an interesting e-mail from a reader who had enjoyed my article on Measuring Process Value-add and sharing an example where their organisation had achieved some cost-savings, but questioning what had happened to value.

The situation was this:

An internal Travel Department has to reduce headcount and its staff working hours. The solution is to pay the external Travel Agency more per month and have all the other employees spend a lot more time booking their travel requirements. However, when reporting the department monthly value add they report increased external cost (agency extra) and savings (due to reduced staff hours) and end up with very big saving.

What had happened to value?

This is very interesting! If I have understood correctly, what the organisation has done is remove some “Business Value Add” but add overall process cost AND annoyed the customer!

The customer has to do more work, the travel agent has to do more work and, although there is a cost saving in the budget of the Travel Dept., the overall process cost is probably very little different.

It’s quite easy to build a simple model of the two processes (before & after) and you can substitute your own numbers to work out the financial impacts. In my example below, they may have saved some cost for the organisation, but they’ve not added any value because the cost to the customer has increased. Moving to a self-serve process need not add cost to the customer, but if it does, there must be some actual benefit to the customer to make it worthwhile. In this case, it’s unlikely the customer would get the travel tickets any quicker or cheaper.

It looks like their “process improvement” has simply redistributed work content elsewhere in the end-to-end process. This is a classic example of not measuring the end-to-end process costs and taking a functional perspective. Read more of my articles on Process Improvement.

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