Continual Process Improvement

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“Identifying and Refining the Correct Business Processes for

Continual Process Improvement ”

May 7, 2008

Overview

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TALKING POINTS

• We do the right things to accomplish our mission (operational effectiveness)

• We do things right (operational efficiency)

• What is your concept of operations?

• Implementation of audit recommendations is essential to improving operations BUT why it’s not the end game

• Controls over operations

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TALKING POINTS

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• Reliable program and performance data

• Using process maps to move from detect and correct controls to prevent controls

• Putting it all together

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“Identifying and Refining the Correct Business Processes”

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OPERATIONAL EFFECTIVENESS

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A strategy, or lack of strategy that commits a company to constantly trying to improve the effectiveness of its processes. Taken to the extreme it results in hyper-competition. (Compare with Positioning.)

Any organization consists of tangible and intangible assets. An effective organization is one where all these assets are fully integrated and their utilization is optimized.

Operational effectiveness refers to the effectiveness of the operation of internal control procedures. Management impliedly assert that internal control procedures are effective as to their operation. If an auditor plans reliance on these controls, the auditor gathers evidence of such effectiveness.

Three major components that influence Operational Effectiveness – the people, the physical work environment, and processes used in the workplace.

OPERATION EFFICIENCY

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Operational Efficiency occurs when process, people, and technology come together to enhance the productivity of an operation, while driving down the cost of routine operations. The end result is that resources previously needed to manage operational tasks can be redirected to new, high value initiatives that bring additional capabilities to the organization.

Warning: Systems designed to increase operational efficiency can have the counterintuitive effect of lowering efficiency and increasing cost by introducing processes that don't reflect the adopting organizations business model.

END GAME

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CONCEPT OF OPERATIONS

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Concept of Operations is a high level requirements document that provides:

– purpose of a system

– business needs that a system will satisfy

– user expectations

– basic concepts behind a system

– system's characteristics and behaviors from a user's point of view

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Past

Unique Hardware and Software for Computing Infrastructure

Closed/Proprietary Architecture/ Interfaces

Mission Capabilities Created By the Combination of Unique Software and Hardware

COTS Based Hardware and Software Computing Infrastructure

Application Software

Standard Application Program Interface

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Present

Commercially Available Technologies for Computing Infrastructure

Open Architecture Using Commercial Standards for Interfaces

Mission Capabilities Created By Reliable, Dependable, Durable Software Applications

Future

Extend Open Standards to Focus on Interoperability (Net-Centric)

Utilize High Throughput of Commercial Technologies to Address Automation and Supportability

Tightly Linked Interfaces

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CONTROLS OVER OPERATIONS

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Legal Services Corporation

Effective internal controls over grants and grantee oversight are critical to LSC as its very mission and operations rely extensively on grantees to provide legal services to people who otherwise could not afford to pay for adequate legal counsel.

U.S.-China Economic and Security Review CommissionThe commission’s organizational structure and management policies and procedures have

weaknesses and are not in accordance with GAO’s internal control standards for the federal government. The commission has not formally defined and assigned key management duties and responsibilities that are typically divided or segregated among different people. Also, policies and procedures were insufficient, incomplete, or not adequately documented.

2010 CENSUSTo conduct a successful census, The U.S. Census Bureau must produce complete and accurate

address files and maps. To mitigate risks in Census must set firm dates to complete research and evaluations and develop action plans; evaluate the schedule and staffing workloads; and assess resources needed to update the address file and maps along the Gulf Coast.

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Proven methodologies for performance measurement include:

Benchmarking

Balanced scorecards

Communicating performance results

Incentive compensation design

Performance measurement systems (Program Assessment Rating Tool)

RELIABLE PROGRAM AND PERFORMANCE DATA

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What is the Balanced Scorecard?

The balanced scorecard (BSC) is a strategic planning and management system used to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organizational performance against strategic goals.

The balanced scorecard identifies four perspectives from which to view an organization.

These are:The Learning and Growth Perspective The Business Process Perspective The Customer Perspective The Financial Perspective

http://www.balancedscorecard.org/

PERFORMANCE

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PERFORMANCE

How does OMB Score a PART Rating?Program Purpose and Design (20%)Strategic Planning (10%)Program Management (20%)Results (50%)

By 2006, 977 Federal Programs were reviewed:Results Not Demonstrated (22%)Ineffective (3%)Adequate (28%)Moderately Effective (30%)Effective (17%)

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The Federal Aviation Administration’s (FAA) Air Traffic Organization (ATO)

Because ATO’s acquisition performance measures lack objectivity, reliability, coverage of core activities, and clarity, and focus only on the preceding year, they may not provide a valid assessment of performance over time. On the positive side, the measures are aligned with FAA’s strategic objectives, are measurable, have no overlap, and address governmentwide priorities.

PERFORMANCE CRITERIA

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Continual Process Improvements

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PROCESS

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Main tools used for improving administrative operational efficiency:

Mapping: Accurately charting your operations using diagrams and flowcharts to visualize problems and improvements

PARETO (the 80/20 Law): Targeting 20% of the causes will resolve 80% of the problems

Benchmarking: Setting standards by measuring your performance and comparing it to similar companies and to industry best practices

Continuous improvement: Making ongoing efforts to perfect the way you do business by reducing time, cost, space, mistakes and effort

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http://www.realisation.com.au/site1/Articles/Operational%20effectiveness.htm By Onno van Ewyk

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What is Process Mapping?

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Process mapping is a workflow diagram to bring forth a clearer understanding of a process or series of parallel processes.

Most organizations that process map use one or more of the following:

– Deming’s Total Quality Management model

– International Standard Organization criteria

– Balanced Score Card

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ISO Criteria

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Process Definition: Key processes capable of delivering services and/or products that meet client needs, are designed and documented.

Process Control: Key processes are monitored to ensure consistency in services and/or products provided; and Problems are analyzed, root causes identified, and actions taken to prevent recurrence.

Process Improvement: Key processes are analyzed to determine opportunities for continuous improvement, through incremental refinement and/or fundamental redesign, including potential for reallocation of service delivery; Process improvements are implemented and monitored, and all changes are documented to ensure consistency in service delivery and/or products provided; Clients and suppliers are involved in continuous improvement activity, for example in problem-solving and improvement teams; and External information is gathered and used to compare performance and to identify opportunities/ideas for improvement.

Results of Actions in Process Management: Indicators of the effectiveness of the design process for new services and/or products, such as cycle times and frequency of process design changes; and Levels and trends in process capability and cycle time for key service delivery and/or production processes.

Continuous Improvement: The organization evaluates and works on improving its approach to process management

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Key Process Terms

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Cycle TimeThe rate at which items are completed for some process stage. If there is only one work station for a process stage, then process time equals cycle time. If there are more than one work stations for a process stage, then cycle time equals the process time divided by the number of work stations. Each process stage has a cycle time, and the operating unit overall has a cycle time. That is, the operating unit has a rate of output, which is established by the bottleneck resource. Note that in many companies, cycle time is used for the definition of throughput time listed below. Be clear on what is meant!

BottlenecksA bottleneck resource is the resource that constrains or limits the output of the overall operating unit. In a line flow process design, the bottleneck is the process stage with the highest cycle time. In a job shop or batch process design, the bottleneck can be more difficult to identify. Certain pieces of equipment and/or specific people may be used at multiple process stages. The equipment or the people may be the constraining resource.

BalanceBalance refers to the evenness of work load across work stations. For example, if a line flow operating unit has a bottleneck resource which creates significant idle times for the other work stations, then we would say that the operation had poor balance. If there is little idle time, then the operation is well balanced.

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Key Process Terms

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Capacity UtilizationThe percent of an resource's capacity that is utilized by by the demand placed upon the operation. Note that we normally would think that higher is better, yet in a service operation, this must be tempered by the level of customer service that results.

Time StandardsEstimates of the time typically required to perform some activity or process. There are multiple methods of developing time standards. These are used as benchmarks against which to measure an operation's performance.

Throughput TimeThe time for an item to pass through the entire transformation process in an operation. This includes wait time and the time to transport a product between work stations. Throughput time is most important in service organizations since people do not like to wait. .

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Controls

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Balancing Risk and Control

Risk is the probability that an event or action will adversely affect the organization. The primary categories of risk are errors, omissions, delay and fraud. Control procedures decrease risk to a level where management can accept the exposure to that risk. By performing this balancing act "reasonable assurance” can be attained. As it relates to financial and compliance goals, being out of balance can cause the following problems:

Excessive Risks Excessive Controls

Loss of Assets Increased Bureaucracy

Poor Business Decisions Reduced Productivity

Noncompliance Increased Complexity

Increased Regulations Increased Cycle Time

Public Scandals Increase of No-Value Activities

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Controls

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Control Activities – Funds Management (Preventive)· Written policies and procedures· Limits to authority· Supporting documentation· Question unusual items· No “rubber stamps”· No blank signed forms

Control Activities - Secure Assets (Preventive and Detective)· Security of physical and intellectual assets· Physical safeguards· Perpetual records are maintained· Periodic counts/physical inventories· Compare counts to perpetual records· Investigate/correct differences

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Controls

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Control Activities – Segregation of Duties (Preventive and Detective)

In general, the approval function, the accounting/reconciling function, and the asset custody function should be separated among employees.·

No one person should...> Initiate the transaction> Approve the transaction> Record the transaction> Reconcile balances> Handle assets> Review reports· At least two sets of eyes

General Controls apply to entire information systems and to all the applications that reside on systems.¨ Access Security, Data & Program Security, Physical Security¨ Software Development & Program Change Controls¨ Data Center Operations¨ Disaster Recovery

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CONTROLS

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Approvals, Authorizations, and Verifications (Preventive). Management authorizesemployees to perform certain activities and to execute certain transactions within limitedparameters. In addition, management specifies those activities or transactions that needsupervisory approval before they are performed or executed by employees. Asupervisor’s approval (manual or electronic) implies that he or she has verified andvalidated that the activity or transaction conforms to established policies and procedures.

Reconciliations (Detective). An employee relates different sets of data to one another,identifies and investigates differences, and takes corrective action, when necessary.

Reviews of Performance (Detective). Management compares information about currentperformance to budgets, forecasts, prior periods, or other benchmarks to measure theextent to which goals and objectives are being achieved and to identify unexpected resultsor unusual conditions that require follow-up.

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CONTROLS

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Security of Assets (Preventive and Detective). Access to equipment, inventories,securities, cash and other assets is restricted; assets are periodically counted andcompared to amounts shown on control records.

Segregation of Duties (Preventive). Duties are segregated among different people toreduce the risk of error or inappropriate action. Normally, responsibilities for authorizingtransactions, recording transactions (accounting), and handling the related asset (custody)are divided

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CONTROL MATRIX

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CONTROL MATRIX

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CONTROL MATRIX

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Putting it all Together

Risk Management

• Sustained Compliance

• Operational Effectiveness

• Quality of Information

• Transparency

• Are Controls Balanced to achieve operational efficiency by avoiding excessive risks and controls?

• Are controls maintained to ensure compliance?

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Process Optimization

• Speed

• Efficiency

• Timeliness

• Resource allocation

• Is there enough standardization in processes and controls?

• Do you know the costs and cycle times of your major processes?

• How well does information flow through the organization? Are there trouble spots?

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Technology

• Scalability

• Enablement

• Cost

• Data Integrity

• Is the technology infrastructure aligned with operational and program delivery requirements?

• Where are we using manual controls and/or compensating controls versus automated ones?

• Are system interfaces effective at trapping errors?

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• Do process owners understand how to operate their control environment?

• Do stakeholders understand their role in managing performance and risks?

• Is the organization and people able to adapt to changing risks and performance requirements?

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Organization and People

• Strategy and Structure

• Accountability

• Knowledge and Skills

• Change Management