If you’re reading this, you are likely working in some capacity in the business process management/process improvement world. You understand there are benefits to well defined process documentation and that it’s a good idea to put systems in place that ingrain the documentation into the working culture of your organization. The documentation and work surrounding its existence is clearly pertinent for the overall success and sustainable growth of your business.
This is all well and good, but there will inevitably be a point in time where someone (most likely in a leadership position!) will approach you to provide a dollar value for the improvement activities you’re orchestrating. Believe it or not, there are some people that aren’t completely sold on dedicating a lot of resources towards process management related work. When approached about the topic of showing value for this type of work, try to frame the questions in your head to something like this:
One method to financially quantify business process improvements is to calculate an amount based on time savings, using two of the core elements that make up a business process model. These two elements being activities, or the actions taken to accomplish something, and roles (who is performing the actions). From this we can apply a value factor to each element as inputs to an overall business process improvement value equation that gets us to a monetary value.
- Activities – time factor: how long does it typically take to complete?
- Roles – money factor: what is the pay rate for the people performing in the role?
With these factors we can come to an estimated value for a process improvement that either (1) reduces time from an activity or set of activities or (2) removes an activity or activities altogether from a process.
Work Order Process Improvement Example
To demonstrate, let’s propose a small modification to a work order process:
Current Process (As-Is)
Improved Process (To-Be)
In this scenario, the firm has decided to remove a mandatory review of the work order object by the engineering manager. Instead, the engineering manager can now support the engineer, as needed, when the work order is created and submitted. Meaning that the engineering manager now has zero committed time in the process.
For the following calculations, let’s create some fictitious numbers to demonstrate how to use the activity (time) factor and the role (money) factor to quantify the business process improvement. The firm currently executes the review work order activity 10,000 times per year with each review lasting 1 hour (this number could also be derived using metrics for the object itself if it’s available. I.e. we could say the firm produces 10,000 work orders a year, thus there are 10,000 instances of the review activity).
The responsible role for the review is the engineering manager. The average wage for people in this role at the company is $40 per hour. We aren’t going to factor in the engineer’s wage for the calculation since they are only supporting the activity as needed in this scenario. Of course we could factor “support” roles into the equation depending on specifics of the activity (i.e. if the engineer was required to be at the review with the engineering manager).
Business Process Improvement Value Equation
(# of instances of activity)
x (time saved with process improvement)
x (average wage of impacted roles)
= Single Period Value
10,000 per year
x 1 hour
x $40 per hour
= $400,000 per year
The result number from the equation gives us an amount for a single period, which in this example is one year. What if we wanted to see the value across multiple years? Multiplying the value as-is by a variable representing the number of years is OK, but that does not take into account the time value of money. For this, we can get a more accurate number by finding the PV (Present Value) of the process improvement savings.
PV = 400,000 ⁄ (1.06)1 + 400,000 ⁄ (1.06)2 + 400,000 ⁄ (1.06)3
PV = $377,358.49 + $355,998.58 + $335,847.71
PV = $1,069,204.78
With this, we are showing that the current, or present value of the future cash savings by the business process improvement is $1,069,204.78. Assuming that the firm thinks the cost savings will be observed over the course of 3 years and their discount rate is 6%. Calculations like this can be very useful when comparing if a project/initiative should be pursued over another where there are shared resources.
How do you quantify business process improvements? One method that can be used is analyzing the improvements via process models. From process models, we can collect information related to the time that activities take and the money that is spent on the people performing in the roles. We can plug this information into a business process improvement value equation that results in a single-period dollar amount. If we want to find the current value of the savings over their full lifetime, then we can apply a present value equation using the single-period amount as an input.