Case Study and Applying AVM to Your Business

Real World Case Study

A financial services organization was facing a $25M profit shortfall and to mitigate this challenge they embarked on a number of responses:

  • Implemented Lean Six-Sigma – slow start with little bottom-line impact.
  • Hired a “Big-5” consulting firm – failed to quantify a perceived “revenue leak.”
  • Unsuccessfully initiated an Activity Based Costing (ABC) study

In addition to the financial shortfall, management expressed additional concerns regarding the:

  • Lack of understanding of the true cost and profitability for 15 lines of business (LOB).
  • Flat revenue growth over the previous 4-5 years.
  • High number of customer complaints and defections (60% every 2 years).

In summary, what they did…

  • Formed both an Executive Oversite Committee and a cross-functional AVM Implementation Team.
  • Defined nearly 500 cross-functional processes and activities
  • Captured then directly and simultaneously assigned the cost and effort of nearly 2,400 employees and 7,000 non-personnel expenses to all activities in support of 15 LOBs – performed without using pooling, aggregation, or allocations. Captured nearly 2,600 performance-related commentaries from employees, existing customers, and defected customers related to issues, concerns, roadblocks, and opportunities all of which were assigned to the costed processes and activities – linking financial data with performance information necessary to assess value (5 weeks).
  • Synthesized the information necessary to identify over three dozen opportunities related to improving financial/operational performance as well as customer loyalty and employee satisfaction.
  • Presented their findings to the Steering Committee to distill the opportunities down to the top 5-7 opportunities for which the Steering Committee identified four major areas in which to concentrate…

In summary, a sampling of what they found and for which solutions were implemented…

  • The cost and profitability of each LOB. Any cell can contain experiential information captured from customers, employees, and perhaps customers of competitors regarding issues, opportunities, and possible solutions. Each cell contains a complete audit trail of specific component cost and effort (personnel and non-personnel) captured by activity, department, and LOB.

Activity costs (excerpt):

Note: Each cell in the above matrix can contain a complete audit trail of all organizational components contributing to the activity for each LOB along with any stakeholder commentaries.

LOB Profitability…

  • Because a mature LOB was originally believed to have both low and declining profitability (based on an absorption cost accounting system), customers were being migrated to a highly technical replacement offering. It was discovered that the mature LOB was actually operating at a 45% operating margin while customers were migrated to the replacement offering operating at a negative 13% margin – the source of the $25M profit shortfall.
  • Customer churn was a major concern of management, knowing that it represented a loss of revenues and a high cost associated with responding to the issues expressed by customers. The process of “Supporting Customers” was costing nearly $24M annually (nearly 10% of total spend) yet garnered close to 500 experiential stakeholder comments (see excerpt below) and was cited as a major cause of customer defection.

Below is the cross-functional analysis comparing the cost and effort associated with the duplication of effort between Marketing & Sales and Operations.

The cost of Customer Support consisted mainly of $13.6M from Sales and $8.7M from Operations. Input from the Sales team provided further insights as this effort represented nearly 200 FTEs within Sales and was non-mission-related work as the primary group responsible for customer service was not in Sales but resided in Operations. Sales performed this work because of the lack of trust of Operations to resolve customer issues and they expended this effort to salvage dissatisfied customers necessary to preserve revenues. Unfortunately, customer dissatisfaction continued. This non-mission diversion of Sales effort was eventually determined as a source of lost revenues of $45M annually.

Note: To demonstrate the importance of capturing activity effort in terms of FTEs in addition to costs, is that activity fragmentation (e.g., the comparison between the actual number of employees engaged in an activity and the FTE equivalent) will identify excessively fragmented activities which negatively impacts productivity. Also, the cost per FTE can be computed and used as an indicator to identify work activities that could be performed by lesser-compensated employees while freeing higher-compensated and experienced employees to concentrate on more mission-critical activities. As shown in the previous graphic, the cost of supporting customers in Operations is only about half the cost of these activities performed in Sales. The questions becomes “where should this activity be performed?

- The analysis of the Sales organization in terms of effort was performed whereby a 50% improvement in mission-related activities was achieved by shifting non-mission-related effort expended on supporting customers to their mission of generating revenues resulted in an additional $45M of annual revenues – a remarkable achievement given that revenue growth had been flat for the previous 4-5 years.

- In an effort to uncover the causes related to customer dissatisfaction, the AVM team wondered if the organizational structure itself contributed to the problem. Examining the structure uncovered the following with regards to the structure.

It was found that many of the issues faced by customers stemmed from the departments having the highest spans of control with significant employee turnover, inadequate training, and the lack of management oversight. The average span of control (9.01) seems reasonable according to published material. However, many departments that “touched” the customer in one way or another had excessive spans exceeding 40:1. Reversing prior efforts to reduce costs through elimination of management, additional supervision was added accompanied by improved training which achieved a marked reduction of errors that reached the customers (e.g. external failure) which was a major contributor in reducing customer churn.

- The AVM Implementation team, working with other functional areas, took responsibility for re-pricing service offerings (both higher and lower) to improve profitability, re-designed the Sales compensation plan, identified LOBs that should be sunset, and restructured the number and location of Sales offices – all of which would have been traditionally considered “off-limits” to previous Lean Six-Sigma teams.

What you can do in your organization

If you wish to try AVM in your own department follow the steps below:

Step 1 - Identify Activities:

- Gather representatives from your own department who can best describe the processes and activities performed in your workgroup.

- Identify activities:

  • Start with the process description
  • Decompose process into sub-processes & activities in sequential order
  • Describe processes in {verb} - {noun} format (e.g. “Generate Reports”) – if this format does not adequately describe the activity or you wish to be more precise,
  • use a {verb} - {adjective} - {noun} format (e.g., “Generate Financial Reports”)
  • Do not describe physical tasks (e.g., “Answer Phones”)
  • Review with the team to ensure that all relevant processes & activities have been identified
  • Number the processes & activities
  • Refer to the excerpt of Financial activities that follows

Step 2 - Define Activities:

- Create definitions for activities only, NOT processes.

- Concise definitions will reduce any confusion between similarly- described activities.

- Definitions should be all inclusive permitting personnel to easily assign time and expenses.

- To reduce confusion and to make the definitions all inclusive, begin the definition with “All time and expense related to…” or “All work associated with…” or similar statements.

Example:

51111 Upload Transactions - All effort required to upload transactions as part of the effort to process JE transactions.

51112 Repair Transactions - All effort and expense required to repair transactions that were not properly documented or uploaded into the appropriate system.

51113 Enter Manual Transactions - All effort and expense required to enter manual transactions as required to process JE transactions.

5113 Adjust Entries (Re-Class) - All effort and expense required to re-class expenses. This activity includes all documentation and data entry.

Step 3 - Collect/Assign Data:

- For each employee assign to each activity:

  • Cost (including fringe) based on a % of time/effort
  • Hours/week to each activity (not processes) based on a % of time/effort

-For each expense item assign:

  • Cost based on the % of cost applied to each activity

- Capture experiential information from stakeholders (employees, internal customers, etc.)

  • Use external resources to conduct interviews
  • Assign experiential information to the processes and/or activities
  • Assign experiential information to the processes and/or activities

- Ask high-gain questions such as…

– If you were working in the most efficient and
effective manner:

what would your department look like?

how else would the work be performed?

what would you have that you currently do not have?

– What gets in the way of you working in that manner?

– What are you NOT doing that you SHOULD be doing?

– What ARE you doing that you should NOT be doing?

– What would you like to see changed immediately?

– What do you think your customers would like to see changed immediately?

– What ONE thing would make the work in your department easier?

Assign the results of the interview questions to the processes and/or activities to which they pertain

Step 4 - Analyze Information:

- Look for:

  • High-cost activities that are not important  redeploy or eliminate resources
  • Important activities that are not performed well  improve process or add additional resources
  • High employee fragmentation – too many employees involved as compared to the FTE (Full-Time-Equivalent) resources  reduce the number of employees by having fewer employees specialize in the activity
  • Activities with exceptionally high risk  take actions to reduce unnecessary risks
  • Negative experiential information  apply corrective action to counter negative experiences
  • Duplication of effort and/or expense with other departments  consolidate effort
  • Non-mission-critical work  eliminate or move to where it belongs

Step 5 – Implement Solutions:

- Identify and document solutions

- Distill the solutions down to those that you are:

– Ready

– Willing

– Able

to implement

• Determine the ROI on the solution. If the ROI meets your hurdle rate move ahead

• Assign responsibilities and with a time table

• Conduct frequent feedback interviews to measure progress

• Test results

• Apply corrective action to solutions if necessary

• Reward participants


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