Are Your Operations Headaches Costing More Than You Know?
If you have never done a financial impact assessment, you might not realize the heavy toll operations problems can take on your organization's bottom line. The examples below have been "eye-opening" even for savvy CFOs.
High Costs of Inefficiency, Errors, Rework
Day-to-day process inefficiencies sometimes seem like "no big deal," but when you calculate the combined costs it can be staggering. Here's an example from Healthcare Executive magazine. After an operations audit one hospital discovered that their staff incorrectly entered "check in" information 70% of the time! It took 20 minutes in rework on every bill to correct those errors. At 1.5 million bills ber year, that one inefficient process created 500,000 hours of unnecessary work. Before the audit, no one realized they had a signficant problem because no one had measured the cost.
Even small operations improvements can net tremendous payback. What if you could gain 35-40 more productive minutes a day from each one of your employees? Just a 10% improvement in productivity from process "streamlining" can give you that. One of our customers, a marketing services firm reduced overall errors and waste by 75% in one of their direct mail groups simply by "standardizing" the best practices of one star performer across the entire team. In the process they saved, $360,000 a year in expenses.
Employee turnover is another operations headache that takes a big bite out of profits. Many organizations don't realize how heavily they invest in getting employees hired, trained, and independently productive. According to the American Society for Training & Development, U.S. companies spent $79.85 billion in 2006 just on internal staff training. The national average cost for replacing an employee is 1.5 times their annual salary, and it takes an average 13.5 months for a new employee to be fully proficient. Obviously, high turnover inflates training costs and supervisory burden, but it can hit even harder by dragging down productivity and increasing the risk of serious errors.
How bad is the problem? The national average annual employee turnover rate is 10-15%. For a 200 employee company that translates into costs as high as $1.8 million annually. The problem is even worse in some industries. Turnover in Banking averages between 20-35%. In Healthcare it is reaching a crisis with 20% turnover considered "good" and reports of turnover in home health care as high as 86%. Experts expect the acceleration of "Baby Boomer" retirements in coming years will make an already bad situation worse.
Faster Ramp Up, Reduced Training Costs
Minimizing "Ramp Up" Reduces Costs
Streamlined business systems decrease ramp-up time, reduce supervisory burden, and increase staffing flexibility to dramatically lower the impact of staff turnover.
Here's an example: one of our customers, a large retail firm, was experiencing extremely high turnover costs. Getting new hires up-to-speed was a painful, costly process. Because each branch location had its own way of doing things, they couldn't easily shift experienced employees from one location to another. Using our Operations Mapping approach and tools, the company was able to capture the best practices of experienced staff and create a flexible, easy-to-use training system. This not only reduced the company’s turnover costs and stress, it also produced an unexpected benefit—happier customers!
Do the math and you can easily see how a decrease in ramp-up time—even by just a small amount—can make a big difference. Take a 500-employee company with a modest 10% turnover rate. Reducing new-hire ramp-up time from 12 weeks to 6 weeks brings $341,640 in savings to the bottom line.
Regulatory compliance and liability risk top the list of operations headaches for many executives, and it's easy to see why. Companies must ensure their operating processes are compliant with regulations and must quickly communicate process changes to employees across the organization or face penalties.
While no one knows exactly how much U.S. businesses spend each year total on regulatory compliance, fines, sanctions and lawsuits, the World Bank listed 2005 total costs at somewhere between $420-$670 billion. Experts estimate that one-third of bank IT costs are spent on complying with regulatory requirements; Sarbanes-Oxley compliance costs approached $35 billion in 2005, and HIPAA compliance in healthcare IT racked up similar staggering costs. Banking and financial services managers often spend up to 30% of their time dealing with both internal and external audits and communicating compliance changes to their staff.
Protecting your company from exposure to compliance breaches is not easy. It requires having controls and accountability in all areas of your operations to demonstrate compliance to auditors and examiners and to avoid costly fines and penalties.
One of our customers literally saved themselves from two separate multi-million dollar lawsuits by applying Operations Mapping techniques to create a clear, easy-to-follow "Safety System." Because they could easily demonstrate that they had in place—and followed—strict safety procedures that everyone understood, they were twice exonerated from liability.
What is a customer worth? Some organizations view customer service as an unavoidable expense rather than as an asset. But by focusing on cost cutting alone and failing to manage service efficiencies, they often end up damaging their bottom line by losing customers and revenue.
Here's what happened when one of our customers realized they had a serious service problem and did something about it. The Quality Director of a $30M manufacturing firm with 150 employees was concerned with the high number of customers they were losing because of inefficiencies in their back office. Customers were being shipped the wrong parts, or frequently missing parts. This caused everyone to run around, scramble at the last minute. Calls to their customer service department went through the roof.
Having a strong systems background, the Quality Director knew the root of the problem was inadequate training and lack of standardized processes. Operations were literally “run by opinion.” By appying the Operations Mapping method, the firm rapidly established discipline and set defined standards to correct the problems. By systemizing customer service, they increased their customer retention rate and profits.
Would you like to know how to calculate the cost exposure for your organization?
COMPROSE has twenty years' of experience helping organizations of all types quantify the financial impact of common operations challenges like these. Our Financial Assessment is an easy way for you to assess your unique situation and discover ways to immediately improve the bottom line.
We can do a complete assessment for you or provide you with tools to guide you through the process yourself. Our experienced analysts use a tested questionnaire to gather key inputs from management, identify high-risk areas, and quantify potential improvements. We assess the financial impact of issues including:
• turnover and ramp up costs, • process inconsistencies, • errors and waste, • long training cycles, • brain drain and knowledge retention, • regulatory compliance.
You can have this analysis done for your entire company or just one workgroup. Our Financial Assessment gives you critical insight fast—saving your management team valuable time in analysis and preparation. Click to learn more.
