Inverted KPI: minimize process exceptionsSubmitted by Hans van Nes on Tue, 11/10/2011 - 06:49
Over the years in many blogs we addressed the need for simple and transparent KPI's that follow closely the organizations objectives. Almost always the actual measure is based upon the actual achieving (of a percentage) of the set business goal. But there is an inverted option to get to this: the minimization of process exceptions. And with maybe an even better result.
An organization, taking its business objectives seriously, will design and implement the business processes in such a standard way that they make reaching these objectives possible. Think of set and embedded standards to ensure desired average margins on transactions or applied terms & conditions to optimize cash flow.
Exceptions to the set standards, rightly or wrongly applied, have a direct impact on the business goals. By limiting the number and impact of exceptions, automatically the actual performances for the desired business goals become better. Weirdly enough I found out that in many organizations there is no structural monitoring for these performance-limiting exceptions.
Are all exceptions to standards wrong? Of course not. A special payment condition to secure a first deal with a new customer can be as such very valid, if taken consciously and properly authorized. But there we hit indeed the two most important parameters around exceptions: scope and impact.
Firstly scope. The decision to start an exception is often placed lower in the hierarchy, mostly at operational level. Systems allow for modification control at user level and workflow, if any, when authorization by others is required. Delegation is required to run an operation but also creates the risk that acceptable individual applied exceptions at roll-up level show substantial effects.
Secondly impact. The impact of an individual exception can be very small at first sight: just giving a customer 30 days payment in stead of the 14 days standard. But this automatically means delaying and thus impacting the invoice control, the reminder process, average days outstanding of all invoices, the cash collection and thus ultimately the cash flow. In other words: the Law of Unintended Consequences hits in again.
Until now we gave examples of exceptions created in the assumed best interest of the business. But hidden in the same exceptions are errors, misuse and fraud. So active monitoring for exceptions is a three-sided blade: detection of both conscious and unconscious deviation from standards, making both performance optimizations possible while limiting risk and thus improving compliance.
A counter argument could be: "We are investing a lot in system controls, segregation of duty and all sorts of compliance protocols. Shouldn't that bring what you advocate?" The answer is no: these are necessary things too but are addressing the same limited scope and isolated impact as described earlier.
Even the best set expectations sadly enough per definition always give room for exceptions. Monitoring for exceptions to weed out the non desired ones from the organizations objectives perspective, is a KPI which should on the list for every C-level executive.
We at Results2Match believe in improving business output in a pragmatic though structural way and thus we work together with organizations that share the same vision. Exception monitoring is one of the concepts that implement that vision. Let me know if we can help you with your exception management.
back to top more blogs