ROI Appraisal of Lean Business Transformation Projects
This is vital in tracking the financial return on Lean Business Transformation projects for clear commercial reasons. Deming and many other Lean or Quality Gurus have noted how the competitive edge of any business is founded upon continually improving the quality of the services and products it provides to its customers.
Survival is not compulsory
They make the point that ‘survival’ is not compulsory, and that there are times when an organization really does have to explore how their service or products are received and viewed by the end user. This needs to be constantly reinforced in many organisations today simply because they may put themselves in danger of putting their livelihoods at risk.
High street failures
You only have to look around the high street to see all the businesses that have gone under in the last ten years, Woolworths, Northern Rock, Blockbuster, Comet, Bradford & Bingley, Land of Leather, Borders, JJB Sports, MFI, Jessops, Threshers, Barretts, etc. We cannot claim that they all failed because of poor quality of products or service, but being ever vigilant is critical in these uncertain times. So, it makes sense to continually strive to improve performance.
This point is also especially true in the public sector where organisations may exist for other than financial gain. The problem here is that managers may not have the same focus on value for money and being accountable for their resources as their partners in the private sector. Here, we will explore how we can evaluate the impact on Lean Business Transformation in key projects.
Deliverables on Lean Business Transformation (LBT) Projects
Benefits of Lean Business Transformation Projects need Exposure
Lean Business Transformation projects should be able to produce a return that is valued by the organization, which in turn will reinforce the fact that Lean delivers significant improvements and is tantamount to improving business performance. We should avoid focusing on Lean simply for cost reduction. Unfortunately, the name ‘Lean’ depicts a radical practice where we focus only on cutting things out of service delivery. Lean Business Transformation goes far beyond this restrictive thinking - it builds a strong culture where process and business excellence is the driver for change and growth.
Practical Deliverables
We should be able to demonstrate clear benefits to adopting Lean and, increasingly, any investment in Lean OD or any variant of continuous improvement must be able to deliver a fair ROI (return on investment). When considering the core benefits some are listed on the page above, these should be identified at the start of a project.
The benefits that will accrue justify or give reasons for the project. It is hoped that the benefits are clearly identified as milestones which can be assessed as the project gathers ground.
When working on the Problem statement in the DEFINE element of DMAIC, your have to assess the financial case for undertaking the project and the long term benefits that will flow from these. Of course, these should be quantified, and if a set target is defined it needs to be SMART as well as stretching and surpassing expectations. These anticipated benefits form an important management tool for assessing the success of the project. They must be fully understood and agreed by the project sponsors and key stakeholders.
Information gleaned in this way will become valuable for funding the budget that will support the Lean projects. There is a greater chance of benefits being achieved when there is a focus on them. The project sponsor and the Lean project team are going to take full ownership and be accountable for the investment in Lean projects. This is critical when we may be considering investing millions of £’s or $’s, especially with the need to audit projects.
Defining ROI or Return on Investment
It is a measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result i is expressed as a percentage or a ratio.
The return on investment formula:
ROI = Gain from Investment – Cost of the Investment/Cost of the Investment
Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken.
There are many variants of ROI which we will not go into here – but you do have to have a sound business case for investing people’s time in exploring Lean opportunities – the principle one being the opportunity cost of the time of using internal resources, i.e.. staff, to devote their energies to the project.
Often, the use of time is not considered in Lean activities because management teams recognise that Lean activities will deliver more than purely financial returns – such as an increase in morale, cross functional working and cultural change. At this stage it might be appropriate to consider another measure which is even more relevant when considering Lean change in Governmental and public services, and this is where we introduce Social Return on Investment.
This is a useful measure and will focus more energies in introducing Lean to large state run organizations, utilities and service organizations such as Banks, Hospitals, Educational establishments, Local Government, Quangos, the Armed forces, the Police and Rescue organisations.
SROI is a form of stakeholder assessment with cost-benefit analysis tailored to social purposes. It demonstrates of change is being created and places a monetary value on that change and compares it with the costs of inputs required to achieve it.
What is Social Return on Investment (SROI)?The Cabinet Office of the UK Government identify that SROI is based on seven principles
1.Focus on stakeholders
Understand the way in which the organisation creates change through a dialogue with stakeholders
2.Understand what changes
Understand and explain all the objectives and stakeholders of the organisation before agreeing which aspects of the organisation are to be included in the Lean change and decide what must be included so that key stakeholders can make reasoned decisions.
3.Value the things that matter
Use financial proxies for indicators in order to include the values of those excluded from markets in same terms as used in markets
4. Only include what is material
Articulate clearly how activities create change and evaluate this through the evidence gathered
5. Do not over-claim
Make comparisons of performance and impact using appropriate benchmarks, targets and external standards.
6. Be transparent
Demonstrate the basis on which the findings may be considered accurate and honest; and showing that they will be reported to and discussed with stakeholders
7. Verify the result
Ensure appropriate independent verification of the account
The Cabinet paper goes on to explain these as principles as………
“These principles are core to SROI and how it should be used. However, in encouraging consistency of models, the SROI Network is in discussion with practitioners who use related tools to see if principles can be aligned and agreement established on measuring social impact. Therefore, these principles and how they are expressed may be revised.
SROI is an approach to understanding and managing the value of the social, economic and environmental outcomes created by an activity or an organisation. It is based on a set of principles that are applied within a framework.
SROI seeks to include the values of people that are often excluded from markets in the same terms as used in markets, that is money, in order to give people a voice in resource allocation decisions. SROI is a framework to structure thinking and understanding. It’s a story not a number. The story should show how you understand the value created, manage it and can prove it.” ( The Cabinet Office: A Guide to Social Return on Investment).”
It is feasible to use SROI on the following projects:
Survival is not compulsory
They make the point that ‘survival’ is not compulsory, and that there are times when an organization really does have to explore how their service or products are received and viewed by the end user. This needs to be constantly reinforced in many organisations today simply because they may put themselves in danger of putting their livelihoods at risk.
High street failures
You only have to look around the high street to see all the businesses that have gone under in the last ten years, Woolworths, Northern Rock, Blockbuster, Comet, Bradford & Bingley, Land of Leather, Borders, JJB Sports, MFI, Jessops, Threshers, Barretts, etc. We cannot claim that they all failed because of poor quality of products or service, but being ever vigilant is critical in these uncertain times. So, it makes sense to continually strive to improve performance.
This point is also especially true in the public sector where organisations may exist for other than financial gain. The problem here is that managers may not have the same focus on value for money and being accountable for their resources as their partners in the private sector. Here, we will explore how we can evaluate the impact on Lean Business Transformation in key projects.
Deliverables on Lean Business Transformation (LBT) Projects
- An over-riding factor in assessing the value created by a project can be measured in many ways and includes
- Profitability
- Cost Reduction
- Reduction in resources required to provide the service
- Better return on capital employed
- Reduction in waste and rework
- Lower returns and complaints from end users
- Increase in consumer or customer loyalty
- Lower customer migration
- Increased sales volume
- Increase in market share
- Increased quality of the product or service from the perspective of the end user
- Adding value to the customer or end user
- Proving social value
Benefits of Lean Business Transformation Projects need Exposure
Lean Business Transformation projects should be able to produce a return that is valued by the organization, which in turn will reinforce the fact that Lean delivers significant improvements and is tantamount to improving business performance. We should avoid focusing on Lean simply for cost reduction. Unfortunately, the name ‘Lean’ depicts a radical practice where we focus only on cutting things out of service delivery. Lean Business Transformation goes far beyond this restrictive thinking - it builds a strong culture where process and business excellence is the driver for change and growth.
Practical Deliverables
We should be able to demonstrate clear benefits to adopting Lean and, increasingly, any investment in Lean OD or any variant of continuous improvement must be able to deliver a fair ROI (return on investment). When considering the core benefits some are listed on the page above, these should be identified at the start of a project.
The benefits that will accrue justify or give reasons for the project. It is hoped that the benefits are clearly identified as milestones which can be assessed as the project gathers ground.
When working on the Problem statement in the DEFINE element of DMAIC, your have to assess the financial case for undertaking the project and the long term benefits that will flow from these. Of course, these should be quantified, and if a set target is defined it needs to be SMART as well as stretching and surpassing expectations. These anticipated benefits form an important management tool for assessing the success of the project. They must be fully understood and agreed by the project sponsors and key stakeholders.
Information gleaned in this way will become valuable for funding the budget that will support the Lean projects. There is a greater chance of benefits being achieved when there is a focus on them. The project sponsor and the Lean project team are going to take full ownership and be accountable for the investment in Lean projects. This is critical when we may be considering investing millions of £’s or $’s, especially with the need to audit projects.
Defining ROI or Return on Investment
It is a measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result i is expressed as a percentage or a ratio.
The return on investment formula:
ROI = Gain from Investment – Cost of the Investment/Cost of the Investment
Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken.
There are many variants of ROI which we will not go into here – but you do have to have a sound business case for investing people’s time in exploring Lean opportunities – the principle one being the opportunity cost of the time of using internal resources, i.e.. staff, to devote their energies to the project.
Often, the use of time is not considered in Lean activities because management teams recognise that Lean activities will deliver more than purely financial returns – such as an increase in morale, cross functional working and cultural change. At this stage it might be appropriate to consider another measure which is even more relevant when considering Lean change in Governmental and public services, and this is where we introduce Social Return on Investment.
This is a useful measure and will focus more energies in introducing Lean to large state run organizations, utilities and service organizations such as Banks, Hospitals, Educational establishments, Local Government, Quangos, the Armed forces, the Police and Rescue organisations.
SROI is a form of stakeholder assessment with cost-benefit analysis tailored to social purposes. It demonstrates of change is being created and places a monetary value on that change and compares it with the costs of inputs required to achieve it.
What is Social Return on Investment (SROI)?The Cabinet Office of the UK Government identify that SROI is based on seven principles
1.Focus on stakeholders
Understand the way in which the organisation creates change through a dialogue with stakeholders
2.Understand what changes
Understand and explain all the objectives and stakeholders of the organisation before agreeing which aspects of the organisation are to be included in the Lean change and decide what must be included so that key stakeholders can make reasoned decisions.
3.Value the things that matter
Use financial proxies for indicators in order to include the values of those excluded from markets in same terms as used in markets
4. Only include what is material
Articulate clearly how activities create change and evaluate this through the evidence gathered
5. Do not over-claim
Make comparisons of performance and impact using appropriate benchmarks, targets and external standards.
6. Be transparent
Demonstrate the basis on which the findings may be considered accurate and honest; and showing that they will be reported to and discussed with stakeholders
7. Verify the result
Ensure appropriate independent verification of the account
The Cabinet paper goes on to explain these as principles as………
“These principles are core to SROI and how it should be used. However, in encouraging consistency of models, the SROI Network is in discussion with practitioners who use related tools to see if principles can be aligned and agreement established on measuring social impact. Therefore, these principles and how they are expressed may be revised.
SROI is an approach to understanding and managing the value of the social, economic and environmental outcomes created by an activity or an organisation. It is based on a set of principles that are applied within a framework.
SROI seeks to include the values of people that are often excluded from markets in the same terms as used in markets, that is money, in order to give people a voice in resource allocation decisions. SROI is a framework to structure thinking and understanding. It’s a story not a number. The story should show how you understand the value created, manage it and can prove it.” ( The Cabinet Office: A Guide to Social Return on Investment).”
It is feasible to use SROI on the following projects:
- Community Projects funded by the Public Purse
- Local Government provisions of services to the citizen and core stakeholders
- Healthcare Organizations to their Patients and Stakeholders in Social Care
- Social Entrepreneurs and Social Enterprise Ventures
- Educational Community Projects
- Public Utilities and associated service providers
