Business processes - from making a mousetrap to hiring a CEO - are being analysed, standardised and quality checked
Throughout the history of business, most firms have built their own processes for almost all the tasks that needed to be done. Whether the processes involved were critical to the company's strategy or incidental to it, they were performed by people within the organisation. Sometimes they were done well, sometimes they were done badly - but since a company had no way of determining how well an outside business might perform these processes, they were kept in-house.
By the end of the twentieth century, the idea of outsourcing processes and capabilities began to gain currency as a means to achieve more rapid benefits. Most companies were drawn to the idea of outsourcing largely because of the potential for reduced costs and leaner balance sheets, but they gained greater flexibility and access to specialised expertise as well.
But, with the exception of IT system development, there is generally no clear basis by which companies can compare the capabilities provided by external organisations with those offered in-house, or to compare services among multiple outside providers. However, a broad set of process standards is expected soon.
Types of process standards
A business process is simply how an organisation does its work - the set of activities it pursues to accomplish a particular objective for a particular customer. Processes may be large and cross-functional, such as order management, or relatively narrow, like order entry (which could be considered a process in itself or a subprocess of order management).
These process activity and flow standards are beginning to emerge in a variety of businesses and industries. Some are the result of efforts by process groups like the Supply-Chain Council, with more than 800 businesses as members. It has developed the Supply-Chain Operations Reference (SCOR) model, which lays out a top-level supply chain process in five key steps: plan, source, make, deliver, and return. Hundreds of organisations (from Alcatel to the US Navy) have begun to use the SCOR model to evaluate their own processes.
Of course, a process standard by itself does not achieve anything. Firms must still make difficult changes in how they do their work.
A second set of needed process evaluation approaches are process performance standards. Once companies in an industry achieve consensus about which activities and flows constitute a given process, they can begin to measure their own processes and compare their results with those of external providers. If there is agreement, for example, on what it means to "process a new employee," managers can analyse how much it costs the internal HR function to provide that service, on average, and how long it takes. They can also have an informed discussion with external service providers about process performance measures.
Benchmarks for the SCOR model are already available and more are being gathered. The APQC is working with a consortium of companies called the Open Standards Benchmarking Collaborative to create one standard public database of process definitions, measures and benchmarks to help organisations worldwide quickly assess and improve their performance.
Finally, organisations need a set of process management standards that indicate how well their processes are managed and measured as well as whether they are on the right course for continuous improvement.
Commoditisation of software
Software development is a good example of a process that needs an overhaul. Whether done internally or externally, software development is error-prone, expensive and time-consuming. The overall level of software quality is low; a 2002 study from the US National Institute for Standards and Technology estimated that software bugs cost the US economy almost $60bn a year. Software quality is particularly unpredictable when purchased from a provider - and virtually every organisation across the world buys software.
One of the main reasons for quality and cost problems is the way - or ways - in which software is developed. There has not been any standard method or approach for software development or engineering; it is normally a 'craft' process. Some individual software developers are much more productive and offer much higher quality than others.
Carnegie Mellon's Software Engineering Institute (SEI) has developed the Capability Maturity Model (CMM) to address a number of these problems. (See box: The SEI's capability maturity model) The model, created in 1987, has become a worldwide standard for software development processes and is now embedded within many government and industry organisations. It has provided an objective basis for measuring progress in software engineering and for comparing one software provider's processes to another's. This in turn has facilitated the growth of offshore providers in India and China by commoditising software development processes and making them more transparent to buyers.
The SEI offers training courses on the Capability Maturity Model and its derivatives and has created processes to authorise appraisers (though the SEI does not conduct appraisals itself). Since 1987, more than 2,700 certified appraisals have been performed on organisations in 51 countries-from Argentina to Latvia to Vietnam.
If a country wants to establish sufficient credentials in software development so that global customers might hire its programmers unseen, there are few better ways to do this than to qualify for Level 5 of the CMM. In India, CMM Level 5 certification is becoming so common that software providers say they typically compete only with other Level 5 providers for software outsourcing business - a sure sign of commoditisation.
Process management standards
The CMM is not the only process management standard that has transformed its industry. A variety of such standards are now in use around the world. Perhaps most prominent among them are the ISO 9000 family of quality standards for product manufacturing. Unlike the CMM five-level standard, the ISO 9000 standards are binary - an organisation either passes or it doesn't.
Other standards focus less on management process itself and more on the output of the process. The well-known Six Sigma standard, for example, focuses on defect reduction to a high level of statistical reliability. Unlike the CMM and the ISO standards, however, organisations certify themselves as meeting Six Sigma standards; there are no external certifiers. Therefore, Six Sigma is less likely to lead to changes in how organisations buy and sell process capabilities to each other.
The road ahead
Process standards could revolutionise how businesses work. They could dramatically increase the level and breadth of outsourcing and reduce the number of processes that organisations decide to perform for themselves. With objective criteria to evaluate whether a company can save money or get better process performance by outsourcing, it is likely that more firms will take advantage of external capabilities. As the global market for process services matures and providers learn what it takes to succeed with a process according to the standard, the number of providers will undoubtedly increase, and the prices of their services will likely drop. In turn, this external market for capabilities will force companies to look more closely at their own strategies.
THE SEI'S CAPABILITY MATURITY MODEL
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SUCCESS STORY
A process standard has impact only if the world accepts it.
Some key factors that played a role in CMM's success story
Simplicity of idea
The five-level rating system is easily understood and offers a clear indication of progress or the lack of it.
Flexibility of use
It provides a framework for improvement but does not specify how an organisation should improve.The CMM supports both process-heavy methods and agile process methods.
The wide network
A variety of large and small companies offer consulting, education and appraisal services that support CMM.
© businesstoday 2005
