Process-Based Management

1. Process-Based Management City XXX Public Utilities February 22, 2001

2. Today’s Objective • To Reaffirm: • The Need for Change in the Way XPU Manages Its Business • The Preference of XPU for • Process-Based Management • Process-Based Information Tools • A Path & Timetable That Has Initial Process-Based Solutions Implemented in 2002 Lenhardt & Colton, LLC

3. Today’s Agenda • The Case for Change at XPU • Why Process-Based? • Insights from a Real Life Project • XPU’s Roadmap Lenhardt & Colton, LLC

4. Do We Still Believe This? The Starting Point: XPU Decides It Must Change • 1996 Annual Report: “...an internal transition designed to prepare staff and the Utility Board to operate the electric utility in an environment of increasing options for our electric customers.” • 1997 Annual Report: “XPU’s efforts in the coming years will be to prepare for operating in a competitive market.” • 1999 Strategic Plan: “Focus on FINANCIAL AWARENESS at a departmental level to drive us toward competitive rates.” Lenhardt & Colton, LLC

5. Then how do you decide? …what to change? . . . what to do differently? Lenhardt & Colton, LLC

6. InformationTools BusinessDecisions InformationforDecisions BusinessIssues One Useful Model InformationTools BusinessDecisions InformationforDecisions BusinessIssues What Needs Changed? Lenhardt & Colton, LLC

7. InformationTools BusinessDecisions InformationforDecisions BusinessIssues Identifying Needed Changes XPU Wants More Business Decisions To Be Made by Managers XPU Needs New & Different Decision Support Information Changing Business Issues are a Given; the Cause of XPU’s Dilemma XPU Needs New & Different Tools to Provide That Information We’ll Look at Each of These in Turn Lenhardt & Colton, LLC

8. Engaging XPU’s Managers Lenhardt & Colton, LLC

9. Another Useful Model • Three Time Perspectives of Business Yesterday Results Perspective Tomorrow Strategic Perspective Today Operations Perspective Lenhardt & Colton, LLC

10. How did XPU do “yesterday”? How will XPU do “tomorrow”? How is XPU doing “today”? Three Kinds of Issues & Decisions Yesterday Results Perspective Where is the best opportunity to improve our process? Tomorrow Strategic Perspective Today Operations Perspective Should I invest in this XPU bond? What should I charge for this new service? These Require Three Different Kinds of Information Lenhardt & Colton, LLC

11. Three Kinds of Information Tools Yesterday Results Perspective Tomorrow Strategic Perspective Today Operations Perspective What Tools Does XPU Have in Place Today? Lenhardt & Colton, LLC

12. XPU’s Existing Information Tools Yesterday Results Perspective Tomorrow Strategic Perspective Today Operations Perspective Little or NoInformation Available Even LessInformation Available SAP Financials Lenhardt & Colton, LLC

13. InformationTools BusinessDecisions InformationforDecisions BusinessIssues Review Needed Changes XPU Wants More Business Decisions To Be Made by Managers XPU Needs New & Different Decision Support Information XPU Needs New & Different Tools to Provide That Information Lenhardt & Colton, LLC

14. Today’s Agenda • The Case for Change at XPU • Why Process-Based? • Insights from a Real Life Project • XPU’s Roadmap Lenhardt & Colton, LLC

15. L&C’s Process-Based Approach • Promote “Process Thinking” in All Aspects of Business Management • Explicitly Use the Process Model of Business for: • Process-Based Management Techniques • Process-Based Information Tools Lenhardt & Colton, LLC

16. Input Output Activity What is the Process Model? • Any endeavor can be described in terms of input, activity & output. Tangible inputs are converted (via the endeavor) to tangible outputs. Lenhardt & Colton, LLC

17. The Process Model & Resources The cost of people, supplies and assets are viewed as organizational resources that are consumed by the activity. Resources (Budget) People’s Time ($) Fuel $ Depreciation $ Lenhardt & Colton, LLC

18. The Process Model & Outputs • Output is expressed in terms of measurable units: • KiloWatt Hours (kWh’s) of electricity • The cost of a measurable unit is the ratio of it’s activity cost and the quantity of the measurable units completed: • Cost per kWh of electricity • Outputs are consumed by products & services, market segments, and so on... Lenhardt & Colton, LLC

19. Resource $ Input Activity Output End Cost Objectives Offerings Segments Customers Process Model Summary Lenhardt & Colton, LLC

20. Why “Process-Based”? • The Process Model, Its Tools & Techniques • Enable Cost Management to be Practiced Throughout the Organization and That’s Good! • They Describe the Organization in the Language of People Who Do the Work • They Establish a Real-Life Causal Relationship Between the Work People Do and Cost • Systematically Integrate Seemingly Independent Functions and Activities and That’s Good! • They “…remind employees that the activities of disparate departments are interdependent, even if organizational charts… suggest otherwise.” • No Other Cost Management Model Does This Lenhardt & Colton, LLC

21. Today’s Agenda • The Case for Change at XPU • Why Process-Based? • Insights from a Real Life Project • XPU’s Roadmap Lenhardt & Colton, LLC

22. Reduce Cycle Time Increase Level of Service Reduce Cost Improve Quality State/DOT’s Challenge … Lenhardt & Colton, LLC

23. The Gov’s Challenge Pool . . . • Commissioners “Contribute” to the Pool via targeted cuts to least valuable programs/services • Participation in Challenge Pool earns them the opportunity to obtain NEW funding, greater than their “pool contributions”, to add or improve existing services • Election not to participate in pool earns them automatic budget reduction What to Change? How? Lenhardt & Colton, LLC

24. Information is Data Endowed with Relevance and Purpose. Peter Drucker, 1990 Requirement for “Good” Information Lenhardt & Colton, LLC

25. State/DOT: Start with the End in Mind • State/DOT’s “Purpose” • Identify CQT • Manage CQT • Improve Competitiveness • Focus on Continuous Improvement • Deploy Resources Effectively • Measure CQT Lenhardt & Colton, LLC

26. Solution! Problem? How much does it really cost? Activity Based Costing Activity Analysis Activity Based Management How do we know what to improve? Activity Based Continuous Improvement Resources How well are we meeting our objectives? Activity Based Performance Measures Activities Activities Activities Inputs Outputs How can we institutionalize improvements? Activity Based Budgeting How can we better manage capital projects? Activity Based Project/Resource Management Activity Based Solutions • What is the annual cost of Construction Management? • What is the cost of a “typical” bridge design? • How much does it cost to prepare a “complex” PS&E package? • Q - What’s ABC Used For? • A - Get Relevant Info. To support strategic decisions, such as: • Are we competitive, OR not? • Are our resources deployed effectively, OR not? • Should we invest in ABM to support the Challenge Pool requirements, OR not? Lenhardt & Colton, LLC

27. Program Support • Develop Activity-based Models • Institutionalize the Process • Roll-out Additional Activity-based Tools • Focus on Activity-based Continuous Improvement, and • Integrate with Business Planning Lenhardt & Colton, LLC

28. Task n Task 2 Task 4 Procedure Procedure Procedure Level 1 Process Info: Process Map 1 2 3 4 Activity 1 Activity 2 Activity 3 Activity “n” Activity Name • Descriptive Text:• Task 1 Task 2 Task 3 Task 4 Task “n” Task 5 Task 6 Lenhardt & Colton, LLC

29. Task n Task 2 Task 4 Procedure Procedure Procedure Level 2 Process Info: Activity Dictionary 1 2 3 4 Activity 1 Activity 2 CLICK HERE! Activity “n” Activity Name • Descriptive Text:• Task 1 Task 2 Task 3 Task 4 Task “n” Task 5 Task 6 Lenhardt & Colton, LLC

30. Task n Task 2 Task 4 Procedure Procedure Procedure More Level 2 Info: Resource Usage 1 2 3 4 Activity 1 Activity 2 CLICK HERE! Activity “n” Activity Name • Descriptive Text:• Task 1 Task 2 Task 3 Task 4 Task “n” Task 5 Task 6 Lenhardt & Colton, LLC

31. Example of Results: An “80/20” Analysis Lenhardt & Colton, LLC

32. Example: Cost/Unit of Primary Outputs Lenhardt & Colton, LLC

33. Example: Secondary Activities Lenhardt & Colton, LLC

34. Example: Hours/Unit Lenhardt & Colton, LLC

35. Activity “5”—A Closer Look Lenhardt & Colton, LLC

36. EC5—Repair Electronic Equipment • Normalization Criteria Lenhardt & Colton, LLC

37. EC5—Repair Electronic Equipment • Normalization Factors X = 2.8 Lenhardt & Colton, LLC

38. EC5—Repair Electronic Equipment • Hours Per Output Type 1.0 FactorX 2.8 hrs./ (n) unit 1.0X Lenhardt & Colton, LLC

39. EC5—Repair Electronic Equipment • Dollars Per Output Type 1.0X Lenhardt & Colton, LLC

40. EC5—Repair Electronic Equipment • Actual Quantities per Output Type 5028 1025 201 0 0 0 858 663 150 81 80 2 660 111 24 14 13 0 8910 Lenhardt & Colton, LLC

41. EC5—What if Demand Increases? • Projected Quantities per Output Type 5028 1025 201 0 0 0 858 663 150 > 250 81 80 2 660 111 24 14 13 0 Suppose projected demand is for +100 more Repairs of the variety indicated above, in red. Assuming no other changes, resource requirements would increase by approximately (100 qty * $317/ea = $32 K). Lenhardt & Colton, LLC

42. EC5—Kinds of Resources per (n) Output Lenhardt & Colton, LLC

43. Status of “Develop Activity-based Models” Lenhardt & Colton, LLC

44. ABM Rollout in Program Support • Major Milestones CompleteAB Models Institutionalize Do ABM Cycle 1 Institutionalize ABM Jan Feb Mar Apr May Jun July Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun 2001 2002 FOR MORE INFO... State/DOT deployment of Activity-based models nearing completion. Institutionalization of model-building process and usage is ongoing. ABM Cycle 1 is in early planning stage. Lenhardt & Colton, LLC

45. Evaluate Performance Cost, Quality, Time (CQT) Budgeting Assign Resources to achieve Performance Resource $ Input Activity Output Improve Processes Implement & Evaluate ABM - A Systematic Process ACT ACT CHECK Identify improvement opportunities PLAN Develop action plans DO Lenhardt & Colton, LLC

46. A New Focus Lenhardt & Colton, LLC

47. Today’s Agenda • The Case for Change at XPU • Why Process-Based? • Insights from a Real Life Project • XPU’s Roadmap Lenhardt & Colton, LLC

48. Summary of 2002 Project • Phase 1, Cost Center Process Analysis • Interlude— Collect Cost Center Data • Phase 2, Modeling • Cost Center Models • Total Utility Models • Phase 3, Training & Sustenance • Teach XPU How to Maintain Models • Teach XPU How to Do Workload Analysis w/Models • Teach XPU to Use Process Models in Budgeting • Teach XPU to Use Models to “Cost Something” Lenhardt & Colton, LLC

49. IdentifyActivities Non-financial process reports Develop process controls Identify outputs and CPO Tracecosts Identify improvement opportunities Project Status Reports Reduce NVA Improve VA Develop action plans Addressed By Project Addressed to Date The Overall Roadmap Process Controls Strategic Information ABC info for strategic decisions Develop ABC Information Evaluate Performance Cost, Quality, Time (CQT) Resource Controls Activity Based Planning & Analysis Process Improvements Lenhardt & Colton, LLC

50. Preparing for 2002 • Exec. Mgt. Discovery Sessions • Helps Exec. Mgt. to understand and internalize Process-Based thinking • Helps Exec. Mgt. to knowledgably advocate Process-Based solutions to their organizations • Some sort of “all hands” communication / training session in 3rd or 4th quarter… Lenhardt & Colton, LLC