- Business process
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A business process or business method is a collection of related, structured activities or tasks that produce a specific service or product (serve a particular goal) for a particular customer or customers. It often can be visualized with a flowchart as a sequence of activities.
Overview
There are three types of business processes:
- Management processes, the processes that govern the operation of a system. Typical management processes include "Corporate Governance" and "Strategic Management".
- Operational processes, processes that constitute the core business and create the primary value stream. Typical operational processes are Purchasing, Manufacturing, Advertising and Marketing, and Sales.
- Supporting processes, which support the core processes. Examples include Accounting, Recruitment, Call center, Technical support.
A business process begins with a mission objective and ends with achievement of the business objective. Process-oriented organizations break down the barriers of structural departments and try to avoid functional silos.
A business process can be decomposed into several sub-processes[1], which have their own attributes, but also contribute to achieving the goal of the super-process. The analysis of business processes typically includes the mapping of processes and sub-processes down to activity level.
Business Processes are designed to add value for the customer and should not include unnecessary activities. The outcome of a well designed business process is increased effectiveness (value for the customer) and increased efficiency (less costs for the company).
Business Processes can be modeled through a large number of methods and techniques. For instance, the Business Process Modeling Notation is a Business Process Modeling technique that can be used for drawing business processes in a workflow.
History
Adam Smith
One of the first people to describe processes was Adam Smith in his famous (1776) example of a pin factory. Inspired by an article in Diderot's Encyclopédie, Smith described the production of a pin in the following way:
”One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head: to make the head requires two or three distinct operations: to put it on is a particular business, to whiten the pins is another ... and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which in some manufactories are all performed by distinct hands, though in others the same man will sometime perform two or three of them.”
Smith also first recognized how the output could be increased through the use of labor division. Previously, in a society where production was dominated by handcrafted goods, one man would perform all the activities required during the production process, while Smith described how the work was divided into a set of simple tasks, which would be performed by specialized workers. The result of labor division in Smith’s example resulted in productivity increasing by 24,000 percent (sic), i.e. that the same number of workers made 240 times as many pins as they had been producing before the introduction of labor division.
It is worth noting that Smith did not advocate labor division at any price and per se. The appropriate level of task division was defined through experimental design of the production process. In contrast to Smith's view which was limited to the same functional domain and comprised activities that are in direct sequence in the manufacturing process, today's process concept includes cross-functionality as an important characteristic. Following his ideas the division of labor was adopted widely, while the integration of tasks into a functional, or cross-functional, process was not considered as an alternative option until much later.
Other definitions
In the early 1990s, US corporations, and subsequently companies all over the world, started to adopt the concept of reengineering in an attempt to re-achieve the competitiveness that they had lost during the previous decade. A key characteristic of Business Process Reengineering (BPR) is the focus on business processes. Davenport (1993)[2] defines a (business) process as
”a structured, measured set of activities designed to produce a specific output for a particular customer or market. It implies a strong emphasis on how work is done within an organization, in contrast to a product focus’s emphasis on what. A process is thus a specific ordering of work activities across time and space, with a beginning and an end, and clearly defined inputs and outputs: a structure for action. ... Taking a process approach implies adopting the customer’s point of view. Processes are the structure by which an organization does what is necessary to produce value for its customers.”
This definition contains certain characteristics a process must possess. These characteristics are achieved by a focus on the business logic of the process (how work is done), instead of taking a product perspective (what is done). Following Davenport's definition of a process we can conclude that a process must have clearly defined boundaries, input and output, that it consists of smaller parts, activities, which are ordered in time and space, that there must be a receiver of the process outcome- a customer - and that the transformation taking place within the process must add customer value.
Hammer & Champy’s (1993)[3] definition can be considered as a subset of Davenport’s. They define a process as
”a collection of activities that takes one or more kinds of input and creates an output that is of value to the customer.”
As we can note, Hammer & Champy have a more transformation oriented perception, and put less emphasis on the structural component – process boundaries and the order of activities in time and space.
Rummler & Brache (1995)[4] use a definition that clearly encompasses a focus on the organization’s external customers, when stating that
”a business process is a series of steps designed to produce a product or service. Most processes (...) are cross-functional, spanning the ‘white space’ between the boxes on the organization chart. Some processes result in a product or service that is received by an organization's external customer. We call these primary processes. Other processes produce products that are invisible to the external customer but essential to the effective management of the business. We call these support processes.”
The above definition distinguishes two types of processes, primary and support processes, depending on whether a process is directly involved in the creation of customer value, or concerned with the organization’s internal activities. In this sense, Rummler and Brache's definition follows Porter's value chain model, which also builds on a division of primary and secondary activities. According to Rummler and Brache, a typical characteristic of a successful process-based organization is the absence of secondary activities in the primary value flow that is created in the customer oriented primary processes. The characteristic of processes as spanning the white space on the organization chart indicates that processes are embedded in some form of organizational structure. Also, a process can be cross-functional, i.e. it ranges over several business functions.
Finally, let us consider the process definition of Johansson et al. (1993).[5] They define a process as
”a set of linked activities that take an input and transform it to create an output. Ideally, the transformation that occurs in the process should add value to the input and create an output that is more useful and effective to the recipient either upstream or downstream.”
This definition also emphasizes the constitution of links between activities and the transformation that takes place within the process. Johansson et al. also include the upstream part of the value chain as a possible recipient of the process output. Summarizing the four definitions above, we can compile the following list of characteristics for a business process.
- Definability : It must have clearly defined boundaries, input and output.
- Order : It must consist of activities that are ordered according to their position in time and space.
- Customer : There must be a recipient of the process' outcome, a customer.
- Value-adding : The transformation taking place within the process must add value to the recipient, either upstream or downstream.
- Embeddedness : A process can not exist in itself, it must be embedded in an organizational structure.
- Cross-functionality : A process regularly can, but not necessarily must, span several functions.
Frequently, a process owner, i.e. a person being responsible for the performance and continuous improvement of the process, is also considered as a prerequisite...
Importance of the Process Chain
Business processes comprise a set of sequential sub-processes or tasks, with alternative paths depending on certain conditions as applicable, performed to achieve a given objective or produce given outputs. Each process has one or more needed inputs. The inputs and outputs may be received from, or sent to other business processes, other organizational units, or internal or external stakeholders.
Business processes are designed to be operated by one or more business functional units, and emphasize the importance of the “process chain” rather than the individual units.
In general, the various tasks of a business process can be performed in one of two ways – 1) manually and 2) by means of business data processing systems such as ERP systems. Typically, some process tasks will be manual, while some will be computer-based, and these tasks may be sequenced in many ways. In other words, the data and information that are being handled through the process may pass through manual or computer tasks in any given order.
The Four Major Process Improvement Areas
The point to note here is that, irrespective of the class of the task - whether manual or computerised - it is important that each task - and hence the process as a whole – is designed and periodically reviewed, improved, or substituted by another task, with a view to continuous improvement in four major areas:
These areas are explained by highlighting typical deficiencies in each of them, as under:
Effectiveness
The overall effectiveness of a process is the extent to which the outputs expected from the process are being obtained at all, and is therefore a first measure of the basic adequacy of the process and its capability to fulfill the logical and reasonable expectations of process uses and operators.
For example, consider the material procurement process. One of its important tasks is the sub-process for supplier follow-up to ensure timely deliveries of materials. Such a task is considerably less effective if it does not provide accurate and timely purchase order status reports for use of the purchase department staff responsible for follow-up.
Efficiency
Supposing it has been observed that the average time taken to prepare and send out a purchase order after receipt of a properly prepared intent from the end-user is unacceptably high, leading to delayed customer deliveries and consequent customer complaints.
The process of “converting” the end-user’s intent to a purchase order is effective because a purchase order is being somehow generated, but its efficiency is very low since it takes an inordinate amount of time and costs considerably more in terms of the cost to the company of the salaries of staff members involved.
Internal Control
In a scenario where quantities of major raw materials are regularly ordered and consumed, rates are fixed with selected, reliable, approved vendors for an extended period – commonly a year. Moreover, let us say that the rate contract does not contain a price escalation clause. This safeguards the organisation from unanticipated price escalation during the period. The rate contract data are stored in the ERP system’s database. Whenever materials are to be ordered (with or without a delivery schedule), purchase orders are generated mentioning the rate finalised in the rate contract. An internal control exists to keep the purchase rate constant throughout the year.
Suppose, however, it is found that the rate on a purchase order based on a current rate contract is changed to a different value, and the purchase order then sent out to the supplier. This is a serious lapse in internal control, since a change to a higher rate exposes the company to a higher financial liability. Moreover, the editability of the rate in such a purchase order completely nullifies the internal controls provided by having a rate contract in the first place and including a no-escalation clause in it. There would be a further breach of internal control if it were found that such a PO amendment is actually authorised before sending the purchase order to the supplier.
Compliance to various statutes and policies
There are certain situations where payments made to consultants or service contractors must be statutorily made after deducting tax at source (T.D.S.), and such T.D.S. amounts must be deposited in government treasury accounts with banks on or before a specified date in the month following the month in which the payments are made.
In such cases, if a business process does not provide for deduction of T.D.S. and/or fails to ensure deposition into government accounts by the specified date, then this is a statutory compliance issue that makes the concerned executives liable to civil / criminal legal action.
Policies, Processes and Procedures
The above improvement areas are equally applicable to policies, processes and detailed procedures (sub-processes/tasks). There is a cascading effect of improvements made at a higher level on those made at a lower level.
For instance, if a recommendation to replace a given policy with a better one is made with proper justification and accepted in principle by business process owners, then corresponding changes in the consequent processes and procedures will follow naturally in order to enable implementation of the policies
Manual / Administrative vs. Computer System-Based Internal Controls
Internal controls can be built into manual / administrative process steps and / or computer system procedures.
It is advisable to build in as many system controls as possible, since these controls, being automatic, will always be exercised since they are built into the design of the business system software. For instance, an error message preventing an entry of a received raw material quantity exceeding the purchase order quantity by greater than the permissible tolerance percentage will always be displayed and will prevent the system user from entering such a quantity.
However, for various reasons such as practicality, the need to be “flexible” (whatever that may signify), lack of business domain knowledge and experience, difficulties in designing/writing software, cost of software development/modification, the incapability of a computerised system to provide controls, etc., all internal controls otherwise considered to be necessary are often not built into business systems and software.
In such a scenario, the manual, administrative process controls outside the computer system should be clearly documented, enforced and regularly exercised. For instance, while entering data to create a new record in a material system database’s item master table, the only internal control that the system can provide over the item description field is not to allow the user to leave the description blank – in other words, configure item description as a mandatory field. The system obviously cannot alert the user that the description is wrongly spelt, inappropriate, nonsensical, etc.
In the absence of such a system-based internal control, the item creation process must include a suitable administrative control through the detailed checking, by a responsible officer, of all fields entered for the new item, by comparing a print-out taken from the system with the item data entry sheet, and ensuring that any corrections in the item description (and other similar fields where no system control is possible) are promptly carried out.
Last but not least, the introduction of effective manual, administrative controls usually requires an overriding periodic check by a higher authority to ensure that such controls are exercised in the first place.
Information Reports as an Essential Base for Executing Business Processes
Business processes must include up-to-date and accurate Information reports to ensure effective action. An example of this is the availability of purchase order status reports for supplier delivery follow-up as described in the section on effectiveness above. There are numerous examples of this in every possible business process.
Another example from production is the process of analysis of line rejections occurring on the shop floor. This process should include systematic periodical analysis of rejections by reason, and present the results in a suitable information report that pinpoints the major reasons, and trends in these reasons, for management to take corrective actions to control rejections and keep them within acceptable limits. Such a process of analysis and summarisation of line rejection events is clearly superior to a process which merely inquires into each individual rejection as it occurs.
Business process owners and operatives should realise that process improvement often occurs with introduction of appropriate transaction, operational, highlight, exception or M.I.S. reports, provided these are consciously used for day-to-day or periodical decision-making. With this understanding would hopefully come the willingness to invest time and other resources in business process improvement by introduction of useful and relevant reporting systems.
Supporting theories and concepts
Frederick Winslow Taylor developed the concept of scientific management. The concept contains aspects on the division of labor being relevant to the theory and practice around business processes. The business process related aspects of Taylor's scientific management concept are discussed in the article on Business Process Reengineering.
Span of control
The span of control is the number of sub-ordinates a supervisor manages within a structural organization. Introducing a business process concept has a considerable impact on the structural elements of the organization and thus also on the span of control.
Large organizations that are not organized as markets need to be organized in smaller units - departments - which can be defined according to different principles.
Information management concepts
Information Management and the organization design strategies being related to it, are a theoretical cornerstone of the business process concept.
See also
- Business analysis
- Business Process Automation
- Business Process Definition Metamodel
- Business process illustration
- Business process improvement
- Business process management
- Business process mapping
- Business process modeling
- Business Process Modeling Notation
- Business process outsourcing
- Business process reengineering
References
- ^ Anderson, Chris. What are the Top Ten Core business processes?, Bizmanualz, July 22nd, 2009.
- ^ Thomas Davenport (1993). Process Innovation: Reengineering work through information technology. Harvard Business School Press, Boston
- ^ Michael Hammer and James Champy (1993). Reengineering the Corporation: A Manifesto for Business Revolution, Harper Business
- ^ Rummler & Brache (1995). Improving Performance: How to manage the white space on the organizational chart. Jossey-Bass, San Francisco
- ^ Henry J. Johansson et al. (1993). Business Process Reengineering: BreakPoint Strategies for Market Dominance. John Wiley & Sons
Further reading
- Hall, J.M. and Johnson, M.E. (2009, March), “When Should Process Be Art, Not Science“, Harvard Business Review, 58 – 65
- Paul Harmon, (2007). Business Process Change: 2nd Ed, A Guide for Business Managers and BPM and Six Sigma Professionals. Morgan Kaufmann
- E. Obeng and S. Crainer S (1993). Making Re-engineering Happen. Financial Times Prentice Hall
- Howard Smith and Peter Fingar (2003). Business Process Management. The Third Wave, MK Press
- Slack et al., edited by: David Barnes (2000) The Open University, Understanding Business: Processes
External links
- BPTrends Website A free webizine that publishes articles on all aspects of business process
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