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Archive for December, 2011


Without measurement systems, it’s difficult to improve your performance. You may have people working on the wrong things because they don’t know what’s important. And you may be subject to continual complaints about service and cost based on anecdotal evidence and past history rather than current performance.

Measurement systems really need to look at three issues:

  • Performance – do we do what we do well?
  • Value – is the work we do valuable to the business and its customers?
  • Health – what is our ability to sustain and improve performance?
Measuring Shared Services

Measuring Shared Services

Current measurement systems often concentrate on performance of specific tasks or processes because this is the easiest to measure. But work of little value, even if done well, does not help the business. At the same time, measures of health are necessary to ensure that we don’t achieve current good performance at the expense of sustainability – a classic example is a factory that skips preventive maintenance to increase current quarter profits. Without health measures, you may not see the consequences of such action soon enough.

Value Propositions

Before you try to measure the performance of any shared services organization, you should start by establishing its value proposition. Unfortunately, the starting point is often unpromising – the default definition for many shared services organizations is “all the non-value-added activities.” Nevertheless, there must be a value proposition for each of the processes and activities of the shared services unit. If not, drop the activity! Value propositions will normally fall into one of three categories: baseline, tactical (often project-based), and strategic services. Table 1.0 provides example value statements in each category.

Table 1.0: Example Value Propositions

Service/ Measures

Example/

Value Statement

Baseline :

  • Cost
  • Accuracy
  • Availability
  • Timeliness

 

Payroll processing is a baseline activity required “to be in business.”  The shared services unit now processes payroll for an average cost of £9.00 per employee per month, with less than one error per 10,000 pay events and a 100% on-time record for paycheck processing, tax deposits and tax reporting. These metrics compare with the 1997 baseline metrics for the six largest business units of costs of £11.23 per employee per month, an average error rate of 7 errors per 10,000 pay events and a 99.5% on-time record for paycheck processing, tax deposits and tax reporting.
Email services for all employees have been determined to be an essential activity. Email is now available for 100% of the workforce at a cost of £11.00 per employee per month. Availability of Email is now 99.6% (less than 36 hours of downtime per year). Response time complaints have decreased to 30% from the1997 baseline year. In the baseline year for the six largest business units, costs were £12.15 per employee per month, availability averaged 99.1% (more than 78 hours of downtime per year), and response time complaints averaged 7 per user per year.
New employee set-up has the goal of ensuring that, once a new employee has an assigned start date, he/she will have the equipment, location, and training needed to be productive from the first day. This includes finding a location for the employee; obtaining office equipment (if needed), phones, computers, voice mail, passwords, email accounts, and access to computer applications he/she will need; and completing benefits and payroll enrollment and all drug testing. We provide initial orientation and a new employee help desk for the first four weeks. For all employees that start on designated orientation days, the goal is 100% set-up and usefulness on the first day of employment. For non-orientation start dates, the goal is 100% set-up and usefulness within four days. New employee set-up labor costs now average £1,025 for all employees starting on designated orientation days and £1,525 for employees starting on other days. (Equipment is excluded from this charge, as it is a capital expenditure of the business unit.)  There is no comparable benchmark on cost from the past. However, several surveys indicated that new employees were waiting an average of six days after hire date for completion of all of the items above.
Tactical/Project:

  • Project-related measures
  • Satisfaction
  • “Market share” versus external suppliers

 

Compensation design consulting services are offered to business units to help them reward desired performance, encourage retention of high performers, and enhance employee perception of compensation fairness. Services are offered at hourly and fixed-price project rates. These rates are at fully loaded cost plus a cost of capital charge. The compensation design group has 10 professionals who bill on average approximately 1,500 hours per year to client (business unit) work. This met the goal of 75% staff utilization (comparable to outside professional services firms). For each project involving more than 80 hours of work, we do a post-project interview to ascertain the business client’s perception of value received. Overall, satisfaction with these services was 8 on a 10-point scale. The business units may use outside providers of this service, and last year they used 3,000 hours of outside help. This fit the goal of providing 20% of these services on contract, 80% in-house.
Strategic:

  • Meeting of business strategic objective
Procurement of strategic materials with delivery within 12 hours of planned time at least 99% of the time is essential to the goals of inventory management. We need to achieve these time commitments while keeping strategic materials cost at less than 18% of COGS. In the baseline year, at the 6 largest business units, strategic materials costs averaged 18.7% of COGS (17%-21%), planned delivery time window was 24 hours, and that window was met 98.7% of the time. By leveraging our purchasing power across the 27 participating business units, we have increased our leverage with our 4 largest suppliers. Each has been willing to commit to price stability, which should result in the 18% COGS goal. They have taken forward future contracts, reduced delivery windows, and set a goal of 99% on-time delivery.

Selecting Metrics

I believe that once you clarify the value proposition, it will be much easier to identify the appropriate metrics.

For more information contact Shaun

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Concern # 2 – Operations

Reliability of the Cloud. Cloud Companies may not provide service level required or may go out of business. No one knows that the general reliability of the Cloud will be, or even how it can be measured adequately. If history is any guide to the future, then experimentation with a new model of delivering computing services in a matter of course will involve problems. No one wishes to be the first to experience these problems. Amelioration Strategy: Favor the large End-to-End providers (i.e., EDS/SAP).

Loss of control: data, software, and operational management. How can day-to-day operations and management control be set

Disadvantages of Cloud Computing

Disadvantages of Cloud Computing

up under the Cloud model? What are the organizational implications when data, software, and operations are under someone else’s purview? Clearly, each organization will be forced to answer this question in a different way, but for some, uncertainty in this domain under the Cloud model may prove to be a significant barrier to adoption. For others, perhaps, it will prove to be a great opportunity. Amelioration Strategy: Difficult. Try to maintain in-house expertise to use in case of a problem.

Technical decisions made by third party. What are the implications for IT autonomy when technical decisions are being made elsewhere, out of direct control? Amelioration Strategy: No real solution, unless Cloud and customers are partners.

Lack of in-house experts. Presumably, use of an Cloud will reduce the need to employ in-house experts in various areas of information technology and applications. This will reduce costs, but at the same time strip away skilled personnel from internal IT operations. IT organizations need to understand the implications of the lack of in-house experts. Note this is generally a long-term systemic issue with outsourcing. Like outsourcing, the Cloud model will create a certain level of dependence of the enterprise on its Cloud. Amelioration Strategy: Give in-house experts control over research responsibilities, and give them management decision status.

Staff migration from company. Few have considered the staffing implications of the Cloud model. What will happen to your own IT staff (assuming you have one) after the Cloud starts to take over major segments of your applications portfolio? If the staff leaves, then will your organization permanently lose the ability to ever build up an in-house operation? If so, then what are the long term implications for that? Clearly, migration of staff away can have serious implications, but it is difficult fully to anticipate what they are. Amelioration Strategy: Give in-house experts control over research responsibilities, and give them management decision status.

Boardroom representation. If the Cloud is a key partner in providing your service, it must be aware of all of your competitive plans, yet it also services your customers. The logical board member representing IT would be the Cloud itself, yet since it services competitors, this is not workable. Amelioration Strategy: Give in-house experts control over research responsibilities, and give them management decision status.

Unclear responsibility for failures. With the Cloud sharing your processing, problem determination can be difficult. If something fails, it may be unclear who is responsible for the failure. Amelioration Strategy: Pick Cloud providers carefully. Contract for single point of responsibility.

Technical decisions made by third party. Once the Cloud is doing the processing, it makes the technical decisions. This removes them from your control. The risk is that you are at the hands of the Cloud for IT-based innovation. Amelioration Strategy: No real solution, unless Cloud and customers are partners.

Mass market versus customization. It is impossible to get competitive advantage from IT applications that everyone else has access to. At the same time, customization can be expensive, possibly reversing the Cloud economic advantage.

Concern # 3 – Peak Workload Concerns

Monthly financial cycles, operational peaks, end-of-year, holiday crunches, and annual meetings – what will happen to a fully-developed Cloud model implementation when it is the end of the billing cycle and hundreds of company uses are doing their monthly billing? Will the system be able to handle it? If so, then how much extra capacity will the Cloud be required to build so that no one receives a “busy signal” during peak hours? And if a significant amount of extra investment is required, then how can the Cloud be profitable? The fact is that no one at this time understands the full implications of peak loading. Amelioration Strategy: Proper Cloud selection and use of contract guarantees.

Concern # 4 – Software Issues

There are a variety of software-related issues that must be considered in the evolving Cloud model:

Version update problems. What will happen when new versions of the software program are released? Has anyone  had experience migrating hundreds of different customers, and their data, to new versions? Although this is not impossible, not many Cloud vendors have done it yet,  and as a result it is a legitimate concern. However In my experience salesforce.com does manage this well, you need to make sure you choose carefully.  Amelioration Strategy: Exercise control by having ownership of the server or partition if possible.

Inability to customize. If the user organization has contracted for vanilla services from the Cloud, then it will be either impossible or very costly to make any type of modification or customization in the software outside of strictly pre-defined ranges of change. Each of these ranges for change needs to be negotiated in advance, because each will involve pricing; yet, it is impossible for any user fully to anticipate all of the changes that are going to be required. As a result, for some users the inability to customize the software being used might present a series of unanticipated business problems. Amelioration Strategy: Make this an advantage by minimizing customization.

Concern # 5 – Selection of Best Cloud Vendors

There are 1000’s  of Cloud vendors, but most persons have heard of only a few. Under these circumstances, how is it possible to make the best choice? Clearly advertising and word of mouth is going to play an important part in selection and screening, but this can not substitute for a clear and more transparent process. Until the markets ‘‘shakes out’’ some with the emergence of dominant players who have a good market reputation, selection of Cloud vendors will remain extraordinarily difficult to the user. Amelioration Strategy: Use a consultant with a track record in doing this.

Other Limiting Factors

Contract limitations. It is impossible to place too much emphasis on the importance of careful contract negotiation. Since there is a poor track record – actually no historical record at all – for Cloud vendors, it will be more difficult to write ‘good’ contracts that can handle the vast amount of new contingencies that may appear. As a result, the contract itself may end up being a liability for either the vendor or the user, neither situation of which is good for the relationship. Amelioration Strategy: Sign shorter contracts, adjust as necessary during renewal. Advance study pays off.

Pricing and economic assumptions may be faulty. There is such a high amount of change in the market, that pricing models can not possibly remain stable. They have not stabilized yet, and may not do so until the third quarter of 2012. As a result, any long-term contract (of perhaps more than 1 year) is subject to a significant amount of arbitrage risk in pricing. Amelioration Strategy: Sign shorter contracts, adjust as necessary during renewal. Do more than listen to the Cloud.

User resistance to change. In some organizations, user re-training, acceptance, and possible resistance to change may inhibit model adoption. Any type of change such as this demands significant sensitivity on the part of IT regarding users. Note that user resistance may not come only from desktop workers, but might as well come from line managers worried about confidentiality and security of their proprietary data. “If one of our competitors is using the same Cloud, how can we guarantee we will be protected?” might be one expressed concern. Amelioration Strategy: Improve training.

Reduced ability to develop competitive systems. Being forced to renegotiate new contracts or add ARUs (additional resource units) each time the enterprise wishes to adopt a major change in technology may not be the preferable route for companies wishing to develop competitive systems. Amelioration Strategy: In-house expertise still needed. Don’t let it slip away.

No standards for certification of applications or service levels. There are no standards for either of these. Amelioration Strategy: In absence of standards, develop your own – either on your own, or with unbiased experienced consultants.

Checklist for Ongoing Management of Your Cloud

Stick to clearly defined responsibilities
  • The company
  • The vendor
Follow pricing formulas and ground rules for change
  • Triggers (tariff increases or decreases, cost of living, etc.)
Formalize change management
  • Formal process and authorization
  • Updates/new releases/new services
  • Changes in requirements
  • Triggers
Monitor performance and service level guarantees
  • Define governance process and responsibilities
  • Specify vital signs, tolerance ranges, and metrics. What is measured – response time, storage capacity, up-time, time-to- repair/recovery, other? How frequently? For what time period? How do you calculate? What period to redress?
  • Reporting periods and formats
  • Face-to-face review meetings
  • Issues management
Put in place an escalation policy and process
  • Define conditions as to when to escalate to next higher level
  • Disputes, recourse and remedies
  • Internal responsibilities
  • External responsibilities – arbitration, the courts
Prepare for untoward contingencies, disaster recovery, back-up and insurance claims
  • Testing
  • Insurance (for multiple reasons – privacy, theft, going out of business, liability, intellectual property
  • Planning
Know how to terminate the agreement
  • Define conditions and responsibilities
  • Define transition plan and costs
  • Define who owns what resources
For more information please contact Shaun

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