When most executives think of an industrial company, they picture a highly disciplined factory under constant scrutiny for any evidence of inefficiency. Let’s call this the “downstairs factory.”

It rarely occurs to anyone that there could be similar “upstairs factories” in the same company -- in non-factory departments like finance, marketing and sales.

These departments make “products” that optimize the downstairs factory and the business overall. Astonishingly, however, companies run their upstairs factories as if the principles of continuous improvement they apply relentlessly downstairs don’t apply upstairs.

William Heitman-The Lab ConsultingFor example, one multibillion dollar division of a Fortune 200 industrial products manufacturer tracks cycle time and error rates in its plants. But its field sales, installation and customer service organizations don’t quantitatively measure detailed operating performance -- except for the typical summary budgets and targets. Consequently, it takes 20% more time to receive, book and process an order than it does to produce and deliver the same order!

This is almost unbelievably costly. Our research indicates that the average Fortune 500 company squanders more than 12% of its potential earnings because of inefficiencies in its upstairs factories. Yet upstairs factories can be “industrialized” and “leaned out” in much the same way as those downstairs have been.

The finance group would be the place to begin. The most important products generated here are management reports. In principle, these help managers monitor their operations and improve the business. In practice, there are simply too many reports disseminating too much inconsistent information.

Despite a plethora of technology, finance’s management reporting operations are like a medieval village cobbler’s shop. Each report is created at the request of a business unit, but there are no orders or requisition slips -- the report maker, like the cobbler, knows each customer. He doesn’t store, or even name his reports in a logical, easy-to-understand fashion. Each user squirrels away his favorites. Other users can’t find reports that might be useful to them, so they order up more custom, one-off reports. Later a part-time army of reconcilers will compare the data and struggle to agree on the implications.

The overhead cost is significant -- 40% of the work of these highly paid finance staffers is wasted, our research shows. Far more costly, however, is the loss of strategic insight that finance could be providing the business. Its product is management reports, after all. Mediocrity here breeds mediocrity in performance throughout the company. The opportunity cost is incalculable.

What can we bring in from the factory floor?

  • Plant scheduling is virtually non-existent in finance. “Drop everything,” ad hoc requests squander up to 50% of the finance group’s valuable capacity. Simple demand management practices can quickly reduce this to around 15%.
  • The product line is out of control. Few authorization controls exist -- almost anyone can order up any sort of report. Finance departments generate two to five times as many reports as they think they generate, and often up to 10 times as many as users need. Most of these are unused or underused. This problem can be eliminated, along with roughly half of existing reports, by using standard “bills of materials” for report design, report inventories and basic product management controls. Catalogs and central files would encourage the re-use of existing reports.
  • Production is inefficient; costs are unknown. At least 30% of finance’s activities are rework, error correction and overwork. The average cost per report ranges from $5,000 to $80,000 annually. These costs should be tracked and questioned.
  • Product performance is poorly evaluated. Many reports are un-useful, even counterproductive, for increasing value. Example: The finance group at a Fortune 250 company produces over 10,000 management reports for executives. Less than 6% of these address margins or profitability. You wouldn’t let manufactured products go out the door without knowing whether they perform. Someone, independent of the departments being analyzed, should design the reports.

Similar situations exist in marketing, sales, IT and customer service. The workers in these upstairs factories are some of the best-educated, most costly employees, yet their work routines are undocumented, and their tasks are not standardized.

Most executives will doubt the likelihood of such a large, overlooked opportunity for improvement. A few savvy, innovative opportunists, however, will seize the first mover advantage and bring downstairs discipline to their unruly factories upstairs.

It will become increasingly impossible to ignore the 12% of earnings lost in the well-intentioned but wasteful busy-ness upstairs.

William Heitman (wheitman@thelabconsulting.com) is managing director of The Lab Consulting, which has been advising companies on non-technology business improvement efforts since 1993. He holds an MBA from The Wharton School of the University of Pennsylvania. In his 10-year consulting career prior to creating The Lab, Bill worked as a manager with CapGemini and a predecessor strategy consulting firm named The MAC Group. He has led strategy development and operations improvement efforts for senior management across major supply chain and services businesses. Earlier in his career, he worked in the engineering and construction management industry. His views have been published in CFO Magazine, PropertyCasualty360, American Banker, Banking Strategy, and Banking Exchange (formerly, ABA Banking Journal).