How to measure the ROI of your process improvement

Process Improvement ROIAs with any major change program, measuring the Return on Investment of your process improvement efforts is key for convincing internal stakeholders that what you are doing is worthwhile.  Despite this, many companies undertaking lean manufacturing do not measure the effectiveness of their efforts on improving the bottom line.

That is the finding of AlixPartners LP, a Chicago based consulting company.  AlixPartners director Andrew Csicsila suggested that whilst 85% of companies in their study were undertaking a form of process improvement, a surprising number had no measurable ROI to determine if it was working or not.

“One thing that we feel is the benefit of lean and Six Sigma is actually the return on investment in these programs,” he said. “Where’s the cash?”

So how can you ensure that your process improvement efforts are being tracked effectively?  Here are a few simple steps you can take to get you moving in the right direction.

Step 1 - Identifying opportunities where process improvement can be measured

It seems an obvious thing to say, but if you want to measure your process improvement efforts, you first need to identify process improvements that can be quantified and measured.

You'll need to benchmark your current performance to give you something to compare against, and then continue to measure outcomes as you make your improvements.

Step 2 - Construct your method of calculating savings

Lets say that you want to reduce the amount of time you spend in meetings (something I suspect most of us would enjoy).  You'd need to create your baseline, using something like:

Meetings (in hours) per week x employees in each meeting x cost per employee per hour

You might even want to throw in an extra 10% saving for the productivity gains from not having people stuck in meetings.  A simple formula like that gives you a method of quantifying your improvements though.

Step 3 - Turn these figures into a bottom-line ROI

So you have your baseline figure.  You can then figure out how much you expect to save by implementing your process improvement.  So if you want to reduce your meeting hours per employee by 20% you can gauge from that the financial savings you will make.

You will then need to figure out how much implementing these savings will cost you.  The meeting example is probably very cheap, but other improvements may require investment in new technology, training or tools.

Once you have the costs and benefits you can map out your ROI over the period of the project to determine the net gain you're likely to receive from implementing it.

This is obviously a simplistic example but gives you a basic framework for measuring the ROI of your process improvement efforts.

 

Adi Gaskell is Head of Online at the Process Excellence Network.

Comments

Excellent, Adi.  Thanks.  In a number of companies I've managed in, it's been an uphill struggle to get directors to understand such an ROI approach.  It's eminently sound, though.

Thanks Chris.  Strange isn't it?  It's such an analytical discipline that it's amazing that you wouldn't want to measure how successful it's been.  You'd imagine it is a fundamental part of doing process improvement in the first place.

Adrian Gaskell wrote:

Thanks Chris.  Strange isn't it?  It's such an analytical discipline that it's amazing that you wouldn't want to measure how successful it's been.  You'd imagine it is a fundamental part of doing process improvement in the first place.

I find it quite an indictment that so many senior managers refuse to/can't see the rationale and benefits.

Return on investment (ROI) is often kicked around by Leaders demanding to know how much a certain improvement project will or won’t save in the short-term. Sometimes the short-term effects of Lean often have negative financial consequences. This means that ROI is often a lead into to a go/no-go decision on a project but I’m not sure if it’s the best measure? For example, a project may generate a low ROI figure but its dollar effect may be large and, of course, the opposite applies too. I personally think that ROI is a more backwards looking measure as opposed to forwards looking. After the event you can estimate what the ROI was but it’s very difficult to forecast what it will be. Just to highlight what I mean, if you break down ROI into its two component parts:

  • Return – relies on prediction, its long-term and difficult to calculate
  • Investment – involves much less prediction, its short-term and easier to calculate

Sometimes improvement activities are small, incremental events. Spending time trying to work out the exact ROI isn’t worth the effort, the time or the resource. Focus on the process and the financial results will follow.

What I think it boils down to a shift of focus from asking, "What’s the ROI on this project?" to, "What is the performance we need and how can we reach it?"

However, saying all this ROI IS an important metric, especially if you consider it in conjunction with other perhaps non-financial measures. For example factoring in the improvement to employee morale or a lower turnover rate which results from smaller kaizen events. I’d suggest involving Lean Accountants, people who understand real cost accounting; they will help you to break down the costs and benefits for any project.