How to get to 99% and beyond... it's all about managing exceptions

In my last blog I made the case that getting your business to 99% and beyond can be a source of sustainable competitive advantage and so it should be a priority for business leaders. In this article, I will explain how to get to 99% and beyond by managing exceptions.

That's not what we expected!

Most businesses are structured according to processes. Although there are exceptions that only work on unique projects, most companies are doing a lot of repetitive work and their activities are defined by processes that are triggered by events and which lead to predictable results. Whether you are buying a burger on the high street or an exotic holiday on-line, the decision to purchase triggers processes that deliver what you ordered, ensure that you pay for it, and line everything up for the next customer. Businesses aim for consistent processes to ensure that the end result is the same regardless of who takes the order or what day of the week it is.

However, real life has a way of throwing up surprises that are not foreseen in these processes. Even if you get your customer service to follow a consistent script, you can’t always expect your customers to follow the same script. Processes fail because things happen in the world outside your business that weren't foreseen in your processes.

When I lived in Germany, for example, I opened a joint bank account with my wife. At that point we generated an exception because my wife chose to keep her maiden name when we married. In those days German banks assumed that married couples had one surname; separate surnames on a joint account were not foreseen. In order to open the account my wife was known as Mrs Humphries. While this annoyed her, she could live with it, until the day when she triggered another process that required authentication of ID. Of course, she couldn't produce ID to prove that she was Mrs Humphries, because she wasn't. Luckily, the man who opened the bank account for us was available, and he was able to confirm her identity.

This is an example of an exception, and it’s something that happens daily in every business. In this case an employee took the initiative and saved the situation. His intervention was dependent on his personal knowledge, though. Had he not been there, the bank would have had an angry customer on their hands. Just as important is this: had there been another bank that allowed husbands and wives to have different family names then we would have changed banks.

If my example doesn't convince you, think about the frustrations that you have had as a customer because you are asking for something that falls outside of the mainstream. The simple act of moving house will give you an insight into the number of companies that assume people only have one address and a credit history linked to that address. After all it’s an assumption that works most of the time.

Understanding the nature of these exceptions and dealing with them will take you from getting it right 95% of the time to getting it right 99% of the time and beyond. For the record, 100% is not achievable. How many 9s you can achieve is what’s important. The thinner your margins, the more 9s you need.

Exceptions arise because process designers do not foresee everything that is going to happen. That’s understandable and normal. Reality is stranger than most of us realise until presented with evidence. Process designers typically start with a number of use cases and work them through. A use case is an example of a scenario that triggers a process. They use these use cases to explore possibilities that seem reasonable to them according to their experience. What they don’t do at this point is to think about all the possible exceptions that might occur. If they did they would probably go mad, or start on a work that has no end. In fact it’s a good thing that they don’t attempt to foresee every possible exception, because they would waste a lot of time preparing for exceptions that never happen. One aspect of exceptions that has surprised me over the years is how many potential exceptions never actually happen. I have seen process analysts tying themselves in knots trying to foresee every single possible problem, only to end up with unwieldy processes that are still caught out because something else happened that they didn't foresee.

The good news is that managing exceptions is actually not that complicated. But first you have to acknowledge that they are an unavoidable fact of life, and that they are important enough that you need to deal with them. It is not possible to engineer processes so that exceptions don’t occur. If you can’t accept this, then you should stop reading now, because the rest of this blog assumes these points to be true.

Are we dealing with apples or with fruit?

I have used three techniques which are relatively simple, but together they are extremely effective.

The first technique is to build exception handling into your processes and your organisation. You don’t have to know what is going to happen, but you do need to know what conditions should be met in order to proceed to the next step. When those conditions are not met, you foresee a step to handle the exception, you foresee people whose job it is to handle it and you foresee a consistent means for delivering those exceptions to them. What you don’t do, is try up front to describe exactly what the nature of the exceptions might be and what those people should do in response. Instead, you chose people who are good problem solvers and you give them the authority to use their initiative. It’s also worth considering giving them the option to overrule a control. A simple example that most of us have experienced is when an item in a supermarket is wrongly priced. The cashier cannot overrule the till and change the price, but he or she can call the supervisor, and if the supervisor is happy the price can be changed. The supervisor has the authority to overrule the process. So, the processes foresee exceptions, without prescribing a solution and a means of passing those exceptions on to people who can deal with them. The organisation foresees people who don’t work in the mainstream processes, but rather parallel to them, effectively dealing with all the exceptions that the process can’t deal with, and putting things back on track.

When these exceptions happen, it’s important that the process captures this information. One reason for doing this is to ensure that there is a trace of who is overruling your validations and how often. While it’s probably the right thing to do, it could also be fraud. More importantly though logging each of these exceptions enables the second technique, which is simply tracking the exceptions and performing root cause analysis to understand why they are happening in the first place. This will enable you to improve your processes and eliminate them with appropriate solutions. This technique is powerful because it is fact driven allowing you to focus on real problems. It does not depend on the imagination and insight of process analysts, and you focus your efforts on solving problems that really do happen, rather than problems that might. It also allows you to solve the problems that matter most because they happen more often.

Possibly the richest technique that I have used though is to delve into data quality problems and to feed them back into process improvement initiatives. This is less obvious than the first two suggestions, but often even more effective. Data and process are interdependent. Processes consume, modify and generate data, which in turn steers the processes. Process designers make assumptions about the data that drives their processes. If you can define these rules, and then search for data that doesn't respect them, then you win twice. Firstly you can identify data that will cause processes exceptions because it doesn't respect the business rules for the process. If you can identify the problematic data then you can fix the problem before it happens. Even more valuable though, is that data that doesn't fit the rules gives you an invaluable insight into how reality really is, rather than how you thought it was. By finding and analysing data that doesn't fit your rules, you get to understand the environment in which your business really operates, and how this is different from the way you assumed it works. If you then feed this back into your processes, again focussing on the problems that really occur rather than those that might, then you have a really powerful technique.

All animals on a sheep farm are sheep. All sheep are white.

So that’s it. The difference between getting it right 95% of the time and getting it right 99% or more of the time is down to managing exceptions. If you foresee these exceptions rather than fight them, and accept  them for what they are, you can reduce your waste, increase your customer satisfaction and increase your competitiveness. Furthermore, it’s a virtuous circle: once you allow for exceptions, and allow them to drive your process improvement initiatives, then you can actually eliminate the most important exceptions by building them into your processes.

Why 99% isn't enough any more

The world has changed, and even as world economies emerge from the financial crisis, nothing is quite as it was before. In most markets today the barriers to entry are low, customer expectations are high and competition is fierce.

Whether you are selling products or services, B2B or B2C, there is no shortage of competition. The customer has never had so much choice. Furthermore it is easier than ever for consumers to share their thoughts about the quality of their latest purchases and the after sales customer care. Your brand is under constant scrutiny.

This is all driving margins relentlessly down. Businesses operating on 40% gross margins have become the exception and not the rule. More and more businesses are being forced to operate as utility operations rather than high end added value. Quality cannot suffer though. If the price is too high or the quality too low, then your customers will look to your competitors, because somebody somewhere will be offering higher quality at lower prices. This is the new reality.

Operating in this new reality means that nothing can be wasted. The maths is simple. A company turning over £50 million with gross margins of 40% can afford to waste 1% of its turnover. That translates into £500 thousand losses from £20 million profit. When operating at just 10% gross margin the same wastage is still £500 thousand, but now from a gross margin of just £5m. In other words just 1% of revenue waste turns into 10% of gross margin, this can easily turn into 50% of net profit. Suddenly 99% is no longer good enough. Think about that for a moment. Getting it right for 99 customers out of 100 is not good enough anymore.

 

Getting it right, on time, every time, for every customer is the new normal. Getting the right product or service to the right place at the right time for the right price is what is needed for success. The wrong product to the right customer is wastage. The right service at the wrong time is wastage. The right product at the wrong price is wastage. Granting credit to a customer who is not creditworthy is wastage as is refusing credit to a customer who is creditworthy. Each mistake eats relentlessly into the bottom line.

Getting it all right means knowing your customers, suppliers, products, inventory levels, sales channels and getting them all synchronised. It means getting all your processes, information systems and data as good as they can be.

Your business processes are the means of adding value by delivering your products or services to your customers when and where they want them at the right price and with a minimum of fuss. Your data is your picture of reality, on which those business processes operate. If either process or data is wrong, you will make mistakes, and those mistakes will eat into your margins and reduce your ability to compete. Make enough mistakes and your competitors will be happy to satisfy your customers.

On the other hand if your business process are highly optimised and can deal with the exceptions as well as the “happy flow” that accounts for 90% of your business, if your data quality is high, so that you know who your customers are, how much stock you hold, what the delivery timing is and so on, then you will have a competitive advantage.

In this new reality, with low margins and low customer loyalty, competitive advantage is to be found in optimised processes working on high quality data. This combination of process and data quality allows the best businesses to operate on gross margins that their competitors cannot afford to follow. That is the opportunity offered by the new reality.