Get to Cause
Effective problem-solving is a passion of mine. I see so many examples of failed efforts that may have been successful had a proven methodology been applied. One of the most common failures is not targeting a root cause. My preferred problem-solving methodology comes from Pascal Dennis. Details can be found here. It’s a four-step problem-solving model based on these key questions:
Do I have a problem?
Do I know the root cause?
Have I confirmed cause and effect?
Have I confirmed the counter measure?
To illustrate this methodology, I will share my experience with a traditional budget process and its effectiveness in contributing to appropriate fiscal stewardship.
Do I have a problem?
As I reflect on my experience with the budget process, I questioned its value to the organization. The process failed to adjust for changes in budget assumption that were outdated as the new year began. The development process was cumbersome. The hours of analyst time and our leadership team to work through this process were staggering. Invariably the process began with a draft budget developed by finance. The department leaders would then add in expense creating a seemingly insurmountable budget deficit. Then the negotiations began. Weeks of haggling to ultimately arrive at a balanced budget with unrealistic assumptions shining through in the first quarter of the new year.
Did I have a problem? Yes. Next, could I quantify it? I asked the team to evaluate the prior three years of budgets calculating the number of operating units within 5% of budget, 10% of budget and so on. It turned out that fewer than 20% of all cost centers were within 10% of budget. Then, I asked for the total hours of time spent by leadership on the development of the budget. I do not recall the specific total. It would not be unreasonable to consider that 40 leaders dedicated 40 hours over the course of 3 months on this process. Then consider the monthly variance analysis that would occur which ultimately did nothing to increase adherence to the plan. In our case the margins were good but the budget was bad, contributing very little to our financial stewardship of the organization.
Do I know the root cause?
In the next step, we asked a group of department directors to evaluate this concern and confirm if a problem was present. This group included the Director of Finance and the budget analysts. The feedback was predictable. The group confirmed its dissatisfaction with the current process and agreed it was wasted effort. The team used the 5-Why technique to develop cause. By asking why is this happening? Then why is that happening? The group could uncover the point of cause, then the direct cause and ultimately the root cause.
A root cause is almost always one of three things ― lack of a standard, lack of adherence to a standard or lack of a system.
The group agreed on two key root causes. The first was a lack of a system. Our budget process did not systemically adjust for real time changes in the environment or our operation. The second was really about the lack of adherence to a standard referring to the current variance process that rarely resulted in countermeasures to correct for a budget variance. I believe this stems from a lack of belief in the current process combined with no personal responsibility for the circumstances causing the variation from budget. Invariable we would have positive variance offsetting some or all of the negative variances leading to the global achievement of the target. Yet, we were still spending hours every year on a process that added no value.
Have I confirmed cause and effect?
The group reflected on its experience with the fixed budget process and confirmed that its inability to adjust for real time changes contributed largely to positive and negative variances that were under constant review. The group formed a hypothesis around developing a process where frequent adjustments could be made to account for these changes in order to free up management time to focus on the operation and its continuous improvement.
Have I confirmed the counter-measure?
The team explored the use of a rolling forecast model. In this model each operating unit would have key performance indicators around labor, productivity and total cost. This would replace line-item expense budget simplifying the forecast process. Finance would produce an 18-month (six quarter) rolling forecast. It would not necessarily go down to every existing cost center but to appropriate groupings based on the divisional structure of the organization. Thus, simplifying it further. The forecast would be reviewed and updated quarterly with appropriate adjustments to the forecast to remain on target for the annual operating margin. The executive team of the organization embraced the recommendation of the problem-solving group and the solution was implemented.
Rolling forecasts have now spread through the industry in various forms. I welcome any thoughts on their use and benefit or even the problems that may have surfaced.
