In our article (“The essential nature of capturing benefits in Lean programmes”) we describe the three main result areas from implementing Lean principles in an organisation (the people, the customer and performance/productivity) and the stages that ensure benefits are captured. What is not described is how these benefits should be further broken down to understand return on investment (ROI).
Lean programmes are chosen for many different reasons, but even when ‘cost’ or budget pressures are not a driver often the Executive team or board/trustees expect the programme itself to be at least cost neutral. This is not unrealistic. In our article (“Parkinson’s Law and the importance of cashing your benefits”) we describe how cashable benefits are derived from implementing a Lean programme regardless of the drivers for the programme itself, and the steps needed in order to fully realise and sustain those benefits.
The approach outlined below explains in practical terms how to arrive at a realistic ROI for your Lean programme.
Calculating the ‘investment’
Firstly you need to establish what the organisation considers an investment; this is calculated one of two ways:
- The additional financial spend on your Lean Programme. This includes consultancy costs, backfilling staff, system changes, etc. This does not include the value of any existing re-directed resources.
- The second way is the above plus the monetary value of all staff time spent on activity to implement Lean. This includes staff time participating in workshops, Lean Champion time, management time etc..
We advocate the first way of calculating investment, for two main reasons. Firstly because you don’t want to discourage participation in Lean activity, or limit its exposure in your organisation – measuring in-house time may lead organisations to try and control this investment ‘cost’. Secondly we believe that if your staff weren’t spending their time on Lean activity they would only fill it with other non-value adding activity, therefore time redirected is not a true ‘cost’ to the organisation.
How to calculate the ‘return’
During a Lean implementation, benefits capture happens in three places:
- As part of the organisational diagnostic
This identifies high level expected benefits, and outlines anticipated ROI from implementing Lean principles in your organisation. It is important that ROI and benefits capture is continued once the roll out of Lean principles and the service reviews take place.
- As part of team-based continuous improvement
Benefits and ROI should be monitored locally and are likely to be minor in scale by comparison. This should form part of your business as usual activity, and is not a focus in this article.
- During Lean service reviews
This is where the detail for the ROI calculation needs to be captured and monitored in a structured way. Below is an outline of how the ROI calculation stages should be followed during a service review or rapid improvement workshop.
Below is an example of one success measure from a recruitment & induction process review. The example has been worked up as a cash benefit; this service review had many other benefits that needed calculating in a similar way.
Success measure: New employees retained passed probation period (%)
Calculation details: Measured by looking at leavers within the period from their first day until their probation review at 6 months
Baseline: 65% of new employees pass their probation period (35% represents 35 employees)
Expected new result: 80% (15% improvement).
Cashable benefits calculation details: Cost saving by not having to go through recruitment and induction process again
Baseline: Cost of an employee failing probation & the cost of the subsequent recruitment round = £17,500 (cost of process = salary to deliver process x hours to complete process + any direct costs to organisation (fees/expenses))
Cost of employee failing probation x 35 (employees) = £612,500
Identified benefit: = 15 (employees) x £17,500 = £262,500
Realised benefit (at 6 months post implementation): 80% (representing 8 employees) = 8 x £17,500 = £140,000
Cashable benefit: Direct fees from recruitment process (expenses, fees, venue hire) = £3,300 per role x 8 = £26,400
= 0.5 FTE from HR team – team vacancy reduced from full FTE to half = £21,000
= 0.7 FTE from management team – not cashable (from different managers)
Total cashable benefit = £21,000 + £26,400 = £47,400
Please note the three phases of benefits capture identified in the diagram above and the definitions below:
- Identified benefits – The benefit of implementing a solution has been identified but nothing has yet changed. Depending on the process this can be an exact science or a ‘best guess’
- Realised benefits – The changes have taken place and therefore the benefits are now ‘live’, and can be accurately quantified
- Cashed benefits – Action has been taken to cash the benefits that have been realised. Cashing the benefit could mean doing more value add work with the same resource or literally cashing in the spare capacity by releasing staff or deleting vacancies.
Calculating and cashing benefits requires significant attention to detail and the willingness to have difficult conversations about whether benefits will be cashed or not. The danger of not doing these things is that you cannot evidence the financial benefits of your Lean programme, and the likelihood of being allowed to further invest in your programme (IT systems, resource, consultancy) will be low.
Ad Esse have 15 years experience of supporting organisations through transformation programmes and have a robust ROI and benefits capture approach. Contact us at email@example.com to discuss how we can support you.