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Audit Value Factor: Consulting Tools for Auditors Dan Samson, CAE SRI International

San Francisco IIA June 15, 2016

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SRI Washington, D.C. SRI State College, Pennsylvania SRI Tokyo, Japan SRI Harrisonburg, Virginia SRI St. Petersburg, Florida

■  Founded by Stanford in 1946

◆  Based in Silicon Valley

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■  Independent in 1970

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◆  800 with advanced degrees

◆  More than 20 locations worldwide

■  Consolidated 2015 revenue ~$520M

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Technicalexper-seforDHS

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InternalandExternalCustomers

InternalAudit

Execu-vesandAudit

CommiJee

What is the common language among these stakeholders?

?

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How much value did you provide customers last year?

Last month?

Last week?

How do you define Value?

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Defining Value

Ø  Customer Value Definition

Critical for any Internal Audit Organization

Ø  Benefits and Costs are determined by the customer (not by us!)

Ø  Every engagement should have a value proposition – even those focused on compliance. Score and rank proposed audits by Value Factor.

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•  !Value!Factor!=!!!!

Perceived!Customer!Benefits!

!!!Perceived!Customer!Costs!

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Connecting Work to Value

•  When performing enterprise risk assessments, calculate the Audit Value Factor (AVF) for potential projects.

•  Traditional considerations: likelihood, impact, velocity of risk.

•  Additional consideration: AVF.

•  Rank audit universe, not only by risk, but also AVF.

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How?

•  Collaborate with customers on universe of possible projects and solicit their priorities based on value.

•  Do advanced work via data analytics, benchmarking, initial diagnostics, and best practice research.

•  Guide customer on ways projects could generate benefits.

−  What are potential direct cost savings (process efficiencies, resource allocation, sourcing options, waste, etc.)?

−  What are potential ways to avoid cost (process inefficiency, fines / penalties, etc.)?

−  What are the potential revenue recoveries (royalties / licensing, warranties, overpayments, improper reimbursements, etc.)?

•  Collaborate with customers to understand potential costs – such as administrative time, system investments, etc.

•  Evaluate projects with highest Audit Value Factor for inclusion in Audit Plan.

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Example

•  Suppose process X is supported by a $1.5 million budget.

•  Perceived benefits:

−  10% reduction in non-value added activity (benefit), translates to $150K in benefit, which can be reassigned to backlog needs, reallocated to other processes, or eliminated.

−  Perpetual benefit of $1.5 million ($150K/.10)

•  Perceived costs:

−  Process diagnostic administrative time of 16 hours x 3 individuals x $50/hour = $2,400. This is a one time cost.

−  Implementation costs of $25,000. This is a one time cost.

•  Audit Value Factor = ~55 ($1,500,000 / $27,400)

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Always Monetize your Recommendations

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Adding Value: Assessing Processes for Efficiency

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Customer Value Stream

•  Customer = external, paying Customer

•  Value (usefulness, worth, utility) is translatable into something that Customers will gladly pay money for:

Products&FeaturesServiceAKributesQualityLevelsDeliveryRateConvenience

ResponseTimePricePointIntegrityandCommitmentReputa?on

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Value-Added Terms

•  Value Added Activity

−  Done right the first time

−  Transforms or shapes the product or service to be delivered

−  Adds value to the external customer

•  Non-Value Added Activity - Unplanned (Pure Waste)

−  Those activities that take time or resources, but do not add to the customer requirements (goal = eliminate these!)

•  Non-Value Added Activity – Planned (Planned Waste)

−  Those activities that do not add to the customer requirements, but must be done for the business to operate (goal = reduce these!)

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Seven Sources of Waste

•  Correction

•  Overproduction

•  Material movement

•  Motion

•  Waiting

•  Inventory

•  Processing

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Waste (Product Development)

•  Correction – miscommunication, coding errors

•  Over Production – designing but not making, never gets to launch, no standardization, designing in features that customers don’t want

•  Material Movement – data hand-off

•  Motion – unnecessary analysis, testing, people involved, coordination of meetings, etc.

•  Waiting – for other elements/functions/disciplines

•  Inventory – design data not organized/not fully utilized

•  Processing – redesign/unfocused activities; poorly run team meetings

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Waste (Administration)

•  Correction – incorrect data entry

•  Over Production – preparing reports, not acted upon

•  Material movement – extra steps in the process; distance traveled

•  Motion – unnecessary tasks

•  Waiting – processing monthly, not as the work comes in (closings)

•  Inventory – transactions not processed

•  Processing – multiple signoffs, reports, etc.

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Value Add Analysis

Benefits:

•  Enables identification of waste and planned waste for elimination and further diagnostics

•  Leans processes

•  Facilitates knowledge sharing among stakeholders

•  Prioritizes improvement opportunities

•  Saves your company actual $$$!

•  Improves your external customer’s satisfaction

•  Can enable generation of revenue

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Approach

•  Identify defined process to assess. You will need:

−  Clear beginning and ending points

−  Know all stakeholders for process

−  Understand systems, etc. involved or have stakeholder with knowledge

•  Review existing workflows or create new ones.

•  Validate and “level set” process owners based on existing workflows. Gain baseline agreement for discussion.

−  Avoid assessing multiple or related workflows at one time.

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Approach continued

•  Facilitate discussion with process owners

−  Set Ground Rules

−  Map the steps in the workflow as if “you were the object”

•  Document workflow step description and responsibility

•  Identify the elapsed time since the prior step (i.e. step one will have a zero elapsed time from prior step)

•  Identify the actual time each step takes to complete in a common unit of measure (usually minutes)

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Approach continued

•  Identify the amount of “dead time” associated with the step

•  Through discussion with stakeholders determine whether the step is value added or not

−  Done right the first time

−  Transforms or shapes the product or service to be delivered

−  Adds value to the external customer

•  Determine whether non-value added activities are pure waste or planned waste

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Example – Value Add Analysis Utility Business •  New customer connections

ServicetakesCustomer

Infoandopensaccount

CustomercallsServiceCenterandrequests

Service.

ServiceRep.Supervisor

reviewsinputforaccuracy.

Newcustomerinfoloadedto

NewConnec?onsSystemovernight.

NewConnec?onsDept.downloads

NewConnectDailyReport

Verifiescustomerapplica?oncomplete

andforwardstoschedulerforappointment.

Start

End

OK?

Rework No

Yes

SchedulercontactsCustomerforAppointment.

Schedulerestablishesworkorderandforwards

tofieldoffice.

FieldofficeVerifiescustomerAddressandinfo

complete

Staffswork

forconnec?on.

Customerconnected

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Which Steps are Value-Added?

ServicetakesCustomer

Infoandopensaccount

CustomercallsServiceCenterandrequests

Service.

ServiceRep.Supervisor

reviewsinputforaccuracy.

Newcustomerinfoloadedto

NewConnec?onsSystemovernight.

NewConnec?onsDept.downloads

NewConnectDailyReport

Verifiescustomerapplica?oncomplete

andforwardstoschedulerforappointment.

Start

End

OK?

Rework No

Yes

SchedulercontactsCustomerforAppointment.

Schedulerestablishesworkorderandforwards

tofieldoffice.

Fieldofficeverifiescustomeraddressandinfo

complete

Staffswork

forconnec?on.

Customerconnected

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Calculating Waste and Planned Waste Step Description Responsible

PersonElapsed

TimeActual Time

(minutes)

Dead Time Value Add

Non-Value Add

1 Customer calls Service Center and requests service.

Customer, Call Center

0 0 0 0 0

2 Service takes Customerinfo and opens account

Call Center Rep 0 20 1 20 0

3 Service Rep.Supervisor reviews input for accuracy.

Supervisor 21 20 40 0 20

4 Rework Call Center Rep 60 90 40 0 905 New customer info loaded to

New Connections System overnight.Supervisor 130 30 480 0 30

6 New Connections Dept. downloads New Connect Daily Report

New Connects 510 30 60 0 30

7 Verifies customer application complete and forwards to scheduler for appointment.

New Connects 90 60 60 0 60Step Description Responsible Person

Elapsed Time

Actual Time

(minutes)

Dead Time Value Add

Non-Value Add

8 Scheduler contacts Customer for Appointment.

Scheduler 120 20 20 20 0

9 Scheduler establishes work order and forwards to field office.

Scheduler 40 60 120 0 60

10 Field office verifies customer address and info complete

Field Office 180 60 2880 0 60

11 Staffs work for connection. Field Office 2940 120 1440 0 12012 Customer connected Field Office 1560 60 120 60 0

Total 5261 100 470

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Prioritize Waste Reduction

-140

-120

-100

-80

-60

-40

-20

0

20

40

60

80

1 2 3 4 5 6 7 8 9 10 11 12

Val

ue A

dded

Non

-Val

ue A

dded

Value AddedPure WastePlanned WasteDead Time

GiventhedatacollectedfromtheValueAddAnalysis,whichmajorstepswouldyoupriori?zeforfurtherdiagnos?cs/analysis?

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Calculate the Value of Waste Reductions

Step #4 “Rework”

−  130 minutes of time dedicated to rework.

−  What are the root causes and conditions associated with the rework? Eliminate these root causes.

−  A 50% reduction in time associated with rework will save $$$

•  65 minutes x $50/hour = $54 x multiple connections!

World-classorganiza?onshaveprocesseswith10%-30%VA

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How we work is our most important innovation

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Questions?

Let’s Connect!

https://www.linkedin.com/in/danielasamson

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Thank You

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