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Efficiency versus Effectiveness: How Companies Can Accomplish Goals


Often, when a company has a stated goal of improving performance, their target is to enhance efficiency. However, a valuable opportunity is sometimes missed by not taking an overall look at the effectiveness of their business processes. Many companies can achieve a higher level of effectiveness through understanding current processes, and redesigning those processes to take advantage of advances in technology, elimination of wasted work, better alignment of human resources and improved internal controls.

Efficiency is doing things right, but effectiveness is doing the right thing. An example is if you visualize an automobile coming down an assembly line, (sparks flying as the robotic arms of the automated welding machines do their work), these robots are far more efficient at welding than any human could ever be. However, if the robots are welding the door shut, the process is still efficient, but certainly not effective.

The situation is similar when many companies evaluate, select and implement new information technology systems. When you implement a new solution, it is likely to make processes more efficient. However, if you do not redesign the processes to properly align your people, the processes and the technology, you are unlikely to make the business more effective.

As an example, a client in need of a new financial system asked us to find a solution that was very efficient in creating journal entries, as they processed up to 2,500 a month. As part of our requirements analysis, we evaluated the business process and determined that the reason they were making such a high number of journal entries was coding errors in purchasing and accounts payable that required numerous reclassification entries.

The solution was to redesign the process and implement an automated requisition and purchasing system in which the requestor codes the requisition to the appropriate cost categories. The system automatically checks the budget for sufficient finances, and the cost categories flow through the purchase order to accounts payable. With this process, there are no invoice coding issues. The combination of the new system and the refined process significantly reduced the number of journal entries, allowing the company to become more efficient and effective.

Depending on the goals of the company, there are a wide variety of drivers for business process reengineering and systems evaluation, selection and implementation projects. However, the most common fall into two categories:

  • Growth: A business has expanded – either organically or through M&A, or perhaps plans to go public – and their current systems cannot keep pace with requirements. As a part of the process to evaluate, select and implement new systems, a company should utilize this opportunity to examine and redesign their business processes to make sure they are efficient and effective given the new and projected demands of the company.
  • Contraction: Especially in a difficult economy, many companies must do more with less as business has decreased, funding sources have dried up and headcounts have shrunk. Here, companies want to look for wasted work and where processes can be streamlined. Each process should add value to the business and make it more effective. Technology can then be applied to make the remaining processes more efficient.

So how does a company determine whether they are truly operating effectively? There are several key indicators that, if not addressed, could be damaging to a business’ health, image and bottom line:

  • Customer service: A high number of complaints, returns and orders that are not shipping on time, or overall poor customer satisfaction
  • Compliance: Difficulty in meeting filing and regulatory requirements, bank covenants and trade agreements
  • Budget to actual variances: Departments, programs or business units that consistently miss budget
  • Cost containment: Difficulty in minimizing costs and remaining competitive
  • Turnover: High unplanned turnover

A company that has any concerns regarding the effectiveness of their processes should consider contacting an experienced advisor. An examination of current processes can help to eliminate non-value added activities and identify opportunities to redesign and streamline the processes. Changes in the organizational structure may strengthen efficiency and effectiveness and result in enhanced control from a compliance perspective.

Implementing new technology can often solve several problems and make a business more efficient. However, evaluating current processes in conjunction with the system implementation to make sure that the right people are doing the right things, enabled by the right technology can help ensure that a company is truly effective.

For more information, please contact RSM Senior Director Charles Riess at 212.372.1222.