PwCConsultingStrategy The Bureaucracy Measurement Index: A systematic way for companies to assess the burden of red tape
The Bureaucracy Measurement Index: A systematic way for companies to assess the burden of red tape
Eduardo Alvarez, Georges Chehade, Olaf Schirmer, Manish Mahajan
Published: June 29, 2016
Most large organizations struggle with bureaucracy, which can slow a company’s ability to respond to market changes and distract the company from building the differentiating capabilities it needs to grow. There is a clear need for a simpler and more aggressive approach to bureaucracy.
To address this problem, we have developed the Bureaucracy Measurement Index (BMI), a quantitative means to assess the level of bureaucracy within a company, compare it to benchmarks for that industry, and highlight problem areas.
The BMI breaks down all work that a company does into a hierarchy of processes and assigns a score to each. The score incorporates three elements:
Performance, defined as the efficiency and effectiveness by which the company can execute the process
Impact, defined as the relative weight of that process on the company’s overall mandate
Risk, defined as the probability of a negative event occurring due to process-related decisions
Critically, the BMI assessment allows companies to be strategic and targeted in how they address their organization. Because it factors risk into the equation, companies can set the right level of oversight for a particular function. In this way, the BMI can help companies make cuts where they’re needed while also identifying and investing in differentiating capabilities that will help the company unlock growth.
Once companies have identified burdensome processes or functions, a new tool known as robotic process automation (RPA) can be used to handle rote, manual, repetitive tasks without requiring highly standardized processes. In that way, RPA improves efficiency and reduces bureaucracy without sacrificing flexibility.
Bureaucracy is an age-old challenge that plagues most large organizations. However, as the pace of business accelerates, the inherent costs of bureaucracy are going up because it hinders a company’s ability to respond to market changes. Instead of focusing on building differentiating capabilities, employees and managers are burdened with inefficient and ineffective processes.
Another challenge is the increased level of regulation and controls now necessary in many core processes. In PwC’s 19th annual CEO survey (www.pwc.com/ceosurvey), more leaders identified overregulation as a source of concern than any other issue (ahead of climate change, infrastructure, and access to capital). Bureaucracy takes a significant toll in time, money, and employee morale. People are less productive in a highly bureaucratic organization, and the company is ultimately less able to grow.
Compounding the challenge is that bureaucracy is difficult to analyze at an enterprise level. Some organizations apply benchmarks to measure things like waste and overhead, but these tend to analyze functions or sub-functions, levels too low to create change throughout the enterprise. By themselves, benchmarks are not enough.
As a result, companies that try to address bureaucracy often use blunt tools. They may not realize that some processes and oversight are valuable, and cutting or streamlining those processes may introduce new forms of risk. Without adequate planning, such measures have a modest success rate, at best. Eventually, bureaucracy creeps back in, and many companies ultimately end up deciding — consciously or unconsciously — to live with it.
To address this problem we developed an analytical, structured method to assess the level of bureaucracy within a company — and to allow companies to compare themselves against their competitors. We call this the Bureaucracy Measurement Index (BMI).
The BMI is a comprehensive means of gauging the level of effectiveness and efficiency of individual processes, business units, and the enterprise as a whole. Critically, the BMI utilizes industry-specific performance benchmarks and it factors in an organization’s risk profile and growth priorities. In this way, it allows companies to accurately measure bureaucracy and be strategic, aggressive, and targeted in how they address it.
As the pace of business accelerates, the costs of bureaucracy are going up.
One means for reducing bureaucracy: Robotic process automation
Once companies have identified bureaucratic processes or functions, they can move with more speed, scale, and aggressiveness to address these opportunity areas. Companies can choose from several approaches, including improving processes, eliminating activities, or radically automating. Recently, a new technology known as robotic process automation (RPA) has shown promise as a feasible, low-cost approach.
RPA is a productivity software capability that operates in conjunction with existing IT systems and automatically performs repetitive manual activities. Earlier productivity measures typically required that all processes be highly standardized, which hinders a company’s agility and responsiveness. RPA is smarter than that and does not require centralized standardization.
It can generate efficiencies, reducing bureaucracy and costs while still preserving flexibility. These attributes are the central premise behind Strategy&’s Fit for Growth* concept, which organizations apply to build differentiating capabilities, transform their cost structure, and reorganize for growth.
Examples of what RPA systems can do:
Access multiple spreadsheets, find specific information, validate it, and enter it into the company’s ERP system
Enter data that multiple computer users can share
Use optical character recognition technology to pull data from fields on a PDF
The real value of the BMI methodology isn’t simply the measurement process but rather how a company uses the information to reduce bureaucracy, focus on differentiating capabilities, and improve performance. Implementing these types of changes has obvious benefits. But a company can achieve greater impact when the improvements are part of a larger-scale Fit for Growth* transformation. We’ve found that companies get the greatest return on investment when they take a holistic approach that aligns their strategy, resources, and all parts of the organization to their common goals. This idea may seem obvious, but it’s harder to get right than most people think. More on how this works can be found at www.strategyand.pwc.com/fitforgrowth. For example, we applied this model to a major global oil company and found that it scored several times higher than the median for its industry. The company took specific steps to reduce bureaucracy, including changing the way it made decisions regarding capital projects.
This is a common problem area at many companies. To approve an expenditure of US$500,000, how many people need to sign off? (And how high in the organization does the final decision get made?) For procedural requests, can one person give the official approval, or does it require a committee? And does the company effectively balance controls against risk?
At one company we worked with — as with many large and established companies — the control model for these decisions was simply too cumbersome. Many people, including senior executives, were involved in approving requests. This merely complicated matters without reducing risk in any material way, and it was out of line with benchmark companies in the industry.
The company needed to push decision-making authority down to lower levels — to the extent that such a move was in line with the company’s risk tolerance. Specifically, the company adjusted its control for capital expenditures to better align with industry standards. For capital expenditures of more than $30 million, the final approval would continue to lie with the board or executive committee. Yet for many other decisions, particularly budgeted items below that threshold, the company pushed approvals down to business unit leaders.
Pushing decision-making authority down in this way leads to a number of benefits. First, it generates buy-in by empowering people to do their work more independently. It also concentrates accountability, in that people cannot hide behind a committee or a number of co-approvers if a decision turns out to be wrong.
More important, pushing control authority down in an organization frees up senior people to focus on topics with greater strategic value, such as the company’s competitive position, large-scale capital investments, and other areas that have a correspondingly bigger impact on the company’s performance. As a result, adjusting the control authority in this way increases productivity and makes the company more agile.
* Fit for Growth is a registered service mark of PwC Strategy& LLC in the United States.
Bureaucracy is a problem with deep roots in many organizations, but the BMI gives leadership teams a systematic way to address it, by quantifying bureaucracy at the level of individual processes as well as for the overall enterprise. As a result, companies can objectively gauge their performance, and identify the departments and functions that most need to be improved.
Moreover, BMI methodology can become an ongoing capability that helps a company continue to assess bureaucracy over time. Management can see whether remedial actions have generated the intended impact, uncover new areas of bureaucracy, and monitor how changes in the market trigger corresponding changes to risk and impact. In this way, the BMI methodology is not a one-time project but an ongoing effort that continues to deliver benefits over time.
The Bureaucracy Measurement Index: A systematic way for companies to assess the burden of red tape