Linking Construction Process Improvement to Business Benefit Matthew Finnemore, Marjan Sarshar School of Construction & Property Management, University of Salford, Salford m.finnemore@pgr.salford.ac.uk Abstract The construction industry is under increasing pressure to increase productivity and deliver a service of consistent quality [Latham 1994]. The Egan Report of July 1998 [Egan 1998], emphasised the call for productivity improvements and urged the industry to focus in particular on construction processes. SPICE [Sarshar et al. 2000] directly addresses this issue by developing a framework that provides direction and guidance for construction organisations to improve their processes. However, research in other sectors has suggested that for a process improvement initiative to be successfully implemented and embraced by management, it must be aligned with organisational strategy and real business benefit demonstrated. This paper introduces proposed research that sets out to investigate the ability of a SPICE construction process improvement initiative to deliver desired business benefits by aligning itself to the business strategy of the implementing organisation. Keywords - SPICE, process improvement, Balanced Scorecard, performance measurement.
1. CONSTRUCTION PROCESS IMPROVEMENT For many years, businesses within the construction sector have been implementing new initiatives to improve productivity and attain quality gains [Sarshar et al. 1998, British Quality Foundation 1996, KPI 2000]. However, despite new methods of working and technologies to improve productivity and attain quality gains, the targets set by Sir Michael Latham in 'Constructing the Team' [Latham 1994] have yet to be achieved. In his report of July 1998, Sir John Egan [Egan 1998] emphasised the call for productivity improvements and urged the industry to focus in particular on construction processes. Hammer and Champy [1993] also suggest that it is no longer enough for organisations to do traditional tasks better, but rather recommended that the old "Individual-based task-oriented" management concept be discarded completely and replaced with a "team-based process-oriented" management concept. However, until now, the industry has not had a recognised methodology or framework on which to base a process improvement initiative. The absence of guide-lines has meant that any improvements are isolated and benefits cannot be co-ordinated or repeated. The industry is unable to systematically assess construction process, prioritise process improvements, and direct resources appropriately. Moreover, it is not possible for companies to benchmark and measure their performance relative to other organisations. 2. SPICE (STRUCTURED PROCESS IMPROVEMENT FOR CONSTRUCTION ENTERPRISES) Structured Process Improvement for Construction Enterprises (SPICE) is a research project that is developing a process improvement framework for the construction industry. Increasing evidence from other sectors [Imai 1986, Paulk 1993] shows that continuous process improvement is based on many small, evolutionary steps, rather than revolutionary measures. The philosophies of W. Edwards Deming [1986] & Joseph Juran [1988] teach that real process improvement must follow a sequence of steps, starting with making the process visible, then repeatable, and then measurable. Using this philosophy, the SPICE project has been developed as an evolutionary step-wise model utilising extensive experience from the IT sector. The research focuses specifically on the use of the Capability Maturity Model (CMM) [Paulk 1993, Saidian 1995] which was developed for, and is used by the United States
Department of Defense. The framework is composed of two elements. The model itself, shown in Fig. (i), and the assessment mechanism. 2.1 Model 2.2 The Assessment Figure (i) - The SPICE Model The SPICE assessment approach is shown in Figure (ii) below. ON SITE Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Introduce Introduce & gain Improvement Implement and assessment Interview team management workshop and monitor Complete members Commitment final report improvement plan Questionnaire OFF SITE Analyse Questionnaire Responses Analyse collected data Figure (ii) The SPICE Assessment Approach
3. THE RESEARCH AREA The development of the SPICE framework has been carried out in close collaboration with industrial partners and is supported by the DETR. This close industrial collaboration has provided vital research direction, but has also raised some important questions that cannot be addressed within the scope of the SPICE research. A recurring theme raised during interviews with industry managers and throughout the case studies has been the alignment of a SPICE process improvement initiative with general business goals and strategies. Process improvement programmes are introduced in an organisation to target mid and long-term business goals that assure profitability and competitiveness in the global (IT) market [Ibanez 1998a]. Managers want to know the potential of a process improvement initiative to deliver real business benefit. If construction companies are to embrace the concepts of process improvement, it is vital that any potential business benefits can be demonstrated. Many organisations are making large investments in process improvement, and it is important that the benefits of those investments are quantified [Butler 1995]. It is proposed that further interviews will be conducted with industry representatives as part of the research to confirm this need for alignment and explore how this has been attempted by the case study participants to date. During the recent case study assessments, the improvement workshops (see Fig.(ii), stage 4) have typically generated 20-30 improvement recommendations to the participating organisations. A management team has then reviewed these suggestions and decided which to take forward and implement. This prioritisation is based the feasibility of each, in terms of cost implications, resource requirements etc. and also their potential impact to the business. However, to date, this decision has generally been based on rule of thumb and experience. It is suggested that a more formal and accountable technique is required to align the process improvement suggestions with business aims, strategies and goals. 4. LINKING SPICE RESULTS TO BUSINESS OBJECTIVES The model(s) themselves provide no support in linking the improvement initiatives to the potential business results that could be expected [Ibanez 1998] but business and management literature is strewn with attempts to demonstrate that certain policies, strategies, tactics or activities lead to improved business performance [BQF 1998]. One of the thorniest problems confronting top management, Janson [1980] suggests, is how best to improve production efficiency - and how to find out whether any steps taken to foster that improvement actually
work. Dion's [1993] experiences at Raytheon suggest that for management to persevere with a process improvement initiative, two important ingredients are required: First, there must be some short term benefit to on-going projects, and second, there must be a meaningful quantification of what that benefit is. The IT sector has some experience in this field, and although it is acknowledged that several different methods can be used to show the benefits of process improvements [Butler 1995], significant benefits have been reported from implementing the CMM framework. For example, Hughes Aircraft (USA) reported a 5:1 Return on Investment (ROI), and Raytheon (USA) achieved a 7.7:1 ROI and 2:1 productivity gains [Saiedian 1995]. Industry analysis by J. Herbsleb [Herbsleb 1994, 1994a] showed that companies implementing CMM achieved an average of 35% productivity improvements and an average of 39% post delivery defect reduction. 5. BUSINESS PERFORMANCE MEASUREMENT TECHNIQUES Software process literature indicates that the term Return on Investment (ROI) is commonly used in the IT sector when reporting business benefit. Under this umberella term various type of metrics are employed by the software industry. Some of the more common elements are listed below. Defect Rates Productivity ROI terms Payback period Investment ROI Cost of Quality Cost of conformance Cost of non-conformance Maintenance Costs Earned Value Measures Weighted Milestone Fixed Formula Percentage complete estimates Percentage complete and milestone gates Equivalent completed units Earned standards Apportioned relationship to discrete work Level of effort These metrics include many tangible measures that are relatively easy to quantify. However, these terms often include various intangibles that are not only valid but also crucial to an accurate measurement of ROI. Less tangible items could include customer confidence, competitiveness, effects of downtime, impact on productivity, and lost opportunities. Because
it is less costly to compute an estimated ROI (because of the intangible values), Smith [1999] concludes that most ROI's are heavily estimated rather than measured. Smith goes on to say that good management planning should include the steps necessary to select the proper method to compute ROI, accurately report ROI, identify necessary success factors that relate directly to your product and organizational structure, then strategically leveraging them. In addition, companies have traditionally only looked to the quarterly and annual financial reports to indicate the success of the organisation, but this is only an indicator of past performance. Financial data in isolation only tells part of the story and can give misleading signals for continuous improvement and innovation [Kaplan 1992]. Companies are still using the traditional financial accounting model as they attempt to build internal assets and capabilities, and to forge linkages and strategic alliances with external parties. Financial performance measures worked well for the industrial era, but they are out of step with the skills and competencies companies are trying to master today [Kaplan 1992]. Epstein [1997] recommends that performance measurement systems should contain many nonfinancial indicators to complement financial ones, particularly with respect to customer perceptions and performance of internal processes. 6. THE BALANCED SCORECARD The 'Balanced Scorecard' performance measurement system developed at Harvard University [Kaplan 1996] attempts to address many of the issues mentioned by allowing executives to view a company from several perspectives simultaneously. It includes traditional financial measures that reveal the results of actions already taken, but also three sets of operational measures that show customer satisfaction, internal processes, and the organisations ability to learn and improve - operational measures that are the drivers of future financial performance. In this way, the scorecard is balanced because it represents external measures for shareholders and customers, and internal measures of critical business processes, innovation, and learning and growth. The measures are balanced between the outcome measures - the results of past efforts - and the measures that drive future performance. The Balanced Scorecard identifies a business as having four perspectives: Customer - How do customers see us? Internal / Business Processes - What must we excel at? Learning & Growth - Can we continue to improve and create value? Financial - How do we look to shareholders?
The Balanced Scorecard Framework and development route can be seen in Appendix A. As well as being a measurement tool for gauging business performance, the balanced scorecard is also used as a strategic business management system. With previous performance measurement systems, most organisations use their non-financial measures for local improvements only, for example their front-line and customer facing operations. The objectives and measures for the balanced scorecard however, are derived from a top-down process driven by the mission and strategy of the business unit. This means that rather than business improvements occurring locally, they have an organisation wide impact that addresses specific business objectives. The Balanced Scorecard has received much literary acclaim [Hepworth 1998], and a survey by Chow [1997] has indicated that managers consider the Balanced Scorecard concept to be extremely beneficial. It is therefore proposed that the Balanced Scorecard could be used to align process improvement suggestions resulting from a SPICE assessment with an organisations overall business aims and objectives. Additionally, benefits derived from a process improvement initiative could be demonstrated not only in financial terms, but also to include less tangible measures in the other three perspectives as well. 7. THE PROPOSED FRAMEWORK This area is under current investigation by the software industry [Ibanez 1998, 1998a]. The European Software Institute is developing a framework that aligns a balanced scorecard with software process improvement. They argue that by identifying relationships among the tangible objectives on the four perspectives, the business benefits of the software process improvement programme can be evidenced. They acknowledge that the value-added by aligning internal processes and activities to business objectives is an important factor for maintaining business competitiveness. This research will develop a similar framework for the construction industry based on Figure (iii). This will not be a duplication of the European Software Institute model since the transfer of innovation across geographical and industrial boundaries is not a linear one, but rather concepts very often need to be re-packaged, modified or tailored to suit the new environment. [Lillrank 1995] The research has also considered the importance of scoping when adopting this approach. Firstly, the target business unit. ie. whether the improvement initiative is being implemented at an organisational level or at individual project level. At project level, objectives should be the same as, or a sub-set of the overall business objectives.
SPICE ASSESSMENT BALANCED SCORECARD Delivers PROCESS IMPROVEMENT RECCOMENDATIONS Compare Delivers STRATEGIC MEASURES ALIGNED TO OBJECTIVES Delivers PRIORITISED PROCESS IMPROVEMENT RECCOMENDATIONS BASED ON BUSINESS OBJECTIVES Figure (iii) The Proposed Framework Secondly, the timing of assessment. Business objectives and priorities can change in a relatively short period of time especially within the context of an individual construction project that may only be a matter of months in duration. In addition, business objectives may change at any point during a process improvement cycle. A popular process improvement paradigm is based on a three phase cycle of stabilization, control, and change which applies the principles of Deming [1986] and Juran [1988]. Some believe that the rewards of process improvement are reaped only when an entire three-phase cycle has been completed. However, the experience of Raytheon [Dion 1994] states that benefits accrue during the first two phases as well. 8. LINKS BETWEEN SPICE AND THE FOUR BALANCED SCORECARD PERSPECTIVES SPICE focuses specifically on internal construction processes, which makes up one quarter (25%) of an overall balanced scorecard. However, Kaplan and Norton [1996] suggest that the success or failure of these processes can influence all perspectives of the Balanced Scorecard through a cause and effect relationship chain. (See Figure (iv))
Financial Return on Capital Emp. Customer Customer Loyalty On-time Delivery Internal/ Business Process Process Quality Process Cycle Time Process Improvements can impact all perspectives Learning & Growth Employee Skills Figure (iv) - Based on a diagram by Kaplan & Norton [1996] 9. RESEARCH METHODOLOGY The subject area will be first be investigated via a thorough literature review of related material. Specific data for the SPICE assessments and the Balanced Scorecards will be collected using the action research techniques defined by Lewin [1946]. This involves the planned intervention by the researcher into some naturally occurring events. In particular, case studies, have been identified as the most suitable method of investigation in this situation since the studies were based in a 'live' construction environment and the control mechanisms available under laboratory conditions could not be created. However, the research will not necessitate the extensive periods of time 'in the field' required by ethnological research to develop detailed observational evidence. The case studies will be carried out with close collaboration from industrial partners in order to validate the theories and proposals. It is hoped that by maximising industrial collaboration, the research and its findings will maintain a high degree of industrial credibility since it is generally acknowledged that there are large gaps between industrial perspectives and requirements, and the academic outlook [Brandon 1999]. However, Gill [1986] warns that close collaboration between the distinctive and very different cultures of the managerial and academic worlds gives rise to issues about whether the aims of the work
will be concerned primarily with problem solving for the particular organisation, or with producing theoretical generalizations for the wider community. Although the results of the case studies will be specific to the participating organisations, it is hoped that by analytic generalization, the theories developed will also be of use to the wider construction community. Case studies are generalizable to theoretical propositions and not to populations and universes [Yin 1994]. The goal of a single case study is to do a generalizing and not a particularizing analysis. 9.1 Specific Data Collection The data for the SPICE case study will be collected in accordance with the CMM framework [Paulk 1993] and consists of the following. Questionnaires Semi-structured interviews Document review The SPICE assessment, and in particular the semi structured interviews, relies extensively on an ideographic approach [Burrell & Morgan 1979] which emphasizes the analysis of subjective accounts that one generates by 'getting inside' situations and involving oneself in the everyday flow of life. However, to maintain the reliability and validity of the largely subjective data a chain of evidence is maintained via a tracibility matrix. This matrix ensures that each proposed finding is substantiated by multiple sources of data. The case study to develop a Balanced Scorecard will collect data in the method prescribed in Kaplan & Norton [1996] Workshops Semi-structured interviews 10. CONCLUSION The SPICE framework provides construction organisations with a structured approach to developing a series of potential process improvement activities. However, in isolation the model provides no guarantee or indication that the suggested improvement initiatives will deliver any desired business benefits. The Balanced Scorecard method of business management analyses an organisation simultaneously in four perspectives. The indicators identified in the scorecard to measure the
performance of each perspective are derived strategically 'top-down' from the organisations overall business objectives. In this way, only those activities that are considered vital to the organisations success are measured. By comparing these measures with the results of a SPICE assessment, the improvement suggestions derived could be methodologically prioritised for action according to their potential impact on the business.
11. References Brandon, P.S., et.al. (1999), "Engagement Leading to Enchantment", in Linking Construction Industry Needs and Construction Research Outputs, CRISP Consultancy Commission 98/1, London, June. British Quality Foundation (1996), "Guide to Self Assessment 97", British Quality Foundation British Quality Foundation (1998) "Evidence of Excellence", UK Excellence, December, 22-25. Burrell, G & Morgan, G. (1979) "Sociological Paradigms and Organisational Analysis", Heinemann, London Butler, Kelley L, (1995) "The Economic Benefits of Software Process Improvement", Crosstalk, Software Technology Support Center, Hill Air Force Base, Utah, July, Volume 8, Number 7 Chow, Chee W. (1997), "Applying the Balanced Scorecard to Small Companies", Management Accounting Deming, W.E., (1986), "Out of the Crisis" MIT Center for Advanced Engineering Study, Cambridge, Mass. Dion, Raymond, (1993), "Process Improvement and the Corporate Balance Sheet" IEEE Software, Volume 10, Number 3, pp. 28-35 July Egan, Sir J. (1998), Rethinking Construction, HMSO, July Epstein, Marc J, (1997), "Translating Strategy into Action" Management Accounting, August pp. 28-36 Gill, John & Johnson, Phil, (1997), "Research Methods for Managers", Paul Chapman Publishing Ltd. Hammer, Michael & Champy, James (1993) "Reengineering the corporation : a manifesto for business revolution", London, Nicholas Brealey Publishing Ltd Hepworth, Paul (1998), "Weighing it up - a literature review for the balanced scorecard" Journal of Management Development, Vol.17 No.8 pp. 559-563 MCB University Press Herbsleb, J., et al, (1994), "Software Process Improvement: State of the Payoff." American Programmer, September
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12. APPENDIX A The development of the four perspectives of the Balanced Scorecard, Based on a diagram from Kaplan & Norton [1996]. What is My Vision of the Future? Statement of Vision Definition of SBU Mission Statement Vision Statement If My Vision Succeeds, How Will I Differ? To My Shareholders To My Customers With My Internal Management Processes With My Ability to Innovate and Grow What are the Critical Success Factors? What are the critical measurements? THE BALANCED SCORECARD
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