Business Methods

The point to note here is that, irrespective of the class of the task - whether manual or computerised - it is important that each task - and hence the process as a whole – is designed and periodically reviewed, improved, or substituted by another task, with a view to continuous improvement in four major areas:

Effectiveness
Efficiency
Internal control
Compliance to various statutes and policies
These areas are explained by highlighting typical deficiencies in each of them, as under:

Effectiveness

The overall effectiveness of a process is the extent to which the outputs expected from the process are being obtained at all, and is therefore a first measure of the basic adequacy of the process and its capability to fulfill the logical and reasonable expectations of process uses and operators.

For example, consider the material procurement process. One of its important tasks is the sub-process for supplier follow-up to ensure timely deliveries of materials. Such a task is considerably less effective if it does not provide accurate and timely purchase order status reports for use of the purchase department staff responsible for follow-up.

Efficiency

Supposing it has been observed that the average time taken to prepare and send out a purchase order after receipt of a properly prepared intent from the end-user is unacceptably high, leading to delayed customer deliveries and consequent customer complaints.

The process of “converting” the end-user’s intent to a purchase order is effective because a purchase order is being somehow generated, but its efficiency is very low since it takes an inordinate amount of time and costs considerably more in terms of the cost to the company of the salaries of staff members involved.

Internal Control

In a scenario where quantities of major raw materials are regularly ordered and consumed, rates are fixed with selected, reliable, approved vendors for an extended period – commonly a year. Moreover, let us say that the rate contract does not contain a price escalation clause. This safeguards the organisation from unanticipated price escalation during the period. The rate contract data are stored in the ERP system’s database. Whenever materials are to be ordered (with or without a delivery schedule), purchase orders are generated mentioning the rate finalised in the rate contract. An internal control exists to keep the purchase rate constant throughout the year.

Suppose, however, it is found that the rate on a purchase order based on a current rate contract is changed to a different value, and the purchase order then sent out to the supplier. This is a serious lapse in internal control, since a change to a higher rate exposes the company to a higher financial liability. Moreover, the editability of the rate in such a purchase order completely nullifies the internal controls provided by having a rate contract in the first place and including a no-escalation clause in it. There would be a further breach of internal control if it were found that such a PO amendment is actually authorised before sending the purchase order to the supplier.

Compliance to various statutes and policies

There are certain situations where payments made to consultants or service contractors must be statutorily made after deducting tax at source (T.D.S.), and such T.D.S. amounts must be deposited in government treasury accounts with banks on or before a specified date in the month following the month in which the payments are made.

In such cases, if a business process does not provide for deduction of T.D.S. and/or fails to ensure deposition into government accounts by the specified date, then this is a statutory compliance issue that makes the concerned executives liable to civil / criminal legal action.