1. Lenhardt & Colton, LLC Process-Based Management City XXX Public Utilities February 22, 2001

2. Lenhardt & Colton, LLC Slide 2 Today’s Objective To Reaffirm: –The Need for Change in the Way XPU Manages Its Business –The Preference of XPU for Process-Based Management Process-Based Information Tools –A Path & Timetable That Has Initial Process-Based Solutions Implemented in 2002

3. February 22, 2001 Lenhardt & Colton, LLC Slide 3 Today’s Agenda The Case for Change at XPU Why Process-Based? Insights from a Real Life Project XPU’s Roadmap

4. February 22, 2001 Lenhardt & Colton, LLC Slide 4 The Starting Point: XPU Decides It Must Change 1996 Annual Report: “...an internal transition designed to prepare staff and the Utility Board to operate the electric utility in an environment of increasing options for our electric customers.” 1997 Annual Report: “XPU’s efforts in the coming years will be to prepare for operating in a competitive market.” 1999 Strategic Plan: “Focus on FINANCIAL AWARENESS at a departmental level to drive us toward competitive rates.”

5. February 22, 2001 Lenhardt & Colton, LLC Slide 5 Then how do you decide? …what to change?... what to do differently?

6. February 22, 2001 Lenhardt & Colton, LLC Slide 6 One Useful Model Business Issues Business Decisions Information for Decisions Information Tools Business Issues Business Decisions Information for Decisions Information Tools What Needs Changed?

7. February 22, 2001 Lenhardt & Colton, LLC Slide 7 Identifying Needed Changes Business Issues Business Decisions Information for Decisions Information Tools Changing Business Issues are a Given; the Cause of XPU’s Dilemma XPU Wants More Business Decisions To Be Made by Managers XPU Needs New & Different Decision Support Information XPU Needs New & Different Tools to Provide That Information We’ll Look at Each of These in Turn

8. February 22, 2001 Lenhardt & Colton, LLC Slide 8 Engaging XPU’s Managers Role of an XPU Manager Change Do Functional Work Manage the Department Supervise Work (Organize,Plan, Monitor, etc.) Manage People (Motivate, Discipline, etc.) Manage Resources (Workload, Operating Budget) Participate in XPU Business Mgmt (Collaborative & Communicate Financial Impacts) Other

9. February 22, 2001 Lenhardt & Colton, LLC Slide 9 Another Useful Model Three Time Perspectives of Business Yesterday Results Perspective Today Operations Perspective Tomorrow Strategic Perspective

10. February 22, 2001 Lenhardt & Colton, LLC Slide 10 Today Operations Perspective Three Kinds of Issues & Decisions How is XPU doing “today”? Should I invest in this XPU bond? What should I charge for this new service? These Require Three Different Kinds of Information Yesterday Results Perspective Tomorrow Strategic Perspective How did XPU do “yesterday”? How will XPU do “tomorrow”? Where is the best opportunity to improve our process?

11. February 22, 2001 Lenhardt & Colton, LLC Slide 11 Three Kinds of Information Tools Yesterday Results Perspective Today Operations Perspective Tomorrow Strategic Perspective What Tools Does XPU Have in Place Today?

12. February 22, 2001 Lenhardt & Colton, LLC Slide 12 XPU’s Existing Information Tools Yesterday Results Perspective Today Operations Perspective Tomorrow Strategic Perspective SAP Financials Little or No Information Available Even Less Information Available

13. February 22, 2001 Lenhardt & Colton, LLC Slide 13 Review Needed Changes Business Issues Business Decisions Information for Decisions Information Tools XPU Wants More Business Decisions To Be Made by Managers XPU Needs New & Different Decision Support Information XPU Needs New & Different Tools to Provide That Information

14. February 22, 2001 Lenhardt & Colton, LLC Slide 14 Today’s Agenda The Case for Change at XPU Why Process-Based? Insights from a Real Life Project XPU’s Roadmap

15. February 22, 2001 Lenhardt & Colton, LLC Slide 15 L&C’s Process-Based Approach Promote “Process Thinking” in All Aspects of Business Management Explicitly Use the Process Model of Business for: –Process-Based Management Techniques –Process-Based Information Tools

16. February 22, 2001 Lenhardt & Colton, LLC Slide 16 What is the Process Model? Any endeavor can be described in terms of input, activity & output. InputOutput Activity Tangible inputs are converted (via the endeavor) to tangible outputs.

17. February 22, 2001 Lenhardt & Colton, LLC Slide 17 The Process Model & Resources The cost of people, supplies and assets are viewed as organizational resources that are consumed by the activity. Resources (Budget) People’s Time ($) Fuel $ Depreciation $

18. February 22, 2001 Lenhardt & Colton, LLC Slide 18 The Process Model & Outputs Output is expressed in terms of measurable units: –KiloWatt Hours (kWh’s) of electricity The cost of a measurable unit is the ratio of it’s activity cost and the quantity of the measurable units completed: –Cost per kWh of electricity Outputs are consumed by products & services, market segments, and so on...

19. February 22, 2001 Lenhardt & Colton, LLC Slide 19 Process Model Summary InputOutputActivity Resource $ CustomersOfferingsSegments End Cost Objectives

20. February 22, 2001 Lenhardt & Colton, LLC Slide 20 Why “Process-Based”? The Process Model, Its Tools & Techniques –Enable Cost Management to be Practiced Throughout the Organization and That’s Good! They Describe the Organization in the Language of People Who Do the Work They Establish a Real-Life Causal Relationship Between the Work People Do and Cost –Systematically Integrate Seemingly Independent Functions and Activities and That’s Good! They “…remind employees that the activities of disparate departments are interdependent, even if organizational charts… suggest otherwise.” No Other Cost Management Model Does This

21. February 22, 2001 Lenhardt & Colton, LLC Slide 21 Today’s Agenda The Case for Change at XPU Why Process-Based? Insights from a Real Life Project XPU’s Roadmap

22. February 22, 2001 Lenhardt & Colton, LLC Slide 22 Reduce Cycle Time Reduce Cost Improve Quality Increase Level of Service State/DOT’s Challenge …

23. February 22, 2001 Lenhardt & Colton, LLC Slide 23 The Gov’s Challenge Pool... Commissioners “Contribute” to the Pool via targeted cuts to least valuable programs/services Commissioners “Contribute” to the Pool via targeted cuts to least valuable programs/services Participation in Challenge Pool earns them the opportunity to obtain NEW funding, greater than their “pool contributions”, to add or improve existing services Participation in Challenge Pool earns them the opportunity to obtain NEW funding, greater than their “pool contributions”, to add or improve existing services Election not to participate in pool earns them automatic budget reductionElection not to participate in pool earns them automatic budget reduction What to Change? How?

24. February 22, 2001 Lenhardt & Colton, LLC Slide 24 Information is Data Endowed with Relevance and Purpose. Peter Drucker, 1990 Requirement for “Good” Information

25. February 22, 2001 Lenhardt & Colton, LLC Slide 25 State/DOT: Start with the End in Mind State/DOT’s “Purpose” –Identify CQT –Manage CQT Improve Competitiveness Focus on Continuous Improvement Deploy Resources Effectively –Measure CQT

26. February 22, 2001 Lenhardt & Colton, LLC Slide 26 Q - What’s ABC Used For? A - Get Relevant Info. To support strategic decisions, such as: –Are we competitive, OR not? –Are our resources deployed effectively, OR not? –Should we invest in ABM to support the Challenge Pool requirements, OR not? What is the annual cost of Construction Management? What is the cost of a “typical” bridge design? How much does it cost to prepare a “complex” PS&E package? Activity Based Management How well are we meeting our objectives? Activity Based Performance Measures How can we institutionalize improvements? Activity Based Budgeting How do we know what to improve? Activity Based Continuous Improvement How can we better manage capital projects? Activity Based Project/Resource Management Activity Based Solutions Problem? Solution! How much does it really cost? Activity Based Costing Activities Outputs Resources Activity Analysis Inputs

27. February 22, 2001 Lenhardt & Colton, LLC Slide 27 Program Support I.Develop Activity-based Models II.Institutionalize the Process III.Roll-out Additional Activity-based Tools Focus on Activity-based Continuous Improvement, and Integrate with Business Planning

28. February 22, 2001 Lenhardt & Colton, LLC Slide 28 Level 1 Process Info: Process Map Activity 1Activity 2 Activity 3 Activity “n” Task “n”Task 1Task 2Task 3 Activity Name Descriptive Text: Task 4 Task 5Task 6 Procedure Task 2 Procedure Task 4 Procedure Task n 12341234

29. February 22, 2001 Lenhardt & Colton, LLC Slide 29 Level 2 Process Info: Activity Dictionary Activity 1Activity 2 CLICK HERE! Activity “n” Task “n”Task 1Task 2Task 3 Activity Name Descriptive Text: Task 4 Task 5Task 6 Procedure Task 2 Procedure Task 4 Procedure Task n 12341234

30. February 22, 2001 Lenhardt & Colton, LLC Slide 30 More Level 2 Info: Resource Usage Activity 1Activity 2 CLICK HERE! Activity “n” Task “n”Task 1Task 2Task 3 Activity Name Descriptive Text: Task 4 Task 5Task 6 Procedure Task 2 Procedure Task 4 Procedure Task n 12341234

31. February 22, 2001 Lenhardt & Colton, LLC Slide 31 Example of Results: An “80/20” Analysis

32. February 22, 2001 Lenhardt & Colton, LLC Slide 32 Example: Cost/Unit of Primary Outputs

33. February 22, 2001 Lenhardt & Colton, LLC Slide 33 Example: Secondary Activities

34. February 22, 2001 Lenhardt & Colton, LLC Slide 34 Example: Hours/Unit

35. February 22, 2001 Lenhardt & Colton, LLC Slide 35 Activity “5”—A Closer Look

36. February 22, 2001 Lenhardt & Colton, LLC Slide 36 EC5—Repair Electronic Equipment Normalization Criteria

37. February 22, 2001 Lenhardt & Colton, LLC Slide 37 Normalization Factors X = 2.8 EC5—Repair Electronic Equipment

38. February 22, 2001 Lenhardt & Colton, LLC Slide 38 Hours Per Output Type EC5—Repair Electronic Equipment 1.0X 1.0 Factor X 2.8 hrs./ (n) unit

39. February 22, 2001 Lenhardt & Colton, LLC Slide 39 Dollars Per Output Type EC5—Repair Electronic Equipment 1.0X

40. February 22, 2001 Lenhardt & Colton, LLC Slide 40 EC5—Repair Electronic Equipment Actual Quantities per Output Type 50281025201000 85866315081802 6601112414130 8910

41. February 22, 2001 Lenhardt & Colton, LLC Slide 41 Projected Quantities per Output Type EC5—What if Demand Increases? 50281025201000 858663 150 > 250 81802 6601112414130 Suppose projected demand is for +100 more Repairs of the variety indicated above, in red. Assuming no other changes, resource requirements would increase by approximately (100 qty * $317/ea = $32 K).

42. February 22, 2001 Lenhardt & Colton, LLC Slide 42 EC5—Kinds of Resources per (n) Output

43. February 22, 2001 Lenhardt & Colton, LLC Slide 43 Status of “Develop Activity-based Models”

44. February 22, 2001 Lenhardt & Colton, LLC Slide 44 ABM Rollout in Program Support Major Milestones FOR MORE INFO... State/DOT deployment of Activity-based models nearing completion. Institutionalization of model-building process and usage is ongoing. ABM Cycle 1 is in early planning stage. JanFebMarAprMayJunJulyAugOctNovDec Complete AB Models Institutionalize Do ABM Cycle 1 Institutionalize ABM SepJanFebMarAprMayJun 20012002

45. February 22, 2001 Lenhardt & Colton, LLC Slide 45 ABM - A Systematic Process Identify improvement opportunities Develop action plans Implement & Evaluate Improve Processes Cost, Quality, Time (CQT) Evaluate Performance InputOutputActivity Resource $ Assign Resources to achieve Performance Budgeting PLAN DO CHECK ACT

46. February 22, 2001 Lenhardt & Colton, LLC Slide 46 A New Focus

47. February 22, 2001 Lenhardt & Colton, LLC Slide 47 Today’s Agenda The Case for Change at XPU Why Process-Based? Insights from a Real Life Project XPU’s Roadmap

48. February 22, 2001 Lenhardt & Colton, LLC Slide 48 Summary of 2002 Project Phase 1, Cost Center Process Analysis Interlude— Collect Cost Center Data Phase 2, Modeling –Cost Center Models –Total Utility Models Phase 3, Training & Sustenance –Teach XPU How to Maintain Models –Teach XPU How to Do Workload Analysis w/Models –Teach XPU to Use Process Models in Budgeting –Teach XPU to Use Models to “Cost Something”

49. February 22, 2001 Lenhardt & Colton, LLC Slide 49 The Overall Roadmap Addressed to Date Addressed By Project Develop action plans Identify improvement opportunities Develop process controls Non-financial process reports ABC info for strategic decisions Project Status Reports Reduce NVAImprove VA Identify Activities Identify outputs and CPO Trace costs Process Controls Strategic Information Process Improvements Resource Controls Cost, Quality, Time (CQT) Activity Based Planning & Analysis Evaluate Performance Develop ABC Information

50. February 22, 2001 Lenhardt & Colton, LLC Slide 50 Preparing for 2002 Exec. Mgt. Discovery Sessions –Helps Exec. Mgt. to understand and internalize Process-Based thinking –Helps Exec. Mgt. to knowledgably advocate Process-Based solutions to their organizations Some sort of “all hands” communication / training session in 3rd or 4th quarter…