Creating a Recruiting Process: DFSS for Process Design

The following case study illustrates how a pharmaceutical company applied selected DFSS (Design for Six Sigma) tools to develop a new recruiting process for sales representatives. Tools and activities are described along the IDOV (Identify, Design, Optimize, Verify) phases, which served as a guiding roadmap through this process design project.

Identify

The need to completely redesign the recruiting process resulted from two weakness in the existing process. First, with an average of 60 days to fill a vacant sales representative position, it simply took too long. Second, due to a growing market in the upcoming three years, an increase of the sales force by 10 percent was planned, and the company wanted to organize its hiring process to make it as effective and efficient as possible.

Every day without a sales rep in a specific region meant a significant loss of revenue. Therefore, all vacant positions in Europe were in scope of the project. The process cycle time was measured from the point of time when the previous sales rep quit the job until the first working day of the new sales rep.

Under the project lead of a human resources (HR) associate, a team with representatives from sales and HR was established. Additionally, a steering committee with members from the same departments and from IT and Controlling was set up. They would meet at the end of each IDOV phase to review the project progress and to make go or no-go decisions for the next phase.

As one of the first steps, the team conducted a voice of the customer (VOC) data collection. Twenty district managers and four HR representatives who had all been involved in at least one recruiting process in the past were interviewed. The main questions to determine the customer needs, their relative importance and measurable CTQs (critical to quality) were:

◈ Which aspects of the recruiting process are important to you?
◈ On a scale from 1 – 5, how important are these aspects for you?
◈ How would you measure that the process is performing according to your needs, and how would you know that your expectations are not met?

The results from this internal VOC were structured via quality function deployment (QFD), as shown in QFD 1 in Figure 1. This showed that in addition to the recruiting cycle time, the most important CTQs were:

◈ How often the new employee could already be selected during the first interview round (i.e., no need to run a second round of interviews)
◈ How long it takes to establish the interview schedule
◈ How often the new employee agreed to the initially offered compensations and benefits (i.e., no re-negotiation of the contract)

Figure 1: QFD 1

The most important CTQs were summarized in a design scorecard (Figure 2). Using historically collected data, a first baseline could be established that showed the performance of the customer requirements at the project start. This baseline information was also used to set the project goals.

Figure 2: Design Scorecard

Design

At the beginning of the Design phase, the team conducted a functional analysis. In a process design, functions are the high-level process steps. Developing functions enabled the team to define the necessary steps of the recruiting process without immediately having to think about solutions, detailed concepts or a detailed process design.

The team used a function tree (Figure 3) to analyze the process steps. This allowed for a definition of the process on levels 1 and 2.

Figure 3: Function Tree

In order to determine those functions that would contribute most to meet the customer requirements, the team used the QFD 2 (Figure 4). This highlighted that the next step, the detailed process development, should mainly focus on these process steps:

◈ Create requisition

◈ Interview candidates

◈ Prepare compensation and benefits package

Figure 4: QFD 2

Optimize

The Optimize phase started with the detailed process design. Using a deployment flow chart, detailed process steps, roles and responsibilities for the previously prioritized level 2 processes were defined. Figure 5 shows the process for planning and conducting the candidate interviews as an example.

Further detailed process design elements were:

◈ Conduct an agency briefing meeting with HR, the hiring district manager and an external agency

◈ Standardize the number of interviewers and interviewees

◈ Parellelize the processes, interview candidates and prepare the contract

Figure 5: Detailled Process Mapping

Furthermore, detailed design elements in the categories of information systems, human resources and templates and tools, as well as supplier quality were developed for the same five prioritized processes steps. Figure 6 shows these design elements per process step. Among others, the team decided to establish an internal talent data base, to develop and conduct mandatory interviewer trainings, to create specific templates and guidelines for interviews, and to collaborate only with pre-qualified agencies.

Figure 6: Detailed Design Elements

As a last step in the Optimize phase, a risk analysis for the new process was conducted using the failure mode and effects analysis (FMEA) approach. The objective was to identify potential failure modes and their potential causes upfront so that appropriate mitigation actions could be determined. An extract of this FMEA is shown in Figure 7.

Figure 7: FMEA

Verify

The DFSS team piloted the implementation of the new recruiting process in three regions and collected new data for the CTQs. They also gathered and analyzed information with regard to the highest prioritized failure modes from the FMEA. In doing this, they wanted to validate what the critical process steps were that had to be controlled as leading indicators of the desired (lagging) process performance.

Based on the pilot experiences, the team made final modifications of the process. Among others, they decided to have the contract already prepared before the second interview date (even if that meant that up to three contracts had to be created in case three candidates were still left). All critical process steps, leading and lagging indicators, and a reaction plan were summarized in a process management chart (Figure 8).

Figure 8: Process Management Chart

After this successful completion of the pilot phase, the team handed the new process over to the process owner, in this case the head of HR. She was responsible for the implementation of the process in Europe. Six months later the first results of the implementation could be measured, and they fully met the expectations of all stakeholders.

Continue reading

Better Project Management Performance with Six Sigma

Every organization faces the daunting task of executing projects that meet or exceed the expectations of its customers. That makes project management a key component of most enterprises, regardless of the business sector. Yet project management is not always met with organization-wide satisfaction. One major reason is that many project management offices (PMOs) are replicated and not designed. Inevitably many PMO processes are little more than copies of what other companies have implemented. They lack a root-level connection to the company they support.

PMO Designed to Meet Customer Needs

When a project is not properly planned, the PMO may be forced to improve systems never designed to meet the customer’s needs, and subsequently appear to fail to meet those needs. The root cause of this failure arises from the disconnection between process performance metrics and customer needs. When this is the case, the PMO is forced to find ways to repair a problem that never had to exist.

The key to consistently maximizing project performance metrics is rooted in the proper development of the PMO metrics. To maximize a project’s performance, management needs to build a better project management process dedicated to meeting the customer’s most important needs.

By applying Lean Six Sigma in a multi-generational model, a strong project management process can be developed. A successful metrics model can be developed using the Design for Six Sigma’s DMEDI (Define, Measure, Explore, Develop, Implement) roadmap. The application of successive quality function deployment (QFD) iterations will be a core step in this process. Subsequent generations of PMO improvements should utilize the DMAIC (Define, Measure, Analyze, Improve, Control) roadmap.

DMEDI Step 0: PMO Charter

No project should ever be launched without a well-defined charter. Regardless of the project leader’s skills, if the expectations of the PMO are not well-conceived, the cycle time, goal attainment and acceptance will be limited.

The PMO charter should answer all of the following key questions:

• Sponsor/Champion
• Who will be where the buck stops? The project Sponsor/Champion must hold a position high enough in the organization to enforce the plans defined for the PMO.
• Business impact
• What are the quantifiable desired gains from the PMO?
• What stands to be gained when from a successful PMO?
• Opportunity or problem
• What is the current quantifiable deficiency that has caused the need for a PMO?
• What is the greatest pain the PMO is targeted to heal?
• Goal statement
• What should the PMO look like and produce?
• What will the data say to provide a picture of success?
• PMO scope
• What should the PMO be doing and not be doing?
• Where should and should not the PMO operate?
• Project plan
• How long and when will the PMO operate?
• What are the key milestones in its development and measurement?
• PMO team
• Who are the players on this project?
• Who will manage the daily activities?
• Who will participate in establishing the PMO?

DMEDI Step 1: Define

In order to maximize individual project performance, the company’s senior leadership must first establish and agree upon what the overall objective is for the PMO. This objective must fall in line with the overall company’s and customer’s objectives. Without a corporate standard and objective for the PMO that is globally accepted, individual projects have little chance of being viewed in their proper light.

This task is significant and many organizations still struggle with it. Operational definitions must be clearly defined and reinforced by C-level management. Without their support, the implementation and adherence to these operational definitions will cause project performance to be seen as lacking. Operational definitions which need clear definition include:

• Project must be defined and scoped:
• Who is authorized to initiate a project?
• What is required to initiate a project?
• What is the breadth and scoped of the project?
• What is the project engagement process?
• Customer must be defined and stratified into clear categories:
• Internal (finance, sales, service, delivery, etc.)
• External (new customers, existing customers, vendors)
• Financial benefit must be clearly defined, according to the following elements:
• Direct external (i.e., new business, new customers, etc.)
• Direct internal (i.e., reduction in production costs)
• Indirect (i.e., losses or costs avoided)
• Benefit recognition period (i.e., time period benefits are realized for accounting purposes)
• Currency (gross or net profit to the organization)

Finally, the chief financial officer (CFO) or chief operating officer (COO) must regularly assess PMO performance. This timetable and scope must be defined early on. The CFO/COO should monitor how the quality of execution has met the strategic vision and overall business needs. Without this high-level oversight, the PMO may come to serve an internal department as opposed to the overall business.

DMEDI Step 2: Measure

This step focuses on capturing and understanding the voice of the customer (VOC). The VOC must be used to appropriately design a PMO to deliver maximum project performance. Capturing the VOC is no small task. To accomplish this effectively, the appropriate customer segment must be identified. In theory, any internal department, external customer, potential customer or vendor may benefit from the services from the PMO. But specific organizations will receive greater benefit of the PMO based on the definitions established in the previous phase. To truly maximize project performance, the needs expressed by organizations with the greatest overall benefit must weigh more heavily.

The secret in the definition of metrics is that customers value services differently. This is where the QFD tool pays off. This tool quantifiably identifies the priorities of the customer’s needs. The QFD tool helps develop the services a PMO will need to satisfy the customer’s needs. Once the services are identified, metrics can be developed to measure them. Properly developed metrics will be closely tied to PMO services that are:

◈ Essential to the customer’s core needs: Services and metrics must address needs important to the customer and not the company.
◈ Quantifiable: A company cannot show excellence if it cannot measure what it has done.
◈ Comprehendible: The PMO services will not be utilized if customers do not understand them.

House of Quality Template

Here is a high-level overview of the QFD house of quality process.

1. Customer needs (VOC)

– For each critical customer segment, capture customer feedback and VOC input consisting of customer “needs.”

– Prioritize each need on a scale from 1 to 9.

2. Critical customer requirements (CCRs)

– The top row of the house contains the CCRs.

– How will meeting customer requirements be measured?

– Translate customer’s terms into process or feature terms.

– Identify ways to deliver on customer needs.

3. Interrelationship matrix

– Evaluate relationships between customer needs (whats) and critical customer requirements (hows).

– Determine relative importance of each critical customer requirement.

4. Customer rating of competitors

– Who is the competition?

– How do customers perceive the competition’s ability to meet the requirements?

– What do competitors do that the company’s customers value?

5. Correlation matrix

– Compare CCRs (hows) to identify conflict, influence or no effect on each other.

6. Process targets

– Determine minimum and desired performance specifications for each CCR.

7. Analyze and diagnose

– Evaluate the house of quality process.

The output of the QFD should provide a ranked set of mission critical deliverables that need to be both implemented into the company PMO and measured on a continual basis. These key deliverables should become the company’s your key performance metrics.

DMEDI Step 3: Explore

The Explore phase seeks to discover the most efficient and best way for the PMO to meet or exceed the customer’s needs. While still at a high level, the company can recognize the opportunity for great innovation. The objective is to identify innovative ways to provide what the customer’s need.

Here again, the QFD is used, but in this iteration the tool is used to conduct a functional analysis. The functional analysis dissects each service into specific features or tasks that must be accomplished to provide the service. Once these have been identified, the company has the ground work to begin developing the model for its PMO.

Remember to ensure that all of the functions in the PMO model are measurable. Therefore this is the perfect time to build a system to measure the PMO’s services. This system must measure each project key metrics and aggregate their sums.

DMEDI Step 4: Develop

This step is where the detailed PMO structure is developed. Keep the core PMO deliverables in focus and make sure the team does not omit any of the following:

• Human resources and staffing plan
• Who will work the PMO?
• How many will work in each role?
• What will they be paid?
• Facilities plan
• Where will the PMO be located?
• What physical resources will be needed?
• Supplies and materials plan
• What will the PMO need to operate?
• What will it cost to set the office up?
• What will it cost for the PMO to operate?
• Technology plan
• What hardware and software will be needed for the PMO?
• What IT services will be needed?
• How will the PMO fit into the company’s business continuity/disaster recovery plans?

One key component that should not be overlooked in the technology plan is the implementation of an automated monitoring/tracking tool. This tool should provide the PMO with a single-pane-of-glass view of key metrics for the entire project portfolio.

DMEDI Step 5: Implement or Re-launch

When the PMO model has been developed or improved, it is time to implement a pilot of the new process. Select a reasonably achievable, moderate-risk project and process it through the new model. The measurement tools should evaluate how the pilot project met or missed the service objectives established in the Measure step. Any necessary changes should be made to ensure future projects will meet the defined customer requirements. Once any necessary changes are completed, the company should be ready to formally launch the PMO organization-wide.

Continue reading

ITIL: Key Concepts and Summary

The ITIL (Information Technology Infrastructure Library) has become the de facto standard in IT Service Management. ITIL helps organizations across industries offer their services in a quality-driven and economical way. The framework’s most recent version, published in 2011, is only a progressive update that further refines an existing body of IT Service best practices.

Whether you’re already on your certification journey or are just researching the field of IT Service, before commencing full-fledged preparation for the ITIL exams, it's helpful to learn the basic concepts and terms of ITIL that will help you gain familiarity with the core components of the exam.

Some Basics IT Service Management Terminology & Key Concepts

- Services: It is a means of delivering value to customers without requiring the customer to own specific costs and risks.

- Service Management: It is a set of specialized capabilities for delivering value to customers in the form of services.

- Service Assets: Service Assets or assets refer to the ‘resources’ and ‘capabilities’ which a Service Provider must allocate in order to offer a service.

- Value, Utility and Warranty: The value of a service consists of two components: utility and warranty. Services must offer both utility and warranty in order to have value. Utility, also called ‘fitness for purpose’, refers to the ability of the service to remove constraints or increase the performance of the customer. Warranty, also called ‘fitness for use’ is the ability of the service to operate reliably.

- Processes: Processes are structured sets of activities designed to achieve a specific objective. The four basic characteristics of processes are:

a. They transform inputs into outputs

b. They deliver results to a specific customer or stakeholder

c. They are measurable

d. They are triggered by specific events

- Functions: Functions are self-contained subsets of an organization intended to accomplish specific tasks. They usually take the form of a team or group of people and the tools they use.

- Roles: Roles are defined collections of specific responsibilities and privileges. Roles may be held by individuals or teams.

- Resources: Resources are the raw materials which contribute to a service, such as money, equipment, time, staff etc.

- Capabilities: Capabilities are the specialized skills or abilities an organization applies to resources in order to create value.

The ITIL Service Lifecycle

The entire framework of ITIL is divided into five broad components/categories:

- ITIL Service Strategy

- ITIL Service Design

- ITIL Service Transition

- ITIL Service Operation

- ITIL Continual Service Improvement

These components form the skeleton of the ITIL Service Lifecycle.

Looking for more information on the ITIL Foundation exam? This video will tell you all you need to know.

ITIL Key Concepts: Processes, Functions

The five broad components of the ITIL Service Lifecycle cover various other sub-categories/aspects, including Demand Management, Capacity Management, Release Management, Incident Management, Event Management, and so on. These are aspects that are meant to cover all areas of ITSM (IT Service Management).

Each of the sub-categories/aspects of the five components of the ITIL framework may be labelled either as a ‘Process’ or as a ‘Function’.

Here’s a diagram that better explains the sub-categories/aspects of the five broader components, classifying them as either a process or as a function.

Now on to the five core components of ITIL.

ITIL Core Component: Service Strategy

The purpose of Service Strategy is to provide a strategy for the service lifecycle. The strategy should be in sync with the customer’s business objectives as well as to manage services, and therein lies its scope. The objective of Service Strategy is, therefore, to provide a definition of strategy and governance control.

The utility and warranty of this component are designed to ensure that the service is fit for purpose and fit for use, respectively. Ensuring this is important as these two components are what add value in the delivery of services to customers.

Service Strategy Process

The Service Strategy process is concerned with the development of service concepts in preparation for the selection of services to be provided.

Service Portfolio Management Process: 

The Service Portfolio is the entire set of services under management by a Service Provider. It consists of three major parts: Service Pipeline, Service Catalog and Retired Services.

The Service Portfolio Management process is concerned with management of services that concern information in the Service Portfolio. Service Portfolio Management organizes the process by which services are identified, described, evaluated, selected, and chartered.

Demand Management Process:

The Demand Management process is concerned with understanding and influencing customer demand. Demand Management models demand in terms of:

- User Profiles, which characterize different typical groups of users for a given service.

- Patterns of Business Activity, which represent the way users in different user profiles access a service over the course of a given time period.

Financial Management Process:

IT Financial Management provides a means of understanding and managing costs and opportunities associated with services in financial terms. IT Financial Management includes three basic activities: -Accounting -- tracking how money is actually spent by a Service Provider

Budgeting – planning how money will be spent by a Service Provider

Charging – securing payment from customers for services provided

Strategy Operations:

Strategy Operations ensure that services like fulfilling user requests, resolving service failures, fixing problems as well as carrying out routine operational tasks, are performed efficiently and effectively.

ITIL Core Component: Service Design

The Service Design lifecycle phase is about the design of services and all supporting elements for introduction into the live environment.

The ‘Four Ps of Service Design’ represent areas which should be taken into consideration when designing a service. They are:

1. People – Human resources and organizational structures required to support the service

2. Processes – Service Management Processes required to support the service

3. Products – Technology and other infrastructure required to support the service

4. Partners – Third parties which offer additional support required to support the service

Processes under Service Design are as follows:

Service Catalog Management

The Service Catalog is the subset of the Service Portfolio which contains services currently available to customers and users. The Service Catalog is often the only portion of the Service Portfolio visible to customers. The Service Catalog commonly acts as the entry portal for all information services in the live environment.

Service Catalog Management involves management and control of the Service Catalog which contains information about services currently available to customers for use.

Service Level Management

Service Level Management is the process charged with securing and managing agreements between customers and the service provider regarding the levels of performance (utility) and levels of reliability (warranty) associated with specific services. Service Level Management results in the creation of Service Level Agreements (SLAs) between customers and the provider.

Operational Level Agreements (OLAs) are performance agreements nearly identical in nature to SLAs

Availability Management

The Availability Management process is concerned with management and achievement of agreed-upon availability requirements as established in Service Level Agreements. In ITIL, availability is defined as the ability of a system, service, or configuration item to perform its function when required.

Capacity Management

Capacity Management is concerned with ensuring that cost-effective capacity exists at all times which meets or exceeds the needs of the business as established in Service Level Agreements. In ITIL, capacity is defined as the maximum throughput a service, system, or device can handle. Capacity Management is divided into three major activities:

-  Business Capacity Management (BCM)

-  Service Capacity Management (SCM)

-  Component Capacity Management (CCM)

Service Continuity Management

The IT Service Continuity Management process (ITSCM) is ensures that the IT Service Provider can always provide the minimum, agreed-upon levels of service. IT Service Continuity Management uses techniques such as Business Impact Analysis (BIA) and Management of Risk (MOR). ITSCM results in the production of the IT Service Continuity Plan which is an aspect of the overall Business Continuity Plan.

IT Security Management

IT Security Management focuses on protection of five basic qualities of information assets:

Confidentiality – Assurance that the asset is only available to appropriate parties

Integrity -- Assurance that the asset has not been modified by unauthorized parties

Availability -- Assurance that the asset may be utilized when required

Authenticity -- Assurance that the transactions and the identities of parties to transactions are genuine Non-Repudiation -- Assurance that transactions, once completed, may not be reversed without approval

Supplier Management

Supplier Management is the process charged with obtaining value for money from third-party suppliers. Supplier Management plays a very similar role to that of Service Level Management, but with respect to external suppliers rather than internal suppliers and internal/external customers. Supplier Management handles supplier evaluation, contract negotiations, performance reviews, renewals and terminations.

ITIL Core Component: Service Transition

The objective of the Service Transition process is to build and deploy IT services by also making sure that changes to services and Service Management processes are carried out in a coordinated way.

In this phase of the lifecycle, the design is built, tested and moved into production to enable the business customer achieve the desired value. This phase addresses managing changes: controlling the assets and configuration items (the underlying components such as hardware, software, etc.) associated with the new and changed systems, service validation, and testing and transition planning to ensure that users, support personnel and the production environment have been prepared for the release to production.

Change Management

The objective of this process activity is to control the lifecycle of all the changes. The primary objective of Change Management is to enable beneficial changes to be made with minimum disruption to IT services.

Change Evaluation

The objective of the change evaluation process is to assess major changes, like the introduction of a new service or a substantial change to an existing service, before those changes are allowed to proceed to the next phase in their lifecycle.

Project Management (Transition Planning and Support)

This process is aimed at planning and coordinating use of resources to deploy a major release within the predicted cost, time and quality estimates.

Application Development

This makes available the applications and systems which provide the required functionality of IT services. This process includes the development and maintenance of custom applications as well as the customization of products from software vendors.

Release and Deployment Management

The objective of this process is to plan, schedule and control the movement of releases to test and live environments. The primary goal of this management activity is to ensure that the integrity of the live environment is protected and that the correct components are released.

Service Validation and Testing

This ensures that deployed Releases and the resulting services meet customer expectations, and to verify that IT operations is able to support the new service.

Service Asset and Configuration Management

The objective is to maintain information about Configuration Items required to deliver an IT service, including their relationships.

Knowledge Management

The objective is to gather, analyze, store and share knowledge and information within an organization. The primary purpose of Knowledge Management is to improve efficiency by reducing the need to rediscover knowledge.

ITIL Core Component:Service Operation

Event Management

The objective is to make sure CIs and services are constantly monitored, and to filter and categorize Events in order to decide on appropriate actions.

Incident Management

The objective is to manage the lifecycle of all Incidents. The primary objective of Incident Management is to return the IT service to users as quickly as possible.

Request Fulfilment

The objective is to fulfill Service Requests, which in most cases are minor Changes (e.g. requests to change a password) or requests for information.

Access Management

The objective is to grant authorized users the right to use a service, while preventing access to unauthorized users. The Access Management processes essentially execute policies defined in Information Security Management. Access Management is something also referred to as Rights Management or Identity Management.

Problem Management

The process objective is to manage the lifecycle of all Problems. The primary objectives of Problem Management are to prevent Incidents from happening, and to minimize the impact of incidents that cannot be prevented. Proactive Problem Management analyzes Incident Records, and uses data collected by other IT Service Management processes to identify trends or significant Problems.

IT Operations Control

The objective is to monitor and control the IT services and their underlying infrastructure. The process objective of IT Operations Control is to execute day-to-day routine tasks related to the operation of infrastructure components and applications. This includes job scheduling, backup and restore activities, print and output management, and routine maintenance.

Facilities Management

The process objective is to manage the physical environment where the IT infrastructure is located. Facilities Management includes all aspects of managing the physical environment, for example power and cooling, building access management, and environmental monitoring.

Application Management

Application Management is responsible for managing applications throughout their lifecycle.

Technical Management

Technical Management provides technical expertise and support for management of the IT infrastructure.

The objective of this is to make sure that IT services are delivered effectively and efficiently. The Service Operation process includes fulfilling user requests, resolving service failures, fixing problems, as well as carrying out routine operational tasks.

Service operation delivers the service on an ongoing basis, overseeing the daily overall health of the service. This includes managing disruptions to service through rapid restoration after incidents; determining the root cause of problems and detecting trends associated with recurring issues; handling daily routine end-user requests; and managing service access.

ITIL Core Component: Continual Service Improvement (CSI)

The objective of this is to use methods from quality management to learn from past successes and failures. The Continual Service Improvement process aims to continually improve the effectiveness and efficiency of IT processes and services in line with the concept of continual improvement adopted in ISO 2000.

CSI offers a mechanism for the IT organization to measure and improve service levels, the technology,  efficiency and effectiveness of processes used in the overall management of services.

Service Review

The objective of Service Review is to review business services and infrastructure services on a regular basis. The aim of this process is to improve service quality where necessary, and to identify more economical ways of providing a service where possible.

Process Evaluation

The objective here is to evaluate processes on a regular basis. This includes identifying areas where the targeted process metrics are not reached, and holding regular benchmarking, audits, maturity assessments and reviews.

CSI Initiatives

The objective of CSI initiatives is to define specific initiatives aimed at improving services and processes, based on the results of service reviews and process evaluations. The resulting initiatives are either internal initiatives, pursued by the service provider on his/her own behalf, or initiatives which require the customer’s cooperation.

Monitoring of CSI Initiatives

The objective is to verify if improvement initiatives are proceeding according to plan, and to introduce corrective measures where necessary.

Continue reading

PMP Contract Types and Examples

Contracts, oh contracts. Are you asking yourself, “Aren’t those someone else’s responsibility?”

As a PMP you will be expected to have knowledge of different contract types and what contracts should be used when. Remember PMPs are expected to maintain relationships with ALL stakeholders, and a vendor (or seller) is a VERY important stakeholder.

You will likely have support from a Procurement Office within your organization, but if not, you need to understand that contracts are your responsibility as a PMP. As you Plan Procurement Management you, with the support of your project team, will decide what contract type you should use for your project.

In this post let’s discuss the types of contracts you should know for the PMP exam and an example of when to use them.

PMP Contract Types

We will break our discussion of the seven contract types into three larger groups of contracts – fixed-price, cost-reimbursable, and time and material.

Fixed-Price Contracts

A Fixed-Price contract is a contract that has a predetermined-set price for a specific product or service. This means that if the vendor completes the product or service as defined in the contract, they will receive the agreed to price.

Scope for the service or product cannot change without a price change; however, fixed-price contracts can build in some flexibility for payment such as incentives or adjustments based on environmental factors.

Fixed-Price contracts are good to use for products or services that a seller creates repeatedly. A fixed-price contract should only be used when the seller is confident in the process it takes to complete a product or service, because fixed-price contracts put the most risk on the seller.

Firm Fixed Price (FFP)

A FFP is the most common type of fixed-price contract. In an FFP contract that scope of the product or service should be exact. The price will be set on the buyer’s request.

A FFP should be used for a product or service that is a repeated process. As an example, a car manufacturer would enter into a FFP contract for a standard model car. The manufacturer knows what it takes to complete the car and the associated cost. The manufacturer is confident that they will be able to deliver on the predetermined firm-fixed price.

Fixed Price Incentive Fee (FPIF)

A FPIF is similar to the FFP; however, a FPIF also offers an incentive if the product or service exceeds an expectation. For example, a buyer might give the seller an incentive fee if the seller completes the product early.

Using the example above of our car manufacturer, a buyer might provide an incentive when the manufacturer delivers the car early. This early delivery allows the buyer an additional week of use, which puts the entire project ahead of schedule. Thus, the buyer wants to show appreciation with an incentive.

Fixed Price with Economic Price Adjustment (FP-EPA)

A FP-EPA is like a FFP, with one exception, if the product or service is largely reliant on an input with a price that is governed by supply and demand, a seller could increase the price of the overall contract accordingly.

Okay, what does that mean? Let’s use our car example again, but add a different piece to the discussion, if the buyer wanted a standard model car with a supply of gas for one year, the seller could adjust the overall price of the contract based on the cost of petroleum.

Since the seller has no control over how much gas will cost when the car is ready for delivery, the overall contract cost might increase if the gas price increases. However, the only portion of the contract that would increase is the portion tied to petroleum costs.

Cost-reimbursement Contracts

Cost-reimbursement contracts are different from fixed-price contracts as the buyer takes on more risk. In all the cost-reimbursement contracts the seller can charge for all legitimate expenses related to completing the product or service, as well as charge a fixed fee as profit for their work.

In a cost-reimbursement contract the seller has more flexibility to complete the scope of work. However, the buyer runs risk if the scope costs more than anticipated.

You would use a cost-reimbursement contract when the seller is not confident in the process it takes to complete a product or service. For example, completing the code for a new app. Although many apps have been created before, there is not an absolute template on how long the it takes to create the correct code.

Cost Plus Fixed Fee (CPFF)

In a CPFF the seller can charge the buyer for all legitimate expenses related to completing the product or service. However, the seller can also charge a fixed-fee that is a percentage of the overall contract price. Remember this fixed-fee is set at the beginning of the contract, and even if legitimate expenses increase this fixed-fee remains the same.

Using our example above, you could use this type of contract to secure a seller to build an app. The seller would provide all legitimate cost, like expense for a coder’s time, in the initial estimate. Based on this initial estimate the seller would include a fixed-fee that is a percentage of the legitimate costs they calculated. At the end of this contract, as the buyer, you would be responsible for all legitimate costs incurred and the fixed-fee.

Cost Plus Incentive Fee (CPIF)

In a CPIF both the seller and the buyer assume risk. Let me explain. In A CPIF contract the buyer is responsible for legitimate costs of the project work, but if the seller does not accurately project estimates, the seller and the buyer split the responsibility of costs that are greater or less than the estimate.

Additionally, if the seller completes the work in a manner that exceeds an expectation write in the contract, the buyer will provide an incentive fee.

If we use our example of creating an app again, we would use the CPIF contract type if this was the first time ever that an app of it’s kind was developed. Since there are no benchmarks there are risks on both the side of the seller and the buyer. However, if the seller completes the app a month ahead of schedule the buyer will want to reward the effort.

As I noted the CPIF puts risk on both sides, but it also provide motivation for the seller to complete quality work that exceeds expectations.

Cost Plus Award Fee (CPAF)

A CPAF is very similar to the CPIF we just discussed. However, the main difference here is the award fee is at the sole discretion of the buyer. The buyer would set predetermined expectations for the seller in the contract. If the seller meets those items, to the satisfaction of the buyer, than an award is provided.

Let’s use our app example again. If you entered into this agreement with a CPAF contract, as the buyer, you would set checkpoints within the project work to check on quality, percent complete, etc. to determine if award fees were worthwhile. It is important to remember that these award fees are solely at your discretion as the buyer.

Time and Material Contracts (T&M)

Last but certainly not least are time and material contracts. T&M contracts are a cross between fixed-price and cost-reimbursable. They are a cross because they can take on either form. T&M are typically used when the scope of work cannot be well defined when the contract is created.

T&M can be more like cost-reimbursable when the buyer agrees to pay for all legitimate expenses.

However, T&M can be more like fixed-price when the buyer sets firm parameters on expenses upfront. For example, this product or service can not cost more than 100,000 to complete.

A T&M is likely the easiest to remember as the buyer will pay the seller for all time and material it takes to complete the product or service, within reason.

Let’s go all the way back to our car example. As a buyer let’s say you want a seller to make a new kind of energy efficient car, unlike any other on the market. You cannot easily define scope as you are not sure what type of energy will be used, etc. As the buyer you could enter into a T&M contract that states you will pay for all time and material up to 5 million dollars. If the project exceeds the limit it will not be reimbursed, unless a new agreement is made.

Continue reading

Six Sigma Trends: Management of Six Sigma Deployments

Below is a typical scenario describing the launch of Six Sigma in European companies and European branches of International companies.

Is Six Sigma A New Quality Initiative?

Six Sigma is often deployed as a quality initiative, where one manager is typically selected as a Six Sigma Leader and a few candidates are sent overseas to learn “new quality methods” and secure billions of dollars in savings “as Motorola and GE do.” Nobody in the company really knows what Six Sigma means, just that other companies are using it and that customers and/or shareholders are starting to demand its deployment.

The candidates usually attend a Black Belt training course where they are asked to present their pre-selected project, which is completed in conjunction with the training. Here is where Black Belts may experience confusion, especially if the project selection process is not completed prior to the beginning of training or the selected project is inadequate. Black Belts may also become frustrated when they realize that they lack an understanding of the Six Sigma concept and the supporting infrastructure needed within their company to ensure a successful deployment. Additional stress is created through their fear of failure.

Lessons Learned

Companies that decide to begin their deployment with Black Belt training nearly always underestimate the criticality of project definition and management. Immediately after a Black Belt’s first week of training and subsequent review of project reports, his/her manager starts to consider whether the Black Belt project should be redefined or stopped and replaced with another project.

Managers may begin to experience similar frustration and fear of failure for the following reasons:

◈ Lack of understanding of what Black Belts are doing in the project
◈ Inability to judge and review project results
◈ Inability to properly evaluate Black Belt ideas
◈ Lack of sufficient Six Sigma knowledge to manage Black Belts, resulting in a potential loss of credibility
◈ A perceived need to learn about Six Sigma in order to remain in a management position

When confusion, frustration and fear reach a critical mass, managers begin their Six Sigma training. During and after their training, they revisit the steps taken to date and re-launch the Six Sigma deployment. Meanwhile, the first group of Black Belts and Green Belts await strategic management decisions that will determine their position, career perspectives, projects, etc.

What Managers Need to Know Before Educating and Managing Black Belts and Green Belts

The above scenario is a pessimistic view that is unfortunately very typical. Real benefit and return on investment in Six Sigma is conditional and should be deployed from the top down. The leaders of the company must first understand the basics of Six Sigma and develop a company-specific deployment strategy before building a Six Sigma infrastructure and beginning Black Belt and Green Belt training. Understanding of Six Sigma should include not only its value as a quality initiative but also as a management and leadership strategy & methodology supported with a variety of tools. Companies deploy Six Sigma to learn how to run, maintain and/or improve business processes to satisfy customer requirements associated with:

◈ quality (and safety) of products and/or services,
◈ price, and
◈ on-time delivery.

Most core business processes at a high-level consist of several generic steps independent of the type of business as shown in Figure 1.

Figure 1: High-Level Process Map Of Core Business Processes

Six Sigma projects aim to:

◈ Improve the efficiency of value-added activities within business processes.

◈ Sustain process changes, particularly through data-based business process control.

◈ Reduce loss of time, effort and money due to defects and failures in specific process steps and subsequent non-value-added activities (see colored process steps in Fig 1).

Role and task allocations within the company allow management of the processes from supplier to customer. Keys to success in this area are the selection and on-the-job training of Process Owners and the support of these changes by company leaders.

The Business Case

All Six Sigma projects are process and business metric-centered and therefore should be linked to the business scorecard. When several projects focus on business process improvement using the same business metric, the collective group of projects is called a Business Case.

If project selection is not managed properly as a part of the Business Case, then there is a high risk of many similar projects running in parallel, doubling activities. This can lead to the loss of efforts and investment, as well as create difficulties such as conflicts of interest in implementing project results. It is the role of management to define, prioritize and manage critical Business Cases. And this has to be understood at the very beginning of any Six Sigma deployment. Business Case Management demands Six Sigma skills and knowledge of the tools. Black Belts and Green Belts may support it, but managers must lead it as a part of their daily activities.

Efficient Training & Deployment: A Top-Down Process

The arguments presented above lead to one conclusion: there is little or no chance to succeed with a Six Sigma deployment by doing it from the bottom-up or by perceiving it as just another total quality management initiative. The quickest and most effective way to success is through Business Case management and project-based top-down training as shown in Figure 2.

Figure 2: Efficient Six Sigma Launch Within A Company

From our experience, management and executive training at a Green Belt level connected with participation on individual and/or group Business Cases provide the necessary momentum to achieve a successful launch and the quickest pay-back. Coaching is an absolute must during the training phase. After training, the first group of Black Belts and Green Belts become “self-carrying” as the savings from their projects usually cover the cost of training and coaching twice over.

Conclusion

We could have assumed that the topics discussed here are not relevant in the United States anymore, where Six Sigma has been deployed for many years. But that is not the case. By analyzing numerous experiences with our research companies, we concluded that these results are still critical and important to publish, particularly to improve cross-sea communication between different branches of a company that has deployed Six Sigma.

We have found that consistent promotion of top-down deployment and development of advanced hands-on training courses for executives and management in manufacturing, service and e-companies is still a burning topic, particularly in European companies. The success of this type of training at the beginning of a Six Sigma launch confirms our conclusion that overall promotion and marketing of Six Sigma training & consulting, usually done through quality initiatives, should definitely evolve to include management as well.

Continue reading

Six Sigma Deployment Planning and Readiness Assessment

Anyone who has deployed Six Sigma, or has thought about deploying Six Sigma, is familiar with the main stumbling blocks to a successful deployment – lack of senior leader support, lack of data, longer-than-expected project cycle time, part-time Black Belt resources, and most important, poorly defined projects.

Since the first financial firm started deploying Six Sigma in 1996, quality professionals still face the same common deployment challenges. Why? The answer is found in the quality of the deployment planning process. To address these common issues in advance and mitigate the risk of failure, deployment leaders, Champions and Master Black Belts should consider using two key requirements of a good deployment planning process:

◈ Six Sigma success equation
◈ Readiness assessment for Six Sigma

Six Sigma Success Equation

What is the Six Sigma success equation? Simply put, a successful Six Sigma deployment requires the following components prior to the first wave of training – the right Belts, the right projects and the right support system. Or, a variation of the formula Y = f(x1, x2, x3):

Success = f (RBelts, RProjects, RSupport System)

1. The right Belts means all of them, from Yellow Belts up through Master Black Belts.

2. The right projects mean well-defined projects and should include a robust pipeline of projects at a ratio of two projects per active Belt at any given time.

3. The right support means a complement of passionate Champions, involved senior leaders, highly analytical and skilled data owners, excellent and available subject matter experts and process owners, the right financial representatives, a robust financial management and reporting system, an excellent human resources support system, good and available data, the right metrics and validated measurement systems, and a good Six Sigma training vendor and curriculum customized to the organization’s culture and needs.

These three critical x’s in the success equation drive the quality of a successful deployment. Having the top quality in these areas, or best-in-class level, requires several key specifics to be completed by the first day of training – Black Belts that are 100 percent dedicated, well-defined projects in which their initial “cost of poor quality” is signed off by the finance department, and a strong support infrastructure. Unfortunately, the common case deployment scenario is what many organizations experience: Not all Black Belts have well-defined projects or are 100 percent dedicated, the financial/customer benefits of projects are not easily identified, and the support system is too weak. Fortunately, fewer organizations experience the worst case scenario: Poorly selected Black Belts, poorly defined projects with little or no financial/customer benefits, almost no support system, and attrition of Belts and Champions.

What can assure the greatest chance for a company to have a best-in-class scenario? The answer is the quality of the deployment planning.

Selecting the Right Belts

Because Six Sigma is a project-based methodology, one deployment success factor is the cycle time of Black Belt training projects. Now, what would be the best-in-class scenario in terms of cycle time of Six Sigma projects? If a Black Belt starts a project the same day as starting DMAIC training, then would it be perfect if at the end of the Control phase of the training, the project also were at the Control phase? This represents a project completion time of four months.

Figure 1: Three Typical Deployment Scenarios

While some firms achieve a best-in-class average of a four-month cycle time on training projects, as shown in Figure 1, others spend more than three quarters – nine months – completing the projects.

One of the most challenging and critical aspects of Six Sigma is selecting the best of the best within the organization to be full-time Black Belts or part-time Green Belts. Successful Black Belts are the kind of employees who overcome virtually all barriers to successful project completion – even such basic problems as poor project selection, lack of Six Sigma infrastructure, poor Champion support and lack of data. The process of selecting candidates for Black Belt training must be thorough. It is important to allow enough time and devote enough effort to the task. A company should start by looking for persons with a well-balanced set of leadership, analytical and project management skills.

The process should include the following considerations:

◈ Begin selecting the right Belts while building the pipeline of projects in order to match project complexity with the skill sets and experience of Black Belts.

◈ Transition the current responsibilities of Black Belt candidates to others in the company, so that each Black Belt candidate is 100 percent dedicated to Six Sigma on the first day of training. (See Figure 1.)

Selecting the Right Projects

The selection process starts by defining and implementing a project pipeline strategy, followed by several project selection workshops. A project pipeline strategy identifies items which are critical to customers (CTCs) or critical to quality (CTQs). Next, CTCs are prioritized and Champions are nominated and selected. Financial representatives, data owners and process owners are key players in this process and should be nominated and trained at this point as well, since the prioritization process often requires some data mining or process mapping. The end result is worthwhile as the cycle time of the projects will be shortened. (See Figure 2.)

Project selection is a never-ending process in Six Sigma. It starts two or three months prior to the first day of training, but has no end. Everyone in the company should be encouraged to suggest project ideas.

The success of the project selection process and project pipeline is measured by two factors – the cycle time of projects and the number of projects per active Belt that are in the pipeline.

Figure 2: Project Pipeline Strategy

Right Support System in Place

Even before building the project pipeline and simultaneously selecting the best of the best to be Black Belt candidates, an organization must begin to develop an infrastructure to support its Six Sigma deployment. This process can take anywhere from three to six months.

It begins with identifying a long- and short-term Six Sigma strategy for the organization. The strategy underlines not only the goal, mission and vision of Six Sigma for the organization, but also the required resources and the risks associated with a potential failure.

The support system must be comprised of the best Champions, subject matter experts, financial representatives, human resources representatives, data owners and process owners within the company. These key players must be trained prior to the Black Belts – usually a long process with results that may be hard to measure immediately. However, a strong infrastructure will pay off in supporting the project efforts. A well-understood financial system is needed to track, report, validate, and book Six Sigma financial benefits holistically throughout the organization. Finally, the organization’s human resources department needs policies and procedures to support the Six Sigma deployment.

Readiness Assessment for Six Sigma

When nominating Champions, conducting project selection workshops and selecting Black Belts, the organization must be aware of any cultural and operational barriers that would prevent it from reaching its goals. Thus, the need for a readiness assessment to understand the positives and negatives in deploying Six Sigma. Two aspects of readiness need examination – cultural and operational.

Cultural Assessment: This type of assessment varies from simple observation to a formal survey of all employees. The goal of the assessment is to identify whether change will be accepted across the organization. And if so, at what speed can the change be implemented? Although cultural assessment may be perceived as an easy process, it is more difficult than organizational assessment.

In a cultural assessment, one must answer the following questions:

◈ How do senior leaders cascade important information throughout the organization?

◈ How are important decisions made?

◈ Who makes the decisions?

◈ How fast are the decisions implemented?

◈ How does the organization recognize successes and failures?

◈ How does the organization handle failures?

◈ Does everyone in the firm understand the mission, vision and strategy of the firm as a whole?

◈ Is everyone in the firm aware of the critical customer, revenue and operating expense issues across the firm?

◈ How does the firm set up corporate goals?

◈ How clear are these corporate goals?

◈ Are the corporate goals measurable?

Operational Assessment: An operational assessment measures the maturity of the processes, measurement systems and data systems in an organization. The questions that must be answered are:

◈ How does the organization measure success?

◈ Does the organization measure the right things?

◈ How often does the organization measure these things?

◈ Does the organization have a few metrics that all employees understand and use?

◈ Are decisions based on data or assumptions?

◈ Who owns each critical process?

◈ Who owns the data?

◈ Where is the data?

◈ Is data stored on spreadsheets on employee laptops or in a data warehouse?

◈ Has the data been validated?

◈ Are the company’s reports written in simple, scientific or financial terms, or free form using fuzzy language?

◈ Are there updated process maps of the most critical processes?

◈ Do the executives know what a process map is?

The answers to these and other cultural and operational questions together with the success equation provide a good understanding of whether an organization is ready to launch Six Sigma. But even more importantly, the success equation and the readiness assessment will provide an organization with the knowledge needed to build a tailored deployment plan that includes the right elements and mitigates the risk of failure.

One More Element for Success

One other key element of deployment success which cannot be over-emphasized is time: Time to plan well. Time to sell the initiative. Time to select the right talent across the firm. Time to select good projects. Time to build a robust infrastructure. Time to ask questions. Time to analyze the answers.

Click here to learn the steps to write a deployment plan.

Continue reading