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Improving Compliance Using Visio 2007Reducing the Cost of SOX Compliance with Minimal IT Investment

IntroductionFabrikam, Inc. is a private building materials manufacturer based in the United States. The company has three local manufacturing facilities, and the largest facility doubles as company headquarters and includes Fabrikam’s back-office staff.

Fabrikam has continued to grow over its 30 year history, and is currently a 500 person company, with 30% of employees focused on back-office operations and the remaining 70% focused on materials production. To continue its growth, Fabrikam plans to raise capital from an initial public offering (IPO) on the New York Stock Exchange (NYSE) timed for the beginning of the calendar year.

The Accounting Department is one of the teams critical to the planning and execution of Fabrikam’s planned IPO. The Accounting Department is made up of 30 accounting professionals located at company headquarters. The department recently laid off 5 employees due to across the board staff restructuring in response to worsening domestic and international sales forecasts. However, this has not in any way reduced departmental workload, leading management to ask the department to “do more with less.”

In conjunction with Fabrikam’s planned IPO, the company’s CFO tasked the Accounting Department with reviewing the company’s financial processes and procedures relative to the Sarbanes Oxley Act of 2002 (SOX), particularly section 404. SOX section 404 demands that companies evaluate the adequacy of internal controls for financial reporting, institute new controls as needed, perform and report on an assessment of these controls each year, and be able to demonstrate that appropriate controls are in place. The section further requires that corporations immediately institute internal controls to protect the integrity of financial data and demonstrate that appropriate controls are in place. Any shortcomings in these controls must also be reported, and registered external auditors must attest that internal accounting controls are in place, operational and effective.

The Accounting Department’s financial process and procedure review uncovered a number of potential SOX compliance issues relating to Fabrikam’s Purchase Order (PO) process. A majority of tasks and activities in the PO process are manual in nature, and involve numerous spreadsheet handoffs from each of the three manufacturing facilities. Documents and process information are maintained separately on employee desktops and are transmitted via email for reporting and review. The PO process was cited by internal auditors as lacking proper controls, making it a potential SOX problem moving forward.

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1. Converting Static Process Diagrams to Visio 2007To develop a better understanding of the PO process and its problems, the Accounting Department analysis team agreed they needed a more thorough documentation of the existing process. Today the PO process and sub-processes are only partially documented, with much of the process knowledge “residing in people’s heads.”

Some PO process information is captured in text-based standard operating procedures (SOPs); other sub-processes are captured in Word documents or PowerPoint slides. The team uncovered a great deal of confusion regarding the PO process and how the three manufacturing facilities participate throughout the process.

Several team members advocated manually re-creating the existing process diagrams in Visio – an environment that would enable rich process analysis. However, the analysis team leader estimated that it would take one person approximately 40 hours of direct labor time to recreate the three manufacturing facilities’ PO process documentation in Visio. Given other commitments, the recreation process could take up to two full-weeks to complete. Although the team leader clearly understood the benefits of having dynamic process diagrams for detailed analysis, he was concerned with the degree of time and effort required to convert the diagrams.

Importing Static Office Flowcharts into Visio for Process AnalysisRather than manually recreate all of the PO process documentation, the team discovered a valuable feature within Visio: the free Flowchart Converter Add-In. As a first step in understanding Fabrikam’s PO process, the team used the free Flowchart Converter Add-in functionality within Visio to take the existing Word and PowerPoint PO process documentation and quickly import it to Visio. This provided the team with much richer process documentation and laid the ground work for further analysis.

Figure 1: Existing Process Documentation Figure 2: Process Diagrams in Visio

Benefits of Converting Static Process Diagrams to Visio 2007 Quickly and easily convert static process diagrams to rich Visio diagrams for process analysis Save a significant amount of labor and cycle time in process diagram translation and redesign; the

Accounting Department team estimated approximately 40 hours of direct labor savings in diagram translation, and a reduction of 2 weeks’ cycle time

Downloadable Examples: Improving SOX Compliance using Visio 2007_Diagrams.vsd – Figure 1 Improving SOX Compliance using Visio 2007_Diagrams.vsd – Figure 2

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2. Discovering the Business Impacts of a ProcessFollowing documentation of the PO process, the Accounting Department analysis team turned to problem identification. In reviewing the PO process and sub-process diagrams in Visio, the team identified a significant number of manual process steps, coupled with numerous back-and-forth document hand-offs. However, they had no visibility into which steps in the process were problematic, or how severe these problems or their impacts were on the overall PO process.

Analyzing the Business Impacts of the Current State ProcessUsing the new PO process diagrams, users within headquarters and the different manufacturing facilities began to observe and add process step data to the Visio diagrams to support deeper process analysis. The team collected performance data for each step in the PO process using Excel 2007. The observational data they collected included:

Average cycle time to complete a process step Average labor time to complete a process step Average number of staff to complete a process step

The team began adding observed data to the Visio PO process diagram using the Data Link feature in Visio 2007. To facilitate their analysis, the team used the Data Graphics in Visio 2007 to better visualize process performance at each step. The process map with data graphics enabled team members to develop a richer understanding of the process elements and key performance indicators, and also allowed the team to quickly communicate their findings to upper level management.

Next, the team added new data fields to the process steps within Visio using the Shape Data feature. These new data marked conclusions formed by the team after they had closely analyzed the process. The team then exported the data back to Excel using a custom built Visio Report template so that they could determine the aggregate business impact of the current state process performance.

After the first iteration of the process, Accounting Department staff exported the process data from Excel to the Visio diagram and began analysis to determine problem areas. To further refine the planned analysis, the team leveraged SOX filters within Visio 2007 to select which specific SOX data (like FS Class, Cycle, Sub Cycle, Control Objective sand Control Activities) should be included in the analysis.

In analyzing the PO process with Visio, the team found the process to be very lengthy, both in terms of process execution as well as PO process reporting. The significant number of manual process steps, coupled with numerous back-and-forth document hand-offs increased process cycle time and was deemed unacceptably long from a SOX compliance perspective.

Using the Visio process model in conjunction with the Excel report, the Accounting Department team calculated that the existing Purchase Order process took on average 16 hours of cycle time to complete. Furthermore, manual order entry and PO recording into spreadsheets introduced significant SOX risks to the process, as well as approximately 10 labor hours per purchase order at each of the three manufacturing facilities.

Using the exported process data from Excel, the team multiplied the average labor time for each step by the staff labor rate and number of staff to determine the labor cost for each step. Summing these costs yielded a total process labor cost of $200 per purchase order. Considering that the company processed 10 orders a day per facility, or approximately 7,800 orders a year (52 weeks x 5 days a week x 3 facilities x 10 orders a day), this equated to an estimated $1.56 million in labor cost associated with the Purchase Order process.

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Upon review, the CFO issued a team mandate to significantly reduce the time to execute the PO reporting process and decrease identified SOX compliance risks in preparation for the IPO.

Figure 2: Process Diagram without Shape Data Figure 3: Process Diagram with Shape Data

Benefits of Discovering the Business Impacts of a ProcessBy using Visio as a process analysis surface, the Accounting Department at Fabrikam was able to:

Discover the business impacts of Fabrikam’s current state processes Quickly communicate process issues both internally and to external consultants to foster innovation Support important initiatives for process improvements using detailed data and analysis

Downloadable Examples: Improving SOX Compliance using Visio 2007_Diagrams.vsd – Figure 2 Improving SOX Compliance using Visio 2007_Diagrams.vsd – Figure 3 Improving SOX Compliance using Visio 2007_Data.xlsx

3. Customizing and Standardizing the Visio SOX Compliance Environment

Upon reviewing the first round of Purchase Order process documentation, the Accounting Department quickly realized that the different manufacturing facilities utilized different process shapes and standards to document their sub-processes and capture process data. This in turn made it more difficult to fully diagnose process performance problems and ensure proper SOX compliance. An independent consultant estimated that the lack of controls and standardization would likely cost Fabrikam approximately $200,000 in SOX related costs and fines over the next three years if not addressed.

To increase cross-facility process consistency, the Accounting Department team worked with Purchase Order stakeholders to standardize SOX process documentation. The team discovered that a large amount of the effort to build their original process diagrams could be captured and stored within the Visio environment, giving future process improvement teams a head start when they prepare new Visio documents.

Accounting staff worked to apply standardized SOX stencils, images, and data graphics to each plant's process diagrams using Visio 2007, ensuring cross group consistency and SOX compliance. In the SOX diagram, standardized, unique shapes are associated with the SOX related information in pre-defined compliance points. The team customized the Process shape – part of the Basic Flow Chart Shapes stencil – to include data inputs for

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the observations they collected. A team member added this shape to the Fabrikam stencil simply by dragging the shape from the completed PO diagram onto the stencil.

The team further saved the report template that they had used to transfer data from Visio to Excel. Finally, the team placed all of the documents in a shared folder on the corporate intranet so that teams across the organization could use the files in their own process analysis projects.

Benefits of Customizing and Standardizing the Visio Compliance EnvironmentBy customizing and standardizing the Visio process analysis environment using SOX stencils, Fabrikam was able decrease the risk of SOX compliance issues and identify additional ways to improve the Purchase Order process.

Figure 4: Process Diagram with SOX Stencils

By customizing the Visio environment, the Accounting Department at Fabrikam was able to:

Standardize documentation of PO process in the context of SOX Compliance Capture team customizations of shape stencils with company specific shapes and Data Graphics Capture the work the team performed to develop a custom report template Reduce future process improvement project effort through reuse of custom Visio stencils and templates Standardize the way compliance projects were conducted and reported to management by disseminating

custom Visio stencils and templates throughout the organization

Downloadable Examples: Improving SOX Compliance using Visio 2007_Diagrams.vsd – Figure 4 Improving SOX Compliance using Visio 2007_Data.xlsx

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4. Enabling Business Process ImprovementsFollowing an in-depth review of the standardized Purchase Order process diagrams across manufacturing facilities, the Accounting Department needed to identify ways to model the impact proposed changes would have on the process, and what impact those changes would have from a SOX compliance perspective. Currently, there was no way for stakeholders to quickly discern potential SOX compliance concerns or process problems through a simple diagram review.

Simulating Improvements to the Purchase Order ProcessThe CFO and the Accounting Department team met with a SOX consultant to further discuss potential improvements to Fabrikam’s Purchase Order process with regard to compliance. The team was able to quickly communicate the process pains to the SOX consultant using the Visio process models with SOX Shape Data that they had developed.

Working with the SOX consultant, the team quickly modeled how the process would change if Fabrikam automated a number of its manual PO processing steps, and what impact that would have on both SOX compliance and overall process efficiency. Labor time for a number of process steps was reduced, while SOX risks associated with certain manual processing steps were effectively mitigated.

Using functionality from the Visio SOX Connector, the team was able to automate the display of process data within the PO process diagrams, pulling performance information directly from existing back-end systems that support the current process. This allowed for a rapid visual representation of the high performing PO process components, as well as areas that required further SOX compliance support. The SOX consultant further associated SOX shapes to pre-defined compliance points to assist with analysis and modeling.

Figure 5: Improved PO Process Diagram

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Benefits of Improvements to the Purchase Order ProcessThe team modified the Visio model and generated a future state report in Excel using the Fabrikam PO analysis template. Comparing the future state to the current state, the team calculated that labor costs would decrease by $50 for each purchase order once the new Purchase Order process was in place. Extrapolated over the 7,800 orders Fabrikam processed each year, the process savings equated to an annual reduction in labor cost of $390,000. Using these cost savings alone, the team created a business case to justify the $200,000 upfront cost in hardware, software, and services to install and deploy the new system and roll-out the process changes. Their business case based on labor savings alone after three years showed a net present value of $699,884, a rate of return of 187%, and a payoff period of less than one year. Furthermore, the Accounting Department team was able to improve financial process controls at key steps throughout the PO process, decreasing the risk of SOX compliance costs and fines by 75%, or approximately $150,000 over three years.

By using Visio as a process modeling and monitoring surface, the Accounting Department at Fabrikam was able to:

Quickly model process improvements and determine the business impacts of proposed solutions Quickly identify and address potential SOX compliance issues Monitor important business processes through data connected diagrams Provide process performance visibility throughout the organization Realize annual labor savings of $390,000 Avoid estimated SOX costs/fines of $150,000 over three years

Downloadable Examples: Improving SOX Compliance using Visio 2007_Diagrams.vsd – Figure 5 Improving SOX Compliance using Visio 2007_Data.xlsx

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About the AuthorValue Prism Consulting, LLC is a management consulting and financial analysis firm located in Atlanta, GA, and Seattle, WA, specializing in the area of Business Process Improvement (BPI). Value Prism’s BPI Services are designed to help companies assess and redesign their business processes to take full advantage of current and future technology investments. Effective alignment of technology with business processes empowers organizations to reduce costs, increase productivity, and derive more business value from technology investments.

Value Prism Consulting also provides 1- and 2- day workshops to help companies identify and improve business processes with Microsoft Office Visio 2007. These workshops demonstrate how Visio 2007 can be leveraged to quickly design, communicate, monitor and revise important business processes.

For more information about Value Prism Consulting, please visit their website at www.valueprism.com.