Creating an OpEx Budget that Delivers ROI

Your operational excellence team does not make widgets, so how do you create a budget? You can’t project X number of widgets produced at $Y per widget, an amazing improvement of Z% over last year, and A% better than your benchmarked projections for your primary competitor. But you need some way of creating a defensible budget or you’ll end up without resources.

The key is that the OpEx budget supports the OpEx strategy. (If you haven’t yet articulated your OpEx strategy, now is the time.) That OpEx vision and strategy will be linked to the organization’s overall vision and strategy, of course, along with the organization’s goals for widget-related outcomes and a favourable ROI.

The OpEx budget-setting process is the perfect opportunity to discuss the level of resources and investment allocated to operational excellence with stakeholders who are counting on the impact of operational improvements to meet their own projected goals for business outcomes. This goal-setting/budget-setting activity is a process, so you can use a standard work approach for setting the OpEx budget.


The budget-setting process involves:

  • Reviewing the organizational and OpEx strategies
  • Defining the type and level of OpEx investments needed to achieve the strategies
  • Drafting a dollarized budget and reviewing with operational stakeholders in a push-pull mode to assure alignment
  • Setting up the internal monitoring and budget review process

Researchers Francis and Gerwels have even suggested that the budget process can follow a Deming cycle (Plan-Do-Check-Act), with appropriate discussion of controlled and uncontrolled variation. 


The Elements of Your OpEx Budget

In general, your OpEx budget relates to the non-operational people side of the resources for improvements for the organization, including training. So in the OpEx budget, you’re likely to include your own staff salaries and benefits as well as training for your OpEx staff.

You’ll also have expenses for the OpEx people for travel and other items. If the training you provide is purchased from an outside supplier, your budget will hold the subscription or licensing fees for any content as well as any costs for consultants for planning, instructional delivery, problem-solving and other professional services. Licensing for software for workflow management of the OpEx portfolio and metrics is in the OpEx budget as well.

Operating departments will cover the capital side of investments for improvements as well as the salaries and benefits for their own employees, which includes all the time they spend with your staff in OpEx training and execution, along with related expenses.

Most likely OpEx salaries will be the largest part of your budget, so it’s important to evaluate how to allocate team member support effectively. Roger Price suggests a rule of thumb of 1 to 3, that is, one OpEx staff member for every three processes or one OpEx leader for every three operational sites, as a reasonable starting assumption for span of control.


Should Your OpEx Budget Be Increasing or Decreasing Over Time?

It depends…On the one hand, organizations constantly strive to reduce the cost of quality, so you might expect the operational excellence budget to decrease over time as improvement efforts drive results and a high-performance culture is established. Much of the basic training has been completed, internal expertise has developed, external consultants are no longer needed, hardware and software infrastructure is in place, and employees across the organization operate more effectively and independently.

This anticipated effectiveness also applies within the OpEx team. Businesses can no longer afford to pay for physical implementations of continuous improvement in the way they have in the past. With the technology and tools available today, there is no need to allocate precious budget dollars for consultants to travel to implement initiatives. It is well within modern abilities to equip, enable, and train multiple locations to be self-sufficient in implementing continuous improvement and to sustain those efforts through digital management. 

OpEx change agents can take advantage of videoconferencing, distance training, digital communications, and other technologies to perform the OpEx functions more effectively by driving out non-value-added activities. Thus non-staff elements of the OpEx budget should decrease.

On the other hand, OpEx in an ideal world “pays for itself” in that the money invested in operational excellence efforts delivers bottom-line results in the same amount or hopefully much higher levels. Nominally then, the bigger your OpEx budget, the bigger the benefit to your bottom line. The sky is the limit!

That’s an exaggeration, of course, but an organization that has a strong improvement vision and strategy and has already demonstrated good momentum in improvement efforts should not be constrained by an artificially induced pressure to reduce OpEx funding because of the maturity of the organization. Shrinking your way to success is generally not a good strategy.

In addition, progressive organizations that are eagerly embracing disruptive technologies, products, and business models need support in their OpEx efforts to drive similarly aggressive improvement infrastructure. If your customer-facing development budget is increasing, it’s probably a good idea to plan for an increase in the OpEx efforts to support it.

As Jeff Bezos of Amazon said, “It's our job every day to make every important aspect of the customer experience a little bit better.” Improvement can never stop. Organizations need the OpEx team to support improvement and the OpEx budget to support the team.


Thinking About ROI

Whether or not your organization puts hard ROI metrics in place for OpEx performance, set your budget with pay for performance in mind. If this were your company—and it is!—you certainly wouldn’t want to pay for non-value-added activities, especially in a department that is not considered revenue-producing. Make sure the budget aligns to strategic deliverables, among them ROI for the organization. In some cases, operational departments may use a chargeback system or at least an internal scorecard to track “revenue” from improvement projects to demonstrate the ongoing value of the OpEx efforts.

Some of the primary functions in your team are to:

  1. Identify the need for change
  2. Be change agents
  3. Nurture change management.

In line with that thinking, the OpEx team needs to be nimble and agile. Relative to the OpEx budget, this becomes a simple practice: Allocate funding and resources on an as-needed basis as opposed to a pre-determined basis. This way the OpEx team can help to drive and leverage not just continuous improvement but also breakthrough and disruptive changes.


Help Your Stakeholders Understand How Operational Excellence Impacts Their Budgets

While you’re creating the OpEx budget, use your understanding of how process improvement works to help other operational departments properly plan their budgets around improvement efforts. One of the important things enthusiastic managers can forget is that operational costs often go up before savings from improvements are realized. If this isn’t understood and built into plans, managers may be tempted to abandon improvement efforts they think are not working because the numbers seem to be going in the wrong direction for months.

Consider this example: A manufacturing team decides to improve quality to reduce customer complaints. To keep customers from getting the bad product, they put tighter specs and 100 percent testing in place, in parallel with implementing improved process control. The new specs drive higher waste until the process control provides improved conformance.

Although external failure costs start going down quickly, waste (internal failure costs), testing (appraisal costs), and early process improvement expenses (prevention costs) go up. The overall cost of quality will be reduced ultimately, but not instantaneously. Factor this cost dip phenomenon into projections and dazzle client managers by giving them accurate rather than overly optimistic predictions.


The Final Test

The true test of your OpEx budget creation process is consistent with the “check” piece of any management process.

Is your OpEx budget working for you or against you?

If it’s working for you, you’re in good alignment with operational functions as you jointly strive to meet improvement goals. If it’s working against you, you’re underdelivering in one of two ways. You’re either struggling to find resources and often failing to meet the supporting commitments you’ve made to your stakeholders. Or you’re seen by the rest of the organization as a fat staff group that spends “their” money without adding much value.

Build an OpEx budget that works for you and delivers favorable ROI for the organization.

About the author

Nancy Bach

Nancy Bach has spent more than 20 years in the industry as a quality and operational excellence practitioner and manager. In private consulting, she creates and delivers a Lean Certification course, provides Green Belt training and works with multi-functional organizations to develop strategy and implement process improvement.