Project New Revenue or Cost Savings: Make Sure You Dig Deep to Find True Values for Each

      A few years ago, I worked in the strategic planning department for a large publishing organization.  The group would assign a project manager to a proposed initiative from senior management and then others in department would be team members to contribute their expertise.  I don’t think I ever worked with a group of such talented individuals during my entire career.

      One individual originally worked for one of the big auditing organizations and she was the ‘go to’ person for financial analysis.  Over her career, she developed her ability to focus intently on true incremental new revenue and incremental cost savings.  On the revenue side, many individuals would optimistically state an initiative would bring in six figure incremental revenue.  She would begin to ask a series of programmed questions which she had in her head.  By the end of the session, much of the supposed incremental new revenue was either built on a very flimsy set of assumptions or was ‘switch revenue’ from another area to the new initiative.

      On the cost side, a significant amount of the cost structure was fixed.  This was good for new initiatives which would bring in true incremental revenue with no cost increases.  But some initiatives proposed significant cost savings.  Again she would ask a different series of programmed questions.  And again at the end of the session, many of the supposed costs savings were based on flimsy assumptions or realistically not going to happen given the cost structure.

      Here are two takeaways.  First always involve members of those in your financial organization on your projects.  More than once, I’ve heard project leaders say those from finance are too negative.  Get over that and bring them in from the beginning.  Second make sure at least one of your financial representatives knows the true revenue and cost drivers of your business like the individual I mentioned above knew those in the publishing business.  This will save you and the team from embarrassment during and after the project.

Hypothesis Testing: Remember There are BOTH Statistical and Practical Problem and Solution Statements

      Recently I went through a series of (free) online Lean Six Sigma videos by Matt Hansen at http://www.statstuff.com/.  The videos are excellent and in the series on hypothesis testing, I was reminded again how important it is to remember there are both statistical AND practical steps.  Many of us get so enthralled with the power of statistical testing from the ease of desktop software nowadays, we forget the practical implications of the findings.

      Matt suggests a four step process for hypothesis testing:

1.     Practical Problem: State the problem as a practical yes/no question.

2.     Statistical Problem: Convert the problem to an analytical question identifying the statistical tool/method.

3.     Statistical Solution: Interpret the results of the hypothesis test with an analytical answer.

4.     Practical Solution: Interpret the analytical answer in a practical way.

My experience has been failure sometimes occurs between steps 3 and 4 when it is time to ‘bring it on home.’  The statistical test has performed its’ duty when interpretation allows us to either reject or fail to reject the null hypothesis.  What happens is we don’t subject the statistical solution to a common sense dose of a practical solution.  Subject matter expert interpretation is essential at this step.

So don’t check your common sense at the door when you venture into the world of hypothesis testing.  This tool is one of the key members of the six sigma tool kit.  But you don’t want to perform all the pre-work to gather appropriate data, perform a correct hypothesis test and then blow it in the home stretch with false interpretation.