Businesses of all types should document workflows, organizational structure, and general operating policies and procedures. Workflow documents detail the process by which significant business functions are carried out, such as how customer orders are entered into the system, how customer orders are filled, how inventory and supplies are ordered, how returns or exchanges are processed, and how or customer service is provided. Organizational charts detail the job titles and responsibilities of employees. Written manuals of poli-cies and procedures should detail material business operations. The failure to document sufficiently policies and procedures related to major business func-tions can result in a number of issues, including the following:
• Revenue leakage, loss of inventory, or incorrect booking of revenues when customer orders are not entered properly by employees or returns are not processed in accordance with clear policies. For example, if the employee of the music store improperly enters the return of a rented instrument because there was no clear procedure on how to handle returns, there may be no way to track what, in fact, happened to the instrument.
• Complaints from customers when standard policies are not followed regarding orders, exchanges, or refunds. For exam-ple, consider how the reputation of the music store is affected if an employee refuses to honor a music les-son refund that another employee allowed under similar circumstances.
• Inability to fulfill orders or meet customer demands because of poor inventory management. For example, the effect on the sales of an emerging medical device manufacturer (Case Study 4) could be devastating if the manufacturer does not have clear protocols in place for ensuring timely manufacture so that customer orders can be filled based on demand. The failure to fill orders in a timely manner could result in the loss of customers, and the overpro-duction of inventory can create unnecessary expenses for a cash-strapped company.
• Mismanaged supplies, resulting in overordering and unneces-sary expenses, or underordering, creating potential business disruptions. For example, if a restaurant runs out of beer, the ingredients to prepare the most popular menu items, or even delivery containers, its sales will be affected.
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• Violations of law or internal company policies by employees who are never advised of the policies in writing. For example, if a business relies on internal call operations to solicit or process orders, but the employee operators are not coached on the standard sales pitch or calling guidelines, or there is no regular supervision, the call center tions can be ineffective. Even more troubling, if call opera-tors are not properly educated on telemarketing laws and regulations, the company could be exposed to substantial claims by the Federal Trade Commission.
• Issues that arise when companies engage third parties to manage aspects of their business but fail to provide clear rules and regulations regarding the business operations or oversight to ensure these third parties follow company rules.
For example, the owner of commercial real estate might hire a management company to oversee its properties, collect rents, and ensure tenant compliance with rules and regulations. Suppose one of the tenants, a dry cleaner, is not disposing properly of the chemicals used in the dry cleaning process, and the management company does not know because it does not check the property regularly.
Proper management of the commercial property could have prevented serious environmental issues and poten-tially a huge liability for the seller and any subsequent owner of the property.
• Issues that arise from the failure to document procedures relat-ing to computer networks. For example, a buyer of a busi-ness takes over operations after closing the transaction and realizes he does not have passwords for the comput-ers, does not know how to enter customer ordcomput-ers, does not know the name of the company that manages the computer systems, and does not know the name of the contacts for key customers because they are stored in the Cloud. Moreover, when customers try to make pur-chases or use the company’s Web-based applications, the application freezes. There is no written documentation detailing information about the computer system, and the seller is spelunking in Iceland. Sales would come to a standstill until a computer expert is engaged to resolve all the technology issues.
• Failure of a business to protect proprietary information as well as the private information about its customers. For example, if a business fails to adopt measures to protect proprietary
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information, a court may reject a claim for damages based on the release of the information (by an employee or other person), finding that the lack of safeguards meant the company did not see the information as important enough to protect. Worse, a court could find substantial liability from release of customer or client information if the business failed to adopt and enforce policies designed to protect the privacy of its clients or customers.
A myriad of issues can arise when management does not invest the time to document important operational, financial, or legal policies and procedures for officers and employees to follow. The costs can be tremendous, not only in terms of loss of revenues, but also from potential damages, fines, or penal-ties arising from violations of internal company policies or external laws and regulations.
Possible solutions include the following:
Document in writing policies, procedures, protocols, and
• rules related to key aspects of the business that employ-ees at all levels must follow.
Prepare work flowcharts that illustrate clearly the
com-• pany’s major business processes.
Maintain organizational charts that describe the
respon-• sibilities of staff.
Secure document access codes, passwords, and other
• sensitive information.
Ensure there is regular supervision of company
employ-• ees, third–party service providers, and managers to make sure all policies, procedures, and relevant laws and regula-tions are being followed.
Require that the sellers (in a business buyout or asset
• sale) provide postclosing support for transition of the business to the purchaser.7
Engage a third-party consultant to document processes
• and procedures relating to significant aspects of the busi-ness, and require that the documentation be delivered to the purchaser as a condition of the closing.8
7Chapter 8 includes a discussion of clauses that can be added to a purchase agreement requiring postclosing cooperation from the seller.
8Documenting workflow and company policies and procedures makes excellent business sense even if a company is not considering a sale, given just some of the potential operating risks discussed in this section.
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