Tackling the Root Causes of Irregular Expenditure

Irregular expenditure reached levels of R45.6 billion for PFMA entities and R25.2 billion for MFMA entities in the 2017/18 financial year.

Very often, this field is completed for reporting purposes without properly analysing the root cause of the irregular expenditure. Management then tries to fix the problem without analysing whether it is a symptom or a root cause. This usually involves strengthening internal controls or adding additional controls. This results in additional costs and adding steps in an already cumbersome procurement process.

Root cause analysis is a process used to determine the primary source of the problem. By identifying the root cause common to most or all of the problems, resources can be applied where it will be the most effective. One of the tools for root cause analysis is the current reality tree from Goldratt’s Theory of Constraints.

Goldratt’s Theory of Constraints is a methodology for identifying the most important constraint in a system that stands in the way of achieving a goal. It then follows thinking processes to systematically improving the constraint until it is no longer the limiting factor.

Current reality tree

The Current reality tree illustrates the current reality using a series of cause and effect relationships. Without fully mapping the as-is situation, the current reality tree focuses on problems that people perceive, suffer from or have to cope with the system. These are often the symptoms of a much deeper problem. The outcome of this thinking process is to unearth the root cause of the undesired effects of the system.

Let us look at a step-by-step scenario. An entity is experiencing high levels of irregular expenditure. They have pinpointed what they determined to be the root causes for each of the transactions. They simply do not have the resources to address all the root causes but would like to apply the resources where it will have the biggest effect.

These steps are:

1. Determine the scope of the analysis.
2. List between five and ten undesirable effects that exist in the system.
3. Diagram the cause-and-effect relationship between two undesirable effects.
4. Start constructing the current reality tree.
5. Add intermediary links where necessary.
6. Review and revise for clarity and completeness.
7. Identify the root cause.

Step 1: Determine the scope of the analysis

This analysis focuses on irregular expenditure and other problems incurred in the supply chain process.

Step 2: Identify undesirable effects

During interviews and discussions, an entity identified the following list of undesired effects in the supply chain management (SCM) process:

1. Meetings for bid committees are regularly postponed.
2. Lack of understanding of the areas of responsibility of the committee members.
3. Boundaries between the Bid Specification Committee, the Bid Adjudication Committee and the Bid Evaluation Committee are unclear.
4. Evaluation criteria do not assist staff to determine whether bidders have the capacity and capability to deliver.
5. Managers of user departments are not able to draft clear bid specifications.
6. Pre-qualification criteria disqualify possible valid bidders.
7. Comments from the probity auditors are not addressed speedily.
8. The SCM department is firefighting to deal with requests that need to be addressed immediately.
9. Change management in the SCM department is not handled well.
10. No accountability in the SCM department.
11. Managers of user departments do not attend SCM training.

Step 3: Find cause-and-effect relationships between at least two of the undesirable effects

This provides the starting point for the analysis. It is not necessary to prioritise the undesired effects. Any two of the undesired effects can be used, as long as there is a cause- and-effect relationship between them. Connections between statements are constructed using IF…THEN statements and checking for sufficient cause.

Caution! Consider this as a brief introduction only. It takes some skill and experience to map a current reality tree.

To read the tree, insert the IF…THEN statements. For example, IF there is a lack of understanding of the areas of responsibility of bid committee members, THEN boundaries between the Bid Specification Committee, Bid Evaluation Committee and Bid Adjudication Committee are unclear.

Statements in current reality trees are either causes or effects. Causes are statements at the base of an arrow indicating that, given its existence, will cause another statement to exist. Effects are statements that exist as a result or consequence of the cause and are located at the point of the arrow. Arrows indicate the relationship between the statements.

Step 4: Start constructing the current reality tree

The tree is constructed using the sufficient cause process through cause-and-effect logic. The tree is structured top-down, with symptoms at the top, leading to causes and finally root causes at the bottom.

At this stage, some of the undesired effects are not linked to the tree.

If there is not sufficient cause, more statements can be linked, for instance, “if A and B occur together, then it is sufficient to cause C”. The symbol for an and-connector is an ellipse.

The normal pattern for sufficient cause is speculating about causes for effects and also speculating about the effects of causes.

Step 5: Add intermediary links if necessary

All the undesired effects do not necessarily link to another effect. Intermediary links are added to follow the cause-and-effect logic. In the diagram below, the original undesired effects are numbered and coloured yellow; intermediary links are coloured green.

Step 6: Review and revise for clarity and completeness

The current reality tree is reviewed and revised if necessary, by the team to ensure that all the effects and intermediary links are added to complete the cause-and-effect logic.

Very often, an undesired effect or link at a higher level in the system aggravates undesired effects at a lower level. This is known as the feedback loop or vicious circle. Note the feedback loop in the diagram below:

• IF officials resort to irregular expenditure to meet the needs of the entity, THEN officials do not want to act in the position of Head of SCM.
• IF officials do not want to act in the position of Head of SCM, THEN there is a lack of accountability in the SCM department.

Step 7: Identify the root cause

Building a robust current reality tree requires teamwork rather than the work of an individual.

In the diagram below, the root cause is identified as a lack of accountability in the SCM department as indicated by the orange undesired effect.

The root cause should be at the base of the diagram. If the root cause is addressed, it will treat multiple problems that arise in the system.

Conclusion

The benefit of a properly constructed current reality tree is that it identifies the connections between undesired effects visually. Leaders can thus focus their attention and resources to address the root cause, which will result in multiple undesired effects disappearing from the system.

Another of Goldratt’s thinking processes, the Future Reality Tree answers the question: What to change to? This thinking process turns the undesired effects of the Current Reality Tree into desirable effects by combining the causes of undesired effects with actions or conditions that do not exist yet, but which are necessary to correct the current state.