Capability Maps: Value of Financial Perspective

In this modern era of business, business architecture as a discrete discipline of business management, has gained substantial traction.  Business architecture approaches and methods are evolving and maturing rapidly.  Capability maps, which establish a comprehensive view of “what” a business does from a consistent, non-redundant and well-defined perspective, are now a part of the foundational aspects of business architecture.  Established business enterprises realize that capability maps are critical for strategic planning and business transformation.  During a capability mapping exercise, business architects sometimes don’t give due importance to the significant financial aspects or considerations of an operational business model.  Business architecture and capability models are not immune to financial constraints, nor should they be handcuffed by them. 

Typical enterprise landscape today

Many mid-to-large 21st century enterprises have acquired or merged with several smaller companies to meet growth targets, fill capability gaps, or mitigate competition.  As per general statistics almost two thirds of these acquisitions fail to deliver long-term financial value.   We will not delve into the reasons for M&A failure, but focus instead on how financial implications relate to, and influence business architecture decisions.  Many acquisition integrations tend to be an organizational chart exercise instead of a comprehensive integration of people, process & technology.  Acquisitions, then, end up being partially integrated, resulting in misaligned organizations, inconsistent values & priorities, and poorly integrated processes, technologies & systems.  In spite of these constraints, companies are under pressure to grow revenue and profit.  So Business leadership and IT leadership have to deftly manage this enterprise landscape and still deliver organic growth regardless of the internal challenges.   There are several issues that result from these misalignments.  Some of the primary issues are:

• Takes organization’s focus away from customer;
• Constant “fire fight” within the enterprise; 
• Capital and resource constrained environments;     
• Turf wars and lack of trust;
• Quality and customer satisfaction issues

To solve these issues, enterprises are able to establish Quality teams to spear head process improvement initiatives to reduce variations and control costs.  Many times these process improvement initiatives take a bottom-up approach, mustering effort through activities such as Six Sigma, but the root cause identification stops at the unique defect event and does not bubble up to the larger strategic model.  Even though benefits accrue through these quality initiatives, it may not alleviate fundamental misalignments.  When such organizations are hit with competitive pressures or further acquisitions, the executive leadership team feels the need for transforming the organization.  Business architecture can be a critical enabler of transformation.   A business architect can influence the organization to bring customer back in focus for the organization by demonstrating the relationship between customer facing outputs (which are purchased and therefore drive revenue) and the hierarchical and aligned capability model showing internal operating costs.   

Challenges faced by business architect

Organizations rarely have the luxury of leveraging business architecture from inception.  A business architect may walk into the scenario, as described above, to solve problems for Executive business leadership.  Business architect should probe executive sponsor and understand value expected through capability maps and value chains (that depict how capabilities come together to deliver value to customers). 

Often business architects focus on the functional & architectural aspects without giving due importance to financial details.  Consequently executive sponsor may quickly lose interest in business architecture.  In this situation “perfect is the enemy of the good” (Voltaire). It is difficult to create a perfect model with one hundred percent consensus. Financial information, such as discrete or unique measures of revenue or cost by capability, is hard to come by in many organizations.   Even when financial information is available, capital and maintenance expenses may be tracked differently by program/project and business operations organizations.  Business architect needs to bridge available financial information to capability maps by partnering with Finance department and arrive at a consensus. When identifying capability synergies and gaps, financials drive the priorities for business leadership.  Executive leadership may not explicitly expect business architect to integrate financial information into business architecture. But nevertheless its importance cannot be stressed enough.

Let us consider the example of a fictitious company called P&C to illustrate the importance of integrating financial information into capability maps.  P&C’s main line of business is Property & Casualty insurance.  Figure 1 below shows one of the primary value chains for P&C.  Let us assume that P&C started out in geographic region “Northeast” and “Southeast”, later they acquired companies in “Midwest” and ”west” to expand their market footprint, revenue opportunity, and strategic position, while facilitating a larger national presence.       

For the sake of simplicity, let us assume that there are five different production lines to process claims based on geography of claim submitter.  Same set of four capabilities are deployed in each production line viz. “Claim validation”, “Fraud detection”, “Claim adjudication” and “Claim payment”.  Business value of “Claim validation” capability may be the same across all production lines, but people, process and technology supporting “Claim validation” may be very different across these production lines.    Business leadership may look at this picture and either ask “Do we need five production lines?” or ask “How to develop a roadmap to consolidate five production lines into one production line?  Integrating capability maps with financial information becomes critical to develop roadmap for consolidation.  Business architect should work with Finance to apportion cost across capabilities and product service lines (refer to sample in table 1 below).

Table 1 – Sample depiction of capability cost by production line for P&C.  Cost includes business operations and IT costs.

Now the business architect can evaluate each capability for both functional effectiveness and financial effectiveness (both cost & revenue).  Using the data in Table 1 along with other business architecture artifacts, the business architect can analyze and do the following

1. Evaluate unit cost of capability in each production line.  E.g. unit cost for “Claim validation”.  Unit cost could be on a per claim basis or per claim dollar paid basis. 
2. Evaluate scalability of capability by production line.
3. Identify capability bottlenecks and gaps by production line.    
4. Prioritize opportunities based on financial benefits

If business architect considers just functional effectiveness, findings and recommendations may not align with financial priorities of executive leadership.  By including financial effectiveness business architect may find that there is business case for partial consolidation of these production lines instead of consolidating five production lines into one. Business leadership will value the business architect engagement and collaboratively envision future state (or) desired state.  Business architect can further facilitate discussions to develop a roadmap to reach desired state.  Thus capability maps along with financial view can help an organization in strategic planning.  Without this financial view, utility of capability maps will become limited.  It is good for business architects working with business leadership to appreciate the importance of integrating finance into capability maps.

References:

 ACORD industry models   http://www.acord.org/library/Documents/ACORDCapabilityModelBook_2010.pdf