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Calculating the Value of Process Improvement for Business: ROI (BPM,EA)

The BPM (Business Process Management) or business management by processes has been the subject of several definitions and approaches depending on the perspective of the interests of its authors, but we can synthesize in two major tendencies, one more IT oriented and other more concerned with the management of the business itself. The IT approach is more focused on modeling, automation and execution of processes, supported by tools of BPMS (Business Process Management Suite) while the management approach aims to ensure the achievement of strategic objectives, seeking to maximize efficiency through the processes, and thereby achieving greater profitability of business operations. It is in this vision that this article should be understood, leaving specific aspects to the reader, essentials to the BPM approach, in order to help organizations ensure real business benefits.

However, considering that the projects to improve business performance , generally rely on information technology, also matter here positioning the role of ICT (Information and Communication Technology), as resources that are consumed by business processes, assuming in this context a determining factor in the implementation of competitive advantages in organizations. Thus, the question that arises is: how to calculate the value of process improvement for business? which we can detail in what "drivers" of ICT investment?, and how to measure the respective financial return?. The approach to answer these questions is to establish a structure in three distinct levels properly aligned; 1- Business Strategy, 2- Business Process Architecture, and 3- System Architecture, commonly referred as EA (Enterprise Architecture), thus forming a kind of "backbone" of organizations, as shown in the picture 1:

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These structural layers, allow to introduce stimuli at the level of strategy derived from the ISO (International Organization for Standardization), GRC (Governance Risk & Compliance), Lean Six Sigma, etc., which should meet appropriate responses in processes, depending of desired business goals. For example, what is the added value that an organization hopes to achieve with the introduction of a quality policy?, or with a policy of risk control?, etc.. It is according to these strategic logic "drivers" that the procedural analysis should be oriented in order to identify, evaluate and implement improvements to business performance, with evidence of the benefits.

Business Strategy

Thus, interests in first place clarify and formalize some critical aspects of business strategy, which should be decisive and guidance for its implementation. The strategic model provides a method of approach that leads from the Study of the Environment (review of competitive forces; trends/scenarios, customers, positions of market value and competitors), the Strategic Framework (vision/goals, mission/values, value proposition and strategy), Control System (revenue model based on ABC (Activity Based Costs), BSC (Balanced Scorecard), FCS & KPI (Critical Success Factors and Key Performance Indicators), and Strategic Programs), until the value chain of Business Processes that transforms resources (inputs) into products/services (outputs) with added value. It should here be noted that among the various types of Positions Market Value identifiable in the Study of Environment, only a few are actually catchable by organizations, in the sense that they can find internal responses (e.g., through the processes) in creating competitive advantages in production of measurable results that can be monitored and harassed. The correct understanding of the positions of market value, ie, the identification of factors that customers value most, plays a decisive role in the further implementation of business strategy. These factors were initially introduced by McCarthy (1060: Basic Marketing: A managerial approach), and later adjusted by Kottler (1988), commonly known as the marketing mix or the 4 P's (Price, Product, Placement and Promotion) which meet here with the equivalent value positions, as shown in the table as following:

Marketing Mix Value Position Strategy type Process Strategy
Price A – Price Value Cost Leadership
  • Low costs
  • Operational Excellence
Product B – Performance Value Focus
  • Product Innovation
  • Logistics
  • Quality (market expectations)
Placement C – Relational Value Differentiation
  • Brand
  • Customer Intimacy
  • Geographical Location
  • Quality (client service)
Promotion D – Diffusion Value FMA (First Mover Advantage)
  • Time to Market
  • Growth Customer Base
  • Increasing Returns

Based on the value position is derived the type of business strategy, which has impact on the Process Strategy. The types of strategies A, B and C are based on the author Michael Porter, in his famous work on Competitive Strategies (Porter, Michael E. (1980 ) Competitive Strategy, Free Press, New York , 1980), while the D type is an adaptation inspired on 4 p's and possible relationship with type of strategy and processes. Thus, it is important to explain in greater detail the impact of the type of strategy selected on Business Processes. Thus, the Cost Leadership should be aligned with the relevant processes with higher volume of activity, which should be performed with extreme efficiency in order to create competitive advantages in terms of costs, while the response to Focus should be based on identifying processes whose scope is the production of singular results in producing products/services with which the competitors cannot keep up. In the case of Differentiation, the processes should produce excellence quality, even at high costs, and ensure effective logistics to the geographical locations of sale and service provide, enabling the closeness and intimacy with customers, and strengthening identification with the brand. The type of strategy FMA (First mover advantage) must guide an implementation of processes that allow rapid growth in turnover in the existing customer base, even at high costs, usually through the campaigns of modular products/services based on market standards, which allow docking with products previously purchased, safeguarding the initial investments of customers.

After the selection of the strategy, it is necessary a Control System for its implementation, enabling planning and controlling of business goals, KPIs and targets, CSF (Critical Success Factors) and strategic programs to ensure the achievement of objectives. The concept of strategic map introduced by Kaplan & Norton (The Balanced Scorecard: Translating Strategy into Action, Harvard Business School Press, Boston (1996)), is an excellent tool for implementing a strategy of concrete processes, and integrates all critical aspects that should be considered in the governance of BPM (Business Process Management) cycle as well as of all its impacts. Each of the four types of strategy has a specific impact on the four dimensions of Strategic Map (Financial, Customer/Markets, Internal Processes and Learning & Growth), with special relevance in internal processes. In Picture 2, the Cost Leadership requires that the goals identified in this dimension, as e.g. "Harmonize systems through a Common Platform Strategy" that contributes to "Improving Efficiency Value Chain", assume a direct impact on Financial dimension by "Decreasing costs of Business Operations”, which contributes to the final goal of "Improve Profitability of Business Operations".

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Depending on the type of strategy adopted and the internal knowledge of each organization, specially its sources of value creation (resources and processes), it is still possible to determine the relative weight and influence that each goal should assume in their relationship with others in pursuit of the final goal. For example in the case of Figure 2, "Harmonize systems through a Common Platform Strategy" exerts less influence (2) on "Improving Efficiency Value Chain", than "Increase Knowledge about Processes", with a strong influence (4), while it is crucial (5) in "Lower costs Business Operations", with an equally decisive contribution ( 5 ) on "Improving Profitability of Business Operations". In addition to the established interrelation between the goals, it is also necessary to create conditions for planning and control in relation to each objective per se, through the identification of key performance indicators (KPIs) and periodic strategic goals, identifying key processes in the value chain, as well as launching strategic initiatives or programs. However, given the economic principle of scarcity of resources, priorities must be established in relation to strategic programs, depending on the influences factors established between the own goals.

Business Processes

Once defined the Strategic Map it becomes necessary to define how it should be run through the processes. Thus, the elements of the Strategic Map together with the identification of products/services and market segments to address, allow identifying which business activities to develop, which (according to Porter) should be organized into three distinct groups; Processes Management, Core Business Processes and Processes Support, becoming thus the Processes Map of the Organization, as exemplified in Picture 3.

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Once established the Map of Processes or Macro Processes of organization, it is necessary to clarify the respective relations with the objectives, indicators and targets of the Strategic Map, in order to ensure alignment and communication of strategy through the processes, as the example in Picture 4. The criteria of selection and prioritization of key processes in the value chain depends on the previously defined strategy as well as the nature of the objectives. For example, for the type of Cost Leadership strategy, interests to select those processes with more weight in the organization's activity, while in the case of Focus, should be identified the processes that contribute to innovation and quality of products/services, etc.. Such priorities should be further refined in the context of the selected processes, using e.g., the Pareto principle of 80-20, where typically 80% of the effects come from 20% of causes. Strategic projects should be executed in accordance with this prioritization, as exemplified by the ABC Strategic Project in the example of Picture 4. Moreover, the KPIs (performance indicators) identified at the strategic level for measuring the goals should be matched in the processes that execute them.

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Established the relationship between the elements of the Strategy Map and Macro Processes, it is necessary that they be detailed until the tasks according to the principle of functional decomposition, thus constituting an Architecture of Processes. Although there are several types of approaches and nomenclatures, this decomposition is usually done on 4 levels; 1- Map of Processes or Macro Processes, 2- Processes, 3- Processes E2E/Activities and 4- Tasks, assuming the third level a particular relevancy, given that defines the sequence of activities and key decisions in the production of a particular product/service, from the customer's request (internal or external to the company) until his complete satisfaction (according to Dr. August-Wilhelm Scheer), as shown in Picture 5.

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In line with these levels of decomposition of processes, other complementary structures should be added to the Process Architecture, such as e.g., from the complex KPIs of strategic level until the most elementary at level of the tasks, the organizational units responsible for processes execution should also be added (from departments, jobs and people), and as well the data required for business (since its organization into clusters, ER models, and elementary data). Similarly, due to the introduction of stimuli at the level of strategy, as e.g., policy of quality, risk control, lean six sigma, etc., the Process Architecture should be enriched with the respective structures of risks, policies of quality, etc., which should align with the same levels of decomposition from the Macro Processes until the tasks, thus constituting a Business Architecture. However, to achieve performance levels competitive with the market requirements, the Business Architecture needs support of application systems for its operational execution, which by their complexity and importance while asset of organizations, must be assumed as one of the structural layers, commonly referred to as Enterprise Architecture (EA).

Enterprise Architecture (EA)

This concept of Enterprise Architecture was originally developed by John Zachman in the '80s, as colaborator of IBM, what that was later known as Zachman framework. This framework resulted in a matrix that integrates the various dimensions of an organization, such as business goals, processes, data, organizational units, geographic localizations and business events, from a contextual and conceptual level until the levels physical and detail. The completeness of this framework is perhaps the greatest legacy we owe to Zachman, although due to their complexity and lack of a method of implementation, it becomes difficult to put into practice. Thus, other approaches have emerged more "simplified", and some gained some prominence in the market, as is the case of TOGAF framework (The Open Group Architecture Framework) and ArchiMate. However, despite the amplitude of these frameworks that seek to integrate dimensions of business and systems, the fact is that the concept of Enterprise Architecture has become increasingly associated with systems architecture. Thus, regardless of the adopted framework and their position is convenient to establish some terms essential to a better understanding and to put in practice in organizations. Firstly, the term application system should be understood as a set of features (capabilities) developed to solve specific business tasks, using the information technology for this purpose. These features may be established as multiplatform services, supported by SOA architecture (Service Oriented Architecture). Anyway, as SOA services or as applicational functionalities, they support the business processes and themselves are supported by TI components of lower level, such as programming languages, operating systems, databases, etc.. Given the multiplicity of such components in the technology market, it should be noted that it is responsibility of organizations to define their own standards, based on an IT strategy (aligned with the business strategy) and establishment of a reference architecture, which is defined as a set of IT components related to each other in a specific way, with the main objective to create and maintain a standardized infrastructure, which enables a more efficient achievement of the corporate objectives of the organization. In turn, the management of an IT architecture consists of activities related to the life cycle of systems in their relationship with the business, from defining requirements until its technical decomposition, in alignment with the principles of standardization previously established. Thus, the relationship between the applicational systems and business processes can be made only through the capabilities, which are required from business processes and provided by systems, as illustrated in Picture 6.

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ROI [BPM, EA]

Established the structural layers of an organization, it is essential to determine the current situation (As-Is) based on the processes, for some critical business indicators, such as time, costs, quality scores, revenue, margins, etc.. This review is essential as a basis for identifying potential improvements and their implementation, with evidence of benefits (To-Be scenarios). For example, an analysis of cost perspective, the most critical indicator is the time (average) along the activities of a process, for which there are various methods of collecting (interviews, questionnaires, observation, application systems, etc.). Moreover, the establishment of organizational units (describing the organizational structures) as cost centers, determines the rate of cost per unit of time (e.g., minute or hour) of effective work (Personnel Cost Rate = Personal Cost / Effective Work Time). Thus, based on this cost rate and the temporal relationship of the respective organizational unit with process activities (FTE - Full Time Equivalent) that execute, it is possible to accurately determine the cost of each process activity in HR, and consequently the cost of overall process. Likewise, it should be use the concept of application system for determination of cost center of data. To this calculation it should be enter the costs weight of each IT component (sw and hw), + additional costs + maintenance costs of all (physical facilities) application system instances. Thus, a top down approach by determining the degree (%) of use per period (e.g. annual) of each system by each process, it is possible to calculate the respective procedural cost in IT consumption. Optionally, by determining the cost of using each system per unit time (e.g. minute or hour) and actual consumption of time for each activity of the process, it is possible to calculate with full rigor, the IT cost of each process, although this bottom-up approach requires a substantial increase in the maintenance of structures of detail that cannot be rewarding in a perspective of cost/benefit analysis. Picture 7 shows an example of the need for costing a E2E Process (Sales), in terms of human resources and IT systems structures.

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With the determination of the As-Is situation, the conditions are completed for a correct analysis of business performance at the highest level. This analysis may result in the introduction of stimuli at the level of strategy and respective operationalization through the alignment of organizational structures (business and systems architectures). So if from As-Is analysis arise problems of competitiveness in terms of recidivism, times and costs, sales and margins, etc., then it should be consider the introducing of a policy of quality and/or lean six sigma, which should lead to an increase in the value of the organization, within a specified period, that outweighs the required financial investment. This approach can be translated through the ROI [BPM, AE] equation where BPM and EA are the arguments that allow to align business and IT systems, and where the deciding factor should be the ROI (Return on Investment). The relationship between strategic objectives and critical processes (Picture 4) allows an effective prioritization of process analysis, and surgical decisions on investments. The analysis of each E2E process, should result in delta improvements between As-Is and To-Be, which must be decided against the cost of investment necessary to its implementation, and it can easily be translated through a system of Cash Flows.

For example, if the strategic improvements require decreasing of time and costs of execution, then the required capabilities from systems should be automate handling of data, since the cost of processing in system ensures the financial return in a specific period. In case of quality improvement as strategic driver, then the required system capabilities should be the correct treatment of specific attributes valuable for customers, in order to meet the client expectations at first time, decreasing costs of client service, and on the other side, increasing client satisfaction and revenue. As example of risk control as strategic driver, the required capabilities shall consist of cross-validation of certain data, to ensure control of the process to mitigate risks, since the avoided losses pay the implementation cost of these controls in a given period. This way, established this system approach (backbone) of organizations, they become more able to increase their agility in reaction of events change in environment, or even predicting them, through strategy adjustment process, and its operationalization ensuring the optimization of their internal forces of creating value, as resources and processes.

Nathaniel Palmer
Author: Nathaniel PalmerWebsite: http://bpm.com
VP and CTO
Rated as the #1 Most Influential Thought Leader in Business Process Management (BPM) by independent research, Nathaniel Palmer is recognized as one of the early originators of BPM, and has led the design for some of the industry’s largest-scale and most complex projects involving investments of $200 Million or more. Today he is the Editor-in-Chief of BPM.com, as well as the Executive Director of the Workflow Management Coalition, as well as VP and CTO of BPM, Inc. Previously he had been the BPM Practice Director of SRA International, and prior to that Director, Business Consulting for Perot Systems Corp, as well as spent over a decade with Delphi Group serving as VP and CTO. He frequently tops the lists of the most recognized names in his field, and was the first individual named as Laureate in Workflow. Nathaniel has authored or co-authored a dozen books on process innovation and business transformation, including “Intelligent BPM” (2013), “How Knowledge Workers Get Things Done” (2012), “Social BPM” (2011), “Mastering the Unpredictable” (2008) which reached #2 on the Amazon.com Best Seller’s List, “Excellence in Practice” (2007), “Encyclopedia of Database Systems” (2007) and “The X-Economy” (2001). He has been featured in numerous media ranging from Fortune to The New York Times to National Public Radio. Nathaniel holds a DISCO Secret Clearance as well as a Position of Trust with in the U.S. federal government.