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Value Chain Performance Metrics


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									              ICH EA and Executive Decision Making

               A CxO Approach To
         Actionable Enterprise Architecture

               Simplicity and Focus

                      White Paper

                   Mark Nelson ICH
                   Rick Smith ICH
                   John Weiler ICH
                   Bill Castoran ICH

11/14/2010                                           1
                            ICH EA and Executive Decision Making

         Enterprise Architecture and Executive
                   Decision Making
Enterprise Architecture, in addition to producing operational efficiencies, should align the enterprise to the
value chain that it serves, and provide built in business analytics and performance management capabilities
that will support continuous improvements. In short, the Enterprise Architecture should be a fundamental
tool for business, operational and technical decisions at the Executive level. Most EA frameworks in use
today focus on achieving operational efficiencies, and do not take advantage of techniques that, at no
additional cost, would result in enterprise value chain alignment and continuous improvements. More often
then not, the resulting Enterprise Architectures do not provide the performance based business information to
make informed capital and human resource planning decisions.

 ICH, working with The Office of the Chief Financial Officer and The Office of the Chief Information
Officer at the GSA is implementing a FEAPMO compliant Financial Management Enterprise
Architecture that provides value chain alignment and continuous improvement. ICH has adapted portfolio
management, value chain and business analytic techniques to conventional EA approaches to achieve this
alignment and continuous improvement capabilities at the GSA. This paper provides an overview of key
elements of our approach.

Value Chain Analysis Techniques
All enterprises exist as part of a value chain of activities that support the consumption of a
product and/or service by a consumer. Understanding the value chain, including activities
external to the enterprise, and structuring the enterprise to effectively align to that value
chain, is the best approach to ensuring the relevance and value of the enterprise. An
enterprise needs at the very least to first strategically define its role in the value chain based
on its unique mix of strengths and weaknesses as it relates to the overall value chain, and
design its processes, supporting assets and organization to execute that value chain. Taking
it to another level, the most successful enterprises have been able to innovate and/or define
the value chains and dictate their market places. Two examples include IKEA and

IKEA has quickly evolved from a local Swedish home furnishing manufacturer into the largest home
furnishing company in the world; partly by convincing their customer to perform the transport and assembly
processes of the furniture manufacturing value chain. They have executed their strategy by building a
worldwide sourcing network of high quality global manufacturers to support their growth.

Microsoft, and other software vendors, has created a standard business practice in the industry where the
customer is an integral part of the QA process. The customer, in return for a flexible desktop platform that
can integrate a wide variety of third-party software applications, tacitly agrees to troubleshoot Microsoft
products. This strategy proved more successful then Apple’s more tightly controlled and QA’ed product

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                           ICH EA and Executive Decision Making

Process Design And Value Chain Analysis
At its most basic, value chain analysis is a business process design approach that defines
processes based on economic value to a customer. To illustrate the value of this approach,
we can briefly compare it to two other widely used business process design approaches:

Work Activity Based

A work activity based approach is a process design based purely on some set of activities
supporting a workflow. An activity is defined as some effort that transforms or creates an
object. For example: A work activity based process design on a purchasing workflow would
include the creation of a purchase order. This approach is useful in determining the
efficiency or effectiveness of a workflow process, but is not always useful in determining
whether the activity should have been performed in the first place. A value chain approach
could have resulted in the finding that setting up a reverse auction capability would not have
only streamlined the process, but would provide improved customer service and competitive
advantage for the business. More often then not a well-executed pure work activity based
approach will result in efficient processes, but will not be useful in determining if those
processes are appropriate for the business. In other words, the enterprise could end up
doing the wrong things very well.

Functional Decomposition

This approach involves the top down decomposition of functions based on types of
activities, e.g., finance, marketing, and engineering. This approach is generally the least
effective as it tends to result in disconnects across the enterprise as well as sub-optimized
processes, but it is very popular due to its simplicity. A misconception by many is that
processes are the lower level activities within a functional hierarchy. This is just not true. As
illustrated below, you can map a functional hierarchy to a process map, but one does not
flow out of the other. In fact a process-based design will more than likely result in different
activity descriptions then a functional decomposition. The theory is that the process-based
activities, especially in the case of a value chain based process design, will better align your
enterprise to its customers.

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                                           ICH EA and Executive Decision Making

                 Big Automobile Company Functional and Process Based Designs

                Marketing                  Finance                                          Sales                            Engineering                   Manufacturing                        Distribution

Design                     Design                               Build
                                                                                                          Market Car                                 Deliver Cars
                            Car                                 Car

             Using the value chain approach, processes that provide direct value to the customer are
             modeled first. Derivative processes that support the value chain processes are modeled to
             support the value chain. The general concept is that by defining your enterprise around the
             revenue producing value chain processes, the enterprise will be more effectively aligned with
             its customer’s needs. Supporting processes that are cost center based would be modeled to
             support the revenue producing value chain. By way of example, following is a strawman
             value chain developed for GSA. Note: since GSA is in the business of purchasing items for
             its customer, purchasing is a value chain process at GSA. In most cases purchasing would be
             considered a cost of doing business, and a derivative process:

                                                                                                         Manage Vendors &
                                                                                                          Provide Sourcing
                                                                        Provide Aggregate
                                            Provide Quotes

                                           Provide Planning &                                             Develop Sourcing
                               Channels                                                                     Strategies
                                             Req. Definition
                               Sales
                                Force                                                                                                                            B2G
                               Call                                                                                                                              Exchange
                                Center                                                                                                                           Acct Reps
                                            Process Orders              Manage Funding &              Procure Products or
                               G2G                                                                                               Process Payments
                                                                                                                                                                 Support
                                                                           Contracting                     Services
                                Exchange                                                                                                                          Staff
                Customer                                                                                                                                                           Suppliers/
                                            Dispose of Gov.
                                                Assets                                 Track/Adjust Orders

                                                                                            Provide Oper. &
                                                                                            Maint. Services
                                                                                                                                Key:                 Out of scope in Phase 1

                                                                                            Manage Projects                                          Phase 1 Value Chain Analysis Focus

                                                                                                                                                     Phase 1 Value Chain Alignment Areas
                                                                                            Provide Logistics

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                        ICH EA and Executive Decision Making

An important outcome of the value chain is simplicity and business focus. Enterprise
Architecture frameworks that focus on descriptive models result in the enterprise becoming
awash in complexity and a hostage to the EA process.

The intent of the above discussion on value chain analysis was to provide a brief
introduction to the discipline. Michael Porter first developed the concept of value chains in
his work on competitive advantage. Since then, there has been a considerable amount of
work to expand on Mr. Porter’s original concepts. Value chain analysis, along with supply
and demand chain analysis, are staples of modern business management. Readers wishing to
learn more will have no trouble finding relevant material.

Prioritizing EA Activities Based on Portfolio Improvement
Once the enterprise value chain is defined, it can be used as a very effective tool for
segmenting the enterprise architecture effort into manageable units of work, and prioritizing
the Enterprise Architecture effort based on business needs. ICH calls this creating a
portfolio improvement program. The concept of thinking of the enterprise as a portfolio of
assets is essential to the ICH performance based enterprise architecture approach. The
enterprise value chain will provide natural breaking points where the value chain can be
segmented for sequencing enterprise architecture activities. Since the value chain goes
across the enterprise, the segmentation of the Enterprise Architecture can be designed to go
across stovepipes. This is a major improvement over a segmentation approach that is based
on business area, which perpetuates the stovepipes that the EA is trying to break down.
GSA initially segmented their EA effort by business area starting with finance. The net result
is that GSA did not achieve the desired level of alignment of finance with the GSA Service

Another widely used approach is to segment the enterprise architecture by discipline, e.g.,
business, application, information, technology. The net result is disconnects across the
disciplines that can lead to business continuity issues and/or poor capital planning. Some
organizations that have separated technology architecture from business architecture created
opportunities for the technology group to invest in potentially unnecessary leading edge and
“gold plated” solutions, since there was no way to effectively align the proposed technology
architecture with the business functional and non-functional requirements.

Since enterprises are extremely complicated, and it is important to avoid a “boil the ocean
approach”, segmentation must occur. Additionally, given the scarcity of resources that all
organization’s face, it is important to focus on problem area and pain points. Also, from an
organization change perspective, an EA effort that is focused on business problems, and not
a Mercator level mapping of the universe, will be more likely succeed. The best approach to
segmenting the enterprise architecture effort is by performing an initial portfolio assessment
and determine which process areas are tightly coupled, and need to be considered jointly.
The GSA identifies five value chain process segments:

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                                   ICH EA and Executive Decision Making

           1.       Market-to-sell
           2.       Opportunity definition
           3.       Order-to-payment
           4.       Service delivery
           5.       Performance management

  Based on business priorities, the order-to-payment processes was addressed first, since it was
  in most need of improvement. A cross-agency team was assembled to develop that EA
  segment. Following is the GSA Order-to-payment process map:

                    Channels
                    Sales
                     Force                                                                                      B2G
                    Call                                                                                        Exchange
                     Center                      Manage Funding &   Procure Products or                         Acct Reps
                    G2G        Process Orders                                            Process Payments
                                                    Contracting          Services                               Support
                     Exchange                                                                                    Staff
Customer                                                                                                                         Suppliers/

  Affinity Analysis and Reducing Redundancies
  A key step in the ICH Enterprise Architecture process is performing affinity analysis to
  identify and reduce redundancies. Once the value chain is defined it can be reviewed against
  existing operations to identify opportunities for eliminating redundancy. Going into the
  value chain analysis at GSA, the thought was that there were at least three to six order-to-
  payment processes. However, while the findings are preliminary, there looks to be only one
  order-to-payment process required within GSA for the complex transactions. All other
  transactions are trivial from a process standpoint.

  Business Alignment and ICH Business Patterns
  Another key step the ICH Enterprise Architecture process is aligning the business processes,
  application services, and information flows across the enterprise. Business pattern based
  analysis becomes very useful for this purpose. At the GSA, the team identified a recurring
  legacy pattern, where financial processes and systems were ineffectively integrated with
  business processes and systems. This legacy pattern was juxtaposed against a best practice
  pattern of effective alignment of business and finance functions. The net result is that the
  problem and its solution were effectively articulated

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                        ICH EA and Executive Decision Making

Sample from the ICH Business Pattern knowledge base:

The following illustrates a misaligned enterprise, exhibiting the legacy business patterns, and
an aligned enterprise exhibiting best practices.

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             ICH EA and Executive Decision Making

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                         ICH EA and Executive Decision Making

Developing and Confirming the Feedback Loop in the Enterprise
Architecture with Performance Metrics
A key function required in fomenting a CxO driven enterprise architecture is the ability to
develop and utilize performance metrics and analytics that delineate primary drivers of the
enterprise. Typically, enterprise architectures are designed to optimize entity performance
with minimized cost. This coincides with the ultimate focus of many institutions, both
government and private, that have a strategic financial focus driving their ultimate value
chain evaluations and development.

Effectively, a in order to provide value, goods and services delivered by the enterprise must
be delivered efficiently enough to match the market price of those items. Even in
circumstances where government mandate requires exclusive government supply of
particular goods and services, optimizing financial efficiency in doing so is in the best
interest of the taxpayer. Therefore financial metrics and analytics with accurate timely
reporting are requirements for senior enterprise management to set and enforce strategic
goals in both the public and private sector.

Further, accountability center operational efficiency is driven by parent organization financial
goals. Accountability centers are effectively profit and cost centers across the enterprise,
rolling up from departments, to lines of business in the GSA, for example. Each requires
metrics and reporting equally advanced to the financial metrics used to set, measure and
enforce strategic goals. Often production and logistics accountability centers have metrics
and analytics functions that far exceed typical financial metrics in complexity. Refer to the
following exhibit to view the levels and focus of the Strategic Process Maturity Model rating

                             Strategic Process Maturity Model
                                    Report Evaluation
                                 Financial =         Tactical =          Technical =
                                  Strategic         Operational          Structural
           Level 1: Basic       Accurate Base      Accurate Base       Accurate Base
          Period Reporting     Financial Reports    Ops. Reports       Cycle Reports
                           Normed, Trend, ABC,  Normed, Trend,
           Level 2: Basic                         & Budgeted     System Interactivity
                                & Budgeted
          Period Trending                                              Reports
                            Financial Reports Operations Reports
           Level 3: Basic      Forecasting,    Forecasting, ABM    System Control/
         Forward Analytics    Valuation, ABM       Incenting         Gap Reports

         Level 4: Advanced       EVA,                                  System Team
                                                    SPC, EVM  TM

             Analytics     Demand Forecasting                          Dev. Reports

         Level 5: Real Time    Case Specific        Case Specific     CMM Rating, System
           Entity Control   Reporting Evaluation Reporting Evaluation   Portfolio View

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                        ICH EA and Executive Decision Making

Finally, supporting the operational functions of the enterprise, control metrics and analytics
should be applied to the technical architecture use to make operations happen. Specifically,
the best practices target is to develop a portfolio management approach to controlling IT
assets in relation to the accountability centers’ needs. This comprehensive view of
application metrics and analytics ultimately yields a Capabilities Maturity Model (CMM)
rating appropriate to the enterprise’s needs by technical team.

Levels of metrics and analytics controls can be assessed using the ICH model, helping
quickly focus managers at all levels on how to move the business towards being a real time
strategic entity operating at optimal efficiency for the entity’s strategic function.

          Defining and Rating Enterprise Performance Measures
                 The Strategic Reporting Maturity Model
                         Tactical Requirements
                           Strategic Direction
         Senior                                           Tactical Requirements

                                   Line Management
  Strategic =>
    Existing                      Tactical=>                         Technical
    Financial                      Existing                         Management
     Reports                      Operational                   Structural=>
                                   Reports                         Existing

      •      The Goal is to Capture the Level of Current Performance Measurement
             for Enterprise
      •      Focus on Strategic, Tactical, and Technical Metrics and Analytics
      •      Correlates to Financial, Operational, and System Reporting Goals to
             Actual Performance
      •      Evaluates Reporting Methodologies and Feedback Loops

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                        ICH EA and Executive Decision Making

Clearly failure to utilize such a “big picture” approach with focused drill down abilities to
metrics and analytics reporting controls will leave today’s complex technical, operational, and
strategic entities in a less than competitive performance level versus organizations that do.
ICH utilizes this standard approach to foment the SAIL architecture management alignment
method and bring value to the client in real time.

Adding portfolio management, value chain analysis, and performance management
techniques to the Enterprise Architecture framework will result in more actionable and
better aligned architectures.

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