tdwi bpm basics for it professionals version 2 master...

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TDWI BPM Basics for IT Professionals: Fundamental Concepts of Business Performance Management

TDWI BPM Basics for IT Professionals

ii © The Data Warehousing Institute

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email: [email protected] Publication Date: June 2005

©Copyright 2002–2005 by The Data Warehousing Institute. All rights reserved. No part of this document may be reproduced in any form, or by any means, without written permission from The Data Warehousing Institute.

TDWI BPM Basics for IT Professionals

© The Data Warehousing Institute iii

Module 1 Introduction to BPM 1-1

Module 2 Strategic Context 2-1

Module 3 Executing for Results 3-1

Module 4 Summary 4-1

Appendix A Business Context A-1

Appendix B Exercises B-1

Appendix C Bibliography and References C-1

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TDWI BPM Basics for IT Professionals Introduction to BPM

© The Data Warehousing Institute 1-1

Module 1 Introduction to BPM

Topic Page Business Background 1-2

Perspectives of BPM 1-8

Concepts from General Systems Theory 1-14

Introduction to BPM TDWI BPM Basics for IT Professionals

1-2 © The Data Warehousing Institute

Business Background Fundamental Purpose of Business

“ to create value for all stakeholders

on a sustainable basis”

TDWI



TDWI



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• Value must be defined within the context of stakeholders• Stakeholders are owners, customers, employees and citizens• Competing definitions of value• Primary focus is typically on owners and balance the others• Develop a recipe for value based on known constraints

Why does a business exist?



Business Background Fundamental Purpose of Business

CREATING VALUE The primary purpose of organizations is to create value for their stakeholders on a sustainable basis. Public sector organizations exist as governments, agencies, commissions, or “public sector” corporations to provide regulatory, legal, policy and public interest services to citizens and taxpayers. Private sector organizations exist as businesses with the intent of serving their customers and creating a profit for their shareholders. Value must be defined within the context of the stakeholders and how the organization attempts to serve them. In a business, shareholder value exists as profit, growth in cash flows, reduction in risk, and return on investment. Other stakeholders include customers, employees, and citizens of the community where the business operates. These groups would define value in different terms. Customers see value as low cost, high quality, or excellent service. Employees see value as high levels of compensation, comfortable work environments, and challenging career opportunities. Citizens see value as charitable donations, funding for the arts, strict environmental controls, and a contributor to the local tax base.

RECIPE AND CONSTRAINTS

Businesses place the interests of their shareholders first. Interests of other stakeholders must be addressed in a balanced manner. Successful businesses understand how their shareholders identify value and create a recipe for generating value based on the following available ingredients:

• Investment capital • Operating income • Technology • Reputation, brand, and goodwill • Market opportunities • Intellectual property, employee knowledge, and skills • Relationships with customers, suppliers, partners, and regulators • Production and delivery capacity • Infrastructure and transportation

The recipe must adhere to the following constraints:

• Legal, government, society, and regulatory compliance • Resource limits including financial, staff, technology, market, and

production capacities



Perspectives of BPM Performance Management Framework

Stra

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Exec

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ecut

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Management Workforce & Operations

Management

Business IntelligenceBusiness Intelligence

Strategy ExecutionStrategy Execution

Strategy DevelopmentStrategy Development

Technology

Measurement

Analytics

Organization

Process

Performance

Strategy

External Environment

Functional Layers

TechnologyTechnology

MeasurementMeasurement

AnalyticsAnalytics

OrganizationOrganization

ProcessProcess

PerformancePerformance

StrategyStrategy

External EnvironmentExternal Environment

Functional LayersStakeholders

Business

Business & IT

Business

Business

Business & IT

Business & IT

Business & IT

Business & IT

Business

Business & IT

Business

Business

Business & IT

Business & IT

Business & IT

Business & IT

Responsibility

Business

Business & IT

Business

Business

Business & IT

Business & IT

IT

IT

Responsibility

Business

Business & IT

Business

Business

Business & IT

Business & IT

IT

IT

Business

Business & IT

Business

Business

Business & IT

Business & IT

IT

IT



Perspectives of BPM Performance Management Framework

DESCRIPTION A framework has been developed to present the high-level building blocks of an overall performance BPM environment. There are many components that span the management, analytics, and IT disciplines. They must work together and be aligned to the common goal of managing the execution of an organization’s strategy. This alignment and management capability must be sustainable and allow management to navigate the organization through difficult challenges and through new opportunities. The framework has been developed as a series of layers that are dependent on each other in a hierarchical fashion. The main challenge to implement an approach such as performance BPM in an organization is to understand its full breadth and depth across its many stakeholders. Performance BPM is shown as a series of eight layers ranging from an upper layer related to the external business environment down to a foundation layer enabled by technology. The framework harnesses and leverages people, processes, and technology to manage an organization’s strategy and elevate its performance to meet its overall objectives.

LAYERS The eight layers of the framework are introduced below:

1. External environment layer 2. Strategy layer 3. Performance layer 4. Process layer 5. Organization layer 6. Analytics layer 7. Measurement layer 8. Technology layer



Concepts from General Systems Theory Cause and Effect Modeling

For example, a desired outcome may be an increase in market share.

If only there was a control button somewhere called “Market Share” that managers could adjust like a volume button on a radio!

Cause and Effect Modeling

Identifies the sequence of activities needed to achieve

desired outcomes

Increase in MarketShareIncrease in

Customer Satisfaction

MaintainLow Prices

NegotiateBulk SupplierContracts Deliver In-Store

DemonstrationsDeliver In-StoreDemonstrations

Improve Staff Skill Levels




Concepts from General Systems Theory Cause and Effect Modeling

INTRODUCTION As an enterprise, organizations behave as dynamic systems. They are made up of processes, assets, and capital, and they consume resources, create valued outputs, serve their stakeholders, avoid threats, pursue opportunities, grow, change their structure, and regulate their activities. On behalf of the owners, management must chart and navigate the organization towards some set of achievable goals along a planned trajectory path. As business or external conditions change, the trajectory path will need adjustment, and the organization must respond and move along the new path. Sometimes the adjustments are minor, and sometimes they are major. Speed of response is often a key success factor for organizations to remain healthy. Analogies exist between physical systems that can be controlled, such as cars, airplanes, and power plants, and enterprises that are indirectly controlled through effective management. Desired outcomes are produced by measuring output variables, comparing them to a target, and then feeding back the error to the controller or manager to make adjustments. This approach can only work if there is an understanding of the cause and effect linkages that exist within the system. A key difference between organizational and physical systems is the fact that enterprises cannot be controlled by moving a lever and having a machine carry out the request. Enterprises are controlled by people carrying out activities within processes that must be in alignment with management objectives and strategy. Execution of the work is based on people. Workers and managers must understand what is important to focus on and what causal linkages exist to achieve desired outcomes. These linkages can be documented in a strategy map as defined by Kaplan and Norton.

STRATEGY MAPS Strategic objectives are linked by cause and effect. Financial outcomes

can only be achieved if the target customers are satisfied. Customer value propositions describe how to generate sales and loyalty from the target customers. Internal processes create and deliver the customer value proposition. Intangible assets such as human capital and information technology enable the internal processes. Aligning objectives across these perspectives is the key to sustainable value creation. A strategy map graphically defines the cause and effects across the four perspectives of finance, customer, process, and intangible assets. Creating a strategy map forces the company to clarify its logic of how it will create value and for whom.

TDWI BPM Basics for IT Professionals Strategic Context


Module 2

Strategic Context

Topic Page External Environment 2-2

Strategy 2-8

Performance 2-14

This page intentionally left blank.

Strategic Context TDWI BPM Basics for IT Professionals


Strategy BPM Framework

Technology LayerTechnology Layer

Measurement LayerMeasurement Layer

Analytics LayerAnalytics Layer

Organization LayerOrganization Layer

Process LayerProcess Layer

Performance LayerPerformance Layer

Strategy LayerStrategy Layer

External Environment LayerExternal Environment Layer

StrategyDefine the strategic focus

Strategy is developed with an understanding of the cause and effect linkages between financial

indicators, customer service, internal processes and innovation.

The strategy layer must remain in alignment with the External Environment layer over time.

The strategy layer provides context for the next layer in the framework,

the Performance layer

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Strategy BPM Framework

DESCRIPTION The context for the strategy layer comes from information determined by the external environment. Developing a strategy includes defining the strategic focus within the context of the value, mission, and vision statements. The strategic focus should be one of the following items:

• Low-cost producer • Product innovator • Excellent service provider

The strategy is developed with an understanding of the cause and effect linkages between financial indicators to customer service to internal processes to innovation and learning. A strategy map graphically shows the linkages and allows a set of strategic themes to be defined. Each theme can be implemented as a project or program or within enhanced business processes. The strategic themes and their objectives must be translated into action plans that all workers can understand. The strategy layer must remain in alignment with the external environment layer over time. The strategy layer provides context for the next layer in the framework: the performance layer.



Strategy Turning Strategy into Results

ChallengesDefining achievable and measurable objectives

Validating the strategyTranslating objectives into action plans

Determining targets Measuring the right variables

Ensuring that compensation schemes are alignedManaging alignment

Being responsive to changes in strategy

Strategy

Results

Success FactorsShow how actions will achieve desired outcomes

Ensure understanding by all participants Model cause and effects

Build a visual model of the strategyCommunicate, communicate, communicate

Manage alignment at all levelsCreate projects to achieve the objectives

Provide measurements and visibilityEnsure objectives are achievable and measurable



Strategy Turning Strategy into Results

CHALLENGES The key challenge facing executive and management teams is getting a strategy executed. It is important to remember that strategies are executed by people. Before people can take appropriate action, they must understand the background, context, intent, and objectives of a given strategy. If managers and staff assigned to turn the strategy into results do not understand it adequately, the execution will likely fail. Additional challenges include the following: • Defining strategic objectives that are achievable and measurable • Validating the strategy to ensure that its causal linkages are correct • Translating strategic objectives into action plans and initiatives • Determining appropriate operational targets • Measuring and communicating the right variables to ensure that

desired behavior takes place • Ensuring that employee compensation schemes are aligned • Managing alignment across organizational and technical domains • Developing responsiveness to changes in strategy

KEY FACTORS FOR SUCCESS

The following factors should be considered and addressed to improve the chances of obtaining measurable results that are consistent with the overall strategy: • Show how actions will achieve desired outcomes, and ensure this can

be understood by all participants • Use an approach to define a strategy that describes how business

processes and assets will achieve objectives and generate value • Ensure causes and effects within the business are analyzed and

included in the plan • Build a visual model of the strategy, including causal linkages that all

parties can validate and understand • Communicate objectives, progress, and results to all parties • Manage alignment at the asset, technology, and organizational levels • Create projects, initiatives, and programs to achieve the objectives • Provide measurements and visibility • Ensure objectives are achievable and measurable



Strategy Creating a Strategy

Mission

Why we exist

ValuesWhat is important to us

VisionWhat we want to become

StrategyGame plan to achieve the Vision

Approach

Describe how management intends to create value for all stakeholders

Use cause and effect modeling to create strategy maps

Address how intangible assets (people, information, brand) will be aligned with the strategy

A measurement system is defined for focus

Debate exists between narrow and holistic approaches

Recent research from Kaplan and Norton recommends a holistic approach to help address alignment issues

StrategyExecution

Turning Ideas into Results



Strategy Creating a Strategy

SPECTRUM OF STRATEGY

Elements of strategy include the following • Mission—“Why we exist” • Values—“What is important to us” • Vision—“What we want to become in the future” • Strategy—A game plan, complete with objectives, that develops

and evolves based on changing environment and internal capabilities. Many different approaches and frameworks exist for strategy development. Michael Porter, a leading strategy practitioner, defines strategy as selecting the set of activities in which an organization will excel to create a sustainable difference in the marketplace. Porter further states that “Differentiation arises from both the choice of activities and how they are carried out.”

CREATING A STRATEGY

According to Kaplan and Norton, strategy is usually developed with too narrow a focus.

• Strategy describes how management intends to create value for its shareholders, customers, and citizens.

• Strategy must address the mobilization and alignment of intangible assets (people, information, market brand, etc.).

• Value creation is addressed as a future sustainable requirement. • A measurement system should focus the strategy. • Strategy is not addressed the same way in any two companies. A

holistic approach is not common. • Practitioners have focused around specific and narrow areas

within the business. For example, shareholder value, customer management, process management, quality, innovation, human resources, IT, organizational design, and learning have been all been the basis for different strategies.

• Each approach is valid. However, none of these approaches is comprehensive and holistic

Consequences of using “one-dimensional” strategy methods.

• Cannot easily communicate the strategy to all employees. • Alignment around the strategy is difficult without a common

understanding from all employees. • Without alignment, execution in response to the five Cs (drivers)

is either difficult or impossible. • Competitive advantage derived from intangible assets (human and

information capital) will be minimal.

TDWI BPM Basics for IT Professionals Executing for Results


Module 3 Executing for Results

Topic Page Process 3-2

Organization 3-12

Analytics 3-20

Measurements 3-26

Technology 3-32

Executing for Results TDWI BPM Basics for IT Professionals


Process Creating Value

activities

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events / transactions

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Two techniques for understanding where value is created:1. Value Chain Analysis (Michael Porter) builds process maps as Primary or Support2. Strategy Maps (Kaplan and Norton) identify processes supporting customer value

propositionsMust align the processes to the value propositionsFour categories of processes:

Operations managementCustomer managementInnovationRegulatory and social



Process Creating Value

VALUE CHAIN ANALYSIS

The value chain idea was developed by Michael Porter of MIT. It is an analysis technique that produces a picture of the activities that a company carries out in its efforts to produce and support its core products and services. The following list shows some benefits of analyzing and documenting a company’s value chain:

• Develop a broader understanding of the overall operations • Identify and document what activities add incremental value • Determine the costs of key activities • Compare with competitors to identify key areas of differentiation • Help management assess their level of competitiveness • Understand the interrelationships from suppliers to customers

A value chain model is developed by creating process maps and grouping them into primary and support activities. Primary activities add value directly to end products or services. Support activities do not directly add value, although in support of a primary activity, they may help to add incremental value. Each major activity is then subdivided into its specific processes and sub processes.

PROCESS CATEGORIES

Work carried out by Kaplan and Norton determined that true value is created and added to the company’s products and services through internal business processes. Based on their work in developing the Balanced Scorecard, there are four perspectives in organizations that management should focus on. The financial perspective is a lagging perspective. It represents an accounting of the past. The customer perspective contains both lagging and leading features. It is where target customer groups are identified, along with the company’s value propositions for those customers. It is the internal process perspective that adds value to the customer, which is accounted for in the financial perspective. Processes that are aligned to the customer value propositions define how value gets created and sustained. Companies must focus on the few core processes that directly support the value propositions for the targeted customer segments, enable productivity gains, and maintain their ability or license to operate. Four broad categories of processes are:

• Operations management • Customer management • Innovation • Regulatory and social

Executing for Results TDWI BPM Basics for IT Professionals


Process Process BPM

Business Processes They are complex, volatile, cross-functional and they flow

between organizations and across functional groups.

Business Processes They are complex, volatile, cross-functional and they flow

between organizations and across functional groups.

Process BPM Functional ViewProcess BPM focuses on the tactical operations of a company. There is nothing inherent in Process BPM that links it to the objectives of a corporate strategy.

To be truly effective, however, Process BPM should be implemented within the context of a corporate strategy.

Process BPM Functional ViewProcess BPM focuses on the tactical operations of a company. There is nothing inherent in Process BPM that links it to the objectives of a corporate strategy.

To be truly effective, however, Process BPM should be implemented within the context of a corporate strategy.

Process BPM Technology ViewProcess BPM is a set of applications that track and coordinate business processes. It serves to automate tasks that require data from many different systems, and it

allows processes to be modeled and designed graphically to improve their flow. Process BPM technologies also provide tools to measure and improve performance.

Process BPM Technology ViewProcess BPM is a set of applications that track and coordinate business processes. It serves to automate tasks that require data from many different systems, and it

allows processes to be modeled and designed graphically to improve their flow. Process BPM technologies also provide tools to measure and improve performance.



Process Process BPM

FUNCTIONAL VIEW

Process BPM is the practice of ensuring that business processes execute to meet the needs of the process owners and stakeholders. The Aberdeen Group states that process BPM is a change management and system implementation methodology. It is based on the premise that business processes are complex, volatile, and cross-functional, and that they must flow between organizations and functional groups. Process BPM has the functional goals of improving the efficiency of the business processes that are executing in most organizations. It recognizes and embraces the various assets that companies use to design, manage, and maintain processes. This includes systems, databases, people, forms, and workflow. The concepts extend to external enterprises of suppliers, partners, and customers as well. Process BPM focuses on the tactical operations of a company. There is nothing inherent in process BPM that links it to the objectives of a corporate strategy. To be truly effective, process BPM should be implemented within the context of a corporate strategy. In other words, the process targets that are set within an operational process will drive efficient behavior to meet those targets. To ensure that the targets themselves are correct and aligned to a higher-level strategy means that process BPM should be implemented within a strategic context. The strategic context and its management is the subject of performance BPM. Further information about the foundations and promise of process BPM can be found in the book Business Process Management, The Third Wave by Howard Smith and Peter Fingar, published by Meghan-Kiffer Press.

TECHNOLOGY VIEW

At a technology level, process BPM is a set of applications that track and coordinate business processes. It serves to automate tasks that require data from many different systems, and it allows processes to be modeled and designed graphically to improve their flow. Process BPM technologies also provide tools to measure and improve performance. Process BPM is not really a new technology; the enabling components are mature and have been on the market for some time. The approach should be viewed as the convergence and synthesis of previously separate technologies. The roots of the technology have emerged from the enterprise integration and workflow communities. Combined together, the functionality includes tools for process modeling, application integration, and performance monitoring of processes and development.

TDWI BPM Basics for IT Professionals Summary


Module 4 Summary

Topic Page Implementation Considerations 4-2

Key Concepts 4-8

Summary TDWI BPM Basics for IT Professionals


Key Concepts BPM Review

Holistic Management Approach Focus is on Business Outcomes Manage Strategy Execution

Metrics BasedEnabled by Business Intelligence

Multi-Disciplinary ApproachGeneral Systems Theory

Cause and Effect ModelingStrategy Maps

Balanced ScorecardsSystem Dynamics

Organizational AlignmentStrategic AlignmentTechnology Alignment

Strategic FocusCommunicationsCollaboration

Measurement and FeedbackFramework Layers

Key Concepts

TDWI BPM Basics for IT Professionals Summary


Key Concepts BPM Review

DEFINITION Business Performance Management (Performance BPM) is a holistic and multi-disciplinary framework and approach focused on achieving desired business outcomes by translating and executing a strategy into operational terms. The approach is flexible and can accommodate specific business management methods such as Six Sigma, Total Quality Management and Continuous Improvement techniques. The underlying theme of Performance BPM is to implement a metrics based management approach that is aligned with the company’s strategy. Activities, accountabilities and tactics are managed with performance targets set within the context of a strategic focus, objectives and assumed cause and effect relationships. Business Process Management (Process BPM) is a tactical management approach focused on streamlining and automating business processes. There is not a direct link to the strategy within this approach. However, when Process BPM is implemented within the context of a Performance BPM program, a linkage to strategy can be implemented. Process BPM is also based on a metrics based management approach within the scope of improving how specific business processes operate. Process BPM considers how efficiently a process executes. It does not question if the process contributes directly to business outcomes.

APPLICATIONS Performance BPM is generally the basis for implementations of metrics

based information and reporting solutions. Dashboards and scorecards are the techniques used to convey the strategic intent of the company and how well it is performing relative to its business objectives. The Balanced Scorecard is a popular technique for implementing Performance BPM because it requires a holistic view of how a company creates value and what processes and intangible assets are critical to achieve results.

TDWI BPM Basics for IT Professionals Exercise

© The Data Warehousing Institute B-1

Appendix B Exercise

Topic Page Exercise 1 B-2

Exercise 1 Solution B-4

TDWI BPM Basics for IT Professionals Exercise

© The Data Warehousing Institute B-3

Exercise 1 Creating a Cause and Effect Model PURPOSE Create a Cause and Effect Model linking the processes listed below in

terms of how they contribute to the business objective to Increase Revenue. The model should show the dependencies between processes and how they contribute to the desired outcome.

BACKGROUND Assume the company is a National Restaurant Chain with a Strategic

Focus of providing Fast, Healthy and Low Cost Meals to their customers. The targeted customer base includes cost conscious business and vacation travelers with busy schedules. Market research indicates that the targeted customer base values healthy meals that are available at low cost with fast service and easy ordering.

PROCESSES 1. Increase Revenues (Desired Outcome) 2. Provide Competitive Pricing to Attract Customers 3. Support Take Out or Eat In Service 4. Create Packaged Menu Items to Simplify Ordering 5. Determine Pricing based on Local Competition 6. Provide Fast and Friendly Service 7. Provide Consistent Quality and Menu Items Nationwide 8. Develop Cost Efficient Bulk Supply Agreements 9. Ensure Product Development Staff is knowledgeable about

nutrition 10. Recruit Staff 11. Carry out aggressive promotional campaign 12. Train Staff 13. Determine Required Staff Levels 14. Increase Customer Satisfaction 15. Ensure all facilities are clean and well maintained 16. Ensure all customer facing staff are friendly and customer focused 17. Develop Healthy and Nutritious Menu Items 18. Develop Compensation Plan Linked to Performance 19. Define value proposition for targeted customers 20. Identify targeted customer market segments

STEPS 1. Review the list of processes 2. Place the Desired Outcome of “Increase Revenues at the top 3. Relate the processes into a “cause and effect” chain. 4. Use the example diagram on the following page as a guide. 5. For simplicity, identify the processes in the diagram by their

number instead of by their description.

Exercise TDWI BPM Basics for IT Professionals

B-4 © The Data Warehousing Institute

Exercise 1 Creating a Cause and Effect Model

EXAMPLE The format of each cause and effect model should follow this example. To simplify the drawing of the diagram, it is recommended that you use the item numbers from the list rather than writing out the full text of the item as shown in the example below.



desired outcomes

Increase in MarketShareIncrease in

Customer Satisfaction

MaintainLow Prices

NegotiateBulk SupplierContracts Deliver In Store

DemonstrationsDeliver In StoreDemonstrations





desired outcomes

15

8

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