A Value Chain Approach To Creating

Architectures for Value Chains & Coalitions: Efficient Business Analytics and Performance

Management for Continuous Improvement

5/24/2010 www.ICHnet.org Copyright © 2003 All Rights Reserved.

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ICH Value Chain Method

Actionable Architectures for Value Chains and Value Coalitions®:

Taxonomies for Efficient Information Flow, Effective Decision Making and Performance

Management

An ICH White Paper

INTEROPERABILITY CLEARINGHOUSE

John Weiler, ICH Bob Schemel, ICH

© INTEROPERABILITY CLEARINGHOUSE, 2003

http://www.ichnet.org/




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Enterprise Architectures for Value Chains and Value Coalitions®:

Efficient Business Analytics and Performance Management

for Continuous Improvement Abstract

Actionable Architectures, in addition to producing operational efficiencies, should:

Align the enterprise to the value chains and value coalitions®

it serves,

Provide built in business analytics and performance management capabilities,

Support continuous improvements.

In short, Enterprise Architecture (EA) should be a fundamental tool for business,

operational and technical decisions appropriate at the executive level and all other levels

of the organization. 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 and values coalition alignment and continuous

improvements. More often then not, the resulting E A does not provide the performance

based business information to make informed capital and human resource planning

decisions.

The Interoperability Clearinghouse (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 values coalition alignment, and business analytic

techniques to EA approaches to achieve effective performance management and

continuous improvement capabilities at the GSA. This paper provides an overview of key

elements of our approach.





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Value Chain and Values Coalitions®

Organizations support the consumption of products and services by consumers.

Understanding the value chains and/or coalitions involved in producing these products

and services is the best approach to building the value of the enterprise. These value

chains and value coalitions®

often include activities external to the enterprise. Effective

organizations align their structure to their value chains and value coalitions®

.

An enterprise needs at the very least to define its role in the value chain based on its

unique mix of strengths and weaknesses and design its processes, supporting assets and

organizational structure and decision making to efficiently participate in that value chain

and/or value coalition.

Taking it to another level, the most successful enterprises have been able to innovate

and/or define the value chains and value coalitions®

in their market. Two examples

include IKEA and Microsoft:

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 strategy.

Value Chains

Value chain and value coalition analysis is a business design approach that defines

processes based on economic value to a customer. To illustrate the value of the

approach, we can briefly compare it to two other widely used business process design

approaches, 1) work activity and, 2) functional organization:

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.





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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 or value coalition 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 Organization

This approach involves the top down organization 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 organization. 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.

Marketing Finance Sales Engineering Manufacturing

Design

Car

Build

CarMarket Car Deliver Cars

DistributionFunctional

Design

Process

Design

Big Automobile Company Functional and Process Based Designs





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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 straw man 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:

An important outcome of the value chain is simplicity and business focus. EA

frameworks that follow the work activity or functional organization models result in

needless complexity and inefficiency.

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.

ICH has extended the value chain model to allow for value coalitions®

, which recognizes

that some processes need to allow greater flexibility.

S u p p lie rs /

V e n d o rs

P ro v id e Q u o te s

P ro ce ss O rd e rsM a n a g e F u n d in g &

C o n tra c tin g

P ro cu re P ro d u c ts o r

S e rv ice s

M a n a g e V e n d o rs &

P ro v id e S o u rc in g

P ro v id e A g g re g a te

P ric in g

P ro v id e O p e r. &

M a in t. S e rv ice s

M a n a g e P ro je c ts

P ro v id e L o g is tic s

P ro ce ss P a ym e n ts

C h a n n e ls

S a le s

F o rc e

C a ll

C e n te r

G 2 G

E x c h a n g eC u s to m e r

B 2 G

E x c h a n g e

A c c t R e p s

S u p p o rt

S ta ff

T ra ck /A d ju s t O rd e rs

P h a se 1 V a lu e C h a in A n a lys is F o cu s

P h a se 1 V a lu e C h a in A lig n m e n t A re a s

O u t o f sco p e in P h a se 1K e y :

D isp o se o f G o v .

A sse ts

P u rch a se rs

P ro v id e P la n n in g &

R e q . D e fin it io n

S u p p o rt

D e ve lo p S o u rc in g

S tra te g ie s





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Value Coalitions ® Often, a single work process can concurrently involve several units in the value chain and might

be more accurately thought of as value coalitions®

. The value coalition®

model recognizes that

value is often created by the simultaneous interaction of several units:

© 2002, Robert Schemel Consulting, LLC.

In the above illustration, R&D, Marketing, Production and Customers all are viewed as working

together to add value. Problems arising in the value coalition®

model thus involve several units

and requires their simultaneous participation to find solutions.

For example, customers in focus groups run by Marketing might communicate how yet-to-be-

developed products/services could add value. Marketing then communicates this information to

R&D. While new products are still in the concept stage, R&D and Production communicate about

how different product designs could be more or less difficult to manufacture. Marketing might

also be involved in this communication so that it can provide its analysis of customer reactions to

modifications in the yet-to-be-developed product.

The value coalition®

model recognizes that many issues arising in organizations are not simply

problems between units sequenced in a value chain but instead require a coalition of units

Marketing Production

R & D CUSTOMERS





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working together either simultaneously or a logical, but case-specific sequence in order to add

value to the organization. EA can encompass the values chain and values coalition®

model units

must be involved in cross-functional communication, and all of their pressures must be

considered.

Value Chains and Value Coalitions®: Usefulness of Both Models

Both the value chain model and the value coalition®

model can help to resolve issues in cross-

functional work. The real questions are:

Does the work process in question involve value added in a step-by-step sequence? Can it be

addressed by sequenced information flows and decisions? In such cases, a value chain model is

appropriate.

Does this issue involve value added by several units simultaneously? Does it need to be

addressed by simultaneous access to information and joint decision-making? In such cases, a

value coalition®

model is appropriate.





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The ICH Portfolio Improvement Program: Prioritizing EA Activities

Based on Value Chains and Value Coalitions®

Once value chains and values coalitions® are defined, they can be used as a very effective

tools for approaching the enterprise architecture effort by sequencing it into manageable

units of work, and prioritizing the EA effort based on business needs. ICH calls this

creating a Portfolio Improvement Program. Thinking of the enterprise as a portfolio of

assets is essential to the ICH performance based enterprise architecture approach.

The enterprise value chain and values coalitions®

will provide natural segments for

sequencing enterprise architecture activities. Since values chains and values coalitions®

go across the enterprise, the segmentation of EA can go across organizational stovepipes

and silos. This is a major improvement over a segmentation approach that is based on

business area or function, which perpetuates the stovepipes and organizational silos that

the EA based on the ICH Portfolio Improvement Program can break down. For example,

GSA initially segmented their EA effort by business area starting with finance. The net

result was that GSA did not achieve the desired level of alignment of finance with the

GSA Service Lines.

Another widely used approach is to segment the enterprise architecture by discipline, e.g.,

business, application, information, technology. Here again, 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 their

value chains and value coalitions®

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

requirements.

Since enterprises are extremely complicated, segmentation must occur. Additionally,

given the scarcity of resources that all organization’s face, it is important to focus on

critical areas. 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 EA effort is by performing an initial

portfolio assessment and determining the actual process which create value and need to

be considered jointly. The GSA identifies five value chain process segments:

1. Market-to-sell

2. Opportunity definition

3. Order-to-payment

4. Service delivery





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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:

Affinity Analysis and Reducing Redundancies

A key step in the ICH EA Portfolio Improvement Program is performing affinity analysis

to identify and reduce redundancies. Once the value chain or value coalition 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.

All other transactions are trivial from a process standpoint.

Business Alignment and ICH EA Portfolio Improvement Program

Another key step the ICH EA Portfolio Improvement Program is aligning the business

processes, application services, and information flows across the enterprise. 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

S u p p lie rs /

V e n d o rs

P ro ce ss O rd e rsM a n a g e F u n d in g &

C o n tra c tin g

P ro cu re P ro d u c ts o r

S e rv ice sP ro ce ss P a ym e n ts

C h a n n e ls

S a le s

F o rc e

C a ll

C e n te r

G 2 G

E x c h a n g eC u s to m e r

B 2 G

E x c h a n g e

A c c t R e p s

S u p p o rt

S ta ff





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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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Developing and Confirming the Feedback Loop in the Enterprise Architecture with Performance Metrics

A key function required in fomenting a CIO 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 and value coalition evaluations and development.

Effectively, 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 analysis with accurate and

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 method.

Strategic P rocess M aturity M odel

R eport E valuation

A ccurate B ase

F inancial R eports

L evel 1: B asic

Period R eporting

Financial =

Strategic

T actical =

O perational

T echnical =

Structural

A ccurate B ase

O ps. R eports

A ccurate B ase

C ycle R eports

N orm ed, Trend, A B C ,

& B udgeted

F inancial R eports

N orm ed, Trend,

& B udgeted

O perations R eports

System Interactivity

R eports

Forecasting,

Valuation, A B M

Forecasting, A B M

Incenting System C ontrol/

G ap R eports

L evel 2: B asic

Period T rending

L evel 3: B asic

Forw ard A nalytics

L evel 4: A dvanced

A nalytics

L evel 5: R eal T im e

E ntity C ontrol

EVA ,

D em and ForecastingSPC , EVM

TMSystem Team

D ev. R eports

C ase Specific

R eporting Evaluation

C ase Specific

R eporting Evaluation

C M M R ating, System

Portfo lio V iew





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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.





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Performance Management: Standards, Feedback, Documentation, Feedback and Development for

Individuals, Teams, Value Chain and Value Coalitions

Performance management measures are ordained by the organization’s strategic direction

and the tactics required to achieve the strategy. Standards should be set to measure the

tactical and technical behaviors and outcomes that support the overall strategy. This is

usually done in the form of setting behavioral and quantitative standards. ICH

recommends that once the strategy is set, a team of insiders and outsiders expert in the

financial, technical, operational and human systems required by the organization, lead a

top down and a bottom up effort to define standards appropriate to the

organizational mission and strategy. Successful EA is not simply a technical effort—it

recognizes the human processes that “oil the gears” and facilitate information flow and

effective decision-making. Sometimes called the “soft stuff” of managing an

organization, without clearly defined standards detailing the management, interpersonal

and communication skills required for efficient performance of various functions, these

crucial catalyzes of performance will be left to chance.

The figure below illustrates that effective performance grows in complexity as it moves

from the individual to the team, and to the values chain and coalition level. This is

because the number of different people, specialties, and types of information tends to

increase at higher levels of the hierarchy. This increased complexity requires greater care

in setting appropriate standards to evaluate team performance, and the performance of

value chains and coalitions. In the case of teams, the coordination of the work of many

different individuals needs to be accounted for. In the case of value chains and

coalitions, while the ultimate measure is meeting or exceeding customer expectations, the

critical parts played by many different teams (each composed of many different

individuals) must be measured.





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Focus on Strategic, Tactical, Technical and Human Systems Strategic, tactical, technical and human systems correlate to financial, operational,

technical systems and the management and people skills critical to achieving

organizational performance. Appropriate reporting methodologies and feedback loops

allow for necessary control, adjustment, monitoring and continuous improvement of these

systems. Training and development goals can be set as needed for members of the

organization.

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, and human systems in a less than competitive performance level

versus organizations that do.

ICH utilizes this value chain and value coalition®

analysis approach to foment the

Solution Architecture and Integration Lab (SAIL) program. The S.A.I.L. program is a

collaborative program were government program managers can architect and validate a

proposed e-Gov solution prior to procurement as a means of removing risk and

developing an analysis of alternatives. Necessary standards for using the human element

to optimize the system can be set. The system is not set in stone. Monitoring and

feedback loops allow for continuous improvement efforts.

Conclusion

Adding portfolio management, value chain and value coalition®

analysis, and

performance management techniques to the EA framework will result in more actionable

and better-aligned architectures. This discussion reviews the approach ICH has

advocates to align strategy, finance, information flow, human systems and decision-

making processes to achieve the greatest value for an organization’s customers. Regular

monitoring and top down, bottom up feedback allow for continuous improvement.

To Reach the ICHnet.org Architecture Resource Center, visit www.ICHnet.org, call 703

768 0400 or email [email protected]. ICH holds multiple GSA contracts under MOBIS

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A Value Chain Approach To Creating