partnering with operations on balanced scorecard initiatives, financial managers
are helping their companies focus on critical business processes and gain consensus
on the critical set of measures to help drive desired business results. In addition,
with the explosion of Enterprise Resource Planning (ERP) and e-Commerce systems,
financial executives are leading the charge in going from theory to practice
by developing a cascading measurement architecture and providing the key linkages
to other relevant information (e.g., products, projects, performance plans,
and organizational data).
the financial community has responded to the 'relevance' challenge that was
laid down over a decade ago1. In fact, relevance has been contagious.
Already companies are tying balanced scorecard initiatives to leadership and
strategy; making sure operating managers are focusing on the right issues and
priorities, and coordinating the actions of the company as a whole in implementing
the role for today's financial managers is quickly moving upstream in the strategic
planning domain, the challenge becomes even greater in light of the accelerating
pace of change. This reality is quickly rendering obsolete the traditional approaches
to corporate governance, such as 3-5 year strategic plans, annual planning and
static budgets. In this new environment, financial managers can play a key role
in driving the corporate agenda through their sponsorship and support of projects
and investments that deliver critical business capabilities. To provide useful
financial insight, sooner rather than later, financial managers need to think
about business strategy as a process of continuous course corrections, evaluated
more like a series of 'real options' than a single projected cash flow3.
While the concepts behind real options are certainly familiar to most executives,
the trick to identifying, valuing and making strategic choices lies in the complex
and often overwhelming task of understanding the linkage between initiatives
and changing corporate goals and managing the interaction among projects.
article provides a breakthrough planning approach for rapidly realizing the
business capabilities dictated by strategy and then through the financial lens
of 'real options' shows how to time strategic choices4.
the vision is only half the job
its core, strategic planning is a process that documents a set of choices made
by management of a business describing 'the vision', objectives, goals, and
supporting action plans along with the rationale and implications associated
with these choices. However, as senior executives seek to realize the new vision,
the momentum for change often stalls. As energized and well intentioned as the
management teams and project teams may be, they often lack a disciplined approach
to orchestrate change within their organizations. To realize the vision, management
must be concerned with three key priorities:
straightforward as this sounds, most company projects aimed at the vision are
often off the mark.
with over 100 executives in Information Technology (IT) and Operations areas
reveal several common root causes leading to strategy execution failure:
consequences can be disastrous as see in the following table.
1: Lessons Learned from other Companies
its SAP implementation after investing over $20m in the project.
relized late in the game that the system being implemented would not fit
its new, decentralized management model that was believed to be a key source
of competitive advantage.
||Spent 7 years
and a half-billion dollars implementing a mainframe-based enterprise system.
Abandoned the project and started over with a client-server version.
duration exceeded the rate of technological change by such a degree that
the system was obsolete before deployment. By anticipating that technology
changes would in some way impact the project, management may well have adopted
a different approach to bringing the desired business capabilities to the
its ERP project in mid-implementation
found itself overwhelmed by the organizational changes caused by the project.
Tom Davenport, Putting the Enterprise into the Enterprise System, (Harvard
Business Review, July-August 1998)
Case for Convergent Business ArchitectureSM
address these issues, companies need a breakthrough approach for rapidly realizing
the new business capabilities dictated by the vision, strategy and/or forces
acting upon the business, whether it be entering new markets, deploying a new
operations model, product expansion, etc.
Business ArchitectureSM (CBA) is a low overhead, highly iterative
planning process that:
science of 'change'
following figure depicts the process of translating external changes such as
market shifts, regulation or new customer requirements and internal forces (e.g.
new strategy or vision) into a sequence of appropriate actions that will move
the organization in a coordinated way towards the realization of necessary business
1: The Science of Change
at some key definitions, one can see the model more clearly:
2: CBA Terminology
and internal forces that are impacting the enterprise and may require it
force groupings that will act as a lever upon the company and force
it to alter the way it does business
must be responded to with
the quantified target capabilities that the company must possess in order
to respond to the change drivers
place unique demands and dynamics on the company's...
Process & Technological infrastructure
process and technology "systems" that interact with one another to get work
must function within parameters set by
within which the company can act on the delivery of capabilities, thereby
greatly increasing the level of assurance that conflicts with other elements
of the organization are not being created. They establish guidelines that
potential solutions may not violate (without explicit management approval)
and offer steerage towards the selection of an optimal solution.
are realized through
affect change on the organizational, process & technological infrastructure
to propel the organization towards its goals through the realization of
needed capabilities and the removal of obstacles.
our experience, the CBA process helps to identify and define critical projects
- including projects not even on the table - that are needed to build the capabilities
to achieve the strategy. It also forces a hard look at the existing portfolio
of projects; killing existing projects that are not in synch with the strategy.
Eliminating some projects frees up scare resources to work on the projects that
have higher value contribution to strategy.
Computer abandoned their ERP program only after several months of detail planning
and implementation when they realized that is was inappropriate in their environment.
Analysis had focussed on inefficiencies caused by multiple home-built, unconnected,
information systems that inhibited information flow across the company. This
analysis led them in to choose an integrated suite of applications. Even as
the decision was being made, two Dell executives were providing sufficient information
to invalidate the ERP decision.
one of their Platinum Council meetings where Dell executives meet with key customer
account CIO's, Kevin Rollins, Dell's Vice Chairman, talked about the critical
need for every aspect of the company to be capable of changing its process rapidly.
He referred to this as an essential part of what he called velocity or the continuous
speeding up of every business process. At that same meeting, Michael Dell described
his business as being a virtually integrated system of processes and products
extending from suppliers through Dell's manufacturing and distribution processes,
on to end customers and the support of the product on their desktops. He also
talked about the company's distributed management style and how continuous process
improvement was a way of life throughout the company.
ERP solution certainly provided zero-latency data availability, and it promised
more seamless virtual integration and less complexity. However, other traits
of the solution would have limited the ability of the company to manage processes
in a distributed manner; violating the company's management and process improvement
style. As shown in Table 3, had the Essential Business Capabilities of Dell
been mapped against the Operational Capabilities of the ERP system, two strong
cautions would have raised. This would have taken place even before potential
suppliers were engaged and well before any large expenditure had been made.
3: Sample Reference Architecture Comparison
of ERP Systems
CBA Architecture Reference
business functions prescribe organization structure
architecture must map directly to transaction definitions.
systems that infer org. structure from business function will need adjustment.
companies find it inefficient to adopt prescribed business function models
Transactions and functional modules demand users who are task and context
of Zero-latency and Zero Propagation Time must be designed into processes.
consistency highly determined by workflow configurations.
required to learn upstream and downstream implications of transaction
enforced business rules facilitate a high degree of coordination
variations for unique requirements are costly and slow to implement.
rule changes will propagate simultan-
eously & immediately to all processes.
of a Cross-Functional process Management Orientation.
fit or no issue
is a methodology that helps to assess the appropriateness or fit of a solution
to its target problem in the context of the complete set of essential business
capabilities. The result is a much more thorough examination of project feasibility.
There are similar interactions in e-Commerce projects causing delays, overruns
and project failures. CBA is designed to assure a complete and appropriate set
of actions that will deliver on an enterprise strategy. The completeness of
the set of projects poses another set of issues including project coordination,
resource allocations and timing.
New Role for Financial Managers
enterprise leaders, one of the most important roles that a financial manager
fulfills is their sponsorship of critical business projects, in balance with
the responsible management of corporate assets. Thinking about projects a set
of 'real options' - interacting with each other over time - helps management
teams understand which projects to invest in and when to make the investment.
In other words making go, no-go decisions on current projects or understanding
the value gained from being able to defer an investment (e.g., greater agility,
less exit costs, etc.), increases the likelihood of strategy execution.
seen in Figure 1 above, a crucial phase of a CBA cycle is 'project alignment'
to strategy. In other words, are the right sets of projects identified to execute
the strategy. By adding the concept of real options into the planning process,
financial executives can help operations evaluate when the projects should be
funded. First, let's consider the different type of options and how they relate
to strategic choices5:
4: Real Options in a Strategic Sense
- investment creates future growth options above and beyond the returns
generated by the initial investment
projects such as investments in a new platform
- delay investments until more data is available, thereby reducing risk
technology until more stable or standards accepted
- invest in stages rather than all at once, allowing decisions (new options)
at critical stages
||ERP or software
releases can be implemented in stages
options - investments generate interaction and provides options not previously
(or multiple) call centers allows agent load balancing
- reduce investment risk by defining exit points
in markets where share targets not met
projects are framed in terms of the options they create, the next step is considering
the value to the strategy based on current knowledge of the marketplace. This
requires two critical pieces of information about projects: their value to cost
(similar to a ROI calculation but for a first pass analysis, a qualitative assessment
will suffice) and their volatility (i.e., the stability of the technology, marketplace,
thinking about projects in terms of value to cost and volatility (see Figure
2), management can quickly identify not only which projects are needed and when
as well as key risk factors.
2: The 'Real Options' Grid
following is a partial table of projects at one company, who first identified
over 50 candidate projects using CBA and then used the concept of real options
to further filter investment decisions prior to detailed financial calculations.
5: Qualifying Real Options
Architecture viewed as critical input to determining the sequencing of IT
investments and make/buy/lease decisions.
pilot, designed to demonstrate synergies between proprietary technologies,
will be used to sell clients on the potential of the product platform.
Product Solution Modules
move to modular product design, away from custom development, will support
solution re-use and rapid deployment. Evaluate resources after 'Invest Nows'
projects and change management efforts must be accomplished before this
project can be successfully implemented. Take a wait & see approach, but
be ready to act.
the momentum behind the Oracle implementation in other areas, this did not
immediately support required critical capabilities. Revisit in 6 months
Business Architecture provides the science behind change and highlights the
interaction among projects. Real Options adds a financial perspective and a
common language for both operating managers and financial managers to discuss
strategy. In doing so, companies benefit from:
- Executive teams
having a comprehensive & cohesive story about where they are going and how
to get to there (even if the destination changes)
- A clear agenda
for setting and measuring operational performance on an ongoing basis
learning about process and technology capabilities
- Early identification
mechanisms to identify tradeoffs, disconnects, and secondary impacts
- Project discipline;
including when to start and stop projects.
Lynch (firstname.lastname@example.org) is a strategic partner
of Results Based Leadership, a Provant Company and the lead author of Measure
Up: How to Measure Corporate Performance and Corporate Renaissance: The Art
of Reengineering, both from Blackwell Publishers. James F. Dowling, (email@example.com)
is the Vice President of Alignment Consulting at Technology Evaluation Center,
Inc. and John Diezemann(firstname.lastname@example.org),
is a senior consultant with the Technology Evaluation Center Inc.
example Rich Lynch, with C.J. McNair and Kelvin Cross wrote about the emergence
of balanced scorecard and the challenges to the financial community in an article
entitled "Do Financial and Nonfinancial Measures Have to Agree?' (Management
Accounting, November, 1990) . [Certificate of Merit Winner]
example, see Results-Based Leadership: How leaders build the business and improve
the bottom line, Dave Ulrich, Jack Zenger, Norm Smallwood (Harvard Business
School Press, May 1999)
A Luehrman, "Strategy as a Portfolio of Real Options" (Harvard Business Review,
4See Timothy A Luehrman, "Investment Opportunities as Real Options:
Getting started on the Numbers" (Harvard Business Review, July-August, 1998)
for a primer on the financial calculations and Martha Amram and Nalin Kulatilaka,
"Disciplined Decisions: Aligning Strategy with the Financial Markets" (Harvard
Business Review, Sept-Oct 1998) for a discussion of options types.
5Martha Amram and Nalin Kulatilaka, "Disciplined Decisions: Aligning
Strategy with the Financial Markets" (Harvard Business Review, Sept-Oct 1998)