Business Capability Modeling: Building the Hierarchy
In Business Capability Modeling: Theory and Practice, we introduced a set of techniques for modeling business capabilities: unique combinations of people, business processes, and physical assets that deliver value to customers or shareholders. The business capability model is a useful abstraction that connects business strategy to the future business architecture. The capability model also provides a way to organize and prioritize investments in physical assets: buildings, equipment, and information systems. We outlined four major steps to build a capability model, including:
- Develop the capability hierarchy.
- Identify key relationships.
- Develop the demand (utilization) model.
- Develop the financial model.
In this article, we will focus on the first two steps in the process of developing the capability model.
Before starting a modeling activity, your team must decide on the scope of work to be undertaken.
Develop the Hierarchy
The largest scope is the enterprise. However, capability modeling is relevant wherever an organization unit has profit and loss responsibility, or where a department manages capabilities to which both benefits and costs can be directly attributed. Geographic business unit, division, product/service line, and profit center are all levels of scope where the technique can add value. Work with business partners to identify a business owner for the modeling exercise, ideally the leader who has P&L responsibility for the scope being modeled, or a strategic planner for the P&L area. Once a scope is identified, proceed through the following steps to develop the hierarchy.
- Gather information about the capabilities.
- Draw the hierarchy.
- Validate the hierarchy.
Gather Information
Work with your business partner to review existing sources of information, including business planning deliverables, marketing materials, public documents about your organization, and models such as business processes, financial plans, and expense forecasts. When reviewing the existing information, identify things that are presented as offers to external customers or constituents (either products or services) or are listed as revenue or cost centers within the financial models. Draft these items into an initial list of candidate business capabilities. Identify the stakeholders within the organization who are responsible for managing these items. Review the candidate capability and stakeholder lists with the business owner as an initial validation step.
Next, interview each stakeholder to learn how he or she talks about the capabilities. What names are used to describe the capabilities? Are there items in the candidate capability list that the stakeholder does not see as significant capabilities? Is it helpful to break down the capabilities into component parts or parent-child relationships? What are the things that drive demand or utilization of these capabilities? How does the stakeholder measure the value of these capabilities? Which capabilities are customer-facing? Are there any operational capabilities (those that don’t directly provide value to external customers) that are necessary to operate this segment of business?
Draw the Hierarchy
Once the interviews are complete, the next step is to organize the information into a hierarchical diagram. Use the root node of the diagram to describe the scope of the hierarchy, in the language of the business owner. The next level of detail should represent the major capabilities within the scope managed by the business owner. If the hierarchy includes both customer-facing and operational capabilities, you may use these terms as the second level in the hierarchy, and organize the major capabilities as the third level of detail. Any one of a number of simple tools can be used to support creation of the hierarchy, including an outline within a word processing document, Post-It® notes, or a diagramming tool that supports organization charts.
Validate the Hierarchy
First, review each level of detail within the hierarchy and confirm that the capabilities within a given level are stated at a consistent level of abstraction. Next, level the diagram by decomposing the initial capabilities into two or three additional levels of detail. Decide on a manageable level of detail (e.g., two to four levels) where each leaf node capability generates discernable benefits and costs, and break down each major capability to the same level of detail. Third, confirm that all parent nodes in the diagram contain at least two children. If a parent node contains a single child, either a second child capability is missing and needs identification, or the parent is sufficiently detailed on its own.
At this point the hierarchy is ready to be reviewed by business stakeholders. Meet with your stakeholders and ask the following questions: Do the capability names use language that is consistent with the way stakeholders speak about the business? Does the organization of the capabilities make sense from a business perspective? Are the parent/child relationships valid? That is, would the business stakeholders decompose the parent capabilities in the same manner as done in the draft hierarchy? Modify the hierarchy to accommodate stakeholder feedback and then conduct a second round of reviews to ensure stakeholder feedback has been correctly incorporated into the model.
Identify Key Relationships
A business capability consists of three components: business processes, people, and physical assets. In this step, the modeling team develops association matrices illustrating the relationships between capabilities in the hierarchy and their components. It is also important to map the capabilities to the organization’s strategy elements. Often the inputs for the component elements can be harvested from existing documentation, reducing the amount of work for this step.
The relationships can be documented in a planning tool that supports association matrices or with spreadsheets. If the team decides to use spreadsheets, the first step is to create a spreadsheet that lists the hierarchy of capabilities and use this as a template. Insert additional sheets in the spreadsheet for each type of relationship to be mapped to capabilities. For each element to be mapped in this manner, take the following steps:
- Create a list of the planning elements (processes, people, physical assets, etc.).
- Add the planning elements to the spreadsheet as a set of column headings.
- Document the relationships with capabilities by marking the appropriate spreadsheet cells.
- Identify inconsistencies in the model.
- Review the association matrices with stakeholders.
Model inconsistencies occur when either the row or column element has no relationship with the other element in the matrix, such as capabilities with no business processes, business processes with no capabilities, organizational units with no capabilities, etc. List the inconsistencies and work with stakeholders to resolve them.
Practical Considerations
As a team builds a capability model, it makes a number of decisions to guide the modeling effort. The first decision to be made involves scope of the model. Two approaches can be taken here: 1) start with the largest scope possible, or 2) scope the model to the responsibilities of the primary business stakeholder. Starting with an enterprise scope allows the team to think holistically about the capabilities of the organization and to identify redundant or conflicting capabilities across organization units. On the other hand, scoping to the responsibilities of a business stakeholder aligns the model with a business leader who has P&L responsibility for the capabilities being modeled.
The next major decision faced by the modeling team is the level of detail. Breadth is more important than depth, so try to limit the hierarchy to four or five levels of detail. Manage the modeling to a consistent level of detail, so the leaf-node elements are at the same level of abstraction.
Finally, there are a number of creative approaches to developing stakeholder support for the technique. One approach is to create a straw capability model and socialize it with stakeholders as part of the organization’s strategic planning process. This approach allows the team to solicit feedback about its understanding of the capabilities without undertaking a highly visible modeling effort. Another approach is to start the modeling effort when a business leader needs help making investment decisions and scope the model to the capabilities associated with the investment decisions. If the capability model helps a business leader visualize his or her business in a new way, it will quickly gain acceptance.
by Leonard Greski, the director of eCommerce Architecture at W.W. Grainger, Inc.
He can be reached at leonard.m@greski.com
