Ambitious businesses looking to scale across multiple product lines, or through a Mergers and Acquisition strategy, often hit the same obstacle. How do you remove duplicate or overlapping processes, products, roles, applications or data whilst maintaining growth momentum in each product or business line?
In this, our next Expert Series, Associate Consultant Henry McNeill explains the role of capabilities – and why you need a capability model – a framework to identify and compare similar activities from previously separate businesses – to achieve both cost-savings and accelerated growth.
Capabilities – A journey of business scoping, opportunities, integration and enlightenment
I have been on a capability modelling journey since 2013. The i-Realise team I was leading co-developed our first major capability model for our client. This was grandly called a ‘Business Reference Model’ as it synthesised a large enterprise in the process of integrating some 50 acquisitions. It was indeed quite an achievement.
I am not saying it was easy. There were lots of discussions/disagreements on what a capability was, the level of detail we should navigate to, how they should be structured and what we were really going to achieve by executing this effort. So, let’s decompose our experiences and propose some Capability Model guidelines.
What exactly is a capability? It sounds a bit abstract to me
In fact, they are far from abstract – capabilities are a clear expression of what a business does, analogous to a business function. The term capability is a bit more specific in this context rather than function, which has a computing, mathematical and other definitions.
Think of straight forward examples – as a starter for 10, I use ‘Invoice’, a capability that nearly every business does or understands. Capabilities can be broken down, or decomposed. An ‘Invoice can be decomposed into ‘Subscription Invoice’ and ‘Transaction Invoice’.
Capabilities are different to a business process, which can define ‘how’ a capability can be fulfilled. Capabilities can act as a collective noun to group all of the processes together for ‘Invoice’ – e.g. in a business, there can be one or more subscription invoices processes; one or more transaction invoice processes and so on.
Wikipedia gives the definition of business architecture as ‘a discipline that represents holistic, multidimensional business views of: capabilities, end-to-end value delivery, information, and organizational structure; and the relationships among these business views and strategies, products, policies, initiatives, and stakeholders.’ I see capabilities as the glue to pull these things together.
What does a capability model look like?
This very simple model should give you an idea of the outcome of capability modelling analysis. Our approach has been to start with a high-level value chain and identify the capabilities that are needed to fulfil it. This ensures there is an inherent business structure and relevance to the capabilities. By using the value chain it starts to exclude those activities of little or no value.
What problems do capabilities solve and why you should consider them?
They are ideal when you know there is duplicate or overlapping processes, products, roles, applications or data – i.e. something to compare. A perfect example is when a business has made its first acquisition – and all of a sudden, they have two finance, HR, payroll and invoice processes. To achieve cost savings, the next step is to integrate these activities together. A Capability Model provides us with a framework to identify and compare these similar activities from both previously separate businesses.
During improvement or transformation exercises, rationalisation and overlapping processes can be identified where the outcome is one set of processes and/or applications for that capability. This capability modelling concept fosters reuse of the solution to be developed – a capability can be called upon from different points in the value chain.
A business strategy can identify which capabilities are core and non-core, with the core activities providing a focus for prioritisation and optimisation. Even further, those that create competitive advantage can be identified for investment. Those non-core capabilities can be de-prioritised, carved-out or sold. As a consequence of capability modelling when co-developed with the business community, a common business language is created to act as a pivot point between previously separate teams, business units and acquisitions. Especially useful when communications are needed between the business and IT.
A well-defined capability can be measured and monitored, including its throughput, quality, faults and scalability.
Post-acquisition integration – a case study demonstrating the power of capabilities
We supported a new management team grappling with the manual/semi-automated customer services and implementation processes and systems across five acquired businesses. The objective was to create an integrated customer services and technical support operating model including a single new process, a single system and 5 down to 2 customer support organisations.
We pragmatically walked through all of the relevant processes for each of the five businesses. By creating small groups of tasks together, the comparable capabilities for these customer service and technical support processes were identified and allowed them to be compared in a matrix format. Two new value chains were created, one for their high-volume products and a second for more specialised, bespoke solution. The analysis of capabilities in this manner enabled an organisation design to be developed and similar activities to be grouped together into centres of excellence.
When should you consider a different approach?
The real power is in categorising and comparing similar things. If you are a small or focused business, with no intention of making a business acquisition, a process/product/customer driven model will achieve your purpose.
If you are a lean organisation, with no duplicated processes or applications, they could be an overhead. But even in these circumstances, they can have a value in optimising your organisation design by aligning similar capabilities into teams.
Capabilities becoming front and centre of an Operating Model
Process-driven operating models is what we expect when we start to develop an operating model, although on some occasions the focus has been on products, applications or organisation structures.
More recently, we have put capabilities at the centre of an operating model to drive rationalisation of processes, products, applications, roles and responsibilities, especially in multiple acquisition scenarios. By mapping one capability to similar processes, applications, products and data generates ideal input to the transformation activities that initiate a To-Be model.
To visualise this capability centric view of the world, see the diagram below. You can create meta-data for the capability, such as definitions and criticality; followed by great fun in mapping it to the operating model and other
assets such as applications.
In conclusion – a path to business enlightenment
Capabilities are not an academic exercise or a consultancy gimmick. For the last 10 projects, I have used them in a practical way with the business community to help them articulate their operating models and their target state they must achieve.
They have enlightened the transformation experience we have experienced on our assignments; as well as shining a light on business structures, activities and opportunities in a practical, down-to-earth way.