11 years, 1 month ago

Capabilities Demystified – Part 3

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Assessing Business Capabilities

Business capabilities have quickly become the core element of most business architecture models. Their appeal is largely driven by three factors. First, business leaders at all levels find capabilities an appealing and useful way to think about growing their organization’s impact. Second, capabilities are versatile, easily applied to high level strategic activities such as scenario planning or outsourcing investigations as well as lower level operational analysis. And third, capabilities can be linked to other elements in the planning process such as people, process, technology, and information.  However, capabilities remain poorly understood and often confused with processes, functions, or services. This series of posts will take a deep look at capabilities from different perspectives.

Business Capability Assessment

While capability models provide a common framework for strategic discussion and creating shared understanding, their real value is in illuminating opportunities for organizational improvement. A capability assessment creates a structure for prioritizing investments and allocating resources against the backdrop of business value and strategic alignment. High-quality capability assessments focus on the relative importance of individual capabilities as well as the overall performance. To assess capabilities effectively, first determine value contribution, then (and only then) assess performance.  

Value Contribution Assessment

All capabilities are not created equal. Some contribute more to value creation than others. Using a value contribution approach helps organizational leaders identify which capabilities are most important to their long term success and place a higher value on investments for those capabilities. A value contribution assessment provides a weighting factor for the performance assessment of each capability. Accelare’s strategy-to-execution framework assesses capabilities for customer and financial impact, using the results to categorize a capability in one of four value contribution categories:

Advantage: capabilities that create distinction in the customers’ eyes and drive financial results. These capabilities contribute directly to the customer value proposition and have a high impact on company financials. Organizations maximize value contribution when performance is among the best among peer organizations at acceptable cost. Advantage capabilities are rarely outsourced.

Strategic support: capabilities with high customer value but little financial impact. These capabilities provide a strong, direct support to Advantage capabilities. Organizations maximize value contribution when they perform these capabilities above industry parity at competitive cost.

Essential: capabilities that drive financial performance but not customer value. Essential capabilities may not be visible to the customer but they contribute to a company’s business focus and have a big impact on the bottom line if they are applied efficiently. Organizations maximize value contribution when they perform these capabilities at industry parity below competitors’ cost.

Business necessity: necessary capabilities that are not seen as creating customer value or driving financial performance. Some work simply needs to be done even though it has little-to-no strategic or financial value. Organizations maximize value contribution when they perform these capabilities at industry parity below competitors’ cost. Business necessity capabilities are strong candidates for alternative sourcing.

Performance Assessment

Performance assessments measure each capability’s performance regardless of its importance to the organization. Performance is relative to need and should be assessed from a fit-for-purpose point of view rather than with a maturity framework. While some organizations perform highly detailed analysis comparing multiple operational factors; most take a more qualitative approach simply asking mangers to rate the organization’s performance on applying each capability. Accelare’s strategy-to-execution framework focuses on two major performance categories:

Effectiveness: the degree to which the organization is getting the result it wants when this capability is applied regardless of cost. The question being asked here is: “How do we stack up against our peers in getting results from our approach to applying this capability?”

Efficiency: the degree to which the application of this capability is expending an appropriate level of resources for the results produced. The question being asked here is: “How does our costs compare to others in our industry applying this capability?”

Capability models provide a powerful tool for facilitating both strategic and operational dialog across disparate organizations, providing a foundation for objective analysis, and understanding how and where value is created. The next post in this series will look at were companies are applying capability analysis to help them make decisions.  

Tagged: Business Architecture, Capabilities