Does senior management in your organization understand the true value that enterprise architecture provides? The following fictional conversation between the COO of a regional manufacturing company and an enterprise architect illustrates how EA supports business strategy by monitoring structures and managing the investment portfolio to ensure the operating model stays aligned with the business model, presented from the COO’s point of view.
Over the last couple of quarters, our revenue has been rising steadily, but our gross margin has been falling. What concerns me most about this is that no one can explain why it’s happening. Sure, there are lots of theories, but none stand up to close scrutiny. What the heck is going on?
One afternoon, Sue, one of those people who call themselves an enterprise architect, stopped me in the break room to say she had noticed something odd in the performance numbers she’d been watching. My curiosity overcame my frustration from being late to my next meeting and I asked her to explain. She showed me several control charts of our outbound logistics process. I recognized the charts from my days as a factory line manager. These charts didn’t display the expected business performance metrics, such as shipments per week; instead they showed numbers that seemed detached from the level of business activity.
Most of the charts looked normal, as I would expect, with relatively flat mean lines. A couple showed the mean trending upwards, however. One of those was labeled “% Capacity”; the other was “Defect Rate.” Now, I was really curious: “Tell me more.”
Sue explained that the recent increases in business activity had driven the shipping department over its capacity, forcing the department to use a lot of overtime to get shipments out on time. The increasing defect rate reflected an increase in both late shipments and shipments with errors in them. Further, the return rate (the percentage of shipments that are returned) had increased steadily. I was not surprised because marketing had pushed through a campaign to encourage customers to buy multiple items and return the ones they didn’t like, and our customers enthusiastically went along.
“Hmm. This may explain the recent gross margin behavior. What else can you tell me?”
“Well,” she said, “the average cost per shipment is up 10% because of the use of overtime, and the defects have added another 15% to the level of activity because of efforts to make right the problems the defects cause. Both of those changes would be direct hits to gross margin.”
“Yes, they would…,” I thought to myself. Why hadn’t my team noticed this?
“I see,” I said to Sue, “Do you have any ideas about how we might fix this? It looks like we’re going to have to hire more people in shipping.”
“Yes, and probably start a second shift; it’s already pretty crowded in the warehouse. There may also be ways to reduce the activity cost of shipping, the time it takes to fill an order.”
“I agree. Thank you. This is good work. I need to go now, but would like to have a longer conversation with you. Can we continue this conversation later in my office?”
Later, Sue came to my office.
“Thank you, Sue, for agreeing to explain this to me.” She seemed a little uneasy. “Relax. I know presenting to the COO can seem intimidating, but I’m genuinely curious about what you’ve been doing.”
“That’s a relief!” she sighed, and smiled.
“Let’s get started. Explain to me how your team works.” I was looking forward to the conversation.
“For starters, architecture is about structures, and enterprise architecture is about the structures that make up the enterprise.” Sue started, somewhat tentatively.
“Well, the processes in the operating model, the capabilities they require, customer segments and channels, the organization structure — that sort of thing — and how they all work together. Architects watch them to ensure they can perform to the level necessary to achieve the goals. Mostly, we keep an eye on processes, since that’s where trouble usually shows up first. That’s how we found the issues in the shipping department.”
“I don’t see any of our normal operational measures. What kinds of measures do you use?”
“There are many ways to measure a process, as in this case, but there are five structural measures common to all processes: capacity, activity cost, cycle time, defect rate, and the cost structure. We monitor these for most of the key processes in our value chains. We noticed a sharp increase in the defect rate in shipping and that led us to the overcapacity situation. From there, it was simple math.” Sue was increasingly relaxed, and enthusiastic about her subject.
“Yeah, we used some of these same measures on the production lines. I notice you measure activity cost in minutes, not dollars. I think I know, but why is that?”
“We use structural measures to assess properties that are inherent to the process. The activity cost in dollars can be changed simply by changing the budget. Structural measures cannot be changed without direct investment in the process.”
“Good point, go on,” I urged.
“Basically, the enterprise architects work to understand and maintain links between the operating and business models so we can see when changes are needed. When we see a need for change, like with shipping, we bring it up to management. When you agree that a change is necessary, we facilitate a project to make sure the change actually accomplishes what we need it to. Have you read The Goal by Eli Goldratt? We use the three questions as a guide to figure out each project.”
“Yes! Great book! Required reading for production line managers. We applied his theory of constraints to the production processes when I worked in the factory. I can see how his three questions might be useful in transforming the rest of the business.”
“Right. Enterprise architecture focuses on managing the set of business change projects, the investment portfolio, to ensure continued alignment between the operating and business models. Business transformation is the mechanism by which we change our business, and the projects in the investment portfolio are how we actually make it happen.”
“I get it. The operating model and how it aligns with and supports the business model is the biggest part of my job. I can see how your techniques and information could make that much easier. Let me talk with senior management. You’ll be hearing from me, I’m sure. Thank you very much for coming to see me; it was enlightening.”
“Thank you. In the meantime, if there are any specific questions you have or things you need, please let me know. We’d be happy to help.”
As Sue packed up and left, I thought about what she had said. It made sense and she had made a few excellent points:
Structures work together to form the enterprise architecture.
All processes can be measured in terms of capacity, flow, cost (activity cost and cost structure), and defects.
Business transformation is the mechanism by which you change your operating model.
The investment portfolio is the means by which business transformation happens.
Enterprise architecture monitors the structures and manages the investment portfolio to ensure the operating model stays aligned with the business model.
It occurred to me that I should be responsible for the investment portfolio, but I had another meeting and that would have to wait.