Structure in Threes: Process Value
November 11, 2013 1 Comment
About two decades ago I was fortunate enough to collaborate with several brilliant people in IBM working in manufacturing research. One of them Dr. Arno Schmachpfeffer had coauthored a paper in the IBM Journal of Research call Integrated Manufacturing Modeling System. One of the key aspects of the paper was a taxonomy of activities in a process. I was struck by the simplicity of the taxonomy and the ability for it to catalog any process activity into one of four categories: Rest, Move, Make, and Verify. After working with this taxonomy for a while using it to catalog activities I had previously created in IDEF0 for various BPR engagements I came up with several simple insights:
- Most business ventures derive their value through the execution of one of these activities. Example, a Product development firm creates most of its value through the make activity, a Consulting firm typically from verify activities and an Airline from move activities
- Extending that insight further one can determine the efficiency of a process by inventorying, classifying and analyzing the rations of the activities in the processes these firms use to create their value. Thus comparing the ratio of the firm’s primary value creating activity to the quantity of other activities provides one the BPR equivalent to a Asset Efficiency Ratio in Finance
Throughout the years –as a personal research project– I had been inventorying, cataloging and analyzing processes I have been reengineering. This past few months as I started to look into valuation of services and processes, the question has come up often. How does one create a valuation for a process. Initially I was looking for a hard formula based upon standard accounting practices. However, after considerable applications of such concepts as Activity Based Costing (ABC) I came to the conclusion that the formula may be standardize but the actual value of the parameters would change. That is one could use the ration of primary value add activities to non-value add activates to determine the allocation of value applied to each process.
While this is a simplistic approach it enables the Process Analyst and the Portfolio Manager to work together to determine the value of services through a hierarchy without having to get too detailed in data collection. The next aspect of using this relative allocation approach is to add adjustments for non-value add activities that are required or mandated (e.g., safety and regulation compliance). However a case can be made for calling such activities value add as they enable a firm to fulfill its mission and requirements. Thus compliance and safety activities are feature requirements of a product or service and without meeting such do not perform as required.
This month’s agenda is to merge my activity ratio spreadsheet with the value portion of the IT Portfolio Management spreadsheet.