procurement business capability model

TOGAF ® Series Guide

Business Capabilities, Version 2

Prepared by The Open Group Architecture Forum Business Architecture Work Stream

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ISBN: 1-947754-69-0

Document Number: G211

Published by The Open Group, April 2022.

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1 Introduction

2 What is a Business Capability?

2.1 Defining a Business Capability

2.1.1 Naming Convention

2.1.2 Description

2.2 Elements to Implement Business Capabilities

2.2.1 People

2.2.2 Processes

2.2.3 Information

2.2.4 Resources

3 Business Capability Mapping

3.1 Approach

3.1.1 Organizational Structure

3.1.2 Business Model

3.1.3 Strategic Plans, Business Plans, and Financial Plans

3.2 Structuring the Business Capability Map

3.2.1 Business Capability Stratification

3.2.2 Leveling

4 The Impact and Benefits of Business Capability Mapping

5 Mapping Business Capabilities to Other Business Architecture Perspectives

5.1 Heat Mapping

5.2 Relationship Mapping

5.2.1 Capability/Organization Mapping

5.2.2 Capability/Value Stream Mapping

5.2.3 Capability/Business Process Mapping

6 Using Business Capability Maps with the TOGAF Standard

7 Conclusion

The Open Group

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Further information on The Open Group is available at www.opengroup.org .

The Open Group publishes a wide range of technical documentation, most of which is focused on development of Standards and Guides, but which also includes white papers, technical studies, certification and testing documentation, and business titles. Full details and a catalog are available at www.opengroup.org/library .

The TOGAF ® Standard, a Standard of The Open Group

The TOGAF Standard is a proven enterprise methodology and framework used by the world’s leading organizations to improve business efficiency.

This Document

This document is a TOGAF ® Series Guide to Business Capabilities. It addresses how to provide the architect with a means to create a capability map and align it with other Business Architecture viewpoints in support of business planning processes. It has been developed and approved by The Open Group.

The intended audience for this document is architects of any kind, business leaders, and users in general of the TOGAF framework.

This document supersedes the TOGAF ® Series Guide: Business Capabilities (G189). The major updates are as follows:

• Replaced roles, processes, information, and tools in Chapter 2 with people, processes, information, and resources
• Added a new Chapter 4 : The Impact and Benefits of Business Capability Mapping
• Added a new Section 5.2.3 : Capability/Business Process Mapping

About the TOGAF ® Series Guides

The TOGAF ® Series Guides contain guidance on how to use the TOGAF Standard and how to adapt it to fulfill specific needs.

The TOGAF ® Series Guides are expected to be the most rapidly developing part of the TOGAF Standard and are positioned as the guidance part of the standard. While the TOGAF Fundamental Content is expected to be long-lived and stable, guidance on the use of the TOGAF Standard can be industry, architectural style, purpose, and problem-specific. For example, the stakeholders, concerns, views, and supporting models required to support the transformation of an extended enterprise may be significantly different than those used to support the transition of an in-house IT environment to the cloud; both will use the Architecture Development Method (ADM), start with an Architecture Vision, and develop a Target Architecture on the way to an Implementation and Migration Plan. The TOGAF Fundamental Content remains the essential scaffolding across industry, domain, and style.

ArchiMate, DirecNet, Making Standards Work, Open O logo, Open O and Check Certification logo, Platform 3.0, The Open Group, TOGAF, UNIX, UNIXWARE, and the Open Brand X logo are registered trademarks and Boundaryless Information Flow, Build with Integrity Buy with Confidence, Commercial Aviation Reference Architecture, Dependability Through Assuredness, Digital Practitioner Body of Knowledge, DPBoK, EMMM, FACE, the FACE logo, FHIM Profile Builder, the FHIM logo, FPB, Future Airborne Capability Environment, IT4IT, the IT4IT logo, O-AA, O-DEF, O-HERA, O-PAS, Open Agile Architecture, Open FAIR, Open Footprint, Open Process Automation, Open Subsurface Data Universe, Open Trusted Technology Provider, OSDU, Sensor Integration Simplified, SOSA, and the SOSA logo are trademarks of The Open Group.

A Guide to the Business Architecture Body of Knowledge, BIZBOK, Business Architecture Guild, CBA, and Certified Business Architect are registered trademarks of the Business Architecture Guild.

All other brands, company, and product names are used for identification purposes only and may be trademarks that are the sole property of their respective owners.

About the Authors

This Guide was developed by the Business Architecture Work Stream of the Architecture Forum, a forum of The Open Group.

(Please note affiliations were current at the time of approval.)

Alec Blair – Program Lead, Enterprise Architecture, Alberta Health Services

Alec has been working as an Enterprise Architect and Enterprise Architecture manager/coach for the last 15 of his 28 years in the IT industry. Alec currently leads the Alberta Health Services Enterprise Architecture community of expertise and is a Certified Business Architect ® (CBA ® ). This virtual team spans more than 40 practitioners working on all dimensions of Enterprise Architecture.

J. Bryan Lail – Business Architect Fellow, Raytheon

J. Bryan Lail is a Business Architect Fellow at Raytheon. He is a Certified Business Architect ® (CBA ® ) with the Business Architecture Guild ® , a Master Certified Architect with The Open Group, and a Raytheon Certified Architect applying strategic business architecture methods in the defense industry. His career has spanned physics research, engineering for the Navy and Raytheon, and multiple publications in the application of architecture to business strategy.

Stephen Marshall – Strategy Consultant, IBM

Stephen Marshall is a Certified Business Architect ® (CBA ® ) with the Business Architecture Guild ® , a Master Certified Architect with The Open Group, and a Senior Management Consultant with the IBM Institute for Business Value (IBV). He currently leads the IBV Global C-suite Study program in Asia-Pacific, co-authoring several pieces of thought leadership.

Acknowledgements

The Open Group gratefully acknowledges the contribution of the following individual in the development of this document:

• Frédéric Lé – DXC Technology

The Open Group gratefully acknowledges the contribution of the following individuals in the development of the first version of this document:

• Sonia Gonzalez – The Open Group
• Kirk Hansen – Metaplexity Associates
• Harry Hendrickx – HPE
• Rich Hillard – Project Editor, ISO/IEC/IEEE 42010
• Chalon Mullins – Business Architecture Guild
• Gerard Peters – Capgemini
• Jim Rhyne – Business Architecture Guild
• Pieter Steyn – Enterprise Architects

Referenced Documents

The following documents are referenced in this TOGAF ® Series Guide.

(Please note that the links below are good at the time of writing but cannot be guaranteed for the future.)

• A Business-Oriented Foundation for Service Orientation, Ulrich Homann, White Paper, February 2006, published by Microsoft, February 2006
• A Guide to the Business Architecture Body of Knowledge ® (BIZBOK ® Guide), Version 8.5, Business Architecture Guide, 2020
• ArchiMate ® 3.1 Specification, a standard of The Open Group (C197), published by The Open Group, November 2019; refer to: www.opengroup.org/library/c197
• Capability-Based Planning Supporting Project/Portfolio and Digital Capabilities Mapping Using the TOGAF ® and ArchiMate ® Standards, The Open Group Guide (G193), published by The Open Group, July 2019; refer to: www.opengroup.org/library/g193
• The TOGAF ® Standard, 10 th Edition, a standard of The Open Group (C220), published by The Open Group, April 2022; refer to: www.opengroup.org/library/c220
• TOGAF ® Series Guide: Business Capabilities (G189), published by The Open Group, June 2018; refer to: www.opengroup.org/library/g189
• Value Stream Mapping: How to Visualize Work and Align Leadership for Organizational Transformation, Karen Martin, Mike Osterling, published by McGraw Hill, January 2014

1 Introduction

Many organizations struggle with managing the complexity of their business. They want to answer questions about their progress toward realizing their strategic aims. Are their strategic investments targeted appropriately? Are there areas of redundancy or duplication that are suitable for rationalization? Does the business have what is necessary, or too much to succeed?

As the discipline and practice of Business Architecture continues to grow and mature, the concept of the “business capability” has emerged to become a fundamental component in the development of a Business Architecture. The business capability map represents one of the four core elements of Business Architecture, along with the value stream map, information map, and organization map. [1]

Business capabilities provide an abstraction of the business reality in a way that helps to simplify conversations between interested stakeholders. Defining a business capability’s supporting components (people, processes, information, and tangible resources) provides a business context for those supporting components. In addition, creating a business capability map for the enterprise promotes more of a common understanding of the business.

Defining business capabilities and a capability map is a means to an end. Understanding a business’s capabilities provides architects and planners with a foundation for making better business decisions. This insight is gained through mapping the business capabilities to different business perspectives and viewpoints. The mapping allows for a more coherent view of the business to emerge.

This document looks to answer some important questions about what a business capability is, and how it is used to enhance business analysis and planning:

• What exactly do we mean by the term “business capability”?
• Why are business capabilities such an integral part of Business Architecture and Enterprise Architecture, and the architecture development process?
• How do we describe business capabilities?
• How (and why) should we construct a business capability map?
• How do business capabilities map to other business perspectives?

2 What is a Business Capability?

Within The Open Group, a capability is defined as “an ability to do something”. A business capability represents the ability for a business to do something. A more formal definition is as follows:

According to Ulrich Homann (see Referenced Documents ): “A business capability is a particular ability or capacity that a business may possess or exchange to achieve a specific purpose or outcome.”

Critically, a business capability delineates what a business does without attempting to explain how, why, or where the business uses the capability.

As part of the practice of Business Architecture, we separate the concern of what we do from who does it within the organization and from how the business achieves value from that activity. A business capability can be something that exists today or something that is required to enable a new direction or strategy. When integrated into a business capability map, business capabilities represent all of the abilities that an enterprise has at its disposal to run its business.

2.1 Defining a Business Capability

Defining a business capability involves identifying and describing what needs to be done by the business in support of its overall mission. A business capability description does not imply how well something needs to be done, simply that it needs to exist. The following guidelines explain how to define an individual business capability.

2.1.1 Naming Convention

Naming the business capability is the first step in the capability definition process. It establishes a clear need for the existence of the business capability and helps to ensure it is clearly distinguishable from other business capabilities.

The naming convention involves expressing the business capability in a noun-verb format, whereby each outcome (input, output, or deliverable) is described as a noun and each activity that is associated with producing or controlling or monitoring the outcome is described as a verb; e.g., “Project Management” or “Strategy Planning”. The noun part of the business capability is a unique business object – a single, persistent thing that is of interest to the business. The advantage of making a business object the focal point of the business capability is that it simplifies the process of identifying the information objects that are tied to and used by the business capability.

A business object is typically tangible – for example, “Customer” or “Loan” – but it can also be more conceptual and intangible, such as “Research”. The most important consideration is to use names that resonate with business leaders and stakeholders. Commonly understood names enable better understanding and improve communication across different stakeholder groups. However, resist the urge to simply repeat the organizational department names. Unlike business capabilities (which are inherently stable), organizational structures are not enduring and frequently change in most organizations.

2.1.2 Description

A brief description helps to clarify the scope and purpose of the business capability and to differentiate it from other business capabilities. A useful syntax is to phrase the description of each business capability as “the ability [or capacity] to …”. For example, a business capability named “Strategic Planning” might be described as “the ability to develop and maintain the strategic plan and overall direction of the organization”.

As with the business capability name, write all descriptions using language that is relevant and appropriate to the business stakeholders. Two important considerations are to:

• Be concise : Provide just enough detail over one or two sentences to enable greater understanding than can be gained from the business capability name alone.
• Be precise : Do not simply repeat the name of the business capability in the description, such as “the ability to manage projects” when describing “Project Management”.

2.2 Elements to Implement Business Capabilities

A combination of roles, processes, information, and tools enables a business capability. The process of reviewing each of the business capability components helps refine the business capability name and description, and supports the subsequent analysis of business capability gaps, duplications, and redundancies. This decomposition can be used as a test to check that the capability definition is, in fact, a business capability (rather than a process, organizational function, or service).

Business capabilities are coarse-grained concepts that enable business planning from different viewpoints. Business capabilities are built to focus on what the business does rather than how the business uses capabilities to deliver value. That said, in order for a capability to be defined, we need to understand how the capability is realized in the form of people, processes, information, and resources. The key distinction is that the elements of a business capability can change regularly, whereas the business capability itself can endure over longer planning horizons. The how of a capability must be self-contained within the capability.

2.2.1 People

People represent individual actors, stakeholders, business units, or partners involved in delivering a business capability. A single organizational group or team may be wholly responsible for delivering the capability, or multiple business entities may share the delivery of a particular business capability. Do not describe people in ways that are organizationally specific. Role-specific business capabilities should be reviewed as they may be just a component of another business capability, or they may need further elaboration to become a more fully described business capability.

2.2.2 Processes

Individual business capabilities may be enabled or delivered through a range of business processes. Identifying and analyzing the efficiency of the underlying processes helps to optimize the business capability’s effectiveness. Identifying the processes within a business capability provides a focus for maturing the capability in concert with the other capability components.

2.2.3 Information

Information represents the business data, knowledge, and insight required or consumed by the business capability (as distinct from IT-related data entities). There may also be information that the capability exchanges with other capabilities to support the execution of value streams. Examples include information about customers and prospects, products and services, business policies and rules, sales reports, and performance metrics.

2.2.4 Resources

Business capabilities rely on a range of tools, materials, and assets for successful execution. Such resources may include:

• Information technology systems and applications
• Physical assets, such as buildings, machinery, and vehicles
• Intangible assets, such as money and intellectual property

3 Business Capability Mapping

A business capability map represents the complete, stable set of business capabilities (along with all of their defining characteristics) that covers the business, enterprise, or organizational unit in question. The end-product of the modeling process is typically a business capability map, which provides the visual depiction (or blueprint) of all the business capabilities at an appropriate level of decomposition, logically grouped into different categories or perspectives to enable effective analysis and planning.

Once defined, the business capability map provides a self-contained view of the business that is independent of the current organizational structure, business processes, IT systems and applications, and the product or service portfolio. However, mapping the business capabilities back to organizational units, value streams, IT architecture, and the strategic and operational plans will provide greater insight into the alignment and optimization of each of those domains.

3.1 Approach

The first goal of business capability mapping is to capture and document all of the business capabilities that represent the full scope of what the business does today (irrespective of how well it does it) or what it desires to be able to do in the future. The second step is to organize that information in a logical manner. This activity is discussed further in Section 3.2 .

There are two approaches for identifying a starter set of business capabilities: top-down and bottom-up:

• Top-down : a top-down business capability mapping approach starts by identifying (from an enterprise-level perspective) the 20 to 30 highest-level business capabilities, each of which can decompose into more detailed levels

Senior business leaders can help to develop the top-level business capabilities in the first instance. In practice, developing a draft business capability map from the top down is a more efficient use of time, but is usually only successful if there is meaningful involvement from senior executives.

• Bottom-up : When more time is available, business capabilities can be defined from within different parts of the business and built from the bottom up

However, this approach can be more difficult to reconcile across the business without strong governance and senior leadership support toward ultimately developing an enterprise-wide business capability map.

Usually, a combination of top-down and bottom-up approaches allows for the refinement of the business capability map. Regardless of the approach, there are three good sources of information with which to create an initial draft of the business capability map:

• The organizational structure
• The business model
• Current strategic, business, and financial plans

3.1.1 Organizational Structure

Organizations are often structured in ways that closely align to business capabilities. People execute processes and allocate resources or tools like money, information technology, or other company assets. The organizational structure of a business can thus be used to inform the capability map.

A common mistake is to transpose the organizational chart onto the frame of the business capability map itself. Quite often, multiple business units are involved in creating or delivering a single business capability. Organizational structures are naturally also far more transient than business capabilities. Avoid, where possible, a tight alignment between the functional names that denote business units and the top-level business capabilities.

For example, ABC Company has four main functional areas, each with smaller departments that report up to the parent business unit, as shown in Figure 1 .

Figure 1: ABC Company Organization Chart

An initial investigation with the managers responsible for each of the business units in the organization chart yields the following starter set of business capabilities, where names are modified to apply the capability naming guidelines identified above: [2]

—  Account Management

—  Customer Management

—  Market Planning

—  Channel Management

—  Partner Management

—  Agent Management

—  Finance Management

—  IT Management

• Human Resources:

—  HR Management

• Operations:

—  Capital Management

—  Policy Management

—  Product Management

—  Government Relations Management

—  Distribution Management

—  Procurement Management

—  Operations Management

—  Training Management

While organizational structure is roughly aligned to capabilities, the alignment is not perfect. It is not uncommon to find duplication or silos of capabilities in organization structures, because organizations do not align clearly to business objects. So, the starter set of capabilities needs to be analyzed to identify the business objects and refine the capability map for better alignment to business objects. Looking at the starter set of capabilities above there are cases in which it is not clear what the operative business concept is:

• IT Management: IT is generally an organization that handles all aspects of information technology systems

As such, it is a common source of duplication in which IT may have its own Finance, HR, or other capabilities. If we ask what the new business object/concept is that is associated with IT, the clearest concept is “Information”.

• Distribution and Procurement Management: distribution and procurement are best thought of as stages in a value stream

The question is: distribution of what? Procurement of what? Procurement is usually of an asset. Distribution can be of an asset or a product. Product Management is already a defined capability, whereas Asset Management is something new.

• Government Relations Management: the issue here is that “Relations” is a vague concept that covers a variety of concepts

For example, there could be lobbying efforts to try to influence legislation, or compliance efforts to ensure the organization adheres to regulatory mandates. Therefore, Regulatory Compliance Management is a potential capability; influencing regulations through lobbying could be considered an aspect of that capability.

• Business Planning: it is also the case that some capabilities will not have a clear alignment to a particular business unit in the organization, and so may be missed in an organizational structure-based capability analysis

Strategic business planning may be done at a variety of levels by a number of different business units, none of which may have business planning defined as their sole or even main responsibility.

After this analysis, we have the candidate list of first-level capabilities as follows:

• ABC Company:

—  Business Planning

—  Information Management

• Human Resources

—  Regulatory Compliance Management

—  Asset Management

This detail enables the identification of duplication, redundancy, or gaps in capabilities across organizational units.

3.1.2 Business Model

Business capabilities provide the building blocks upon which to execute an organization’s business model. If an overarching business model exists, individual business capabilities (which support each of the core business model elements) can be derived from that. Mapping individual business capabilities back to the business model also ensures that the organization’s activities and investments are tightly aligned or targeted in support of the overall enterprise vision and strategy.

3.1.3 Strategic Plans, Business Plans, and Financial Plans

Use the published strategy and operational business plans to identify any business capabilities that are considered strategic or core to the organization. These represent business capabilities that provide a competitive advantage or that are core competencies, unique to the particular industry and market that the business is targeting.

An assessment of the business’s financial plans should also highlight additional business capabilities that are essential for the business to operate, especially those that consume significant financial resources.

3.2 Structuring the Business Capability Map

There are two concepts for turning the set of business capabilities into a logical structure that communicates the right amount of detail to different stakeholder groups. Creating these structures will allow them to focus on those capabilities that are most important or relevant to their sphere of influence: stratification and leveling.

3.2.1 Business Capability Stratification

Stratification is the process of classifying, grouping, and aligning business capabilities within categories, tiers, or layers. The purpose of stratification is to break down a business capability map so that it can be more easily understood; a collection of 20 to 30 capabilities without some form of stratification is difficult to read and process.

Each stratification tier provides a different perspective or focal point for different stakeholder groups, allowing each group to organize their analysis and subsequent planning activities in more structured ways. For example, the top tier is often aimed at the executive function’s span of control: business capabilities related to strategy and direction-setting. The middle tier typically represents the core, customer-facing elements of the business, while the bottom tier deals with those business capabilities that are essential for the business to function but play a supporting role behind the scenes.

Figure 2 represents an example of a Level 1 business capability map for ABC Company, derived from all the inputs discussed in the previous section.

Figure 2: ABC Company L1 Business Capability Map

3.2.2 Leveling

Leveling is the process of decomposing each top-level (Level 1) business capability into lower levels to communicate more detail at a level appropriate to the audience or stakeholder group concerned. Some business capabilities intuitively decompose as part of the modeling process. Others only become evident when capabilities are mapped to show other perspectives.

For example, senior executives may only be interested in the Level 1 view of the business capability map. Architects and planners expect to see a much greater degree of granularity. The number of levels of decomposition is limited only by the degree necessary to communicate the information required by the intended audience or to enable the business to make informed decisions about capability gaps. Between three and six business capability levels of decomposition is common in practice.

Figure 3 shows the Human Resource Management business capability decomposition. Here, Human Resource Management is the Level 1 business capability. There are seven Level 2 business capabilities, including Human Resource Performance Determination, which in turn has been decomposed into three Level 3 business capabilities.

Figure 3: Human Resource Management Capability Decomposition

4 The Impact and Benefits of Business Capability Mapping

As a foundational part of a Business Architecture blueprint, the business capability map can provide benefits at a strategic level, at an enterprise-wide scope, or for individual projects. To the Enterprise Architect, the usage of the capability map is only constrained by the scope of the architecture effort itself and often starts with previous work at a very broad scope across the business.

Some of the impacts and benefits include:

• Providing a common vocabulary or language around what the business does, while being agnostic to specific organizational units, business processes, or technologies
• Allowing business relationships to be understood in terms of how many domains relate back to the same ability to perform a business activity
• Focusing investments and cost savings through mapping to the same business capabilities
• Relating projects to each other through mapping back to a common view of capabilities
• Ensuring stakeholders agree on the capabilities to be delivered to the business before proposing potentially incorrect or incomplete solutions
• Determining which capabilities provide the means to deliver value for the stages of a value stream

For a powerful use-case applying business capability maps for Portfolio and Project Management, see The Open Group Guide to Capability-Based Planning (see Referenced Documents ). That document describes capability-based planning, which is a way of creating a line of sight between objectives and goals, and the organization’s capability, as well as changing initiatives. Benefits and associated principles are expanded on by the Business Architecture Guild. [3]

5 Mapping Business Capabilities to Other Business Architecture Perspectives

Having identified and organized the business capabilities into a business capability map, we can now start to apply the information to business analysis and planning.

There are two aspects to consider:

• Heat mapping the business capability map itself
• Mapping the relationships between the business capabilities and other business and IT architecture domains

Heat mapping helps identify opportunities for business improvement or investment. It visually highlights business capabilities that are performing at a sub-optimal level, or that might not exist in a form that is required to meet some future strategic need.

The second approach helps to strengthen alignment across different parts of the business, ensuring that what the business wishes to do is:

• Reflected in the company’s strategic and operational plans (the why )
• Supported by the appropriate systems, processes, information, and organizational structure (the how and where )

5.1 Heat Mapping

Heat maps can show a range of different perspectives. These include maturity, effectiveness, performance, and the value or cost contribution of each capability to the business. Different attributes determine the colors of each capability on the business capability map. Typically, a stoplight metaphor highlights, at a glance, those capabilities that may need further attention. For example, a business capability maturity heat map shows capabilities at the desired level of maturity is green; one level away is yellow; and two or more levels away are red. Other colors may indicate other status levels; e.g., purple denotes that the business capability does not exist today but is desired in the future. Missing capabilities signify a significant gap.

The heat map example shown in Figure 4 represents ABC Company’s business capabilities when viewed from a capability maturity perspective.

Figure 4: ABC Company Business Capability Heat Map

Here, we can see that Market Planning, Government Relations Management, and HR Management are in need of immediate attention. Partner Management, Customer Management, and Training Management have some issues but are of lower priority. Agent Management is a new business capability that the business wishes to develop. Business leaders can then take this information and ensure that investments and project initiatives are prioritized and funded at an appropriate level to bring those business capabilities shown in purple, red, or yellow up to the desired level of maturity.

Different heat maps can be generated from the same business capability map, depending on what criteria, perspective, or lens the business wishes to apply. Other heat mapping examples include:

• Strategic contribution
• Performance/effectiveness
• Revenue contribution
• Cost contribution
• Coverage (the degree to which each business capability is used by more than one business unit)
• Criticality

5.2 Relationship Mapping

Business capabilities have relationships to organizational units, value streams, information assets, and all other domains of a business and IT architecture. Business capability analysis and capability-based planning must recognize and evaluate the strength or weakness of each of those relationships in order to develop a complete view of the business, and to isolate those areas to target for improvement.

The relationships that business capabilities have with other domains can be depicted using relationship mapping techniques. Three of the most common and useful mappings (from a business planning perspective) are capability/organization mapping, capability/value stream mapping, and capability/business process mapping.

5.2.1 Capability/Organization Mapping

Many business capabilities align to one and only one part of an organization. Business capabilities executed in many different parts of the organization can sometimes lead to inconsistent deployment and inefficiency. In the earlier example of looking at the organization chart to identify business capabilities, each business capability aligned to a specific business unit. In this case we did not look at duplicated capabilities. The matrix shown in Figure 5 shows how the same business capability can exist across different organizational units.

Figure 5: Capability/Organization Mapping Example

As an added dimension, the capability heat map shows where there may be opportunities to rationalize or harmonize capabilities across the organization.

One option may be to standardize using a consistent set of tools within the capability. Another option may be a complete realignment of the capability around a specific organizational unit to optimize all the components of the capability.

5.2.2 Capability/Value Stream Mapping

A value stream represents the sequence of activities (or value stages) that an organization undertakes to deliver on a customer request. In this context, a customer can be an external client or an internal stakeholder that is responsible for supporting the delivery of value by the organization.

Value streams help organizations identify which specific business capabilities are required to create and deliver value to their customers. The process of mapping business capabilities to each stage in a value stream serves to highlight which ones are more or less critical to the business operation. That, in turn, supports investment prioritization and initiative planning to develop or enhance those business capabilities that provide the greatest contribution to value delivery.

Figure 6 shows a sample recruit employee value stream and the various value stages mapped to different business capabilities. Each capability enables one or more value stages.

Figure 6: Capability /Value Stream Mapping Example

After identifying which business capabilities are needed to fully realize the value stream, further analysis can look at whether each of those business capabilities exists at the required level of maturity, performance, or effectiveness. Once an organization has defined its entire set of value streams, capability/value stream cross-mapping can also highlight which business capabilities are used in multiple value streams and thus have an even higher level of importance to the operation and in the success of the business.

5.2.3 Capability/Business Process Mapping

In order to clarify the relationship between business processes and business capabilities, it helps to be clear about the relationship between business processes and value streams. As the process management community becomes more focused on end-to-end processes and using more abstract representations beyond task, role, decision, and event descriptions to show how to implement a process, their similarity to value streams starts to emerge. Value stream principles become more suitable for modeling high-level business processes at an abstract, end-to-end level.

Within the context of this document, business processes enable business capabilities, which are those abilities the organization must have in order to deliver the value characterized in the value streams (to the stakeholders described). In other words, business capabilities provide the abilities required to execute the processes.

6 Using Business Capability Maps with the TOGAF Standard

Business capabilities and business capability mapping are both core features of the TOGAF Standard, 10 th Edition (see Referenced Documents ). We see them introduced early in the Preliminary Phase as part of the process to Define and Establish Enterprise Architecture Team and Organization (see the TOGAF Standard – Architecture Development Method) and determine existing enterprise and business capability. Business Capability Management (the process for determining what business capabilities are required to deliver business value) is also identified as a focus area for coordination with the TOGAF Standard.

In Phase A (Architecture Vision), the architect starts to identify the required business capabilities that the enterprise must possess to act on its strategic priorities (see the TOGAF Standard – Architecture Development Method). These business capability requirements, documented using a Business Capability Map, are then used to create a high-level view of the Baseline and Target Architectures.

A detailed assessment of any business capability gaps belongs in the subsequent Phase B (Business Architecture). This is where heat mapping is applied to identify and analyze those gaps. Suggested heat mapping perspectives include maturity, effectiveness, performance, and the value or cost of each capability to the business.

In the TOGAF Standard – Architecture Development Method (Applying Business Capabilities), the business capabilities are mapped back to the organizational units, value streams, information systems, and strategic plans within the scope of the Enterprise Architecture project. This relationship mapping provides greater insight into the alignment and optimizations of each of these domains.

7 Conclusion

Business capabilities are a key building block for developing and optimizing a Business or Enterprise Architecture. Linking business capabilities to their underlying components provides a business context for the underlying people, processes, information, and resources that combine to deliver value in the form of products and services to the stakeholders of a business.

Organizing the business capabilities into a business capability map provides architects and stakeholders with a stable view of the business that is agnostic of the organization’s structure. The model describes what the business does, or expects to do, at some point in the future. This abstraction also helps business leaders to manage the overall complexity inherent in their business.

Finally, mapping business capabilities to different business perspectives helps business leaders make better decisions.

[1] A Guide to the Business Architecture Body of Knowledge ® (BIZBOK ® Guide); see Referenced Documents .

[2] This chart is not a complete list of possible business capabilities, much like any first pass where there is not enough time to meet with all stakeholder groups or there is not enough information to define a particular capability.

[3] See https://www.businessarchitectureguild.org .

Related Expertise: Procurement , Automotive Industry , Biopharma

Building Advanced Capabilities in Procurement: Moving Beyond Table Stakes

May 22, 2013  By  Robert Tevelson ,  Amit Ganeriwalla , and  Stefan Benett

Trends reshaping the business environment during the past decade have created new opportunities for procurement to enhance a company’s overall performance. Supply markets and management have become more dynamic and complex as companies develop global supply chains and pursue growth opportunities in developing markets. What’s more, the risk of supply chain disruptions has increased as commodity prices and foreign exchange have become more volatile.

In this environment, even excellence in traditional core activities is no longer enough. Now procurement must be able to anticipate and address challenges in dynamic supply markets as well. To succeed, procurement executives will need to work closely with business partners to make decisions with a cross-functional, end-to-end perspective along the supply chain. To this end, many procurement functions now report directly to the CEO or CFO—a clear indication of their elevated strategic importance across the organization.

To fulfill their new mandate, procurement functions must develop and broadly apply a range of specialized skills that go beyond traditional cost management to materially improve the bottom line. Typically, the challenges they face include determining which capabilities to prioritize, as well as facilitating and managing cross-functional collaboration.

As leading procurement organizations have demonstrated, a structured approach to building capabilities is critical for success. Some companies that have established leading-edge procurement capabilities and addressed volatility and supply risks have improved their margins by more than five percentage points—a significant return on investment. Other benefits can accrue as well, such as developing more innovative supplier relationships, boosting growth rates in rapidly developing economies, and improving service capabilities.

For example, a major alloy producer interested in learning more about its products’ value in use involved the procurement team in discussions with customers. The team worked with the sales division and production managers to figure out how raw-material characteristics affect the production process downstream. Team members also developed and conveyed their insights on key supply markets and shared their knowledge of supply market innovations concerning the characteristics with the other parties in the discussion. As a result of this collaboration with customers, which took an end-to-end perspective on the business impact, the team was able to optimize the mix of input materials. This allowed for better material characteristics and a higher price in the end market. Procurement’s contribution played a significant role in increasing the value in use for customers while improving the alloy producer’s operating margins by up to 8 percent. (See “The Benefits of Developing Advanced Capabilities,” below.)

The Benefits of Developing Advanced Capabilities

The benefits of developing advanced procurement capabilities can take many forms and may be achieved across industries.

• Global Supply: Managing Risks. The procurement department of a major Asian automotive company played a vital role in ensuring business continuity following a major natural disaster. Procurement quickly assessed the industry’s supply chain, evaluated the status of global suppliers, and identified alternative supply sources. This helped the company to alleviate a critical supply shortage more quickly than expected and to achieve a faster recovery for its overall production process.
• Machinery: Achieving Design-to-Cost and Scale Benefits from Platform Design. A high-tech company whose material costs accounted for 60 percent of its product costs aimed to reach competitor benchmarks for material efficiency and cost levels. The company hoped to improve its cost structure by more than 20 percent through economies of scale and by achieving greater uniformity in its supply chain. An important element of this turnaround agenda was developing a more standardized architecture for the company’s portfolio of diverse products, which were manufactured at global production sites. Procurement’s involvement was essential. It actively contributed to the company’s design-to-cost initiatives and product-architecture-standardization efforts and managed the effort to standardize the supplier portfolio for key commodities at all global production sites.
• Consumer Goods: Applying Advanced Analytics to Surpass Targets for Cost Savings. A consumer products company hoped to cut costs so it could reach profitability targets within a year and free up money to invest in marketing. To help the company meet its goals, procurement introduced advanced analytics and scenarios analyses, as well as detailed cost models. To ensure that all regions and businesses benefited from these new tools, the function developed a global training program that was rolled out to more than 200 employees. Ultimately, the company achieved $200 million in annual run-rate savings above the original target of $50 million. When the head of strategy asked what drove the incremental savings, he was advised that procurement’s introduction of new tools and approaches had played a critical role in both generating new ideas and convincing stakeholders to proceed with the cost-savings initiatives.
• Mineral Resources: Reducing Maintenance Costs by Aligning Contracts with Business Objectives. A major mineral-resources company reduced costs by reviewing targets for equipment availability and maintenance in light of new insights into operating requirements. For example, a cross-functional negotiation team finalizing maintenance contracts with equipment suppliers found that a much lower guaranteed uptime for production equipment would be sufficient for meeting midterm business objectives. By reducing guaranteed uptime by 15 percentage points, the company was able to significantly decrease the annual contract costs for maintenance and express delivery services.

Advanced Capabilities for Capturing Strategic Value

Companies certainly expect procurement to fulfill its traditional role, which includes supplying needed goods and services and managing spending categories and key supplier relationships. However, companies also expect procurement to develop enhanced capabilities and even to seek and maintain a competitive advantage—and that requires a new approach to building and applying skills. Training programs should expand their focus to specifically address advanced capabilities that capture strategic value in critical spending areas. (See Exhibit 1.) Because procurement is a hub for interactions between other functions and external partners, it is equally important to develop team members’ interpersonal skills when building capabilities.

Advanced capabilities typically fall into one of three categories: high-end analytics and modeling, cross-functional integration, and an integrated supply-market perspective. High-end analytics and modeling can enhance decision making by providing, for example, a clearer view of overall life-cycle costs to evaluate the total cost of ownership for complex investments. They may also allow for a more refined market perspective based on market scenario forecasts and demand modeling for specific commodity markets. In addition, developing sophisticated “should cost” models can provide critical information for negotiating with, and managing, suppliers.

Cross-functional integration seeks to improve close collaboration with business partners and even suppliers. For example, cross-functional design-to-cost teams can evaluate and optimize product and service requirements, and cross-functional governance mechanisms can help implement supply strategies across organizational units.

An integrated supply-market perspective provides a broad view of the supply chain, which is useful for developing sourcing strategies. For example, a company can identify opportunities for participating in procurement alliances to reap the benefits of scale. Integrated supply management may also entail a fundamental review of the company’s current positioning along the value chain, such as the level of vertical integration or the scope of activities that are outsourced.

These capabilities are applied in many different ways in practice, and a company’s focus with regard to each type of capability will depend on its critical spending areas. (See Exhibit 2.)

An Integrated Approach to Building Capabilities

We have found that the best way for companies to build capabilities is to apply an integrated approach that addresses four focus areas: agreeing on procurement’s value contribution, defining an action-oriented approach to skill development, applying a robust approach to rolling out capabilities, and implementing enablers of improved performance. (See Exhibit 3.)

Agree on Procurement’s Value Contribution

Before an organization designs a capability-building program, procurement leaders and top management should agree on which skills the program will seek to build. In a well-designed program, the stakeholders choose capabilities that are likely to produce tangible benefits, such as reducing costs. They also figure out the potential benefits of applying enhanced capabilities to overcome supply-related challenges.

Leading companies have created decision boards with representatives from procurement and other functions. The boards identify which advanced capabilities will be required and which functions should participate in the capability-building program. They also review plans using a business case framework that helps procurement to prioritize its capability building according to the pros and cons of each approach.

A company’s strategic priorities for procurement—and the skills it must build to pursue them—will, of course, depend on the company’s industry and specific objectives. Several examples illustrate the range of possibilities:

• In process industries, such as chemicals, procurement must have a deep understanding of chemistry and the dynamics of the supply chain through several levels. For example, one major producer of specialty chemicals needed to secure key sources of supply. The procurement team initiated a program in collaboration with the strategic-planning function to identify new sources of supply and to manage critical supply relationships. The team also developed an improved forecasting model that enhanced the company’s ability to anticipate price changes and proactively adjust prices.
• A technology conglomerate with production facilities all over the world aimed to establish global standards for managing its supply base. The company initiated a program that sought to reduce the number of supplier relationships while improving integration with partners in areas such as quality control and joint supply-chain planning. It also implemented new processes for making decisions about existing suppliers and contracting with new suppliers.
• Through increased cross-functional collaboration, a global metals producer developed a comprehensive business perspective on the company’s procurement of raw materials and thereby was able to significantly increase its margins. The company’s procurement and sales departments had been meeting their respective cost and revenue objectives. But profitability was under pressure, and raising margins by changing product specifications would have meant buying more expensive, higher-grade raw material. To adapt procurement practices, top management adjusted performance targets to reflect the new focus on margin improvement. Management also established cross-functional teams charged with resolving conflicting requirements concerning cost and revenue management and identifying the impact of decisions on product margins.

In addition to periodically reaffirming priorities, procurement must communicate regularly with line management and key stakeholders on supply-related issues. The procurement function of a large steel manufacturer, for example, had successfully managed supplier risks at existing production sites and maintained a joint demand forecast with production managers. During a major expansion project, however, the departments responsible for managing a new plant did not involve the procurement team in the early stages of critical planning efforts, such as forecasting demand and qualifying the supplier base. As a result, the supplier base was not ready to serve the new plant early enough, and the plant’s production ramp-up was delayed by several months. To prevent this from happening again, the company initiated a training program and established a standardized operating model that ensures continuous collaboration among all the functions involved in core procurement processes.

Define an Action-Oriented Approach to Skill Development

To translate their strategic objectives for capability building into bottom-line impact, leading companies ensure that their investments in training are tightly linked to procurement’s day-to-day operations. They accomplish this by designing capability-building programs that combine classroom instruction with on-the-job deployment of new skills.

When designing a training program, organizations should consider how participants will apply the lessons they have learned to their daily work. To ensure that those lessons become part of the normal course of business, the training curriculum should align with the company’s core procurement processes, such as category strategy definition, the source-to-contract process, and supplier development.

A roadmap for capability building should identify up front the opportunities for directly applying elements of the training agenda in pilot initiatives.

The company should ask cross-functional teams to identify the scope of the pilots to ensure that the advanced approaches are tested in appropriate settings. Team members from other functions—such as engineering, quality management, and logistics—should also participate in the program, so that cross-functional collaboration is developed throughout the organization.

Apply a Robust Approach to Rolling Out Capabilities

Following a successful pilot, leading organizations facilitate the rollout of the training program by asking members of the initial team to share best practices with new participants. They also develop approaches to ensure that best practices are applied in daily operations. These approaches often include introducing qualification standards for successfully completing the training program and designating someone to be accountable for its results.

When rolling out a capability-building program to the full team of procurement professionals, some companies have achieved success by establishing a new organizational entity to lead the effort. (See “Building Capabilities with a Procurement Academy,” below.)

Building Capabilities with a Procurement Academy

A mining company based in an emerging market established a “procurement academy” as a key element of its ongoing training program. The company had operations in multiple locations and was transitioning to a centralized procurement model to enhance scale benefits and to better define the scope of procurement activities. A successful transition required addressing several change-management challenges.

Because the procurement division had been following a decentralized model, transactions had been managed at only the local level. Since local management teams had limited exposure to other functional areas, moving to a centralized structure offered significant opportunities. To enhance value from procurement, the company sought to develop standards for effective category management, with an emphasis on employing concepts and approaches such as total cost of ownership, the use of frame contracts, and proactive supplier management.

Given its starting position, the organization had to implement change management simultaneously across different businesses and in diverse locations in addition to building capability on functional procurement topics. The company established its procurement academy to ensure an integrated approach and action-oriented framework for this capability-building program. To bring together a cross-functional set of participants, the academy combined classroom-based instruction on technical expertise with on-the-job coaching on applying the new routines and approaches. (See the exhibit.)

The classroom instruction introduced participants to concepts such as category management and supplier risk management, which were deployed in the organization shortly thereafter. The on-the-job projects revealed the benefits of cross-functional collaboration and exposed participants to the needs and challenges of different functions. The first wave of participants in the academy also produced a talented set of employees who went on to form the core of the procurement function and to lead future steps of the capability-development process.

In addition, the procurement academy helped the organization gain a more highly skilled workforce by teaching the participants functional capabilities and showing them how to use those capabilities on the job. The action-oriented learning approach helped to set new standards for cross-functional collaboration by identifying best practices and establishing joint organizational routines and approaches.

The academy engendered broader and deeper stakeholder engagement in the procurement function and helped the company boost the gains from its cost-reduction program by 10 percent.

Companies should make sure not to overlook the importance of improving overall compliance with best practices related to core capabilities. For spending areas in which common best practices in supply management have emerged (such as many indirect expenditure categories), making sure to establish a solid foundation of core capabilities can have a stronger impact on the bottom line than establishing complex cross-functional approaches.

Implement Enablers of Improved Performance

To ensure that advanced capabilities are deployed effectively, leading companies implement critical enablers of improved performance, such as making adjustments to the operating model or elevating the level of talent in the organization.

Making adjustments to the operating model, such as establishing cross-functional category boards to monitor decisions and review progress throughout the sourcing process, can improve cross-functional collaboration and decision making. During pilots, companies can evaluate potential adjustments to the operating model for specific spending areas by considering the following:

• Does the organization’s current operating model strike the right balance between local execution and the centralized or coordinated definition of category strategies?
• Are decision-making processes and decision rights consistent and clearly understood throughout the organization?
• Are effective platforms, such as cross-functional design-to-cost teams and decision boards, in place to promote collaboration across functions and among global teams?
• Do the existing tools and methods support effective management of spending and strategic sources?
• Are performance metrics aligned with strategic objectives to promote compliance with identified standards?
• Is a robust IT infrastructure in place to support advanced capabilities and cross-functional collaboration?

Elevating the level of talent in an organization also helps to achieve procurement’s strategic ambitions. Leading companies develop attractive career paths and offer incentives when hiring, developing, and retaining top talent.

For example, a large national oil company sought to enhance its procurement capabilities to better manage volatility in the commodity and supplier markets so that it could maintain profitable growth. The organization also hoped to reduce costs and improve its management of an increasingly complex supply chain, from crude-oil sourcing to supplying fuel at filling stations. The company determined that its current model of allowing business units to conduct all transactional purchasing would impede these goals. So it opted to transition to a central procurement function reporting directly to the CEO and applied a talent management strategy to enhance the attractiveness of a career in procurement.

To emphasize the importance of procurement, the company staffed the department with some of the organization’s best performers, a number of whom had only limited procurement experience. The new team formed a nucleus that attracted further talent and made working in procurement a desirable step in the career path for top performers.

Leading companies also seamlessly integrate capability building and performance management. For example, they use a stage gate process to track and validate the category teams’ intermediate results, thereby ensuring compliance with the company’s category strategy process. At predetermined points, key members of the leadership team coach the category teams responsible for developing the supply strategy and review their progress. The review assesses each category team’s ambition and strategic focus, and determines how well it is developing and executing the category strategy.

How to Make It Happen: Capability Building in Practice

Companies can apply a set of ten practices throughout their capability-building programs to promote success. Those practices are critical across the three phases of a capability-building program—assessment, the customization and piloting of initiatives and tools, and rollout. (See Exhibit 4.)

Assess Current Capabilities

An organization should design its capability-building program after evaluating its procurement function’s performance and skills and identifying the expected benefits of deploying advanced capabilities.

Assess the function’s performance. A company should start by establishing a baseline for procurement’s current performance. To compare the function’s skills with best practices, the organization should gather feedback from the procurement staff (including a self-assessment and a prioritization of potential training modules) and from internal customers. The results can help define the capability-building program’s focus and reveal the potential value of enhanced procurement capabilities.

Review the current approach to capability building. The organization should review its current approach to capability building and deployment. This includes analyzing the roadblocks to applying best practices—such as a lack of effective cross-functional forums to drive the alignment of category strategies and inadequate performance management.

Establish a case for change. To justify an investment in strategic procurement capabilities, the company can use the assessment’s findings to demonstrate the need for change and show how specific capabilities will add value within a spending area. Leading companies establish baselines for spending and performance using three-year targets for procurement savings and then estimate the resource costs of the capability-building program. Individual business cases for particular spending areas can help to establish the near-term benefits of investments in specific skills and resources and to track the program’s performance as it is rolled out.

Customize and Pilot the Approach

In a second phase, the company customizes the elements of the capability-building program and pilots it.

Prepare a detailed roadmap for program delivery. To guide the multiyear program and transformation, companies need to implement an enabling roadmap that capability-building activities should follow. This is particularly critical when organizations, such as successful players from emerging markets, set ambitious targets to achieve their aspirations for best-in-class procurement capabilities. The roadmap identifies important intermediate steps and milestones along the journey, as well as the benefits that are expected to accrue from the effort. It also defines the program’s focus and highlights the interdependencies in multiple work streams and spending areas. The following are common elements of such a roadmap:

• A curriculum and specific modules for classroom training and coaching
• A detailed plan for training teams during the pilot and in subsequent waves
• Adjustments to the operating model, if required

A detailed plan for building and implementing advanced capabilities, such as the preparation of cross-functional strategies

Customize content and enrich the training program. Demonstrating a training program’s success in customizing best practices to a company’s specific situation helps gain acceptance for the program. Leading companies emphasize the development of successful initiatives in the pilot phase of the program to gain support for the implementation. The training program should also try to use a variety of instructional formats, including e-learning, and invite internal or external experts from other functions to lead some of the sessions.

Establish cross-functional teams. The procurement team should meet with teams from other functions and business units—ideally for the duration of the program—to foster an increased understanding of roles, to share ideas and challenges, and to improve teamwork. These teams should pilot performance measures, changes to the governance model, and the deployment of new collaboration approaches. For example, members of a cross-functional team could collaborate on reengineering a component or designing a product. The pilot teams provide valuable feedback that the organization can use to more effectively make the proposed changes. This gives the participants an opportunity to immerse themselves in the new way of working and to understand the benefits of doing so.

Emphasize the application of new skills in pilots and track results. During the program, coaches should support cross-functional teams in implementing major procurement projects that require applying the acquired skills. The coaches should meet with teams regularly to review results and facilitate the practical application of lessons in the pilot projects. Participants should then identify areas in their day-to-day work where they can use the lessons they learned during the pilots.

Roll Out the Program and Monitor Results

When the pilot phase is complete, the company can roll out the program to the entire organization, monitoring progress and assessing the results.

Develop trainers to lead subsequent waves. Larger organizations should roll out their training programs in several waves and apply capability levels and standards, similar to those in Six Sigma programs, to qualify a larger group of trainers. Typically, employees who have successfully completed the initial waves become trainers for subsequent waves.

Sustain momentum and reward performance. Top management can help highlight a training program’s importance by rewarding extraordinary performance and touting successful participants.

Systematically track results using a standard process. Stage gate reviews should be an integral part of the rollout phase. In addition to ensuring that ideas from outside the core team are applied in developing the category strategy, the review process can be used to support on-the-job training and assure that the new procurement capabilities are being applied.

Getting Started

As companies chart a new path for procurement and face revised expectations in today’s volatile economic environment, assessing ongoing capability-building activities is critical. To evaluate the effectiveness of their current approach to capability building and identify the roadblocks to broader application, executives can consider their responses to a series of pointed questions. (See “Is Procurement Applying Best Practices in Capability Building?,” below.)

Is Procurement Applying Best Practices in Capability Building?

Procurement executives can use the following questions to evaluate the current status of their capability-building activities. The answers may reveal opportunities for significant improvement in their approach.

Setting Expectations for Procurement

• Do you have regular interactions with business functions regarding procurement’s strategic role?
• Are the expectations for procurement’s contributions to the company’s agenda and bottom line well defined?

Establishing a Case for Change

• Have you prioritized the benefits of improved performance by procurement?
• Have you identified the essential skills to be developed and assessed the effort required to build them?

Prioritizing Category Groups

• Have you prioritized spending categories based on their strategic importance?
• Have you identified which procurement activities, in which major categories, your capability-building program should address?

Creating a Company-Specific Knowledge Base

• Do you have a customized strategic-procurement manual to support training new members of the procurement team?
• Have you established a common approach for core procurement processes?

Defining the Curriculum and New Skills

• Have you established a dedicated training curriculum for enhancing procurement capabilities?
• Have you identified critical capabilities for selected spending areas—for example, evaluating the total cost of ownership?

Promoting Robust Deployment and Compliance

• Do you support the practical application of new capabilities in pilot projects?
• Do you have a clear process for tracking the rollout of capabilities? Do you use stage gates with real-time feedback?

Defining Individual Roles and Expectations

• Are roles, competencies, and expected capabilities defined for individual buyers?
• Do you maintain an up-to-date understanding of procurement teams’ capabilities and training needs?

Managing Performance

• Do you manage performance effectively and recognize successful qualification?
• Do you follow up on the practical application of skills learned through the training programs and the impact they have had on the organization?

Companies that want to improve their procurement function should create more effective cross-functional linkages and establish a program that builds advanced capabilities and extends across the organization. They should also develop the ability to deploy these capabilities broadly in the company’s context and make procurement roles attractive, important steps in a career path. Organizations that do so successfully will ensure that their procurement functions are well prepared to apply the new skills that enable superior cost performance and build competitive advantage.

Senior Advisor, Sr. Partner Emeritus

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• Skills Management
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• Procurement Excellence Program
• Category Management
• Cost Reduction

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Procurement capability and operating model

Dave Henshall Capability Model , Procurement Excellence

Is your procurement function set up for success?

Procurement capability and operating model: Many procurement teams operate under an informal mandate that does not clearly articulate their accountability. In the absence of a capability model, the procurement function is fundamentally limited in its effectiveness. This is why we developed the CPP Procurement Capability Model:

1. Procurement capability and operating model

CPP Procurement Excellence House

The key to defining a procurement capability model is to consider the following:

1.1 Strategy:

Establishing the vision, objectives, strategies and performance measures for the team.

1.2 Governance and Alignment:

Defining executive oversight and how procurement interacts with the wider business:

• Defining the appropriate organization design, reporting relationships,  and determining appropriate role and responsibilities.
• Defining appropriate procurement delegations that reflect value, risk and capability.
• Defining how risk and compliance are going to be measured and monitored.

1.3 People Capability:

Determining the right competency framework, identifying the key skills gaps and filling them. Our point of view is that high calibre procurement professionals need to be grown rather than sourced. We believe this is best done through coaching, experiential learning and clarity of roles and responsibilities with a clear career path.

1.4 Processes:

Procurement processes affect both the efficiency and effectiveness of the overall organization and are therefore a key enabler of operational excellence. Key processes include; category management, strategic sourcing, supplier management, and procure to pay.  Procurement processes are ‘engines’ for delivery of policy and program initiatives.  As such they need effective controls, performance checks against expectations and appropriate adjustments to drive world class performance.

1.5 Performance Management:

What are the KPI’s for procurement performance and what reporting is required to ensure procurement benefits are captured, measured and reported so that its contribution to the business is recognized?

1.6 Operating standards and systems:

What operating protocols and standards for systems, tools and templates that support and enable the procurement function?

2. Procurement’s challenge

We often see organizations attempting to improve one aspect of Procurement and being frustrated by poor results because the other elements necessary to sustain them are not addressed or only superficially dealt with.

Our observation is that many organizations do not recognize the importance of defining a procurement strategy or implementing effective governance and control. Without these key enablers procurement leaders and staff are cast as observers, unable to influence or drive sustainable performance improvement.

Consider the application of our model in terms of its support for what your business is really trying to achieve. If you do this in a manner that effectively relates the model to the complexity and uniqueness of the various supply chains that deliver value to your customers, and you will quickly appear on the CEO’s Agenda.

Nuff said …

If you would like to discuss how we can help you redefine your procurement, then contact us . We would love to here from you.

Learn more about gaining Procurement Excellence

Learn more about Competency Frameworks for Procurement

Learn more about the Twin Arenas of Procurement Excellence

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M&A Integrations: Untangling the Notoriously Messy and Complex

Business Capabilities: How to Identify, Define and Leverage Them

Business capability model: a definitive guide to what it is, benefits and best practices.

by Ian Stendera

Every business has a strategic set of goals to achieve success. To meet these objectives, every part of an organization must be aligned and work collaboratively. Unfortunately, though, this is where issues often arise. By not understanding their limitations and interdependencies, businesses run into roadblocks. This is where a business capability model is essential.

The better an organization understands its capabilities, the better it can work to maximize them and proactively address the ones that are most critical to its success.

But what exactly is a business capability model? More importantly, how can it help organizations be more successful and effective? This article will address each of these areas and more. 

What Is a Business Capability Model? 

Business capability modeling (BCM) is a method for illustrating an organization's core business framework regardless of its structure, processes, personnel, or technology. As a platform for Enterprise Architects, business capability models can facilitate strategic discussions on investment or divestment opportunities. These capability models help companies understand and evaluate themselves. 

Linking this information to strategic goals allows organizations to identify what kind of groundwork needs to be done to ensure a successful outcome in various organizational change projects. This ranges from procurement of a new system to department restructuring after acquiring or merging with another company.

4 Benefits of a Business Capability Model

Defining a business capability model can be a great starting point for businesses to get a common framework for analyzing performance across the business and IT. 

Business capability modeling can quickly bring the following benefits: 

An achievable, understandable asset that can be utilized across the entire business. 

A bridge that connects strategy and IT architecture, becoming an intuitive common language for both.

Data-driven insights into many different areas across the organization.

A means of evaluating the business, such as measuring the success of change projects or analyzing performance.

Business Capability Modeling Is an On-Going Process

A common pitfall with business capability modeling is teams getting stuck arguing over the nuance of  capability. Another pitfall is getting too involved in developing a complete model. The beauty of a business capability model is that it does not need to be fully defined or complete to start adding value. A good reference model and the motivation for progress mean that capabilities can provide a quick win from the get-go for building an understandable vocabulary of what an organization does. It is still important for architecture or digital change project teams to begin the process with some foundational discussions over what is valued as core to the business and how the business differentiates itself from competitors. Putting these things “down on paper” helps make the unspoken parts of the process clearer and more actionable, improving alignment across the enterprise.

A Business Capability Model Bridges Strategy With IT

Bringing the strategy out of the boardroom and connecting it to the business’ architecture is no easy feat. Too often, this is left to the Enterprise Architects or change-makers mediating between the business and IT, leading to solutions sometimes being lost in translation. Business capability models address this communication issue by becoming the common language between business and IT, building alignment across the organization. This improves the translation and operationalization of strategy, a critical factor in successfully achieving enterprise-wide goals.

By drilling up to the capabilities different domain experts support, models help the team see how they are or should be positioned to deliver on a given strategy.

Below is an example of a business capability model in the Ardoq platform, illustrating how the overarching Finance capability can be broken down into sub-capabilities. 

How to Create a Business Capability Model In 4 Key Steps

We’ve explored the many benefits of the business capability model. Now, let’s look at how to create one. We’ve broken the process down into four vital steps. 

Step 1 - Assess Your Business Needs 

The purpose of the business capability model is to help organizations align their operational functions with strategic objectives effectively. The first step, therefore, should be to carry out a thorough assessment of the needs of the business

Activities involved with this stage might include:

Collaborating with stakeholders across various organizational levels and departments to capture diverse perspectives. This holistic approach guarantees that the model mirrors the needs and visions of the entire organization rather than just a portion.

Analyzing external market trends, competitor actions, and industry benchmarks comprehensively. This external examination enables the organization to spot opportunities for differentiation and areas of potential risk.

Assessing current performance metrics and operational data meticulously to gauge the organization's strengths and weaknesses. This internal review helps identify areas where capabilities require development or enhancement.

Integrating Information Technology (IT) strategy from the outset. In today's digital era, IT is pivotal in enabling business capabilities. Early IT involvement ensures alignment of technology strategies with business objectives, facilitating smooth integration and support.

Step 2 - Identify Needed Capabilities 

Once a thorough assessment of the business's strategic requirements is established, the next phase involves pinpointing the capabilities necessary for attaining these goals. This procedure consists of:

Ranking capabilities according to their role in realizing strategic objectives and influencing the organization's competitive edge. This ranking process makes it easier to focus efforts and resources on areas likely to yield the greatest advantage.

Crafting a systematic hierarchy of capabilities, organizing them into different tiers based on their strategic significance and operational reach. This structured framework enhances comprehension of interconnections among capabilities and guarantees a holistic approach to capability enhancement.

Step 3 - Identify Your Current Capabilities

Having gained a comprehensive understanding of the required capabilities, the organization must now evaluate its current capabilities to pinpoint gaps and areas for enhancement:

Undertaking a thorough gap analysis to compare existing capabilities with identified requirements. This analysis illuminates the organization's current deficiencies and highlights where investments in capability development are necessary.

Assessing the maturity levels of current capabilities, considering factors like effectiveness, efficiency, and integration with other capabilities, aids in identifying areas where existing capabilities can be refined or require substantial transformation.

Step 4 - Link Capabilities With Applications 

The last stage involves establishing explicit connections between the identified capabilities and the applications, processes, and technologies that underpin them:

Connecting each capability with precise supporting technologies and applications, along with the processes that facilitate them. This provides insight into what those capabilities rely on to be fulfilled and operationalized.

Recognizing opportunities for optimization and integration across processes and technologies. By seeking methods to streamline and augment support for essential capabilities, the organization can enhance efficiency and effectiveness.

Business Capability Modeling Best Practices: Do’s and Dont’s

There are plenty of pitfalls that can trip up even the most knowledgeable EA teams when building a business capability model. With that in mind, here are some things to remember for successful and effective business capability modeling.

Think about the present and the future: Capabilities should encompass not only what the business is doing now but also what it will do in the future. 

Involve teams in capability modeling: If teams are properly engaged, the model is more likely to resonate with them. Tapping cross-functional expertise and insight is important in having a capability model that accurately reflects the reality of the enterprise.

Be as granular as possible in descriptions to ensure clarity : Listing general capabilities isn’t enough, they must be accompanied by explanations of what each capability is for context.

When beginning with an Enterprise Architecture framework , remember to focus on modeling what is most important and relevant to the enterprise’s key challenges or objectives rather than adhering strictly to the framework.

Don’ts 

Go too deep: Don’t overcomplicate the hierarchy of the capabilities and sub-capabilities. Model as much as is necessary for useful insight into the business.

Let capabilities overlap: Different capabilities may handle overlapping information or data, but the core functionality should be distinct.

Think of your model as a static deliverable: Businesses change and evolve continuously, so the business capability model should be a living artifact that evolves with it as needed.

These guiding principles will help, but if you want to get a head start on the modeling process, Ardoq also comes with out-of-the-box industry-specific reference models. These models are great accelerators for a BCM initiative and can be readily adapted to the nuances of any organization. Data can be easily imported via Ardoq’s wide selection of APIs and integrations .

What’s Next After Creating a Business Capability Model?

After following our business capability modeling best practices, look back to key business drivers and assess where the model would be best expanded. If managing IT spending is a critical priority, Application Portfolio Management and Application Rationalization are logical next steps. If an organization has just undergone a merger and acquisition and needs an improved structure, adding people, departments, or business units to the model will aid this process.

Organizations can align strategy with the project portfolio using our approach to Strategic Planning and Execution , connecting the business strategy to how it impacts the architecture.

Building on a Business Capability Model

Business capability management can be the evaluation point of how well the business is currently doing in a given area. By connecting the capability model to other parts of the technological infrastructure, more insight can be unlocked for the organization.

By adding the technology or applications that realize capabilities, a business can identify:

• Cost savings through redundant or duplicate systems
• Risks where it is dependent on underperforming tech
• Opportunities where the right investment can increase the enterprise’s ability to differentiate in the market

An organization’s people can be an interesting way to evaluate a business when connecting them to capabilities. People can provide insights into expert networks, bottlenecks, or single points of failure. Including them in the architecture can also be useful in many other ways. Including people in an application portfolio management initiative, for example, can provide insights into responsibility and expert networks. It can also set the foundation for a far more data-driven approach to collaboration. By connecting capabilities to people, a business can identify:

Domain expert networks critical to business

Insights into responsibility

Areas of risk and opportunity (e.g., if some core differentiating capabilities are dependent on contractors or consultants)

Building out your business capability model in nearly any direction will provide additional value and actionable insights into how a business model is being implemented.

Business Capability Modeling Tools: Leverage the Power of People

It’s valuable and important for people to be included in an Enterprise Architecture effort, yet many business capability modeling tools are not equipped to include them. Ardoq places specific importance on ensuring that the tooling is people-focused by: 

Including People-in-the-Graph

Having people in a graph-based, data-driven tool like Ardoq provides additional value to EA models. Ardoq is more than just an EA tool as it lends additional insight, such as who the domain experts are in an organization , who is responsible for a given application or system, and identifying areas of potential risk or opportunity.

Engaging People With Relevant Information at the Right Time

Mapping people into the graph means that Ardoq can identify the right people to notify for a given issue. This could be a crisis like a server outage or a technical error stopping a critical service. Having people included in the model means that it’s quick and easy to notify the correct individuals to mitigate and resolve issues. It is also possible to integrate this functionality with Slack or Gmail so that individuals can receive notifications on a platform they prefer. One customer used Ardoq to inform external hosting providers of exactly what their servers and applications were supporting, giving them better insight into the business impact of what they were responsible for. This improved their vendor relationship and reduced the number of avoidable outages like scheduled maintenance unintentionally impacting key banking services.

Keeping People Accountable To Drive Quality

It has long been a challenge to keep people engaged to ensure the documentation is kept updated. While integrations help reduce this workload, it has also been found that including ownership and visibility across domains motivates people to maintain their information. These factors help to create a new level of awareness of how people depend on each other. Understanding that others depend on you to maintain documentation encourages a culture of ownership and quality in documentation.

Share Business Capability Models, Early and Often

Remember that building the business capability model is just the beginning. To uncover real value from it, it should be shared with peers, stakeholders, and managers. Only then does this visualization of the business and what it can do enable more meaningful discussions that drive better decisions. Ardoq’s Presentations and Surveys allow organizations to begin sharing capability models, even as they are being developed, in a context that suits the recipient best. It is highly recommended to embed this model in the organizational intranet, Sharepoint, or Confluence pages, to bring awareness and transparency to the work being done. Exposing the model to more people in the company also means more opportunities for data collection or correction. Surveys are an effective way to encourage users to contribute data without needing to understanding the core Ardoq platform. They are quick and easy to use, ideal for gathering data from teams outside the architecture or IT function.

Broadcasts are another function that aids engagement and improves communication. They allow Ardoq administrators to send the right messages to the right people at the right time. Using Broadcasts to send out surveys is a fast and efficient way to collect and validate data and keep it up to date. 

Ardoq Helps You Make the Most of Your Business Capability Model

• Blog Posts Business Capabilities Examples Business Capabilities vs. Technical Capabilities
• PDF Guides 6 Best Practices for Defining Your Business Capabilities Navigating Turbulent Times With Digital Business Optimization
• Best Practice Guides Business Capability Modeling Business Capability Realization

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Business Capabilities

Business Capability is the expression or the articulation of the capacity, materials, and expertise an organization needs in order to perform core functions. Enterprise Architects use Business Capabilities to illustrate the over-arching needs of the business in order to better strategize IT solutions that meet those business needs.

Introduction

Business Capability Modeling

Merger Management

It risk management, innovation management, business capability benefits.

• Create your own Business Capability Model in 4 steps

In the digital age the role of technology shifts from supporting processes of the business strategy to the key factory of strategy execution itself. Information Technology helps that customers receive their shirt ordered online the next day, it helps that they can read their newspaper during their commute on an iPad and that the invoices for these services are processed without friction. As a result, the challenge of how to bridge the gap between strategy and execution in IT becomes much more pressing.

This gap is often caused by organizations speaking many languages. They speak of missions, strategies, goals, processes, and projects. The CEO speaks of “making mobile-first a priority”, Marketing of “increasing the share of wallet with millennials” and IT of “load balancing the Linux server cluster”. Which one is the right language? Business Capability maps have the potential to serve as this common language.

📚 Related: 2023 Gartner® Magic Quadrant™ for Enterprise Architecture Tools

What you need to know

Business Capability modeling is a technique for the representation of an organization’s business anchor model independent of the organization’s structure, processes, people, or domains.

As a tool for Enterprise Architects, Business Capability models enables the discussion of strategic invest or divest. Business Capabilities can serve as the structuring element to uncover redundancies in IT.

McKinsey estimates the saving potential from uncovering IT redundancies to be 15 - 20%.  

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The Definitive Guide to Business Capabilities

Learn how business capability modeling influences enterprise architecture's role in post-merger harmonization, technology risk management, and application rationalization.

Plus, four easy steps to get started on your capabilities map.

Business Capability mapping allows companies to clearly see what a business does to reach its objectives. Business Capability modeling is an essential view for IT leaders. Business needs should shape your IT architecture . As companies change, innovate, and prepare for digital transformation , processes, needs, and goals change. After complex and numerous changes, the supporting technology should also be revisited.

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What can you achieve with Business Capability Mapping?

• Encapsulate what a business is doing right now and what needs to be done to meet current and future challenges.
• Define “what” a business does, rather than “how” it does it
• Provide a common basis for discussion and planning
• A clear link from strategy to execution
• Involve the appropriate stakeholders that define the strategy
• Carry out highly organized mergers & acquisitions
• Accurately define roles within the business
• Manage mergers, assess risk, and prepare for innovative endeavors.

Since Business Capabilities structure a company according to its activities, Capability maps are a crucial tool in setting up highly strategic M&As . Capability maps provide both groups with the basis to structure a merger in a beneficial way, even if the organizational structures and processes of the two companies are very different from each other.

Capability maps assign applications to user groups and Business Capabilities. This overarching view of applications together with SaaS discovery and their business value makes it possible to assess redundancies and gaps in IT support in both dimensions - functional and usable.

Imagine a multinational insurance company that has recently acquired a local insurance player. During the M&A process , both teams sit down and take an assessment of their supporting applications. The teams have to decide which applications can be used in the future, and which should be phased out. Being familiar with their prospective applications, and affected by their previous organizational structures, how can teams objectively choose the best fit application for the new company going forward?

Instead of getting lost in uncertainties, “this application worked for us previously, so it should work going forward,” the teams can sit down with a Business Capability map to structure the entire post-merger integration .

A Business Capability model helps to discuss the areas of strategic invest or divest. Business Capabilities can serve as the structuring element to uncover redundancies in IT. McKinsey estimates the saving potential from uncovering IT redundancies to be 15 - 20%.

LeanIX Customer Helvetia was able to reduce redundancies and realize substantial savings in the merger with Swiss Re. In their half-year report, Helvetia reported IT as a significant contributor to these savings. The establishment of transparency was a crucial first step towards doing so. Today, the established LeanIX inventory serves as the single source of truth that strategic IT management decisions are based on.

By linking Business Capabilities to applications, and linking those applications to technology components, CIOs can take a glance at a Business Capability map and perform a quick strategic risk assessment . With the right information in place, CIOs can deliver a statement such as: “We cannot accept the risk of an end-of-life server cluster because it provides the infrastructure for our online booking system that is crucial to our Capability to sell directly to customers.

Selling directly to customers has highest strategic priority due to its financial impact.” Having a clear view of which technology components are dependent upon other technology components is a strong view, especially during times of high-security vulnerability. 

Business Capabilities are also a great help in structuring thoughts on how to transform business and IT . In this digital age, companies need to investigate and ponder new ways to innovate, Capability by Capability. A SaaS provider could go down the list, thinking of ways to transform and update their Capabilities.

Take a second glance at the “Manage Pricing” Capability, and ascertain ways to update it. In the past, the company may have followed a simple standard pricing model sheet. Now, the SaaS company could enable pricing based on updated data.

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The Business Capability view brings many benefits.

• Link execution to strategy, by associating which Capabilities support the strategy pillars, aligning funding to core Capabilities, and assigning, measuring, and monitoring key performance indicators.
• Focusing on core Capabilities gives your company a competitive advantage, allowing you to standardize the context Capabilities and outsource the commodity Capabilities.
• Having a 360-degree view of the enterprise gives you a coherent and comprehensive view of business motivation, Capabilities, processes, data , and resources, and gives you the ability to understand interconnectedness, overlaps, and synergies.
• Business Capabilities establish a common language, providing an actionable framework for business and IT.
• From the overview of the Business Capabilities, IT and business leaders are able to communicate across the organization tasks that should be fulfilled, devoid of business and technical lingo.
• Business Capabilities allow for more pointed architecture definitions, as Capabilities help to provide a better business definition which leads to effective and efficient technology solutions. Once organized, IT assets may be leveraged and reused many times, which saves costs, and reduces unnecessary soft and hardware purchases.
• Business Capabilities help to break down silos, both in IT and business. Operating from a Capability-centric organization design speeds time to market.

McKinsey reports   that Business Capabilities can help to uncover redundancies - saving potentials often range from 15 to 20%.  Capability-driven thinking helps organizations to understand and  mitigate technology risks better, saving upwards of $590K – which is the cost of a single IT incident .

At its essence, Business Capabilities should lie at the top layer of the business architecture . Business Capabilities carry three main characteristics.

• They are the most stable reference for planning organizations,
• they make strategy much more tangible,
• and if properly defined, they can help overcome organizational silos

Business capabilities describe what a business does and needs to do in response to the defined strategy. They help to close the gap between strategy and execution.

If one Business Capability says “recruit great employees," it involves various people – HR team, the process – attract, screen, interview, hire, and the technology needed – online assessment center, digital personnel file, etc., into one Capability of the organization. 

Business Capabilities form a crucial part of great IT strategies, as they specify the path to winning, and point out the necessary steps of both IT and business along the way.

Create your own Business Capability Model in 4 steps

1 - understand the needs.

“Know where your company is heading and how IT can help.”

If the IT department does not know where the business is heading, it is impossible to make supporting decisions. Therefore, it is a good start to review your company’s strategy and goal documents or even better involve people that define the strategy, like the strategy or corporate development department.

2 – Define your Business Capabilities

“Business Capability syntax: When in doubt, go for breadth rather than depth.”

Think about the major Capabilities that your business needs to operate. On the first level (level 1) there should be only a few critical ones. An analysis of the top 100 LeanIX workspaces shows that companies typically use around 7 - 10 Capabilities on the highest level. You can build them by thinking both from top-down (what does the company want to achieve) and from bottom-up (what organization, processes and people are in place)

📚 Related: Business Capability Examples and Business Capability Maps Library

3 - Assess your Capabilities

“Not all Business Capabilities are equal in terms of value for the customer and financial impact.”

Not all Capabilities are of equal importance. Assess Capabilities according to defined criteria as a basis for later analysis and planning.

4 - Link Capabilities to applications

“The link between Business Capabilities and applications creates a bridge between business and IT.”

In the final, but equally important step, link your Capabilities to your applications . Applications, unlike IT components, are always linkable to a specific business purpose. Business users work with them in order to create value. Therefore, applications are the perfect transit between business architecture and technology architecture.  

A great way to get a complete overview is to depict Business Capabilities as nested boxes that contain the assigned applications.

Figure 2: The 4 steps to creating a Business Capability model

In Conclusion

Business Capabilities have the potential to serve as a common language between business and IT. Properly defined, Business Capabilities can help to save money, decrease risk and enable growth.

Best practices show that Business Capability models of companies with a lean philosophy have around 10 top-level Capabilities and two levels of depth.

The resulting model can be used to support analyses to align IT investments with strategy, draw technology risk maps , and consolidate IT applications . LeanIX supports these analyses with out-of-the-box best practice reports.  

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Best Practices to Define Business Capability Maps

See how IT and business align with a complete overview of your business capability landscape.

• Whether you are from the banking or insurance industry, automotive or logistics industries or others, this generic business capability map is the perfect start point!
• See mapping examples and model your own business capabilities!
• Additionally, we have added tips and best practices on how to get started with business capability maps and to create a complete overview of your business capability landscape.

Answers to frequently asked questions on Business Capabilities

How do you define business capabilities?

Business Capabilities can serve as a structuring element to uncover redundancies in IT.

Business Capabilities provide you with a coherent and comprehensive view of business motivation, skills, processes, data and resources, enabling you to understand relationships, overlaps and synergies.

They are a critical part of great IT strategies, as they set the path to success and show the necessary steps for both IT and the business to take on the way.

What are core business capabilities?

Core capabilities are associated with the existence of the company. This includes the core competence of a company, such as content production, like films and series for Netflix or product management for brands like Coca Cola.

For other companies logistics or manufacturing could be an existential core capability and for others it could be the development of an IT infrastructure. What can be seen is that the core capabilities depend more on IT over time.

What are advantages of business capabilities?

With business capabilities, you can link the execution of your business to the strategy you want to achieve by mapping which capabilities the strategy pillars support.

Based on this, you can align financing with the core capabilities and assign key performance indicators to better measure and monitor performance.

By focusing on the core capabilities, you can give your company a competitive advantage by standardizing the contextual capabilities and outsourcing the product capabilities. Business capabilities provide a common language that offers a framework for business and IT.

Starting with an overview of business capabilities, IT and business managers are able to communicate across the organization's functions without business and technical jargon.

Business capabilities enable more focused architecture definitions, as capabilities help deliver a better business definition that leads to effective and efficient technology solutions.

Once organized, IT assets can be used and reused multiple times, saving costs and reducing the purchase of unnecessary software and hardware. In essence, business capabilities should be at the top level of the business architecture. Business capabilities have three main characteristics.

• they make strategy much more tangible
• and, if properly defined, they can help to overcome organizational silos.

What is business capability modeling?

Business capability models can be considered as a tool of enterprise architecture and allow discussions and insights on strategic investments or divestitures within the business units.

Business capability modeling is considered independent of the structure, process, people or domains of the organization.

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Business Capability Model Explained with Examples

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Businesses may see how they achieve their objectives using business capability modeling. A crucial understanding for IT managers is business capability modeling. Business needs must shape your IT infrastructure. Processes, needs, and goals alter due to organizational change, innovation, and preparation for digital transformation. It is essential to re-evaluate the underlying technology after extensive and complicated changes.

One of the significant issues in planning service operations is connecting the planning to the organization’s strategy and business model and ensuring that it is strategically aligned. Applying the “resource-based perspective of the company (RBV)” and a related strategy termed “business competency modeling” is one attractive way to accomplish this.

The basic premise is that organizations must be able to do specific things to execute their business model and strategy. To do this, they need a set of “business capabilities” created by having access to various tangible and intangible “resources,” including people, places, processes, technologies, and people. Business skills are concerned with “what,” not “how.” They do not focus on how to do things or how to do them but rather on their capacity.

These skills are “conventional competencies” required to manage the business. Others, either separately or together, help an organization achieve organizational performance, which is essential to its success. “Core Competency” (also known as “Core Strengths” or “Strategic Capabilities”) is used.

Business capabilities are used to build the operating model by determining the resources required to accomplish each feature. The strategic architecture uses business capabilities to develop business competencies and core abilities.

Essential Features Of A Business Capability

Business capabilities have certain essential features:

Stability:  The company’s needs for business capabilities are constant and won’t alter unless the business model undergoes a significant change. This is because a business must be capable of doing specific tasks as frequently as they change. For instance, checking in for a flight could only be done in person. You can now register online or at a self-service kiosk in the airport. Although it is still possible to check in for a flight, the process has changed dramatically.

Uniqueness:  Businesses have specific and clearly defined skills. It does not repeat in the model or combine with another feature. One feature in the model might only mention “Case Management” once, but it is probably a property of several other features. But because these features established a dependency relationship on the model, they are only called once and linked to other properties.

Decomposition:  Lower-level capabilities are separated into business capabilities; these detail the more specific characteristics necessary for the higher-level skill. For instance, “ customer management ” is highly abstract, and people will have different interpretations. High-level concepts must break it down into lower-tier characteristics that demonstrate the essential capabilities to eliminate this.

Building Your Business Capability Model:

A business capability model requires both science and art to build. Since it is neither a start-up nor a small company, its development requires a gradual and iterative strategy based on corporate priorities.

Identifying current capabilities is the initial stage in the case of an existing organization. It’s easier to develop a basic structure and develop it from the bottom up by speaking with the organization about the skills they need in a specific area. This is sometimes treated as a top-down activity.

If a new business model is created, business capabilities should be outlined as part of the business model and strategy. If you use business model design, switch the business model view to “Key Functions” and “Key Resources” to emphasize the crucial components of the company on which the business model depends.

A definition and a name are the two components of a business capability. A precise, unambiguous, and thorough definition is necessary. It must always be expressed as “the capacity to do x.” This takes time; for instance, “brand management” may be a well-known concept, but it may be difficult to define it in the context of your organization.

The business capability entry must be related to the definition. A noun, a compound noun, or a noun should be used, such as “creativity,” “strategic planning,” or “customer management.”

Determine each business’ capacity before building a model of that capability. These should then be grouped to form a logical framework. Then, further, dissect each business capability to find specific features that are distinct, clearly defined, and demanding in and of themselves. Noting that understanding lower-level competencies can help you better grasp higher-level competencies frequently aids in ultimately defining a high-level business capability.

“Normalization” comes after the basic model has been created. By doing this, all redundant business pieces are eliminated from the model. Typically, a business capability model’s initial draft contains a few dispersed examples of the business capability (especially if it was developed from the bottom up). The normalization process entails locating them, grouping them under an individual business capability, and establishing connections within the model. Keep in mind that overlap might happen on several levels and at any tier of the model.

They have included a straightforward, functional example below centered on finance, a dull but crucial business component that every company requires.

The following phase is to determine the organization’s core competencies, or those people or groups of business skills that, currently or in the future, will be essential to the company’s success. The title and definition of the core competency are once again present. As part of the process of strategic planning, this must be done.

The last stage of establishing connections with your operating model is determining the resources connected to each business capability. Below, we go into more depth about this phase.

In reality, it is doubtful that you will create a flawless business capability model the first time. An original high-level version or a version that concentrates on particular business sectors are the versions you are most likely to generate. Remember to keep this in mind when developing the model, mainly if you use it to construct relationships with other design aspects — unless you are up for a lot of rework! You will likely need to report on the framework as you expand it further.

Your business capacity model must include your key partners and the extended organization. Once more, procurement is about “how” rather than “what.” Don’t fall into the trap of believing that simply because you’ve outsourced something, your company strategy no longer requires talent. Honestly, you can have a different perspective while creating a model on what to externalize and what to retain inside.

You should consider this when creating a business competency model if your business model depends on teamwork.

Identification of the resources needed for each business capability—or, more precisely, the connections between the capabilities and the operational model, such as processes, people, location, and IT planning areas—represents the last phase in the construction of the business capability model. Business capabilities have a unique and compelling advantage in the IT sphere, which requires special attention.

Business Capabilities Enabled By Technology

From the perspective of IT design, the business capability model has a vital component since it lends itself well to logical IT design, especially in IT Services Oriented Architecture (SOA). For this purpose, the business capability model—which primarily provides a direct link between business planning and IT—is frequently referred to as the “Rosetta Stone” of organizational design.

The strategy is to break down a business capability into a level that identifies a clearly defined capability offered by a single technological resource, commonly referred to as an “IT capability.” The components are divided into “logical application components” or “logical IT services” and then grouped (in the case of SOA).

By describing IT capabilities, you efficiently specify high-level; IT needs that may be utilized to influence the delivery of simple, reusable IT services directly. Remember that IT features are permanent, just like all other features. The exact IT requirements need only be defined once to avoid the issue that most businesses face. They must define the exact IT requirements across numerous instances, and generations of the same enabled IT.

Putting Business Capability Model Into Practice

The Business Capability Model has a variety of applications beyond just aiding in creating an operating model and purchasing decisions.

Investing Choices:  The organization has already created business skills in several areas if the business capability model is established within an existing operation. A business capability model is most frequently used to assess how these current capabilities (the current state) compare to the necessary strategic capabilities (the future situation) and to choose investment priorities. A heat map is created that shows the areas of the business that still require improvement and pinpoints work programs and projects that will build the necessary capabilities and offer new or modified business services.

Management Of The Lifecycle (Or Portfolio) Of IT Assets: For managing the lifecycle of IT assets, including IT services as well as the underlying technologies and infrastructure, the Business Capability Model offers a solid foundation. You may understand better how the lifecycle of these assets affects your business, such as the level of risk if they are approaching the end of their lives and where investors should invest. Suppose you know the relationship between these assets and your business capabilities. Relationship mapping can also be used to spot technology duplication or the availability of multiple solutions for a given business capability. It is also usual to see numerous case administration platforms and solutions used in various regions of the organization if you use a frequently required business capability, such as “Case management.”

Strategic Mindset A business capability model can be used to assess the impact of existing flight operations or new projects that are not directly related to the application of the business capability model, that is, the business capabilities that the project enhances. To make sure the project is aligned correctly, apply this assessment. In the course of such an exercise, it is not unusual to suspend an ongoing project.

Acquisitions And Mergers: When two organizations strategically merge, they can use the Business Capability Model to compare each organization’s business capabilities and how BMC might utilize them within the new, merged organization.

Implementation Of Industry Reference Models

It is easy to believe that all businesses in a particular industry need the same services, such as insurance, financial services, and logistics. Because of this, much effort has been put into developing industry-specific standard BMC reference models.

In good faith, they do not advise using these models. Your BCM must align with your business strategy rather than a less innovative, industry-standard version. It must be stated in ways that represent your character and strategic goals. When it makes sense, such as when you can concentrate on describing your key competencies rather than the more broad capabilities you need, they strongly advise creating an independent definition and utilizing these templates sparingly.

Methods And Techniques Based On Additional “Capability”

In addition to the RBV methodology described here, the word “ability” is employed in other settings and with different methodologies and techniques. A quick word about one of these because it mainly generates misunderstanding in the IT industry.

The terms “competence management” and “competence planning” should not be confused with business capability modeling based on RBV. This has to do with “operational skills,” typically characterized as “things a firm needs to accomplish to execute its business plan.”

Ability refers to the direct physical embodiment of an ability, action, or function because the emphasis in this context is on doing rather than just being able to. The pooling of assets to provide a defense capability is an often-mentioned example; capability planning is heavily utilized in the defense industry.

Although ArchiMate, an EA modeling language belonging to the same source, is much more compatible with the RBV-based approach described here, capacity planning is utilized in the TOGAF Enterprise Architecture framework.

Purchasing choices and introducing “specialization,” such as with the “business modeling component,” are other examples of how competency planning is used.

It is impossible to directly relate a business capability to a function or function in RBV-based business capability modeling. It is not about actually doing something; it is merely about being capable of doing something. An author can write a best-selling book, but that does not mean it will sell well.

It can be challenging for some individuals to comprehend this distinction because it is somewhat abstract, yet it is essential to execute business possibilities in enterprise architectural design successfully. Resource planning has a problem since it is fundamentally functional fragmentation, which leads to the development or strengthening of functional silos and the fragmentation of processes and responsibilities.

Using Business Capability Models With The Togaf Standard

The 10th edition of the TOGAF standard’s key components are business capabilities and functional mapping (see reference documents). We anticipate their introduction soon as part of identifying and building an organization and enterprise architecture team (see TOGAF Standard: Architecture Development Methodology) and outlining current business capabilities and enterprise. A crossbeam for TOGAF standard coordination has been identified as “business capability management,” which identifies which business capabilities are required to produce business value.

Phase A (Architectural Vision) is when the architect determines the organization’s business capabilities to achieve its strategic aims (see TOGAF Standard: Architecture Development Methodology). The Business Capability Map’s needs are then utilized to produce a high-level perspective of the foundation and target designs.

A thorough analysis of any potential business gaps is required for step B (Business Architecture). Heat mapping is performed to find and examine these gaps in this situation. The business’s effectiveness, maturity, productivity, and cost or value of each component are suggested heat map considerations.

Strategic plans, information systems, value streams, and organizational units are used to trace back business capabilities inside the Enterprise Architecture project according to the TOGAF Standard, Architecture Development Method (Implementing Business Capabilities). This relationship mapping provides a better understanding of the aims and management of each sector.

The creation and improvement of a company or enterprise architecture are based on business capabilities. Business context is given for the underlying people, information, resources, and process that collectively provide added value in the form of goods and services for the company’s stakeholders by connecting business capabilities to their underlying components.

Business capability maps give designers and stakeholders a thorough understanding of the business, independent of the organizational structure. The model outlines what the business currently does or anticipates doing in the future. Business managers can better control the full complexity of their organization using this abstraction.

Finally, corporate executives can improve decision-making by mapping business capabilities and observing various perspectives.

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Modern Spend Management and Accounts Payable software.

Helping organizations spend smarter and more efficiently by automating purchasing and invoice processing.

We saved more than $1 million on our spend in the first year and just recently identified an opportunity to save about $10,000 every month on recurring expenses with Planergy.

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Procurement Maturity Model: Steps To Maximizing Value In Business Spend

• Written by Rob Biedron
• 17 min read

While commerce has boiled down to “buy and sell” since the concept was born, the art of doing business effectively continues to evolve over time. In the modern global economy—fast-paced, data-driven, and increasingly complex—procurement organizations are quickly becoming a primary driver of not just cost savings, but strategic value. The “buy” half of the commerce equation has become, with help from automation, analytics, metrics, and other emerging technologies, a core component of successful digital transformation.

In order to reap the benefits of true digital transformation, however, companies need to understand the procurement maturity model and apply it effectively in evaluating their current procurement processes. By understanding how their procurement organization impacts the enterprise as a whole, they can improve their procurement strategies, set and reach goals for higher levels of maturity, and achieve the procurement transformation that is essential to true digital transformation.

What is the Procurement Maturity Model?

While it would be nice (and certainly more convenient) for companies to implement fully mature procurement organizations that spring forth like Athena from the forehead of Zeus, in practice every company has its own unique procurement situation and capabilities. Well-established, brick-and-mortar companies with a long history of manual workflows and prioritizing cost savings will have a different starting point on the road to full procurement maturity than a fully virtual start-up run by digital natives, for example.

Regardless of their current procurement functionality and capabilities, however, procurement organizations can achieve truly strategic procurement and spend management that drive both value and innovation for their companies through self-assessment and careful optimization of their procurement processes.

The procurement maturity model is used to help companies set and reach goals for optimizing business processes in their procurement function and implementing both procurement transformation and enterprise-wide digital transformation supported by it.

Achieving procurement maturity begins with a procurement capabilities assessment , also called a procurement maturity assessment .

This stage is effectively needs analysis , wherein procurement professionals use assessment tools and methodologies to determine:

• The organization’s current practices and controls for the Procure-to-Pay process.
• The ways in which the organization’s procurement processes affect its capabilities in generating cost savings, value, and strategic insights for the enterprise.
• New goals the organization sets for moving procurement into a more mature and strategically valuable role by improving its capabilities in key areas.
• The tools, techniques, and training required to help the procurement function, and the enterprise, achieve these goals.

The procurement maturity model starts with traditional (tactical) procurement and evolves toward best-in-class (also called world-class) procurement capabilities. It provides a clear overview of the ways procurement professionals can deliver more value to their organizations over time by improving the procurement department’s functionality and efficiency in key areas.

Incorporated into the procurement maturity model is the procurement capability maturity model , which specifies the capabilities characteristic of, and required to achieve, each stage of procurement maturity. As procurement capability increases, so too does procurement maturity.

The stages of the model are:

1. Tactical and Operational Procurement

Procurement organizations at this stage are still reactive, rather than proactive. They’re focused on cutting costs, securing goods and services at the lowest possible price at the time of purchase, and making sure invoices get paid accurately and on time.

At this level, procurement may not even be a dedicated function, but rather an ad hoc procedure. Staff source and purchase their own goods and services, with Finance (accounts payable) burdened with trying to keep these purchases within budgetary limits while simultaneously paying invoices and tracking spend as best they can.

These organizations don’t have full visibility into, or control over, their spend. Software solutions that help teams with contract management, inventory management, Procure-to-Pay (P2P) optimization, or spend management are totally absent. Analytics, if present, are provided by the company’s enterprise resource solution (ERP) and focused on expense accounts in the general ledger.

Tactical procurement helps minimize costs in the short term but doesn’t provide the tools, controls, or infrastructure required to generate value, provide insights, or reduce risk for an organization.

World-class procurement teams have full control over the Big Data flowing through their organizations, and by analyzing data streaming from a wide variety of internal and external sources, provide rich, detailed insights that guide decision-making on multiple fronts.

2. Strategic Sourcing Procurement

Companies at this level of procurement maturity are beginning the journey to generating substantial value through business spend management. They employ dedicated procurement professionals to develop and implement policies and controls for core procurement processes such as purchasing, contract management and negotiation, and the strategic sourcing process.

These organizations leverage the power of strategic sourcing, engaging in much more proactive supplier management. They use sourcing events to take advantage of optimal pricing through economies of scale and negotiated terms. They approach supply chain management with an eye toward both savings and value, and implement procurement strategies that help protect business continuity and competitiveness through supply chain resilience .

Procurement departments at this stage recognize the importance of collaborating with finance to streamline and optimize the Procure-to-Pay process . They invest in software solutions that include automation and analysis tools to develop and enforce spend management policies. They set benchmarks for, and use key performance indicators (KPIs) to analyze, vendor performance and compliance. And through the use of artificial intelligence, process automation, and centralized data management, obtain full control over and visibility into their spend.

These organizations generate value for their companies through:

• Long-term savings from more effective contract management.
• Improved operational efficiency across the P2P process.
• Better risk management through tighter controls and the elimination of rogue spend and invoice fraud.
• Better spend control through guided buying.
• Improved supplier relationship management and more effective sourcing processes.

3. Strategic Category Management Procurement

At this stage, organizations are ready to build on the success and value created through strategic sourcing. They want to expand their capabilities to include advanced category management , as well as more advanced data analytics and modeling.

The procurement department expands to include dedicated category specialists. These procurement professionals focus all their skills and time on specific spend categories in order to secure maximum return on investment and develop strong, strategic supplier relationships that build value through not just reduced costs, but new opportunities for shared success and innovation (e.g., developing new products sourced with more sustainable materials, strategic partnerships in manufacturing, etc.).

These companies rely on robust, centralized software solutions that include advanced analytics and robotic process automation to manage spend, create accurate and complete forecasts and budgets, and deliver actionable insights senior management can use to make more strategic decisions. The datasphere is fully integrated, and standardization and automation eliminate data silos to promote better collaboration and communication between stakeholders.

Beginning at this stage, organizations can take advantage of a project management model known as RACI (Responsible, Accountable, Consulted, Informed) to obtain the best possible results from category, supplier, and spend management. The RACI system helps teams evaluate opportunities and obtain optimal results through careful assessment and analysis of available data, and is best executed with support from software tools.

At this level, procurement organizations have advanced supplier management capabilities and a focus on building supply chains that are both resilient and agile, with the flexibility to capture value from unexpected opportunities and the strength to weather business disruptions. They use their know-how to advise leadership within the company, guiding their organizations to greater competitive strength and profitability.

4. World-Class or Best-in-Class Procurement

A trusted partner and highly valued source of strategic value and innovation, procurement organizations at this stage have fully aligned procurement’s goals with the company’s and provide the data and insights that fuel enterprise-level initiatives. Procurement transformation directly powers enterprise-wide digital transformation at this level, and the chief procurement officer (CPO) is a powerful source of strategic leadership.

Continuous improvement through iterative process optimization makes procurement a source of ever-growing savings and value. World-class procurement teams have full control over the Big Data flowing through their organizations, and by analyzing data streaming from a wide variety of internal and external sources, provide rich, detailed insights that guide decision-making throughout the value chain .

Procurement strategy is tightly aligned with organizational planning at this stage. Category management and supplier relationship management are collaborative and proactive, enabling the company to seize opportunities to negotiate optimal terms, develop new products to meet changing consumer demand while keeping costs low, and target new areas for growth with confidence.

The datasphere integration achieved at the Category Management level has been further enhanced. A single platform provides control over all areas of procurement and spend management. Historical spend data, diverse data sources from multiple locations, and financial models are used to set goals and benchmarks, evaluate performance and compliance, and reduce risk. Return on investment is viewed through the lens of total cost of ownership .

Improving Your Procurement Maturity

Understanding where you are, where you need to go, and what you need to do to get there is just the beginning. But whether you’re just starting your procurement maturity journey or looking to level up, you can enhance your procurement maturity by following a few simple best practices.

Craft Your Procurement Strategy Based on Your Actual Needs and Capabilities

Having performed a procurement maturity analysis and finding you’re a bit behind the curve, it might be tempting to go full-throttle in an attempt to keep up with the Joneses. But long-term digital transformation success depends on strategic change management. Changing too much, too quickly can not only tax your budget, but create costly chaos that can hamper, rather than help, your procurement transformation plans. Carefully consider not just the competition, but your company culture, budget, and long-term goals for growth. Starting with the areas most in need of optimization (e.g., the Procure-to-Pay process ) can provide a solid foundation of value and savings you can build on over time. Simply centralizing data management and incorporating process automation can provide the perfect launchpad for more ambitious efforts down the road, and allow you the breathing room you need to establish new protocols and policies and secure buy-in and compliance from everyone in your organization.

Don’t Be Afraid to Invest in Best-in-Class Technology

While it’s crucial to let your budget and capabilities guide your procurement strategy, making the decision to invest in a top-shelf, centralized P2P solution such as Planergy as soon as is reasonably possible is a smart way to ensure the long-term success of your procurement and digital transformation initiatives. Think of it this way: procurement maturity relies on generating value and innovation in the long term. Shifting procurement to do so requires high-quality, reliable, and transparent spend data.

A centralized, cloud-based software solution that streamlines your business processes, standardizes and secures information exchange, and provides full control over your spend data is key to turning data into decisions.

Transform Your Business with True Procurement Maturity

The journey to procurement maturity takes time, skill, and dedication. Take the time to perform a procurement maturity assessment, then create the procurement strategy that best fits your goals for helping the procurement team become a trusted and invaluable source of value for your business. By optimizing your procurement processes and implementing the tools, controls, and policies you need to succeed, you can transform your procurement department into a powerful engine for value, innovation, and digital transformation throughout your organization.

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Procurement’s new operating model

Introduction

By now, most companies have ridden one or more strategic sourcing waves that have collectively saved their organizations billions of dollars. Yet even after having benefited from these initiatives, the average company still leaves on the table unrealized savings equaling 5 to 10 percent of its total spending. These savings are not lost because of ill-conceived strategies or organizational incompetence; rather, their loss is inherent in flawed or incomplete procurement operating models.

There are many reasons that the operating models constructed to procure and pay for goods and services prove inadequate. They may not include the processes, tools, or resources needed to fully execute the sourcing strategy. They may not be properly connected to organizational decision making or sufficiently integrated into key corporate planning processes. Decision making authority and accountability may not be clearly defined. Or the IT systems that enable them may be fragmented, impeding efficiency and clouding the visibility necessary to ensure compliance with overall purchasing policies and objectives.

In order to mitigate these problems and deliver on purchasing’s cost, quality, and service commitments, companies must evaluate and design their procurement operating models along four fundamental dimensions: organization, processes, technology, and performance management ( Exhibit 1 ). Together, these four elements determine an operating model’s effectiveness at executing a company’s sourcing strategies. And because any model is only as strong as its weakest link, each element must be developed fully and aligned properly. A company may develop a series of nearly perfect procurement processes, but without clearly defined mechanisms for managing and measuring performance, procurement will struggle to ensure compliance and achieve its overall strategic goals. Similarly, procurement technology may provide all the information needed for executives to make well-informed purchasing decisions, but that capability is largely meaningless if the procurement organization has not also clarified the decision rights that identify who will make those decisions and be accountable for their outcomes.

Most procurement organizations excel along one, two, or even three of the operating model dimensions, but very few have fully developed and aligned all four of them. Some companies need to travel only a short distance to properly integrate the four dimensions; others face a more arduous journey. But no matter how long or difficult the road ahead, the best way to begin is to view the purchasing function as a broad, cross-enterprise activity incorporating all elements of the procurement process, from sourcing through contract negotiation, demand management, procure-to-pay, supplier relationship management, and measurement and tracking. Such a view enables companies to better see the gaps in their operating models and address each of the four dimensions.

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Home > Insights > Capability Model

• Capability Model

By: Ciopages Staff Writer

Updated on: Feb 25, 2023

What is a Capability Model?

A Capability Model or a Business Capabilities Model is an integrated and comprehensive set of business capabilities. The capability model is a decomposition of what a business does and can do in a logical and granular grouping.  A business capability model is one of the critical business architecture deliverables and a bridge between business and IT, and a foundation for enterprise transformation.

However, if you are looking for a “Competency Model” – which is about soft skills or competencies, or a “Capability Maturity Model (CMM)” – which is a way to measure the maturity of the processes, those are distinct and different from a capability model in the business architecture realm.

Business architects and enterprise architects build business capability models as a part of the overall business architecture and enterprise architecture mandate.

A capability model is an integral part of the business architecture deliverables and is a significant component of BizBok (Business Architecture Book of Knowledge). A capability model is an essential part of the TOGAF framework (The Open Group Architecture Framework).

So, that begs the question: What is a Business Capability?

A business capability is an elemental building block (or a Lego block) of what a business does or can do.  At its core, it is an abstraction of the underlying functionality and flows expressed as a noun form (some business architects use Gerunds as well, but we are not the grammar police.) An agglomeration of a  cluster of underlying business capabilities can manifest a product, a service, a platform, a business unit, a department, and of course, an enterprise.

Let’s also look at what is NOT a business capability:

Dissecting a Capability Model: Capability Model Example

A capability model (or business capabilities map or capabilities model) is a structurally sound and internally logical group of capabilities, which conforms to a MECE model (Mutually Exclusive, Collectively Exhaustive.)

For example, one can combine a bunch of underlying capabilities to manifest a “Sales” or a “Sales Management Capability.  As the picture below illustrates, “Sales” is an agglomeration of 7 level 2 capabilities:

• Sales Planning and Forecasting
• Territory Management
• Lead and Opportunity Management
• Customer Relationship Management
• Quotes, Contracts, and Negotiations
• Order Management

Why is a Capability Model Framework a swiss army knife in the enterprise toolkit?

The capability-based view is:

• Logical and intuitive,
• Stable, and
• Non-redundant yet comprehensive

A capability model provides a better way to:

• Organize how we think about a business
• Instill & track business strategy & performance
• Communicate across disciplines (e.g., business & IT)
• Gather requirements & develop evolution roadmaps

For example, if one wants to define what constitutes “CRM (Customer Relationship Management) Capability Model, one can look at the picture above and fathom that CRM comprises of the following capabilities:

• Client Segmentation
• Client Contact Details Management
• Interaction Management, and History
• Customer Analytics
• Activity Planning and Meetings Management

Hence, if a company is keen on assessing their CRM capabilities and then decide on whether to replace or re-platform the CRM capabilities, the detailed composition of the CRM capabilities will come in handy. In particular to a) assess the current state b) envision future state capabilities c) conduct gap analysis d) define a transformation roadmap e) conduct a vendor analysis of competing CRM platforms.

Enterprise Business Capabilities Model

Category : Capability Models

Finance Capability Model

Emerging digital technologies assessment.

Category : Accelerators

How do we build a Capability Model?

We believe there are two viable approaches to building a capability model.

Create a capability model from scratch:

A cross-functional team of experts gathers together to define a capability model.  Typically, the capability modeling team will comprise of business architects, enterprise architects, process owners, product owners, functional specialists from areas like Human Resources, Finance and Accounting, Marketing and Sales, Operations et al.  Through a series of facilitated workshops – and countless hours in meeting rooms, gallons of caffeine, and innumerable arguments – the team comes up with a capability model.  We’ve seen this process take months or in some large companies around 18-24 months.

The advantage of creating a capability model from scratch is that it is home-grown and the process will be cathartic, and given the many rounds of consensus building, the business capabilities have a chance of getting used in real use cases across the enterprise.

As you can guess, we are not fans of this approach, and we have seen the time, energy, effort, and friction is not commensurate with the results.

Straw-model or Sample Reference Capability Model-based Approach:

A sample business capability model template helps accelerates capability mapping efforts by reducing the time, energy, and cost. We may be biased as CIOPages.com sells full-fledged business capability frameworks in functional areas as well as for various industries, but we are fans of a business capability model template approach wherein you retain, refine, reinforce, and are ready to go.

A sample/straw model-centric approach minimizes the effort, cuts down the time to completion, reduces friction, and allows the teams to focus on the 20% that may be important to the enterprise, rather than get bogged down by the 80% minutiae and peripheral capabilities that may not matter much.

Of course, you are under no obligation to buy our pre-built and customizable business capability models — instead, a few select groups of experts (perhaps with representation from business architecture, enterprise architecture, and a few business/IT leader who are familiar with the paradigm of business capability mapping to come together and create a draft business capability map.  Seeing something in front of them helps the rest of the team members to participate effectively and contribute to the evolution of the capability model to what the enterprise needs.  The capability model validation sessions will be more productive and fun (is fun the right word in an enterprise context?).

There are also sample capability models from Gartner or Forrester , even though you may want to examine the granularity of the models.

Where do we start to build a capability model?

Obviously, if you are not interested in starting with a sample or reference capability model – whether it is purchased from a vendor or an internal draft model developed by a small group of experts – and instead insist on building from scratch, here are a few starting pointers.

• Begin with a value chain: A value chain (of Michael Porter fame) is a classic and well-respected framework which the top leadership is typically familiar. So, starting with a company value chain will be a great starting point.

For example, if you are a drug company, the value chain and the primary capabilities may look something like the following:

Capabilities of a Pharmaceutical Firm:

A sample set of primary capabilities for a Pharmaceutical company.

• Research and Drug Discovery
• Drug Development
• Trials and Regulatory Approvals
• Manufacturing
• Distribution
• Sales and Marketing

And there will be a lot of support capabilities that fill out the value chain.

Then you can decompose the value chain level capabilities into granular entities to create a holistic and integrated business capabilities map.

How low do you go?  Business Capabilities Model Granularity

We think that if we consider business capabilities to be Lego blocks or atomic building blocks, then the logical interpretation of that principle is to decompose to a deeper level of granularity.

We think capability models that stop at Level 1 are nothing but wall art – an excellent summation of “Oh! That’s what we do.”  If the model were to comprise of capabilities at Level 1, and Level 2, then we consider that a strategic picture and an executive level deliverable to have interesting conversations.

A capability map with up to Levels 3, 4, and 5 (as necessary) contains a lot of the execution detail which will be extremely valuable in operations optimization, transformation roadmap development, and IT enablement.

While one can start with Level 1 and 2 for gaining executive level support, we urge business architecture teams to forge ahead and decompose to a logical level of granularity for increasing the value-add from the capability mapping endeavors.

Is a capability model one and done?

Business capabilities, while more stable and long-term, do evolve, morph, or newly emerging.  So, a capability model is never done. It is continually changing and evolving. Even if the capability itself doesn’t change, the underlying maturity which a company wants to foster, or the way the capability is realized changes. Hence, business architects and other stewards of business capabilities maps should continuously strive to update and upgrade the artifact. Also, period re-assessments of capabilities – regarding the strategic importance, the level of maturity, and the desired target state – is an essential exercise.

What tools should we use to create and manage a capability model?

A capability model is a dynamic and living entity, and hence static tools to create and manage capabilities are not appropriate. Therefore, general purpose office productivity software doesn’t stand muster.  Using one of the many available capability modeling software tools is the way to go.

For executive consumption using data visualization tools – such as Tableau or Domo or equivalent – may help as well. Also, Excel for advanced data manipulations and PowerPoint for executive presentations may be acceptable. But the day-to-day management of capabilities should be within a specialized software.

After building a Business Capability Model: What comes next after creating a capability map?

Once you have a coherent and comprehensive business capabilities model, the next steps are as follows:

• Capability definition
• Goals and objectives of the capability
• Current state capability assessment
• Capability needs to reach the desired target state
• Capability to Systems Footprint
• Capabilities to Services Footprint (SOA services or Microservices)
• Capability to Location Mapping
• Capabilities to Roles Mapping
• Capabilities to Data Mapping
• Capabilities to IT product model mapping
• And any others are per the needs of the enterprise
• Align backlog and future needs to capabilities.
• Use capabilities to develop functional level or business unit level or enterprise level transformation roadmaps.
• Leverage capability models for vendor functionality and feature mapping.
• Influence the modularity and granularity of SOA services or Microservices using capabilities as the driver.

Human Resources Capabilities Model

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The four key elements of an enterprise-level negotiation capability.

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Founding partner of Vantage Partners and prize-winning author on negotiation and partnering. Vantage Partners - Negotiation Insights .

Lots of people take pride in their individual negotiation style, but they may not consider how their company negotiates. Given the sheer number of negotiations going on across an organization at any given point in time — with customers, suppliers, bankers, business partners, and more — imagine the impact if your organization could do a little better in each one, across the board.

When I took my first negotiation class, many years ago now, I learned that a negotiator’s success doesn’t just come from experience nor from memorizing a long list of tactics. To be successful, a negotiator starts by recognizing that negotiation is mostly problem-solving with another person (who may or may not see the same problem they do), and applies a framework or structure to get prepared and then execute.

At Harvard, they teach a model called the “Seven Elements of Negotiation” (which is now taught at law schools and business schools around the world, as well as in diplomatic academies and war colleges, including the U.S. Military Academy West Point).

I love that model, and in fact co-authored with Roger Fisher a short book, Getting Ready to Negotiate: The Getting to Yes Workbook, on how to use that model to prepare for all kinds of negotiations, be they M&A deals, border disputes or with your landlord. But when it comes to improving the results of negotiations across a whole company, you need to think more broadly than how to train individuals to negotiate better. You have to tackle the entire negotiation system.

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What do I mean by “negotiation system?" It’s a term that recognizes that the most effective negotiators don’t operate in a vacuum. They apply their skills on behalf of the organization, in support of an overall business strategy, while standing on the shoulders of other negotiators at the company and leveraging a wide range of existing relationships, prior precedents and future commitments. A negotiation system encompasses four critical elements:

1. A Company-Wide Definition Of Success

What does “winning” mean for your organization, and how are those behaviors recognized and rewarded? A negotiation system addresses how incentives affect behavior at the negotiation table and adjusts incentives to serve not only the individual’s, but the company’s best interest.

For example, in theory, paying a salesperson or an agent a percentage of the deals they close rewards them for doing higher-value deals. But it also causes many of them to make any deal, especially at quarter’s end, because 10% of even a deeply discounted price is better than 10% of nothing. Another flaw is that it rewards them for doing bigger deals, but not necessarily better deals that are more profitable, strategic or otherwise valuable over the longer term for the company.

2. A Clear Negotiation Process

If it’s more than just a very simple transaction, the negotiation doesn’t just happen “at the table.” It starts by clarifying what you’re setting out to do, and defining the negotiator’s mandate and who holds the right to make which decisions.

It requires careful preparation, including consultation with relevant stakeholders. And it’s imperative to use that preparation to formulate and align around a strategy that looks not just at this negotiation with this counterpart, but at the broad portfolio of all negotiations going on across the company over the short and medium term.

And most deals require a deliberate plan to move from the negotiation table and “getting to yes” to actually putting the deal into action so it can deliver value to the parties.

If you fail to do any of these things, you may fail to reach a deal worth doing; or you may well do a deal you come to regret.

3. Negotiation Knowledge

In the negotiation process, organizations often have a lot more information than they know what to do with. Selecting, leveraging and applying that information so it informs your strategy and enables more effective problem-solving is one of the lowest hanging fruits in any organization’s efforts to improve across-the-board results.

Some are quite easy to put in place: Simple deal databases, context-sensitive playbooks, and “communities of practice” that share intangible lessons about particular counterparts or types of situations. And as we all learn to make greater use of generative AI tools, accessing and processing information about existing contracts, past deals and market trends will become easier.

But it’s critical to set aside the assumption that because “every deal is different,” each negotiator operates in a vacuum.

4. Skills And Mindset

There’s no question that negotiators can be more skilled, and that training can improve enterprise results. But just as important as skill enhancement is considering how to influence the mindset they (and their managers) take into the negotiation.

In my experience, if a manager never engages direct reports in a conversation about strategy, never tests their readiness for the negotiation and never demonstrates that they understand and embrace whatever framework is being taught in the training, the individual negotiators will quickly learn that the company doesn’t really believe in the training. And they’ll simply “go rogue.” Or they’ll become mere messengers for a manager calling the shots. And messengers are rarely very persuasive.

Think about all the negotiations going on with your suppliers and partners. What if you could do just a little better, on average, across all of them? What if your teams could create just a bit more value in each negotiation with every customer? How much better could your company do if each of those deals was a bit more productive and valuable?

Doing better deals, smarter deals, consistently — all it requires is to see negotiation through a different lens, one that goes beyond putting a few skilled individuals on the front line. Improving your enterprise negotiation capability by implementing a negotiation system creates tangible and lasting value for the firm.

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How medium-size enterprises can better manage sourcing

It is an age-old question that has confounded companies big and small: how can we reduce external spending without harming supply chains or sacrificing the quality of our products and services? The question becomes more relevant in times of economic uncertainty and high inflation as large companies take drastic cost-cutting measures such as reducing office space or scaling back on investments. 1 Mark Maurer and Jennifer Williams-Alvarez, “Companies weigh fresh cuts as operating costs go up,” Wall Street Journal , August 3, 2022.

While large companies can usually drive procurement cost savings with relative ease, small and medium-size enterprises (SMEs) typically lack the necessary scale despite being the backbone of many economies around the world (see sidebar “The critical role of SMEs”). When it comes to procurement, SMEs often do not have the same purchasing power with suppliers that larger companies do because SMEs lack scale and often have a single source of supply, rendering them unable to seek pricing that is more competitive. Moreover, SMEs sometimes lack focus or the wherewithal required to rein in spending—and when they do, value capture is often slow, prone to stagnation, and mostly ad hoc, resulting in incomplete, suboptimal, or even unintended outcomes.

The critical role of SMEs

Small and medium-size enterprises (SMEs) include a broad range of businesses that have revenues, assets, or a number of employees below defined thresholds. Each country has its own definition of what constitutes an SME. In the United States, the Small Business Administration (SBA) classifies small businesses according to their ownership structure, number of employees, earnings, and industry. For example, in manufacturing, an SME is a firm with 500 or fewer employees. SMEs generally exclude large multinationals, state-owned enterprises, and conglomerates.

Despite their size, SMEs play an important role in the economy, employing large numbers of people and helping to shape innovation. According to the SBA, SMEs contributed 43.5 percent of US GDP in 2023, paid 39.4 percent of the country’s private payroll, and created seven million more new jobs than large businesses did from 1995 to 2020. 1 “Frequently asked questions about small business,” US SBA, March 2023. Governments regularly offer SMEs incentives, including favorable tax treatment and better access to loans, to help keep them in business.

So what factors prevent SMEs from undertaking a procurement transformation that goes beyond spending cuts—one that helps simplify, realign, and strengthen the organization to help it grow and provide a better customer experience? Is there an approach or framework that SMEs can use to regain control of their budgets and external spending in a way that doesn’t harm productivity or diminish morale? There is—as long as CFOs, chief procurement officers (CPOs), and COOs are willing to be innovative, make hard and timely decisions, and take necessary steps to transform their businesses.

What stops companies from reining in external spending?

In the United States and Canada, according to McKinsey analysis of data from S&P Global, companies with less than $3 billion in revenue represent 86 percent of total enterprises and 26 percent of total revenue (Exhibit 1). Perhaps unsurprisingly, the largest corporations (those with annual revenues of more than $5 billion) contribute the biggest chunk of revenues, while those with annual revenues of less than $1 billion make up the largest group of companies.

But while SMEs account for a significant slice of total revenue, a broad range of factors are limiting their ability to implement meaningful procurement cost savings in a way that not only boosts profits but also transforms companies along functional lines and prepares them for future shocks and economic downturns. Overcoming these limiting factors would be prudent, given the precedent set from 2017 to 2022, when smaller companies struggled most to maintain margins (Exhibit 2). The COVID-19 pandemic and the subsequent inflationary period have created challenges for companies of all sizes, but in aggregate, the biggest companies saw a much less dramatic drop in net income in comparison and have fully recovered or even exceeded prepandemic margin levels.

With the benefit of hindsight, it would have been optimal for SMEs to have had cost-cutting and procurement strategies in place before the pandemic, cushioning the blow from disruption in supply chains. However, the following example of a midsize company that produces residential components and fortuitously initiated a cost transformation program right before the COVID-19 outbreak illustrates how SMEs can mitigate risk by using better procurement strategies.

In this case, the company had long-term contracts in place for most of its business-critical external spending and reserved dedicated capacity with its top suppliers. It renegotiated better payment terms, identified and developed additional supplier sources to derisk its supply chain, and dynamically optimized sourcing decisions and logistics operations. These measures helped the company avoid some of the supply chain issues experienced by many SMEs during the pandemic. It also helped after COVID-19 containment measures were eased, when demand spiked and supplies ran short.

Overall, we find that five major drivers often hold SMEs back: a lack of spending transparency, a myopic focus on the short term, talent gaps, underused digital tools and automation, and exclusion of procurement and supply chain in business decisions.

A lack of spending transparency

Spending transparency means having full visibility into all relevant external expense information, revealed in a timely and systematic manner. While spending transparency is not new to the business sector, few SMEs adequately track and regularly reassess their spending. They often aren’t equipped with a dynamic spending database to serve as the single source of truth for functions such as procurement. This is partly because small and midsize companies often underinvest in process improvement, have a plethora of legacy enterprise-resource-planning systems, or find implementation cost prohibitive. As a result, SMEs often fail to identify basic price variances, hurting competitiveness and margins. For example, margins for a midsize industrial company that operates in North America and Europe plateaued 30 to 40 percent below peer companies; inefficient sourcing was one of the major contributors to the company’s margin reduction.

Competitive procurement has its foundation in full spending transparency. Poor spending transparency can lead to value loss and ineffective budget management. With greater spending transparency, CPOs can effectively manage external costs, exercise greater control as the situation demands, and better understand risks to supply chains.

SMEs often fail to identify basic price variances, hurting competitiveness and margins.

A myopic focus on the short term

Unlike large companies, which employ long-term strategies for most major spending categories, SMEs often fail to strategically align their business functions with procurement categories. Buyers focus the most on transactional efforts and work with single supplier sources with limited leverage and low committed volumes. As a result, supplier relationships tend to be transactional in nature as well and not focused on long-term partnerships, making suppliers reluctant to offer contracting discounts to SMEs. Moreover, the lack of a reliable demand forecast creates challenges for establishing longer-term cost savings. However, the deeper problem is centered on inefficient sales and operations planning, which directly affects supply chain strategy. SMEs could put more effort into planning and forecasting, which can enable long-term category and supply chain risk management.

Talent gaps

It’s not uncommon for procurement managers at SMEs to spend most of their time dealing with supply disruptions. The cause of supply chain issues can be partially ascribed to a lack of the entrepreneurial or strategic mindset required to help derisk the supply chain. These issues can also be attributed to a lack of strategic direction at the executive level—for example, in setting target KPIs for the share of spending that is dual sourced or for average miles traveled for supplies. First and foremost, however, SMEs often face challenges in attracting the right talent.

While a lack of brand recognition could hinder hiring, SMEs often source talent without a strategic mindset. When it comes to hiring for a procurement function, the experience and skill sets required to make a strategic impact are often not part of the job requirements. The traditional mindset of SMEs is that experience or exposure to a category family is the main requirement for category manager job candidates. To hire the best team, however, companies might consider candidates with track records of bringing about change at the organizations they’ve worked for or candidates with more diverse profiles that have skill sets outside traditional category management, such as data scientists, to find ways for procurement to drive broader business value.

Procurement managers could also be empowered with greater analytics capabilities to address the complexities of their job. Along with buying roles, various other support roles could be introduced to best manage external spending. Data analysts, for example, could perform activities such as category analytics, spending intelligence, predictive analytics, and running advanced-analytics models of business relevance. Procurement organizations that are more advanced can even look to include software engineers and scrum masters to help develop customized automated business solutions, such as commodity indexing and forecasting supply chain disruptions.

Underused digital tools and automation

High-performing category managers at large organizations spend much of their time finding ways to propel value for the business through negotiations and supplier-sourced innovation. In contrast, category managers at SMEs tend to spend their days handling transactional work and managing disruptions. Inefficient workflow patterns at SMEs often evolve because repetitive processes are still carried out manually rather than being automated. In contrast, large companies have often digitalized procurement, thereby effectively managing costs and avoiding value loss. Legacy systems are still commonplace in SME organizations, and smaller companies often lack resources to continuously improve system infrastructure and tools.

Exclusion of procurement and supply chain in business decisions

The role of CPO at many SMEs is still limited to category and supplier performance management. Accordingly, the CPO’s role in an organization should evolve to become that of business enabler and driver of customer value. The CPO should be a partner to engineering and marketing functions from early product development stages. The evolution of the role will require new skills, including strategic thinking and problem-solving abilities. A minor change in roles and responsibilities can not only help better manage cost of end products but also get an organization ready for the future.

An action plan for procurement cost savings

Further actions to enable next-gen procurement transformation.

To regain control of spending and create cultures of continuous improvement, small and medium-size enterprises (SMEs) need to overcome several major hurdles, which can take significant time. Successful SMEs often take several actions that span structure, operations, and strategy.

Transformation office. A dedicated central team can help ensure cost transformation is realized. This team can manage an idea bank, set up idea generation sessions, organize regular troubleshooting meetings, organize governance meetings, conduct implementation follow-up sessions, and closely track achievement.

Cost control cell. A cost control cell is a governance team that reviews and approves all price changes.

Governance. Implementation remains key to any transformation. We recommend holding regular governance sessions with middle and senior management.

Cost savings targets. Continuous improvement requires a change in culture. Setting year-over-year cost savings targets is an important step on the transformation journey, helping to update the workflow of category managers, which involves moving from day-to-day management to proactive contract negotiations.

Incentive plan. An incentive plan acts as a key motivator for timely execution and helps justify the additional responsibility for managers.

Central data repository. Effective data management is critical to sustainable cost improvement. Organizations can miss out on opportunities if a central repository is not maintained.

Upskilling. With continuous changes in technology, it is important for teams to understand and leverage all available skills and resources.

No easy fix exists when it comes to external spending optimization—and addressing just one challenge is unlikely to make a transformative difference. However, five interconnected strategies can help SMEs identify procurement cost savings opportunities: establishing center of excellence (CoE) teams, improving forecasting, expanding the use of digital procurement tools, gaining greater market intelligence, establishing a culture of and processes for continuous cost optimization, and incorporating supplier-driven product improvements. In addition, SMEs can consider several structural changes—some that would echo those of their larger corporate counterparts, and others that would capitalize on the strengths of SMEs (see sidebar “Further actions to enable next-gen procurement”).

Establishing CoE teams

Establishing a CoE team to support sourcing teams is now the norm at advanced procurement organizations. The focus of CoE teams is to empower buyers with deep category analytics and negotiation support. They perform category market analysis and supplier profiling, create fact packs and negotiation playbooks for supplier discussions, and develop component “should cost” models to provide greater cost transparency and buying leverage. One reason for value loss at procurement organizations is a lack of understanding of the full opportunity potential for a supplier and supporting facts during price negotiations. CoE teams can lay the groundwork for establishing short- and long-term strategies at the category and commodity levels.

Improving forecasting

A dedicated centralized planning team that works with the procurement team can be another value add and can forecast demand at the SKU, business unit, or product levels, with input from operations and marketing. Furthermore, they can provide transparency in future award timing and volumes. Suppliers become long-term partners with a stable forecast of business and are more willing to collaborate with companies to find cost opportunities. The planning team can also answer questions about minimizing risk through dual sourcing versus single sourcing of components, request-for-quotation strategies and frequencies, annual negotiations, and local sourcing versus best-cost country sourcing.

Expanding use of digital procurement tools

Digital tools can help make processes more effective and efficient by improving communication and efficiency across operations while reducing the manual workload on procurement managers. Digital procurement tools are also affordable and can elevate the standards of SMEs to match large corporations in terms of internal capability. While there is no one-size-fits-all approach to digital procurement, successful organizations are experimenting with digital innovation, sometimes designing custom solutions. Examples of leading digital procurement tools include spend intelligence tools, e-sourcing solutions, e-auctions, parametric should-cost models, automated contract analysis and management, and negotiation simulation for capability building.

Investment in digital tools can also prepare SMEs for long-term sustainable operational efficiencies while keeping their spending in check. Taking a more data-driven approach, especially for SME manufacturing organizations, has exponential benefits because digital applications can play a major role. For example, e-auctions—online auctions with potential suppliers—help eliminate the need for multiple rounds of negotiation with suppliers and increase transparency of the business award process for both buyers and suppliers.

Gaining greater market intelligence

Market intelligence can include product changes, supplier market dynamics, material price changes, tariff changes, global and national policy changes, total capacity utilization, currency fluctuations, and other variables. For example, by carefully tracking market fluctuations, SMEs can prepare buying strategies that are more resilient in the face of external disruption. Market intelligence can also lead to greater transparency with core supplier partners, empowering buyer organizations and providing greater visibility to suppliers, which are focused on growth and future readiness.

For instance, a North American SME used market intelligence to develop a cost savings model to aid in the procurement of steel for fabricating products, sourced from countries across Asia and Latin America. The model used different indexes (such as freight and raw material) to provide data on the best total landed cost for steel products from various suppliers and is now considered by category managers to be a robust solution for making informed supply chain decisions.

Establishing a culture of—and process for—continuous cost improvement

Large organizations work to generate cultures that encourage continuous cost optimization. SMEs could start by holding internal workshops at regular intervals to create “idea banks” that map out opportunities. These workshops can be run at the product family or supplier level.

Companies will likely find it necessary to work closely with their long-standing supplier partners to find procurement cost savings, given the impact of component price on margin and, ultimately, what the customer pays.

At the same time, SMEs could define their own procurement cost-cutting programs and communicate these programs to internal stakeholders, including product design, manufacturing, and quality teams, to identify potential opportunities to reduce costs. Companies will likely find it necessary to work closely with their long-standing supplier partners to find procurement cost savings, given the impact of component price on margin and, ultimately, what the customer pays. SMEs have limited resources available, so prioritizing efforts to capture the value identified is necessary. SME leaders might also consider a five-step “escalatory ladder” to generate fast procurement savings with minimal effort (Exhibit 3).

Developing an “external spend cube”—that is, a structured data set of the firm’s spending patterns with external suppliers—and a specification library for top procurement categories could also help when establishing a cost savings performance baseline, generating cost-saving ideas, shaping category strategy, and identifying synergies across business units. Companies can define short-term and long-term opportunities by category and develop an understanding of the effort required to carry them out. As savings accrue, companies can focus their attention on the sustainability of savings through cost control cells and governance mechanisms dictated by upper management.

Incorporating supplier-driven product improvements

More SMEs could work with their suppliers to drive product improvement. As many companies look to outsource their manufacturing and maintain only key process steps in-house, suppliers now have a significant stake in the end product. Therefore, it is important to involve suppliers in product development and enhance the free flow of ideas about product improvement. SMEs can entice supplier participation in product optimization programs through an incentive program, which shares the gains of supplier-driven initiatives with the supplier.

Not only can a program optimize specification, but overall, products can also be improved by supplier-side innovations. For example, suppliers for an industrial-machinery manufacturer suggested that the manufacturer adopt new compressor technology. Newer compressors were energy efficient but came at a slight premium. But in the long run, the new compressors helped the company to differentiate its product offering and entice new customers.

Cost transformation is never easy, especially for SMEs. It requires a concerted effort on the part of CFOs, CPOs, and even CEOs. However, if done correctly—focused particularly on procurement automation, strategic sourcing, and structural changes—cost transformation can generate significant savings and boost profits. But for organizations to make meaningful, effective change, they must stay ahead of the curve. Simply responding to crises and wielding the budget knife, without ensuring business units are aligned and implementing improved processes, will only postpone what needs to be done.

Deepanshu Chawla is a knowledge expert in McKinsey’s Gurugram office, Ryan Fletcher is a partner in the Southern California office, and Stijn Tollens is a partner in the Stamford office.

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