Description
Financial methods encompass many topics, including:
- Standard financial statement analysis
- Time-Driven Activity Based Costing (TDABC)
- Capital vs. Operational Expense
- Cost vs. Investment
- Debt Financing vs. Working Capital
- Creation, collection, and reporting of structural performance measures (see note) for business services, process, and capabilities
Note: Structural performance measures can be key performance indicators, but are not the same thing. Structural performance measures assess the potential to perform, not actual performance. Actual performance is a combination of potential and the degree to which a structure Is used, or as Chris Potts puts It, exploited. A high potential structure can produce no results if it is not exploited.
Overview
Everything that happens in an enterprise has a financial impact. Sometimes, the impact directly affects one or more of the key performance measures for the enterprise. Other times, the impact is not so direct, and can in fact be quite circuitous; it can be very difficult to quantify some costs or benefits. Managers of business units, processes, and capabilities often cannot directly affect important financial measures, instead relying on proxies they do control. The business architect is uniquely situated to understand the relationship between these proxies and specific key financial measures. This provides the business architect the opportunity to coach business unit leaders and process owners on the best ways to change their unit or process’s performance in order to achieve the desired financial outcomes.
The key tool of the business architect for assessing the current state of a business or process is a set of structural performance measures that provide a picture of the performance potential of a business unit, process, or capability. The business architect has many other tools at their disposal to understand and model the many ways that the structural performance of a business unit, service, process, or capability are linked to financial outcomes.
Starting with basic financial statement analysis that provides most of the financial performance measures currently in use, the business architect can use time-driven activity based costing to quickly and easily determine the capacity cost and capacity required for a business unit, organization, or process. This information will help determine where bottlenecks are currently and will likely arise as investments are made to improve processes or capabilities.
Financial methods include an understanding of the differences between and uses of:
- Capital and operational expenses (CapEx and OpEx)
- Costs to operate an operating model and investments to change the operating model
- Financing a project with debt and financing it with working capital
In some cases, the appropriate measure to use can be hard to measure. In these cases, the business architect can draw on several methods to determine measures that are close enough to what is required to serve as a proxy.
Proven Practices
- Financial statement analysis
- DuPont chart
- Goal/Question/Metric
- Fermi questions
- Time-Driven Activity Based Costing
- Measurement determination, collection, and reporting
Sub-Capabilities
Financial Statement Analysis
The basic financial skill of being able to analyze a set of financial statements is critical to understanding the motivation and current health of the business.
| Iasa Certification Level | Learning Objective |
|---|---|
| CITA- Foundation | - Learner will be able to describe the difference between cost and investment and explain why the difference matters |
| - Learner will be able to describe the difference between capital and operational expense and explain why the difference matters | |
| - Learner will be able to demonstrate understanding of basic financial statement analysis | |
| - Learner will be able to demonstrate how to compute the cost of capital for a company | |
| - Learner will be able to analyze a set of financial statements and explain how they are connected together | |
| CITA – Associate | - Learner will be able to compute the current financial performance measures for their company |
| - Learner will be able to identify and explain actual and potential financial trends based on their company’s current position and past history | |
| - Learner will be able to compute their company’s cost of capital | |
| CITA – Professional | - Learner will be able to assess and describe the financial impacts of risks and events in terms of changes to financial measures within a program or business domain |
| - Learner will be able to analyze and explain the effects of financing and other management decisions on the financial measures of the company | |
| CITA – Distinguished | - Learner will be able to assess and describe the financial impacts of risks and events in terms of changes to financial measures at the enterprise level |
| - Learner will be able to teach and mentor less senior architects through senior managers on the effects of changes in financial measures on the company | |
| - Learner will be able to evaluate and explain how possible courses of action, the inputs that management can change, are linked to outcomes in terms of changes in financial measures |
Financial Effects of Investment
All change initiatives have at their root improvements in financial performance, but it is nearly impossible to change financial performance directly. There is a linkage and degree of influence between changes the business can implement directly and the desired changes in financial performance. Different measures of performance are influenced by different kinds of changes, and the business architect needs to understand how the potential changes the business can make directly are linked to those measures of financial performance. This is “understanding the plumbing” of the business and can help the business architect guide senior leaders into investing in the changes that have the most potential to impact the targeted financial measures.
| Iasa Certification Level | Learning Objective |
|---|---|
| CITA- Foundation | - Learner will be able to explain how the costs and benefits of a proposed investment will affect the financial measures |
| - Learner will be able to compare and contrast changes in one financial measure in terms of changes in others, for example, being able to explain how changes in gross margin might affect return on assets and earnings per share | |
| CITA – Associate | - Learner will be able to analyze a set of proposed investments and determine the most likely outcome in terms of changes in financial measures |
| CITA – Professional | - Learner will be able to evaluate impact of potential action on the state of the company using changes in financial measures |
| - Learner will be analyze targeted changes in financial measures and synthesize a plan of investments that potentially lead to the target values for a business domain | |
| CITA – Distinguished | - Learner will be analyze targeted changes in financial measures and synthesize a plan of investments that potentially lead to the target values for a business unit, line of business, or the enterprise as a whole |
| - Learner will be able to demonstrate cause-and-effects between proposed business change and technology investments and outcomes expressed as changes in financial measures |
Financing Methods
Once a decision is made to make an investment, there are several options for financing that investment that can have a significant and varied impact on different financial measures.
| Iasa Certification Level | Learning Objective |
|---|---|
| CITA- Foundation | - Learner will be able to explain the difference between debt financing and working capital |
| - Learner will be able to describe examples of the sets of circumstances that would favor one method over the other | |
| CITA – Associate | - Learner will be able to analyze and explain how the choice of financing method for a project will affect the financial measures |
| - Learner will be able to analyze the effects of alternative funding choices on the financial measures | |
| CITA – Professional | - Learner will be able to analyze the current state of the business domain or business units determine the effects of various financing options might have given the current set of investments for the domain or unit |
| CITA – Distinguished | - Learner will be able to analyze the current state of the company, assess the effects of different financing options, and recommend a course of action covering the entire investment portfolio |
Time-Driven Activity Based Costing
Time-driven activity based costing (TDABC) is a powerful, easy-to-use, method to determine the basic cost structure of a process, an organization, business unit, or entire company. By collecting a few answers to simple questions and performing some quick calculations, a business architect can determine whether the process or business unit is near capacity, what that capacity costs to provide, the resources consumed by each activity, and the potential budget given projected volumes of business activity.
| Iasa Certification Level | Learning Objective |
|---|---|
| CITA- Foundation | - Learner will be able to explain how capacity cost rate and capacity required are calculated given a business context (process or organization) |
| - Learner will be able to estimate an operating budget given current capacity cost rate and capacity required and a projected volume of business activity | |
| CITA – Associate | - Learner will be able to compute and maintain a TBABC model of each process step or activity for which they are responsible |
| - Learner will be able to demonstrate how changes in the volume of activity for a process step or activity will affect either the capacity cost rate or capacity required | |
| - Learner will be able to compute the level of excess (or short) capacity that currently exists for each process step or activity for which they are responsible | |
| CITA – Professional | - Learner will be able to compute the capacity cost rate and capacity required for an entire end-to-end process or business organization |
| - Learner will be able to analyze and explain the effects proposed changes might have on the capacity cost rate and/or capacity required for a business process or organization | |
| CITA – Distinguished | - Learner will be able to establish and maintain a set of TDABC models for all end-to-end processes for the enterprise |
| - Learner will be able to create a TDABC model for any organization or business unit in the enterprise | |
| - Learner will be able to predict where capacity problems are likely to arise as business volume changes | |
| - Learner will be able to explain potential capacity problems to senior management | |
| - Learner will be able to analyze the root causes of capacity problems and recommend investments that are likely to alleviate them |
Measurement of Non-Financial Costs and Benefits
It can be difficult at times to determine the financial costs and benefits a potential investment might have. Not all structural performance measures are financial. Business leaders may not understand how best to measure the performance of their business units. There are several methods for measuring things that are otherwise hard to measure. Business architects need to be subject matter experts in how to measure the performance of the business using financial and other measures
| Iasa Certification Level | Learning Objective |
|---|---|
| CITA- Foundation | - Learner will be able to list the barriers to measurement and ways to address them |
| - Learner will be able to explain how to determine a rough measure of some aspect of the business given very little information (applying Fermi questions) | |
| - Learner will be able to describe the goal/question/metric approach to determine what to measure | |
| - Learner will be able to describe the difference between efficiency, productivity, and effectiveness measures | |
| CITA – Associate | - Learner will be able to apply the goal/question/metric or Fermi question approach to a single project to determine a set of appropriate measures |
| - Learner will be able to construct an appropriate set of performance measures for a business process | |
| - Learner will be able to apply the concepts of efficiency, productivity, and effectiveness measures to a business service, process, or capability | |
| CITA – Professional | - Learner will be able to construct an appropriate set of performance measures for the processes in a business domain and for the business domain itself |
| - Learner will be able to construct and operate a data collection mechanism sufficient to compute and report the structural performance measures for the processes in a business domain and for the business domain itself | |
| - Learner will be able to mentor others, including business unit and process owners, on ways to measure the structural performance of their unit or process | |
| CITA – Distinguished | - Learner will be able to construct an appropriate set of performance measures for any activity anywhere in the enterprise |
| - Learner will be able to construct and operate a data collection mechanism sufficient to compute and report the structural performance measures for any activity in the enterprise | |
| - Leaner will be able to mentor others, including senior executive, on ways to measure structural performance of a given context |
Resources
Books/Articles:
Kaplan, Robert S., Anderson, Steven R., Time-Driven Activity Based Costing, Boston: Harvard Business School Press, 2007.
Hubbard, Douglas, How to Measure Anything, 2Ed., New York: John Wiley & Sons, 2010.
Potts, Chris, RecrEAtion: Realizing the Extraordinary Contribution of Your Enterprise Architects, Bradley Beach, NJ: Technics Publications, LLC, 2010.
Author
Scott Whitmire
Research Manager/Systems Architect, The Mayo Clinic Chair, IASA Board of Education
Scott Whitmire is the research manager and systems architect for the Neurosurgery Research Lab at the Mayo Clinic in Phoenix, Arizona. He has over 30 years of business change and software development experience, including serving as lead architect on a number of major applications. His interest in software engineering and architecture began over 20 years ago as he became frustrated with the state of the systems on which he worked as well as those he had built. He has built or designed applications and entire lines of business for several industries, including aerospace, health care, manufacturing, professional practice management, financial services, wholesale, retail, and telecommunications.
Mr. Whitmire is the Chair of the Iasa Board of Education and serves on the Iasa Board of Directors. He is one of the original members of the Curriculum Committee, is one of the initial authors of Iasa’s definitions of software and infrastructure architecture, led the committee’s efforts to define business architecture as an architecture specialty, and is the primary author of Iasa’s Business Architecture curriculum.
Mr. Whitmire is a Senior Member of the IEEE, an Iasa Fellow, and CITA-P. He has served on many CITA-P certification boards, and is an Iasa mentor. He has published one book (so far), Object Oriented Design Measurement, and numerous papers, articles, and presentations. He is a frequent instructor for Iasa and speaker at Iasa chapter and global events.