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April 25, 2005

The ROI of Management

The essential function of a business is to process resources to generate value in a targeted market. Generally, the profit results from exchanging the delivery of specific benefits of that processing for something else more valuable.

To sustain this ability over time, the business must be able to regenerate and refocus resources in accordance with the changing requirements of competitive demand in the market.

This means that the capability to execute is the result of an ongoing investment, and the capability itself is a return on that investment. Let's call this the capability return on investment, or CROI.

Because market demand forms competitively, the business must anticipate the conditions in which the exchange of benefits for reward is probable. Organizing around the probability is the concern of strategy.

For the purpose of instituting practice of this organizational effort, Strategy is formulated in Plans.

The business goal is then to have execution of the plans generate a profit return on the investment -- or PROI.

Shifting markets mean that PROI relies on CROI. But the likelihood that execution will drive profits rests on the likelihood that the underlying resource-processing will have the characteristics needed to establish -- on demand -- appropriate delivery of benefits for the current opportunity presented by the market.

This makes capacity and coordination the key characteristics of execution, while strategy directs the execution.
- Capacity provides immediate breathing and maneuvering room in the set of options for resource allocation and application. Growth is the increase in capacity that is effectively applied to opportunity.
- Coordination provides constructive throughput of the impacts of resource deployment, from the initial decision through runtime activity. Alignment is the increase in coordination that ensures operations meet requirements.

Those key characteristics of execution mean that PROI from execution mandates a use of resources that both results in and leverages growth and alignment.

In turn, the criticality of appropriate usage mandates direct management of utilization to comply with strategic direction. The degree of compliance realized is called "performance."

Thus, in order for CROI to drive PROI on a long-term basis, performance must support strategy by establishing compliance through growth and alignment.

This understanding is the basis of the Archestra Management Framework.

Posted by Malcolm Ryder at April 25, 2005 6:50 AM

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