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December 6, 2005

The Value of Performance Pt. 2

One of the general ideas that help to focus management properly on the business effectiveness of operations is the principle that the overall "throughput" of operations goes through different planes of impact, and that "performance" on one plane generates "value" on the next level up.

In that case, optimizing operational throughput calls for visibility based on an architecture that consistently represents the most significant planes.

I.

Here, "significant" refers to having a structural role in organizing the business's capability, regardless of the current frequency of events and interactions in that role. For proper managerial visibility on throughput, we need to know that any plane on which a critical impact is measurable is "in the picture" whether it happens to be eventful at the moment or not.

Making a key structural difference means that the plane is literally "critical". In creating the big picture of all planes, the challenge is always to take the overall construction of the organization that is hosting the activity, and to identify where within it the meaningful logical separations exist.

To do that, we must see that each separation is really a "boundary" -- on either side of which events may occur independently of those on the other side, yet also influence the conditions and/or events on the other.

Those facts, and how they mix, are what makes it so difficult to determinea proper segmentation of planes. Add to the challenge that the strength of influence across segments may be variable, and the influence may be direct or indirect.

However, against those complexities, a hypothesis can be tested through monitoring for correlations of events and conditions. These correlations will represent performance and value.

- In general, performance is a measure of how closely execution met a target achievement level under demand. So for each plane in the hypothetical architecture a signature achievement must be defined.

- Meanwhile, received value generally refers to the significance of the difference made by the impact of a supporting event. Thus, for each plane, a characteristic significant impact must be named.

Here is one top-down hypothesis of the main planes of throughput (and hereafter let's call the planes "layers"), :

Linking the target achievement of one layer to a "significant difference" on the next higher layer will decribe how performance on one layer generates value on the next higher. To do this linking, the first layer's achievement level must be associated with an impact registered on the higher layer.

Typically, the association is defined as follows: achievement on one level must be an important event on another level.

II.

Interdependencies define the prospective relationship of performance and value across the layers. The question is, how important is the achievement on one layer to the impact needed on another?

That analysis of throughput must address that question, thus leading to design of throughput that proposes and timely implementations and their adjustments. Measurement systems should focus on monitoring and validating the specific conditions, changes and consequences related to the throughput design.

In general, however:

- managing the stack of layers bottom-up is about " access" -- such as the availability of an asset as a resource, the availability of a resource for a function, etc.

- moving top-down the stack is generally an issue of "quality" -- such as the suitability of the business process to the business function, or of the business service to the business process.

This suitability is not the same as "compatibility". Instead, suitability refers to whether a given layer generates the type of impact needed by the higher layer's characteristic distinction.

III.

But again, influences across layers may be direct or indirect.

For example, M. V. Sarma of the consulting firm CSC gave the following definition:
Business Service Management - – Defines the performance of IT services in terms of business value, such as revenue, cost, risk management, market share.

If we parse this a bit, we can restate it in saying that the "values" for the business (i.e., the needed distinctions) are
- increased or sustained revenue
- lowered or controlled costs
- minimized or contained risk
- increased or protected market share

The related "performance" of IT services is not equal to the business value. Rather, we remember that value is always "a distinction with a significant difference". IT service performance contributes to a business value by supporting the significance, and the exact nature of how it is supportive is not a unique "given" but most often a result of management. For example, high-speed IT data processing can deliver timely information; this is a good achievement but that achievement does not itself lower cost. Instead, a manager's interpretation of the data leads to decisions and actions that lower cost. But the manager does rely on the visibility offered (i.e., the performance) by the data processing.

Another key note is that, to drive the desired business value, the amount of impact required may itself be achievable at various different amounts of underlying IT service achievement. This is analogous to being able to find the same given product ("impact") at different prices or financing ("achievement levels") depending on the time and place of purchase. In an IT example, an increased degree of website responsiveness is a contribution that is associated with triggering an increase in revenue, because more site visitors complete discretionary transactions. But this contribution may change from time to time or place to place, according to the business focus and location. For generating business value, it needs to be constantly visible against a target impact or threshhold set for the time and location of interest. The contribution needed for triggering inreased revenue is not always the same at every time and place.

Thus, accounting for the linkage of IT performance and business value takes several steps of drilling-down, and includes intermediary phenomena such as threshholds and interpretation. Meanwhile, describing the performance-value connection highlights impacts that are attributable to the IT-based activities and that are supporting the desired difference representing the business value. .

IV.

The important relationship to track between performance and value is how consistently the business demand for the service impact is satisfied at a given amount of service output. This principle is the same regardless of whether the service is an IT service, a Financial service, or some other kind of service.

The main issue is that if the layers are properly identified, then they are independent, although interactive. But this is exactly what we want. As illustrated in this discussion, this independence logically corresponds with two key known facts:
- changes can occur in any given layer without changing the overall business needs, and
- different implementations of the overall architecture will occur from one time to another and/or from one company to another; but the management practice itself can be consistent across these changes.

For any given organization, optimizing the overall operational throughput means focusing on the relationships between the layers, with investment and improvement directed mainly at those relationships.

But any given layer must also be managed. Once we separate a layer's output achievement from its upstream impact significance, it is possible for subsequent analysis to more precisely identify what is really necessary and sufficient performance to drive value all the way through to the business function's arena.

Posted by Malcolm Ryder at December 6, 2005 10:07 AM

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