Making Business Models Work for Enterprise Architecture

A Focused Approach to the use of business models to support enterprise architecture

work.

There has been considerable angst in the business community about aligning the IT
(Information Technology) investments to the business. This particular chestnut has been
on the CIO shortlist of headaches since time immemorial. Promoted by industry research
groups and focus groups, practiced by CIOs, the call for alignment of IT to the business
has also become the rallying call for justifying increasing IT expenses with increasing
rhetoric, formulae and financial “business cases”.

This white paper will describe the type of business models that can be useful in
enterprise architecture work, particularly in “aligning IT to the business” and in IT
Portfolio Management, where every IT project or application must be tied to a business
initiative, customer value or a key internal business function.

Business Models

When we talk about a business model what comes to mind?

If you are financially inclined – and an investor in the business, maybe the first thing that
comes to mind is the profit and loss model – how much do we spend, how much do we
make, and are we profitable or should we close up shop? You may then ask the same
financial questions over a longer time period and come to conclusions about the model
and the continued fate of the enterprise.

If you are in the investment banking business, you are probably thinking of the value of
the enterprise in terms of its stock, breakup value based on its assets and your fees for
providing advice.

If you are in the operational side of the business, your view of the business model is the
organization structure, the locations, the operations and the people involved with the
business.

If you are the CFO the financial disclosures tell the entire story, supplemented by those
financial ratios. You have your balance sheet, profit and loss statement, cash flow
statement, maybe the annual report to shareholders.

If you are the VP of sales, your sales projections represent the business model you see:
Various sales regions reporting revenue projections and cost of sales. Sales broken out by
products and services and by region and territory.

If you are a strategic planner, your canvas is bigger screen. You are looking at goals,
missions, objectives, strategies and business tactics that support the strategies. You are
looking at 5-10 year windows and the environmental trends, competitive pressures and
market trends. You are looking into the enterprise while at the same time looking from
outside the enterprise, at the enterprise.

If you are a logistics person you are looking at the business model as the supply chain
representation. Which suppliers are supplying what, when to which processes?

If your are in manufacturing you are looking at the business model as a value add chain
of processes, each of them adding cost, but creating more value. If you are a value
engineering specialist, you are using the value chain model to squeeze more value out of
lesser costs.

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Will the right business model stand up?

Business Models for Enterprise Architecture

We can broadly look at two types of business models that support enterprise architecture
work:

1. A business model from the viewpoint of the customer (External Business Model)
2. A business model from the viewpoint of the provider (Internal Business Model)

Customer-Driven Business Model

The Business Model from the viewpoint of the customer is: What products and services
does the enterprise provide for me? For any business to survive, it has to make explicit
what it offers to customers, in marketing literature, product specification sheets,
brochures and other product information. The services that are offered are also explicitly
described in websites, brochures and other literature.

Business Model Components

Current work in enterprise architecture [FEAF] has defined the following components that
comprise the business model:

Business Areas Broad classifications of services and products into major categories. The
Federal Government defines 4 Business Areas for its services.

Lines of Business Further breakdown of a major business area into a lines of business.
There are 39 lines of business in the Federal Business Reference Model
(BRM).

Products and Services

Breakdown into specific products and services that are offered by the
enterprise. The Federal Business Reference Model treats specific
services as “Subfunctions”.

This business model (designed to aggregate/standardize the classifications of services

offered by Federal Agencies works particularly well for commercial businesses.

Example of a Customer Driven Model

Acme Bolt Corporation

Industrial Fasteners
Bolts
Rivets
Self Tapping Screws
Consumer Fasteners
Bolts
Screws
Nuts and Washers

Where can we find customer business driven models? Everywhere there is customer
literature or company literature. Be it in annual reports where companies report the
performance of their various products and services, or product fact sheets that describe
specific products and features, this information is generally freely available for most
enterprises.

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All Rights Reserved
Provider-Driven Business Model
We saw that the customer’s view was as a provider of products and services. By
hierarchically nesting products and services into lines of business and then nesting the
lines of business into business areas we are able to build a fairly compact external
business model. For the provider driven model, we look inwards to determine which
common functions are required to fulfill the delivery of the products and services that are
part of the customer driven business model.

Since the enterprise internally may or may not distinguish internal business functions by
product or line (the same Marketing function marketing product X may also be responsible
for marketing product y), functions are cross cutting and are broken down by affinity
rather than the specific products or services they operate upon.

You would probably think that certain functions like Marketing, Sales, Product
Development, Human Resource Development, Training, etc are fairly ubiquitous across
corporations and are all taught as part of Business 101 in MBA classes. After all, every
company has to recruit, they have to distribute payroll, they have to make products and
they have to take them to market. They bill customers and collect money… And you
would probably be right. The bulk of functions that enterprises undertake are non-unique
across the types of businesses they operate. Though certain unique types of business do
introduce certain unique types of functions such as airlines, cruise ships, flower delivery,
etc these are also common across businesses of the same type – one airline probably
performs all the business functions performed by another airline.

When we start breaking down functions into sub functions and then finally into
processes, is where we see differences between Company 1 and Company 2.
The provider driven business model, therefore breaks out into:

Major Business Functions

These are key internal functions that need to be performed to support a
product or service in the external business model.

Subfunctions These are refinements (breakdown) of major functions into smaller

functions that provide more detail on how a major function is
accomplished.

Processes These are collections of directed business activities that fulfill the
objective of a major function or subfunction.

Process Decompositions
These are progressive breakdowns of a Process into individual activities
that work together to achieve the objectives of the process. The
decomposition can occur to arbitrary steps.

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Example of a Provider Driven Business Model

Acme Bolt Manufacturing Corp

Sales
Direct Sales
Indirect Sales
Marketing
Product Planning
Product Promotion
Website Management
Product Manufacturing
Engineering
Manufacturing
Quality Control
Packaging
Shipping
MRP
Administration
Payroll
Accounts Payable
Accounts Receivable
Contracts
Legal
Human Resources

Where can you find the Provider Driven Model?

Unfortunately this model is harder to find. If your organization is functionally organized,

the clue to the model is already in the organization chart. If not, you will have to piece
together, based on the external business model, all the functions that are required to
produce, and bring that product or service to market.

Most enterprise architecture efforts in the recent past have focused on putting together
this internal business model. The rule of thumb is that if your mission or area of business
does not change, your internal business model at the level of functions and subfunctions
will also not change.

Conclusion

We have presented two types of business models that are useful for enterprise
architecture work.These are relatively clean and uncluttered. The externally focused
business model consists of business areas broken down into lines of business broken
down into products and services. The internally focused business model consists of a
function hierarchy transitioning into a process hierarchy.

Information for the external model can be compiled from usually, readily available
customer facing materials. The construction of the internal model is easy if the
organization is functionally organized but becomes more difficult if business units are
organized on product boundaries.

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All Rights Reserved