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IN THIS WHITE P APER

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WHITE P APER Business Performance Management: Merging Business Optimization with IT Optimization Paul Mason March 2004

In this white paper, IDC describes how business and IT optimization strategies have largely occurred in parallel. However, the relationship between the two has rarely been appreciated, even as the importance of IT to the business has grown. Top business managers have been increasingly embracing a set of tools for business process optimization (BPO) that go beyond business process automation and business intelligence to provide true optimization of the individual components of the business. At the same time, IT executives and CIOs are reassessing the tools they are using to manage IT. Many of these tools have, in the past, been designed to manage the performance and availability of IT components and applications. Recently, however, there has been a growing recognition of the need to relate these to business requirements and a whole new concept, called business service management (BSM), has appeared. This white paper explains how BSM is really a special case of BPO — one that is applied specifically to the IT operation. This paper also describes how top management needs to embrace business performance management (BPM) — something that goes beyond BPO. By using tools with such names as "balanced scorecards," today's CEOs and top managers are able to keep a closer watch on the performance of the business relative to its strategic goals and are more able to rapidly identify areas needing attention. Both conventional BPO and the newer concept of BSM need to be thought of as part of such a toolset.

EXECUTIVE SUMMARY Business Process Optimization — A History Over the past decade or so, major corporations have been leveraging information technology to find ways to increasingly optimize their business processes. This has both yielded substantial cost savings and improved product and service delivery and improved customer satisfaction. These developments occurred in a step-by-step manner as enterprises graduated from simple integration projects to true business optimization. As shown in Figure 1, emphasis changed from its start at simple application integration, then moved to

business process automation (to obtain internal efficiencies), and then to business intelligence (to improve the knowledge of what components of the business were doing). The development of balanced scorecards is another example of this — they are more than just performance indicators; they allow managers to understand relationships and to optimize investments and management attention. The final step has been the integration of the intelligence and the automation into a closed-loop process that actually allows one to optimize the business. When enterprises are able to model the business processes and create metrics (such as costs) for them, deploy the process, and use business intelligence to monitor the results — all using the same toolsets — then the goal of continuous improvement comes within reach.

FIGURE 1 The Convergence of Business and IT Optimization

Business Trends

Business Performance Management

IT Trends

Business Optimization

IT Optimization

Business Intelligence

IT Operations Intelligence

Business Application Integration

IT Automation

IT Optimization

Platform Integration 1980

1985

1990

1995

2000

2005

Source: IDC, 2004

IT Optimization As the above changes were occurring, IT was struggling to catch up. While the business was working on application integration and process automation, IT was working to complete its own parallel vision of integration of management across platforms and automation of IT operations across the enterprise. The IT step that parallels the implementation of business intelligence is the development of a service management approach that is organized around business goals. IDC terms this

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business service management. The next step is to integrate this business service management approach with the processes for orchestrating resources to achieve true IT optimization to meet business goals.

Business Performance Management As IT implements the final stage in a process of IT optimization, then business process optimization and IT optimization will start to come together to provide a true end-to-end view of the business using real data that is relevant to business needs. In this way, we allow IT to be optimized for the business. The result is that a true business performance management solution will then be created — an approach that can drastically increase the responsiveness of a company to the needs of its customers by giving both business leaders and IT management access to the real-time information they need to identify problems and take action quickly.

SITUATION OVERVIEW Business Drivers for Business Performance Management Economic and competitive pressures have been creating severe challenges for business unit managers. These mostly revolve around issues of "velocity" — how do they obtain and evaluate information rapidly, and how do they use that information to respond rapidly and appropriately? They know they are failing to respond to these challenges when they see certain symptoms. Examples are: ! The company is too slow to recognize or detect new opportunities, moves by competitors, or changes in regulatory environment because: #

It can't see what is currently happening all across the business.

#

It can't put current business conditions and events in the context of what previously happened.

#

It can't relate what is happening to company goals and objectives.

! Even if the company did understand what needed attention, it can't make the needed changes quickly enough because: #

The company is always reactive and not predicting the problems early enough.

#

The trends are not tied directly to change vehicles to enable action to be taken.

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To address these challenges, business leaders need a solution that enables them to see their entire business in real time while also predicting how current trends will affect future performance. This solution needs to span the IT infrastructure that is increasingly critical in supporting key business processes as well as the business processes themselves.

The Origins of Business Process Optimization Business process optimization (sometimes also called business process management) evolved from three earlier initiatives that companies undertook in order to enhance business efficiency and responsiveness. And to optimize the business. The three earlier capabilities are prerequisites and must be successfully completed before the value of BPO may be obtained. These three steps were application integration, business process automation, and business intelligence.

Enhancing Business Operations Efficiency Through Application Integration At first multiple computer applications grew to meet the needs of the different parts of an organization — procurement applications, bill-of-materials applications, process management applications, shipping applications, billing applications, and customer support applications, for example. It soon became clear that it was impossible to streamline operations and minimize waste unless these applications were able to share information and interact with each other. Thus the concept of application integration evolved, initially based on various middleware technologies and then evolving through such tools as application servers and now Web services architecture. Although this first step brought about some efficiencies in that information did not have to be reentered into applications, thus increasing information flow and accuracy, this did not provide a significant increase in business agility. That occurred with the next step, business process automation.

Achieving Business Agility Through Business Process Management The second step in the evolution was to achieve true business process management through integration and automation. This required either that the business processes themselves be adapted and changed to take full advantage of the interoperation of the applications or the process steps be automated to support the business process. In the best of all worlds, it would be most effective to approach this by using a single tool that would enable one to: ! Model a business process from end to end. ! Set measures (including costs) you would like to track. ! Generate code from that model — code that runs as "process automation." ! Monitor what is really happening — against the measures you set. ! Improve the model using the real, measured data.

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The benefits from this step go beyond simple efficiency and staff productivity and start to yield actual improvements in process effectiveness that have a real impact on business and customer satisfaction. Another step, however, is missing — the collection and dissemination of intelligence about the business and how it is doing.

Business Intelligence to Add Context and Mine Knowledge Now that business applications are more integrated, and the framework established for continuous processes improvement, it is necessary to track in detail how well these processes are serving the business. The collection of relevant data into a data warehouse for later analysis is a good start here — it enables managers to then mine the data for knowledge about the effectiveness of internal processes and the results that are obtained in outputs such as product quality, delivery speed, inventory turns, customer satisfaction, and so on. The general term for this is business intelligence — the creation of intelligence about how well the processes are working and the results that are obtained. The information is typically displayed in the form of so-called dashboards — an interface designed to deliver user-specific information relating to the health of the business, typically represented by key performance indicators (KPIs) and links to relevant reports. One link is still missing, however. That is the relationship between the various components of the business and the financial results, and the ability to tune or optimize operations to respond to changes. Doing this requires applications that can present consolidated, real-time (or near-real-time) information across the enterprise — information that includes financial metrics to permit tradeoffs to be made. That is the role of enterprise information integration and the balanced scorecard. Managing to Strategic Goals Using Balanced Scorecards

We have seen that the use of applications as described above can help managers to optimize the business. One technique to do this is the balanced scorecard. Balanced scorecards are not the same as dashboards — they are applications that define, measure, and analyze a business strategy according to key performance indicators. A relatively new technology, enterprise information integration, has emerged to facilitate such applications by giving them an integrated view via portal technology across disparate, but related, information in real time. Thus current indicators can be readily compared to historical trends or business goals. The key is that these analytic applications represent the causal relationships and thus support a closed-loop process of measuring and managing the execution of strategic goals across the organization. This is the promise of business performance management.

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Business Service Management and Its Place in a Business Performance Management Strategy The Parallels Between IT and Business Operations There are clear parallels between the IT operations and business operations arenas (refer back to Figure 1). Just as businesses went through a need to simply integrate disparate applications, so IT had to create new ways of managing across distributed platforms. Later, IT automation efforts that were designed to improve IT operational efficiency and productivity also paralleled the business process automation efforts undergone in the rest of the company. Still later at most companies, with the development of so-called management frameworks, IT was able to create centralized operational intelligence that could report on the status of all systems and networks via their equivalent of dashboards. IT is lagging, however, in its implementation of the final step — IT optimization to achieve strategic business goals. IT needs tools to manage its operations from a business perspective and to implement optimal strategies to deal with change. This is the role of business service management — IT's version of BPO.

Business Service Management as a Domain-Specific Tool for BPO As shown in Figure 2, IDC has previously described a hierarchy of capabilities to support a business performance management strategy. At the bottom, we find the foundational layer (the infrastructure for collecting, warehousing, and presenting the information). Above this is the process-specific operational level, where the various business process are managed. The original IDC work categorized this operational or process-specific group as being predominantly financial-intensive, production-intensive, people-intensive, or customer-intensive. But even though IT operations are slightly different, it is an operational department, nonetheless. The internal service departments often need domain-specific tools to provide the requisite capabilities. Examples include the service called Biz360 for corporate communications departments and so-called results-based marketing concepts for corporate marketing groups. BSM, then, is a domain-specific tool for business optimization that is especially designed for IT. Companies implementing BSM will be positioning themselves for greater success by linking IT processes more explicitly to the business and by extending the principles of BPO to IT as well as to business units.

Adding IT to the Strategic Level of Management As Figure 2 shows, there is a strategic layer above the process-specific operational level. This is where we generally find overall corporate performance being managed. This business performance management layer is where one typically finds the concept of balanced scorecards. The four "dashboards" usually defined here are financial-related, internal-process-related, learning-related, and customer-related. But IT needs to be treated at the same strategic level — after all, IT is strategic to most businesses. In other words, a BSM strategy is key to any rational BPM approach.

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FIGURE 2 BSM and Its Place in a Business Performance Management Strategy

Business Performance Management

Balanced Scorecards for Corporate Performance Internal Process

Financial

FinancialIntensive Processes

ProductionIntensive Processes

Learning Growth

Customer

PeopleIntensive Processes

CustomerIntensive Processes

IT and Business

ITIntensive Processes

Portal Technology Enterprise Data Warehouse (Data, Rule Repository)

Internal Data

Activity Models, Drivers, Metrics

External Content

Other Data sources

Source: IDC, 2004

Business Performance Management as a Corporate Strategy The Business Performance Management Value It should be clear from the above discussion that BPM is really a business transformation or evolution strategy that employs all the advances that have been made in using IT to enhance business efficiency, integrate processes, and manage and present information. BPM offers an enterprise that implements its three major capabilities that, together, have the potential to dramatically increase business performance and responsiveness to opportunities, competitive challenges, and changes in regulations. These are: ! Greater visibility into complete end-to-end business processes across the business and the infrastructure (such as IT) that supports it ! The ability to analyze performance against trends, goals, and key performance indicators in real time (or near real time) to assess progress

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! The ability to understand and model the impact of changes in processes and to reallocate resources in order to optimize execution

The Track/Analyze/Model/Adjust Cycle of Business Performance Management Business performance management applications, including so-called balanced scorecards, are analytic applications. Their goal is to provide a high-level view of a business's performance using financial and nonfinancial indicators and to enable management to understand key interrelationships and "close the loop" between information and execution. As IDC pointed out some years ago, business performance management applications are different in key respects from earlier executive information systems. First, they are applications rather than tools, as they incorporate models pertaining to specific business measures or indicators, as well as the ability to "crunch the numbers" and present them. In addition, the users of these applications are broader than those targeted for an executive information system. As IDC researcher Henry Morris pointed out, "If only senior executives use BPM applications, there is a serious disconnect between the business objectives and the communication of these goals (as observable measures) to the many individuals whose decisions determine actual business performance." We will see below that IT needs to be included in this observation. BPM is also different in that it incorporates a concept of a feedback loop or cycle that is designed to continuously optimize and respond to changes. The BPM model for management is based on the concept of the track/analyze/model/adjust cycle (see Figure 3). This management model depends on the availability of effective tracking processes that measure the right things. Top-level management relies on an aggregation of metrics that come from business-unit tracking processes. Thus, the model is a hierarchy (refer back to Figure 2). Each business-unit tracking process needs tools to be able to: ! Collect and store information, data, and events from across the business in order to track what is going on. ! Control and analyze the information, data, and events in real time to understand the situation and identify trends across the organization and value chain. ! Visualize a model of the analyzed information, data, and events so that the business situation, opportunities, and trade-offs are clear to business-unit leaders in real time. ! Act on the information in an attempt to move toward an optimum. The success of this action is then tracked, starting us back at the first step.

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FIGURE 3 The Track/Analyze/Model/Adjust Cycle of Management

Track

Adjust/ Act

Analyze

Model

Source: IDC, 2004

FUTURE OUTLOOK As business performance management becomes a cornerstone for business transformation, there needs to be a recognition that creating efficiency in IT (while valuable) is not sufficient. Just as business operations efficiency is not the whole story, but is now being extended to business optimization, so optimization of the IT operation is the logical step. In fact, linking the two for a full view of the business and IT together would provide the best results. Companies that undertake a business performance management strategy that includes IT will be setting themselves up to be industry leaders in the future through their ability to take advantage of opportunities and respond to competitive threats more quickly. That is the role of business service management — to create that last linkage between IT and the business to enable BPM to truly extend to all components of the organization.

CHALLENGES/OPPORTUNITIES We have seen that the full value of BPM can only be attained if IT is also included in the process. Information technology is so imbedded in all phases of most businesses today that it seems obvious to say so, but most discussions of BPM speak in terms of

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supply chain optimization, order-to-cash streamlining, customer service effectiveness, and so on, without any mention of IT. The reason for this is twofold: ! IT has failed to bring its management tools in line with modern concepts of business optimization with the emphasis being on managing the IT components. ! Business-unit managers have continued to see IT as the "gnomes in the basement" and have failed to see how a true partnership with IT would create a global optimum for the whole company. The challenge for IT, then, is to wholeheartedly embrace concepts such as BSM in order to create an optimized IT operation ready to participate in corporatewide BPM initiatives. If companies do this — make IT full participants in a corporate BPM strategy — then IT will truly be optimized for business and business truly optimized for IT.

CONCLUSION For some years, major corporations have achieved substantial cost savings and have improved product and service delivery and customer satisfaction by leveraging information technology to find ways to increasingly optimize their business processes. The developments started with simple application integration, then moved to business process automation, then to business intelligence, and then finally to the integration of the intelligence and automation into a process that actually optimizes the business. This has allowed managers to better understand relationships and to optimize investments and management attention. Despite being the enabler of many of the technologies to permit these advances, IT has lagged in the application of the concepts to its own processes. When IT finally becomes a full participant in this business performance management world, then IT and the rest of the business will truly be optimized for each other.

Copyright Notice External Publication of IDC Information and Data — Any IDC information that is to be used in advertising, press releases, or promotional materials requires prior written approval from the appropriate IDC Vice President or Country Manager. A draft of the proposed document should accompany any such request. IDC reserves the right to deny approval of external usage for any reason. Copyright 2004 IDC. Reproduction without written permission is completely forbidden.

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