We spoke with Jeanne Ross, Yury Zaytsev, and Martin Curley about the emerging business value model concept. None of our interviewees refer to the concept specifically as a "business value model." Ross and Zaytsev use the term operating model, and Curley talks about an enterprise capability framework. PwC introduces the term business value model to incorporate the broader themes that all three discuss in overlapping, though not identical, ways.
Discussion with Jeanne Ross
PwC: Companies are increasingly aware of the need to develop management strategies that create a sustainable future while they respond to their day-to-day market challenges. Analyzing your customer value proposition and figuring out how to extend that proposition is one approach to sustainability. Is this a reasonable approach?
JR: We certainly see a lot of companies trying to recognize the customer and provide an enriched experience to the customer by leveraging customer data and the customer relationship. But it's hard to do, and I think we don't have a lot of examples of companies that do that well.
PwC: What does your research suggest companies need to look at to have a sustainable future?
JR: First you must figure out how you want to operate. If you understand how you want to operate, then you can have a strategy and know how you are going to execute it. What do we mean by "how you want to operate?" For a given customer value proposition, you must understand the extent to which you need everybody performing the same critical processes the same way. You also must understand the extent to which the individual parts of the organization must share data, so they can function effectively.
PwC: How does this square with the need to innovate? How do you make customers feel special if the operating model dictates treating everyone the same, for example?
JR: One way of looking at the operating model concept is that it frees the organization to innovate at the edge. This is very consistent with what Charles Handy was saying about 20 years ago. You don't want everybody focused on the things that just have to routinely get done. That's why you standardize them. You want everybody focused on the things that make you unique. That's what you accomplish by basically taking the routine tasks off the plates of managers. It's not the only way to look at operating models. For some companies, the competitive edge will come from an end-to-end global capability that others can't match. And so for those companies, the operating model is about articulating and understanding that competitive edge and how you are going to make sure you sustain it.
PwC: But once you put these questions to a management team dealing with their specific complex reality, they may find it difficult to come to agreement. What sort of frameworks can help management understand their operating model?
JR: I think all the frameworks, at least the ones that have long-term value, help management understand their choices a lot better. People are looking for frameworks that give them focus, and I think that's why our operating model framing has proved valuable. It puts things in terms of simple choices. Interestingly, when we study companies, they seem to have the most difficulty with maintaining their focus. This means making the tough choices, deciding what are we going to be versus what we are not going to be. The whole goal of a framework should be to help people focus, so that the limited time they have is spent on the most important choices they need to make.
PwC: What are some of the good things that happen once this sort of focus has delivered a mutually understood, agreed-to core operating model?
JR: If we can get this core into place, then as long as the general concept of how companies are going to make money in a specific industry is stable, we can count on empowered people to make the organization successful. I think this is the beauty of really understanding your core. You provide people with information, explain to them the goals of the organization, empower them to meet those goals, and encourage them to experiment. The companies I see right now that are good at this concept of a core have basically changed what they expect people to do. For example, in the simplest manufacturing environment it's about saying to your salespeople, "From now on it's not just about revenue; it's about profitability. So take a look at how much it cost us to customize something for your customer. If they really want it, let's make sure we will make money on it. Don't just say, 'Well, you're a good customer; we're going to do what you want.'"
PwC: I would expect that a major challenge to defining your core operating model would be to achieve a shared understanding across your senior management team about how the organization really functions. Doesn't this run up against the functional organization of management? How will the head of marketing, for instance, truly understand, say, the supply chain process?
JR: People are in marketing because they love marketing, or they're in manufacturing because they love manufacturing-and so of course the part of the organization they're in is what's most important to them. And that's a problem. On the one hand, we want that kind of passion, and on the other hand, it gets in the way. The framework we've talked about and its ability to simplify and provide focus does not solve that problem. The governance process can solve that problem, but the simplification process can't.
PwC: Are you seeing some creative, new approaches to governance to address this issue?
JR: We are seeing really leading-edge companies take their 30 to 35 top managers and say, "From now on, you are all going to sit on at least two strategy teams." These strategy teams focus on things like becoming the largest company in the market, being number one in customer service, or producing the highest quality scores. They put these top 35 senior managers on one team covering an area that they are deeply familiar with. But they also put them on one of the strategy teams that isn't their specialty. They make those strategy teams responsible for defining change and systems requirements. They quickly find senior managers saying things that they have never said before, such as, "Oh, if you need that system to do that, then there is no point doing my system until we have done your system. We will make yours the higher priority."
That's like a miracle. And I think that's a governance process. I don't see a framework like a core operating model creating this sort of miracle. Making these strategic tradeoffs is all about learning what you do in the context of what everybody else does. For that sort of learning to take place, you must put in the time, and you must have people willing to articulate their own context, but they also must be willing learners. We're seeing these creative governance ideas make that happen.
Discussion with Yury Zaytsev
PwC: An MIT case study1 explained that Swiss Re has pursued the development of a global operating model, a process that has taken more than a decade. What was the motivation for this investment?
YZ: For many years, Swiss Re had been operating as a combination of many different legal entities, with different brand names, connected to a parent company in Zurich through the capital structure. But those entities basically operated on their own client base with their own ways of doing things. As this environment grew, we arrived at a certain level of diversity, because nobody looked at it as one structure, one global enterprise. In 1996, just after I joined Swiss Re as group information officer, Walter Kielholz was named the new CEO to replace Lukas Mühlemann, who had moved on to lead Credit Suisse. Walter was interested in looking at how we could become a truly global enterprise and take advantage of global capital, global client relationships, and global diversity. He understood that the diversification of our risks on a global basis together with our use of capital and the use of our skills and experiences on a global basis could create a more sustainable Swiss Re.
PwC: What exactly did sustainable mean in this context?
YZ: Here's how I think about it. There are many forces that influence corporate performance. These forces may come from the market, they may come from organization changes, and most importantly they come from the ability to use skills and competencies embedded in the corporation. And the more a company can look forward and align itself to the markets to deliver better performance without really changing its operating model every time it needs to do something, the more this company becomes sustainable. This operating model is not something that you can define once and say, "I'm done." It's more a journey than a destination. It's a matter of responding to short-term developments without changing your core operating model, while also applying lessons to the long-term evolution of the model.
PwC: So the primary goal of this decade-long project was targeted at the development of a global operating model?
YZ: We did not describe it as an operating model at first. It became apparent to us as we made progress in becoming a globally consistent company that it could be described as an operating model. At first we called it a business application architecture and business information architecture initiative. And these were driven by our business model, defined as the end-to-end processes that define our internal value chain. But what eventually surfaced was a more fundamental challenge: how to bring the right information at the right time and the right place to the right people so they can make the right decision.
Today we describe our operating model as a combination of three things. It's a business model defined in core business processes, it's a set of system and business solutions that support elements of this model, and it's the information capability that allows the company to make decisions required during day-to-day operations. All three greatly interact with and greatly depend on each other. However, all of that is definitely driven by the business model and the business design of this model.
PwC: What phases did you have to work through before you saw some real changes?
YZ: We are talking about a process that has taken years, so I will have to greatly simplify the phases. At the highest level they could be called the technology infrastructure standardization phase, the business terminology standardization phase, the business process harmonization phase, and the operating model improvement phase. The latter represents the continuing evolution of the model. The phases also overlapped; they were not strictly linear.
PwC: Can you describe the business terminology standardization phase? Is this like an enterprise data modeling exercise?
YZ: No, not at all. You must understand that this effort needed a foundational element to proceed, and that element was everyone having a common understanding of the Swiss Re business model. Semantics are a critical part of it, and we created our own data language, called Swiss Re Data Language, where we documented the terms. When we referred to terms such as risk, client, customer, or relationship, it was all documented in very specific language. This made it possible, then, for us to create a shared understanding of one common Swiss Re business model across the global firm.
PwC: You referred to "harmonizing your business processes" earlier. Did you mean "standardization"? Harmonization could mean a lot of different things.
YZ: Standardization means you define certain sizes of screws, certain sizes of bolts, and everybody uses the same. To me, harmonization is a creative process. You bring many people together with their distinctive knowledge and understanding of a business process they all do somewhat differently, and you help them create one inclusive common process.
PwC: So harmonization is really the process, and standardization is the outcome.
YZ: Correct. You can describe it this way.
PwC: Where was all this harmonization activity leading to? What motivated such a large investment?
YZ: We knew we could greatly increase the use of our internal competence, skills, and knowledge by bringing everybody to this consistency we called harmonized business processes. After we define things at this level-and we basically define it with a key rule that as long as it's one core process, it requires one solution-we don't need many solutions. You can immediately see that by bringing people's skills and knowledge into a harmonization process, we can develop a set of consistent solutions. This includes being able to deposit and retrieve a lot of different information in a consistent form, with consistent definitions, consistent usage, and following the design of a core business model. This allows any company of our nature, which is greatly dependent on people's skills and information, to benefit more and more as this operating platform is developing forward.
PwC: Were all business processes treated the same? Was the focus on harmonization targeting non-value-add processes, what some might call commodity processes?
YZ: Commodity processes were not our focus.
PwC: So your harmonization effort targeted only those processes that specifically defined you as a reinsurance business?
YZ: We more or less put the business model together starting from client relationships and proceeding through assessing risk, underwriting, pricing, and on to the elements of collecting cash, paying our claims, and so on. If we wrote down all our business processes on a piece of paper, we basically would divide this piece of paper in two. On the left side would be everything that is driven by the markets, by our own internal competence, and by our own knowledge of the company. We decided we would most likely need to develop these applications ourselves. There are not enough market tools in our business that would be able to help us. However, everything that is on the right side of that piece of paper-cash collections, finance, HR processes, etc.-is more common to the industry, and therefore our advantage there is to find the outside tools that could be implemented faster and efficiently, and we can gain some benefit there.
1 Yury Zaytsev and Jeanne W. Ross, "Building a Global Operating Platform at Swiss Reinsurance Company," MIT Sloan School of Management Research Briefing VIII-1B, March 2008.
Discussion with Martin Curley
PwC: Our focus in this issue of the Technology Forecast is on the strategic use of value models to enhance enterprise performance. Is this something Intel is actively engaged in today?
MC: We are. In fact, we are one of the founders of the Innovation Value Institute (IVI), which puts value management front and center of its research agenda. In the IVI we are partnering with other leaders, such as Boston Consulting Group, Chevron, SAP, Microsoft, and Astra Zeneca, to build an integrated value-based model that helps drive a structural change in the way organizations get value from IT. We use two main frameworks at Intel; the first derived from IVI research. We have the IT Capability Maturity Framework (CMF), which is our process map for IT. It says, "Here are the business processes that we need to run IT." And then from a business standpoint, we have a related framework that we're finding quite powerful called the Enterprise Capability Framework. And this, basically, is a map of all the business processes within Intel, at different levels of granularity. It includes everything-design processes, manufacturing, sales and marketing. What we're able to do with both frameworks is decide which processes are going to be differentiating, which are going to be competitive, and which are going to be base. With that understanding, we can do a health assessment and identify where we have underinvested and where we have overinvested.
PwC: Do these frameworks allow Intel to better understand the challenges of creating new value for customers?
MC: Yes, they do. They also are providing a road map for improving IT and business capability to deliver more value. We are able to assess where we are against a reference capability framework and indeed benchmark against other companies to determine our relative maturity.
Intel is fairly unique. One of our senior VPs talks about Intel as being the largest single-cell organism on the planet. We have a very successful core model. And Craig Barrett, our chairman, talks about that core model being a creosote bush, and everything that's underneath it has died because the model is so successful. The processor business model is one of those business ideas and models that appears once in a generation, and trying to replicate that is difficult. So we do have one operating model as a company, and that is enormously successful. We can even make bad ideas work, and we have. Now Intel's challenge is to grow-whether we profit from the core or do something different. Our CEO, Paul Otellini, has launched a number of high-potential growth initiatives, and to support this, we need to find an operating model for the company that keeps the core going but also allows new businesses to prosper. So I think at the moment our Enterprise Capability Framework is a view of the core operating model with a couple of skews that are allowing us to try to find a path to some complementary operating models that can coexist with the core operating model.
PwC: Is this focus on really understanding your operating model a new development?
MC: I think the formalization of a business operating model vocabulary is new. People have had an intuitive sense of it without really calling them business operating models. I think the work that Jeanne Ross and other folks are doing is really helping to educate management. It makes things visible that were sort of taken for granted. Managers have to make explicit decisions as they define their company's operating model. It's only my perspective, but I think the business operating model concept will probably become much more talked about and debated.
PwC: How does this focus on value creation and operating models relate to innovation at Intel?
MC: I think we do an outstanding job with our product innovation and with our process innovation, and they're two of our core competencies. I think we will continue to do that. I think we've figured that out. It's very hard. You know, our engineers excel and they do a fantastic job, but the opportunity for Intel now is actually business innovation. We have got to innovate on our business model and on our business operating model, so that we're able to monetize the invention and innovation better than we've done it in the recent past.