An environment of increased competition demands differentiation from your competitors. To win over customers, firms have to show that they can get their products and services to the end user in a manner that is faster, less costly, and of higher quality.Traditionally, firms have addressed which projects to prioritize based on financial returns analysis methods, such as discounted cash flow and return on invested capital. To accomplish this mission more effectively and position themselves for success, firms have to look at project funding and prioritization decisions in a different light.
A Process-Based Approach to Funding
In order to prioritize multiple opportunities that provide returns in excess of a firm’s hurdle rate, managers today need to think about project prioritization with business processes in mind. While discounted cash flow analysis and Monte Carlo simulation provide managers with insight into the projected financial benefits, these methods neglect an important aspect of business operations: identifying which processes the prioritization decisions affect, and the impact these decisions will have on customer-facing activities.
To address this issue, managers need to examine their firm’s process architecture. While process architecture has traditionally been a technology-focused function, there is significant value in leveraging it for project prioritization and business agility analysis. Namely, what are the core business processes, and what is the level of differentiation and maturity of each of the core business processes?
By examining the enterprise processes from a process differentiation and maturity perspective, managers gain valuable insight into the processes that differentiate them from their competition. While these projects may seem to have a lower return on invested capital from a projected cash flow perspective, it is difficult to accurately calculate the future financial impact of differentiating your offering from the plethora of choices available to consumers in the environment of endless choices.
Deploying resources against these differentiating processes can add significant value to the enterprise, which can often be overlooked if discounted cash flow analysis is the only tool used in prioritizing which projects to undertake. For example, a consumer products firm could choose to deploy resources against improving receivables collection from a retailer rather than in improving their customer offering. While the former may improve day’s sales outstanding (and ultimately cash flow) in the short term, those resources could be applied to a customer-facing process such as improving the perceived value of the product or service to the customer.
By undertaking a differentiation and maturity assessment, one can determine which processes affect customer buying decisions. By prioritizing improvement in these customer-facing processes rather than those which improve internal efficiency in the short run (and thus may seem to have a better return), firms can better position themselves for future success.
Differentiating the Organization for Long-Term Value Creation
With this thought process in mind, the question turns toward execution: with limited resources at hand, how can managers leverage process architecture to better understand which projects to prioritize? In order to answer this question, key business processes must be identified through value analysis. After processes are modeled and ownership is assigned, their positioning on a differentiation and maturity matrix should be assessed.
Based on this assessment, the type and amount of investment will become evident. In addition to having a return in excess of the firm’s hurdle rate, projects that improve processes which differentiate the firm from its competitors will be prioritized, so that long term value is created.
Summary
Ultimately, managers should look at more than just ROI when prioritizing projects. While ROI tells us a great deal about projected future financial benefits, it does little justice to the consideration of market factors—if everyone improved the same processes and failed to differentiate their offering and build process maturity, ROI calculations would look vastly different because consumer choice would be greater, and net revenues for the firm would potentially be lower.
Through the assessment of business process differentiation and maturity, firms can prioritize which positive-ROI options to prioritize, and what type of decision to make—whether to sustain, source, or leverage a business process for future success.
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