Capturing processes usually involves creating two versions, the as-is and the to-be, in order to support the transformation journey for an organisation. Any such transformation journey requires a business case – and often several, each dealing with separate aspects. In this column I will explain how process designs can be used to generate the cost-benefit analyses that underpin such business cases.
First, though, why tackle this is in a column called “Human Processes”? For the simple reason that very few organizations have completely automated processes, so it is necessary to deal with the human aspects of change, which are often among the most expensive. For many organizations, labor is their most significant cost.
I'll also say up front that it is not possible in a short column like this to give more than a brief illustration of the approach. I may say more in future columns, and in the meantime readers are welcome to contact me with specific questions.
The starting point for measuring change is not a process diagram at all, but rather a different kind of diagram entirely, drawn from the venerable technique of System Dynamics. Here is an example Causal Loop Diagram (from https://en.wikipedia.org/wiki/Causal_loop_diagram), examining the growth or decline of a life insurance company:
Diagrams such as this are used to illustrate the relationships between parts of a “system”, or if you prefer the term, of an “ecosystem” – i.e., a real-world area of interest. In plain language:
- The diagram as a whole represents the activities of a set of stakeholders;
- The nodes in the diagram are the things affected by those activities, represented as quantities – time, money, stock, capability, skill, and so on;
- A line between nodes tells you that having more of the source results either in having more of the target (if labelled with a plus sign) or less of the target (if labelled with a minus sign).
Causal loop diagrams are non-technical and easy to understand, so make a good basis for discussion among subject matter experts and senior stakeholders. They allow you to detect feedback loops (“reinforcing” and “balancing”), which can be used to control the amount of key quantities – such as money. What is more, causal loop diagrams can be transformed semi-automatically into a different form of system dynamics diagram, a stock and flow diagram, that can be used for numerical analysis.
From the above, it should be clear that System Dynamics offers great potential advantages for the development of business cases, both for their arguments and for their cost-benefit analyses. However, despite the increasing availability of powerful tools, and periodic revivals of interest, the technique is not widely used. Some typical reasons are laid out in “A Critical Review of the Criticisms of System Dynamics” (www.systemdynamics.org/conferences/2012/proceed/papers/P1228.pdf), which also provides counter-arguments, although it does not (I believe) address the key blocker.
System Dynamics is generally used by people with a mathematical background, such as financial modellers, who usually do not also create, or even take a particular interest in, the business processes that explain the feedback loops on a causal loop diagram. As a result, such diagrams live in isolation, and appear to business stakeholders to be not only complex but also intractable. They just do not know what to do with them next.
The way forward is to align system dynamics with business processes, as follows:
- Create a causal loop diagram;
- Create as-is and to-be business process diagrams, down to the level where the differences are visible in detail;
- Do a gap analysis of the business processes, to identify the transformation opportunities that require a business case for investment;
- For each such opportunity, track back up the process hierarchy until you get to a high level process that effectively puts a boundary around the associated changes;
- Compare this high level process with your causal loop diagram to identify which nodes on the latter are affected by the changes;
- Extract just those nodes into a new, smaller causal loop diagram;
- In the new diagram, identify the reinforcing and balancing feedback loops;
- Transform these loops into stock and flow diagrams;
- Use tools to simulate the stock and flow diagrams, gathering summary statistics;
- Use the summary statistics as the basis of a cost-benefit analysis and hence investment case.
I have used this approach with success to identify optimal transformation opportunities in large-scale, multi-stakeholder environments whose complexity appeared initially to be almost insurmountable. By combining System Dynamics and process modelling, it is possible to obtain a cost-benefit analysis of each transformation opportunity that is not only based on sound theory but also has buy-in from senior stakeholders. You may not make the best impression if you try to present detailed process flows to C-level executives, but show them a causal loop diagram and they will recognize that you genuinely understand what you are dealing with.