Sunday, October 27, 2013

How to Perform Cost Benefit Analysis for EA

EA is Philosophical, Systematic, Linguistic,  Scientific, Artistic, Can you Measure such Paradox?

Not being able to provide a clear value proposition is big hurdle for EA to clear and get the credibility to be able to make a difference within an organization. When you propose an EA initiative to the C-level executives who look at how the EA initiative will contribute to the bottom line or even top line growth. So how would one go about justifying the costs for such an initiative when you cannot measure the intangible benefits?


The value proposition EA is about improving the medium to long term performance of an enterprise. So the first stage is to define the boundary of the enterprise in question, which could be anything from a transformation program to a complete multi-national enterprise. The next stage is to define the degree and nature of any medium term performance improvement needed. If the performance of the enterprise is going to be good enough in the medium term, then there is no business case for Enterprise Architecture

EA is a management philosophy more than anything else. If senior management holds to a philosophy that planning things is better than reacting to them, they will see the benefits of EA. Since EA is the enterprise wide architecture, watch for benefits from rationalization of resources, streamlined operation, and alignment of resources to operation and strategic planning, faster understanding of the enterprise, common vocabulary, realization of vision and objectives.

EA by itself is a philosophy, but you can do a cost benefit analysis for EA when it comes to EA specific initiatives. The cost benefit would be done for things such as admin costs for meetings, design/ modeling, and then figured as a function of a cost-benefit analysis on infrastructure projects that come about as a result of the EA taking a pragmatic approach. You have to instill the philosophy first, then you can go about building the infrastructure, otherwise you get the same mess as you had before. The important thing is not to look at EA as a project, but rather a driver of initiatives with common appeal across the organization.

EA is an indirect value proposition in the same way that a strategic planning group is and thus any ROI or Cost/Benefit analysis is extremely difficult. Architecture aids in the transformation from strategy to plan and acts as assurance of the quality of the strategy and contributes to improved quality of the plan - higher likelihood of success, lower risk of failure, earlier delivery of outcomes. Statistically, more than two third of business strategies are not successfully implemented. EA contributes to increasing success rates.

EA as type of upfront analysis would not only let you measure the impact of EA, it would also help you steer the program to drive maximum benefits in the right direction. Then by factoring some assumptions from risk / rework reduction into NPV / probabilities approach,  it should be possible to illustrate the costs and benefits that might have been achievable on past projects with different approaches to planning. Applying the insight gained from this exercise would then allow a reasonable degree of confidence in the order of magnitude of benefits achievable by using an EA approach on future propositions.

C-Levels want to hear about customer value proposition or business value proposition. When you think of intangibly specific value proposition gets replaced by probabilities (you have a 30% probability of seeing a $2.1 million NPV over 5 years, with a 5% chance of $-25,000 NPV, and a 67% chance of seeing a $600k NPV). Each intangible can be assigned an estimated probability that it will affect one or more tangible, which you can then use to derive these types of summary statistics. If you want to get really ambitious, you might use a Monte Carlo analysis to generate those statistics

Enterprise Architecture must be goal oriented from the beginning. Once you identify the goals, it would be easy to understand and agree upon leading and trailing indicators to measure the impact of EA. In situations where it is difficult to measure, the typical approach is to develop some indicators rather than direct objective measures. There is nothing to say that this could not be done for EA. Again, the timescale for measuring cause and effect, so to speak, and the number of complicating factors are such that it may not be possible to achieve high levels of confidence in the results. An EA cost-benefit analysis is just like any financial analysis; you make a lot of assumptions. That’s OK, the C-Suite is used to making with assumptions

The biggest challenge with evaluating the ROI of Enterprise Architecture comes from the difference in time scale between EA decisions and measurable changes of EA derived actions. This state exists because of three elements, one of which is the time it takes between EA efforts and the results. The other two include the fact that people seldom follow the plan, and that if someone actually follows the plan there is no way to attribute success or failure to any element in the plan. EA is an integrative philosophy intended to give better survival attributes to the organization (that is better sustainability and growth). An EA driven change is systemic (affects many interdependent parts) and, as such, costly when compared with single purpose local poking.

Although cost-benefit analysis for EA is difficult to perform, it is much easier to perform if you have a project that has at least implemented aspects of EA as well as projects that have not. A similar example would be what's the cost benefit analysis of using an architect, have been able to show a benefit when you have implemented EA especially showing how projects are able to meet budget and schedule, which in the end the C-suite is most concerned. The primary benefits of EA are reduced risk and cost avoidance. It is like any planning activity. The benefits are in reduced rework, etc.

EA's ‘promotion technique’: The simplest way to "sell" EA is to do it in an incremental fashion and in a manner where there are clear deliverables with clear value being added. It is reasonably feasible to be adding value to virtually every enterprise encounter. More often than not, this is through a focus on the core process, the outcomes required of the process and the changed capabilities which will support realization of the outcomes being soughtHowever, the narrower the time and scope window of evaluation, the lesser the visibility of the EA ROI is. In architecture there is intuition; this is why it is related to both science and art.

EA as answer for enterprise's needs which are result of problems and pain points. So you may look benefits in problem solving. Benefits can be counted only in connection with proper organization. Looking for universal value is seeking of Holy Grail. You need also remember that EA is not one time action which solve problem, it is building capabilities which are leveling organization to higher level of management. So check what assets will you provide and look what will be benefits - ROA. It may be seen in better decision process, risk avoidance ... And last thing - adjust chosen benefits to decision maker. Even the highest ROI may not give you "GO" decision if solved problem won't be the concern.

Either EA as philosophy or practice, the ‘ivory tower’ approach is no longer fit for the rapidly change, doing EA with justified cost benefit analytics is not only necessary, but also imperative. Actions speak louder than words. Leading by example is powerful. Practicing what you preach is essential.










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