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Walking the Competitive Edge with Business Process Management
By
Henk Pater
September 2005
Master of Science in Business Administration Specialization Business & ICT,
Faculty of Management & Organization, University of Groningen, the Netherlands
Student:
H.R. Pater, s14225528
Supervisors:
Drs. D.J. Schaap
Faculty of Business Administration University of Groningen
Prof. Dr. E.W. Berghout Faculty of Economics University of Groningen
Drs. Peter A. Buur RE RA Senior Manager KPMG Information Risk Management (Financial Services)
Preface
This Master thesis has been written in order to graduate for my Master of Science Business Administration studies, specialization Business & ICT, at the Faculty of Management &
Organization of the University of Groningen in the Netherlands. KPMG Information Risk Management (IRM) in Amstelveen provided me the opportunity and means to perform a graduation project of which this thesis is the result.
The subject of this thesis, Business Process Management (BPM), is the result of interest in the combination of Workflow Management (WfM) and the optimization of business processes. I had only heard of BPM once before, when two fellow students examined the somewhat futuristic proposition that a “third wave” in management of business processes was at hand.
Although this next big thing sounded a bit exaggerated to me, I became interested because it stressed the essential role of BPM and with it the role of both business and Information &
Communication Technologies (ICT) issues, which suited well with my Master Business & ICT, as well as with the initial focus on WfM (i.e. an ICT issue) and the optimization of business processes (i.e. a business issue).
Many practical sides of BPM were suitable for further research. However, for several reasons I regarded a more theoretical approach as legitimate as well. The suggested link between BPM and sustainable competitive advantage caught my attention in particular. If something new receives a lot of interest, it must come with a good and well supported story, especially if some are predicting it will have a vast impact on competition (remember the “third wave”). I believe a theoretical basis that goes back to the fundamentals of competition can help to evaluate the true potential of BPM. Yet, it was clear to me that it would be a difficult job and that I did not choose the easy way. However, it is my opinion that such a challenge should be accepted, since it may very well provide new and relevant insights. After all, companies will always be in search of new and better ways to compete.
During the process I realized that BPM can be considered not just as a methodology, but even as a philosophy, a way of thinking. This new perspective can be used to reconsider an infinite number of business issues, which made writing this thesis both fascinating and seductively;
there are so many compelling topics and it is easy to get lost. When reading this thesis it may be easy to get lost in the many topics and details, but I believe that it was crucial to consider the details in order to be able to make statements about the whole. Similarly, with BPM the comprehensive view proofs to be essential, but underexposing the details would undermine the potential of BPM.
Finally, I wanted this thesis to be progressive, meaning that it should be open the idea of a new wave in management of business processes, while also maintaining a critical attitude. In retrospect, it may perhaps also be a bit challenging or provoking, but I believe that subsequent discussions will improve our understanding of BPM and its meaning for businesses.
To write and fruitfully finish this Master thesis would not have been possible without the help of others. First of all, I would like to thank Jaap van Beek, partner at KPMG IRM, who provided me with the opportunity to write the thesis at KPMG. Furthermore, I would like thank Peter Buur, senior manager at KPMG IRM, who functioned as my supervisor and who spent time with me brainstorming, keeping me on the right track, and evaluating my produced works.
I would also like to thank Mark Reijnders, manager at KPMG IRM, for giving me additional input. Furthermore, special thanks go out to John Bamber, manager Operational Risk Management at ABN Amro Private Clients Asset Management, for providing me with practical information and sharing his thoughts and experiences. Finally, I would like to thank Egon Berghout, from the University of Groningen, Faculty of Economics, who provided input with regard to sustainable competitive advantage, and Dick Schaap from the University of Groningen, Faculty of Business Administration, for supervising the entire graduation project and for providing both practical feedback and suggestions for examining relevant literature.
After having finished this Master thesis, I will continue the BPM journey at KPMG IRM Financial Services, where I will start working as a junior consultant. I am looking forward to this phase, in which I will continue to work on BPM, specifically in a compliance context in the financial sector. Writing this thesis has helped me to get an understanding of BPM and its impact on competition, but BPM still is an immature, evolving, and ambiguous subject, which requires continuous attention and which implies there still is and will be much to learn.
Management Summary
Business Process Management (BPM) is a reemerging term that currently receives a lot of attention. As the term suggests, it is about managing business processes, but Information &
Communication Technology (ICT) is also a main ingredient. BPM is often associated with sustainable competitive advantage, in line with the idea that business processes are the unit of competition and that ICT is an important factor that enables new ways for managing business processes and related issues. This Master thesis will examine business processes, BPM, and sustainable competitive advantage in more detail, in order to identify relationships that support the proposition that BPM can contribute to sustainable competitive advantage. It will demonstrate that BPM is able to do so through supporting strategic positioning, through optimization of (operational) business performance, and through making an organization more agile. The results of this thesis will be interesting for both business and ICT people.
The way business processes are perceived and the manner in which they are employed and managed have changed because of new insights and advances in ICT. Moreover, the increasing dynamic nature of the external world raises new demands that also affect business processes.
The main features of business process are that they are (horizontal) complete end-to-end processes or value chains that cross the departmental or even organizational borders, and that they involve business and technical issues, while their focus and goals are expressed in terms of the ultimate customer value. In addition to the internal matters, business processes can also be linked to external components, as they are affected by changes from the external world.
Management of business processes can be performed from both an external perspective (i.e.
entrepreneurial sense) and from an internal perspective (i.e. organizational skills). Finally, the role of ICT with regard to business processes can be split up into common ICT that is particularly deployed to support operational processes and into ICT tools that enable and support the management of business processes.
BPM is a methodology that combines management practices/theories with ICT to manage business processes throughout their entire lifecycle. BPM is not only aimed at improving operational performance (e.g. increasing efficiency and decreasing the business-ICT divide), but also about enabling agility and alignment, which allows a company to deal with change more rapidly. BPM and so-called BPM systems/suites are able to contribute to each phase that can be recognized in a process lifecycle. The capabilities range from increasing awareness and communication between technical and non-technical people to real-time monitoring and ongoing process improvement during process execution and via the business process design and analysis. BPM is primarily located on a tactical level, but it also supports strategic issues and aligns them through business processes, whereas BPM also manages and coordinates the operational processes and activities on the operational level. BPM is thus present on the tactical and operational level and between all organizational levels. Because of that, and because BPM involves both business and ICT issues, many different functions can come in touch with BPM.
Developments, such as economic downturn, strict regulations, volatile competition and constant change, have created the demand for BPM and the willingness to think about business processes in a more comprehensive way. New insights and progress in ICT created the opportunities to meet these new requirements. Many reasons and objectives for adopting BPM can be related to these demands. Roughly, they can be divided into two categories: optimization of operational performance and agility through dynamic business processes. Although BPM is a rather immature and ambiguous subject, potentially covering many different areas in the working fields of both management and ICT, the link with strategy and sustainable competitive advantage is regularly made.
Sustainable competitive advantage can be created through strategy, for instance through strategic positioning or differentiation, aimed at a unique and hard to imitate value proposition.
However, it is only the first crucial step in the process toward achieving sustainable competitive advantage. Other approaches to compete, which rely on common available ICT or diffused best practices, cannot create sustainable competitive advantage by themselves, but they and, more generally, the internal organization, are essential to enable and realize the sustainable competitive advantage intended by strategy. In that context, the external and internal components are considered to be interdependent, meaning that everything matters in the process to achieving sustainable competitive advantage. The dynamic external environment and its constant change require continuous optimization of the internal organization, as well as maintenance of sustainable competitive advantage, for instance through sustainable alignment.
BPM has the potential to contribute to sustainable competitive advantage and to help companies getting on, as well as staying on the competitive edge. In addition to optimization and maintenance, BPM can contribute to sustainable competitive advantage through supporting strategy, particularly the constructs of differentiation. It can also deliver valuable management information for strategic decision-making and various tools to support the strategy process.
Furthermore, BPM can enhance operational optimization and the internal organization, which will have a positive impact on the enablement and support of strategy (e.g. differentiation) and thus on sustainable competitive advantage. Optimization can also contribute to a company’s superior competitive position by securing already established sustainable competitive advantage. Finally, BPM can contribute to the sustainable competitive advantage through agility, because it allows a company to better deal with change, particularly with incremental and continuous change, thus facilitating creation and particularly maintenance of sustainable competitive advantage. Together with the business processes, BPM plays a key role with regard to the company’s competitive position. It takes away the need to choose between flexibility and efficiency, or between an outside-in or inside-out approach; companies can become agile without having to sacrifice efficiency internal organization, while still fully supporting a differentiation strategy. Overall, BPM is argued to be essential to walk the competitive edge.
Consequently, BPM will have implications for the concept of sustainable competitive advantage and the rules of competition. It will also give a new impulse to the discussion surrounding strategic alignment and functional integration (e.g. decreasing the business-ICT divide).
Table of Contents
PREFACE ... 3
MANAGEMENT SUMMARY ... 3
1 INTRODUCTION ... 3
2 RESEARCH DESIGN... 3
2.1 MOTIVATION AND RELEVANCE... 3
2.2 KPMGINFORMATION RISK MANAGEMENT –FINANCIAL SERVICES... 3
2.2.1 KPMG’s History...3
2.2.2 KPMG Globally...3
2.2.3 KPMG’s Services and Industries...3
2.2.4 KPMG Information Risk Management ...3
2.3 PROBLEM DEFINITION... 3
2.3.1 Problem Statement...3
2.3.2 Research Objective ...3
2.3.3 Main Research Question...3
2.3.4 Conceptual Model ...3
2.3.5 Research Sub-Questions ...3
2.3.6 Research Scope and Constraints...3
2.3.7 Research Method ...3
3 REINVENTING BUSINESS PROCESSES ... 3
3.1 ABRIEF HISTORY OF PROCESSES IN BUSINESS... 3
3.2 BUSINESS PROCESSES... 3
3.2.1 Business Process Definitions and Characteristics...3
3.2.2 A Comprehensive and Supported Definition of Business Processes ...3
3.2.3 Hierarchical Division of Processes ...3
3.3 BUSINESS PROCESSES AND MANAGEMENT... 3
3.3.1 Management in General...3
3.3.2 A Definition of Management in a Business Process Context ...3
3.4 BUSINESS PROCESSES AND ICT... 3
3.4.1 The (R)evolution of ICT in a Nutshell ...3
3.4.2 The Impact of ICT on Business Processes...3
3.4.3 Strategic Alignment and Functional Integration with ICT ...3
3.5 SUMMARY AND CONCLUSIONS... 3
4 BUSINESS PROCESS MANAGEMENT ... 3
4.1 APRELIMINARY DEFINITION OF BUSINESS PROCESS MANAGEMENT... 3
4.2 BUSINESS PROCESS MANAGEMENT DEFINITIONS AND CHARACTERISTICS... 3
4.2.1 Current Theories and Definitions ...3
4.2.2 Additional Opinions about BPM from Research Organizations...3
4.2.3 A Final Construal of BPM...3
4.3 THE PROCESS OF BUSINESS PROCESS MANAGEMENT... 3
4.3.1 A Basic BPM Process Lifecycle Based on Workflow Management ...3
4.3.2 A Basic BPM Process Lifecycle Based on the Application Development Lifecycle ...3
4.3.3 A Detailed BPM Process Lifecycle Based on BPM Capabilities ...3
4.3.4 The BPM Process Lifecycle Revised ...3
4.3.5 Common ICT and BPM Systems for Supporting the BPM Process...3
4.3.6 Implications of the New BPM Process Model...3
4.4 THE DOMAINS OF BUSINESS PROCESS MANAGEMENT... 3
4.4.1 The Presence of BPM on Different Organizational Levels ...3
4.4.2 The People Involved in BPM ...3
4.5 BUSINESS PROCESS MANAGEMENT DEVELOPMENTS AND MOTIVES... 3
4.5.1 Developments Surrounding BPM...3
4.5.2 BPM Drivers and Objectives ...3
4.6 THE STATE OF AFFAIRS REGARDING BUSINESS PROCESS MANAGEMENT... 3
4.7 SUMMARY AND CONCLUSIONS... 3
5 IN SEARCH OF SUSTAINABLE COMPETITIVE ADVANTAGE... 3
5.1 AN INTRODUCTION TO STRATEGY AND SUSTAINABLE COMPETITIVE ADVANTAGE.... 3
5.2 STRATEGY:SUSTAINABILITY BY MEANS OF DIFFERENTIATION... 3
5.2.1 The Fundamentals of Differentiation...3
5.2.2 Strengthening Differentiation to Increase Sustainability...3
5.2.3 Porter’s View on Strategy...3
5.2.4 Reexamining the Extent of Sustainability ...3
5.2.5 Conclusions and Implications...3
5.3 OPERATIONAL EFFECTIVENESS:APREREQUISITE,NOT AN END IN ITSELF... 3
5.3.1 How Operational Effectiveness Undermined Strategy ...3
5.3.2 The Failure of Operational Effectiveness to Contribute to Sustainability ...3
5.3.3 Operational Effectiveness is Not Strategy ...3
5.3.4 Conclusions and Implications...3
5.4 THE ROAD TO SUSTAINABLE COMPETITIVE ADVANTAGE... 3
5.4.1 From a Plan to Action: Everything Matters...3
5.4.2 The External Environment and Internal Organization...3
5.4.3 Conclusions and Implications...3
5.5 SUMMARY AND CONCLUSIONS... 3
6 PUTTING IT TOGETHER: WALKING THE COMPETITIVE EDGE ... 3
6.1 THE RELATIONSHIP... 3
6.1.1 The ‘Renewed’ Business Process ...3
6.1.2 The Core Objectives of BPM: Agility and Optimization ...3
6.1.3 The Requirements for Sustainable Competitive Advantage ...3
6.1.4 BPM and Sustainable Competitive Advantage Linked Together ...3
6.2 BUSINESS PROCESS MANAGEMENT:STRATEGIC,NOT STRATEGY... 3
6.2.1 Strategy and BPM: Linked Differently to Business Processes ...3
6.2.2 The Role of BPM in Differentiation Strategies ...3
6.2.3 Bright Sides of BPM: Supporting Strategy in Multiple Ways...3
6.2.4 The Dark Side of BPM: Potential Undermining of Strategy ...3
6.2.5 Conclusions and Implications...3
6.3 SUSTAINABLE COMPETITIVE ADVANTAGE THROUGH OPTIMIZATION... 3
6.3.1 Securing Sustainable Competitive Advantage through Optimization ...3
6.3.2 Supporting Sustainable Competitive Advantage through Optimization ...3
6.3.3 Conclusions and Implications...3
6.4 SUSTAINABLE COMPETITIVE ADVANTAGE THROUGH AGILITY... 3
6.4.1 The Need for Agility ...3
6.4.2 Enabling Sustainable Competitive Advantage through Agility...3
6.4.3 Maintaining Sustainable Competitive Advantage through Agility...3
6.4.4 Conclusions and Implications...3
6.5 SUMMARY AND CONCLUSIONS... 3
7 RESEARCH CONCLUSIONS, IMPLICATIONS, AND DISCUSSION... 3
7.1 MAIN CONCLUSIONS:AN OVERVIEW... 3
7.2 RESEARCH IMPLICATIONS... 3
7.3 SUGGESTIONS FOR FURTHER RESEARCH... 3
7.4 RESEARCH EVALUATION... 3
REFERENCES... 3
1 Introduction
This Master thesis is about processes, business processes, to be more precise. Processes in general are all around us. The have been and they will always be, and it is not hard to become aware of this or to think process-centric. Consider, for example, the very beginning of our universe. Every version that attempts to explain it, both from a scientific and religious viewpoint, involves processes. In the scientific ‘Big Bang’ version, the process began with an incredibly dense singularity that exploded. All matter, light and energy came from that explosion and formed the beginning of the cosmos. In many religious versions, a higher being created the earth and everything on and around it, which can be regarded as a process as well.
The differences and discussions arise because some are convinced that many processes just happen, whereas others believe that some being or something is helping a hand. An illustrative example is the recent popularity of ‘Intelligent Design’, which argues that theories of evolution are not appropriate to explain many complex forms encountered in nature; Intelligent Design disciples argue that it cannot just be evolution; they believe an intelligent source is involved.
However, the abovementioned discussion is not held for processes in a business context.
Although a few may happen with no or little help, it is generally accepted that virtually all processes in a business context require some form of assistance. In other words: management.
This new ‘dimension’ of processes originated simultaneously with mankind’s civilization, in which the first sorts of business took place. Without a doubt, hunters in the Bronze Era and, later on, farmers also did ‘business’. For instance, they traded. Surely, it does not resemble our present sophisticated manners of doing business and it probably did not require an intensive management effort. Still, it can be considered as business and it involved processes for sure.
Throughout history, it appeared it is man’s nature to arrange things, to manage. Even processes that originally could not be ‘managed’ are challenged by science (e.g. nuclear energy, genetic modification, nano technology, etc.).
Obviously, we cannot escape process thinking because everything in and around us, as well as other things (e.g. objects and circumstances) are subject to processes. This also accounts for processes in business. Yet, like in nature, processes in business can be complex and hard to make visible. Various inter-related processes that act as whole can be even more complicated.
Understanding processes often leads to new perceptions, insights and knowledge. It will thus be a useful concept for managing business processes and, ultimately, managing business in general. If this central role of processes is emphasized, business processes can be perceived as the unit(s) of competition. For this statement, it is essential to have a good understanding of business processes as well as the management of business processes. New viewpoints and knowledge may clear the way to improving an organization’s competitive position and, in the end, to achieving sustainable competitive advantage.
Business Process Management (BPM) recently receives a lot of attention in relation to new insights with regard to business processes and process-centric approaches, as well as due to advances in Information & Communication Technologies (ICT). BPM, in its newest form, is
considered as a relatively immature and ambiguous subject. Yet, the possibilities and the potential benefits of BPM are regarded to be vast and tend to cover many business areas. The first experiences with BPM are convincing and also point to that direction. Some even believe that it will change the rules of competition for the next couple of decades. A commonsense question than follows: to what extent can BPM contribute to a company’s competitive position and to its sustainable competitive advantage?
This question is the base for and will be examined in this Master thesis, which is the result of my graduation project for my studies MScBA Business & ICT at the University of Groningen.
The project is performed at KPMG Information Risk Management (IRM), Financial Services (FS), located at KPMG’s International Headquarters in Amstelveen, the Netherlands.
The structure of this thesis is as follows. The next chapter will set out the lines for this thesis by explaining the research design. It will also pay brief attention to the motivation for this research, as well as address the organization for which the research has been carried out.
Chapter 3 will examine the concept of business processes and the process-centric approach. To enhance the understanding of processes in business, a brief historical overview is presented.
Next, a comprehensive definition of a business process is created, which is based on several relevant theories and definitions. Finally, attention is paid to the role of both management and ICT in a business process context, as it is assumed that these subjects are essential in BPM.
BPM itself will be addressed in chapter 4. First of all, a preliminary definition is proposed, based on the information of the previous chapter, in order to analyze the relationship between BPM and the concept of business processes. Next, theories as well as other BPM information is presented to acquire a better understanding of BPM and to verify the preliminary definition.
BPM is subsequently described as a process itself, which provides an overview of the required capabilities and the intended objectives of BPM. After that, the domains of BPM are discussed in order to examine where BPM is located and who can be involved. Of course, attention is also directed to developments surrounding BPM and to consequent motives for employing it.
Finally, the current state situation with regard to BPM is addressed. Chapter 5 will elaborate on sustainable competitive advantage. It will introduce the concept through addressing some basic information about strategy and competition. Next, it will provide a detailed explanation of how sustainable competitive advantage can be achieved through strategic positioning and differentiation. In order to study the distinction between (temporary) competitive advantage and sustainable competitive advantage, attention will also be paid to operational effectiveness and its potentially negative consequences for competition. Finally, several critical comments are presented with regard to sustainable competitive advantage and the theoretical ideas related to it. The strict distinction sustainable and non-sustainable will be nuanced. In chapter 6, everything will be put together in order to draw conclusions about how BPM can contribute to sustainable competitive advantage. The relationship is addressed, which leads to three interesting questions. BPM is examined in relation to supporting strategy, optimization of business performance, and agility. The final chapter will present an overview of the conclusions and main propositions made it in this thesis. In addition, it will discuss the research implications, formulate suggestions for further research, and briefly evaluate this research.
2 Research Design
This chapter will explain the research and the subject of this Master thesis in more detail. First of all, it will concentrate on the motives for selecting the specific subject of this research, including its envisaged relevance. In addition, the research setting is illustrated by addressing the organization at which the research is performed, which should enable placing this research in a practical context. Next, the research design itself is explained through a problem definition.
The problem definition includes a problem statement, which forms the base for formulating a research objective that, in turn, is translated into the main research question. A conceptual model is introduced to illustrate the relations of the subjects that are to be examined in this thesis. Next, the research question is split up into three essential research sub-questions that are briefly explained. Furthermore, this chapter will address the scope and the constraints of this graduation project. Finally, several details about the research method are provided.
2.1 Motivation and Relevance
Obviously, there are many interesting questions that can be asked with regard to BPM. One of the most eminent questions concerns the contribution of BPM to a company’s competitive position. This includes the strategic relevance of BPM and its ability to support or even create sustainable competitive advantage – a competitive advantage that can be preserved on the long- term. In order to examine these matters, it is necessary to have a thorough understanding of BPM.
As mentioned in the previous chapter, interest in business processes is not new. It is interesting to examine whether or not the re-emerging interest in BPM, particularly the specific term, is caused by new developments, insights or specific business needs. Based on a recent survey, Gartner1 estimates BPM related issues are expected to be an important issue on the 2005 CIO agenda (Gartner, January 2005; May 2005). The fact that it concerns the CIO implies that ICT must have an essential role, consequently putting forward questions about how ICT is involved in BPM. With regard to BPM Systems, the vendor selection question is an interesting issue as well. Yet, a first brief investigation of the subject reveals that BPM comprises of and touches a broad range of issues, such as optimization, integration/fusion, standardization, and inter- organizational aspects of business processes. This suggests that, in addition to ICT people, business people should also play a central role. In order to evaluate the potential of BPM, they need to know how BPM can be applied in their organization.
1 http://www.gartner.com/
However, a more fundamental question is important before concentrating on other, more practical, questions: what exactly is BPM and how can it contribute to the competitive position of an organization? The available literature mostly concentrates either on explaining what BPM is (particularly from an ICT or technology perspective) or on evaluating the vendors that provide BPM or BPM-related software solutions. Clearly, both are important; in order to employ BPM successfully, it is required to have an adequate understanding of BPM, including the technologies behind it, and to be able to select the appropriate vendor and software. Yet, Gartner, the very same research institute that estimates BPM is going to be an important issue for CIOs, also is reported to be using three different definitions of BPM (Smith & Fingar, 2004). This implies that beneficial deployment requires a lot of profound thinking in advance, particularly because BPM encompasses many business and ICT related matters, which in turn relate to different organizational aspects and, ultimately, to competitive advantage. Moreover, BPM may very well be perceived as a strategic topic, which can contribute to something that every organization requires to survive or grow: sustainable competitive advantage.
This topic is essential for CIO’s and other IT seniors when deciding how to deal with and invest in BPM related ICT technologies. Moreover, non-IT functions also have to be concerned with the same developments; a CEO and higher management may (or should) be involved to keep an eye on strategic issues as well as on the execution of strategic objectives, and line managers may need to participate as they own (parts of) the business processes. In fact, if the process- centric approach is postulated, it is reasonable to assume that BPM, in spite of the important role of ICT, is a primary concern of business people rather than ICT people. After all, business is what drives or should drive the entire process, whereas ICT is or should be used by the business in a supportive role. We have learned from the problems that occurred in situations where ICT people used to know more about the business, while business people did not know as much about ICT, resulting in major failures and the well-known business-ICT divide. Hence, it should be obvious that a subject like BPM requires attention from both sides and that the content of this thesis is relevant for both business and ICT people.
In addition to businesses that intend to apply BPM, there are other organizations that are interested in the developments regarding BPM. Hardware and software vendors may (and already do) exploit these developments to their benefit. Consultancy companies can help organizations to evaluate the potential of BPM for their specific situation, whereas accountancy firms may be interested in understanding how BPM is involved in consolidation and compliance issues, as well as in auditing in general. KPMG IRM delivers a broad range of advisory and audit services focused on management of information and related risks within a context that is impacted by ICT. As mentioned in the first chapter, KPMG IRM is recognizing the potential of BPM and the role KPMG IRM could fulfill, in both advisory and audit tasks.
The results of this graduation project, which come in the form of this Master thesis, should function as a helpful resource for KPMG IRM to position and sell its advisory services with regard to BPM, as well as for consultants who are involved in projects that concentrate on, or contain elements of, BPM. Finally, the outcomes of the graduation project should contribute to
the general information and knowledge about BPM as a subject in itself and its relationship to sustainable competitive advantage.
2.2 KPMG Information Risk Management – Financial Services
The graduation project is performed at KPMG Information Risk Management (IRM), Financial Services (FS). In the Netherlands, IRM is part of KPMG EDP Auditors NV, which in turn falls under the KPMG Holding. IRM ultimately belongs to KPMG International, which is a well known organization, and usually associated with the Big Four: Deloitte, Ernst & Young, PricewaterhouseCoopers, and KPMG. In this global context, IRM is part of Risk Advisory Services (RAS), which in turn belongs to the Advisory Services function of KPMG.
2.2.1 KPMG’s History
KPMG was formed in 1987 with the merger of Peat Marwick International (PMI) and Klynveld Main Goerdeler (KMG), and their respective member firms. Spanning three centuries, the organization's history can be traced through the names of its principal founding members, whose initials form the name KPMG. K stands for Piet Klynveld, who founded the accounting firm Klynveld Kraayenhof & Co. in Amsterdam, in 1917. P is for Peat William Barclay. Peat founded the accounting firm William Barclay Peat & Co. in London, in 1870. M stands for Marwick James, who founded the accounting firm Marwick, Mitchell & Co. with Roger Mitchell, in New York City, in 1897. Finally, G is for Goerdeler.
Dr. Reinhard Goerdeler was the first President of the International Federation of Accountants, and was for several years the Chairman of KMG. He is credited with laying many of the foundations for the Klynveld Main Goerdeler merger.
2.2.2 KPMG Globally
KPMG International is a Swiss cooperative of which all KPMG firms are members. Each member firm is a separate and independent legal entity and each describes itself as such. As a worldwide company, operating in 148 countries and in 717 cities, and employing approximately ninety-four thousand people, KPMG achieved a global revenue reaching US$
13.44 billion in 2004. That is a 14.7 percent increase over last year – a 7.3 percent increase in local currency terms – which makes it the fastest growing of the Big Four in 2004.
In the Netherlands, KPMG has 19 offices and employs more than thirty-one hundred people.
The main office is located in Amstelveen and houses, among other units, IRM. KPMG Holding realized revenue of 443.66 million euro over the financial year 2003/2004. Together with KPMG Meijburg & Co, the Dutch revenue totaled 568.90 euro.
Even though the member firms of KPMG are separate and legal independent entities, it is possible to describe the services of the KPMG firms on a global level, since KPMG focuses on
consistent services. For example, in 2004, it launched ‘The KPMG Way’ throughout the network. ‘The KPMG Way’ is regarded as a powerful statement of who they are, what they do, and how they do it. It defines KPMG’s purpose and strategy, and provides KPMG employees around the world with a set of shared values and behaviors. These are: lead by example; work together; respect the individual; seek he facts and provide insight; be open and honest in the communication; be committed to the communities; and above all, act with integrity.
Furthermore, KPMG’s commitment to integrity is supported by a Global Code of Conduct.
Internationally, KPMG’s purpose is described as: KPMG’s purpose is to turn knowledge into value for the benefit of KPMG’s clients, people, and the capital markets. KPMG member firms aim to provide clients with a globally consistent set of multidisciplinary financial and accounting services, based on deep industry knowledge.
The overall vision of KPMG in the Netherlands is described as follows: KPMG wants to be a leading company in its markets. It pursues having the best reputation in its branch. KPMG wants to be recognized as a market leader in the area of its professional provision of services for the knowledge of developments and issues in the markets, branches and sectors in which KPMG’s clients operate.
2.2.3 KPMG’s Services and Industries
With regard the KPMG’s services there is an essential functional breakdown: Audit, Tax, and Advisory Services. In additional, there is a regional breakdown: Americas, Asia Pacific, and Europe, Middle East, and Africa (EMA). IRM falls under the Risk Advisory Services, which, together with Financial Advisory Services, form the Advisory Services. Hence, this graduation project does not pay attention to the audit and tax services. Obviously, the Dutch IRM operates within the EMA region. This project will primarily focus on the Dutch market, although it does not exclude foreign or international companies in advance.
Besides the functional breakdown, KPMG distinguishes several industries: Financial Services (FS); Information, Communications & Entertainment; Industrial Markets; Consumer Markets;
and Infrastructure, Government & Healthcare. As mentioned, this graduation project is performed under the wings of FS and will therefore have a practical focus on organizations within the FS market, such as banks and insurers. However, BPM is not specifically related to the FS market; other branches, such as (local) governments and healthcare institutions may also benefit from BPM and thus from the information produced by this thesis. In fact, all markets may benefit from BPM, since all organizations have processes and virtually all organizations employ ICT and other techniques to manage these processes.
2.2.4 KPMG Information Risk Management
Advisory provides advisory services to large (inter)national enterprises, not-for-profit organizations and (semi-)public institutions. As mentioned before, the advisory service is split up into Risk Advisory Services and Financial Advisory Services. The former focuses on risk
management, organizational, return and performance improvements, as well as on finance administrative services and advices, and cost price and efficacy assessments. It includes Business Advisory Services (BAS), Information Risk Management (IRM) and Management Services. The latter, Financial Advisory Services, provides services focused on accompanying and advising during mergers, and on advisory for suspension and bankruptcy.
KPMG IRM helps companies and institutions to realize objectives related to the utilization of ICT that are of vital importance, for instance to be able to provide better services to clients or to optimize the business processes. KPMG IRM illustrates its services by stating that after a period of investments and innovations, it is now time for consolidation. Relevant questions in this context are: What results have been achieved with the ICT investments? Is the management information reliable? Is the security of the network adequate? KPMG IRM aims at making ICT risks governable and at turning ICT into a factor that optimally contributes to the organization’s revenues. A brief overview of the services provision of KPMG IRM is presented below:
• Package Solutions:
Recognize and overcome risks with regard to complex ERP implementations;
• Information Security:
Create adequate measures for controlling ICT related security and continuation risks;
• Project Management:
Tight project direction with knowledge of general and specific issues to minimize risks;
• ICT Performance Improvement:
Optimize ICT efficiency and return by reasoning from business and corporate strategy;
• ICT Assurance:
Reliability of information systems on which the business/processes depends.
2.3 Problem Definition
The problem definition basically consists of a research objective, a research question and its derived sub-questions, and constraints (De Leeuw, 2001). Before addressing these issues, the problem statement is introduced. The statement, which is grounded on the topics discussed in paragraph 2.1, provides the initial motive for this research and can serve as a basis for the other elements of the problem definition.
This paragraph can be considered as the central element of the research design. Based on a problem statement, a research objective is formulated and translated into the main research question. A conceptual model will be used to further elaborate on this research question and to identify three sub-research questions. Additionally, this paragraph will address the scope and the constraints of this graduation project. Finally, more details about the research method are provided.
2.3.1 Problem Statement
As can be read in chapter 1 and paragraph 2.1, renewed interest for BPM and surrounding developments are triggering both clients and vendors to evaluate the potential of BPM, but it is likely that they will need help in doing so. Moreover, the relationship between BPM related developments, BPM itself, and strategic issues, like sustainable competitive advantage, is not (yet) unambiguously and clearly described or defined, and there seems to be no adequate methods available for analyzing this issue. Therefore, the problem statement is formulated as follows:
Due to the new process-centric approach, supported by new the ongoing ICT developments, as well as developments in the businesses’ external environment, interest in BPM is re-emerging. Businesses are (re)considering the potential of BPM, but BPM is not a simple, unambiguous concept. In addition, little attention has been paid to the potential strategic importance of BPM, such as its contribution to sustainable competitive advantage.
From a scientific perspective, value could be added by an evaluation of BPM from a strategic viewpoint. The generated knowledge is also valuable to KPMG IRM, which recognizes the BPM developments. Extended advice focused on this area is considered as a welcome addition to KPMG IRM’s advisory services, but requires a strong foundation with regard to the meaning of BPM and its strategic relevance.
2.3.2 Research Objective
Now that the problem statement has been defined, it becomes possible to formulate the objective of this research:
The goal of this research is to examine to what extent BPM is able to contribute to sustainable competitive advantage.
2.3.3 Main Research Question
The research objective can be transformed with the purpose of creating the main research question, which is primarily concerned with the question of what information is required to ultimately provide an answer that suits with the research objective. In order to be able to make a statement about how BPM can support or achieve sustainable competitive advantage, it is essential to elaborate on the relationship between the two subjects. Information about this relationship can then be used to describe how BPM is able to contribute to an organization’s competitive position and its extent of sustainable competitive advantage. Therefore, the main research question is:
How do BPM and sustainable competitive advantage relate to each other?
Obviously, examining the relationship will require closer examination of both BPM and sustainable competitive advantage. Moreover, when taking a closer look to the elements of BPM (e.g. business processes and management) and to the subject with which sustainable competitive advantage often is associated, strategy, it becomes possible to draw an additional indirect relationship between BPM and sustainable competitive advantage. This will be demonstrated in the next section, using a conceptual model.
2.3.4 Conceptual Model
Based on this main research question a conceptual model is compiled, which is depicted in Figure 2.1. This simplified model will be used as a basis for this research and for the research sub-questions, which will be presented in the next section.
determines
relates to / supports or creates execute
Figure 2.1 – A conceptual model for examining the relationship between BPM and sustainable competitive advantage
The main question concerns the link of BPM with sustainable competitive advantage. Rather straightforward, it can be said that BPM is in some way directed to managing business process.
Furthermore, sustainable competitive advantage is considered as an organization’s vital purpose, since it is about making profit (in the widest sense) and thus about being able to survive or grow. Sustainable competitive advantage, therefore, must be related to the organization’s business strategy. Strategies, in turn, particularly the derived strategic objectives and business requirements, have a close relationship with business processes. On the one hand, they determine how the business processes must be organized. On the other hand, business processes execute strategy and thus play an important role in the actual realization of sustainable competitive advantage. This supports a link between BPM and sustainable competitive advantage.
2.3.5 Research Sub-Questions
To further structure the research, the main research question will be split up in several sub- questions. Based on the main research question, three essential questions can be asked. The first
question concerns BPM and its meaning. BPM, in turn, can be broken up into business processes and management. In order to build a strong foundation for examining BPM, it is argued that it is necessary to initially study business processes. It can help to provide an unambiguous definition of BPM, which is, after all, a relatively new topic. Therefore, the examination must also include new developments and new insights, which may be of importance with regard to the emerging interest in BPM. Furthermore, brief attention must be paid to the role of both management and ICT, since these subjects are mentioned as essential elements of BPM.
After having examined this part of the first sub-question, the essential part of it can be answered more precisely. Based on the information from the previous sub-question, it becomes possible to describe and define BPM from two theoretical perspectives; from a business process point of view as well as from the actual BPM point of view. In addition, it will be valuable to get an idea how BPM works and where and when it can be applied. While elaborating on these matters, potential benefits and reasons to employ BPM may also be addressed. The first sub- question thus comprises of two parts:
1 a) What are business processes and how are both management and ICT involved?
And which recent developments and insights are relevant?
1 b) What is BPM and how does it work? And who are involved where and when?
The second essential question focuses on sustainable competitive advantage. The conceptual model provided in the previous section illustrates its relation with business strategy and, via strategic objectives and/or business requirements, with business processes. To understand the concept of sustainable competitive advantage, it will be necessary to examine which issues are involved in creating or supporting it. Hence, the second sub-question is:
2 What is sustainable competitive advantage and how can it be created or supported?
The last essential question should provide the information required to answer the main research question and to meet the research objective of this thesis. The results of the previous questions can now be compared in order to determine the relationship between BPM and sustainable competitive advantage. Therefore, the third and final sub-question is:
3 What is the relationship between BPM and sustainable competitive advantage and how can BPM contribute to the organization’s competitive position via sustainable competitive advantage?
The organization of this Master thesis is similar to the structure of these research sub-questions.
Chapter 3 will start with a discussion of business processes, including the management of business processes and the role of ICT. Next, chapter 4 will extensively examine BPM. Chapter 5 will address sustainable competitive advantage and its relevant related issues. Finally, chapter
6 will put everything together in order to examine the relationship between BPM and sustainable competitive advantage and to be able to draw conclusions about how BPM can contribute to an organization’s extent of sustainable competitive advantage.
2.3.6 Research Scope and Constraints
To be able to carry out an efficient and effective research, it is essential to clearly define the scope and constraints, which respectively limit and circumscribe the research project.
The scope marks out the area, on which the research will focus. To a large extent, this can be decided by the performer of the research, for instance by formulating a precise research objective and detailed research questions. Scope, however, remains a tricky issue; by setting a very narrow scope, the research may be hampered, whereas setting a broad scope may result in slow down. It will require adequate attention during this research. First of all, BPM is far from unambiguous and it will not be easy to find a good balance that is appropriate for discussing BPM in relation with sustainable competitive advantage. The same accounts for addressing the strategic issues and sustainable competitive advantage; these subjects are rather abstract and can easily provoke or result in complicated and endless discussions. Finally, it should be noted that the approach for examining the subjects is primarily theoretical. To provide correct information requires a thorough investigation of the relevant literature, but it should be avoided to get stuck in an information overdose.
Constraints are specific restrictions or limitations that can only be influenced by the researcher to a small extent. Constraints may also be derived from background information and research setting (see paragraph 2.1 and 2.2). The following constraints are recognized for this graduation project:
• For theoretical research and desk research the domain will be unlimited. However, it should be taken into account that KPMG IRM primarily focuses on the Dutch market, but this market includes organizations with an international character. Moreover, the line of business at which this graduation project is performed – Financial Services – delivers its audit and advisory services to financial companies or departments, as well as to non- financial companies or departments that are in some way dealing with financial issues. As a consequence, most processes will have a strong focus on information. The interaction between processes, ICT systems and applications, and the information flows are therefore essential elements. They can be related to or placed within themes such as information/
operational risk management, compliance, etc. The role of business processes and BPM may differ compared to other branches. For instance, consider an automobile manufacturer, which has processes that will particularly be aimed at optimizing the production process, involving the coordination of machines, production robots and other (supportive) production technologies, as well as supply chain management.
• This thesis focuses on BPM that is primarily concentrating on business processes or, more precisely and in accordance with Weske et al. (2005), on operational processes. This excludes processes such as strategy forming or processes that cannot be made explicit, even
though it is not unthinkable that BPM can be employed to manage such processes.
BPM.com also underlines that BPM “is a process-centric approach to managing business operations” (BPM.com2).
• In addressing BPM, it is possible to investigate the required resources, such as ICT applications and technologies, management practices, and other methods, policies and metrics. This will be demonstrated chapter 4 when discussing the definitions and characteristics of BPM; most definitions even offer concrete examples. However, discussing all these matters is beyond the scope of this thesis. Not only will such a discussion require a lot of space for introducing each, often complex, topic, it will also raise questions about how and to what extend each topic is able to contribute to one or more BPM capabilities. That discussion is located on another level compared to discussion level of this thesis.
2.3.7 Research Method
As part of the research design, the research method section pays attention to the methods used for collecting information during the research project. It should be noticed that the content of this thesis will be primarily theoretical. This obviously requires an extensive literature review for the examination of business processes, BPM, and sustainable competitive advantage.
However, due to the ‘newness’ of BPM, it is necessary to perform a desk research that includes more recent – and perhaps less scientific – information. This additional information will be derived from ‘institutional’ websites (e.g. research organizations and consultancy firms, including white papers, news letters and columns), vendor information, and (popular) business/ICT magazines.
Since BPM is not (yet) a subject strongly included in the services of KPMG IRM FS, regular conversations were held with several employees in order to see how the subject could fit in.
Yet, these were no formal interviews and the obtained information was only used if applicable.
In the follow up of this thesis attention will be paid to evaluate how BPM and this thesis’
results can be used to enrich existing services as well as develop new services. In addition, it will be examined which further (more practical/empirical) research is required.
2 http://www.bpm.com/AboutUs.asp
3 Reinventing Business Processes
Processes have always existed in businesses. There is nothing new in that. However, interest in processes is increasing due to several reasons. First of all, new insights, particularly those related to the concept of a process-centric company – concentrating on complete end-to-end processes rather than separate single (sub) processes – reinvent the idea that it is crucial to have a big picture overview to keep things in perspective, arguing that business processes actually are the business and therefore the unit of competition. Second, ICT developments create new opportunities to support the execution and management of business processes, giving powerful new means of executing on management theories that go back to the 1920s. Finally, the ever increasing dynamic nature of the external environment requires intensive management efforts as well as new demands for business process characteristics, such as flexibility, adaptability and agility.
This chapter will address business process from a process-centric perspective. It is argued that this investigation is required in order to see if the interpretation of business processes and the new concept of a process-centric company, including the principles of management and the role of ICT, relate to the current meaning of and interest in Business Process Management (BPM).
First, a brief history about the role of processes in businesses is discussed. Next, business processes and management are considered and explained separately in order to create a basic understanding of these elements, which construct BPM when interpreted literally. Finally, the role of ICT in a process-centric context is addressed, because it is impossible to rule out the essential role ICT plays in business processes today. This information is subsequently used to formulate a preliminary definition of BPM, which will be presented in the beginning chapter 4.
3.1 A Brief History of Processes in Business
This paragraph will address the role of process through history, starting at the end of the 19th century. By addressing the development regarding management of processes, it will put Business Process Management (BPM) in a historical context, which should help to understand how the perception of processes has evolved. It should also provide an idea of which issues were and are considered as important aspects of business processes.
Long before the actual term BPM appeared, organizations were already paying attention to processes in general. This discussion starts with the Industrial Revolution, notwithstanding it is possible to go back into history way further. For instance, imagine the ancient Egyptians, who managed to build the great pyramids. The ‘business process’ of building a pyramid probably was very complex and must have required intensive ‘management’ (e.g. coordination and delegation). This example demonstrates that business processes have existed since mankind started to civilize. Although fascinating, such examples may be considered less relevant for the
discussion of management of business processes today, because the situation was different (e.g.
no competition) and because not much information is available on these cases of ‘business process management’.
Due to the Industrial Revolution it became possible to ‘automate’ parts of the work (i.e.
activities or tasks) using machines. Soon after, in the beginning of the 20th century, Henry Ford had an innovative idea concerning the business process in his Ford Motor Company:
developing an automobile as a single (sequential) process. It should be noted that Ford’s effort was not merely aimed at automating processes, but also on how to employ other resources, such as human actors, in an efficient manner. It proved very successful; an incredible number of T- Fords were produced and sold. Still, Ford’s idea was not that hard to imitate, which eventually had its impact on the company’s competitive advantage.
Several years later, Taylor (1911) focused on creating efficient and consistent processes. He developed theories of scientific management and refined the work activities in order to simplify and narrow skills, as well as to specialize. These scientific management techniques segmented the process into functional departments in the call for economies of scale and work standardization. As a result, the functional structured organization, with its characteristic silos, was born. But consequently, the holistic view of the end-to-end process, including a responsible person or group for that process and achieving its objectives, was lost (Lindsay et al., 2003).
Not having this ‘big picture’ or complete overview complicates to keep things in perspective, as well as to see the interrelationships and dependencies, for example between departments.
Other techniques with a process-centric perspective emerged, such as the KANBAN, used by the Japanese army during World War II with the purpose of keeping stocks low, while maintaining an adequate delivery of products (i.e. weapons and ammo). This method was reintroduced during the late 1980s and 1990s as Just-In-Time (JIT), which resulted in growth for several ‘Asian Tigers’ due to improvements at their native companies. Later on western enterprises also achieved improvements, particularly related to the areas of logistics and Supply Chain Management (SCM).
Naturally, there are many more examples available. However, the most important developments regarding business processes after the work of Taylor started in the 1980s. The conceptualization of organizations as a functional structure (e.g. departments or divisions) that had been dominant for so many decades, was more or less debunked (or at least criticized), for instance by Porter (1985). Among other things, Porter mentioned the so-called value chain as a substitute for silo-thinking. In principle, the value chain represents a process that travels horizontally (i.e. through or crossing the vertical functional departments) from beginning to end of the organization. Actually, the value chain may also be seen in a larger context, crossing organizational borders (a value system). Focus on both the functional units (vertical) and the processes (horizontal) that cross these units, results in an organization structure that closely resembles so-called matrix organization, in which there exists a functional and a hierarchical structure. Matrix organizations are particularly found in companies that perform project based work (e.g. contractors and software houses). From a business process or value chain perspective, managers are responsible for the functional departments and other managers
responsible for the processes. A network organization, which consists of autonomous actors who together produce products or services, may be regarded as an extended form of a matrix organization and is particularly useful collaboration between (small, specialized) organizations.
It should be noted that these organizational structures still require arbitration in case of differences of opinion or conflicts. Currently, organizations that emphasize the central role of processes are referred to as process-centric companies, or in Harmon’s words: “Instead of conceptualizing the organization as a set of departments or divisions, the organization is conceptualized in terms of a set of processes that it manages” (Harmon, 2003a).
According to Porter & Millar, information and ICT is an important source of competitive advantage (Porter & Millar, 1985). In the 1990s, authors like Hammer (1990, 1993) and Davenport (1990, 1993) believed ICT – evolving rapidly – would enable radical change and improvement of business processes, which led to the Business Process Reengineering (BPR) wave. In their books, Hammer and Davenport originally defined BPR as emphasizing “starting from a blank sheet and completely re-conceptualizing major business processes and using information technology in order to obtain breakthrough improvements in performance”
(Harmon, 2003). BPR did produce radical change, but it was frequently misunderstood or even used for ulterior motives by the business, which led to unpleasant and frustrating situations (e.g.
downsizing). Today, the term is redefined in Business Process Redesign. According to Harmon, it usually focuses on smaller-scale processes and aims for more modest improvements.
Meanwhile, BPM emerged. During the 1990s it was not a big issue, perhaps because the subject was dominated by other matters, such as the developments regarding BPR and the increasing popularity of Enterprise Resource Planning (ERP) systems. Nevertheless, in 1995, the Business Process Management Journal was issued for the first time. Today, BPM has become an important concern, which is demonstrated by the great number of resources that address or mention BPM. A Gartner survey (May 2005) reports that BPM will be one of the major topics on the 2005 agenda of CIO’s and vendors from different markets are offering BPM systems and/or BPM-related solutions.
It is also possible to examine the developments regarding business processes from another point of view. It is easy to see that the focus and goals of business processes have regularly shifted (for example, see Lindsay et al., 2003). To begin with, industry concentrated on how to produce more (i.e. quantity) during the 1960s, whereas the 1970s were about how to produce cheaper (i.e. cost). Next, industry focused on quality (e.g. Total Quality Management, TQM) during the 1980’s and on how to produce faster (e.g. lead time, time-to-market, JIT) in the 1990s, while Business Process Reengineering (BPR) advanced as well, encompassing both cost reduction and faster process times. With the increasing focus on the customer and the many products that contain increasingly more information or ‘products’ that consist purely of information, industry currently tends to focus on how to produce more, that is, more and better services. It is interesting to consider how BPM fits into this picture. The developments addressed in both perspectives are illustrated in broad lines in Figure 3.1.
