The Definitive Guide to

Business Capabilities

Business Capability is the expression or the articulation of the capacity, materials, and expertise an organization needs in order to perform core functions. Enterprise Architects use Business Capabilities to illustrate the over-arching needs of the business in order to better strategize IT solutions that meet those business needs.

Business Capabilities

Introduction

In the digital age the role of technology shifts from supporting processes of the business strategy to the key factory of strategy execution itself. Information Technology helps that customers receive their shirt ordered online the next day, it helps that they can read their newspaper during their commute on an iPad and that the invoices for these services are processed without friction. As a result, the challenge of how to bridge the gap between strategy and execution in IT becomes much more pressing.

This gap is often caused by organizations speaking many languages. They speak of missions, strategies, goals, processes, and projects. The CEO speaks of “making mobile first a priority”, Marketing of “increasing the share of wallet with millennials” and IT of “load balancing the Linux server cluster”. Which one is the right language? Business Capabilities have the potential to serve as this common language.

This blog will help you understand what Business Capabilities are and why they make your life easier.

Business Capability Modeling

What you need to know

Business Capability modeling is a technique for the representation of an organization’s business anchor model independent of the organization’s structure, processes, people or domains.

As a tool for Enterprise Architects, Business Capability models enables the discussion of strategic invest or divest. Business Capabilities can serve as the structuring element to uncover redundancies in IT.

McKinsey estimates the saving potential from uncovering IT redundancies to be 15 - 20%. 

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Business Capability mapping allows companies to clearly see what a business does to reach its objectives. Business Capability modeling is an essential view for IT leaders. Business needs should shape your IT architecture. As companies change, innovate, and prepare for digital transformation, processes, needs, and goals change. After complex and numerous changes, the supporting technology should also be revisited.

What can you achieve with Business Capability Mapping?

  • Encapsulate what a business is doing right now and what needs to be done to meet current and future challenges.
  • Define “what” a business does, rather than “how” it does it
  • Provide a common basis for discussion and planning
  • A clear link from strategy to execution
  • Involve the appropriate stakeholders that define the strategy
  • Carry out highly organized mergers & acquisitions
  • Accurately define roles within the business
    Manage mergers, assess risk, and prepare for innovative endeavors.

Merger Management

Since Business Capabilities structure a company according to its activities, Capability maps are a crucial tool in setting up highly strategic M&As. Capability maps provide both groups with the basis to structure a merger in a beneficial way, even if the organizational structures and processes of the two companies are very different from each other. Capability maps assign applications to user groups and Business Capabilities. This overarching view of applications and their business value makes it possible to assess redundancies and gaps in IT support in both dimensions - functional and usable.

Realizing Post-Merger Synergies in Your IT Application Landscape [White Paper]: Find out what methods for consolidating IT Application Landscapes exist and  what steps should be taken to consolidate an IT landscape from a merger. »

Imagine a multinational insurance company has recently acquired a local insurance player. During the M&A process, both teams sit down and take an assessment of their supporting applications. The teams have to decide which applications can be used in the future, and which should be phased out. Being familiar with their prospective applications, and affected by their previous organizational structures, how can teams objectively choose the best fit application for the new company going forward? Instead of getting lost in uncertainties, “this application worked for us previously, so it should work going forward,” the teams can sit down with a Business Capability map to structure the entire merger.

A Business Capability model helps to discuss the areas of strategic invest or divest. Business Capabilities can serve as the structuring element to uncover redundancies in IT.McKinsey estimates the saving potential from uncovering IT redundancies to be 15 - 20%.

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LeanIX Customer Helvetia was able to reduce redundancies and realize substantial savings in the merger with Swiss Re. In their half-year report, Helvetia reported IT as a significant contributor to these savings. Establishment of transparency was a crucial first step towards doing so. Today, the established LeanIX inventory serves as the single source of truth that strategic IT management decisions are based on.

IT Risk Management

By linking Business Capabilities to applications, and linking those applications to technology components, CIOs can take a glance at a Business Capability map and perform a quick strategic risk assessment. With the right information in place, CIOs can deliver a statement such as: “We cannot accept the risk of an end-of-life server cluster because it provides the infrastructure for our online booking system that is crucial to our Capability to sell directly to customers. Selling directly to customers has highest strategic priority due to its financial impact.” Having a clear view of which technology components are dependent upon other technology components is a strong view, especially during the times of high-security vulnerability. 

Innovation Management

Business Capabilities are also a great help in structuring thoughts on how to transform business and IT. In this digital age, companies need to investigate and ponder new ways to innovate, Capability by Capability. A SaaS provider could go down the list, thinking of ways to transform and update their Capabilities. Taking a second glance at the “Manage Pricing” Capability, and ascertaining ways to update it. In the past, the company may have followed a simple standard pricing model sheet. Now, the SaaS company could enable pricing based on updated data.

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Business Capability Benefits

The Business Capability view brings many benefits.

With Business Capabilities, you may link execution to strategy, by associating which Capabilities support the strategy pillars, aligning funding to core Capabilities, and assigning, measuring and monitoring key performance indicators.

Focusing on core Capabilities gives your company a competitive advantage, allowing you to standardize the context Capabilities and outsource the commodity Capabilities.

Having a 360-degree view of the enterprise gives you a coherent and comprehensive view of business motivation, Capabilities, processes, data, and resources, and gives you the ability to understand interconnectedness, overlaps, and synergies.

Business Capabilities establish a common language, providing an actionable framework for business and IT.

From the overview of the Business Capabilities, IT and business leaders are able to communicate across the organization tasks that should be fulfilled, devoid of business and technical lingo.

Business Capabilities allow for more pointed architecture definitions, as Capabilities help to provide a better business definition which leads to effective and efficient technology solutions.

Once organized, IT assets may be leveraged and reused many times, which saves costs, and reduces unnecessary soft and hardware purchases.

Business Capabilities help to break down silos, both in IT and business. Operating from a Capability-centric organization design speeds time to market.

McKinsey reports that Business Capabilities can help to uncover redundancies - saving potentials often range from 15 to 20%. Capability-driven thinking helps organizations to understand and mitigate technology risks better, saving an upwards of $590K – which is the is the cost of a single IT incident.

At its essence, Business Capabilities should lie at the top layer of the business architecture. Business Capabilities carry three main characteristics.

  • They are the most stable reference for planning organizations,
  • they make strategy much more tangible,
  • and if properly defined, they can help overcome organizational silos

 

Business Capability strategy and execution

Business capabilities describe what a business dows and needs to do in response to the defined strategy. They help toclose the gap between strategy and execution.

If one Business Capability says “recruit great employees," it involves various people – HR team, the process – attract, screen, interview, hire, and the technology needed – online assessment center, digital personnel file, etc., into one Capability of the organization. 

Business Capabilities form a crucial part of great IT strategies, as they specify the path to winning, and point out the necessary steps of both IT and business along the way.

Create your own Business Capability Model in 4 steps

1 - Understand the needs

“Know where your company is heading and how IT can help.”

If the IT department does not know where the business is heading, it is impossible to make supporting decisions. Therefore, it is a good start to review your company’s strategy and goal documents or even better involve people that define the strategy, like the strategy or corporate development department.

2 – Define your Business Capabilities

“Business Capability syntax: When in doubt, go for breadth rather than depth.”

Think about the major Capabilities that your business needs to operate. On the first level (level 1) there should be only a few critical ones. An analysis of the top 100 LeanIX workspaces shows that companies typically use around 7 - 10 Capabilities on the highest level. You can build them by thinking both from top-down (what does the company want to achieve) and from bottom-up (what organization, processes and people are in place)

3 - Assess your Capabilities

“Not all Business Capabilities are equal in terms of value for the customer and financial impact.”

Not all Capabilities are of equal importance. Assess Capabilities according to defined criteria as a basis for later analysis and planning.

4 - Link Capabilities to applications

“The link between Business Capabilities and applications creates a bridge between business and IT.”

In the final, but equally important step, link your Capabilities to your applications. Applications, unlike IT components, are always linkable to a specific business purpose. Business users work with them in order to create value. Therefore, applications are the perfect transit between business architecture and technology architecture.  A great way to get a complete overview is to depict Business Capabilities as nested boxes that contain the assigned applications.

4 steps to creating a business capability model

Figure 2: The 4 steps to creating a Business Capability model

In Conclusion

Business Capabilities have the potential to serve as a common language between business and IT. Properly defined, Business Capabilities can help to save money, decrease risk and enable growth. Best practices show that Business Capability models of companies with a lean philosophy have around 10 top-level Capabilities and two levels of depth.

The resulting model can be used to support analyses to align IT investments with strategy, to draw technology risk maps and consolidate IT applications.

LeanIX supports these analyses with out-of-the-box best practice reports.  

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Best Practices to Define Business Capability Maps

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Whether you are from the banking or insurance industry, automotive or logistics industries or others, this generic business capability map is the perfect start point!

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See mapping examples and model your own business capabilities!

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See how IT and business align with a complete overview of your business capability landscape.

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Additionally, we have added tips and best practices on how to get started with business capability maps and to create a complete overview of your business capability landscape.

Answers to frequently asked questions on Business Capabilities

How do you define business capabilities?

Business Capabilities can serve as a structuring element to uncover redundancies in IT.

Business Capabilities provide you with a coherent and comprehensive view of business motivation, skills, processes, data and resources, enabling you to understand relationships, overlaps and synergies.

They are a critical part of great IT strategies, as they set the path to success and show the necessary steps for both IT and the business to take on the way.

What are core business capabilities?

Core capabilities are associated with the existence of the company. This includes the core competence of a company, such as content production, like films and series for Netflix or product management for brands like Coca Cola.

For other companies logistics or manufacturing could be an existential core capability and for others it could be the development of an IT infrastructure. What can be seen is that the core capabilities depend more on IT over time.

What are advantages of business capabilities?

With business capabilities, you can link the execution of your business to the strategy you want to achieve by mapping which capabilities the strategy pillars support.

Based on this, you can align financing with the core capabilities and assign key performance indicators to better measure and monitor performance.

By focusing on the core capabilities, you can give your company a competitive advantage by standardizing the contextual capabilities and outsourcing the product capabilities. Business capabilities provide a common language that offers a framework for business and IT.

Starting with an overview of business capabilities, IT and business managers are able to communicate across the organization's functions without business and technical jargon.

Business capabilities enable more focused architecture definitions, as capabilities help deliver a better business definition that leads to effective and efficient technology solutions.

Once organized, IT assets can be used and reused multiple times, saving costs and reducing the purchase of unnecessary software and hardware. In essence, business capabilities should be at the top level of the business architecture. Business capabilities have three main characteristics.

  • They are the most stable reference for planning organizations,
  • they make strategy much more tangible
  • and, if properly defined, they can help to overcome organizational silos.

What is business capability modeling?

Business capability models can be considered as a tool of enterprise architecture and allow discussions and insights on strategic investments or divestitures within the business units.

Business capability modeling is considered independent of the structure, process, people or domains of the organization.

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