Building a Business Case for Agility

Agility is increasingly being seen as a prerequisite for continued competitiveness in the changing global marketplace. However, many of the technological and organizational changes required in making the migration to agility are radical and strategic in nature. Attempting to justify many of these pervasive changes is difficult using currently available techniques, especially those which focus solely on traditional economic criteria. The failure to consider strategic and long term benefits of agility can lead to the failure of manufacturers to adopt these required changes. This paper will discuss how the migration to agility can be justified from a business perspective using a business "case" methodology for the strategic justification of enterprise integration technologies. ACKNOWLEDGMENTS Research for this paper is funded in part by the National Center for Manufacturing Sciences, the State of Texas Advanced Technology Program Grant 003656-036 and by the National Science Foundation sponsored Agile Aerospace Manufacturing Research Center. INTRODUCTION The integration and adoption of agile technology, practices, processes and people into any organization relies heavily on strategic and operational measures and goals. For an organization to become more agile, a vision must be adopted that will guide them to accomplishing this goal. The process of adopting and integrating this vision will not be made without consideration of the overall sustainability of the organization. That is, for agility to be adopted and implemented within an organization it needs to be sold to management from a business perspective. This business case should not rely on the traditional practice of the strict use of economic performance measures. Agility is a pervasive concept that impacts the organization on a number of dimensions. Agility does not necessarily arrive immediately, and similar to many strategic visions, will probably require a relatively long migration period for a significant adoption of its principles [5,6]. This paper will present a unique application of a methodology that can be applied to justifying the adoption of agile manufacturing strategy and principles. It will discuss the characteristic benefits and costs which are incurred when making this transformation to agility. Possible metrics and performance measures identified from various literature and research sources, which can be used in the methodology, will be presented. The discussion will include the use of the methodology for building a business case for the overall decision to embrace agility and agile manufacturing as a paradigm for doing business. Additionally, the more general case presented in this paper can be made more specific for making a case for the acquisition of individual enablers for agility. A number of issues pertaining to building a case for agility are outlined in the concluding section. THE BUSINESS CASE METHODOLOGY The business case methodology, now known as SJET (Strategic Justification of Enterprise Technology), was developed under funding from the National Center for Manufacturing Sciences. The focus of the methodology is on justification of technologies having pervasive, enterprise wide impact through a structured analysis approach. In the context of this methodology, technology can refer to major organizational changes, such as agility, as well as hard automation and other more conventional process technologies. We have chosen to present the business case methodology within the unique context of a company seeking to build a case for the transition to agility. The discussion will include the methodology itself along with the specific factors involved in agility. It should be noted that the methodology would be equally appropriate in justifying an investment in a specific technology necessary for agility, such as a new integrated information system or flexible machining system. The methodology consists of five integrated phases as illustrated in Figure 1 by an IDEF0 based diagram. These phases are: Identify System Impact, Identify Transition Impact, Estimate Costs and Benefits, Perform Decision Analysis, and Audit Decision [8]. In the Identify System Impact phase, the technology or change is linked to the enterprise. This linkage uses an activity based approach to estimate financial costs and benefits. The activity also links the impacts of the new technology to the strategies of the enterprise. In much the same way, the Identify Transition Impact activity identifies the impacts the process by which the new technology is implemented. The Estimate Costs and Benefits activity estimates the actual magnitude of the strategic and financial impacts. In the Perform Decision Analysis activity, the analyst(s) performing the justification arrives at a decision recommendation. The Audit Decision phase is present to allow for an evaluation of the justification process so that improvements can be made to the methodology itself. The analysis in this methodology is accomplished through a series of documents and analysis matrices (templates) (as shown in Figure 2) in which the pervasive impact of the technology on the enterprise is determined. The documentation, labeled "forms" in Figure 2, can be extensive. Documentation data will require such elements as the written strategic vision of the organization to assumptions and constraints that face the decision making process. The detailed requirements for this documentation, as well as the details of the methodology, can be found in [8]. This data must be acquired for successful completion of this justification methodology and is assumed to exist prior to the use of the methodology. The matrices will help identify relationships among the strategic and activity based (operational) impacts of the technology. There are five major sets of "linkage matrices" used to link objectives, strategies, attributes, strategic and operational metrics, as well as activities, that are used by the methodology. Two of these, the Strategies to Objectives and the Strategies to Strategic Metrics Matrices are detailed within the illustrative example. Four "analysis matrices" are used to measure the actual impact of the adoption of a technology or business practice. The methodology relies on various performance metrics which may be used to measure or estimate the actual impacts. An activity based approach for determining cost impacts is used. These impacts are aggregated and placed within a cash flow matrix for the calculation of traditional financial impact in a form presentable to financial analysts or external funding sources such as banks and financiers. The net results of these cash flows, maybe expressed in financial criteria such as net present value (NPV) or return on investment (ROI). These criteria are then incorporated into a final strategic analysis matrix in which all impacts (from the traditional and strategic metrics matrices) are integrated to arrive at a final evaluation "score" for the technology alternative. A strategic analysis matrix is developed for each alternative. From this strategic analysis matrix, summarized data is extracted and presented in an alternatives comparison matrix which will be utilized to make a final evaluation among competing alternatives. For this approach to be successful it will require the efforts of a project/analysis team comprised of individuals from various functions. The next section will detail the methodology though an illustrative example focusing on agility as the "technology" to be justified. AN ILLUSTRATIVE EXAMPLE FOR JUSTIFYING AGILITY In this illustrative example we present the methodology within the framework of a company seeking to justify a transition to agility. To make the example meaningful, we will use reference material from management literature and the Agility Forum. In the interest of space, we will not present all of the forms or matrices used in the justification, but only highlight those which give the reader an overall understanding of the methodology. Additional information about the methodology can be found in the specification of the methodology [8]. The strategic nature of this justification methodology requires that the analysis team gain an understanding of the strategic direction of the firm. To be able to successfully accomplish this, a linkage matrix similar to the one shown in Figure 3 is completed. This Strategies to Objectives Matrix identifies the objectives of the enterprise and links them to the strategies employed to meet the objectives. Strategies are listed along the vertical axis and objectives along the horizontal axis. Within the methodology, objectives are broadly defined, long term results which an enterprise strives to reach. In this case, we use as objectives some of the "Enterprise Characteristics" of an agile enterprise as outlined in volume 2 of the 21st Century Manufacturing Enterprise Strategy document [5]. A company making and measuring progress in achieving desired characteristics in areas such as concurrency, customer responsiveness, and vision based management, should find itself progressing toward agility. A company may and should develop their own definitions of these or other objectives entirely. We have added an objective for long term financial viability, since it is implicit in being agile. Strategies are the means by which a company will meet its objectives. Where objectives define where a company wants to go, strategies define how it will get there. To maintain the general nature of this presentation, rather than present specific strategies, we present areas in which strategies should be defined. Financial Performance, Cost, Flexibility, Quality, Time, Product/Process Innovation, and Environmental are fairly well accepted in management literature as areas in which enterprises should develop strategies. The Strategies to Objectives Matrix defines the relationships of all or some of the corporate and functional strategies and objectives. The analysis team defines which of the strategies assist in the achievement of particular objectives and designates the relationship with an identifying mark. In this and in all matrices included in this example, marks are shown mainly for exposition purposes. The focus of this paper is not on whether a particular strategy supports an objective so we will not spend time justifying any of the linkages. This matrix simply helps the team come to an understanding of the environment in which the decision analysis is being accomplished, in this case, why is the company considering agility as a competitive choice? The project under consideration is linked to the enterprise both operationally and strategically. The operational linkage allows for an activity based analysis to determine the financial costs or benefits from adopting the technology. This portion of the analysis is referred to as the traditional analysis within the methodology. The operational linkage is accomplished through a Traditional Analysis Matrix similar to the one shown in Figure 4. Activities that are impacted are listed along the vertical axis (the selection of these activities to metrics relationships is a phase in the methodology that is not detailed in this paper). There are several sources to guide an enterprise in developing the activity model used in this matrix. Examples include the enterprise reference models developed by NCMS [7] and ARRI [2]. For this example, we use the highest level activities defined in the ARRI reference model: Perform Strategic Planning, Manage Resource, Market & Sell Product, Design Product/Process, Conduct Manufacturing Operations, and Support Product. The ARRI reference model is developed in the IDEF0 syntax. Each of these activities are detailed in text and graphics and are broken down into additional levels of detail. The relative breadth and depth of the analysis, in terms of which activities are selected, is dependent on the pervasiveness and "significant" impact of the technology alternative, or as defined by the objectives of the decision maker. The technology under consideration is broken down into "components" to facilitate the identification of the operational linkages to activities. Components are logical or physical breakdowns of the technology. For this example, we use the Agile Enterprise Elements from Dove [3]. These elements are defined as the sub-modules for focused measurement and analysis when applying the Agile Production Focus Group's model for measuring agility. This definition closely matches the methodology's definition of a component. These elements are: Organizational Structure, Human Resources, Operating Procedures, Information Automation, Control Automation, Material Movement/Management, Production Process, Production Equipment, Changeover/Setup System, Supply Chain, and Distribution System. Several metrics which relate to the activity based benefits realized from the investment are listed along the columns of the matrix. These activities are presented as examples of the types of metrics which could be considered used. It is important to note that even these strategic metrics are linked to strategies in another matrix to ensure their relevancy to the strategic direction of the enterprise. The marks indicate that the metric can be helpful in arriving at the actual cost or savings estimation for a particular activity. The Cost/Savings Categories indicate the components making up the total cost of performing each of these the activities. Included in this example are labor, materials, and other, fairly standard cost categories. Rather than present contrived figures, we simply use $X's to indicate that a savings or cost is entered in the appropriate cells. Values need not be placed in every cell and values may be positive (to indicate a saving) or negative (to indicate a cost). Estimation and acquisition of data for each of the of the activities will require the necessary accounting and reporting systems. A Traditional Analysis Matrix is created for each year of the analysis. Yearly cost savings are calculated. These total yearly dollar costs or savings from Figure 4 are then transferred to a Cash Flow Analysis Matrix (not shown). The goal of the cash flow analysis matrix is to help calculate traditional financial criteria such as NPV, ROI and Payback. To determine the values for these criteria, we require the final expected cash flow per period of analysis. The calculation of the financial criteria completes the traditional analysis. Figure 5 represents the Strategies to Strategic Metrics Matrix, a linkage matrix used for identifying and assigning weights to the metrics to be used in the integrated strategic analysis matrix of this justification methodology. These metrics are used to estimate the actual magnitude of impact that the investment will have on the various strategies. Those strategies identified in Figure 3 and determined to have a relationship to the objectives of the organization are listed along the vertical axis. We have identified three types of strategic metrics categories that are listed along the horizontal axis of the matrix. These include: 1) Financial metrics, such as Net Present Value (NPV) and Internal Rate of Return (IRR), are used to incorporate the cost impacts of the investment as identified in the traditional analysis with non-cost impacts. 2) Quantitative metrics, such as lead time and throughput, refer to those metrics for which numerical estimates can be obtained but are difficult or impossible to put in dollar terms. In our example, we use three metrics from the Benchmarking Agility study from the Agility Forum [4, page 6]: Cycle Time, Quality Improvements, and Product Development Cost Reduction. 3) Qualitative metrics, such as employee relations and community goodwill, are used to measure the impacts difficult to measure in dollar terms. These are often expressed in terms of categorical values such as Better/Same/Worse and A/B/C/D. In the example shown, the investment's effect on Consistency of Product Quality, Customer Goodwill, Ability to Respond to Varied Product Life Cycles, Environmental Impact, and Integration of Operations will be rated on Poor/ Bad/ Neutral/ Good/ Excellent scales. Strategy relationships to objectives show that each strategy has a different level of relative importance. An enterprise may feel that certain strategies have a greater effect on meeting the corporate objectives. Similarly, not all metrics are equally applicable or adept at measuring the impact for a particular strategy. To take into account the variable impacts of strategies on objectives and metrics on strategies, relative importance weights are assigned to strategies, as are relative importance weights of each metric on a specific strategy Through group decision making techniques, the enterprise assigns relative weights to strategies and records them in the Strategy Weight column. Normalization of weights and clarified calculation require the sum of the strategic and metrics weights should sum to one. For this example, the first strategy, Financial Performance has a 0.40 relative weighting for impact on corporate objectives. The two metrics that have an impact on this strategy include NPV and IRR. Respectively, their weightings are 0.8 and 0.2. This reflects the greater importance that the decision makers place on NPV as a measure of predicted financial performance when compared to the IRR. The overall weight for each strategic metric is calculated by summing the product of strategy weight and individual cell values for each column. For example, the NPV metric gains an overall weight of 0.32, indicating that financial considerations are still an important criteria in building a case for agility. The final values that will be used in the integrated strategic analysis matrix are shown in the "Strategic Metric Weight" row in Figure 5. Due to the variations of measurements' units among the metrics, their aggregation cannot be carried out without some transformation. For example, a metric expressed in dollars can not be summed with metrics expressed in percent or on a subjective scale. The methodology overcomes this difficulty in aggregation of diverse unit measurements by converting the impacts of all metrics to a 0 to 5 unitless utility scale. This conversion is done through determination of utility functions, either defined by the analysis team or through some set of predefined utility functions. The last four rows of the Strategies to Strategic Metrics Matrix in Figure 5 are used to define the utility functions. The Target row defines a value to which the decision maker aspires. In the case of NPV, a value greater than 0 is desired. The Upper and Lower rows define the bounds of the values for the utility function calculation as well as what may be viewed as the "ideal" and "nadir" (best and worst) points as viewed by the decision maker, it is assumed that any value beyond the best and worst is a constant utility value. The Type row specifies the type of utility function is to be used. We have built in three basic types of linear utility functions for this methodology. Increasing (I) functions are used when a higher value is preferred, as with NPV. It is assumed that any value less then or equal to the Lower value receives a normalized utility value of 0, anything equal to or greater than the Upper value receives a normalized utility value of 5. Values in between receive a proportionate score. Decreasing (D) functions are essentially similar but with lower values preferred, as with a metric such as Lead Time. A third type not shown among these metrics, the peaked (or target) utility function, aims for a value at a specified target, with deviation in either direction resulting a lesser score. An example might be a Delivery Date metric, where orders arriving too early or too late are both undesirable. For the three quantitative metrics, we set as the target the average results realized by the companies in the Benchmarking Agility study [4, page 23]. The upper and lower values were developed by adding and subtracting one standard deviation from the mean, respectively. For example, the mean for % cycle time improvement was 53% with a standard deviation of 21%. With roundoff, we set the target at 50% and upper and lower bounds at 70% and 30%, respectively. This shows an example of how a company might use benchmarks in setting its utility functions. The integrated Strategic Analysis Matrix (Figure 6) is used for integration of actual calculation and integration of "scores" of the strategic metrics. In the same way that we decomposed the system into components to facilitate the identification of linkages to activities, we decompose the system into "attributes" to identify linkages to strategies. Attributes are defined as either strategic attributes about the system itself or strategic advantages gained by the company through the acquisition of the system. An example is flexibility, which can meet both definitions. Consider a company looking to justify a new shop floor control system. The system can itself be considered flexible (able to be used in wide range of environments). Additionally, the system may provide the company an advantage in the marketplace of being more flexible, perhaps through the ability to respond to changes in demand or customer expectations. In this example, we again use areas or categories of attributes: cost, time, quality, flexibility, and environment. The reader will notice these map almost directly to the areas of strategies identified in Figure 3. In our experience, however, the mapping is usually not this clear. In this matrix, estimated values ("Estimated Value" column) for each metric is converted into its normalized value ("Normalized Value" column). This normalized value is then multiplied the weight to arrive at a score for this strategic metric. For example, in this example, the estimated value for NPV is 200k, which converts to a normalized value of 2.5 because it is midway between the upper and lower values of 300 and 100, respectively. The contribution of this NPV value to the total strategic analysis value is determined by multiplying its normalized utility score (2.5) by its strategic metric weight (0.32) from Figure 5. This provides a strategic metric total of 0.8 in the Strategic Metric Total column. The total value for this alternative comes out to be 3.96 and is calculated using a simple summation of the Strategic Metric Total column. Alone this value does not mean much, but should used as a comparative value with other alternatives. An alternative which scores the maximum on all metrics would receive a score of 5. To compare alternatives, the Alternatives Comparison Matrix shown in Figure 7 is used. This matrix allows the scores of several alternatives to be displayed on one matrix for easy comparison. In this example, we are comparing to a baseline alternative of some kind. We see that even though the technology under consideration does not perform as well on the Financial metrics, its strong performance on the Quantitative and Qualitative Metrics allows it to outscore the baseline overall by a score of 3.96 to 3.06. This example points out the importance of considering all benefits, not simply financial in deciding on alternatives. SUMMARY AND CONCLUSIONS We have shown a technique that can be used as a framework to justify agility from a strategic perspective. The use of the SJET methodology in this example is relatively general in scope. The results of this general framework may be used in the justification of more specific technology, product, process or project. The process will be similar for most levels of analysis. Those that are more strategic will necessarily require more resources for a thorough evaluation. For this methodology to work more effectively in aiding managerial decision makers in justifying agility, a number of requirements should be met. Some of these requirements are due to the characteristics of the methodology, some are due to the environment associated with the agile concept. The methodology requirements include the development and use of appropriate tools for estimation and analysis. A number of prerequisites need to be in place for its effective usage. This tool is only one step in a larger process of agility implementation, developing strategy, changing the organization, implementing projects, and monitoring these projects, are all closely related to making a business case. Additionally, systems for development of performance measures and metrics within an organization will greatly aid this methodology. Yet, performance measurement systems are relatively wanting in most organizations [1]. Without this organizational management infrastructure in place, a justification alone will far from guarantee success of agility adoption by the organization. The requirements associated with the agile concept are primarily related to its definition. Currently, a definition of what agile is and thus how to implement it as a strategic vision, is still vague. This is usually true of most concepts that are in the early stage of development. Yet, without an encompassment of agility an organization will find it much more difficult justify. We have used a number resources to help in the construction of this paper, and during this process, we found that a number of issues pertaining to metrics, performance measures, strategic attributes and effects on activities, associated with the concept of agility are still in acute need of development. This paper aids decision makers by reducing some of the risk with making a decision to become more agile.