Value Stream Management: Peter Coote Explains How Firms Can Use an Architectural Approach to Improve the Way Key Back-Office Functions, Including Finance, Perform

By Coote, Peter | Financial Management (UK), October 2010 | Go to article overview

Value Stream Management: Peter Coote Explains How Firms Can Use an Architectural Approach to Improve the Way Key Back-Office Functions, Including Finance, Perform


Coote, Peter, Financial Management (UK)


Russell Ackoff, the "dean of systems thinking", argued that any successful organisation's managers will look beyond their own departments' functional boundaries and targets in order to understand the effects of their activities on other parts of the organisation and its stakeholders. Ackoff, who originally trained as an architect, applied architectural principles to his business theories. If financial managers take a similar view, they can fundamentally change how they achieve improvements in the crucial business support services of finance, HR, sales administration and procurement.

In recent years a number of organisations have gained a better understanding of what their customers value and the series of activities that come together to provide this: the value stream. They have used this knowledge to improve both the effectiveness and the efficiency of what they do. Having started in manufacturing, these techniques are spreading into the service industry.

In their 1996 book Lean Thinking, James Womack and Daniel Jones defined the value stream as all the specific actions required to bring a product or service through the following critical management tasks of any business:

* The problem-solving task: from developing the concept through design and engineering to production.

* The physical transformation task: the process of converting raw materials to the finished product.

* The information management task: from receiving an order through scheduling to delivery to the customer.

My work with a range of organisations tends to focus on the following two streams:

* Concept to customer: the use of information about potential customers' existing or future needs in order to develop a product or service that satisfies these.

* Order to delivery: the process from when the customer expresses an interest in buying the product or service through to its delivery.

In organisations that make a durable product, there may be a third stream:

* Acquisition to disposal: the process of understanding and fulfilling the service needs of customers during their ownership of that product.

The combination of these streams into one overall value stream will be assessed by consumers for its ability to deliver products and services, and the associated experience, that they value. These streams often involve an organisation's external partners. For example, in the car industry the value stream might also include suppliers, importers and dealers.

The late management guru Peter Drucker observed that "in any functional organisation 90 per cent of failures occur at the interface points". The original equipment manufacturer needs to play a central role in aligning and integrating the activities of the participants in each stream and among streams. The combination of internal functions and internal and external partners creates a lot of potential for failure across these streams that will detract from customer value and increase operating costs.

Womack recently identified the need for what he calls a value stream architect. Like a real architect, this person talks to customers to determine their needs and then talks to all the players involved in design and construction in order to create something that delivers the desired value affordably.

While this process does occur on the operational side of organisations, is it practised in the support services of finance, HR, sales administration and procurement? Organisations are starting to use end-to-end reviews to assess these activities. Some have achieved benefits from placing certain functions into internal or external service centres, but that practice has introduced new challenges. Taking the manufacturing industry as an example, we should be seeing substantial benefits from such an approach. In practice, they generally haven't accrued. Why?

I believe that these support functions have yet to escape their traditional functional confines and reach a clear understanding of their activities and how they combine to form a "support service architecture" that meets the business's needs. …

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