Lots of people are talking about the importance of prioritizing the work your software development teams do. For a product development group, this means picking the right features to build in the best order. For many IT organizations, it means selecting the right projects to work on to create value for the organization.

• Mike Cottmeyer at Leading Agile is talking about agile portfolio management at http://www.leadingagile.com/2009/04/in-my-post-second-order-agile-scaling-i.html.
• Back in January, I was talking about how important it is to Focus on the Right Projects http://www.dennisstevens.com/2009/01/22/focus-on-the-right-projects/.
• In the ganthead article, “Tough PPM Decisions” Bob Weinstein calls for a “comprehensive understanding of the organization’s business and industry, along with finely honed business analytic skills.”
• Over at PMThink! They are discussing this issue as well. http://www.pmthink.com/2009/05/project-value-delivery.htm “Our historical challenge is being able to identify and articulate business value in the first place”
• Thinking for a change talks about estimating business value using a forced rank order method.

So this is clearly important. We need focus on the right projects and features – in a way aligned with our business model and how we create value for our customers. We need to have a forcing mechanism to overcome the tendency for everything to be a number one priority. And we need to be able to understand how shifts in strategy and market conditions impact the prioritization.

But how can you do it?

I use capability analysis to identify where to focus and to align everyone in the organization with the decision. A version of this work was published in the June 2008 Harvard Business Review article, “The Next Revolution in Productivity.” It is also covered from an executive perspective, in Ric Merrifield’s new book, “ReTh!nk: A business manifesto for cutting costs and boosting innovation.” I have used it over the last 10 years to support dozens of businesses and projects.

What is a capability?

A business capability describes something that the business relies on for a specific purpose or outcome. The focus is on what the business does rather than how it is done. Most organizations are not accustomed to thinking about the business as a series of outcomes and fundamental purposes. They think about what they do – not outcomes and purposes. Sending a fax is an example. Ask someone what they do and they will say “I send faxes.” While a business might ‘send a fax’, sending a fax is not a capability, it is a how. Sending faxes is one way of achieving the business outcome of ‘notifying vendor’ or ‘communicating with the customer’. Also, capabilities remain stable. For example Pay-Payroll, it doesn’t matter whether you do it manually, internally, or outsource it. It has the same performance criteria, regulatory constraints, and inputs.

Capability Analysis is presented here as a five step process.

1. Identify the capabilities within in your business
2. Identify the capabilities most critical to your company’s success (Business Value)
3. Identify the health of the business capabilities (Performance)
4. Identify the business risk and technical risk associated with the capabilities (Risk)
5. Prioritize opportunities to the smallest subset necessary to deliver value

Identify the capabilities within the activities in your organization

I usually start with six high-level capability groups within the typical enterprise: develop and manage products and services, market and sell products and services, deliver products and services, manage customer service, manage vision and strategy, and provide business infrastructure. Identifying the specific capabilities within the enterprise involves creating a capability hierarchy within the capability groups.

For example, market and sell products and services can be broken down to activities and these activities can then be broken down to capabilities. This isn’t functional decomposition, think of it as a tree of cascading purposes.

Capabilities

There are several sources to build out these models. One excellent starting point is the Process Classification Framework from APCQ (www.apcq.org). This framework provides a relatively complete list of capabilities across organization’s across industries.

Identify the capabilities most critical to your company’s success

Critical capabilities are indentified by assessing how closely each capability is tied to the execution of business strategy and the direct contribution of customer value.

• Is this capability directly linked to a strategic objective? (Yes/No)
• How does this capability contribute significantly to the profitability of the company? (High/Medium/Low)
• Does it have a strong connection to company’s brand or identity? (High/Medium/Low)

By assigning scores to each capability and totaling per capability you can rank order the capabilities based on business value. If the business strategy or market conditions change, the model can be rapidly re-evaluated.

Identify the health of your business capabilities

Capability health is evaluated by looking at performance, cost, and the tendency to be a constraint. The more factual and objective you can make this data, the better. But a solid subjective assessment that has been agreed to by the organization is a very powerful tool.

• How is this capability performing relative to expectations? (Above/Meets/Below/Far Below)
• Is the cost per for this capability acceptable? (Too High/Acceptable/Below)
• Is this capability ever a constraint in the organization? (Often/Sometimes/Seldom)

Again, you assign scores to the factors and use the resulting score as a force rank mechanism. It is important to focus on improving where you can improve the ability of the capability to meet the needs of the business, reduce the cost per, or eliminate it as a constraint. One nice thing about this evaluation method is that any initiative now has a very specific out. And that outcome can be tied directly to the business strategy.

Identify the business risk and technical risk associated with the capabilities

Finally, they are evaluated for the risk associated with changing (or not changing) them.

• Is the technology and the vendor stable and aligned with the IT strategy? (Yes/No)
• Is this a highly connected, highly regulated, or unpredictable capability? (Yes/No)
• Will this capability support any anticipated growth? (Yes/No)

Prioritize Opportunities

Now that you have clarity of your business model or product you can prioritize within specific portfolio segments. For example:

• High Business Value/High Performance/Low Risk: Operate
• High Business Value/Low Performance and/or High Risk: Invest
• Low Business Value/High Performance/Low Risk: Optimize
• Low Business Value/Low Performance/High Risk: Eliminate

The majority of your capabilities will fall outside one of these segments. You probably shouldn’t be spending everywhere all the time and these segments highlight where you should spend and what type of action to take. As you complete initiatives, capabilities will move into new segments. For example, the High Business Value – Low Performing capability better be moved out of the Low Performing segment at the completion of a project.

Visual Tool

The findings can be presented graphically in a heat-map fashion. In the heat-map the border is strategic value, the fill is suitability of performance, and the dot is risk. The red-colors means it is interesting, green means it is not something to evaluate.

For example, the capability above is strategically important, performs suitably, and has some risk. In future posts I will show a more detailed capability model with cascading capabilities. This type of Visual Tool serves to align an organization around a common vision. It also can highlight where there is a disagreement around the perspective. These conflicts should be resolved so management is focusing all efforts in a common direction.

Benefits of Capability Modeling

This is a high level look at capability modeling. Based on the complexity and maturity of an organization this approach can be established and maintained rapidly and with low friction. The approach facilitates:

• A clear connection of development work with business value
• Alignment of organizational and infrastructure decisions with business value
• A stable context for understanding and communicating across functional areas
• Requirements clarity and testability
• Negotiating the balancing of technical and business risk
• A progressive elaboration model that supports an Agile approach to improvement

This is a high level overview of how to execute a Capability Analysis. Most of the assessment will require a high-level of detail in the preparation of questions. You will also decompose the business or product to more detailed capabilities in those areas where it provides value. We have a new Yahoo group called rethinkbus you should join if you want to interact with people who are learning about and have done projects using this approach.