Big Challenges
Suppose you were in charge of distributing $700 billion to financial institutions that have failed, how would you do it? Suppose you were put in charge of fixing the world economy, how would you do that? Suppose you were in charge of eradicating cancer, how would you do that? I submit that the foundational principles of Business Architecture can be used to address such challenges.
When the G20 leaders recently convened in Washington to address the world’s economic challenge, Sir Nigel Sheinwald, UK’s ambassador to the US was asked how to address the global economic crisis. In spite of throwing a lot of money at it, the problem seems to persist; what can be done about it? He response: we need to “understand the architecture of the international financial system (IFS).” It’s indeed encouraging to see that top decision makers are seeing the need for a disciplined approach.
From a business perspective, Business Architecture provides the tools and techniques to model the current and future states of an entity – where that entity can be a small problem, a large enterprise, a country, a concept, or even a global challenge such as the current economic one we are facing. So it does make sense that to solve the current economic crisis, we have to rethink about and architect the IFS, its institutions and its governance structure.
Large as these global challenges may be, they require a strategically aligned systematic approach that includes: (1) an analysis of the current state, (2) a vision of the future state, and, (3) a plan to get there. The current state analysis will help us understand the many problems and challenges of the current system, which in turn will help us formulate the characteristics of the future state of the system. The plan will provide us a roadmap on how to get there and when we can expect to achieve that future state.
Business Architecture to the rescue
Leveraging the tools and techniques of business architecture to model the challenge of distributing $700 billion provides us a view of how different entities in the system interact with one another to accomplish its goals. Let’s first try to understand the current problem.
At the highest level, the following table summarizes the situation on who did what and why, in the context of the financial meltdown:
| Who | Borrower | Lender | Investment Banks | Insurer | Rating Agency |
| What | Borrowed more money than he could manage to pay back | Approved loans liberally without much documentation | Consolidated loans and repacked them as collateralized debt obligations (CDO) | Insured these CDOs while underestimating the risks of non-payments | Issued A-level ratings to many of the CDOs |
| Why | Some expected house prices to continue rising and some were ignorant | Their compensation was linked to the amount loaned | They could now sell these in the market and profit right away. | Assumed their risk estimation was right and were making a good profit. | Assumed that since the CDOs were insured, they would not lose money |
This simple table captures the essence of what happened to cause the meltdown. However, it does not provide an understanding of the entities and institutions that caused this situation. Such a representation of the entities, their relationships, what each produces and what each consume would begin to form the starting point of the architecture that Nigel was referring to. As we begin to include the entities that play a role in the IFS, a picture often referred to as the context diagram will emerge.
It’s often best to think about large problems in a “top-down and systematic” manner. In a top-down approach, we first model the problem as being the result of interactions among a few high-level components. We may then choose to further decompose one or many of these components as we gain an understanding of the system and try to identify the root causes. The top-down analysis helps us keep the IFS goals in perspective while the systems approach helps us localize our analysis to the specific components and yet understand the relationships among them.
As a quick analogy, if the air-conditioner in my car does not work, an experienced mechanic quickly creates a mental model of the whole car in his mind and then focuses on the cooling system to identify the problem.
We do have to recognize that there are two types of systems – static and dynamic. Static systems are those that do not change over time, offer deterministic interactions with its neighbors, and produce deterministic outputs. Dynamic systems (also called emergent systems) on the other hand are those that may change over time as they adapt to the environment, where such adaptation may come through learning.
The IFS consists of both these types of systems, which makes the analysis a little more complex. The lending institutions played more of a static role, though they lent more money than they should have, while the CDO insurers played a dynamic role by adapting to the market by providing insurance where non existed.
Conclusion
A really big problem that’s as intractable as this is not trivial to solve, and I have simplified the concepts by a few orders of magnitude. However, the foundational principles are still applicable. At the highest levels, business architecture provides a structured mechanism to organize ideas and the information connected with the world’s financial system. It also provides tangible artifacts that provide guidelines for implementation and ensures alignment towards achieving the goals of the system. While the organizational challenges may be greater due to the need to work across multiple governmental bureaucracies, the same principles of business architecture that are used to address cross-organizational enterprise problems can be used to address global challenges.
