Every Manager's Guide to Business Processes:

The rules of financial accounting clearly specify what may be treated as an asset for tax and public reporting of income statements and balance sheets. Those rules exclude research and development, even when R&D is the foundation of the firm's current capabilities and its future growth. Merck and Intel, for instance, became and remain leaders in their industry through their R&D processes, which they consider identity assets. But accounting and tax rules treat them as an expense, an annual cost rather than a long-term investment. If the two firms were to cut their R&D in half, their profits would soar while their business advantage would decline, a contradiction between the rules of accounting and taxation and the logic of business investment.

There are many other instances of this contradiction. Software development is expensed, even though a large firm may have spent around $2 billion on the software assets in use that are major competitive long-term assets, such as American Airlines' Sabre and Wal-Mart's point-of-sale systems. Motorola's much-admired investment in education as a cornerstone of its long-term growth and innovation is also a cost that reduces profits, but the physical facilities of Motorola "U" are an asset on the balance sheet. The managers of American Airlines, Wal-Mart, Motorola, Merck, and Intel manage those nontangible assets as such, and investors value them as assets.

Processes are not handled as assets by the tax and accounting system, either, but logically should be by the management system. Process capital is the approximate value of all cash invested in a process, including recruitment, training, software development, maintenance and operations, facilities, and many other costs. These elements are integral parts of the process asset, regardless of accounting rules. They may be integral parts of a process liability, too, and thus drain economic value. Administrative processes are a typical example. Consider, for instance, employee expense reporting. Is this just a minor expense or does it tie up substantial capital? The accounting system is unlikely to answer the question. It won't show the capital invested in the requisite software, computers, and departmental telecommunications networks, especially the costs of maintaining and updating them and providing the technical staff support that typically exceeds the costs of acquisition and development. It won't show the capital tied up by the facilities, supplies, and services used by the central financial unit handling the process; recruitment and training; or ongoing and unavoidable annual costs of management time, business unit personnel, facilities, and so on. This capital is scattered across many budgets and accounts and across many years of expensing the costs.

A primary insight of the business process reengineering movement is that business processes need to be viewed end-to-end across functional and departmental boundaries. The functional organization blocks this view. Add to this the insight of the Business Process Investment framework-that business processes need to be viewed in terms of end-to-end economics across budget and accounts as well-and you have a base for knowing exactly which processes tie up capital. These processes are thus targets of opportunity for increasing the value from the capital and for focusing your firm's reengineering efforts on the processes that most directly affect business positioning and shareholder value.