Module 2
AIS, Accounting Analysts, Modeling, Databases, ERP
a. Definition of Accounting Information System
Of the many information systems that are used in a firm, one type of information
system is used in every firm: an accounting information system (AIS). An AIS is defined
as a system that records, processes, summarizes, reports and communicates the results of
business transactions to provide financial and nonfinancial information to facilitate
decision making. In addition, an AIS is designed to ensure appropriate levels of internal
controls (important security measures to protect the integrity of sensitive data) for those
transactions. This is the focus of this book. Some might call an AIS just a financial
reporting system. Others might include in their AIS a much broader set of data that
includes nonfinancial information such as customer data, sales transactions, and
marketing activities or the results of research and development investment. Viewed
broadly, an AIS collects, processes, and reports information deemed useful in decision
making.
The study of AISs lies at the nexus of two traditional disciplines: information
systems and accounting. In this book, we will highlight knowledge from both of these
disciplines to more fully understand an AIS. While an AIS could take the form of a
paper-and-pencil manual bookkeeping system, we will view an AIS as having all of the
capabilities of a computerized system.
An AIS, just like any system, can be explained using a general systems approach
with input, storage, processing, and output activities. We cover these activities in
subsequent, but the input may come in the form of sales recorded on aStarbucks cash
register or point-of-sale terminal. Processing those data may take the form of getting the
input into storage (such as a database or a data table). Processing might involve querying
that database (e.g., using SQL or other queries) to produce the output in the form of a
report for management use. As an example, Starbucks may query its sales database to
report how much coffee it sells around Christmas to see if additional sales incentives
need to be made to increase sales around Christmas in the future. Whether this report has
information that is ultimately useful to management for their decision making is covered
in the next section.
To be useful, information must be relevant to the decision maker, capable of
influencing the decisions of users. In other words, information is relevant when it helps
users evaluate how past decisions actually worked out (feedback value) or predict what
will happen in the future (predictive value). It is also relevant if the information is
material in size, big enough to influence the decisions of its users.
Information exhibits faithful representation if the information is complete (i.e.,
includes all applicable transactions), is neutral (i.e., free from bias), and is free from
error). Faithful representation information represents the substance of the underlying
economic transaction. If Amazon sells Steph Curry athletic shoes for $300, it should be
recorded and subsequently reported in its sales revenue account as $300. Accounting
information should not be designed to lead users to accept or reject any specific decision
alternative, but rather to offer information from transactions that report in essence what
happened, free of error or bias. AISs and accountants exist to provide useful information
to decision makers. Considering the attributes of useful information helps AIS designers
and users construct a system that delivers useful information to decision makers.
Hal Varian, Google’s chief economist, explains that while data are widely
available, “what is scarce is the ability to extract wisdom from them.” In that short
statement, we learn that data and the information actually needed to make decisions may
well have different definitions. Data are simply raw facts that describe the characteristics
of an event that, in isolation, have little meaning.
Walmart has an information system called Retail Link. Retail Link is an internet-
based tool allowing Walmart employees and Walmart suppliers to access the point-of-
sale data. Retail Link provides sales and inventory data, by item, store, and day (and
time) to its suppliers. That is, it contains a record of every sale of every individual item at
every Walmart store, every hour of the day for the last 2 years at its store in Lawrence,
Kansas, including time and date of sale, bar code number, price, and quantity purchased.
However, to be most useful to Walmart, these data must be processed in a meaningful
way to provide information useful to Walmart management.
Decision makers typically require useful information to make decisions. As an
example, while the sales price of a particular toy might be just considered data,
subtracting the cost of goods sold from the sales price to compute the net profit would be
considered information if the data help a retailer decide whether to carry that particular
toy in its inventory, or even where to place it on its shelf to maximize customer exposure.
To the extent that computers can assist in processing and organizing data in a way that is
helpful to the decision maker, it is possible that there may be so much information
available to actually cause information overload, which we define as the difficulty a
person faces in understanding a problem and making a decision when faced with too
much information. Therefore, an AIS must be carefully designed to provide the most
important and useful information without overwhelming the user.
The overall transformation from a business need and business event (like each
individual transaction including bananas) to the collection of data and information to an
ultimate decision is called the information value chain and is reflected. If Walmart needs
to know how many bananas it should have at each location (i.e., business need), it will
collect transactions involving banana sales (i.e., business event). Then it can take those
data and turn them into useful information that might be used to make decisions on
banana supply levels at each store. Certainly, the transformation from data to information
is a key part of that value chain. Information that is useful (i.e., exhibiting characteristics
of relevance or faithful representation) may get to the point of being knowledge and,
ultimately, may be helpful in forming the basis for a decision.
Because you have already taken a few accounting classes, you understand the
types of information that are recorded, processed, and subsequently reported for different
purposes, including managerial, financial, or tax purposes. Managerial accounting
information is generally produced for internal information purposes and would usually be
considered to be discretionary information because there is no law requiring that it be
provided to management. Management simply decides what information it needs to track
and builds an information system to track it. For example, management may want an
activity-based costing (ABC) system to figure out which cost drivers should be used to
allocate overhead costs at Tesla to different products (like Tesla’s Model 3, Model X, and
Model S). The value of information equals the difference between the benefits realized
from using that information and the costs of producing it. Because discretionary
information is not required, management must determine if the benefits of receiving that
information are greater than the costs of producing it.
In contrast, much of the financial and tax accounting information is produced by
the company for external information purposes such as for investors, banks, financial
analysts, bondholders, and the Internal Revenue Service (IRS) in the form of tax returns
or audited financial statements. This financial and tax accounting information would
generally be considered to be mandatory information. As mentioned earlier, discretionary
information should be produced if the value of the information it provides to management
is worth more than the cost to produce it. However, mandatory information is usually
produced at the lowest possible cost to comply with the laws of the regulators (e.g.,
Securities and Exchange Commission, IRS, state banking commission, state tax
commission, etc.).
b. Role of Accountans in Accounting Information Systems
In today’s age, technology is a key tool in creating information systems for
today’s businesses. As a result, accounting and information technology are now more
closely linked than ever. As information technology (IT) has gained operational and
strategic importance in the business world, the role of accountants, understandably, must
adjust as well.
Indeed, accountants have a role as business analysts and business partners; that is,
they gather information to solve business problems or address business opportunities.
They determine what information is relevant in solving business problems, work with the
AIS (and/or other data provider) to create or extract that information, and then analyze
the information to give needed information to the decision maker. Some even
characterize the accountant as the “interpreter” between the data provider (or data
scientist) and the decision maker. An AIS provides a systematic means for accountants to
get needed information and solve a problem. Another illustration of the role of
accountants in AIS comes from the Institute of Management Accounting.
In considering the information technology competencies in the accounting
profession, the American Institute of Certified Public Accountants (AICPA) and
International Federation of Accountants (IFAC) assume that, at a minimum, all
accountants will be proficient in the AIS user role and at least one of the other listed roles
(e.g., manager, designer, or evaluator). Accountants will be better users, managers, and
evaluators of AISs if they understand how the AIS is designed. Thus, throughout this
textbook we touch on all of the roles that accountants have in the firms, but we
particularly emphasize skills most relevant to the designer role.
In addition to the various roles that accountants play, accountants and related
professionals may also seek various certifications to show they are proficient in specific
areas of AISs. This will show their competence to specific employers or clients that need
some specific services. There are three primary certifications that most directly apply to
accounting and information systems.
c. The Value Chain and Accounting Information System
Information technology (IT) is increasingly omnipresent! Worldwide spending on
IT is expected to exceed $3.7 trillion in 2018.9 Clearly, information technology is a huge
investment that firms make, and they expect to create value through its use. How IT
assists firms to carry out their internal and external business processes and, in turn,
creates value is an important topic.
A firm makes money by taking the inputs (e.g., raw materials, talented workers,
buildings, equipment, etc.) and producing a more valuable output (e.g., iPhones available
forsale, completed audit financial statements, etc.). Let’s take universities as an example.
Universities admit students to the university (as inputs) and use their resources
(curriculum, faculty, buildings, computers, textbooks, labs, etc.) to create a job-ready,
educated graduate (the output). Arguably, universities create value. If they were not
creating value in one form or the other, they probably would not continue to survive.
Let’s continue the discussion by defining business value as all those items, events,
and interactions that determine the financial health and/or well-being of the firm. This
value may come from suppliers, customers, or employees or even from information
systems. Business value does not necessarily need to be determined by stock price or net
income. A not-for-profit group like the International Red Cross may define business
value as how many lives are saved, the amount of blood donated or the number of
children that are immunized.
To consider how value is created, we begin by looking at the business processes.
A business process is a coordinated, standardized set of activities conducted by both
people and equipment to accomplish a specific task, such as invoicing a customer. To
evaluate the effectiveness of each of its business processes, a firm can use Michael
Porter’s value chain analysis. A value chain is a chain of business processes for a firm.
Products pass through all activities of the chain in order; at each activity, the product is
expected to gain some value. It is important not to confuse the concept of the value chain
with the actual cost of performing those activities. One way of looking at this is by
considering a rough diamond. Although the cutting activity of a diamond may have a
very low cost, this cutting activity adds much of the value to the end product because a
cut diamond is much more valuable than a rough diamond. And a diamond cut well adds
more value than a diamond cut poorly.
An AIS can add value to the firm by making each primary activity more effective
and efficient. For example, AISs can assist with inbound and outbound logistics by
finding efficiencies and cost savings (transportation and warehousing costs, etc.).
Specifically, use of AISs and geographic information systems help identify the lowest
cost of getting items from one location to another. AISs can make marketing, sales, and
service activities more valuable by summarizing data about key customers to help
manage and nurture a firm’s interactions with its clients.
As an example, Amazon is one of the best at fostering its interaction with its
customers by keeping a record of their past purchases and product searches and using that
information to recommend other similar products for its customers to consider. As
another example, as the loan officers at a bank learn more about the financial products
currently being used by its bank’s customers through its AIS, they will be able to help
identify additional bank products (e.g., insurance, CDs, mutual funds, additional savings
accounts, etc.) to sell to their clients. Netflix also uses data to help recommend TV shows
people should watch—more than 80 percent of the TV shows customers watch are
attributed to Netflix’s recommendation system.
d. Ais and Internal Business Processes
Our discussion now turns to how an AIS can assist the firm with its internal
business processes. An AIS within a firm is usually the foundation for an enterprise
system (ES)—also called an enterprise resource planning (ERP) system. An enterprise
system is a centralized database that collects data from throughout the firm. This includes
data from orders, customers, sales, inventory, and employees. These data are then
accumulated in the centralized database and made available to all enterprise system users,
including accounting, manufacturing (or operations), marketing, and human resources.
As the data are integrated into one single, centralized database to become useful
information, authorized employees throughout the firm (from the CEO all the way to the
lowest-paid line worker) have access to the information they need to make a decision. For
most firms, the informational benefits of these integrated data include enhanced
completeness, transparency, and timeliness of information needed to effectively manage a
firm’s business activities.
As an example, an enterprise system can automate a business process such as
order fulfillment. The enterprise system can take an order from a customer, fill that order,
ship it, and then create an invoice to bill the customer. When a customer service
representative receives a customer order into an enterprise system, she has all the
information needed to approve and complete the order (e.g., the customer’s credit rating
and order history from the finance module of the centralized database, the firm’s
inventory levels to see if the product is available from the warehouse module of the
centralized database, and the shipping dock’s trucking schedule from the logistics module
of the centralized database). Once the order is complete, the enterprise system routes the
order to the warehouse and shipping department for order fulfillment and shipping and
then back to the finance department to make sure the customer is invoiced. During the
process, all workers in the various departments can see the same information and update
it as needed. As problems arise (e.g., backordered products, returned products, trucker
strikes, etc.), the enterprise system gives all within the firm the most current, real-time
information to address these issues.
e. AIS and External Business Processes
Firms do not work in isolation. They are always connected to both their suppliers
and customers and their wants and needs. AIS assists in business integration with external
parties such as suppliers and customers. The firm’s interaction with the suppliers is
generally called supply chain management, and the interaction with its customers is
generally called customer relationship management.
Supply chain refers to the flow of materials, information, payments, and services
from raw materials suppliers, through factories and warehouses, all the way to the final
customers of the firm’s products. A supply chain also includes the firms and processes
that create and deliver products, information, and services to the final customers. The
supply chain refers to a network of processes that delivers a finished good or service to
the final custome reflects the sourcing, manufacturing (making), and delivering to the
customer for each member of the supply chain (assuming the Unilever product is made in
China, sold to Sam’s Club and convenience stores, and ultimately sold to an end
customer picking it up at the convenience store).
The software used to connect the focal firm with its suppliers is generally referred
to as supply chain management (SCM) software. This software addresses specific
segments of the supply chain, especially in manufacturing scheduling, inventory control,
and transportation. This SCM software is designed to facilitate decision making and
optimize the required levels of inventory to be ordered and held in stock. In the preceding
example, Dell might produce expected demand for its products for the next year. As the
dates get closer, the estimate is refined so the supplier has a better idea of what exactly
will be needed. It is expected that this use of SCM software will optimize inventory and,
in turn, will reduce the required amount of raw materials and finished goods inventory
the firm will have to hold and thus lower product costs.
A recent study12 found that firms implementing SCM software are able to reduce
the amount of raw materials inventory on hand and reduce selling, general, and
administrative expenses. They are also able to increase their gross margins and overall
inventory turnover. This suggests that supply chain management systems allow inventory
to be optimized to lower the amount of required inventory on hand while not decreasing
sales.
Walmart has long been regarded as having one of the best supply chain systems in
the world. One aspect of Walmart’s supply chain management software is simply
communicating the results of its retail sales to its top suppliers. Walmart’s Retail Link
database is one ofthe world’s largest databases and allows many of its suppliers to view
real-time sales data of its products for each store. This allows suppliers to assess the
demand for their products and to optimize their own level of inventory and related
logistics costs. In turn, the cost savings generated from this process are passed on to
Walmart itself and its customers.
The more a company can learn about its customers, the more likely it will be able
to satisfy their needs. Customer relationship management (CRM) software is a term that
describes the software used to manage and nurture a firm’s interactions with its current
and potential clients. CRM software often includes the use of database marketing tools to
learn more about customers and to develop strong firm-to-customer relationships. CRM
software also includes using IT to manage sales and marketing for current sales and
customer service and technical support after the sale is done.
As mentioned in the opening vignette of, a good example of the need for CRM is
Starbucks. After its quick expansion in the early 2000s, Starbucks felt like it had lost
some of the original Starbucks customer coffeehouse experience. This caused a desire
within Starbucks to make sure it understood its customers and their coffeehouse needs.
Therefore, an initiative at Starbucks was implemented to learn more about its customers.
The new chief information officer, Stephen Gillett, argues that his most crucial duty is to
enhance Starbucks’ ability to mine its customer data to help “reignite our passion with
our customers.” Starbucks uses loyalty cards (Starbucks’ Rewards cards) and surveys to
track its customers’ purchases and build profiles of its customers.
As another example, Royal Bank (formerly Royal Bank of Canada) considers
CRM software to be such an important part of its strategy that the stated objective of the
bank is “to capture the full potential of our customer base through the use of customer
information to deliver the right solutions in a consistent, professional manner at every
point of contact.”
f. Ais, Firm Profitability, and Stock Prices
Throughout this, we have tried to make the case that AIS facilitates value-creating
activities. This section presents a direct test of whether an investment in AIS, in fact,
creates value by considering whether an AIS investment led to more profits or higher
market value. One way to consider how AIS creates value is to look at an income
statement. Accountants understand that to make more profits, a firm either needs to
increase revenues or decrease expenses (or both!).
In an academic study,15 a positive association was found between the level of the
firm’s annual AIS investment and its subsequent accounting earnings (as measured by
return on assets and return on sales), suggesting that AIS investment does in fact create
value. In a completely different study,16 researchers found both an improvement in
profitability as well as stock returns around the implementation of supply chain
information systems.
Every time a firm makes an investment, it expects a return of its original
investment as well as a return on that investment. This is the case for AIS investments as
well. When an investment is announced by a public firm, stock market participants assess
whether the investment will pay off or not, either by enhancing revenues or reducing
expenses or some combination of both. If the stock market participants believe the future
cash flows from the investment will increase for the firm, the stock price of that firm is
expected to increase. If the stock market participants believe the future cash flows from
the investment will decrease for that firm, the stock price is expected to fall.
An academic study17 divided up announcements of 315 firms making new AIS
investments. The study broke these announcements into three groups, depending on what
strategic role the technology was expected to fill within the firm. If AIS investments
simply replace human labor to automate business processes, they are defined as automate
AIS investments. The automate process will typically digitize (i.e., put in a digital form)
the business processes. Once digitized, this information can be automatically and easily
summarized in a usable form (i.e., reports, etc.) for management use (defined as the AIS
strategic role of informate-up) or in a usable form to employees across the firm (defined
as AIS strategic role of informate-down). AIS investment can also change the basis of
competition and redefine business and industry processes (defined as the AIS strategic
role of transform). As an example, FedEx, which allows its customers to track their own
packages on the web, changed the basis of competition for the express transportation
industry by fundamentally redefining business processes and relationships with their
customers.
How the stock market responded (adjusted for level of risk and overall market
returns) on the day the AIS investment was announced. This analysis assumes there were
no other significant news events at the firm on the same day as the AIS investment
announcement. On average, the 172 Automate AIS investments increased firm market
value by 0.05 percent and the 95 Informate AIS investments increased firm market value
by 0.40 percent. On average, the Transform AIS investments increased firm market value
by 1.51 percent, which is statistically greater than zero. The authors found that those 48
AIS investments that transformed the business processes and changed the way business is
done had the greatest impact on firm value. Automate and informate investments do have
an impact, but they are substantially smaller than the value-enhancing impact of
transform investments.
Accountants play a critical role in recording, processing, and reporting financial
information for decision making and control. An accounting information system (AIS) is
defined as an information system that records, processes, and reports on transactions to
provide financial information for decision making and control.
The accounting profession (including the IFAC and the AICPA) recommends that
accountants develop proficiency in at least two areas of information systems: as a user
and as a manager, designer, or evaluator of information systems. Accountants often seek
certification in information systems to show their level of proficiency to both prospective
employers and clients. • Firms invest in AIS to create value. The value chain illustrates
how, during each primary activity, the product should gain some value. An AIS serves an
important role in providing value in each primary and supporting activity.
An AIS creates value by managing internal and external business processes.
Enterprise systems, sometimes called an ERP or back-office systems, generally manage
transactions within the firm. Supply chain management software is used to manage
transactions and communications with suppliers. Customer relationship management
software is used to manage and nurture the relationship with current and potential
customers.
g. Changing Roles of Accountants in Business
Over the past 15 years, a number of studies have highlighted the changing role of
the accountant in business. Rapid changes in the global marketplace substantially affect
the accounting profession. In the past, accountants typically focused on stewardship and
reporting functions; they kept financial records, prepared financial reports, and performed
audits. Now, they face the challenge of helping the enterprise to optimize its processes
(financial, administrative, and operational) to achieve the competitive performance levels
and maximize shareholder value.
Rapid changes in technology such as business intelligence (BI) and enterprise
resource planning (ERP) systems have increased the availability of data throughout the
organization. However, technology alone will not ensure good decision making. To be
fully effective, the information produced by the technology must support the information
requirements of the business’s decision makers. Consequently, accountants are involved
in supporting evidence-based decision making throughout the business. Although they
continue to face the challenge of conducting their core transaction processing and
reporting more efficiently, accountants must also act as business partners involved in a
host of business management activities—including strategic planning, process
improvement, and compliance management—to produce better management information
for both internal and external stakeholders.
Similarly, the American Institute of CPAs, in conjunction with the Chartered
Institute of Management Accountants, created the Chartered Global Management
Accountant (CGMA) designation. Together, they created the CGMA Competency
Framework to articulate the broad set of skills and technological expertise needed for
important accounting roles.
Recently, three prominent accounting organizations articulated the skills and
competencies that accountants need to be successful in the 21st century. The Institute of
Management Accountants developed the IMA Management Accounting Competency
Framework.
Finally, the International Federation of Accountants also articulated the need for
accounting professionals to offer a much higher contribution to their organizations. Due
to rapidly changing competitive environments and technology, accountants must look
beyond financial reporting to develop the skills necessary to provide useful, forward-
looking insights. Enterprise performance management is evolving. Accountants must
evolve to be able to deliver insights based on financial and nonfinancial, internal and
external, structured and unstructured data and information. Accountants need to harness
data and models, technology, talent, and organization culture to support dynamic
planning and forecasting as well as integrated performance analysis. They must be able to
analyze costs, profitability, productivity, and operational performance to allow the
organization to respond proactively to current performance and deliver long-term value.
Every accountant should be able to articulate ideas and communicate the business case
for new technologies.
In summary, to be valuable business partners, accountants must first understand
the business, as well as the various ways that the business collects data, summarizes, and
communicates business information. They must understand how the business delivers
value to its customers, interacts with other businesses, and meets requirements for good
corporate citizenship. They must also understand the risks that the business faces and the
internal controls in place to mitigate those risks. Finally, they must understand how
accounting information systems collect, summarize, and report business process
information. At a minimum, this highlights the need for accountants to understand
business processes and how technology affects process performance and contributes to
organizational value creation.
h. Business Process Documentation
Documentation includes business process models, business rules, user manuals,
training manuals, product specifications, software manuals, schedules, organization
charts, strategic plans, and similar materials that describe the operation, constraints on,
and objectivesof business processes and systems. Although documentation has always
been important for accounting information systems, the Sarbanes-Oxley Act of 2002
made documentation essential for businesses. That act requires managers to assess and
attest to the business’s internal control structure and procedures. The U.S. Securities and
Exchange Commission (SEC) rules require “management to annually evaluate whether
ICFR (internal control of financial reporting) is effective at providing reasonable
assurance and to disclose its assessment to investors. Management is responsible for
maintaining evidential matter, including documentation, to provide reasonable support
for its assessment. This evidence will also allow a third party, such as the company’s
external auditor, to consider the work performed by management.”3 The act also requires
external auditors to audit management’s assessment of the effectiveness of internal
controls and express an opinion on the company’s internal control over financial
reporting.4 Thus, documentation is necessary for internal audit to support management’s
assertions as well as external auditors to evaluate management’s assertions on internal
control over financial reporting.
Imagine a map of a city like Los Angeles, California, or even a small city like
Fayetteville, Arkansas. How many words would it take to provide the same information
as the map? Undoubtedly, the graphical representation (map) presents the information
more concisely and perhaps more clearly than a written description. Business processes
and systems can also be difficult to describe concisely using words alone. Thus, business
models allow us to depict the important features of business processes and systems
clearly and concisely.
Organizational change—including mergers, acquisitions, outsourcing, offshoring,
product innovation, and continuous process improvement—and other business
transformations are common. Change, however, can be expensive and risky. Careful
planning is necessary to implement change in a way that minimizes those costs and risks.
This is where business models create value. Business models provide communication,
training, analysis, and persuasion tools that are particularly suited for planning business
transformations. Business models allow managers to assess what needs to be changed and
plan how to make the change. In particular, business models create value in the following
ways.
i. Activity Models
Activity models describe the sequence of workflow in a business process or
processes. While the purpose of structure models is to create a blueprint for the
development of a relational database to support the collection, aggregation, and
communication of process information, the purpose of activity models is to represent the
sequential flow and control logic of a set of related activities. They are tools for planning,
documenting, discussing, and implementing systems; however, they also facilitate the use
of those systems once implemented. Furthermore, they are important tools for analyzing
and improving business processes.
Activity models, such as flowcharts, have been used to analyze business processes
and design changes since well before 1920.5 As technology changed, designers
developed a variety of activity models, such as data flow diagrams, business process
maps, and the IDEF0 functional modeling method,6 to document and analyze business
process workflow.
For this textbook, we employ business process modeling notation (BPMN) for
activity models, although the concepts discussed also apply to other modeling notation,
such as UML activity diagrams and data flow diagrams.7 The Object Management Group
(OMG) also maintains the specifications for BPMN. The original specification for BPMN
was issued in 2004. Since then, BPMN has been widely adopted because it was
specifically designed for process modeling in a way that can be understood by
businesspeople rather than software engineers (in contrast with UML activity diagrams).
Additionally, there arefree or inexpensive software products that support modeling and
subsequent simulation of the process. The International Organization for Standardization
(ISO) has adopted a specification for BPMN identical to OMG BPMN 2.0.1.
Events include start, intermediate, and end events. Basic events are modeled as
small circle. Start events have a single thin line circle. End events have a single thick line
circle. Intermediate events have a double thin line circle. Intermediate events affect the
flow of a process, but do not start or end the process. Icons placed in events are used to
further define event categories, such as message, timer, or error events.
Activities represent specific steps in the business process. Basic activities are
modeled as rounded rectangles. Each activity is described with a short verb phrase placed
within the rectangle (e.g., process credit card payment or bill customer). An activity can
depict a single action or some logical combination of actions depending on the required
level of detail to achieve the objectives of the business process analysis.
Sequence flows are represented by arrows to indicate the progression of activity
within the process. The diagram should show the sequence of activity from left to right
and top to bottom. Gateways show process branching and merging as the result of
decisions. Basic gateways are depicted as diamonds. Usually, gateways appear as pairs
on the diagram. The first gateway shows the branching, and the second gateway shows
merging of the process branches. Annotations allow the modeler to add additional
descriptive information to the model. Annotations aremodeled with text inside a bracket
connected to other model symbols with a dashed line.
In this process, the customer presents items for checkout. The clerk scans items
and identifies payment method. Then, the process branches depending on the nature of
payment. The payment is accepted, and the process branches merge. The clerk bags the
items for the customer, and the process ends. Note that the start event can be labeled to
explain the start event, and the gateway branches can be labeled to show the purpose of
the branches (handling cash or credit payment in this case).
First, the models are usually presented left to right or top to bottom. All processes
start with a start event and end with an end event, although there may be more than one
end event. The flow of the process is shown by the sequence flow arrows. The sequence
flows following the branching gateway are labeled to describe the circumstances under
which the process would follow that specific flow. Each step in the process, each task, is
named to describe the nature of the task. Tasks are named with a verb and an object, such
as bag items and accept cash. The branching gateway represents an important question
that affects the subsequent flow; in this case, the gateway questions the payment method.
However, the gateway is not a decision. The information to answer the question is
determined in the task labeled “Scan Items and Identify Payment Method.” The second
gateway shows that the two paths merge and the flow then continues. In this model, the
second, merging, gateway is optional. Later, you will see models where the merging
gateway is not optional.
It is often important to identify who performs which activity in a business
process. A participant is an actor or person that performs activities and interacts with
other participants in a process. Participants include people, systems, organizations, and
machines. Participants can also be identified by the role of the actor in the process.
BPMN provides notation to identify both the organizations and the departments or
individual actors participating in a process. Every diagram contains at least one pool, but
if there is only one pool, the pool may be presented without a boundary. Activities can be
assigned to only one participant, and thus may appear in only one pool or lanes.
You should note that regardless of the number of lanes in the pool, there is still
one start event per pool and at least one end event. Each task is located in only one lane.
Tasks may not span lanes. In other words, one task cannot be performed by two
departments. The sequence must flow continuously from the start event to each end
event, but the sequence flows can cross lane boundaries. Sequence flows, however, do
not extend beyond one pool.
BPMN represents exchanges between two participants (pools) in the same process
as message flows. For example, in a sales process with a customer pool and a store pool,
the customer order would be represented as a message flow. The activities within a pool
are organized by sequence flow, but the interactions between pools are represented as
message flows. A message flow is shown as a dashed arrow with a small circle at the
starting end.
One pool represents a patient and the other pool represents the doctor’s office.
The patient becomes ill and calls the doctor’s office for an appointment. The doctor’s
office receives the request and assigns the appointment. Each pool has a start event and in
the case one event. The sequence flows are continuous from the start events to the end
events and do not cross pool boundaries. The message flows are between pools and not
within pools. While the nature of each message flow is pretty clear in this model, it is
good practice to label the message flows. As models become more refined, it is
sometimes necessary to define the specific content of each message flow to aid the
implementation of the process.
Usually, modelers are not very interested in activities in the external pool. So, if
we are modeling the doctor’s, we might not care about the activities in the patient’s pool.
Yet, we remain concerned about the message flows between the pools. So, we can make
the patient’s pool opaque, hiding the activities but still showing the message flows. Note
that the message flows now attach to the edge of the patient’s pool.
Token Concept. BPMN uses the theoretical concept of a token flowing through
the process to understand how various elements interact. A start event generates a token
that must then be able to flow through the process until it reaches an end event,
whichconsumes the token. In most cases, tokens only travel along sequence flows and
pass through process flow objects. Process flow object behavior can be defined by how
that element interacts with a token as it flows through the process. A token does not
traverse message flows.
Flow Object Types. Flow objects include events, activities, and gateways.
Sequence flows only connect to flow objects. Within BPMN, each flow object can be
further characterized by type. To show the type of element, BPMN includes a type icon
within the specific flow object. For example, a “timer” event would show the event with
a clock face icon inside, and a “message” event would show the event with an envelope
icon inside. Within this text, we will focus on the types that are widely used.
Gateway Types Exclusive gateways pass the token along the path established by
the gateway conditions. Inclusive gateways can create additional tokens depending on the
number of paths taken after the branching gateway. Parallel gateways also create
additional tokens for each path leaving the gateway. The merging gateways synchronize
the process. For inclusive and parallel gateways, the merging gateways delay the flow
until all tokens for that instance arrive, then one token proceeds along the exiting
sequence flow.
Event Types. The basic flow objects include start events, intermediate events, and
end events. First, message events either create (throw) or receive (catch) messages.
Messages are communications from individual participants in a process. When modeled,
the messages are shown as message flows. Second, timer events indicate a delay until a
specific time and/or date or a specific cycle (such as 8 hours, 2 weeks). Third, error
events indicate an interruption to the process. Intermediate errorevents are “boundary”
events; they are attached to an activity and indicate an alternate process flow when an
error occurs.
The process starts with a start message event that receives (catches) the “Request”
message from the external participant. The process proceeds to the “Evaluate Request”
task, and then the intermediate message event sends (throws) the “Evaluation” message
flow to the external participant. The process flow continues to the next intermediate
message event, where it waits (the token stops) until the external participant responds
with the “Confirm” message flow. When the event catches the message, the sequence
flow continues to the “Do Something” task and then the process ends. The end message
event throws a message to the external participant that the process is done.
The start timer begins the process two weeks before the birthday to be celebrated.
The “Plan Party” task has an intermediate error event attached to its boundary (a
boundary event). Specifically, this is an example of an interrupting boundary event that
affects process flow when an error occurs in the Plan Party task. If an error occurs, then
the process flows to the “Cancel Party” task and then ends. However, if the Plan Party
task completes successfully, the process flows to the intermediate timer event and then
waits two weeks (the token waits to proceed). After two weeks, the process continues to
the “Hold Party” task and then ends.
Task Types. Finally, BPMN offers different task types, but task types are used
less often than gateway and error types. There are tasks to send and receive messages.
These would be modeled with envelope icons (white for receiving, black for sending) in
the upper left corner of the task rectangle. These tasks correspond to catching and
throwing message events, and in most cases, the message events are preferred. Normally,
you woulduse the send and receive tasks when you need to attach boundary events to the
task as you can’t do that with events. Modelers are often tempted to use the send and
receive tasks to forward work to the next task in the process. This is unnecessary because
the sequence flow implies that the work is forwarded. So, send and receive tasks are only
related to message flows. Next, there are business rules tasks. In a business rules task,
one or more business rules are applied in order to produce a result or make a decision.
There are several other task types, such as user, script, manual, service, etc., and users
can define their own tasks. In most cases, there is little need to use other than the general
abstract task type (without any type icon). In this textbook, we will not use task types.
Activities are the place where work takes place in BPMN diagrams. An activity
can represent a process, subprocess, or task. So far, we’ve focused on tasks, but
sometimes it is helpful to show a higher level of abstraction. In other words, we might
want to lump several related tasks together into a subprocess. Subprocesses can be used
to show processes that are reused in several other processes. They are a useful modeling
tool when the modeler doesn’t want to add unnecessary detail to a diagram, especially
when that detail will be presented in another model.
Sometimes, we want to show that the same task is performed multiple times. In
this case, we can show the task as looping. Looping tasks repeat until a condition is
satisfied. This has the same effect as using a gateway that sends the process back to the
task if the condition is not satisfied. When the number of times that a task will repeat is
known in advance, we canuse a multi-instance task. A parallel multi-instance task is
performed several times by different actors at the same time. A sequential multi-instance
task is performed several times by the same actor in sequence. Think about taking a test.
Each student takes the test at the same time, so this would be an example of a parallel
multi-instance task. Then, the instructor grades the tests sequentially, so this would be an
example of a sequential multi-instance task.
Processes create, update, transfer, and delete data in various forms. Sometimes the
data management is implicit. At other times, it is important to explicitly model where
data are created or used. The two main BPMN elements used to model data are the data
object and the datastore. Data objects are modeled with document icons. Datastores are
modeled with a disk icon. Associations are dotted lines that show the movement of data
between the data objects and datastores and activities. Associations may use arrowheads
to show the direction of data flow.
Pools represent participants in a process. If the process has only one participant, it
is not necessary to use a pool symbol. Sequence flows are used within pools. Message
flows are used between pools. For example, a sequence flow can connect an activity to
another activity, collapsed subprocess, gateway, intermediate event, or end event, but a
sequence flow cannot connect to a start event. Again, a message flow must connect a
pool or a symbol within a pool to another pool or symbol in another pool. For example, a
message flow can connect an external pool to a start message event, but a start message
event cannot initiate a message flow to another pool. Activities can initiate or receive
(throw or catch) message flows.
j. Structure Models
Structure models describe the data and information structures inherent in a
business process or processes. The primary purpose of these models is to create a
blueprint for the development of a relational database to support the collection,
aggregation, and communication of process information. They are tools for planning,
documenting, discussing, and implementing databases; however, they also facilitate the
use of databases after they are implemented.
For more than 50 years, data models have been used to represent the conceptual
contents of databases to communicate with the users of those databases. For example,
Charles Bachman developed data structure diagrams, also known as Bachman diagrams,
in the 1960s. Using similar notation, Peter Chen developed entity-relationship modeling
in 1976 to describe the entities (e.g., people, things, and events) and the relationships
among entities in databases. Since then, a number of others have offered a variety of
notations to describe the elements of databases, but the concepts in all variations are
similar.
This textbook employs the Unified Modeling Language (UML) class diagram
notation for structure models, although the concepts also apply to other notation
standards, such as entity-relationship modeling. The Object Management Group is a not-
for-profit consortium of computer industry members that maintains and publishes the
specification for the UML. Class diagrams are one type of diagram within UML and are
similar in many ways to entity-relationship diagrams. They describe the logical structure
of a database system.
A class is any separately identifiable collection of things (objects) about which the
organization wants to collect and store information. Classes can represent organization
resources (e.g., trucks, machines, buildings, cash, investments), persons (e.g., customers,
employees), events (e.g., sales, purchases, cash disbursements, cash receipts), and
conceptual structures (e.g., accounts, product categories, budgets). Classes are typically
implemented as tables in a relational database, where individual instances of objects are
represented as rows in the table. Each class is represented by a rectangle with three
compartments. The top compartment shows the name of the class. The middle
compartment shows the attributes (data elements) shared by all instances in the class. The
bottom compartment describes operations that each instance in the class can perform. The
attribute and operation compartments are optional. In this text, we will typically omit the
attribute and operations compartments and use the class symbol with only the name of
class when depicting classes.
An association depicts the relationship between two classes. For example,
customers (class) participate in sales (class); professors (class) teach courses (class);
employees (class) work for organizations (class). It allows navigation between instances
in one class and instances of another class, such as linking customer information to a
particular sale. A generic association is drawn as a line connecting two classes. When the
business purpose of the association is not clear, the association can be named by placing
the text name on the line. Association names are verbs or verb phrases that indicate why
instances of one class relate to instances of another class.
Multiplicities describe the minimum and maximum number of times instances in
one class can be associated with instances in another class. Multiplicities for a class are
represented by a pair of numbers placed on the opposite side of the association. In a
binary association, there would then be two sets of multiplicities. Minimum values can be
0 or 1. The minimum values of multiplicities indicate whether participation in the
relationship is optional (0) or mandatory (1). The maximum values can be 1 or many (*).
The maximum values for a pair of multiplicities for a single association describe the
nature of the relationship between classes: one-to-one, one-tomany, or many-to-many.
Attributes are data elements that describe the instances in a class. The full
specification of attributes would also include data type, default value (if any), constraints
on the value (such as minimum and maximum possible values), and other descriptive
information. Primary Keys. A primary key (PK) is an attribute or combination of
attributes that uniquely identifies each instance in a class or row in a table. Primary keys
can be modeled as part of the attribute list for each class on the UML class diagram;
often, however, they are defined in the supporting documentation, such as the table
listing, especially when using class symbols that only show the class name. The primary
key is a unique identifier for each instance in the class. For example, the “State”.
Collectively defines all the states. Each state is an instance in that class, and each state
would be identified by a unique primary key, such as the abbreviations AR, CA, WA, and
so on.
The generic relationship between two classes is modeled as an association, as
described earlier. However, UML includes modeling notation for other types of
relationships: generalization (or inheritance), aggregation, and composition. These
special-purpose relationship notations should be used when they clarify relationships in a
particular model, but they can also be modeled using associations.
The primary objective of a class diagram is to describe the important elements of
a domain of interest clearly, concisely, and accurately. As noted previously, class
diagrams are tools to aid in planning, documenting, discussing, implementing, and using
database systems. Here are some modeling best practices that can enhance the use of
models for these purposes.
k. Decision Requirements and Business Rules
In addition to the foundational process activities outlined comprehensively,
analysts are increasingly emphasizing the significance of integrating decision-making
requirements within business processes. This recognition underscores the pivotal role of
informed decision-making in driving organizational success and efficiency.
Consequently, analysts are tasked with developing robust business rules that seamlessly
support and align with these decision-making imperatives.
The integration of decision-making processes within broader business frameworks
is pivotal in optimizing operational efficiency, enhancing agility, and mitigating risks. By
strategically incorporating decision-making considerations into process design and
implementation, organizations can better navigate complex business landscapes, adapt to
evolving market dynamics, and capitalize on emerging opportunities.
Against this backdrop, the Object Management Group (OMG) has emerged as a
key facilitator in the realm of decision modeling and notation. Their recent issuance of
version 1.0 of the Decision Model and Notation (DMN) standard underscores the
growing recognition of the need for standardized approaches to represent and manage
decision logic within business processes. This standardization effort aims to streamline
decision modeling practices, foster interoperability, and promote best practices across
industries and domains.
In practical terms, the adoption of DMN empowers organizations to articulate
decision logic in a clear, structured manner, thereby enhancing transparency, traceability,
and governance. By leveraging DMN, analysts can effectively capture, analyze, and
optimize decision-making logic, ensuring alignment with organizational objectives,
regulatory requirements, and stakeholder expectations.
Moreover, the integration of DMN-compliant decision models within broader
process architectures fosters synergy between decision-making and executional activities.
This alignment not only enhances operational efficiency but also enables organizations to
proactively respond to changing market dynamics, customer preferences, and competitive
pressures.
Furthermore, the evolution of decision modeling practices catalyzes
advancements in artificial intelligence (AI) and machine learning (ML) technologies. By
leveraging DMN-compatible decision models, organizations can harness the power of AI
and ML algorithms to automate routine decision-making tasks, unlock actionable insights
from vast datasets, and drive continuous process improvement initiatives.
Looking ahead, the strategic integration of decision modeling and notation within
business process management frameworks is poised to emerge as a cornerstone of
organizational excellence. As businesses navigate an increasingly volatile, uncertain,
complex, and ambiguous (VUCA) environment, the ability to make informed decisions
swiftly and effectively will be instrumental in sustaining competitive advantage and
fostering long-term resilience.
The scenario depicted a seemingly straightforward yet multifaceted context
involving persons, automobiles, states, and dealerships. Within this framework, several
decision points emerge, each carrying implications for the individuals, entities, and
systems involved. By delineating these decision points and articulating corresponding
business rules, organizations can streamline decision-making processes, enhance
operational efficiency, and ensure regulatory compliance. Moreover, documenting these
rules facilitates transparency, consistency, and accountability across the entire lifecycle of
automobile ownership and servicing.
Furthermore, integrating these decision-making requirements within a
standardized framework such as the Decision Model and Notation (DMN) can further
enhance clarity, interoperability, and governance. Leveraging DMN enables stakeholders
to model, analyze, and optimize decision logic effectively, fostering agility and
innovation within the automotive ecosystem.
In essence, recognizing and addressing the diverse decision points inherent in
processing information related to automobile ownership and servicing is paramount for
ensuring seamless operations, satisfying customer expectations, and driving
organizational success in the dynamic automotive landscape.
Business rules play a fundamental role in shaping and guiding the behavior of
businesses within various operational contexts. They serve as concise statements
encapsulating constraints that govern business processes, ensuring consistency,
compliance, and efficiency. While business rules are often expressed in text form, their
influence permeates throughout the organizational landscape, influencing decision-
making, process design, and overall operational outcomes.
One of the primary functions of business rules is to standardize and constrain
process actions. By establishing clear guidelines and parameters, business rules mitigate
ambiguity, reduce errors, and promote uniformity in how tasks are executed within the
organization. For example, a business rule might dictate the minimum requirements for
approving a customer transaction or specify the conditions under which a product can be
returned.
Moreover, business rules provide a structured framework for decision-making
within business processes. They serve as the logic that governs how organizations
respond to specific situations or scenarios, guiding employees, systems, and stakeholders
in making informed choices. For instance, a business rule might dictate the pricing
strategy for different customer segments based on predefined criteria such as purchasing
history or geographic location.
While business rules are primarily expressed in text format, they exert a tangible
influence on the structure and flow of various modeling methodologies used in business
analysis and process management. In class models, for instance, business rules often
establish multiplicities, defining the relationships and cardinalities between different
entities or objects within the system. Similarly, in activity models, business rules serve as
criteria for branching, determining the sequence of actions or decisions based on specific
conditions.
Furthermore, the documentation and articulation of business rules are essential for
promoting transparency, accountability, and alignment within the organization. By
clearly defining the constraints and guidelines that govern business operations,
stakeholders gain a shared understanding of expectations and requirements, facilitating
smoother collaboration and decision-making across departments and functions.
As organizations strive to adapt to evolving market dynamics, regulatory
requirements, and customer expectations, the role of business rules becomes increasingly
crucial. They provide a mechanism for organizations to maintain agility, responsiveness,
and compliance in the face of change, enabling them to navigate complex business
environments with confidence and resilience.
In summary, business rules serve as the backbone of organizational processes,
providing clarity, consistency, and control in how businesses operate and make decisions.
By acknowledging their significance and integrating them effectively into business
models and processes, organizations can optimize performance, mitigate risks, and drive
sustainable growth in today's dynamic business landscape.
There are several forms for business rules. To put these in context, let’s consider a
simple example of customer payments at a restaurant. Suppose the restaurant accepts
cash or credit card payments as long as the credit card is American Express. Additionally,
the restaurant only accepts payments in U.S. dollars, not foreign currency, and it does not
accept checks.
Rules are stated in short sentences, as described earlier. In an attempt to formalize
the statement of rules, the Object Management Group published a standard, titled
“Semantics of Business Vocabulary and Business Rules” (SBVR), in 2008.2 SBVR sets
standards for stating business rules using natural language. The standard describes
operative business rules, such as the three forms just described: obligatory, prohibited,
and allowed. It also describes similar structural rules that describe fundamental
characteristics—such as, “It isnecessary that each sale be made to a customer”—rather
than operating policy rules that are stated in terms of preferred outcomes.
Rules must be enforceable. So, there must be related enforcement-level
information that describes how to deal with potential violations. Enforcement levels
include strict enforcement, pre-override, and post-override. If a rule is strictly enforced,
violations are not authorized. If a rule is subject to pre-override, violations are allowed if
authorized in advance. If a rule is subject to post-override, violations are allowed if
authorized after the violation. When rules are subject to override, there should also be a
statement of who can authorize a violation. Additionally, certain rules can be considered
guidelines, which are generally followed but not enforced. The enforcement level can
vary for different parts of the organization.
Business rules serve as indispensable guidelines within business processes,
shaping operational workflows and ensuring alignment with organizational policies and
objectives. Their role in modeling business processes cannot be overstated, as they
provide a framework for decision-making, constrain options to those compliant with
business policies, and establish requirements for system implementations. However,
while rules are essential for maintaining consistency and compliance, they can also
present challenges, particularly when they become tied to outdated technology or hinder
process improvements.
One of the primary advantages of business rules is their ability to streamline the
modeling of business processes. By delineating specific constraints and guidelines, rules
help simplify the complexity of process design, guiding analysts in structuring workflows
and defining decision points. This clarity not only facilitates communication and
understanding among stakeholders but also accelerates the development and
implementation of business processes.
Moreover, business rules play a crucial role in enforcing business policies and
regulations. By limiting the range of options to those permitted by established policies,
rules ensure adherence to regulatory requirements and mitigate the risk of non-
compliance. This proactive approach to governance helps organizations uphold their
reputation, minimize legal liabilities, and foster trust among customers and stakeholders.
However, despite their benefits, business rules can sometimes act as barriers to
process improvements. When rules are tightly coupled with outdated technology or
legacy systems, they may impede innovation and hinder organizational agility. In such
cases, a critical examination of business rules becomes essential to identify outdated or
redundant constraints that may no longer align with evolving business needs or
technological advancements.
Furthermore, it's important to recognize that while some business rules may be
explicitly stated, many are implicit and embedded within organizational culture,
practices, and workflows. Therefore, effective process analysis must involve eliciting and
documenting both explicit and implicit business rules to ensure a comprehensive
understanding of the factors influencing decision-making and process execution.
In light of these considerations, organizations must adopt a balanced approach to
managing business rules. This entails regularly reviewing and updating rules to reflect
changing business requirements, technological advancements, and regulatory landscape.
Additionally, fostering a culture of continuous improvement and innovation can help
organizations identify and eliminate unnecessary constraints, thereby optimizing
processes for enhanced efficiency and competitiveness.
In conclusion, while business rules play a vital role in modeling business
processes and ensuring compliance, organizations must remain vigilant to prevent rules
from becoming obstacles to progress. By proactively assessing and refining business
rules in line with evolving needs and priorities, organizations can leverage them as
enablers of efficiency, agility, and innovation in today's dynamic business environment.
Decision tables represent a powerful tool in business analysis and process
management, allowing organizations to systematically analyze and document complex
decision logic. By combining multiple business rules into a structured format, decision
tables provide a clear and concise representation of the various factors influencing
decision outcomes. Let's expand upon the concept of decision tables and illustrate their
utility through a detailed example:
Consider a scenario where a retail company aims to determine the discount to
offer to customers based on their customer type and the size of their order. This scenario
lends itself well to the creation of a decision table, which we'll name "Discounts". The
decision table comprises inputs (Customer Type and Size of Order) and an output
(Discount to Offer), along with a set of rules defining the relationship between inputs and
outputs.
In this simplified example, the decision table presents three distinct rules, each
representing a unique combination of inputs and corresponding output. For instance, Rule
1 specifies that for regular customers placing a small order, a 5% discount should be
offered. Similarly, Rule 2 dictates that regular customers with a medium-sized order
qualify for a 10% discount, while Rule 3 stipulates a 15% discount for regular customers
with a large order.
By organizing decision logic into a structured table format, organizations can
easily visualize and manage complex decision-making processes. Decision tables
facilitate the identification of decision points, the definition of decision criteria, and the
alignment of business rules with organizational objectives and policies.
In summary, decision tables are a valuable tool for organizations seeking to
streamline decision-making processes, enhance operational efficiency, and ensure
consistency and compliance in their business operations. By leveraging decision tables
effectively, organizations can make informed decisions, mitigate risks, and drive
sustainable growth in today's dynamic business environment.
