The buzz is spreading: There’s a new set of technologies on the horizon. Web services offer the potential of low-cost, flexible connections among applications running on diverse platforms. The payoff is substantial reduction in near-term operating costs and improvements in asset leverage for businesses. Translation: Companies can do more, faster and more flexibly, for less.
Not so fast. True, Web services can offer businesses substantial savings in an increasingly demanding economic environment. But put the emphasis on potential: Realizing these savings is not simply a question of using a new set of technologies. To fully enjoy the economic potential of Web services, managers must take a new tack in orchestrating business processes.
Technical managers and software architects, especially, have an opportunity to help businesses migrate toward these new process management approaches. First, let’s create some context.
It’s Not Just a Recession
We’re all focused on the lingering recession and debating how long it will last. Implicitly, we believe that when recovery occurs, the pressure will be off and we’ll once again be able to count on profitability and growth.
Recessions are cyclical events—they have a beginning and an end. But beneath this cyclical event, long-term trends are gathering momentum, converging in ways that suggest that economic pressures may not recede even when the recession does.
In particular, two fundamental forces are coalescing to intensify competition. First, technical innovation continues to reduce interaction costs—those expenses incurred in coordinating economic activity. At the foundations, Moore’s Law, Fiber Law and Storage Law offer developers and CTOs alike the assurance that the cost of the basic hardware required for processing, communicating and storing information will continue to decline by orders of magnitude for the foreseeable future. More recently, the advent of Web services can help to connect existing applications in much more flexible, low-cost ways.
These innovations will make markets even more dynamic as enterprises start to move faster and cheaper. They’ll also make customers more adept at extracting value from vendors as they glean more information about more options, negotiate more readily with more vendors and switch more easily to another vendor if they’re not happy with the value received from the original vendor. To get an idea of technology’s role in empowering customers, look at the impact of CNet.com in the consumer computer market or FreeMarkets Inc. in a variety of industrial markets.
The second force at work is laissez-faire public policy across a broad range of global markets. Deregulation, trade liberalization and continuing reform of securities laws are all intensifying competition for customers.
These forces will have long-term impact. To begin with, intensifying competition creates growing uncertainty. New entrants emerge from unexpected angles, nudging sleepy old competitors awake. In this environment, managers will need even more flexibility in business operations.
Faced with these prospects, companies can continue to squeeze costs and assets out of their own operations, a task that will require greater collaboration with other companies. In these recessionary times, outsourcing remains a growth business. Why? Because it can cut costs and increase return on assets. And we’re no longer just talking about outsourcing IT shops—now, the move is to outsource entire business processes: human resources, logistics, manufacturing, customer support.
Efficiency can also be increased by improving coordination with business partners, be they part of a supply chain or distribution channels. Much of the remaining inefficiency in business is concentrated at the edge of the enterprise, where it’s particularly challenging to coordinate activities with other companies.
Becoming more efficient doesn’t ensure success, however. Intensifying competition means that managers must do this just to stay in the game, but it also means that most of the cost savings will be competed away and captured by the customer. In this environment, the only way to continue to create economic value is to aggressively grow the business—and the real win is to grow without adding many more assets.
This is not a pretty picture. Surviving the recession isn’t enough—to succeed in a bleak long-term economic environment, you must reposition your business. Are you ready to address these challenges?
The Foundations Are Solid—That’s the Bad News
Competition didn’t intensify overnight—it’s been heating up over the past several decades. Large enterprises got the wake-up call and began focusing on serious cost reduction. In particular, they started to look at the business processes within the enterprise and found substantial inefficiencies. Business process redesign came into vogue. While it failed to live up to the hyperbole that always accompanies such fads, it did help to cut costs.
But it also highlighted a major obstacle to increased efficiency. Over time, large enterprises had implemented incompatible technology platforms within various business functions. Business process redesign required much tighter integration of activities across units, but incompatible technology made this difficult to achieve. Developers responded to the challenge by creating broad suites of enterprise resource planning (ERP) applications designed to more effectively integrate activities along business process lines, such as managing supply chains, customer relationships and human resources.
By breaking down existing application stovepipes, ERP applications helped to cut costs—ironically, at a price. First, ERP implementations weren’t cheap or quick. Large enterprises often spent several hundred million dollars and supported implementation teams of 100-plus members for five or more years before seeing any significant cost savings.
Second, ERP applications focused on “hard-wiring” business processes to render them more efficient, secure and predictable. In part, the cost of computing resources made this approach necessary. This made it very expensive to tailor an ERP application to the unique characteristics of each enterprise, and even more difficult to modify an ERP application when business conditions changed.
Third, ERP applications concentrated on integrating activities within the enterprise, assuming that connections with other enterprises would be limited and would need to be “hard-wired” like in-enterprise business processes. This narrow focus also made mergers more challenging, as companies wrestled with integrating different ERP platforms.
In effect, business managers had made a Faustian bargain: In an effort to obtain a single large reduction in operating expense, they implemented ERP applications and business process redesign—at the cost of inflexibility and diminished collaborative capacity. At the time, this bargain appeared quite reasonable: Companies were under competitive attack, needing major cost reductions for survival. Technologies were available to support this business objective in the absence of technologies to enhance flexibility and collaboration.
Now, competition continues to intensify, uncertainty is an even more dominant reality and collaboration grows more essential to continuing the march toward ever-lower operating costs and asset investments. These trends were already visible before September 11, 2001, but, after that day, it became even clearer that management needed more flexibility to deal with major discontinuities. More importantly, a new set of technologies known as Web services has emerged to support lower cost and more flexible connections across applications.
Can corporations simply move to this new set of technologies and reap the business benefits? In much the same way that ERP applications alone would yield little business benefit without accompanying business process redesign, Web services technologies on their own will make minimal business impact.
The answer is not to launch another round of business process redesign—traditional approaches suffer from the same limitations as do ERP applications, seeking to tightly integrate business activities within the enterprise. As a result, they fail to address the growing need for more flexibility and collaboration across enterprises. What is needed is a different approach to designing and managing business processes.
Toward More Loosely Coupled Business Processes
Flexibility, collaboration and leverage are becoming more important business objectives. They remain relatively meaningless, however, unless they’re anchored in the reality of core business processes, which are increasingly reaching beyond the boundaries of the individual enterprise. As long as business processes remain hard-wired and constrained by the limits of the firm, these objectives will make for good presentations but have little impact on performance. To implement these objectives at the level of business processes, then, requires a very different approach to managing them. Few companies have made much progress in this direction, but the basics of implementing loosely coupled business processes are beginning to emerge.
Different design principles. Traditional business processes tend to be defined by the boundaries of the enterprise, managing activities within the enterprise with the help of detailed, real-time information.
In contrast, loosely coupled business processes tend to span multiple enterprises—for example, supply-chain management extending across several layers of an industry or customer-relationship management mobilizing a broad range of specialized third parties to support the customer. These business processes require more flexibility to achieve their potential. Managers seek to extend business processes beyond the enterprise to access more specialized capability. More specialization creates more diversity. In turn, this increases the need for flexibility, especially if managers want to access the specialized resources dynamically to tailor the business process.
As a result, loosely coupled business processes are generally defined in terms of entities (which companies will participate and what roles will they play?) and milestone-driven deliverables (what are the specific outcomes that must be delivered and when?). These business processes operate with much more selective information access to provide early warnings regarding performance shortfalls. Given these characteristics, loosely coupled business processes require different roles, rules and renewal approaches relative to traditional ones.
Roles. Managers who sought to implement business process redesign soon learned that it was hard to make much headway without designating a specific business process “owner”—a senior executive
who had the authority and accountability necessary to deliver the anticipated benefits. However, as authority disperses, the challenge of coordinating business activities spanning multiple enterprises escalates.
As the scope of business processes broadens to encompass not only more enterprises, but also more types of enterprises, effective coordination demands a specialized role. Imagine the challenge of coordinating business activities on a global scale across the supply chain of the apparel industry. Raw materials, specialized weavers and knitters, cut-and-sew operations, packaging facilities and logistics providers must all come together in flexible combinations tailored to the needs of specific designers and merchandisers. In this context, a Chinese company by the name of Li & Fung (see “Case Study: Li & Fung”) has emerged as a specialized business process orchestrator, working with designers and merchandisers to configure exactly the right combination of entities for each line of clothes. In collaborating with Li & Fung, all the other enterprises become service providers, offering specialized business capabilities to support different elements of the supply chain.
Rules. Enterprises traditionally manage processes by precisely specifying activities and making them as transparent as possible. This “hard-wiring” of business processes ensures efficiency, security and predictability.
It does not deal well with flexibility or collaboration, however. Process manuals can accommodate some flexibility by defining optional process paths, but they become less helpful as the number of options expands or an unanticipated option surfaces. Process manuals may be feasible within the enterprise, but once we move beyond its boundaries, lawyers come calling. Tightly negotiated contracts may be a reasonable supplement to process manuals, but they become increasingly untenable as the number and variety of business partners expands. Accommodating unanticipated options at this level becomes even more challenging (especially since most lawyers view their role as protecting the business rather than creating room for new opportunities).
Instead of detailing the activities within the business process, orchestrators specify the end products at various stages of the workflow, qualifying service providers and creating appropriate economic incentives (and penalties) to ensure performance. Cisco illustrates the application of these principles in its Cisco Connection Online. CCO’s loosely coupled customer relationship–management system mobilizes hundreds of specialized channel partners to provide tailored support to individual customers. After preparing a needs assessment, CCO refers the customer to a range of prequalified providers for complex services that span consulting, configuration, fulfillment, installation, training and operation of Cisco equipment. CCO precisely specifies provider actions and offers incentives to motivate good work.
As the number of enterprises participating in a business process increases, it becomes less and less feasible to provide complete transparency into the full range of activities across the business process. Simply integrating the applications and databases within a single enterprise is a daunting task that few enterprises have fully accomplished.
Loosely coupled business processes, on the other hand, don’t need full transparency. They rely instead on selective visibility designed to provide early warning of potential problems. Dell has mastered this approach in managing its supply-chain partners, including specialized third-party logistics providers and component suppliers. The company’s build-to-order operations depend on the timing and quality of deliveries to its assembly plants. To ensure dependability, Dell has implemented an innovative, Web services–based event management system that defines process milestones and then systematically queries service providers throughout the supply chain to confirm whether those goals have been met. In this way, Dell has quickly and cost-effectively implemented an approach that doesn’t require integration of diverse databases and yet provides the necessary visibility to determine whether deliveries will be on time.
Renewals. Like remodeling a home, redesigning business processes is a massive and disruptive undertaking. Few enterprises would want to endure it more than once or twice a decade. The hard-wired approach to enterprise business processes dictates that major improvements to the process occur relatively infrequently.
Because of their flexibility, loosely coupled business processes allow far more frequent and significant performance improvements. By focusing on milestones, orchestrators of loosely coupled business processes can provide continuous benchmarking capability. Since major business process redesign efforts occur infrequently, systematic benchmarking initiatives tend to be timed to coincide with the launch of these redesign programs.
Toyota has pioneered innovative collaborative business processes with major suppliers in the automotive industry. In its assembly plants, it has set aside a room where it brings together its suppliers and posts weekly the performance of each against specific milestones. This open tracking and assessment method helps to create rapid feedback on performance gaps—and enormous social pressure for suppliers to act to close these gaps.
Loosely coupled processes offer an opportunity to dynamically reconfigure the business based on up-to-the-minute performance information. Li & Fung, for example, continually reallocates work among its service providers based on recent performance trends. If one develops a performance advantage for a specific task, that service provider enjoys a quick return on its performance investment while others experience an equally rapid decline in workload as performance gaps appear. Li & Fung supplements this ongoing reconfiguration of the business process for performance improvement with regular, three-year reassessments of its entire approach to orchestrating resources.
The Benefits. Loosely coupled business processes maximize the economic value of Web services. As long as companies rely on traditional, enterprise-centric, hard-wired business processes, they’ll be blocked from exploiting the advantages offered by this technology.
Specifically, loosely coupled business processes provide far more flexibility than traditional business processes. Eminently suitable for coordinating activity across enterprises, they enable each enterprise to more effectively leverage the resources of others. This is where Web services have advantages over client-server approaches. Finally, the loosely coupled approach requires less incremental investment in IT platforms by the participating enterprises since they don’t require broad transparency, relying instead on standard protocols for communication and data transfer.
IT Managers in the Spotlight
IT managers must shape this new approach. In the process, they can help unleash the economic value of Web services and position their enterprises for success in an increasingly challenging world. To exploit this opportunity, IT managers must exercise a new type of leadership as skill builders, standards shapers, service providers, service evangelists and knowledge architects.
Skill builders. Most enterprises today have limited experience
in deploying Web services. Among the skills required to make the leap are:
- Building nodes (exposing existing IT resources as Web services);
- Managing nodes (ensuring availability, reliability and problem resolution); and
- Outsourcing services (creating a grid of specialized providers).
Standards shapers. Loosely coupled business processes encompass a growing number of enterprises. To ensure effective coordination across a diverse group, managers must develop and refine shared meaning. XML provides a potentially powerful framework for developing this shared meaning, but the real work is identifying what terms must be understood for a process to operate smoothly. Managers must then mobilize support from all the participating enterprises for standard definitions of these terms.
Service providers. In some cases, IT managers can use the distinctive capabilities of their own organization to support loosely coupled business processes. For example, General Motors provides its dealers with shared services that include some major financial and inventory management applications. These shared services help dealers coordinate with General Motors to respond more quickly to a customer purchasing a car. A large enterprise seeking to coordinate activities with much smaller enterprises often finds that its deeper IT capabilities can be an asset. By offering access to these capabilities as a shared service, the large enterprise creates incentives for other enterprises to participate in a loosely coupled business process.
Service evangelists. Web services are a promising tool, but the service grid is the missing link for increasing critical functionality while removing complexity from the enterprise. Many of the specialized services required to populate a service grid are already emerging, but even more will pop up to address particular processes or industries. Technical managers can help accelerate the development of these specialized services by identifying their needs, publicly encouraging providers to address them and participating in pilot projects.
Knowledge architects. Loosely coupled business processes provide a powerful platform for building knowledge. IT managers can identify ways to capture and disseminate metrics that pinpoint the source of performance shortfalls. IT managers can also assist in building collaborative problem-solving platforms to help participants address these bottlenecks. Designing appropriate information flows and creating shared context can enhance both near-term business performance and long-term learning.
The Web Services Way
Technology can help firms become more flexible, collaborative and efficient. However, it’s only a tool. To harness Web services, companies must master a new approach to managing business processes. IT managers have a chance to generate more economic value from this technology by working with business line managers to ensure that appropriate foundations are built for these new processes. By better understanding the business context and the specific tools available, IT managers can play a vital role in realizing success.
John Hagel III is a San Francisco–based independent consultant whose former lives include stints with McKinsey and Atari; he’s the author of five books, including, with John Seely Brown, Out of the Box: Strategies for Achieving Profits Today & Growth Tomorrow Through Web Services (Harvard Business School Press, 2002). John Seely Brown spent a decade directing Xerox’s Palo Alto Research Center, as well as serving as Xerox’s chief scientist. He is the coauthor, with Paul Duguid, of The Social Life of Information (Harvard Business School Press, 2002).