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The Economics of Service Orientation

Enrique Castro-leon, Jackson He, Mark Chang and Parviz Peiravi are the authors of The Business Value of Virtual Service Oriented Grids: Strategic Insights for Enterprise Decision Makers on which this article is based. Copyright (c) 2008 Intel Corporation. All rights reserved.

Virtualization and grid computing bring costs down by enabling the reuse and sharing of a physical resource, leading to a more efficient and higher degree of utilization for that particular resource, whether a computer or a network.

In this article, we will explore structural economic changes brought up by service orientation. Most IT organizations today are under enormous pressure to keep their budgets in check. Their costs are going up, but their budgets are flat to decreasing as illustrated in Figure 1. The restructuring brought about by the concept of services and the reuse at the service level promises long lasting relief from the cost treadmill.

Figure 1:The Overwhelming Cost of Legacy

In a certain sense, service orientation does not really bring new capabilities. Yet it has the potential to bring about profound changes because of the economics involved. Service orientation radically reduces the cost to bring in certain capabilities. We illustrate some of the cost dynamics in the four diagrams. Conceptually, a portion of IT budgets is used to maintain existing projects. This portion is important because it is the part that "keeps the business running" (KTBR). In most IT organizations, the KTBR portion takes the lions share of the budget. The downside is that the KTBR is backward looking, and its only the leftover portion that can be applied to grow the business. There is another problem: the KTBR portion left unchecked tends to grow faster than IT budgets overall, and the situation is obviously not sustainable.

A number of strategies have been used in IT organizations to keep the KTBR growth in check. Lets take outsourcing for instance as shown in Figure 2. When outsourcing (and perhaps off-shoring) is brought in, costs actually go up a notch as reorganizations take place and contracts are negotiated. Once the outsourcing plans are implemented costs may go down, but still have the problem of sustainability. Another issue is that costs are growing faster in countries providing services, so in a few years these countries will reach parity.

Figure 2: Effect of Outsourcing

A third alternative is illustrated in Figure 3. The introduction of a new technology, such as Intel Pro processor technology, lowers the cost of doing business, seen as a cost dip. Costs can be managed through aggressive "treadmill" of technology adoption, but this does not fix the general uptrend, and not many organizations are willing or even capable of sustaining this technology innovation schedule.

Figure 3: Effect of Introducing New Technology

Finally, Figure 4 illustrates how service orientation eventually leads to a structural and sustainable cost reduction to the synergies of reuse. As in the outsourcing case, there is an initial bump in cost due to the upfront investment needed. Note that this transformation may take years to accomplish and will require difficult cultural and organizational adjustments.

Figure 4: Structural Cost Reduction Attained through the Adoption of Service Orientation

Service orientation brings a discipline of modularity that has been well known in the software engineering community for more than 30 years, but had been little applied in corporate-wide IT projects. As previously mentioned, the goal of service orientation is to attain a structural cost reduction in the delivery of IT services through reuse and standardization. There may be more upfront costs for architecture and planning as well as consideration for interoperability and security. However the benefits of modularity and interoperability will pay back as more and more services are developed and reused to attain the same results as we have seen in software engineering today.

In the end, aligning IT with business at a reasonable and predictable cost is a challenging problem. The best solution is attained through an integrated strategy that includes business process improvement (in the form of service orientation), technology, and an appropriate business strategy.

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