There are some who say that “SOA will force alignment of the business with IT.”  This may fall under the category of wishful thinking.  What it can do is enable alignment between the two, but IT still needs to make its case to the lines of business it supports that service-oriented architecture (SOA) is truly a competitive weapon in creating the Alert Enterprise.

What differentiates Alert Enterprises from others is a well-developed capacity to respond to change, react to opportunity and pre-empt risks.   By becoming an Alert Enterprise, they can better sense operational performance, assure process adaptability, and drive market distinction with this being viewed by many as the holy grail of enhanced IT/business alignment.  As such, an SOA must be viewed in this context.

Essentially, SOA is about how to assemble business systems out of parts.  This is something that the manufacturing world has perfected decades ago, with the notion of a bill of materials, or BOM, that defines the subassemblies and components that make up an end item.  By reusing components across multiple end products, sourcing costs and effort are reduced.  By reusing subassemblies, design time for a variant of an end product is reduced.   Overall, quality goes up because the reliability of the BOM elements has already been validated.

What we often see in the justification for SOA are such benefits as lower integration costs, higher productivity of IT personnel and faster delivery of new applications to the business.  And there is usually a brief mention that these applications will be of higher quality because you are reusing already-tested services, the building blocks of applications.  What is missing is a deeper explanation of why the lines of business should care.  In other words, what is the ROI for being an “alert” enterprise, where IT can rapidly deliver new applications and capabilities in lock-step with business needs ?

Why is this important?  First, for most companies, IT budgets range between 2-4% of total revenues (to be sure, higher in certain industries such as financial services), with maybe half of this going toward applications development and maintenance in some way or another.  For a $20B enterprise, this amounts to an IT applications-related budget of $200M to $400M.  But, contrast this with expenditures in the lines of business.  For a manufacturing company, for example, supply chain related costs (COGS and some of SG&A) account for 60% or more of revenues, or $12B+.  A 1% savings due to SOA in IT is worth $2M - $4M, but in the supply chain it’s worth $120M or more.  This is a 30X – 60X difference.  It is certainly worth exploring what the specific benefits might be to the lines of business.

A recent survey reinforces this point. As shown in figure 1, about 50% of the executive respondents indicated that the IT organization does not do a particularly effective job of demonstrating a clear business case for what it delivers.

As such, the question needs to be asked – what are some of the specific ways in which an Alert Enterprise, supported by an SOA infrastructure, can create measurable ROI?  There are at least 3 basic value levers to be exploited.

The first is improved cash flow, where benefits - cost savings, revenue lift or working capital improvements – can occur sooner than they otherwise might.  For example, if an IT project using SOA can be completed 20-30% faster, this could translate into months of earlier benefits capture.  True, this is a one time benefit.  However, if you compound this across what is typically a long backlog of IT projects, these one-time benefits can be delivered with some regularity.  The result is to increase the velocity of the business – speeding up the metronome, as it were, to create a higher tempo in the business – resulting in better asset utilization.

The second LOB-related benefit from faster delivery of applications via SOA is the avoidance of lost opportunities.  For rapidly changing industries such as high tech, where new products have the life span of a mosquito and trading networks change just as quickly, you can actually lose sales if you miss the market window of opportunity.    For example, one Fortune 500 company has credited their SOA with allowing them to capture $200M in additional revenue as they were able to quickly fill a marketplace void left by another vendor’s departure.  Equally important, it can also cost you money, if for example you cannot adjust your applications quickly enough to comply with regulatory requirements and you incur fines as a result.

Third, if new applications can reuse existing components that have already been thoroughly tested and are of proven quality, businesses can reduce the long-term impact of software defects on productivity, downtime, lost sales, poor customer service, etc.

Let’s apply these approaches to some specific examples that demonstrate how SOA can improve business process productivity.  In the same survey mentioned earlier, executives were asked what factors drive them to modify existing business processes and introduce applications (see figure 2).