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SOA - The Backbone of the Alert Enterprise

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).

Let’s map the top 5 in this list to a few specific business scenarios.

Evolving customer needs and preferences – In order to streamline their own procurement operations, customers may wish to shift a higher percentage of their purchase orders and order releases to a B2B channel, rather than phoning or faxing orders to their suppliers.  You are more than happy to comply with this need, because it also translates to lower order management costs, higher productivity for order management personnel, and improved data accuracy.  By re-using application services defined by SOA, the creation of this “new” capability is made much simpler and deployed faster.

Competitive moves, threats and pressures – The American automotive industry is under serious pressure from foreign automakers, and is struggling to deal with health care and pension commitments to its workers.   GM and Ford have both announced major retrenchments and layoffs, with more to come.  Eventually, they may have to pare down the number of unique brands that they manage.  Normally you might not think of this kind of business consolidation as having a direct impact on IT applications, but it certainly can.  What is often forgotten is that there are few companies that have complete application and systems homogeneity throughout their enterprise.  Even with ERP, it is not uncommon to see more than one vendor’s product in use.  Consequently, if a company is consolidating plants and warehouses across its supply chain, it may have to realign, reconfigure, and even redeploy applications along the path.  Business rules and processes may change, too, all of which needs to be reflected in the underlying systems.  While it may be counterintuitive, the need to eliminate these “redundant” systems and processes can actually increase IT complexity with SOA helping to simplify this challenge by facilitating easier redeployments.

New product, service and revenue opportunities – Using the auto industry again as an example, it is fascinating to see how cars are becoming high-tech havens of electronic gizmos.  Elaborate infotainment systems are becoming the norm, from sound systems, to video, to navigation systems.  Under the hood, computers have become essential to the proper functioning of our vehicles.    Customers may still care most about the overall style and reliability of the car itself, but these high tech gadgets are proving to be a major source of differentiation, constantly upping the ante for consumers’ attention.  And underlying much of the high tech electronics is sophisticated software.  SOA offers the opportunity for automotive high-tech component suppliers to rapidly reuse and reconfigure their solutions to the OEMs.  The same can be said of a number of other manufacturing sectors as well, such as consumer products goods or high-tech, along with financial services, media & entertainment, professional services or virtually any business that delivers its product or service digitally.

Cost savings and operational efficiency – In the High Tech industry, outsourcing has become the norm, as OEMs focus their attention on new product introductions in response to end consumer demands.  EMS (Electronics Manufacturing Services) providers and other contract manufacturers (CM) focus much of their attention on being highly efficient in delivering subassemblies or even finished products to the OEMs at the lowest possible cost, with high quality and, of course, on time.  The challenge for the EMS providers and CMs is to respond to the service level agreements with their OEMs in light of rapidly changing demand.  SOA provides an excellent platform for establishing B2B linkages from the EMS/CM to their OEMs.

Regulatory and legislative requirements – With each new country or geographic market that a company decides to play in comes new regulatory hurdles:  trade restrictions; restrictions on component content as with RoHS, the Restriction on Hazardous Substances; and proper handling and disposal of product returns as with WEEE, or Waste Electrical and Electronic Equipment, directives.  With SOA, the core demand fulfillment processes and application services can remain the same, and thus be reused, and new or modified services can be grafted in relatively easily.   By deploying these systems at a more molecular level, enterprises can ultimately benefit from the enhanced flexibility that allows them to meet matrixed requirements with greater speed, precision and cost-effectiveness.

At its core, SOA delivers the ability to develop systems out of reusable parts.  Elevating this from simply an IT benefit to a business benefits is the added ability for business process actors to participate directly in this effort.  If you think about the so-called SOA stack – services, registry, messaging, web services management, orchestration, analytics and user interface – the first four belong largely to the realm of IT, that is, the users in the lines of business don’t really have an appreciation (nor do they need to) for what is occurring essentially under the covers from their perspective. The lines of business clearly care about and understand the analytics and user interface, as this is what they see day in and day out.

As shown in figure 3, orchestration is the bridge between these two worlds of IT and the LOB.  On the LOB level, it gives them a real-time view to their business processes such as order to cash and procure to pay, and it is the platform from which they can propose process improvements.  On the IT level, orchestration, or BPM, is the tool by which these business processes become real in terms of the underlying systems and applications.  But to really create alignment between the two worlds of IT and the LOB, it is critical to define the ROI on both sides of this divide.