Home > Articles > Business & Management

  • Print
  • + Share This
This chapter is from the book

Economies of Scale (the Integration Market)

As stated earlier, the benefits of Lean are economies of scale and reduction in variation. As a general rule, doubling volume reduces costs by 15 to 25 percent, and doubling variation increases costs by 25 to 35 percent. The ideal low-cost model, therefore, is maximum standardization and maximum volume. But how exactly is this accomplished in a Lean Integration context?

A core concept is to view the collection of information exchanges between business applications in an enterprise as a "market" rather than as a bunch of private point-to-point relationships. The predominant integration approach over the past 20 years has been point-to-point integration. In other words, if two business systems need to exchange information, the owners and subject matter experts (SMEs) of the two systems would get together and agree on what information needed to be exchanged, the definition and meaning of the data, the business rules associated with any transformations or filters, the interface specifications, and the transport protocol. If anything needed to change once it was in operation, they would meet again and repeat the same process.

For a small number of systems and a small number of information exchanges, this process is adequate and manageable. The problem with a hand-coded or manual method is that it doesn't scale, just as manual methods for other processes don't scale well. Certainly if a second integration point is added to the same two systems, and the same two SMEs work together and use the same protocols, documentation conventions, and so on, the time and cost to build and sustain the integrations will indeed follow the economy of scale cost curve. But in a large enterprise with hundreds or thousands of applications, if each exchange is viewed as strictly an agreement between the immediate two parties, diseconomies begin to creep into the equation from several perspectives.

Imagine trying to follow a flow of financial information from a retail point-of-sale application, to the sales management system (which reconciles sales transactions with refunds, returns, exchanges, and other adjustments), to the inventory management system, to the general ledger system, to the financial reporting system. In a simple scenario, this involves four information exchanges among five systems. If each system uses different development languages, protocols, documentation conventions, interface specifications, and monitoring tools and was developed by different individuals, not only will we not receive the benefits from quadrupling volume from one integration to four, but we will in fact increase costs.

This example reflects the two largest factors that drive diseconomies: the cost of communication between teams and duplication of effort. Additional factors can drive further diseconomies, such as the following:

  • Top-heavy organizations: As organizations get larger and add more layers of management, more and more effort needs to be expended on integrated solutions that require collaboration and agreement across teams that each play a narrow functional role.
  • Office politics: Disagreements across teams are a result of different motivations and agendas, usually a result of conflicting goals and metrics but also sometimes caused by the "not invented here" syndrome.
  • Isolation of decision makers from the results of their decisions: Senior managers may need to make decisions, such as how much of a budget to allocate to a given group, without a clear picture of what the group does and what value it brings to the organization.
  • Slow response time: Delays are caused by multiple handoffs between teams or by queuing requests for information or support from other groups.
  • Inertia: People are unwilling to change or are opposed to standards.
  • Cannibalization: Limited resources (such as SMEs in specific business domains) are consumed for project B, slowing down progress on project A.

The degree of integration variation in many organizations is staggering in terms of both the variety of technology that is used and the variety of standards that are applied to their implementation. That is why most organizations have a hairball—hundreds or thousands of integrations that are "works of art."

The alternative is to view the need for information exchanges across applications as a market economy, and to serve the market with an efficient shared-services delivery model in order to gain economies of scale. For example, multiple groups within an organization may perform similar activities but do so with varying degrees of efficiency and consistency. Centralizing the activities makes it much easier to standardize and streamline the work, thereby reducing the cost per unit of work while improving the quality and consistency.

The two graphs in Figure 1.3 are borrowed from the field of economics and show the relationships between costs and volumes. These graphs reflect the well-understood laws of diminishing returns and economies of scale. The chart on the left reflects a manual or low-tech operation, such as when information exchanges are developed using custom hand-coded integration solutions. In this scenario, there are few (if any) capital costs since existing enterprise tools such as COBOL, Java, or SQL are used to build the integration. The overall average cost per integration initially falls as the individuals doing the work gain experience and are able to share some of their experience and knowledge, but then at some point it starts to increase as diseconomies emerge. In terms of the marginal costs (i.e., the incremental cost for each additional integration), initially the curve is somewhat flat since the first integration developer can develop a second or third integration with a similar effort. The average cost also falls initially since the fixed costs of the developer (hiring costs, office space, desktop PC, etc.) are amortized over more than one integration. As the volume of integrations increases, however, the marginal costs increase on an exponential basis, and the average costs begin to increase as more and more diseconomies emerge from the increasing complexity and number of unique integration points.

Figure 1.3

Figure 1.3 Diminishing returns and economies of scale

The chart on the right of the figure shows the cost curve as a result of a capital investment in tools and infrastructure (such as an Integration Factory) to largely automate and standardize the development effort. Note that in this scenario, the marginal costs are small and constant. For example, it might cost Microsoft $5 billion to develop a new version of Windows, but once developed, it costs just pennies to make another electronic copy. The marginal cost per copy of Windows is essentially the same whether 1 copy or 1,000 copies are made, but the average cost drops significantly and continuously in this scenario as volume increases and as the up-front fixed costs are amortized over more and more units.

The key challenge for organizations is to determine at what level of integration complexity do diminishing returns begin to emerge from manual hand-coded solutions, and how much capital investment is warranted to achieve the time and cost advantages of a high-volume Integration Factory. The answer to this will become clearer in Parts II and III, where we discuss the Lean principles related to continuous improvement, mass customization, and process automation, and the financial management competency area.

  • + Share This
  • 🔖 Save To Your Account

InformIT Promotional Mailings & Special Offers

I would like to receive exclusive offers and hear about products from InformIT and its family of brands. I can unsubscribe at any time.

Overview


Pearson Education, Inc., 221 River Street, Hoboken, New Jersey 07030, (Pearson) presents this site to provide information about products and services that can be purchased through this site.

This privacy notice provides an overview of our commitment to privacy and describes how we collect, protect, use and share personal information collected through this site. Please note that other Pearson websites and online products and services have their own separate privacy policies.

Collection and Use of Information


To conduct business and deliver products and services, Pearson collects and uses personal information in several ways in connection with this site, including:

Questions and Inquiries

For inquiries and questions, we collect the inquiry or question, together with name, contact details (email address, phone number and mailing address) and any other additional information voluntarily submitted to us through a Contact Us form or an email. We use this information to address the inquiry and respond to the question.

Online Store

For orders and purchases placed through our online store on this site, we collect order details, name, institution name and address (if applicable), email address, phone number, shipping and billing addresses, credit/debit card information, shipping options and any instructions. We use this information to complete transactions, fulfill orders, communicate with individuals placing orders or visiting the online store, and for related purposes.

Surveys

Pearson may offer opportunities to provide feedback or participate in surveys, including surveys evaluating Pearson products, services or sites. Participation is voluntary. Pearson collects information requested in the survey questions and uses the information to evaluate, support, maintain and improve products, services or sites, develop new products and services, conduct educational research and for other purposes specified in the survey.

Contests and Drawings

Occasionally, we may sponsor a contest or drawing. Participation is optional. Pearson collects name, contact information and other information specified on the entry form for the contest or drawing to conduct the contest or drawing. Pearson may collect additional personal information from the winners of a contest or drawing in order to award the prize and for tax reporting purposes, as required by law.

Newsletters

If you have elected to receive email newsletters or promotional mailings and special offers but want to unsubscribe, simply email information@informit.com.

Service Announcements

On rare occasions it is necessary to send out a strictly service related announcement. For instance, if our service is temporarily suspended for maintenance we might send users an email. Generally, users may not opt-out of these communications, though they can deactivate their account information. However, these communications are not promotional in nature.

Customer Service

We communicate with users on a regular basis to provide requested services and in regard to issues relating to their account we reply via email or phone in accordance with the users' wishes when a user submits their information through our Contact Us form.

Other Collection and Use of Information


Application and System Logs

Pearson automatically collects log data to help ensure the delivery, availability and security of this site. Log data may include technical information about how a user or visitor connected to this site, such as browser type, type of computer/device, operating system, internet service provider and IP address. We use this information for support purposes and to monitor the health of the site, identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents and appropriately scale computing resources.

Web Analytics

Pearson may use third party web trend analytical services, including Google Analytics, to collect visitor information, such as IP addresses, browser types, referring pages, pages visited and time spent on a particular site. While these analytical services collect and report information on an anonymous basis, they may use cookies to gather web trend information. The information gathered may enable Pearson (but not the third party web trend services) to link information with application and system log data. Pearson uses this information for system administration and to identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents, appropriately scale computing resources and otherwise support and deliver this site and its services.

Cookies and Related Technologies

This site uses cookies and similar technologies to personalize content, measure traffic patterns, control security, track use and access of information on this site, and provide interest-based messages and advertising. Users can manage and block the use of cookies through their browser. Disabling or blocking certain cookies may limit the functionality of this site.

Do Not Track

This site currently does not respond to Do Not Track signals.

Security


Pearson uses appropriate physical, administrative and technical security measures to protect personal information from unauthorized access, use and disclosure.

Children


This site is not directed to children under the age of 13.

Marketing


Pearson may send or direct marketing communications to users, provided that

  • Pearson will not use personal information collected or processed as a K-12 school service provider for the purpose of directed or targeted advertising.
  • Such marketing is consistent with applicable law and Pearson's legal obligations.
  • Pearson will not knowingly direct or send marketing communications to an individual who has expressed a preference not to receive marketing.
  • Where required by applicable law, express or implied consent to marketing exists and has not been withdrawn.

Pearson may provide personal information to a third party service provider on a restricted basis to provide marketing solely on behalf of Pearson or an affiliate or customer for whom Pearson is a service provider. Marketing preferences may be changed at any time.

Correcting/Updating Personal Information


If a user's personally identifiable information changes (such as your postal address or email address), we provide a way to correct or update that user's personal data provided to us. This can be done on the Account page. If a user no longer desires our service and desires to delete his or her account, please contact us at customer-service@informit.com and we will process the deletion of a user's account.

Choice/Opt-out


Users can always make an informed choice as to whether they should proceed with certain services offered by InformIT. If you choose to remove yourself from our mailing list(s) simply visit the following page and uncheck any communication you no longer want to receive: www.informit.com/u.aspx.

Sale of Personal Information


Pearson does not rent or sell personal information in exchange for any payment of money.

While Pearson does not sell personal information, as defined in Nevada law, Nevada residents may email a request for no sale of their personal information to NevadaDesignatedRequest@pearson.com.

Supplemental Privacy Statement for California Residents


California residents should read our Supplemental privacy statement for California residents in conjunction with this Privacy Notice. The Supplemental privacy statement for California residents explains Pearson's commitment to comply with California law and applies to personal information of California residents collected in connection with this site and the Services.

Sharing and Disclosure


Pearson may disclose personal information, as follows:

  • As required by law.
  • With the consent of the individual (or their parent, if the individual is a minor)
  • In response to a subpoena, court order or legal process, to the extent permitted or required by law
  • To protect the security and safety of individuals, data, assets and systems, consistent with applicable law
  • In connection the sale, joint venture or other transfer of some or all of its company or assets, subject to the provisions of this Privacy Notice
  • To investigate or address actual or suspected fraud or other illegal activities
  • To exercise its legal rights, including enforcement of the Terms of Use for this site or another contract
  • To affiliated Pearson companies and other companies and organizations who perform work for Pearson and are obligated to protect the privacy of personal information consistent with this Privacy Notice
  • To a school, organization, company or government agency, where Pearson collects or processes the personal information in a school setting or on behalf of such organization, company or government agency.

Links


This web site contains links to other sites. Please be aware that we are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of each and every web site that collects Personal Information. This privacy statement applies solely to information collected by this web site.

Requests and Contact


Please contact us about this Privacy Notice or if you have any requests or questions relating to the privacy of your personal information.

Changes to this Privacy Notice


We may revise this Privacy Notice through an updated posting. We will identify the effective date of the revision in the posting. Often, updates are made to provide greater clarity or to comply with changes in regulatory requirements. If the updates involve material changes to the collection, protection, use or disclosure of Personal Information, Pearson will provide notice of the change through a conspicuous notice on this site or other appropriate way. Continued use of the site after the effective date of a posted revision evidences acceptance. Please contact us if you have questions or concerns about the Privacy Notice or any objection to any revisions.

Last Update: November 17, 2020