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Services Is the Mega-Trend

If you open a technology magazine or listen to any vendor presentation, you will read or hear the following: E-Business on Demand, Services on Demand, Business Process Management, Composite Applications, xApps, Real-Time Enterprise, Enterprise Application Integration, Web Services, and Adaptive Supply Chains.

What do all these buzzwords have in common? If you look closely you will find that they are all part of the services digitization mega-trend. The impetus for services digitization lies at the convergence of five core trends taking place in business.

  • Technology Payoff and ROI—How can new value be created by leveraging existing technology investments?

  • Process Configuration and Flexibility—How can technology help reconfigure operational processes and improve flexibility through business process outsourcing?

  • Cross-Enterprise and Multi-Channel Business—How can companies move from uni-channel, single business unit solutions to cross-enterprise, multi-channel solutions?

  • Improving Application Integration—How can applications be integrated more quickly and cheaply to create a real-time environment?

  • Aligning Outside-In and Inside-Out—How can the inside-out process perspective (customer management, supply chain) be balanced with an outside-in services view (Easy To Do Business With, one face to the customer)?

Each of these trends, by itself, is important. Combined, they present the emerging picture that is services digitization.

Technology Payoff and ROI Trends

Companies don't want to hear about innovation, vision, or possibilities anymore. They want results, return on investment (ROI), and better execution.

In December 2002, McDonald's posted its first quarterly loss in 47 years. To turn things around, the board got rid of the CEO and installed a new management team. The team promptly started examining various money draining initiatives as they related to near-term financial benefits and restaurant profitability. The team zeroed in on technology spending in an effort to save "tens of millions" of dollars.

In particular, the focus was on an ambitious project called Innovate. Innovate was envisioned as a global real-time network that would link fast-food restaurants, headquarters, and suppliers of McDonald's. The long-term business objective was to create a digital environment to share consumer demand data and procurement information and to reduce paperwork. The initial installation of the network was scheduled for late 2003 beginning in Canada and France. The United States portion of its business was to be linked by 2005.2

McDonald's decided to kill the Innovate project because it was taking too long to realize an ROI. Millions of dollars had already been spent on Innovate, and tens of millions more would have been required before completion.

McDonald's is not unique. Tough business conditions and the need to focus on fewer priorities have inspired a backlash against mega-technology projects. The backlash has resulted in tech investments being placed under the ROI microscope. Many CEOs and CFOs are questioning whether they are getting results for the money spent. This introspection is forcing companies to refocus their energy on what customers care about. Some are going back to the basics; others are accelerating digitization initiatives to support and streamline business processes better.

Clearly, a shift in thinking is taking place among senior management, line of business users, IT departments, and mainstream technology vendors. They have come to the realization that technology is only part of the solution. Merely implementing technology applications and infrastructure doesn't amount to productivity or payoff. Business processes, change management, and incentives are key to wringing value out of technology investments. Common sense, you might say. But common sense is quite uncommon and often overlooked in search of the quick fix. So begins a new chapter in information technology.

As the technology love affair turns cautious, back-to-basics process thinking is taking center stage again. Evidence of this trend can seen in Table 1.1, which captures the evolution of business process transformation. We think that current digitization must be understood against the background of the past.

Table 1.1: Historical Perspective: Changing Process Priorities (Innovation)

Time Period

Focus

Method

1970s

Quality

Total Quality Management, Zero Defects, Statistical Process Control

1980s

Lean Manufacturing

Just-In-Time, Zero Inventory, Kanban, Computer Integrated Manufacturing

Early 1990s

Process Improvement

Vendor Managed Inventory, System Outsourcing, Customer Satisfaction, Enterprise Resource Planning, Lean Thinking

Mid- to Late 1990s

Process Reengineering

Business Process Reengineering, Six Sigma

Late 1990s to 2002

Transaction-Centric— Digitization of Tasks and Simple Processes

E-Commerce, E-Business, Collaborative Commerce (B2B), Customer Relationship Management

2003 onward

Services-Centric— Digitization of Cross- Enterprise Processes

End-to-End Supply Chain Enablement, Business Process Outsourcing, Business Process Management


Process Configuration and Flexibility Trends

Driven by the constant need to cut costs and gain flexibility, business processes are being reconfigured or outsourced.

The need for process flexibility is not a new trend. The trend has been evident for the last two decades. First, in blue-collar factory automation, on the heels of industrial robotics, came computers with intelligent shopfloor automation software. Second, in white-collar administration, spreadsheets and enterprise applications like ERP took hold. Networking facilitated by high-bandwidth fiber optics and other telecom innovations set the stage for mind-blowing innovation. Finally, the Internet, Web, and mobile computing came along and enabled a global productivity boom, resulting in technology innovations that are constantly laying the foundation for renovating industrial-age processes.

At the macro level, factors that caused this process redesign flux include customers, competition, (de)regulation, growth via mergers and acquisitions (M&A), divestitures, and internal reorganization. At the micro level, process instability was caused by the huge investment in factory automation technology, the demand for more real-time information, and tighter collaboration among business partners. Regardless of why companies redesigned processes, improving productivity—in manufacturing, sales, and supply chain—was the goal.

More recently, evidence of the dramatic process changes brought forth by the Internet is beginning to show up everywhere. Consider business process outsourcing. Service jobs such as call centers, billing, and claims processing, the mainstay of the United States, British, French, and other developed economies for the past 20 years, are moving. These jobs, courtesy of the Internet, are set to follow manufacturing jobs by emigrating to China, India, the Philippines, and other low-wage countries. We are witnessing in services exactly what happened in manufacturing 15 years ago. Whatever can get done in a more cost-effective location will be relocated.

Besides outsourcing, organizations are reconfiguring processes wherever possible to drive productivity higher. Even if various discrete parts of the business are operating at peak performance, too often the end-to-end business processes are not. That is because many processes—with customers, suppliers, and employees—remain largely disjointed, linked by a hodgepodge of information flows—telephone calls, faxes, e-mail, spreadsheets, and FedEx packages. Connecting and improving broken processes have taken on broader urgency due to the velocity and volatility of modern business.

Multi-Channel and Cross-Enterprise Trends

In some firms, processes are moving from a single channel to a multi-channel focus. In others, processes are moving from department to cross-enterprise. Both are fairly significant trends.

Most of the current e-business thinking is centered on uni-channel automation and single business unit applications. Unfortunately, customers don't think or act this way; they want flexibility. In other words, they want efficient and effective hybrid combinations, that is, new service designs that weave brick, click, call center, and mobile channels. They also want the service designs to span internal and external boundaries. For instance, when you call Delta Airlines, they offer internal transactions such as travel reservations but also external services such as car rentals and hotel reservations.

Consider the service problem facing retailers. Most have invested heavily in Web sites and digitized significant portions of the end-to-end processes (order-to-return). However, when the customer behavior changes from uni-channel (Web site) to multi-channel (Web site, retail store, and call center), the carefully crafted end-to-end process that worked well for a single channel breaks down completely. Let's look at a simple variant: The customer buys online but returns offline at a store and gets her account credited immediately. This simple action can wreak havoc with finely tuned back-office processes, such as inventory management, financials, and reverse logistics, which have been optimized for a single channel or business unit.

As the business environment changes, so must the underlying processes. Unfortunately, organizations tend to ignore process problems until it's too late. This primarily occurs because management regards process design as a low-level activity tied to the application implementation process. As a result, most management teams tend to trivialize end-to-end process design and pay a big price downstream. The numerous first-generation e-business projects that have been discontinued or minimally adopted prove our point.

All is not lost, however. Cutting-edge organizations are adopting new ways of attacking process transformation problems. These organizations see digitization as a complex combination of multi-channel process thinking, cross-enterprise integration, and business technology. This thinking increasingly shapes enterprise application innovation.

Process transformation has three interrelated dimensions:

  • Changing Type of Process Interactions—new multi-channel processes are evolving from traditional uni-channel processes.

  • Changing Scope of Process Integration—processes are expanding from business unit-centric to cross-enterprise and inter-enterprise.

  • Changing Degree of Process Digitization—processes and transactions are evolving from manual to automated.

Figure 1.1 displays the process transformation. Where does your corporation lie? The nonstop management decision problem is to align all three dimensions continuously with customer, employee, or supply chain priorities. Optimizing only two dimensions, as is frequently done, often leads to poor choices that cause problems in the long run.

Figure 01Figure 1.1: Process Transformation Dimensions


Improving Application Integration Trends

There are significant changes taking place in the way applications and supporting infrastructure are integrated. These changes are taking place under the broad umbrella of service platforms, Services Oriented Architecture (SOA), and Web Services. The corporate world is migrating from a bottom-up integration model to a top-down service integration model that leverages multiple underlying enterprise application components.

SAP, PeopleSoft, Oracle, IBM, Microsoft, Sun, and BEA have grasped this development and are racing to address the issues of change with a new breed of cross-application service platforms called xApps, Services on Demand, and E-Business on Demand. Service platforms are emerging as the foundation on which process digitization will actually occur. (See Chapter 3 for more details on service platforms.)

Leading companies have seen this service platform trend and have been creating proprietary versions for several years. FedEx, the world's largest express shipper, has been developing a Fast Service service platform. The company's complex cross-channel, multi-enterprise service platform allows it to outperform its competition in the business of door-to-door delivery of small packages and just-in-time delivery of high-value components. In order to build a service platform similar to FedEx, companies need to invest in a Services Oriented Architecture. Examples of SOA products are SunONE from Sun Microsystems, NetWeaver from SAP, and WebSphere from IBM.

An analogy should give you a better idea how everything fits together. A car (a service platform) has large components (chassis, powertrain, electronics, and climate). The chassis (SOA) in turn is made up of subcomponents (driveline system, steering system, and braking system). These subcomponents are further made up of sub-subcomponents. The braking system is made up of brake hubs, brake rotors, and catalytic converters. These, too, can be decomposed further. You get a picture of the complexity involved here.

Similarly, the underlying foundation for all these SOAs is the fledgling field of Web Services. Web Services enable different applications to be integrated without the hassle of custom coding. In addition, Web Services are not reliant on one vendor or programming language. They allow businesses to share data with each other and customers while keeping IT systems secure behind a firewall.

Web Services are often misunderstood. They are not a fad; they are a model of computing and integration that helps solve the challenges of multi-channel and cross-enterprise process integration. The business driver of Web Services is simple: As business requirements shift, companies are trying to keep pace and are demanding greater productivity, less risk, and higher returns from their software investments. They are also desperately trying to leverage their existing multi-million dollar investments in applications. Clearly, organizations everywhere are looking for standardized ways to integrate information assets.

A simple analogy for Web Services is the euro, the standard currency of the European Union. Prior to the euro, incredible inefficiency existed due to the need to change currencies every time a border was crossed. With the euro standardized across the Union, barriers to trade and cross-border movement have been lifted. Productivity has been boosted because a pile of paperwork tracking currency exchange has been eliminated. Similarly, without Web Services, the scale and scope of digitization will be constrained due to fragmented applications and infrastructure.

Web Services and SOA are closely intertwined with process thinking. Without process thinking, Web Services and SOA are not very effective. While this should be obvious, it is not widely accepted. We have found very little process thinking preceding Web Services adoption in organizations or vendors. If this does not change, the service platforms developed using Web Services will fail miserably.

Aligning Inside-Out and Outside-In Process Trends

Consider the following customer request: We want you to become Easy To Do Business With (ETDBW). A successful ETDBW digitization project starts with the recognition that the focus is not technology, but understanding customer priorities and aligning internal processes accordingly. So the key questions are: What new services do we need to design to become ETDBW? What channels (brick, click, tele, and mobile) do we need to synchronize?

Consider the internal management request: We want to lower the cost of serving the customer, increase the productivity of agents in our call centers, and increase customer loyalty. So the key questions are: How do we segment our customers? What applications do we need to integrate internally?

There are two viewpoints of digitization that are battling each other in the real world:

  • Customer-Centric—outside-in design of cross-channel and cross-enterprise workflows driven by a superior understanding of what the customer really wants.

  • Process-Centric—inside-out design of application integration to support workflows driven by what managers think the customer wants.

Design from the customer perspective is the problem that most customer-facing groups (strategy and marketing) are wrestling with. Process integration from the efficiency and productivity standpoint is the problem most internal-facing groups (operations and human resources) are grappling with.

While both viewpoints are necessary, the applications and infrastructure needed to support them tend to be different. Therein lies the problem. It is very difficult to leverage the investments in applications and infrastructure made to support the process-centric view in the customer-centric context. While this looks rather trivial, it is very hard to do. Why? Because most enterprise applications, which support internal processes in corporations, are fragmented and are not integrated. Significant investments have to be made in integrating applications to rectify the problem.

Now imagine a situation where there are twenty different customer-facing projects, each with its own customized integration model. The business outcome: severe structural problems in the organization's process foundation—applications, infrastructure, and people—as it struggles to keep up with changing corporate and customer priorities. Avoiding these structural problems, which in turn are driving up business risk, is job number one for management.

One way to avoid the inside-out and outside-in alignment problems is to have a clear focal point (for example, Every Day Low Price) and align the processes accordingly. For instance, Wal-Mart over the years has succeeded in executing its Every Day Low Price focal point while its competitors—KMart, Ames, and other discount retailers—have faltered. Wal-Mart's ability to focus and digitize the supply chain and logistics processes effectively allowed the company to slash prices and outperform its competition. We think that Wal-Mart's ability to align all its investments to create value around a focal point is a key long-term differentiator.

As Figure 1.2 shows, customers care about value. Line of business and IT departments tend to care about processes. Services represent the convergence of customer priorities, business priorities, and technology capabilities. Not aligning the three carefully can lead to problems. Operationally speaking, creating new services requires an outside-in (external) perspective on customers' interaction with the service and an inside-out (internal) perspective on existing capabilities and applications.

Figure 02Figure 1.2: The New Process Thinking—Taking the Customer's Perspective

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