Building the Internal SOA Marketplace

The Lack of Cost Transparency

One of the drivers for looking towards increased service-orientation is the pursuit of transparency of cost. There are two issues that currently lead to a lack of transparency:

1. Businesses are not designed as systems and thus we have functional or product based silos that make it difficult to understand the cost of providing business capabilities; and
2. Implementation processes and supporting IT systems are delivered as individual applications within these mis-aligned business silos, resulting in even greater opacity.

This situation means that most organisations have no idea how much any given process or capability actually costs them and hence no worthwhile metrics to help them improve.

Service-Orientation for Business Design

As I’ve discussed previously, it is interesting to note that the concept of service-orientation has nothing to do with technology but is rather a structural abstraction.  As a result you can use the ideas of loose coupling, defined contracts and quality of service within business design as well as within IT – in fact service-orientation makes no sense when this business context is absent.  Service-orientation thus delivers a coherent method for the structuring of a business as a system, with services offered by business capabilities forming the system elements that are coordinated in the pursuit of value.

Service-based Costing

If we use these concepts to redesign the enterprise as a set of services realised by a combination of people, technology and processes then the costs of a given business service are the combined costs of these elements as they interact to deliver to the specified contract. This means that costs are now available at the business service level; i.e. for each service that the enterprise wishes to use they have a specific cost associated with it. When a number of business services are linked together, the cost of the aggregating service needs to be pitched by the owner at such a level that they can profitably aggregate the consumed services in order to deliver to their contract. 

Procuring Services

The expression of an enterprise as a number of collaborating business capabilities allows the organisation to consider how it procures the necessary functions; one option is to deliver a single service that supports the necessary function for the whole enterprise, a second might be to outsource the execution of the service to a specialised provider, whilst a third could be the use of multiple internal and external providers that compete for individual service fulfillment requests on the basis of cost and quality of service. In reality there are likely to be a variety of models applicable.

Utility Business

In order to enable the final transparency, however, and deliver utility style costs to the enterprise, each business capability owner will need to be able to charge for the usage of their services on a per transaction basis. For example, human resources will need to be able to charge for recruitment, induction or dismissal services. This will enable consuming capabilities within the enterprise to be billed for the specific services that they consume and thus see where their major costs lie. Such a model will enable capability owners to decide whether internal service providers represent a good deal or whether they should look to leverage the services of external specialised providers.  In addition service providers will have clear metrics for the costs that they charge to the rest of the enterprise, a view on the competitiveness of their services and a clear sphere of control within which to innovate in order to increase cost-effectiveness. Some service providers may even begin to charge a markup to reinvest in the improvement of their services rather than simply charge at cost.  In point of fact I believe that this will increasingly be the case (even within a given enterprise), since such a market approach drives the sustainability (or not) of a service by forcing it to be competitive or driving it out of the organisation and into the hands of an external provider.  For those capability owners who do succeed in making the transition, the opportunity will be there for them to offer their capabilities to external partners and grow their services as an independent business, taking advantage of greater economies of scale and scope.

Governing the Utility Business

As we increasingly conceive of an enterprise as a set of business capabilities so the focus of governance moves away from inappropriate concentration on technology and onto the portfolio of services that the enterprise needs to realise its goals.  In this scenario the implementation of business capabilities is wholly federated to the capability owners who have the right to decide how they implement the services that they offer to the rest of the organisation, resulting in a cascading (and greatly simplified) ‘business architecture’ where organisations only scope and govern services at the level at which they consume them, leaving onward decisions within the remit of their service providers.  This might seem to fly in the face of traditional notions of SOA where people bemoan the fact that most organisations are ‘project-centric’ and that there should be less ‘selfishness’ but the fact of the matter is that if we charge people with delivering certain value – and we judge them on their performance -then the natural tendancy of human beings is to exclude anything that is orthogonal to the task at hand.  This means that rather than force people into situations where they come into conflict over differing priorities we need to realign the way in which people are judged – by charging them with the delivery of a service that meets the needs of the organisation as a consumer – whilst giving them total autonomy over how that service is delivered.  This delivers the best of both project and enterprise thinking by more appropriately aligning people’s responsibilities around system boundaries whilst satisfying their need to control their own destiny (this, incidentally, is a subject that was explored more lucidly by Todd Biske here!).  Such a model also helps to remove the tensions traditionally associated with inter-departmental integration – discussed by Joe McKenrick here – by realigning departments around the services that they provide, again moving the focus to system boundaries in place of overlapping hierarchies.

This will be a significant shift away from current, immature models of governance which focus on forcing shared IT services, applications and infrastructure onto business capability owners, thereby locking them into potentially inappropriate solutions and preventing them from changing independently.  In the business capability model we concentrate on discovering and managing those services that have value to the business and rely on market forces to drive capability owners to share (or not) services that can be conceived of and offered by third parties in a way which is monetisable and thus sustainable.  This covers the other points raised by Joe around governance given that the answer to all of the questions about ownership, charging, change, etc. are answered by the fact that there is a commercial (or at least pseudo-commercial) agreement between the consumers and providers of service within the enterprise, again driving a market approach in search of transparency and sustainability.  In either case sustainability is the key concern here, as current notions of reuse based on small granularity services are not sustainable given that they cannot generate sufficient revenue to ensure their own survival whilst they simultaneously place capability owners into lockstep for little value gained.  In this scenario the IT department is essentially levying a tax on the business in order to unfairly prop up a collection of services that result in an inflexible environment for the business capability owners,

Utility Platforms for Utility Business

In order to enable a more sustainable model based on market forces, service realisation platforms will need to demonstrate a number of characteristics:

1. They must be cost-effective:  As capability owners start to surface the costs that they incur in offering their services, so the cost of the supporting IT systems will come to light.  In many organisations IT has been seen as an unpleasant but necessary evil with the costs dispersed across the organisation in such a way as to make it feel like an ungovernable black hole.  If you suddenly find yourself tasked with delivering a set of services competitively, however, and find that your specific share of the IT costs makes you uncompetitive in doing so you are going to be very concerned.  This will force capability owners to take a long hard look at the costs that they incur and look for ways of reducing IT expenditure.  In this scenario it is likely that they will begin to look at shared platforms from utility computing providers in place of expensive, home grown, inflexible infrastructures and architectures that don’t support them in delivering, robust, monetisable services;
2. They must support service provision: As well as requiring increased quality and robustness, providing services to consumers requires that there be a host of supporting functions in place, including management, reporting and monetisation.  As a result any service delivery platform  must include the ability to capture complex service events for service level management, audit and metering and billing.  Without such functions service providers will be unable to scalably serve their consumers and ensure that they are invoiced for the functionality that they use.  Current enterprise IT infrastructures (and most middleware products) do not support any notion of service delivery at this level of maturity and thus the likely platforms for such service enablement will be SOA-aware SaaS platforms – like the kind described frequently by Phil Wainewright (for example see his discussion of OpSource here) – delivered either centrally by specialised utility computing providers or within the enterprise data centre by such providers as a special service.

Summary

Service-orientation represents a new way to describe the way in which an enterprise functions. If pursued successfully a service-oriented business design can open the way for increased transparency of costs, greater competition and new business opportunities. Any vendor who wishes to help companies with this transition will need to ensure that they have adequately catered for the needs of service delivery within their SOA platform, however.  Of particular concern are a coherent monetisation strategy along with underlying charging and invoicing capabilities, as I believe that ensuring the provision of monetisable services is the only sustainable way of creating and maintaining a portfolio of business services that are exposed to market drivers and hence forced to be competitive. In addition such a market-led approach introduces more transparent governance, focusing on business capabilities and forcing capability owners to deliver clear and competitive services against which they are judged, hiding the complexity of implementation – where most people try to address governance today - and governing more appropriately on the outputs required.

I think I’ll return to the areas of both governance and sustainability in the near future as I believe that they are areas of significant weakness in most current SOA proposals and thus worthy of further discussion.

Capabilities vs ERP

Just picked up on a post by Clive Keyte (here) that discusses the selling of SAP as a set of services.  The post was in response to one by Jeff Kaplan, where Jeff argues that SAP needs to learn some lessons about service enablement and the fostering of an ecosystem from more agile companies – more specifically Salesforce.com (here).

There were two points that I found interesting in the ensuing discussion – 1) that Jeff believes that the value lies in services that can be leveraged to build better end propositions rather than in monolithic applications with outdated licensing models (my emphasis given my biases ) and 2) (and perhaps more interesting) Clive’s response about TDS building a set of services that ‘enwrap’ SAP.  I was initially quite excited about this as I thought that this scenario might mirror some of my comments a couple of weeks ago (here) where I was considering how the ability to buy services from specialised providers impacts companies like SAP who attempt to sell applications that are a) tightly integrated (and thus do not promote process agility) and b) representative of the commodity processes that people don’t focus on.  I thought that TDS had taken SAP and were selling commodity services (i.e. complete propositions) whilst using SAP as the backend to enable them to deliver.  Turns out, however, that TDS are essentially selling an ASP proposition into the mid-market based on a set of applications that they have created that use SAP as the backend.  Nothing wrong with that but it isn’t the big deal I initially thought.

On idly looking at the SAP website for BPO propositions, however, I did discover a list of providers who use SAP within their offerings rather than sell SAP into end organisations.  This is much more like the shift I had in mind and effectively changes the whole consumption model from many-installation to single-installation.  Essentially SAP disappears behind people who provide commodity services and is no longer needed in the end enterprise.  To me this makes much more sense than attempting to sell applications into end organisations (whether on a SaaS or on-premise basis) since as I’ve argued before such applications represent commoditised capability that I may as well buy from someone else if it’s not an area of concern for me.  Currently these services are mostly based around the usual BPO suspects like Human Resources – which have a broad horizontal appeal – but I believe that we’re rapidly going to see a shift towards the outsourcing of much more specialised (and potentially differentiating) capabilities, with complex value chains spanning multiple providers.

If this model proliferates – as I believe it will – then how long will it be before specialised providers decide that they too need more flexibility in how they deliver?  Which other modules – beyond HR – are good candidates as a starting point for the creation of specialised services?  Are ERP packages – given the breadth of their function and the difficulty of breaking them up – too expensive and inflexible to play within a specialised service provider market?  How will a shift towards service provision affect the revenue streams of ERP providers given a consolidation of the supporting applications into fewer end organisations?  All interesting stuff I guess – any ideas would be gratefully received

Elements of the Future Business Ecosystem (Part II)

Introduction

In part one I started to discuss some of the changes occurring in the business environment that will have an impact on IT organisations and service providers.  In particular I considered the need for greater modularity in business architecture – to support greater adaptability – and our trajectory towards the emergence of increasingly specialised service providers driven by the Internet and rapidly consolidating standards.  In this post I’ll look at how these trends will drive a change in the value proposition for technology.

The Shift From Products to Services 

If we consider the implications of the changes that I discussed in part one we can see two major, parallel shifts:

• Increased understanding within enterprises of the modular business capabilities needed to deliver value to stakeholders along with clear metrics about their performance; and
• The emergence of specialised service providers who can be used to provide those capabilities that we do not wish to focus on.

As increasingly powerful abstractions allow us to modularise our capabilities, we can consider our operations from a service viewpoint without worrying about implementation.  This will give organisations greater clarity in terms of what they do and help them to raise their horizon from the complexities of non-metricised implementation issues – whether organisational or technological – within which they find themselves mired today.  As a result of this shift companies will increasingly want to talk about the business services that they need rather than procure base technology or products – they will no longer want to buy the products that they would need to deliver non-core value themselves (as they do today) but would rather place expectations on partners for the delivery of the desired results with no concern for the way in which the value was delivered (Figure 1 – Commoditisation of Technology). 

  

 

Such capabilities may be small and wholly automated  – such as access to valuable data or specialised algorithms and calculations – or as complex as whole BPO propositions.  They are going to be services rather than applications, however, since they are firstly going to represent the delivery of discrete value to the consuming organisation rather than just the tools that they would need to use to generate value for themselves and secondly they will need to be supportive of composition into more complex value chains.

The Easy 80%

One of the interesting implications of such a shift is that such specialised partners may end up delivering the 80% of non-core capabilities that an enterprise requires, leaving them to implement and execute the remaining 20%.  Such a shift would represent a large flight away from the purchase of the technology and products needed to support the implementation of this 80% towards the procurement of the actual capabilities themselves. 

As a result I believe that these changes will ultimately move the focus of a large chunk of enterprise procurement away from technologies and products and onto service provision from partners.  Such a move would reflect the changing nature of organisations, since – as discussed in the previous post – their role would be to source and orchestrate specialised capabilities rather than minimise transaction costs by running them internally.

The Other 20%

Whilst organisations will increasingly look to leverage partners for 80% of their needs in place of buying products – along with implementation and maintenance services - there still remains the 20% of services that represent their core differentiation (given that this is primarily an IT skewed blog I’m going to concentrate on that aspect).  The question is how these organisations will choose to implement the systems that underpin the services that they offer to other people - both their own discrete capabilities and those that pull together value chains across internal and external capabilities - especially as they will now have a taste for buying ‘outputs’.  I feel that there are three major points to consider:

• The increased understanding of the business capabilities required by the organisation to deliver value means that the enterprise can state what services they need to be realised.  Rather than source products and technology to realise them, however, organisations are going to increasingly look to external IT service providers to deliver these realisations more quickly, more cheaply and more reliably through leveraging architectures, patterns and infrastructures across customers in order to deliver the economies of scale that are beyond the reach of the common enterprise IT department – essentially they are going to procure the desired outputs (i.e. services) delivered with service level guarantees rather than the vague potential of implementation using some inert product(s).  I strongly believe, therefore, that IT service organisations need to invest in Industrialisation – bullet proof platforms (preferably shared SaaS style platforms) with strong service realisation factories that facilitate the rapid construction or composition of services with outstanding quality of service attributes targeted specifically at the chosen platform.  Essentially as providers are judged on outputs so the characteristics of delivered services come to dominate the procurement process in place of the technologies used in their implementation – i.e. cost, timeliness, payment models, reliability, reporting etc.;
• The need for lower costs and greater repeatability/reliability will drive the consolidation of platform providers to a small number of commoditised technologies wrapped into service platforms that support the realisation needs of many organisations – essentially IT platforms will become commoditised utilities in the same way that electricity generation was unbundled from individual companies and focused in large, infrastructural providers.  Such a shift leaves IT service providers with greater repeatability through industrialised and consistent target platforms around which they can innovate in terms of service realisation and composition factories whilst simultaneously giving end-user enterprises the benefits of choice in service provision (because of interoperability), reliability,  and economies of scale.  Essentially such platforms enable end organisations to be specialised in terms of the services that they offer whilst eliminating the need to expend the time, attention or money needed to design service and technology architectures or run a scalable, always-on platform with strong billing, service management, reporting etc. as a way of delivering and monetising the services that they execute.  This consolidation also becomes critical given that such platforms will provide discoverability for service providers as well as visibility and tracking of capability performance; and
• Enterprise IT breaks down in the face of this disaggregation of the technical environment; essentially each capability owner is free to choose an IT service provider who best meets their needs in terms of service characteristics, from basic service platforms all the way up to Internet scale platforms.  No longer does a drive by IT to limit technology costs force homogeneity across business units irrespective of fit; rather each external IT service provider competes on their ability to deliver services for the capability owner at the cost and service levels appropriate to the requirements and absorbs a large part of the costs of doing so by sharing resources and solutions across customers.  This is much easier where external providers concentrate on providing infrastructural capabilities in this way – the issue for internal IT departments is that they can only afford to support one set of technical capabilities whilst remaining cost effective; where external providers have to compete for service realisation business, however, a marketplace of people providing different levels of service and cost will naturally grow out to cater for the needs of many different kinds of service providers, thereby supporting the different needs of different capability owners within the organisation.

To be clear here I don’t believe that SaaS alone is the answer, rather that there need to be commoditised platforms with similar characteristics (e.g. multi-tenancy, billing, scalability etc.) that support the controlled delivery, hosting and execution of differentiated services and compositions for individual capabilities within enterprises.  The big problem with SaaS from my perspective is that it – by definition - provides economies of scale in the provision of software that supports the enactment of some part of a business capability (or capabilities).  As companies increasingly specialise, however, there is a major issue with this; SaaS by definition provides commoditised software support for standard business capabilities – if the capability itself is so standardised as to support commoditised software then why would I be interested in enacting that capability?  Surely such business capabilities would be provided as a service to me?  As an example if I decide that customer relationship management is not a core capability (e.g. I want to concentrate on product development) would I be more likely to outsource the software that would be needed by a capability to manage customers (but still execute the capability in the same way as every one else by using such software and thereby distract myself from my core mission for little or no differentiation) or would I just partner with a specialised provider who can offer economies of scale and scope in the provision of customer management on my behalf?  At the end of the day if the business processes that support a particular capability can be codified to the extent that they can be sold to multiple businesses then surely those processes are ripe for consolidation into a specialised service provider who concentrates on such infrastructural capabilities.  This is one of the major shifts that is emerging in the provision of repeatable, infrastructural capabilities – where we previously had to replicate commoditised capabilities within each organisation in order to minimise transaction costs we will increasingly be able to centralise these capabilities within specialised providers who deliver better service and lower cost through economies of scale and/or scope.  This is in opposition to the current model where repeatable capability is codified within application software that supports the execution of such commoditised processes many times within end organisations.

The upshot of all of these issues is that IT service providers – whether internal or external – need to increasingly understand the capabilities that an organisation needs to deliver and to use this information to be able to engage on a results basis.  They need to be able to compete on their ability to implement, deliver, compose and manage the required services using commoditised platforms rather than on selling the benefits or otherwise of individual technologies; in short they must sell meaningful business value.  It is up to the IT service provider to ensure that they have standards-based technology that enables them to realise and orchestrate services with competitive characteristics and guarantees, rather than placing the onus on the consuming organisation to understand, select, implement and manage technology – something that is unlikely to be core to their business.  Service orientation supports this push by delivering a set of abstractions that allow us to discuss the capabilities to be delivered along with the service levels and costs that they need to support, giving us the framework against which to compete on required outputs instead of implementation technologies.

The Changing Landscape

As a result of these changes I believe that enterprises will increasingly be uninterested in the technical details of implementation, since greater clarity on how value is delivered will enable them to procure or deliver the services that they need to underpin their mission rather than the base technology needed to implement such services themselves.  Procured services will thus be delivered using any processes and technology platforms that the IT service provider sees fit to use, since competition will move from how services deliver value to what value they actually deliver.  In this environment I believe that competition will move from technology and technology features to the quality and cost attributes that implemented services support (Figure 2 – Competition on Service Attributes).

 

 

These cross cutting concerns or quality attributes (such as modifiability, performance, security, etc) will determine whether the service provider can deliver competitive SLAs to meet customers’ demands.  One of the implications of this shift is the fact that service providers will need to deliver services on a strong base, with a standardised and well understood set of technologies, patterns and service management practices that are well factored and well integrated, since this is what will allow them to deliver consistent and superior service characteristics.  A related example may be that of automotive design, where people buy a car for its ability to get them from A to B but choose the actual implementation (i.e. vehicle) based on its characteristics (e.g. speed, handling, economy).  Such characteristics are largely determined by the quality of the technology with which it is constructed, however, (e.g. engine, gearbox etc) along with the design which brings them all together. In this context very few people buy a car because of a particular technical component or insist that one part of an engine is replaced with another; essentially people buy the experience provided by the car and not the individual pieces which comprise it.  As a result, I believe that technology in this new model becomes an enabler for differentiation in service provision rather than the main focus of procurement.

Conclusions

In this post I have considered how the shift to service provision impacts the way in which organisations will procure capability in future.  In particular we have considered two main aspects:

• As we move towards a market of specialised service providers and unbundling so organisations will be able to procure the 80% of non-differentiating services that they need rather than the technology and people they would need to use to realise such services for themselves.  I’ve already discussed the benefits of unbundling in a previous post; and
• For those 20% of services that remain within the organisation we will need a way to realise the supporting IT.  In this context we will see increasing consolidation of utility computing (nee SaaS) infrastructures externally to the enterprise and a shift from selling products and technology into organisations towards competition on realising the services most efficiently and cost effectively on such industrialised, utility platforms.

These issues have two different implications for IT departments and for IT service providers.

• CIOs and their staff need to help their business colleagues to understand the benefits of unbundling and prepare the ground for the leverage of external service providers.  At the same time – for core capabilities – they need to keep an eye on the emergence of utility computing platforms and take every possible opportunity to offload the delivery, support and management of services onto specialised IT service providers who can deliver new and changed services more quickly, reliably and repeatably and with much greater economies of scale.  Such a change will leave IT staff to execute the much more appropriate job of understanding shifts in technology and helping business colleagues take advantage of such shifts by reworking business models appropriately.  Although I won’t get into this until the next post I believe that CIOs and their staff will increasingly become ‘consultative’, understanding the enterprise, the services available in the marketplace and how to bring both together for the benefit of the organisation within which they work; and
• IT service providers need to recognise that the shift to service-orientation will change the nature of procurement.  As organisations increasingly understand the capabilities they need IT service providers will need to position themselves as more competitive realisers of these services rather than just push technology at the consuming organisation – such behaviour will merely demonstrate an inability to understand the needs of the organisation by surfacing complexity rather than making the procurement of the desired value as painless as possible.  Proactive providers will begin to deliver the Industrialised platforms and methods needed to compete in such a market and begin to work with both business and IT people within end organisations in order to educate them and enable them to focus more completely on their core mission. 

In my next post on this subject I’ll talk more about the types of companies that I see emerging from these shifts and the shape of the ‘future business ecosystem’.

 

Elements of the Future Business Ecosystem (Part I)

The Wild Outside

It’s no secret that the global business environment has changed radically over the last twenty years due to the effects of globalisation, radically increased competition, pervasive regulation and rapid commoditisation. In addition the increasing information content of products and services is leading to a rapid decline in cycle times as their creation, maintenance and suspension is far more rapid than that of physical goods.  We’re all therefore continually striving to find more innovative propositions with improved service at lower cost - as a result we’ve never needed to be more responsive. Unfortunately, however, most organisations are hampered by organisational, process and technology practices belonging to a less dynamic age, making them unable to adapt within the time and cost parameters increasingly demanded.  These practices make it difficult for us to recognise opportunities in the mass of data with which we’re increasingly being overwhelmed and then frustrate us in any subsequent attempt to adapt, with change being complex, time consuming and hugely expensive.

Whilst these issues have been bubbling away with increasing ferocity under the apparently calm surface of many organisations over the last decade, those people who are continually running ever faster just to keep a lid on things are in increasing trouble – the global environment is set to accelerate further over the next few years.  Technology is increasingly enabling the creation of new business models in support of customers and partners who expect continual service on their own terms – where, when and how they want it – and the speed of change enabled by technology innovation on the Internet represents an almost continuous source of change.

In order to succeed in future, we’re going need to find ways of facing these new realities.  In particular we’re going to have to address the following major issues:

• The need for greater adaptability: The increasing pace of change will force us to adopt strategies that specifically stress adaptability.  Current – mostly dysfunctional – command and control structures that attempt to predict demand and ‘push’ resources will increasingly break down due to the unpredictable nature of the environment.  Organisations will thus need to reinvent themselves as a set of modular business capabilities that provide specific, known and costed services that can be reconfigured on a ‘pull’ basis in response to changing demands; and
• Increasing specialisation: New collaborative technologies and interoperability standards will continue to reduce the transaction costs of collaboration with other organisations.  These changes will enable organisations to replace mediocre internal capabilities with world class services provided by partners, helping us to concentrate on what’s truly important and combat increasing attention scarcity.  We will therefore see increasing specialisation, with organisations who do not outsource non-core concerns finding themselves at an increasing cost and capability disadvantage.

Let’s have a quick look at each of these issues.

The Need For Greater Adaptability

In order to address the need to survive in an increasingly uncertain world organisations need to adopt strategies that specifically stress adaptability – at the end of the day the only way to deal successfully with uncertaintly is to be able to adapt successfully to the changes that occur.  In order to achieve adaptability, however, we must first understand what capabilities are needed to deliver to our stakeholders before considering exactly how all of these component parts combine to deliver value.  Gaining this higher level view of the organisation requires a systematic approach to enterprise design which emphasises the creation and coordination of shared business capabilities in place of hierarchical silos with cross cutting concerns.  Such an approach concentrates on reconceiving the enterprise as a set of collaborating business capabilities which have well understood commitments to the rest of the enterprise and which are firmly placed within the context of the overall value chain.  In particular each capability is expressed only in terms of its commitments – there is no external view of the way in which the capability delivers on these commitments in order to ensure loose organisational coupling.  These changes deliver a set of abstractions that allow senior management to define what the organisation should do without surfacing the mass of how, delivering greater adaptability at both levels.  This brings benefits at a number of levels:

• Organisational leaders are able to concentrate on what they are trying to achieve at the enterprise level by ensuring that they have the correct capabilities and that these capabilities are offering the cost and service levels that the organisation requires.  In addition such leaders are able to concentrate on macro level changes, reconfiguring value chains and renegotiating commitments with the capability owners in response to changes in external demands;
• Capability owners – including partners – have clear responsibilities and are empowered to innovate within the bounds set by these commitments.  In effect the design of the organisation only constrains the capability owner in terms of required outputs – they are free to produce these outputs in any way they choose as long as they continue to offer competitive services; and
• Organizationally we have much greater adaptability, since change can be understood and managed at multiple levels of abstraction – capability owners can implement changes – for example service improvement or regulatory requirements - without impacting the wider organisation whilst enterprise management have a system of abstractions that allows them to understand the impact of change and to  rework the organisation appropriately.

Although these concepts all sound pretty cool, until recently we’ve lacked a consistent set of abstractions with which to define capabilities, the services they offer and the costs and service levels that they conform to.  In the last few years, however, the concepts of service orientation have emerged. Service orientation allows us to view complex systems – such as an enterprise – as a group of collaborating services that can be coordinated to deliver value, each with its own purpose, contract and service agreement.  These techniques can thus be used – with some extension – to form the basis for the systematic design of the enterprise by helping us to understand and define the business capabilities that are needed whilst deferring their implementation to capability owners. Each business capability can then be delivered using an arbitrary combination of people, physical resources and technology.  This removes the artificial boundaries between different kinds of resources by concentrating on how they combine to deliver service commitments rather than splitting them into – for example – ‘business’ and ‘IT’ and thereby losing the necessary value context.  From an IT perspective this cuts across the traditional view of ‘Enterprise IT’ since capability owners are free to procure any necessary services – potentially including IT – from anyone.

Increasing Specialisation

Despite the efficiency benefits of specialisation most firms continue to be generalists, executing non-core capabilities in-house rather than rely on other specialists to execute such services on their behalf.  The main reasons for this have been twofold:

• Current organisational structures do not allow for easy outsourcing due to the lack of clarity around discrete business capabilities – it has generally been difficult to untangle consistent threads from the hairball of organisational structure; and
• The transaction costs of collaboration have largely been a barrier to the leverage of external capabilities since such costs have traditionally been sufficiently high as to negate the benefits gained through specialisation.

The former issue will increasingly be resolved through the use of methodologies – such as service orientation – that enable business capability mapping in the search for greater agility.  Transaction costs, however, are a different issue. Traditional economic theory suggests that firms exist to maximise efficiency; in order to do this they organise services internally to themselves in order to minimise the costs of transacting business with third parties. These costs consist of the effort required to find, establish, execute, manage and conclude partnerships for the provision of services.

Until recently these issues have been a sufficient barrier to the emergence of a specialised service provider market, with external transaction costs remaining sufficiently high to prevent large scale outsourcing in all but a few areas of broad applicability (e.g. HR or Payroll).  The increasing capabilities of the Internet are set to change this pattern, however, with key standards facilitating the exchange of information between organisations in a much simpler way.  In particular web service standards – both WS-* and Web 2.0 based - allow documents to be exchanged with partners over the web, forming a basis for a contractual commitment and enabling them to execute some service on our behalf.  When we also add in the more human-collaborative aspects of Web 2.0 and the increasing convergence of communications technology we can see that we have a powerful platform for cross-organisational collaboration.

By lowering the costs of information exchange and collaboration these developments are opening the door to a change in the nature of the enterprise.  We are headed to a market where organisations will be increasingly virtual - the enterprise will no longer exist to maximise efficiency by minimising transaction costs but to pull together a network of highly efficient, specialised providers in order to deliver an overall proposition.  These changes will be complemented by the modularisation of enterprises, since the definition of a business as a set of services enables us to make clearer decisions about how we realise them.

This process will deliver advantage to organisations in three major ways:

• Enabling tighter focus on the provision of differentiating services: Currently organisational attention spans a myriad of business capabilities, most of which – whilst critical to the overall delivery of value – are not key areas of focus.  Such non-core capabilities represent a diffusion of attention, increasing the information to be absorbed in order  to remain competitive and wasting organisational energy.  As we’re increasingly overwhelmed by information about change – whether competitive, technological or sociological -  attention will become a highly valuable asset and will need to be focused in the correct areas if we are to have any chance of making a sustained impact in our chosen field;
• Boosting wider performance by replacing mediocre internal capabilities with world class services provided by specialised providers: Non-differentiating services will already suffer from a lack of focus and therefore be less effective than those provided by people whose sole concern is to deliver sustained excellence in those capabilities.  As increasing competition and attention scarcity begin to bite we will have even less spare energy within the organisation to devote to these supporting capabilities, leading to rapid degradation.   Those organisations that take the opportunity to leverage 3rd party providers, however, will be exponentially better than those that do not - they will benefit from the ability to focus on their own areas of specialisation whilst simultaneously benefiting from the continual improvement of their specialised partners;  and
• Maximising learning opportunities by working with other specialised providers to improve the overall value chain:  The emergence of extended value chains will see many specialised providers coming together in order to deliver overall propositions to the market.  Where these providers come together there will be abundant opportunities to leverage their different perspectives to generate innovation around the way in which the overall value-chain functions – such innovation will be continuous, sustained and generate improvements at a rate that is inconceivable in today’s static organisations. In addition, the fact that each provider works with many other organisations maximises their opportunities for learning, a stark difference to current internally focused capabilities whose horizons are highly limited.

Standing back we can see that the move towards specialised service provision further destroys the notion of enterprise IT; as capabilities are unbundled to other providers the only ‘architecture’ that remains critical is adherence to interoperability standards.  Each specialised provider needs to be able to interact with the cloud but can no longer expect to force a unified IT architecture across everyone in the value chain.

Conclusions

In this first post I have considered some of the broad changes that I think are going to have a major impact on enterprises but I’ve really only brushed some of the implications from an IT perspective.  I guess the big take away from this initial post is that organisations – and therefore enterprise IT – are entering a period of fragmentation as unbundling occurs.  In future posts I’ll look at the potential effects of such fragmentation before going on to talk about the resulting future landscape from a business and IT perspective.

Elements of the Future Business Ecosystem – Introduction

I’ve been working to a model over the last year that considers how the emergence of SOA, web 2.0 and SaaS/Managed Services will change the way in which businesses are composed and executed.  In order to address the timeless question of ‘how to start’ I’ve decided to pull my thoughts together here into a series of posts that address the thinking I’ve been doing.  I’ll start with some of the key drivers that I feel are pushing us towards a sea-change in business models before going on to give my views on how the resulting shake out will coalesce.

Some of the key themes I’d like to highlight are:

• The importance of thinking about ‘services’ and ‘service provision’ at the business level and not just at the technology level; to me SaaS (and indeed managed services) are just a subset of the real emerging trend (i.e. the outsourcing of business capabilities to more specialised and focused providers);
• The increasing commoditisation and ‘infrastructural’ nature of technology – as we’re able to express business capabilities as consumable services we will increasingly want to buy business results (i.e. measurable outputs) rather than the underlying technology that we would require to create these outputs for ourselves.  This will have serious implications for software and IT service providers (both internal and external); and
• The emergence of the Internet as a global service delivery platform and the resulting disaggregation of business types into those concentrating on specialised services, those concentrating on infrastructural capabilities and relationship enablement and those concentrating on helping service providers to be as effective as possible.  I call these businesses ‘Service Providers’, ‘Service Aggregators’ and ‘Enterprise Integrators’.

The challenge for CIOs and their IT departments – as well as for IT service companies like mine – is to recognise the shifts occurring in the market and to remain relevant by helping our business colleagues source and integrate appropriate services from specialised external providers at the time of actual need.  This increased level of abstraction is going to be a tough journey for many IT professionals given an ability to buy technology and services on a results basis. Hopefully I can give some pointers during the current series of posts to the way in which I believe these changes will play out and how IT stakeholders in particular can position themselves for the future.

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