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From Resource, November 2006
Copyright by LOMA
Harnessing the
Business Potential of Information Technology
Pressure is mounting; find out how your company can be more successful in
harnessing both the strategic and operational value of new generations of
technology.
By
Tammy J. McInturff
Executives
must consider two time horizons to get the most value from Information
Technology (IT) investments—the short and the long term. Getting this balance
right is challenging and most companies end up focusing too much on only one
horizon. At the ACORD LOMA Insurance Systems Forum, noted business consultant,
author, and speaker John Hagel III discussed new approaches to strike an
effective balance between opportunities in the short-term and the long-term.
According to Hagel, by mastering these approaches, companies will be much more
successful in harnessing both the strategic and operational value of new
generations of technology.
Hagel
shared with attendees some perspectives from his interactions in executive
boardrooms around the world. “When I walk into executive boardrooms, I’m
very impressed with the diversity of experience, expertise, perspectives and
issues that all of these executives are wrestling with,” he said. “But I’m
also struck by one element that is becoming increasingly common and prominent in
all of these discussions and it is a sense that pressure is mounting. In
conversations with these executives, I have been surprised by one image that
keeps coming up in a number of different contexts and that is the image of the
Red Queen from Lewis Carroll’s Through the Looking Glass, the sequel
book to his Alice’s Adventures in Wonderland. In Through
the Looking Glass, the Red Queen said, ‘It takes all the
running you can do, to keep in the same place.’ Executives increasingly relate
to that frustration of the Red Queen running faster and faster just to stay in
the same place.”
The
perception of growing pressure is not just an illusion and it is not something
that is temporary in terms of its impact. Hagel said this growing pressure is
driven by some very long-term secular trends that are reshaping the business
landscape that we operate on. “In particular, it reflects two fundamental
forces that are at work in reshaping both the opportunities and the challenges
that we all have as businesses,” he said. “One of those forces is
information technology and the continuing rapid pace of innovation in terms of
the capabilities that information technology brings to our businesses. In
particular in its economic impact, information technology is systematically and
pervasively reducing interaction costs. The costs that we all incur in terms of
finding resources, getting information about them, coordinating activity and
monitoring performance; all of those costs are going down systematically
worldwide and that is a huge opportunity for all of us in business. It makes
life easier at one level; but at the same time information technology is giving
customers unprecedented access to information about vendors enabling them to
make choices about vendors, monitor and negotiate performance from vendors and
to switch from one vendor to another if their needs aren’t being met. So at
that level information technology is increasing pressure on businesses. We have
to continue to move those performance levels in order to satisfy the customers
that we are serving. Information technology innovation is continuing to reshape
the economics of our businesses.”
Hagel
said another trend that he has observed is a public policy trend and this has
been playing out for decades on a global scale. “Over decades we have seen a
public policy trend worldwide to removing barriers to entry, increasing the
opportunity for new entrants to come into markets. That public policy trend of
liberalization means that the few safe harbors that we used to rely on in terms
of business strategy that had to do with regulatory barriers are rapidly
eroding. We face competition from unexpected quarters on global basis and we
have to recognize that.”
Performance
Trends
Hagel
noted that in today’s business world, profitability is harder to generate and
survival is harder to achieve. To illustrate this point, he discussed long-term
performance trends. “Over decades we have seen an erosion in the ability to
generate profitability as companies,” he said. “When you look at corporate
profitability as a percentage of gross domestic product (GDP) you are not
looking at absolute profits but profits as a share of total economic activity.
Profits as a percentage of GDP in 1950 in the
United States
were 18 percent but over the last 50 years that number has declined
significantly. In 2002 profits as a percentage of GDP in the
U.S.
were six percent. So over those 50 years there has been a long term decline of
our ability to create and capture profitability in our companies relative to
total economic activity.”
Survival
rates are something that many CEOs pay close attention to and continually
monitor. Survival rates measure the average lifetime of a company as it goes on
the S&P 500. “If you look back to 1938 businesses were still wrestling
with the throws of the depression,” Hagel said. “It was a very challenging
business environment. But in 1938 if you made it on to the S&P 500, you had
an average lifetime of 75 years on that list. That is a pretty nice run and
certainly well beyond the lifetime career of any executive in one of these
companies. But over time, company survival rates have also dropped. In 2004 the
average lifetime of a company on the S&P 500 was 15 years, an 80 percent
reduction in the average lifetime of a company over that 60 year period.
Although there are some ups and downs along the way, it is a long term downward
sloping line with no sign of relief. And on a more personal level, if you look
at any executive position whether it is CEO, CIO or any of the other chief
positions in large companies the average tenure of those executives is
diminishing over time. It is harder and harder to stay in those senior level
positions. So pressure is mounting and whatever we are doing in terms of
managing our companies really isn’t working. Companies are stuck and in fact
the Red Queen is too optimistic. She was running faster and faster and she
managed to stay in the same place. What we are seeing in these performance
trends is you run faster and faster and performance still diminishes.”
Business
and IT Alignment
There
are a lot of factors that are contributing to performance shortfalls. Hagel
said, “One of the most significant obstacles to performance improvement is the
gap between the IT organizations and business line management,” he said. “In
the last 25 years there have been a lot of efforts to try and close the gap and
achieve more alignment within the senior management teams, but the gap still
persists. It is very hard to eliminate and even harder to close.”
Hagel
explained that at one level the friction that exists between business and IT is
totally understandable because in part companies have set it up to be that way
in terms of incentive structures and employee motivation. The friction allows
two very legitimate points of view to be brought to the table.
IT
executives are under an increasing amount of pressure to reduce costs in the IT
operations of the business and to achieve compliance with a growing set of
requirements. This pressure has led to a really deep focus on long term
architectures to help reduce costs, increase efficiency, ensure compliance, and
in a somewhat paradoxical way it has actually led to more risk adverseness about
incorporating new technology into the enterprise. “All of our enterprises are
more and more dependent on IT for their operations,” said Hagel. “If you are
worried about disruptions in operations, one of the last things you want to do
is bring in a new set of technologies because that is one of the easiest ways to
risk disruption. So there is a lot of risk adverseness emerging in IT
organizations.”
Line
management executives on the other hand are under pressure to deliver near term
business results in their operations and that has led them to focus more on
action, particularly action that yields short term results and benefits to their
operations. “In an interesting kind of flip line management executives are
becoming more open to thinking about bringing new technologies into their
operations if there is a credible business case with quick ROI,” said Hagel.
“So IT and business executives often have very legitimate different points of
view but closing the gap is one of the biggest challenges to improving
performance. Given this mounting external pressure one of the paradoxes is that
rather than bringing management teams together often it is intensifying some of
the friction. Everybody hunkers down in terms of their own agendas and the
bottom line is that while we are seeing ever increasing, impressive IT
innovation the lead time in terms of deploying that in a systematic basis
throughout our enterprises is actually increasing.”
Web
Services and SOA
The
gap between business and IT has the risk of slowing down the deployment of new
technologies and in particular two related elements of new technology—Web
services and service oriented architectures (SOA).
There
are many different definitions floating around for Web services and SOA. Hagel
argued that everyone has their own definition for these two terms and their
definition tells you more about who they are then about the technology. He said,
“The way I think about Web services is as a set of technologies that are
really about helping to facilitate automated connections across applications and
databases. It does this by relying on a new set of standards that have emerged
using XML as the core technology standard. What is impressive about these
standards is that they have emerged with very broad support throughout the
technology community and increasingly throughout the enterprise community.”
Loose
coupling is an element in Web services and it is particularly important in terms
of business value. Basically, loose coupling is a philosophy about how you
connect. “If you really want to enhance flexibility and the ability to enhance
and innovate over time, loose coupling is an important way to think about
connections,” said Hagel. “What it basically means is that when you design
modules of resource you want to put all the information required to establish
the connection in the interface and make it as standardized as possible so that
anybody can quickly get a sense of what this resource can do, how to connect to
it and how to use it rather than having to have a deep understanding of what is
behind the interface in terms of the resource itself. Loose coupling in turn
leads to another element that is critical for Web services which is the notion
of shared services—IT resources and services can be shared across an ever
broader range of uses within the enterprise and again across enterprises.”
Service
oriented architecture is another technology concept that is getting a lot of
attention right now. “When I talk to business line executives there is a bit
of an allergic reaction to the word architecture,” Hagel said. “Architecture
in their minds means big, complicated, hard to change, expensive and
increasingly a barrier to movement of the enterprise, actions and initiatives
that executives want to take. There is a new generation of architecture that is
represented with SOA that is actually quite interesting in terms of its business
opportunity.”
Service
oriented architectures start with a mindset shift in terms of how to organize
technology resources. Hagel explained that, rather than focusing on software
that is designed in advance for a specific context and installed where it is
expected to be used, services are designed without knowing in advance the exact
uses and tasks that they are going to be called upon to support. Instead they
are accessed wherever and whenever they are needed. The location of the software
becomes largely irrelevant from a user perspective.
According
to Hagel, another important aspect to SOA is that the services concept
encourages technologists to shift from a very granular view of individual
actions performed on data, to view the modules and services as being much more
closely aligned and mirroring the way that business executives would describe
their activities. “Also important in this is the notion of being helpful in
coordinating processes and activities across enterprises,” he said.
“Previous generations of architectures were known as enterprise architectures,
because as soon as you got to the boundary of the enterprise it became really
hazy about how you were going to connect in to all the other resources that were
available in business partners and other kinds of companies. SOA is enhancing
the opportunity to collaborate with business partners by adopting a much broader
sense of architecture, shared services that are not just available within one
enterprise but are potentially accessible by business partners as well.”
The
Business Case for SOA
Business
executives are naturally suspicious about service oriented architectures.
They’ve been through generation upon generation of hype in information
technology. “There has always been the panacea that is just around the corner
that is going to help us all get to that nirvana of high performance and stay
there,” Hagel said. Some business line executives are concerned that the move
toward service oriented architecture is just the latest hype. “I have my own
concerns about this,” Hagel added. “If you listen to some of the more
enthusiastic evangelists they make it sound like SOA is going to answer
everybody’s problems immediately.”
Although
SOA obviously won’t solve every problem, there is a compelling business case
around SOA and it comes at three very different levels. There is a short term
level, which is driving the early developments of Web services and SOA. The
business case here is about eliminating operational inefficiency that still
exists in a lot of enterprises. For example, many companies still have people
who are focused on taking data and information out of one set of systems and
manually reentering it into other systems, which can cause lead time lags and
possibilities for error. “There is this operating inefficiency from swivel
chair integration that Web services and service oriented architectures really
address,” Hagel said.
The
automating of these connections across diverse applications and databases is now
possible with a set of technologies and standards that are simpler, less
expensive and more flexible to use than previous generations of integration
technologies. In addition this set of technologies operates as an overlay. Most
enterprises have a very diverse set of legacy systems in their operations and
this technology does not require you to rip that out. Instead, it creates an
overlay that can access those resources, present them as services and enhance
reusability. “You can implement these overlays in an incremental way targeted
to very specific business inefficiencies that limit the amount of investment you
have to make and then focus on near-term wins,” said Hagel. “Rapid and
tangible payback in the form of cost savings is really driving a lot of the
early deployment of Web services technology and the building of these service
oriented architectures.”
However,
that is only the first step. Hagel explained that there is a second business
case that comes into play which is moving from savings to flexibility and
agility. “Many executives were motivated to deploy this technology with the
prospect of early cost savings but found over time as they deployed this loose
coupling, it actually creates much more flexibility in the operations,” he
said. “For example an insurance company that implemented these shared services
using Web services was able to reduce the time required to introduce a new
insurance product by 30 percent because of this loose coupling and the ability
to access shared services that were already available.”
Then
there is a third element of the business case which is only starting to emerge
in most companies. According to Hagel, it is the notion not only that this
technology is creating opportunities for flexibility but it is also enhancing
potential for innovation, because it is enabling two levels of experimentation
in business operations that are made possible by modular, more loosely coupled
architectures. The experimentation at one level comes from recombining modules
of services in different ways to deliver more tailored value in response to
changing business needs. Then secondly, there is an opportunity to do more
experimentation within the individual service modules and an opportunity for
rapid incremental innovation that occurs as a result. “An insurance company in
their call center operations dealing with supporting brokers was able to use
this experimentation at two levels—the recombining of service modules and
playing around with the different ways that activities were performed within the
individual service modules. This company was able to reduce the cost of
supporting the brokers on a particular set of issues by 60 percent over time,”
said Hagel. “So, the early business case, the reason companies are moving to
deploy this technology, is really about very mundane cost savings. It doesn’t
require you to rethink the business or make major changes to how you do business
today. But as companies start to deploy these technologies within the enterprise
it is creating options to transform the enterprise as we know it. My belief is
it is leading ultimately to the most basic question of all for senior management
which is what business are we really in. We have an opportunity to reimagine
what business we are really in.”
Challenges
of SOA
There
is a lot of potential for SOA to really improve business processes but there are
also challenges in deploying SOA. Hagel highlighted some common challenges in
deploying SOA. One challenge is the misunderstanding and mistrust that still
exists between IT executives and the business line executives. The second common
challenge is that IT departments have become overwhelmed by the development of
massive, architectural blueprints, mapping out in detail how these service
oriented architectures are going to affect all parts of the business. And on the
other side, the business line executives are under delivering on the business
impact that is available for the technology. “There is a lot of under
performing on the business line executives in terms of a lack of a systematic
view of the opportunity and assessment of where the highest impact can be,”
said Hagel. The development of these business services using Web services and
SOA has been hampered by a lot of inefficiency. Hagel said that this is due in
part to the fact that the services are often defined at a too granular level and
are often hand coded in ways using traditional procedural programming languages
that limit the ability to enhance and evolve these services to meet changing
business needs.
Hagel
discussed an approach that can be helpful in overcoming some of the challenges
encountered by the early adopters of service oriented architectures. This
approach focuses on helping to make connections not only between IT and the
business but also connections in terms of managing near term business impact
with positioning for much longer term economic opportunity. Hagel said this
approach challenges two of the most basic assumptions that still prevail in a
lot of executive suites. “It is conventional wisdom that the best way to
manage performance is to develop a very detailed business strategy and make sure
that is iron clad and then move out into deployment and operational
initiatives,” he said. “There is another perspective that says for senior
management the primary time horizon to be focused on is a one to five year time
horizon. We are all familiar with the five year plan. Anything less than one
year you delegate down the organization anything more than five years you
don’t spend a lot of time thinking about.”
FAST
Hagel
discussed an approach which challenges both of those assumptions. It says we
should be moving in parallel, not sequentially, and should be looking at two
very different time horizons simultaneously. The approach is called FAST, which
is an acronym for the four key elements—Focus, Accelerate, Strengthen, and Tie
it together.
Focus
Focus
is that first element of the FAST approach and it addresses the disconnect that
exists between IT and business in a lot of companies today. “If I go into the
IT organization there are these elaborate detailed blueprint maps of SOA playing
out over many years,” Hagel said. “Then when I walk into the line management
offices and they tell me things are so uncertain that they can’t possibility
figure out what the business is going to look like five years from now much less
any longer. I think the way to resolve that disconnect is to reset expectations
and to say there is an need to develop a long term, high level sense of
direction that plays out over a five to ten year period and really is focused on
three levels of uncertainty. One is the question of what is the market going to
look like over time? How is it evolving? Second, what are the implications for
the kind of business we need to be in to continue to be successful? And third
what are the IT architecture requirements that are going to help to support that
kind of business need? Without that high level view we lack a broad sense of
direction that is required to really make some of the difficult choices in
resource allocation.”
With
so much uncertainty in our business today, Hagel said that the temptation is to
spread resources very thin across a lot of different initiatives. The result
often is that none of those initiatives have the critical mass of resources
required to really maximize impact. “They are all under performing and the
result is rather than reducing risk, we are actually increasing risk,” he
said. “By focusing attention on a long term direction of five to ten years you
also perform the useful function of surfacing assumptions. Every executive, even
though they may say they are focused on short term action, has a set of
assumptions that they are operating with about where the future is going to be.
The problem is by believing that the future is too uncertain, you avoid the need
to articulate your long term plan. And without articulating it there are no
challenges to it and no alignment built around those assumptions at the senior
management level. It also helps business executives to get a better sense of
where IT is headed by focusing on this kind of five to ten year time horizon.
And at the same time it gives IT executives a much richer sense of the broader
business context in longer term business tracks. But the key is to avoid getting
too detailed too quickly. The challenge is finding a way to articulate that
direction in as concise a way as possible. It should be articulated
in just one or two sentences.”
Then
companies should test of those one or two sentences by asking if they are
helpful in making difficult near term choices that executives are facing. They
need to be concise enough and detailed enough to make those choices, without
getting carried away with trying to map out in great detail where the future is
headed.
From
an IT architectural view point it forces
executives to define the most basic principals. Instead of focusing on detailed
architectural blue prints, they can focus on identifying the basic principals
that are going to shape and affect the long term IT architecture given this
broader sense of where the business is headed and where the market is headed
more broadly.
Accelerate
The
second element of the FAST approach is accelerate and it is about accelerating
operational initiatives. Hagel said that here you shift time frames. “We are
no longer talking about five to ten years we are talking about six to twelve
months,” he said. “The key question it poses for senior executives is over
the next six to twelve months what are the two or three operating initiatives
within the company that will have the greatest impact in terms of accelerating
movement towards that longer term direction. The question as you start to
identify those two to three operating initiatives is what is the critical mass
or resources that are required for those operating initiatives? Do they have the
critical mass; if not how do we identify that critical mass and deploy it to
support those two or three efforts? And what are the operating measures that are
going to be helpful to us in measuring progress and determining whether we are
successful or not over a six to twelve month time horizon.” As these are
defined, IT executives work with their business counterparts to determine how
service oriented architecture deployments can be focused and accelerated to
maximize the support for these operating initiatives. In the process it gives an
opportunity to test and refine some of these high level architectural principals
as well as figure out the most productive deployment approaches that can be used
to really maximize impact. It also gives an opportunity to more effectively
build the business case for necessary investments and SOA platforms by making
clear the connection between these two or three key operating initiatives and
the architectural investments.
Strengthen
The
third element is strengthening capabilities. Here the key question for
executives is what are the key organizational bottlenecks that are preventing
you from moving faster against those two to three operating initiatives? What
can you do over the next six to twelve months that is going to have a meaningful
effect? “One of the key bottlenecks to faster movement towards SOA is the
difficulty in connecting very narrowly defined data and processing services with
much broader business processes driving the business,” said Hagel. “There is
a need to systematically define a business service layer that can help to
simplify the interaction between the business processes and all the diverse
technology resources that are available in the enterprise. So as an example
taking the insurance policies that are generated by an agent or producer and
making certain that those policies conform to company standards before they get
entered into the policy issuance workflow. IT groups can further reduce the
investment required and accelerate time to value by sourcing preconfigured
business services that are consistent with the activity and process definitions
adopted by industry standards groups like ACORD.”
Hagel
explained that these preconfigured services also need to be built using
executable XML tags rather than relying on procedural programming languages to
make them easier to maintain and deliver the promise of ability to adapt and
enhance over time.
Tying
it Together
The
fourth element is to tie it all together. By tying all the elements together
companies create the potential to really deliver even more value by carefully
monitoring the progress against each of these streams and extracting as much IT
learning as possible to sharpen the effectiveness of those streams. “Business
and IT executives need to come together on a regular basis to review progress
against performance milestones and when obstacles and shortfalls are encountered
to test and refine the assumptions about the future direction of the
business,” Hagel said.
Looking
to the Future
Hagel
discussed mounting performance pressure, the gap that exists between IT and
business line management, the existence of a new generation of deceptively
disruptive technologies that offer potential to really enhance business impact
and a fast approach that can help to harness the full business potential of
these new technologies and deepen connections between business and IT executives
and between near term business results and longer term business impact. He said
that this isn’t just an economic imperative it is also a competitive
imperative.
Although
some believe that IT is diminishing in terms of strategic advantage, Hagel said
he did not believe that was the case. “If you look at the capabilities of
these new technologies you can both reimagine your business in ways that were
never possible before and rapidly incrementally innovate in ways that are very
difficult for competitors to follow, much less catch up,” he said. “Those
who really understand the potential of this new technology have an opportunity
to create sources of strategic advantage that in many respects are
unprecedented. While those who are still caught up in the patterns of the past
are going to end up even more vulnerable to the mounting performance pressure
that we all face.”
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