your next it strategy

8/8/2019 Your Next It Strategy

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The age of proprietary information systems

is coming to an end, and the age of

shared services is dawning. D on't panic.

There's a pragm atic way to make

the change pay off or you r company.

Y o u r N e x tIT S trategyby John Hagel III and John Seely Brown

OVER THE PAST YEAR, AS THE HYPE OVER E-CO MM ERCE HAS

subsided, a new chorus of promises about the potential ofthe In ternet has been gaining volume. The singers this time

are not dot-coms and their backers but rather the big providers ofcomputer hardw are, software, and services. What they 're prom oting,throug h a flurry of advertisements, white papers, and sales pitches,

is a whole new approach to corporate information systems. Theapproach goes by many different names - Microsoft calls it ".Net,"Oracle refers to "network services," IBM touts "Web services," Suntalks about an "open network env ironm ent"-b ut at its core is theassumption that companies will in the future buy their informationtechnologies as services provided over the Internet rather than own-ing and maintaining all their own ha rdware and software.

No doubt, many executives are skeptical. They've heard outsizedpromises and indecipherable buzzwords before, and they've wasteda lot of time and money on Internet initiatives that went nowhere.This time, though, there's an important difference. The technologyproviders are not making empty promises: They're backing up their

words with massive investments to help create th e infrastructure



Your Next IT Strategy

needed to make the new IT approach work. As these ef-forts co ntinue, over the next year or two, a steady streamof new, Internet-based services will come on-line, provid-ing significant cost savings over traditional, internal sys-tems and offering new opportunities for collaborationamong companies. Slowly but surely, all your old as-

sumptions about IT managem ent will be overturned.In this article, we will provide an executive's guide to

the new IT strategy. We will explain what the Web servicesarchitecture is, how it differs from traditional IT architec-ture, and why it will create substantial benefits for com-panies. We will also lay out a measured, practical plan foradopting the new architecture - a step-by-step approachthat will pay for itself while mitigating the potential fororganizational disruption. Indeed, we believe that tw o ofthe great advantages of the Web services architecture areits openness and its modularity. Companies won't needto take high-risk, big-bang approaches to its implemen-

tation. They can focus initially on opportunities th at willdeliver immediate efficiency gains, incorporating newcapabilities as the infrastructure becomes more robustand stable.

The New Architecture

Until now, companies have viewed their information sys-tems as proprietary. They bought or leased their ownhardware, wrote or licensed their own applications, andhired big staffs to keep everything up and running. Thisapproach has worked, but it has not worked well. After

years of piecemeal technology purchases, companies baveinevitably ended up with a mishmash of disparate sys-tems spread throughout different units. Over the lastdecade, in efforts to merge these "data silos," many bigcompanies have invested large am ounts of m on ey- hun -dreds of m illions of dollars, in some cases - in massivelycomplex enterprise-resource-planning systems, whichoffer suites of interlinked applications tha t draw on uni-fied databases. The ERP systems have certainly solvedsome problems, but they've been no panacea: Most bigcompanies still struggle with a hodgepodge of hundredsof incompatible systems. And ERP systems have also cre-

ated new problems. Because they're relatively inflexible,they tend to lock companies into rigid business processes.It becomes hard, if not impossible, to adapt quickly tochanges in the marketplace, and strategic restructurings,through acquisitions, divestitures, and partnerships, be-come fiendishly difficult to pull off. In effect, the compa-

John H agel III is the chief strategy officer of 12 Entrepre-

neuring, an operating company in San Francisco. He can

be reached at [email protected]. John Seely Brown is the

chief innovation officer of 12 Entrepreneuring, where he de-

veloped the perspectives in this article, and also serves as the

chief scientist of Xerox. He can be reached [email protected].

nies that have installed ERP systems have replaced theirfragmented unit silos with more integrated but no nethe-less restrictive enterprise silos.

The Web services architecture is completely different.Constructed o n the Internet, it is an open rather tha n aproprietary architecture. Instead of building and main-

taining unique internal systems, companies can rent thefunctionality they need - whether it's data storage, pro-cessing power, or specific app lications-from outside ser-vice providers. Without getting too technical, the Webservices architecture can be thought of as comprisingthree layers of technology, as described in the sidebar"An Overview of Web Services." At the foundation are soft-ware standards and communication protocols, such asXML and SOAP, that allow information to be exchangedeasily among different applications. These tools providethe common languages for Web services, enabling appli-cations to cormect freely to other applications and to read

electronic messages from them. The standards dramati-cally simplify and streamline information managem ent-you no longer have to write customized code whenevercomm unication with a new application is needed.

The service grid, the middle layer of the architecture,builds upon the protocols and standards. Analogous to anelectrical power grid, the service grid provides a set ofshared utilities - from security to third-party auditing tobilling and pa ym en t-th at makes it possible to carry outmission-critical business functions and transactions overthe Interne t. In addition, the service grid encompassesa set of utilities, also usually supplied and managed by

third parties, that facilitates the transport of messages(such as routing and filtering), he identification of avail-able services (such as directories and brokers), and the as-surance of reliability and consistency (such as monitoringand conflict resolution). In short, the service grid playstwo key roles: helping Web services users and providersfind and connect w ith one £inother, and creating trustedenvironments essential for carrying out mission-criticalbusiness activities. The role of the service grid cannot beoveremphasized: A robust service grid is vital to acceler-ating and broadening the potential impact of Web ser-vices. Without it.Web services will remain relatively mar-

ginal to the enterprise.The top layer of the architecture comprises a diverse

array of application services, from credit card processingto production scheduling, that automate particular busi-ness functions. It is this top layer that, day to day, will bemost visible to you, your employees, your customers, andyour p artners . Some application services will be propri-etary to a particular company or group of companies,while others will be shared am ong all companies. In somecases, companies may develop their own application ser-vices and then choose to sell them on a subscription basisto other enterprises, creating new and potentially lucra-

tive sources of revenue.



Your Next IT St ra tegy

An Overview o f Web Services

The Web services architecture has

three layers. The m ost fund ame ntal

layer consists of software standards

(such as XML) and communicat ion

protoco ls (such as SOAP and its likely

extensions) that make it possible for

diverse appl icat ions and orga nizat ions

to do business together electronically.

The midd le layer is the service gr id,

throu gh which spec ia l ized ut i l i t ies

provide key services and too ls. Four

types of ut i l i t ies operate over theservice gr id .

Shared utilities provide services

that support not only the appl icat ion

services residing in the top layer but

also the other ut i l i t ies w ithi n the ser-

vice gr id . For example, security util it ies

provide such services as authentica-

t i o n , author izat ion, and account ing.

Performance aud it ing and assessment

util it i es assure users of Web services

that they wi l l obta in agreed-upon lev-

els of performance and wi l l be com-

pensated for damages if performance

falls below these levels. Bill ing and

The Web Services Architecture

Appl icat ionservice

Service grid

Shared u t i l i t i es

Security, auditin g

and assessment

of third-party

performance,

bi l l ing and payment

S e r vi c e m a n a g e m e n t u t i l i t i e s

Provisioning, monito r ing, ensuring qu al i ty

of service, synch ronization , conflict resolution

R e s ou rc e k n o w l e d g e m a n a g e m e n t u t i l i t i e s

Directories, brokers, registries, repositories,

data transform ation

T r a n s p o r t m a n a g e m e n t u t i l i t i e s

Message queuing, fi ltering, metering,

mo nitor ing , rout ing , resource orchestration

Standards and protocols

Software standardsWSDL (Web services de scriptio n

language)

UDDI (universal description,

discovery, and integration)

XML (extensible markup language)

Communication protocolsSOAP (simple obje ct access protoco l)

HTTP (hypertext transfer protocol)

TCP/IP (transmission control protocol/

Internet protocol)

payment ut i l i t ies aggregate charges

for the use of Web services and ensure

prompt and fu l l payment .

Transport managem ent utilit ies

include messaging services to facilitate

rel iable and f lexible communicat ion

among application services as well as

orchestrat ion ut i l i t ies that help compa-

nies assemble sets of app licatio n ser-

vices from dif ferent providers.

Resource knowledge management

utilities include service directories ,

brokers, and common registr ies

and repositories that describe

available application services

and determine correct ways of

in teract ing w i th the m. They

also include specialized services

for convert ing data from one

format to another.

Service managem ent util it ies

ensure rel iable provisioning of

Web services. They also manage

sessions and mo nitor perfor-

mance to ascertain conform ance

to service-quality specifications

and service-level agreements.

The to p layer encompasses

a diverse array of applica tion

services that support day-to-day

business act ivi t ies and pro-

cesses -eve ry th ing f rom

procuremen t and supply chain

management to m arke t ing

communicat ions and sales.

OCTOBER 2001




To illustrate how the architec-ture works, let's contrast the waya typical business activity - loanprocessing by a bank - would becarried out through a traditionalproprietary architecture and the

Web services a rchitecture . Loanprocessing is a complex procedurerequiring at least six steps (datagathering about an applicant, val-idation of data, credit scoring, riskanalysis and pricing, underwrit-ing, and closing) and involving in-teractions with a num ber of otherinstitutions (checking an appli-cant's credit rating, verifying in-vestment and loan balances, andso on). With a traditional IT archi-

tecture , the process is usually sup-ported by one , very com plicatedapplication maintained by an in-dividual bank; like a Swiss Armyknife, the integrated applicationdoes a lot of things, but it may notdo any of them particularly well.And since the costs of maintainingelectronic connections with otherinstitutions are high, requiringleased communication lines andexpensive software to link differ-

ent systems, the necessary interac-tions are often handled manuallythrough phone calls and faxes. Theprocess, in sum, is cumbersom e,costly, and prone to errors.

With the Web services architec-ture, loan processing becomes much more flexible, auto-mated, and efficient. Leased lines are replaced w ith the In-teme t, and open standards and protocols take th e place ofproprietary technologies. As a result, the bank can con-nect automatically with the most approp riate institutionfor each transaction, speeding up the entire process and

reducing the need for manual work. And rather thanmaintain its own integrated loan-processing system, thebank can take a modular approach, using specialized Webservices supplied by an array of providers. It can also shifteasily among providers, using one service, say, for riskanalysis of loans to restaurants and ano ther for risk analy-sis of loans to hospitals. In other words, the bank will al-ways be able to use the best tool for the job at hand; it willno longer have to compromise on performance to avoidthe complexity of integrating proprietary applications.

Clearly, th e Web services architecture offers importantadvantages over its predecessor. First, it represents a much

more efficient way to manage information technology. By

Big Changes forYour IT Department

The shif t to the Web services

arch i tecture for corporate com-

put ing is not on ly a mat ter o f

adopt ing new technology. I t w i l l

require broad organizat ional and

man agerial changes as wel l as

the developm ent o f new k inds

of capabi i i t ies. A part icular ly big

impa ct wi l l be fel t in the co rporate

IT department. ClOs wi l l face

new chal lenges and assume

new roles:

t=i IT departments wi l l need to

move in two dimensions simulta-

neously: outsourcing many tradi-

tional IT activities (as credible

and reliable providers of services

emerge) whi le leveraging internal

capabi l i t ies to design d ist inct ive

Web services that can be sold to

other companies. ClOs will become

strategists an d entrepreneurs, assess-

ing areas of com peti t ive advantage

and focusing resources on bui ldin g

new IT-based businesses.

IT departme nts w i l l need to inte-

grate new sets of skills in such areas

as enterprise a pplicatio n architec-

ture, enterprise appl icat ion integra-

t ion , appl icat ion development, secu-

rity, and IT ope rations. ClOs will

become knowledge brokers, pul l ing

together expertise from with in and

outside their companies.

IT operat ions and performance

wil l increasingly depend on the

effect ive integrat ion of external

resources, requiring deeper skills

in structuring and managing rela-

t ionships. ClOs will become relation-

ship managers, coord inat ing the

efforts of an array of companies.

: ; :- IT depa rtmen ts wi l l need to take

the lead in shaping the standards

required for indus tr ies and busi-

ness com mu nit ies to operate effec-

tively. ClOs will become negotiators,

their leadership styles shifting

f rom comm and-and-contro l to

persuade-and-inf luence.

allowing companies to purchase only the functionalitythey need when they need it, the new architecture cansubstantially reduce investments in IT assets. And by shift-ing responsibility for maintaining systems to outsideproviders, it reduces the need for hiring num erous IT spe-cialists, which itself has become a significant challenge for

many companies. Using Web services also reduces the risktha t companies will end up using obsolete technologies;third-party utilities and application providers will be re-quired to offer th e most up-to-date technologies in orderto compete. Companies will no longer find themselvesstuck with outdated or mediocre applications and hard-ware. The standardized, plug-and-play n ature of such anarchitecture will also make it much easier for companiesto ou tsource activities and processes whenever it makeseconomic sense. (See the sidebar "Big Changes for Your ITDepartment.")

Second, and perhaps more impo rtant, the Web services

architecture supports more flexible collaboration, both




among a company's own units and between a companyand its business partners. When traditional informationsystems need to talk to each other, they do so throughdedicated, point-to-point connections. For example, whena sales-force-management application needs to send in-formation on closed sales to a payroll processing applica-

tion for the computation of commissions, a programmerhas to write a special piece of cod e-a co nne ctor-to allowthe two systems to com municate. The problem with suchpoint-to-point connections is that they are fixed and in-flexible and, as they proliferate, become nightmares tomanage. With the Web services architecture, tight cou-plings will be replaced with loose couplings. Becauseeveryone will share the same standards for data descrip-tion and connection protocols, applications will be able totalk freely with o ther applications, without costly repro-gramm ing. This will make it m uch easier for com paniesto shift operations and partnerships in response to mar-

ket or competitive stimuli. The loose-coupling approachof Web services also makes it an attractive op tion withinan organization. CIOs can use th e Web services architec-ture to more flexibly ntegrate the extraordinarily diverseset of applications and databases residing within most en-terprises while at the same time m aking these resourcesavailable to business partners.

Until now, what's been called e-business has for themost part been a primitive patchwork of old technolo-gies. Most companies that do business on the Internethave had to yoke together existing systems with new onesto create th e illusion of integration. A visitor using a cor-

porate Web site m ay think it's a single, streamlined sys-tem, but behind the scenes, people are often manuallytaking information fi-om one application and entering itinto another. Such swivel chair networks, as they have

come to be known, are inefficient, slow, and m istake rid-den. Merrill Lynch, like almost all large companies, hasstruggled to patch together hvmdreds of different appli-cations to support its sites for customers. John McKinley,the company's CTO, draws an analogy to the Potemkinvillages in czarist Russia, where brightly painted facades

hid the unseemly reality of run-down homes. The Webservices architecture p romises to solve this p roblem. Tak-ing the people out of the network, the architecture willenable connections between applications - both withinand across enterprise s-to be m anaged automatically.

First Steps to Success

The construction of the Web services architectu re is stillin its early stages, and years of investment and refinementwill be required before a m ature, stable architecture is inplace. This does not mean, however, that companies

should wait to begin the transition to a new IT strategy;even today, benefits can be gained by moving to a Webservices model for certain activities and processes. But itdoes mean that companies should take a pragmatic, mea-sured ap proach. Fortunately, the Web services architec-ture is ideally suited to such an approach: Because it'sbased on o pen standards and it leverages the capabilitiesof third parties, companies don 't have to place big bets atthe outset. They can carefully stage their investments,learning im portan t lessons along the way. (See the side-bar "Five Questions You Need to Ask.")

Merrill Lynch's McKinley, for example, is currently lead-

ing a num ber of initiatives designed to take advantage ofWeb services. One initiative is the creation of an innova-tive portfolio-analysis system for use by brokers and se-lected customers. By using XML to link disparate systems

Five Questions You Need to Ask

Senior managers need to ensure tha t

the ir organ izations' executives are

thinking ahead about the implica-tions of the Web services architec-

ture. Here are five questions you can

use to spur your people:

Does our management team have

a shared vision of the long-term (five

to ten years ou t) business implica-

tions of the new IT architecture?

Do we have a transition plan that

balances the state of the architec-

ture's development with a clear

understanding of the areas of high-

est business impact?

Are we m oving fast enough

today to build our expertise and

exploit immediate opportunities

for streamlining intercompany

processes, outsourcing activities

in which we don't have distinctive

capabilities and designing Web

services tha t we can m arket to

other companies?

^Do we have a clear^understanding,

of the obstacles w ithin our organi-

zation that may hinder us from

exploiting the full value of the new

IT architecture, and do we have

initiatives under way to overcome

these obstacles?

.Are we exerting sufficient leader-

ship in shaping both the functional-

ity offered by providers of Web

services (defining, for example, the

performance levels required for

mission-critical applications) and

the standards needed to collaborate

with our partners?




within Merrill Lynch as well as to integrate informationfrom partner organizations, the new system will tie to-gether customer information, product information, andreal-time market data in a flexible, ow-cost way. It willgive the company's brokers up-to-the-second, integratedviews of all the information they need to meet a cus-

tom er's needs at any given mom ent. Merrill Lynch is alsousing a Web services approach to enable brokers andclients to access information and applications from awide variety of devices, including computers, PDAs, cellphones, and conventional phones. Both of these projectsoffer immediate business benefits: They provide an im-portant competitive advantage to the company's sales-people w hile delivering added value to customers.

Merrill Lynch's experience, as well as that of otherearly adopters such as General Motors and Dell, offersthree guidelines for other companies looking to get ahead start.

Build on your existing systems. The Web services ar-chitecture should initially be viewed as an adjunct to yourcurrent systems. Through a process we call node enab le-ment, you can use Web or application servers to connectyour traditional applications, one at a time, to the outsideservice grid, turning them , in effect, in to nodes on the In-temet. Node enablement is often as simple as creating anexplicit record of the connection specifications of an ap-plication - documenting, in other words, its applicationprogramm ing interfaces, or APIs - along with the appli-cation's name, its Intemet location, and procedures forconnecting with it. The existing application is left intact

but is "exposed" so that it can be foimd and accessed byother applications in th e W eb services arch itecture. Theprocess of node en ablem ent should be systematic, drivenby near-term needs but shaped by a view of longer-termopportunities.

General Motors provides a useful example of this pro-cess. Mark Hogan, the president of eGM, a business un itcreated by the auto giant to oversee its consumer Intem etinitiatives, is a strong advocate of the Web services ar-chitecture. Like Merrill Lynch,eGM began with fairly conven-tional Web sites connecting th e

company with customers anddealers. Now, however, H oganand his team have developed aroad map for using Web ser-vices to move GM to a dramati-cally new build-to-order m anufacturing and d istributionmodel, which will enable the company to generate addedrevenue and use its assets much more efficiently. This ini-tiative requires the ability to communicate and collabo-rate electronically with m ore tha n 8,000 dealers, all withinformation systems of widely differing specifications andsophistication. Few of the dealers have cutting-edge IT

skills, and fewer still have the money to invest in major

GM's long-term goal is to cut in half

its $25 billion investment

in inventory and working capital.

new applications. Given these constraints, says Hogan,"traditional IT architectures simply aren't up to the task.The Web services architecture provides the only way torapidly enhance our IT platform." By applying node en-ablement to existing applications at GM and at the deal-ers, new processes can be rolled out incrementally with

relatively modest investment.For the first stage in the transition, GM is focusing on

using Web services to enhance its traditional build-to-stock m odel, providing a broader set of options for deal-ers and customers. It has provided dealers, for example,with a locate-to-order functionality - a Web services-based application th at quickly finds specific car modelsin the inventories of other dealers. GM is also planningto roll out an order-to-delivery application, which willshorten the lead time between placing a customer or-der and delivering the vehicle. Such interim steps willpave the way to offering the ultimate build-to-order

model, which will require the reconfiguration of manu-facturing operations and a more sophisticated deploy-ment of Web services.

The payoff is expected to be enorm ous. GM's long-termgoal is to cut in half its $25 billion investment in inventoryand w orking capital. Analysts at Goldm an Sachs estimatetha t supply chain initiatives using Web services could ul-timately reduce GM's operating cost per vehicle by morethan $1,000. Yet the staged approach to change allowsGM to shift its IT arch itecture slowly, avoiding disrup-tion and focusing only on systems tha t will deliver realeconomic paybacks at each stage of deployment. It also

allows the com pany to tem per th e risk involved in mov-ing to a new technology platform, since GM's efforts aretied to the evolution of the arch itecture.

Start at the edg e. In implementing the new architec-ture, early adopters are concentrating their initial effortsat the edges of their enterp rises-on the applications andactivities that tie their companies to customers or to othercompanies. Sales and customer support are obvious ex-amples of edge activities, as are procurem ent and supply

chain man agem ent. Less obvi-ously, some traditionally inter-nal functions can be pushed

out to the edges as a result ofoutsourcing. In the electronicsindustry, for example, manyproduction activities are beingcontracted to specialized man-

ufacturing service providers, creating a need to share for-merly proprietary applications and data.

Why is there so much focus on the edge? Because that'swhere the limitations of existing IT architectures are mostappa rent and on erous. Almost by definition, an applica-tion on the edge can benefit by being shared. As a result,it suffers most from the difficulties in connecting propri-

etary, heterogeneous systems. As GM found, rolling ou t a




new set of applications to its far-flung dealer network wasnext to impossible before th e em ergence of Web services.

Dell Computer provides a great example of the benefitsof starting a t the edge. Dell's relationships w ith its sup-pliers of components and other direct materials are criti-cal to the company's strategy. The total amoimt the com-

pany spends on direct materials equals as much as 70% ofits revenue, so even modest savings in supply chain costs

Of course, such lean manufacturing approaches oftenjust push inventory back from the manufacturer to thesupplier. Dell's goal, however, is to eliminate excess in-ventory throughout the supply chain. So the company isnow focusing on reducing the buffers held at the hubs.These stocks could be cut substantially if supply prob-

lems could be identified earlier. If, for example, Dell knewthat one supplier was having a problem fulfilling an order

Trying to engage w ith too many partners too fast is one of the main reasons that so

many on-line market makers have foundered: The transactions they had viewed as simple

and routine actually involved many subtle distinctions in terminology and meaning.

will have a big impact on the bottom line. A related andequally important concern to Dell is inventory manage-

ment. In the personal computer industry, where prod uctprices have recently be en declining a t 0.6% per week, ex-cess inventory can become very costly.

Recognizing the huge gains possible from more effec-tive supply-chain managem ent. Dell focused its early Webservices initiatives in this area. It began by more closelyconnecting its assembly operations with the network ofoutside logistics providers that operate the distributioncenters for direct mate rial s-th e vendor-managed hubs,as Dell calls them . Traditionally, the company had to holdsubstantial inventory in the supply chain to ensure thatproducts could be delivered quickly to customers. Its goal

was to fill orders in five days, yet it took suppliers an av-erage of 45 days to fill materials orders. To ensure it didnot run short of key components, suppliers had to main-tain ten-day inventory buffers at vendor-managed hubs,and Dell had to m aintain buffers of 26 to 30 hours at itsown assembly p lants. In addition, every week. Dell dis-tributed a new 52-week demand forecast t o all suppliers.

Today, Dell generates a new manufacturing schedulefor each of its plants every two ho urs, reflecting actualorders received, and publishes these schedules as a Webservice via its extranet. Because the schedules are inXML format, they can be fed directly into the disparate

inventory-management systems maintained by all thevendor-managed hubs. The hubs always know Dell's pre-cise ma terials requirem ents and can deliver the materialsto a specific loading dock at a specific building, fromwhich they are fed immediately into an assembly line.With this new app roach. Dell has been able to cut th e in-ventory buffers at its plants to just three t o five hours. Ex-plains Eric Michlowitz, the company's director of supplychain e-business solutions, "We've been able to removethe stock rooms from the assembly plant, because we nowpull in only materials specifically tied to customer orders.This has enabled us to add more production lines, in-

creasing ou r factory utilization by one-third."

for a particular part, it might be able to temporarily re-move from its Web store the com puter model th at used

the part. This would, in tu m , enable a reduction in thestocks of the part held at the hubs. To establish such anearly warning system for its supply chain. Dell is rollingout an "event management" Web service, again using itsextranet. This service automatically sends out queries onthe status of orders to suppliers, whose own systems au-tomatically send back responses. Dell expects that thissystem will reduce hub inventories by as much as 40%while at the same time significantly improving gross mar-gins by better matching demand and supply.

Create a shared terminology. The move to a sharedITarchitecture raises an obvious question of control: W ho

calls the shots? Within a single company, a CIO can im-pose a set of standards governing information technology(requiring, for example, that accounts always be repre-sented in applications as "ACCTS"). But once a group ofcompanies, each w ith different internal systems and stan-dards, begins to collaborate electronically, establishingclear lines of authority becomes difficult. In some cases,one company will have the m arket power to impose stan-dards on its partners, but these situations are rare and,given th e increasing complexity and fluidity of corporatepartnerships, usually unwise. Instead, shared meaning,and the trust it engenders, must develop m uch m ore or-

ganically am ong participants.Incremental implementation of Web services can aid

this process. By starting with a few long-standing businesspartners-as GM did with its dealers and Dell did with itslogistics providers-companies gain room to experiment;they can establish through trial and error a common tech-nical language. Then , as they leam w hat works and whatdoesn't, they can expand the orbit of their p artnershipsto encompass new companies. Trying to engage withtoo many partners too fast is one of the main reasons thatso many on-line market makers have foundered: Thetransactions they had viewed as simple and routine actu-

ally involved many subtle distinctions in terminology and




meaning. That doesn't mean that shared standards can'tbe established among large groups; it just can't be doneeasily or overnight. Traditional distributors spend yearslearning the shades of meaning used by different buyersand sellers. A produce distributor, for example, has tobuild an understanding of how each of its suppliers quan-

tifies the ripeness of an orange as well as how each buyerevaluates ripeness. It is only then tha t the distributor willhave the knowledge and the authority to create a stan-dard rating system for oranges and p romote its adoptionthroughout the comm unity of buyers and sellers.

XML can be a powerful tool for building shared mean-ing in Web-based comm unities, but it's important to un-derstand th at XML isn't a cure-all. While XML establishesa common grammar - a framework for sharing mean-ing-it establishes only very limited semantics. The pre-cise meanings of XML terms still need to be determinedby the actual partne rs. For instance, a particular XML tag

may refer to the price of a product, but that doesn't tellyou if it's the net price after d iscounts, if it includes ship-ping, and so on. Subtleties of meaning have to be hashedout before business can be conducted in all its inevitablecomplexity. And don't expect the meanings, once estab-lished, to stay fixed. They will evolve as partners gainexperience and discover shortcomings in their sharedprocesses.

The service grid will play an important role in helpingbusiness com munities build shared meaning, since a set ofutilities will be established to facilitate the developmentof trading standards. In many cases, the dominant com-

panies within private trading networks will provide theseutilities. In o ther cases, industry consortia will take thelead. RosettaNet is an early example of a consortium-driven utility. It is defining and prom oting the adop tion ofstandard XML formats to describe processes in the supplychain of the electronics industry, enabling all participantsto use the same terms to describe activities like issuing

Lynch, GM, and Dell play key roles by providing theirbusiness partners with compelling reasons to use Webservices. Over time, as additional resources become ac-cessible, the benefits of adopting this architecture willbecome compelling to more and more companies. New-comers will find it advantageous to adopt meanings al-

ready in use in order to tap into existing applications andutilities.

A P latform for G rowth

Although many of the early uses of Web services willfocus on reducing costs, efficiency-driven initiatives areonly the beginning. Ultimately, the greatest beneficiariesof this new technology will be companies tha t harness itspower for revenue growth. (See the sidebar "Unbundlingand Rebundling.")

The new architecture provides, for example, a platform

for com panies to offer their core competencies as servicesto other companies. Smart businesses, in other words,won't just consume W eb services; they'll also sell them.That's exactly what Citibank is doing right now. It sawtha t one drawback to early on-line exchanges was the in-ability to handle paym ents: Participants would use an ex-change to reach agreement on the terms of a transactionbut would then have to process payments either m anuallyor through specialized banking networks. Leveraging itsdeep skill in electronic payments. Citibank quickly intro-duced CitiConnect, an XML-based payment-processingservice tha t plugs into existing trading applications.

Here's how it works. A company purchasing suppliesthrough an Intemet exchange platform, such as one of-fered by Commerce One, registers information abou t theauthorization levels for specific employees and the cor-porate bank accounts to be used for payment. When apurchase is made, the buyer clicks the CitiConnect iconon the Web site. An XML message containing payment

While XML establishes a common grammar-a framework for sharing meaning-

it establishes only very limited semantics. The precise meanings of XML terms

still need to be determined by the actual partners.

purchase o rders. Such utilities might also be provided byindependen t businesses that are focused solely on devel-oping XML or other software standards within an indus-try or across industries.

Shared meaning will naturally increase as the use ofthe Web services architecture expands. In the architec-ture's cu rrent, early stage of development, incentives forits adoption are limited because relatively few applicationservices are available and the functionality of the service

grid is limited. In this period, early m overs like Merrill

instructions is automatically assembled, specifying theamoimt involved, the identity of the buyer, the identityof the supplier, the bank from which to w ithdraw funds,the bank to transfer the funds to, and the timing ofpayment. The message is then routed, according to pre-defined rules, to the appropriate specialized settlementnetworks.

The benefits for buyers and sellers are compelling: Sell-ers cut settlement times by 20% to 40%, and both buyers

and sellers reduce settleme nt costs by 50% to 60%.




Unbundling and Rebundling

Two and a half years ago, Marc

Singer and 1 wrote "Unbundling

the Corporation" (HBR March-

April 1999). In that article, we de-

scribed how most companies en-

compass three very different types

of businesses-customer relation-

ship management, infrastructure

management, and product innova-

tion and comm ercialization-and

how the Internet would facilitate

their unbun dling, leading to much

more tightly focused companies.

The rise of the Web services

architecture w ill not only speed

this unbundling but will spurthe

growth of the new companies by

letting them mobilize a greater

range of resources to reach a

broader set of customers. Freed

from the straltjacket of existing

enterprise-centric IT architectures.

companies won't have to acquire

new assets to grow (a slow and

often treacherous process); they

wi ll be able to rent them, as Web

services,from third parties. The

capital-intensive model of owning

resources wil l be supplanted by ^ H |

the much more efficient model ^ ^ B

of orchestrating resources. A new ^ ^ ^ B

kind of business organ izat ion-a ^ ^ H ^

rebundler focusing on the assem- ^ ^ B

biy and coordination of business ^ ^ H

processes that stretch across entire ^ ^ H

industries and markets-wil l likely ^ ^ B

emerge and gain enormous power. ^ ^ ^ B

Of course, exploiting these new ^ ^ H

kinds of growth opportun it ies ^ ^ B

wil l require much more than Just ^ ^ B

the new technology architecture. ^ ^ B

Very different organizational j ^ ^ B

capabil it ies must be developed- ^ ^ B

not just new skills but also new ^ H B

performance measurement and ^ ^ H

reward systems and knowledge ^ I B

management approaches. Even ^ ^ ^ 1

more fundam entally, managers

wi ll need to adopt new mind-sets:

They wi ll need to focus on creat-

ing new o pportu nities, largely

by helping to define and deploy

standards, rather than simply try-

ing to adapt to rapidly changing

environments.

-John Hagel III

II1M11II

Citibank tu m ed an existing operational capability in toa new service line and extended its reach to a broaderrange of customers through its partnerships with appli-

cation providers like Commerce One. And CommerceOne, for its part, got happier customers while also asso-ciating itself with the respected Citibank b rand.

The relationship between C itibank and Commerce Oneillustrates a broader pattem that will both speed theadoption of the Web services architecture and open newgrowth opportunities for traditional companies. Allproviders of inter-enterprise applications-private tradingexchanges, procurement services, supply-chain manage-me nt services, and so on-recognize that they need to addnew functions rapidly to attract and retain customers.They have two choices: develop the added functionality

themselves o r source it fr̂ om specialized providers. Many

are choosing the latter path be-cause it's faster and allows them todedicate their scarce resources toacquiring customers.

In supplying these functions,traditional companies have an im-

portant advantage. When an ap-plication provider has to choosebetween sourcing a Web servicefrom a well-known enterprise witha strong track record or from asmall start-up with an uncertainfutiire, it will likely go with the es-tablished company, as CommerceOne did with Citibank. As tradi-tional companies begin to makethei r capabilities available to othercompanies throu gh Web services,

the importance of the service gridwill become increasingly appar-ent. Web services for functionslike invoicing, payments, and logis-tics are critical to the companiesthat use them. Without the secu-rity, reliability, and performanceauditing that service grid utilitiescan provide to their customers,few enterprises will be willing tooffer, much less subscribe to , suchmission-critical services.

As the service grid m atures andcompanies move aggressively toexploit revenue growth opportu-nities created by the Web servicesarchitecture, a curious dynamicwiU begin to play out. The distinc-tion between users and suppliersof Web services will fade. Compa-nies will provide Web services to

others in areas in which they have distinctive expertisewhile at the same time buying Web services from othersin areas in which they lack special skills. Over time, th e lo-

cation of pa rticular capabilities - w hether inside or out-side the walls of any given company-w ill become less im-portant than the ability to discover and orchestratedistinctive capabilities across enterprises in order to de-liver greater value to customers. In the process, manycompanies will find themselves tumed inside out, withtheir formerly well-guarded core capabilities visible andaccessible to all. 9

The authors thank D ennis Layton-Rodin, Halsey Minor, Mahmoud

Falaki, and other colleagues for their contributions to this article.

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