What to Expect
Many businesses raced onto the Net only to discover—quite painfully—that a Web presence doesn't spell automatic success. If you attempt to win e-customers' business with a less than rock-solid and bullet-proof application architecture, you will succeed only in alienating them. Clearly, the business logic and knowledge contained in enterprise software applications provide the foundation on which leading companies build their e-business designs.
The e-business design built on an application architecture has become a boardroom topic as more companies than ever integrate applications to streamline operations and compete in the e-com- merce arena. But disparate applications are like modular building blocks—they have to be put to- gether systematically to create an e-business enterprise.
In this chapter, we'll show you what application integration is, why it's important, and what business and technology megatrends are driving application integration. We present case studies of com- panies that have embraced application frameworks and explain how they did it. We then show how you can integrate various applications to create an e-business architecture.
Imagine running your office with computers designed 30 years ago or taking orders by hand and using runners to get them from one place to another or shipping merchandise with a fleet of Model T cars. Ludicrous? Of course. But this is exactly what many corporations do in the e-business world with their outdated applications.
As a result, CIOs face an overarching challenge from their CEOs: "Give us next-generation enter- prise applications that make us more competitive and deliver benefits quickly, so we can improve our business performance today, not years from now." CIOs increasingly recognize that the fastest and most effective way to deliver business benefits is to bridge the chasm separating customers, back-office operations, and the supply chain. The cost of this chasm? Tens to hundreds of millions of dollars in higher service costs and longer order-fulfillment cycles.
The modern CIO's job is to develop an e-business architecture, which means turning abstract e- business design concepts into working solutions on time, within budget. The rubric of e-business architecture includes three best practices: (1) to create a clear map of the company's strategy for the next 2 years and to use it to manage all aspects of the company's application development activities; (2) to generate a seamless application strategy, one that leaves no holes for customers to complain; (3) to collect, interpret, and assimilate good information about the technical and mar- ketplace uncertainties.
Application design and business design are now irrevocably linked. According to Bill Gates, "Virtually everything in business today is an undifferentiated commodity, except how a company manages its information. How you manage information determines whether you win or lose. How you use infor- mation may be the one factor that determines its failure or success—or runaway success."[1]
That brings us to the question, How does a company manage its information? The simple answer is, through its business applications (apps): order and inventory management, financials, and cus- tomer service. Linking isolated apps into a cohesive architecture is the central theme in e-business execution.
Modern business designs are constructed from well-integrated modular building blocks called en- terprise applications, which provide a common platform for apps in a given functionality, such as enterprise resource planning (ERP), customer relationship management (CRM), and supply chain management (SCM). These enterprise apps form the backbone of the modern enterprise. Although the Web may have grabbed most of the media attention recently, the business world's steady de- ployment of enterprise apps is one of the most important developments in the corporate use of information technology in the 1990s. Emphasis on enterprise apps increased significantly in the mid 1990s as companies scrambled to find ways to root out old legacy apps incapable of meeting the stresses of the global economy. Today, as companies race toward the information economy, their structures are increasingly made up of interlocking business apps. Isolated, stand-alone applica- tions are history.
So, in reality, a large part of e-business is about how to integrate an intricate set of apps so they work together like a well-oiled machine to manage, organize, route, and transform information. This vision is not easy to achieve, and failures are more frequent than successes. It is estimated that one of three e-business projects fails and that more than half come in over budget.[2] Also, the bigger the company, the bigger the problems. Large companies suffer from projects that are too large and that have too many requirements to fulfill on a timely basis.
For instance, TCI attempted to create a massive computerized customer billing service called Sum- mitrak to handle customer service and billing functions. But three years and $132 million later, the system barely ran. TCI extricated itself from the mess and sold the system to CSG Systems Inter- national, a cable billing services company.
What happened to TCI can happen to any company, any time. In summer 1999, Hershey Foods, the $4.4-billion candy maker, suffered a glitch in a $112 million new enterprise system built to au- tomate and track every step of the candy-selling business. Just days before Halloween, the problem manifested itself as lost orders, missed shipments, and disgruntled customers. Although Hershey would not reveal its losses from the glitch, third-quarter revenues were down $151 million from 1998.
[3]
As these examples illustrate, creating and deploying large-scale applications is not easy. The reason is simple. As the rate of change increases, the complexity of problems increases. The more complex these problems are, the more time it takes to solve them. The more the rate of change increases, the more the problems change, and the shorter the lifetime of the solutions. Therefore, by the time one finds solutions to many of the problems being faced, the problems have morphed so much that the solutions are no longer effective. In other words, many of the solutions are dead-on-arrival. As a result, companies that attempt massive application projects in fast-changing markets are digging themselves into a deeper hole.
The actual cost of creating and deploying large applications, such as SAP, is much greater than most firms anticipate. Little wonder, then, that making application investment decisions is rising to the top of the management agenda. As businesses apply technology to address new opportunities, the bond between the business design and its application architecture inevitably grows closer, and the question of how to steer this relationship becomes more and more urgent. How well you manage and use information depends on the e-business design that your company's "C"-level executives—
CEO, COO, CIO, and CFO—are contemplating.
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Senior managers must play the role of corporate architects in order to shape the application infra- structure so that they can meet the demands of customers and build lasting value by connecting business strategy with operational reality. Top management cannot afford to leave this task to de- velopers or lower-level managers who don't see the big picture. The challenge facing management is evident: Create and deliver customer value through integrated business apps. That brings us to the questions managers must ask.
• What key trends will drive new e-business application investments over the next 5 years?
• What is the realistic e-business application architecture needed to satisfy business and technical objectives?
• Will business requirements like mobile computing change priorities massively once the specifi- cations are done?
• What is the role of packaged apps in creating the architecture? Is the focus on infrastructure or a point solution?
• What management structure will help my organization manage and deploy business apps de- spite ever-increasing complexity and volatility?
Clearly, unique customer experiences based on integrated business apps are becoming catalysts for the corporate change. However, with firms banking on visions of an e-commerce-enabled,
"wired" enterprise, separating market hype from technology reality demands new levels of insight and shrewd decision making. Taking a multiyear planning perspective, this chapter focuses on the most important business and technology megatrends driving application architecture, as well as key areas of investment necessary to harness and exploit business apps effectively.
Trends Driving e-Business Architecture
The following three business trends are driving e-business architecture decisions.
• The velocity of business is increasing. —Speed to market is essential for seizing opportunities.
• Enterprise boundaries are disappearing. —The new business paradigm requires that nonem- ployees have controlled access to internal systems.
• Expectations for technology solutions are rising. —Customers, employees, managers, and part- ners expect more in a short period of time.
At the same time, other internal IT events are happening: integrating applications from mergers and acquisitions (M&A) companies into the portfolio of systems, moving applications to the Internet, moving applications from legacy systems to new platforms, upgrading the network infrastructure to handle high-bandwidth traffic, building an integrated data model. Every layer added to a business's application environment increases its complexity and creates more potential points of failure.
Unfortunately, there are no quick fixes. Application architecture and the underlying information in- frastructure are quite complex in the face of the e-business requirement to integrate your front-end and back-end systems to provide accurate, real-time information to your customers. With all the changes happening in the marketplace, an organization is not safe with an outdated, ineffective application infrastructure. To deploy a workable e-business design, management must be on top of which application architecture will best meet the company's needs. This takes work and a lot of vision.
Whether you like it or not, your company may be forced to undertake application integration for a variety of reasons, including better customer care, new competitive conditions, or the need to offer more integrated services. Let's take a look at each of these in detail.
New Customer-Care Objectives
Needless to say, an integrated application architecture is key to serving the customer seamlessly, especially in e-commerce. This strategy is exemplified by Amazon.com, whose goal is to create a seamless buying experience for the mainstream customer. Seamless buying and fulfillment is im- portant because as the novelty of e-tailing fades and customer expectations increase, rapid, error- free fulfillment will increasingly play a major role in retaining customer loyalty. Realizing this, Ama- zon.com's business goal is to significantly improve order fulfillment and shipment speeds.[4]
How does its integrated fulfillment work? Once an order is placed on the Web site, Amazon.com uses an integrated packing and shipping system via an online connection to the order management system. This system monitors the in-stock status of each item ordered, processes the order, and generates warehouse selection tickets and packing slips. Once picking and packing are done, the package is sent via Airborne or UPS to the customer. The high level of integration in order fulfillment can, potentially, enable Amazon.com to turn its own inventory more frequently than do traditional competitors, which average two to three times longer. Frequent inventory turns is critical to keeping warehousing costs down.
The Amazon.com example shows that to achieve the business goal of creating a richer customer experience, firms need to integrate their Web sites with their back-office systems, the heart of their operations: inventory management, order processing, financials, and customer service. Again, eas- ier said than done. Companies spend billions of dollars on application software every year and still do not have the ability to process customer transactions seamlessly. Why? Because companies lack integration across apps. This happens because most application software automates some tasks but not entire processes. Clearly, the challenge facing large companies, not start-ups, is how to integrate enterprise apps for seamless flow of orders and customer information that e-business designs demand.
Managers understand that the Web is a powerful tool for slicing margins and increasing interactivity with customers and prospects, but if companies don't practice the fundamentals of fast, error-free service, they will fail miserably. In the same vein, as customers become more Internet savvy, their tolerance for wasted time and lack of integrated processes diminishes. To survive, companies must refine their business processes if they hope to win the hearts of fickle consumers and reap the benefits of integrated front-office and back-office apps.
New Competitive Conditions
The changing competitive environment is driving the need for integrated apps. Consider the case of New Brunswick Power (NB Power), which has provided electricity to customers throughout the Canadian province of New Brunswick since 1920. With 2,500 employees and assets of $4.3 billion, NB Power has developed one of the most diverse power-generating systems in the world, with a mix of hydro-, nuclear-, coal-, oil-, and diesel-generating units.[5]
Deregulation and the growing demand for better customer service began to strain the limits of its existing apps. Pending regulatory changes leading to a far more deregulated and competitive en- vironment forced the company to reevaluate its business processes, especially its customer service functions. NB Power anticipated that the existing software and system infrastructure would soon lack the functionality and flexibility needed to meet changing business requirements.
As the power industry deregulates, NB Power and other utilities are quickly realizing that integrating internal apps is merely a down payment on a competitive advantage. In order to remain a player in the new century, firms better start thinking about ways to tie their various apps together tightly and smoothly. Another important goal for NB Power is to improve the quality of services it provides. This requires improving the quality, timeliness, and types of information available to the corporation and increasing control over resources through improved process integration.
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Unfortunately, business objectives are in conflict with existing apps. NB Power's previous application infrastructure included both purchased apps and in-house apps running on IBM mainframes. Within that mainframe environment, access to information was cumbersome, software and hardware had become obsolete, and maintenance, support, operation, and integration of the systems were be- coming difficult and expensive.
To achieve better alignment between business needs and application capabilities, NB Power deci- ded to migrate to a more flexible environment. After exhaustive research and a thorough comparison of various application solutions, NB Power decided that its demands would be met best by custom- izing a packaged application infrastructure provided by SAP. But the game is far from over after choosing a packaged application architecture.
The challenge for managers is to make sense and good use of what packaged apps offer. Not all purchased apps add value. In the coming years, managers will need to figure out how to make an integrated application architecture a viable, productive part of the work setting. They will need to stay ahead of the information curve and learn to leverage information for business results. Other- wise, those managers risk being swallowed by a tidal wave of data, which is not a business ad- vantage.
Fast-Moving Competitors
Established companies are forced to scrutinize their existing application architectures after an M&A transaction. At the same time, they have to determine whether they are capable of competing with new entrants that enter their turf with new products and services. This is the question facing Norwest Mortgage, a leading residential mortgage lender.[6] Norwest is going through a very complex series of M&A transactions and at the same time faces challenges from new online players, such as E- LOAN and HomeAdvisor. These upstarts offer mortgage marketplaces, where consumers can shop easily for home loans from a number of companies.
Norwest presents a good case study because it's in a traditional, non automated industry caught in the midst of an e-business transition. To understand the application challenges facing Norwest, we must first understand their business. Norwest provides funding for 1 of every 15 homes in the United States and serves more than 2 million customers. Norwest has grown rapidly, with more than 11,000 employees and more than 750 branches in all 50 states. Growth has come from both internal ex- pansion and aggressive acquisition, most recently the 1996 purchase of Prudential Home Mortgage.
Along with Prudential's $45-billion portfolio, Norwest acquired an added complement of legacy computing systems.
Postacquisition Norwest faced many challenges, including how to take advantage of new economies of scale, leverage existing technology assets, and use new Web and Internet technologies in the best way to provide real-time quotes to agents, telemarketers, and other online users. The issue is not how much information exists or how to store it but rather the speed and agility with which the
"right" information can be transmitted to solve a particular customer problem. The idea is simple:
Put information at the customers' and employees' fingertips so they can act more quickly and make better decisions.
Norwest's strategy is to enable customer convenience. In the old days, customer convenience in the mortgage business was defined by three simple words: location, location, location. Web access, however, makes geographical proximity an obsolete virtue. Today, consumers define convenience as access to any information, in any form, anytime, anywhere. To meet their customers' needs, Norwest must offer a range of delivery and access options to customers, insurance agents, and employees and provide customer convenience.
Norwest's first task is to simplify the application infrastructure by evaluating and selecting the best systems in each of the newly merged firms. Next, it has to find a way to integrate all business systems into a single, unified platform that will support an expanded user base and a growing revenue stream.
The most difficult task is integrating various apps, as most rely on proprietary solutions.
Norwest realizes that in the rapidly changing and fiercely competitive financial services industry, the firms that flourish are those that offer the best service and deliver it ahead of the competition (see Figure 5.1). With this understanding, Norwest quickly recognized the necessity for a completely flexible and scalable e-business architecture that allows it to
Figure 5.1. e-Business Architecture Challenges
• Enhance customer service and quality of operations through enterprise-wide apps
• More closely link technology to business objectives
• Develop apps more quickly, reliably and cost-effectively, with minimum training or cultural change
• Meet the standards for performance, reliability, and security of mission- critical systems The case of Norwest may sound familiar because many large companies are going through similar experiences. Today's e-business architecture must enable companies to analyze their businesses like chessboards, on which they seek to be two, three, or four moves ahead of the competition.
Problems Caused by Lack of Integration
The lack of integrated application architecture can bring companies down rather quickly. Consider the case of Oxford Health Plans, a $4-billion health maintenance organization (HMO) whose motto is "The health and healing company." Oxford Health operates in New York, New Jersey, Pennsyl- vania, and Connecticut, offering traditional HMO service, point-of-service plans, Medicare/Medicaid plans, employer-funded plans, and dental plans. Oxford has been a juggernaut in the managed- care arena, buoyed by strong membership growth and keen marketing. Beyond this, Oxford has been praised for use of the Web, giving members access to lists of providers and allowing physicians to check the status of claims.
At the end of 1997, Oxford Health announced that a computer problem in the accounting and billing system had caused the company to underestimate medical costs and to overestimate revenue. The announcement that it was poised to post its first-ever loss stunned investors, and the stock fell more than 80 percent. Who is to blame? Initially, Oxford Health blamed computer conversion for rendering it unable to bill customers and to make payments to doctors and hospitals. However, Oxford later
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