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Out of the Box: Strategies for Achieving Profits Today and Growth Tomorrow Through Web Services- Using Web Services to Tame Diverse Technologies

In Out of the Box, published by Harvard Business School Publishing, John Hagel III voices the frustration many managers feel about their technology's lack of compatibility. His answer? Web services—a way to connect existing applications and information to increase profits and growth. The good news is that most large companies already have initiatives to deploy Web services technology. Plus: Q&A.

Author John Hagel III discusses how Web services can correct the wrongs of the "big bang" school of IT in this e-mail interview with HBS Working Knowledge staffer Wendy Guild. His new book is Out of the Box: Strategies for Achieving Profits Today and Growth Tomorrow through Web Services.

Guild: Many managers and business leaders in the 1990s bought into the idea of purchasing various technologies as a panacea for cutting costs and spurring growth, and are now left with a mishmash of software and programs. What makes Web services different? Can you briefly define Web services?

Hagel: For many years, managers have been seduced by the "big bang" school of IT investment. Confronted with intensifying competition, executives have been vulnerable to vendor pitches promising significant performance breakthroughs, with one catch: The executives had to invest significant sums of money and wait long periods of time before seeing any business impact. There were many variants—ERP platforms, data warehouses, client server architectures, etc.

Web services replace "big bang" approaches with targeted incrementalism. The business proposition with this technology is much more compelling: Invest modest sums of money with relatively short lead-times (often six to twelve months) and generate tangible business benefits, particularly in the form of operating savings. In these challenging economic times, that's a powerful proposition.

We are all wrestling with the challenge of connecting the diverse technology platforms that enterprises have installed over the years.
—John Hagel III

Web services are different from Web sites that help to connect people with technology and information. Web services are a set of technologies designed to automate connections across applications and databases. They are built upon a set of standards and protocols derived from a core standard known as Extensible Markup Language (XML). All major technology vendors have embraced these standards and protocols. This universal adoption makes these standards and protocols especially valuable in supporting connections across diverse technology platforms.

In fact, this is one of the major reasons for the interest in Web services technology. We are all wrestling with the challenge of connecting the diverse technology platforms that enterprises have installed over the years. Rather than requiring us to rip out these technology platforms and install new ones, Web services technology serves as an overlay, operating on top of existing technologies to provide a much more low cost and flexible way of connecting these technology platforms. In this way, businesses can generate more economic value from their underlying computers while attacking a lot of the operating inefficiencies created by "swivel chair" integration, where employees manually print out data from one system and then re-enter the data into another system.

Q: How will the utilization of Web services change the way business gets done?

A: Web services are a "deceptively disruptive" technology. Part of the reason they will be adopted so quickly is that they do not require significant changes in the way business gets done. They simply enable businesses to operate more efficiently—doing the same things they have always done, but doing them faster and cheaper. This speeds adoption and reduces the risk.

The disruption will begin to surface once the technology is deployed within and across enterprises. By making automated connections easier, less costly, and more flexible, Web services create many different options for business. For example, it makes it much more feasible to outsource key business activities, increasing the incentive to rely on other companies for world-class capabilities. On the flip side, it also allows businesses to take world-class capabilities of their own, that have previously been provided internally as a cost center, and to make these available to other companies as a service, creating a new revenue and profit center. Citibank was one of the first companies to do this by exposing its payment processing engine as a Web service that could be accessed by other companies to support their business transactions.

book cover

By supporting this kind of corporate restructuring, helping businesses to shed secondary activities and to focus on generating more value from world-class capabilities, Web services technology will focus executives on the most basic question of all: What business are we really in?

Businesses will not only be able to focus more tightly, they will also be able to grow more rapidly. Web services enable leveraged growth strategies, helping companies to access and mobilize resources of business partners in order to add more value to their customers.

Q: How can Web services be used to increase profits and growth?

A: The earliest impact will be on increasing profits by delivering operating savings. A large portion of the operating inefficiencies in our enterprises today is a result of difficulties in connecting existing applications and information. These inefficiencies are increasingly concentrated at the edge of the enterprise, in functions like procurement and sales channel management that have to frequently interact with a large number of business partners. As difficult as it is to connect the diverse applications within the enterprise, the complexity escalates when the connections have to extend to multiple business partners. Swivel chair integration results in significant operating expense and inefficiencies in these connections and also leads to accumulation of inventory and other working capital investments. By implementing Web services technology, companies can quickly deliver significant near-term operating expense and asset savings to the bottom line.

The opportunity for savings will drive the early adoption of Web services technology. The most substantial economic value, however, will surface over the longer term, as companies begin to realize the potential of the technology to support more accelerated growth. Mergers and acquisitions confront a significant challenge in terms of post-merger systems integration. Web services can help to overcome this hurdle. More broadly, the opportunity to drive leveraged growth will create opportunities to accelerate growth by accessing resources of other companies through Web services-enabled connections.

Q: In your research, have you encountered much resistance from business executives to the idea of adopting Web services?

A: There is a lot of resistance from business executives at the outset. They have been burned badly by technology investments in the past and there is a high degree of skepticism to any technology related investment proposition. Technology vendors often intensify this skepticism by painting grand visions of technology capability—grand visions tend to sound expensive, risky, and very long term. These grand visions are especially suspect when they are framed in terms of the technology—for example, dynamic composition of applications—rather than very specific business benefits.

When the Web services business proposition is clearly stated—tangible business savings with modest incremental investment and short lead-times—this resistance quickly evaporates. Business executives are under growing pressure to deliver substantial bottom line improvement in the next one or two quarters. They are very open to technologies that can help them achieve their objectives.

When the Web services business proposition is clearly stated—tangible business savings with modest incremental investment and short lead-times…resistance quickly evaporates.
—John Hagel III

Of course, executives are also concerned about the early stage of development of the technology. The technology is still limited in terms of delivering the reliability, robustness, and security required for certain kinds of mission-critical business activities. These limitations will be addressed over time as the technology continues to evolve. In the meantime, executives need to be aware of these limitations. They need to be thoughtful about focusing on early implementations in areas of the business where these limitations are less of an issue. Ironically, it is the IT department that tends to be much more risk-averse in this area. Non-technology line executives are much more comfortable in making a trade off between certain levels of risk inherent in any new technology and the business benefits offered by the technology.

Q: What methodology should a company use to determine if it could benefit from using Web services?

A: The first thing to realize is that most large companies already have initiatives to deploy Web services technology. These initiatives are often not visible to senior management because the line executives sponsoring these initiatives are trying to maintain a low profile—they don't want to encounter any resistance to their initiatives. The first challenge is to identify and inventory these initiatives. Wherever necessary, more resources should be deployed to support these initiatives and to ensure that they become learning beds for the rest of the enterprise.

More broadly, companies need to move beyond an ad hoc, opportunistic approach to Web services implementation. They need a more systematic approach to ensure that the technology is being deployed against the areas of greatest impact consistent with the current capabilities of the technology. A simple two by two matrix can help to focus on the areas of greatest potential near-term impact.

On one dimension, identify the largest pockets of operating inefficiency within the enterprise. Concentrate in particular on the edges of the enterprise where there is frequent interaction with a broad number of business partners. Single out the areas where the operating inefficiency stems in particular from the lack of automated connections across technology platforms (hint: look for large numbers of staff consumed in swivel chair integration and for large concentrations of "buffer" inventories).

On the second dimension, array these opportunity areas in terms of performance requirements. Be creative in terms of designing approaches that may reduce the performance need, at least at the outset. If security is a big issue, for example, see if there are ways to design "work-arounds" that reduce the security requirement. As an illustration, rather than providing access to full inventory details, it may be feasible to provide a query capability where the connection will answer a specific question about the inventory—e.g., is a certain SKU available for shipment today?

The goal is to discover the business operations where significant inefficiencies occur and where Web services may be ideally suited to target those inefficiencies today.
—John Hagel III

The goal is to discover the business operations where significant inefficiencies occur and where Web services may be ideally suited to target those inefficiencies today. Sequence initiatives to target in the first wave the areas of greatest inefficiency where the performance requirements are less demanding. Use these as opportunities to gain more experience with the technology and to be more prepared as the performance of the technology evolves to go after the other more demanding areas of inefficiency.

Q: What's next for you?

A: My current focus with clients and in my research involves the opportunity to define different approaches to business practices—operations, organization, and strategy—given the new capabilities offered by Web services technology. One of the most interesting attributes of Web services technology is that it supports loosely coupled connections, meaning that connections can be quickly established and just as quickly terminated. This is in sharp contrast to traditional technologies where the connections are typically much more hard-wired or tightly coupled.

In business, we have evolved hardwired, tightly coupled business practices, in part because that was all that could support the technologies available at the time. As an example, look at the detailed process manuals that we use to manage our business processes. Because these processes are so tightly coupled, we become very reluctant to change anything because it might cause unanticipated ripple effects in other parts of the process. The result is a lot of rigidity and difficulty in adapting rapidly to changing business conditions.

In seeking to develop more loosely coupled approaches to business practices, the issue of trust becomes central. We often resort to hardwired connections because we don't trust the other party to perform as expected. If companies could become more skilled in quickly building and reinforcing trust among business participants, they could reap significant business benefits—more flexibility, more leverage in terms of accessing third party resources, and more learning through experimentation. I believe we have significantly underestimated the role of trust in driving economic value creation.

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John Hagel III is a business consultant based in Silicon Valley. He is coauthor of the books Net Gain and Net Worth. For more information, visit the author's Web site at: http://www.johnhagel.com

Other HBS Working Knowledge stories featuring John Hagel III:
Infomediaries: Managing Customer Information in the Electronic Marketplace

Why Your IT Strategy Is Moving To the Web

Additional resources:
Web Services: Technology as a Catalyst for Strategic Thinking

Adoption Accelerators

by John Hagel III

Web services architectures are likely to be broadly adopted, given the compelling business benefits and the pragmatic adoption path. Nevertheless, a variety of factors can help accelerate their adoption:

  • Delivery of mission-critical functionality
  • Development of shared meaning
  • Generation of revenue from Web services
  • Discovery of, and access to, Web services

By watching the development of these factors, business managers can shape their own migration path—certain applications of the technology may become feasible sooner if these factors are developing rapidly. Conversely, if the factors are taking longer to be developed, business managers will need to reevaluate the timing of specific business initiatives requiring these capabilities.

In many cases, this is not simply a question of passively watching for developments. Enterprises can play a significant role in helping to promote and shape many of these factors. This is certainly the case in developing the enterprise platforms required to participate in a Web services architecture. Companies need to acquire the tools and platforms required to expose their applications as Web services and then to manage the deployment and operation of these Web services over time. Even with regard to the service grid, enterprises have an opportunity to shape, if not participate in, the development of the specialized utilities required to build out the service grid.

In the early stages of Web services deployment, the service grid ensures the performance required to support mission-critical business processes. The grid helps define and evolve the shared meaning that a business needs to collaborate with other business partners. As Web services architectures are more broadly deployed, the role of the service grid will become more critical in helping to connect potential users and providers of Web services and in providing the tools required to generate revenue from Web services. Each of these capabilities will play a key role in driving the adoption of Web services.

Excerpted with permission from Out of the Box: Strategies for Achieving Profits Today and Growth Tomorrow through Web Services, Harvard Business School Press. Copyright 2002, John Hagel III.


Delivering mission-critical performance
The specialized utilities of the service grid provide various components of mission-critical functionality: reliability, availability, and security. Without these, it becomes more challenging to use Web services architectures to support mission-critical business processes. More challenging, but not impossible.

Enterprises can start implementing Web services architectures even in the absence of specialized utilities. For example, Dell offered its extranet technology platform to support interaction with its business partners. By using technology built on public Internet standards and protocols, Dell was able to provide enough of the necessary reliability, availability, and security without requiring its business partners to invest in proprietary technology. Of course, if specialized utilities had been available to provide much of this functionality, Dell could have provided even more functionality in flexible ways to its business partners. Specialized utilities in areas like message transport, non-repudiation, and security will develop deep expertise in their business area and innovate rapidly to provide enhanced functionality.

Some traditional enterprises may even have an opportunity to develop some of these utilities themselves and offer them as a specialized service to other enterprises. Large companies have sometimes established considerable expertise in certain areas so they would have much more credibility in offering such specialized services than would start-ups with no name recognition, no track record, and the long-term viability concerns typical of any start-up.

Even where traditional enterprises are not in a position to offer the specialized services themselves, they have considerable influence in drawing investment to build these specialized services. The managers of traditional enterprises can be very articulate in creating awareness of the need for such services. They also can help such services develop by offering to become beta sites and eventually reference sites for the specialized service utilities.

Developing shared meaning
Specialized utilities in the service grid can also play an important role in helping companies develop and refine shared meaning. As discussed, this shared meaning becomes essential to support collaborative business processes spanning a number of enterprises.

Dell played a key role in defining the XML-based standards to describe its products and their components….These standards helped Dell automate much of its communication with its business partners. In the process, Dell also significantly increased its ability to coordinate activities across its own assembly plants.

Dell was able to do this because it was focused on a limited number of business partners within a particular business process. Since it had been doing business with these partners for a long time, a substantial degree of mutual understanding and trust already existed. This made it much easier for Dell to create the standards required for implementing a Web services architecture and to gain their adoption.

Dell could in effect evolve a specialized utility that would continue to refine these XML standards based on experiences with the existing implementation. In the rapidly moving computer industry with new products and components introduced on a regular basis, Dell will need to update the XML standards to reflect the changing product universe. More broadly, by observing where exceptions occur in the supply-chain process and determining whether confusion about the meaning of terms contributed to these exceptions, Dell can play an important role in continuing to evolve the XML standards for the benefit of its business partners.

Again, the evolution of XML standards is an option for Dell, but it also may represent a distraction. Dell is in the computer business, not the standards definition business. Third parties may have an opportunity to emerge and provide specialized standards monitoring and enhancement services, supported by technology tools to automate much of this process. These third parties might also help in a related area: the monitoring and refinement of policies required for the smooth functioning of such loosely coupled systems. Like the meaning of specific terms, policies need to be simply defined at the outset and then refined as the participants gain experience with these systems. Dell can play an important role in contributing to the success of such specialized services by making available to selected third parties its deep expertise in the computer product business and mobilizing its business partners to support the enhanced standards.

Developing shared meaning is inherently a time-consuming process. It is also a highly political process in which each party may seek to shade meaning to its own advantage or simply to reflect its own unique experience. All parties must negotiate and agree on standardized terms; they must then integrate them into their systems and organizations and refine them over time as they learn where misunderstandings still occur. Companies can play a significant role in accelerating this process. Nevertheless, they must remain realistic about the time and effort required to make progress in this area. An objective assessment of progress in creating shared meaning will provide a key indicator of the pace of adoption.

Generating revenue from Web services
In the early stages of Web services architecture deployment, the bulk of the application services offered in this architecture are likely to be delivered as part of a broader business relationship. Dell provides an example of this early approach. Over the previous two decades Dell had already built a broader business relationship with its partners. Dell developed and offered application services because they enhanced the performance of the broader supply-chain-business process, not because they represented a source of additional revenue for Dell. Dell achieved significant inventory reductions and operating cost savings and, indirectly, enhanced innovation capabilities—these were the economic benefits that motivated Dell. As a result, Dell did not have to worry about implementing the capability to charge for application services.

Specialized companies may offer application services as their core business. As previously indicated, the next generation of application service providers is already emerging to harness the power of a Web services architecture. These specialized companies will be very focused on the capabilities required to charge for application services….These capabilities, including security, metering, monitoring, billing, and payment mechanisms…are all examples of services that will be offered by specialized utilities in the service grid. Of course, these capabilities can also be obtained in more traditional forms, either as application software that can be installed and operated by the application service provider or as an outsourced service by providers using earlier generations of technology. In the near term, many application service companies will undoubtedly rely on these approaches to create the basis for a revenue-generating business.

As the specialized utilities of the service grid emerge and evolve, however, they are likely to help provide additional incentives for the growth of application service businesses. Although traditional approaches are available to implement revenue-generating capability, they are often expensive and inflexible. Specialized utilities offering these capabilities in a Web services architecture will be able to deliver these capabilities as lower-cost services that can be rapidly enhanced over time. This will reduce the initial investment required to build application service businesses, make it easier for them to capture revenue from their service offerings, and allow them to focus more of their resources on developing the functionality of their core offerings. As specialized providers deploy more and better application services, businesses will find more incentives to adopt the Web services architecture to get access to these application services.

This category of service grid utility may also be shaped by initiatives taken by large enterprises. As in the aforementioned examples, large enterprises may be uniquely positioned to create the specialized utilities-delivering elements that can help others to generate revenue from their application services. Citibank has exposed its payment-processing engine as a Web service. Even before the advent of Web services architectures, Cincinnati Bell developed such strong capabilities in billing technology and call-center operations that it spun out an independent company (Convergys) to offer these services to other enterprises. Large enterprises may also create additional demand for these specialized services as they discover the potential to generate additional revenue from value-added services. They will then need the same revenue-generating capabilities that specialized application service businesses require.

Finding and accessing Web services
In the early stages of Web services deployment, finding and accessing Web services will not be challenging. As indicated earlier, the complexity of the task increases exponentially as the number of potential services multiplies.

Certainly companies like Dell are not yet focused on this challenge. The Web services supporting Dell's supply-chain business process are few and well known to Dell and its business partners.

This lack of complexity can change rapidly, however. Without specialized services in the service grid, like directories and brokers to help find and access Web services, there is a substantial risk that the adoption of Web services could stall as enterprises become overwhelmed with the growing complexity of this task. Enterprises will need to begin at an early stage to develop and integrate services to help users locate the appropriate resources in the Web services arena.

The tools to do this will certainly be offered as specialized services by utilities in the service grid. For these tools to have value, though, they must be embraced and used by the developers of Web services. As developers of many early Web services, large enterprises are especially important in helping to increase usage of the specialized services for finding and accessing Web services. In many cases, especially in the early stages of deployment, large enterprises will want to use these specialized services only within their own private trading networks to help their business partners and themselves make the best use of the Web services being deployed. Over time, however, it may make sense to offer many of these resources to a broader range of businesses, particularly as enterprises begin to exploit the potential for generating revenue from Web services.

Excerpted with permission from Out of the Box: Strategies for Achieving Profits Today and Growth Tomorrow through Web Services,Harvard Business School Press. Copyright 2002, John Hagel III.