Architecture as Strategy

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© 2007 IMD International. Not be used or reproduced without permission.

Architecture as StrategyProfessor David RobertsonIMD International6 November 2007

[email protected]

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The Architecture and Strategy Study

Joint effort between IMD and MIT

Interviewed or surveyed over 150 organizations in 7 countries in the US and Europe

Quantitative survey of 103 organizations in US and Europe

Book published in June 2006

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Outline

What is architecture?

Why don’t organizations have the right architecture?

Why does aligning IT with strategy make things worse?

What decisions do organizations have to make?

How do you transform your architecture (and legacy systems)?

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The architecture of an organization is like the structure of a car

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Just like a car, an organization has a structure

Inside any organization is a base foundation of work processes and IT systems that processes thousands of daily transactions

Enterprise architecture is the organizing logic for the work processes and IT systems in an organization

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An organization’s architecture lets it execute some initiatives well but not others

Johnson & Johnson:• Over 200 operating units• $47B in annual revenues• Sales increases and double-digit earnings

increases every year for 20 years

J&J’s Management:• Autonomous management of each unit• Different systems and processes in each unit• Great local flexibility and fast response to

changing market needs

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Liverpool City Council’s Challenge

The Situation in 1999:• 9 silos of services, each grown organically over years• Information captured on paper many times, with each incident or

transaction creating many forms• 10 HR organizations, 5 IT groups, 2 different email protocols

The Result:• Call center could not answer more than 4% of calls• Revenues (tax collection) had backlog of 60,000 queries• Overall service quality 423rd out of 426 UK local authorities

SocialServicesRequest

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European Products Producer

Branded products producer:19 different country business units, each independently managed, with separate systems, processes, and staff

The Problems:• Slow to change• Expensive to run• Global customers took advantage

CustomerGroup 1

BU 1

CustomerGroup 2

BU 2

CustomerGroup 3

BU 3

CustomerGroup 19

BU 19

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ArchitecturalEntropy

M&A, or other strategic actions No Plan

Change in Environment

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How do architectures get designed?

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Corporate Networks &Infrastructure ServicesCorporate Networks &Infrastructure Services

Lack of standardization

Lack of integration

RedundancyData

Applications

Platforms

Without a plan, IT becomes project- and cost-focused, leading to a siloed architecture

Corporate Data

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Siloed architectures and a short-term cost focus lead to long-term cost increases

Time

Maintenance and Repair

NewCapability

IT Budget

63%

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Outline






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StrategicInitiative

StrategicInitiative

StrategicInitiative

Organization Leadership

Organization FoundationCore work processes and IT Systems

How alignment should work

Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006

Senior managers define strategic priorities

Project teams identify and implement business changes and IT support

The resulting IT-supported processes help the organization achieve its strategic objectives

Drivesdirection

Buildsfoundation

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ABC Company strategy statement

“ABC Company aims to build and consolidate leadership positions in its

chosen markets, forging profitable growth opportunities by coordinating a strategic,

synthesized approach to achieve maximum returns for our stakeholders.”

Source: Adapted from Company, by Max Barry

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StrategicInitiative

StrategicInitiative

StrategicInitiative


Organization FoundationCore Business Processes and IT Systems

How alignment really works

Provides onlyvague direction

Reducesfutureagility


Strategic statements are often promises (“get closer to our customers”) or operational directives(“enter Chinese market”)

Strategy provides little information on long-term direction of organization

By the time IT finishes its work, the strategy has changed

The resulting IT legacy makes the organization less flexible in the future

Reducedflexibility

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Outline






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Building capabilities

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Building capabilities

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To achieve greatness requires learning basic skills so well that they become second nature

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Managers need to focus on high-value activities, not routine everyday tasks

Collecting taxes,paying

benefits, delivering services

Answering calls,

processing payroll,

managing pensions

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In many organizations managers spend too much time on basic tasks – not focusing on higher-value activities

Understandingconstituent

needs



Answering calls,

processing payroll,

managing pensions

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Getting the architecture right for basic tasks gives you a platform for innovation

Developing innovative

new services

Understandingconstituent

needs



Answering calls,

processing payroll,

managing pensions

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To support your strategy, define your operating model

The operating model is your answer to two questions:1)What are the core activities in your organization?

o What activities do you want to perform repeatably, flawlessly, and efficiently?

o What activities did you perform yesterday, and will you perform today and tomorrow?

2)How standardized and integrated do they need to be?

The operating model:Focuses on the “sacred transactions” of the organization – the core activities that should be second natureProvides a stable view of the organization Is more useful for guiding IT efforts

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Standardization (without integration)

Business Unit 2

Business Unit 3

Customer Group B

Customer Group B

Customer Group C

Customer Group C

Examples: Marriott Hotels

Business Unit 1

Customer Group A

Customer Group A

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How much standardization do you need?(Or: how much standardization can you live with?)

Standardization:Simplifies operations, reduces costs, and increases efficiencyAllows measurement, comparison, and improvementCan accelerate innovation

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How much standardization do you need?(Or: how much standardization can you live with?)

Standardization:Simplifies operations, reduces costs, and increases efficiencyAllows measurement, comparison, and improvementCan accelerate innovation

BUT:Can limit local flexibilityMay require that local units replace perfectly good systems and processes with new standardsMay be politically difficult to implement

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The challenge of standardizing

Country Business Units

Performance

Performance of new standard

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Integration (without standardization)

Business Unit 1

Business Unit 2

Business Unit 3

CustomersCustomers

Examples: MetLife, Liverpool City Council

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How much integration do you need?(How much can you live with?)

Integration:Links efforts through shared dataProvides transparency across the organization, and the seamless flow of information across activitiesAllows an organization to present a single face to a customer, supplier, or partner

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How much integration do you need?(How much can you live with?)

Integration:Links efforts through shared dataProvides transparency across the organization, and the seamless flow of information across activitiesAllows an organization to present a single face to a customer, supplier, or partner

BUT:Requires common data definitionsCan be time-consuming and difficult to implementUnnecessary if units are organized around unique customer groups

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HighLow

Low

High

Business Process Standardization

Bus

ines

s P

roce

ss In

tegr

atio

n


Business Unit 2

Business Unit 3

Customer Group B

Customer Group B

Customer Group C

Customer Group C

Business Unit 1

Customer Group A

Customer Group A

All Business Units

CustomersCustomers

Business Unit 1

Business Unit 2

Business Unit 3

Customer Group B

Customer Group B

Customer Group C

Customer Group C

Customer Group A

Customer Group A

Business Unit 1

Business Unit 2

Business Unit 3

CustomersCustomers

Coordination Unification

Diversification Replication

The Operating Model

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HighLow

Low

High


Bus

ines

s P

roce

ss In

tegr

atio

n


Where is your organization?

Process 1

Process 2

Process 3

Process 4Process 5

Process 6Process 7Process 8

Process 9

Process 10Process 11

Process 12Process 13

Process 14

Process 15

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HighLow

Low

High


Bus

ines

s P

roce

ss In

tegr

atio

n


ING DIRECT

Business Unit 2

Business Unit 3

Customer Group B

Customer Group B

Customer Group C

Customer Group C

Business Unit 1

Customer Group A

Customer Group A

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ING DIRECT

Average Branch Bank cost: 250 bps

142123

96

59 49

250

0

50

100

150

200

250

300

1999 2000 2001 2002 2003 Branch

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2004

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2005

ING DIRECT Operational Costs as Percent of Assets(Basis Points)

Simple products, mostly savings and simple loansNo current account, no cash, no ATMsNo bank branches: internet and call centers onlyCopy best practices between country business unitsShared IT architecture and applications

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ING DIRECT Architecture Description

Connectivity & IntegrationExternal Services

Customer Relationship Services Core Banking Services

Common Business Services

Channel Services

Self-Service:•Internet, MinTel,ATM, WAP, (WebTV)

Customer-Contact:•Call Center, IVR, E-mail, Direct Mail

IVR/CTIserver

Imagingserver

Gatewayserver

Webserver

E-mailserver

Transactions Customers Products Services

ContactHistory

CIF

ProductInfo

CRM

BankingEngine

MutualFunds Brokerage

CreditScore

ProspectFulfillment

StatementFulfillment Payment Checks Reports

local/HQ/Tax


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HighLow

Low

High


Bus

ines

s P

roce

ss In

tegr

atio

n


Unification example: Delta Airlines

All Business Units

CustomersCustomers

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Delta’s Enterprise Architecture Requirements

Source: Adapted from Delta Air Lines documents – used with permission

BusinessReflexes

Employee RelationshipManagement

Delta Nervous System

Electronic Events

Nine core databases

Location Maint.ScheduleFlight

Equip. Employee Aircraft Customer Ticket

Clean/ServiceAircraft

UnloadAircraft

FlightArrival andCloseout

MonitorFlight

FlightDepartureand Closeout

Load Aircraft

Prepare for FlightDeparture

AllocateResources

BaggageInflightBoardingCrownRoom

TicketCounterSkycapTravel

AgentReservationsSkymilesSkylinks

Personalization Digital Relationships Loyalty Programs

Customer ExperienceCustomer Experience

Operational PipelineOperational Pipeline

Reservation Systems

PDAs

ScannersLaptops

EVENTS

PROFILE

Desktops

Cell Phones

Video

Voice

Pagers Gate Readers Kiosks Hand

Helds

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HighLow

Low

High


Bus

ines

s P

roce

ss In

tegr

atio

n


Integration example: MetLife

Business Unit 1

Business Unit 2

Business Unit 3

CustomersCustomers

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Sign-on

Navigation

Search

SessionsSales Office Party

Management

Underwriter

ACO

RD X

ML Underwriting

& Issue

Business Rules

Service Recording

Producer

Customer

Partner Portals

ACORD XML

Security & Entitlements

ACORD JLife

Rates & Calcs

Licensing SuitabilityForms &

Requirements

Events Workflow

Product Admin

Operational Data Store

IntegrationHub

Application Presentation Tier Application Business Logic and Data Tier

Screen Entry & Validation

Call Center

ServiceProvider

Portal –Presentation Integration

Illustrations

Order Entry

Service

Claims

Marketing

Eligibility

Billing/Payment

Underwriting

MetLife’s Enterprise Architecture Requirements

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StrategicInitiative

StrategicInitiative

StrategicInitiative



The problem with strategic alignment


Strategic statements are often promises (“get closer to our customers”) or operational directives (“enter Chinese market”)

Strategy provides little information on long-term direction of organization

By the time IT finishes its work, the strategy has changed

The resulting IT legacy makes the organization less flexible in the future

Provides onlyvague direction

Reducesfutureagility

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StrategicInitiative

StrategicInitiative

StrategicInitiative



Architecture guarantees strategic alignment, and provides a foundation for innovation

Drivesdirection

Definessolutions Enterprise

Architecture

Operating Model

Updates architecture

Builds foundation

Definesbusiness

requirementsInnovation(“Happy

Surprises”)

Process integration &

standardizationrequirements

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Outline






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Enterprise Architecture Maturity Stages

Enterprise Architecture is the organizing logic for work processes and IT systems in an organization


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Business Silos

• Collection of separate departments/units rather than integrated enterprise

• Separate choices made for each product, function, and segment

• Investments based on project ROI



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Business Silos

StandardizedTechnology




• Centralized standardization of technology platforms with exception management

• Business process and IT application decisions made locally

• Investments based on cost reduction



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Business Silos

OptimizedCore








• Standardization/ integration of processes and data

• Separation of decisions about processes, applications, data, and infrastructure

• Business case made on performance



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Business Silos

BusinessModularity

OptimizedCore











• Information and process interface standards defined

• Business process ownership defined

• Business case made on time to market, flexibility



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Business Silos

BusinessModularity

OptimizedCore











• Information and process interface standards defined

• Business process ownership defined

• Business case made on time to market, flexibility

(12) (48) (34) (6)Source: Enterprise Architecture as Strategy: Creating a Foundation for Execution, by J Ross, P Weill and D Robertson, Harvard Business School Press, 2006

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Key Findings

The transition from one stage to the next is difficult and time consuming.

Moving from one stage to the next requires a business transformation as well as a technical one

Companies that try to skip a stage are usually unsuccessful

Each stage involves a very different view of the value of IT and the role of IT in the organization

The leadership challenges are very different for each transition

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50%26%0%Percent of IT heads with second title:*

CEOCEOCEO or CFOReports to:

Ability to facilitate innovation off new platformDetailed knowledge of core business - could potentially run a business unit if necessaryAbility to delegate ownership of key process and data modules, while still ensuring adherence to standardsUnderstanding of strategic benefits of architecture

Detailed knowledge of how the organization functions Ability to manage large organizational change effortsCredibility with business unit or functional heads Ability to manage large central budgetUnderstanding of architecture as a business enabler

Technical knowledge to help with standards decisionsAbility to implement standard project methodology and oversightAbility to work with top management team to establish basic governanceAbility to make business case for standardization

Key Skills of the CIO:

Optimized Core/Business Modularity

Standardized Technology

Business SilosStage

* Percent of CIOs having second VP title, from sample of 26 CIOs in US and Europe

The role of the CIO changes as organizations move through the stages


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Management practices by stage

Business Silos

BusinessModularity

OptimizedCore



• Enterprise arch. core diagram

• Post-impl’nassessment

• Full-time enterprarchitecture team

• Process owners• Enterprise

architecture guiding principles

• Business leadership of project teams

• Senior executive oversight

• Architects on project teams

• IT steering committee

• Architecture exception process

• Centralized funding of enterprise applications

• Centralized standards team

• Business cases• Project

methodology

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The challenge of transformation

The business:• 19 different country business units, each independently

managed, with separate systems and processes• Business units sell approximately the same products

The challenge:• Slow to change• Expensive to run• Global customers taking advantage

CustomerGroup 1

BU 1

CustomerGroup 2

BU 2

CustomerGroup 3

BU 3

CustomerGroup 19

BU 19

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The business:• 19 different country business units, each independently

managed, with separate systems and processes• Business units sell approximately the same products

The Solution:• Ripped out all systems in country BUs• Replaced with standard system, centrally designed and

controlled

CustomerGroup 1

CustomerGroup 2

CustomerGroup 3

CustomerGroup 19

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GlobalAgility

Business Silos

BusinessModularity

OptimizedCore


LocalAgility


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0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

BusinessSilos


OptimizedCore

BusinessModularity

IT Responsiveness (1)

Strategic Business Impacts (2)

Architecture Stage

CIO

Rat

ing

(1) Development time.(2) Operational excellence, customer

intimacy, product leadership and strategic agility.

The benefits of architecture increase as organizations move through the stages


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0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

BusinessSilos


OptimizedCore

BusinessModularity

IT Responsiveness (1)

Strategic Business Impacts (2)

Managerial Satisfaction (3)

Architecture Stage

CIO

Rat

ing

(1) Development time.(2) Operational excellence, customer

intimacy, product leadership and strategic agility.

(3) Senior management and business unit management satisfaction.

The benefits of architecture increase as organizations move through the stages


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BusinessSilos


Optimized Core

IT Budget: 100% 85% 75%

36%

18%

11%

35%

25%

14%

40%

21%

16%

32%

17%

35%

Local Applications

Enterprise Systems

Data

Technical Infrastructure

IT budgets are corrected for industry differences. Application silo budget is the baseline. Budgets for other stages are represented as a percentage of the baseline budget. Only five firms in stage four reported their IT budgets so data is not reliable.

Shared IT Capability

Costs decline steadily as organizations move through the stages


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Summary

Enterprise architecture is the organizing logic for the foundation of your organization: your work processes and IT systems

In most organizations, architecture is hindering execution and preventing innovation

Defining your operating model is the first step in choosing the right architecture for your organization

Transforming architecture is a difficult, time-consuming process, but the benefits begin immediately

Education

Architecture as Strategy