HBS Working Knowledge: 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 12 months) and generate tangible business benefits, particularly in the form of operating savings. In these challenging economic times, that's a powerful proposition.
Web services are different from websites 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.
How will the utilization of Web services change the way business gets done?
Hagel: 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.
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.
How can Web services be used to increase profits and growth?
Hagel: 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.
In your research, have you encountered much resistance from business executives to the idea of adopting Web services?
Hagel: 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.
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. Nontechnology-line executives are much more comfortable in making a tradeoff between certain levels of risk inherent in any new technology and the business benefits offered by the technology.
What methodology should a company use to determine if it could benefit from using Web services?
Hagel: 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 "workarounds" 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. 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.
What's next for you?
Hagel: 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 hard-wired 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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