Metrics and Web Services

Today, somewhere over Texas, I was reading John Hagel's Out of the Box, a wonderful description of the power of Web Services. The "box" of the title is actually a series of boxes, and the "most insidious box of all ... is the box that we all create in terms of the mind-sets we bring to our businesses."

Web Services = overlaying legacy systems with interoperable Internet-style concepts to enable computers to understand one another without human intervention. The next step in the evolution of computing.

Business managers are stuck in their ruts. And largely unaware of it. Sweating bullets but not knowing why. Web Services are part of the way out.

I'm also in the midst of rewriting Metrics, and I found these lines of Hagel's so appropos that it stunned me:

    Broadly speaking, managers tend to be most comfortable with mechanistic mental models. Develop detailed blueprints, and then micromanage activities.

    The advocates of business process reengineering challenged conventional business practices, but at the end of the day, they remained firmly within a mechanistic mental model. Even the language they used shaped, and revealed, their outlook. Reengineering -- could one possibly choose a more mechanistic, top-down, deterministic view of business activities?

Hagel (and I hope he pronounces it "Hegel" and not "haggle") points out that when reegineering types talked about end-to-end, the end of the world was the wall of the enterprise silo. End-to-end didn't encompass raw materials at one end and customers at the other. We don't need no stinking value chain.

Web Services are captivating because they can be adopted for demonstrable short-term gains, all the while laying the foundation for radically more malleable business models.

All business executives understand financial leverage. Use somebody else's money alongside your own, and you grow faster. You don't leverage yourself to the hilt, for that's risky. But if you don't leverage yourself at all, that's foolish.

The flexibility brought on by Web Services creates the opportunity for operational leverage. If I want to grow my business, why shouldn't I have somebody else's assets alongside my own?

I flew across the country today to meet with a major client. They requested I book my travel through their travel department. American Express. Why? Because for my client, the travel business would be a diversion. It's not something they would ever get out-sized returns from. So they farm it out and have more assets to put behind their core operations.

When Web Services are widely adopted a couple of years hence, companies will be able to swap a lot more than travel administration under or out from under their umbrellas. Hagel suggests that the largest gains will be from transferring major business processes such as maintaining customer relationships, managing infrastructure, and creating & commercializing new products.

How does our engineering mind-set manager adapt to that? It's not the old scenario of "draw the blueprint and then manage activities to it". This is more like rewriting the blueprint whenever you see it's to your advantage to do so. We have a name for people who stick to their old plans when new plans would take them further; we call them losers.

Now I'm pondering three sorts of >strong>value that make business worth doing. You can measure the first without leaving the enterprise silo. This is value from operations. You boost value by increasing revenues or decreasing costs. You can increase revenue by selling more stuff or selling at higher prices, by selling more through agents and partners, by adding new products or by increasing prices. You can decrease costs by being more efficient, achieving higher quality/fewer rejects, and leveraging intangibles (such as customer loyalty, employee retention, effective work processes, team experience).

Shareholders are more interested in a second form of value, market capitalization, i.e. the value of the stock. Share prices are set by the market, based on investors' perceptions of the firm's earnings potential, discounted for risk and time. This in turn rests on competitive advantage as evidenced by innovation, patents, social capital, executive smarts, reputation, market position, confidence, and inspirational management. Market cap is only loosely coupled with profitability.

Hagel started me contemplating another sort of value that traverses an enterprise's traditional boundaries. Back to operational leverage. If my company's operations are interoperable with other companies', I can pick and choose what I want to focus on. If I'm truly interoperable, I can farm out just about any business process and use the capitalI would have spent there leveraging my primary business. Or I could consciously set out to capture the highest margin segments of my entire value chain.

A company whose IT is built on Web Standards by definition has more options to leverage operations than one saddled with proprietary systems. In time, the equity markets will pay a premium for such adaptability.

Three sources of corporate value are:

  1. value from how well the business has operated in the past
  2. value from investors' perceptions of how well the business will do in the future
  3. value from changing what the business does -- or having the flexibility to do so

This all sounded a lot more exciting when Hagel wrote about it, but he filled a book rather than a blog entry in the telling.

Posted by Jay Cross at April 20, 2004 08:46 PM | TrackBack

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