Task Automation

The first phase of computer technology adoption was task automation. Seventy years ago, business, for the most part, was driven by the flow of paper. Business processes were prescribed in procedure manuals to be implemented through training people. Substantial changes to business operations could take years for full realization.

Early, widespread applications of the computer were for task automation. The computer could do monotonous, repetitive tasks faster, cheaper, and more reliably than people could. Computers were kept in controlled environments, and people brought the work to the computer and picked up the results when processing was done.

As more tasks were automated, they were bundled together into increasingly large applications. People interacted with the applications online, so the data stayed with the applications and were eventually stored in departmental databases. Some workflow management systems emerged to direct the flow of records between tasks performed by people. But, most of the flow of work between the tasks was built into the systems, embedded in program code.

Business leaders started to focus on business processes for incremental improvement and business process reengineering for significant restructuring of business operations. Typically, work flowed from department to department, order to cash, to produce and deliver the end product or service.

Large applications grew within departments to streamline their operations, and files were transferred between departments, initially on magnetic tapes and later through electronic transfer of files. The movement of files between applications was automated for efficiency and control. Within large applications, embedded business processes could move transactions between tasks as they occurred, but records were still batched for transfer to the applications of other organizations.

The transfer of files between applications extended outside the enterprise, to suppliers, large customers, health care insurers, and financial institutions. Industry standards were developed for electronic data interchange (EDI). File transfers were typically a daily occurrence—batches of records from the day's business activity. This movement of files between applications was generally point-to-point communications, as depicted in Fig. 1.1A. For remote locations, the communications occurred over dedicated telephone lines.

The development of interactive applications and personal computers enabled widespread, computer-based modeling. Business process models emerged as a method of designing and analyzing business processes and business process modeling systems emerged to transform the models into automated process control systems, coordinating the work of people and machines. As the scope of computer applications expanded, the scope of automated business process models expanded as well.

Commercial off-the-shelf (COTS) systems offered industry-best-practice solutions and process automation, but widespread adoption limited the ability of a company to differentiate and gain competitive advantage. Implementation of these systems took years and locked adopters into a particular stage of evolution of the technology, thus requiring major investment of time and money to exploit further advances. More recent enterprise applications have incorporated business process modeling to enable adaptation of business processes.

Enterprise Application Integration

Enterprise application integration (EAI) middleware emerged in the marketplace to streamline the transfer of data between systems. It brought the hub-and-spoke communication model depicted in Fig. 1.1B. Within an enterprise, the middleware could route messages from many sources to many destinations, reducing the number of communication links and improving control. In addition, there was no longer the need to send records in batches, but individual records could be sent as messages as they became available thus reducing delays.

EAI middleware enabled a transition from batch-oriented enterprise integration to transaction-driven integration. The EAI middleware provides a buffer so that a message can be sent when a receiver is not yet ready to receive—store-and-forward mode. It can also provide a buffer between legacy batch processing systems and those systems that process and send transactions as they occur. EAI middleware products provide adapter software to integrate systems implemented with diverse technologies and message transformation services, to make the data structures compatible between applications. Transaction-driven systems accelerate the delivery of results; for example, a customer order for stock items might be processed and the order shipped the same day.

Of course, the hub-and-spoke configuration relies on the use of shared middleware. Unfortunately, incompatibility of EAI products was a barrier to integration between enterprises and sometimes within a large enterprise, particularly in the absence of interoperability standards for message exchange.

The Internet

As EAI was gaining widespread adoption, the Internet and the World Wide Web were gaining momentum. The Internet opened the door to many-to-many communications in a different way as depicted in Fig. 1.2. The public Internet was the global hub through which messages could be directed from any Internet subscriber to any other Internet subscriber. Dedicated telephone lines were no longer needed between business partners.

There was no industry, technology-independent standard for message exchange using EAI middleware, so a standard format was required for communicating between diverse systems over the Internet. Web pages were already being communicated between diverse systems, so this technology was adapted to communication of messages between business systems.

Hyper Text Transport Protocol (HTTP) from the Internet Engineering Task Force (IETF) and the World Wide Web Consortium (W3C) became the accepted messaging protocol, and HyperText Markup Language (HTML) from W3C became a basis for exchange of content; it was already allowed to pass through corporate firewalls for Web access. Since business messages were not intended for graphical display, HTML per se was not appropriate for application integration, but eXtensible Markup Language (XML), also from W3C, shares the underlying technology of HTML that enables interpretation by diverse computer systems, and it also provides greater flexibility for content specification and transformation. XML is discussed further in Chapter 6.

The Internet became the medium of exchange for business-to-business communications. IT industry leaders recognized a potential for ad hoc relationships between businesses to be established automatically, at a moment's notice, if only there were industry standards by which these relationships could be discovered and specified.

Web Services and SOA

The concept of “Web services” emerged. Fig. 1.3 illustrates the vision. The arrows depict request-response relationships. In concept, an enterprise posts a service offering on a public registry. Another enterprise in need of a service queries the registry to obtain information on available services. The registry includes information about the service and the protocol for using the service. The service user then sends a message to the service provider, initiating the exchange. All this is expected to be performed automatically by applications of the participating enterprises. Within the enterprises, the exchanges are mediated by automated business processes.

Standards for Web services have been developed, but the ad hoc, automated selection of services has not caught on. Business leaders are not ready to trust computer systems to establish and manage trusted business relationships, not least because the current abilities to express the actual semantics of a given service offering leaves a lot to be desired. However, much of the technology has been adopted, and relationships established by humans can be quickly automated for exchange of business transactions over the Internet. Web access by humans is still the primary mechanism for ad hoc access to services on the Internet.

The concept of business systems interacting over the Internet is well established. Development of standards for interactions with prescribed services led to the SOA. Internet-based technologies support the integration of systems offering services and using services. This greatly expanded the market for a new breed of middleware to perform Internet-based communications and drive interactions with automated business processes.

Within the enterprise, SOA has been viewed as a way to implement shared application components. Functionality used in different areas of the business can be implemented as shared services and invoked by other applications. The concept of the enterprise service bus (ESB) emerged as middleware that enabled applications to be connected using Internet technology. Essentially, an ESB is decentralized EAI middleware with standards-based communications.

However, the major impact of SOA will be realized by a business architecture rather than just an IT architecture—the CBA. CBA defines services based on business capabilities that are the building blocks of the enterprise discussed further in Chapter 3.

CBA builds on the following benefits enabled by SOA:

• Economies of scale are realized through shared services.

• Quality and productivity are improved by enabling the development of special skills and methods for shared services that would not be justified for multiple, smaller operating activities.

• Improved consistency and control are achieved by placing responsibility for management of key operations in a single organization.

• Distributed operations are enabled through Internet-based communication of interactions with people and between services.

• Process optimization is enhanced by enabling each service unit to optimize the processes of the services it provides within the constraints of its interfaces.

• Greater assurance of regulatory compliance can be achieved through consolidation of regulated processes and related business functions.

• The enterprise gains the ability to utilize the most effective alternative sources of services such as outsourcing or operations in other countries.

• The scope of changes is more focused because sharable service interfaces conceal changes that only affect the service implementation and do not adversely affect performance.

CBA extends SOA with the business concepts and relationships for the specification, integration, and management of shared business services as components of value streams and business exchanges.

The Evolving Internet

Web access to services opened the door to new relationships with customers. The Internet is now a major vehicle for retail sales. Customers also access product information and support services. Web services for customers expanded to portals for various stakeholders, particularly employees and suppliers. These interactive services require automated processes to guide the interactions with users and respond to their requests.

The Internet has changed the marketplace—the scope, diversity, sales channels, and products, as well as customer expectations. Customers expect fast response—including product delivery, access to information, access to competitive offerings, and product evaluations/reviews. Furthermore, “social computing” has emerged from consumer services such as Facebook, Twitter, and LinkedIn with voice and video communications in addition to email. These services have created new mechanisms for collaboration as well as marketing and analytics.

Smart phones have connected everybody to the Internet, everywhere, and have put computing resources in their hands to perform personal applications and engage them with Internet service offerings. The Internet has been extended with cellular networks and wireless hot spots. The “Internet of Things” is an emerging Internet phenomenon. Sensors and computers embedded in all forms of devices are being connected to the Internet. The volume of data exchanged over the Internet has exploded and continues to explode.

The Internet has become the new, distributed computing platform for cloud computing—making the Internet the basis for a computing utility. Cloud computing supports the configuration of applications as massively parallel computations, greatly increasing the speed and reducing the cost of computationally intensive applications. Analytics has emerged as an approach to utilizing this computational power for analysis of the large volumes of data—“big data”—generated from the expanding scope of computations and interactions occurring over the Internet and within the enterprise.

The continued expansion of applications of the Internet will continue to create new challenges and opportunities for business.

The Business Design Hierarchy

Fig. 1.4 depicts a business design hierarchy. Strategic planning is the most abstract and furthest removed from the actual operation of the business. It focuses on the characteristics of the enterprise inspired by its mission and vision. It considers strengths, weaknesses, opportunities, and threats; the evolving ecosystem; and innovations that will strengthen the business and exploit its opportunities.

The Conceptual Design is an abstraction of the business design like a blueprint is the conceptual design of a home. It presents the design in terms that management understands with enough detail to be clear about what the people, organizations, systems, and processes do without getting into all the details of exceptions and optimization. This layer has not been well supported but is the domain of VDML and the focus of VDM. VDM includes modeling of both the internal business design and the relationships with external entities. It includes conceptual models for both CBA and BCM. For CBA, it defines the capabilities and their configuration and relationships as sharable services. For BCM, it defines the collaborations that do the work of the enterprise including the organization units and the activity networks that describe the work of capabilities. It defines organizational responsibilities, including capability units responsible for management of bundles of capability methods, personnel, and other resources that provide a general, sharable capability. It includes the statistical measurements of performance and customer value to optimize multiple value streams from an enterprise perspective.

The Operational Design develops the detailed models for how the business works. This is the domain of the design of service interfaces and service level specifications along with process design in the context of services, and the application of rules to implement policies, controls, and guidance. Service units at the Operational Design level are the counterparts of capability units at the Conceptual Design level. Capability methods are implemented as services. Automated business processes can be designed at the Operational Design level with tools that implement BPMN and CMMN, discussed in Chapter 4, and DMN (decision model and notation) discussed in Chapter 5.

At the Technical Design level, we are concerned with information technologies. Other technologies such as physical machines, plant layout, buildings, vehicles, and so on are out of scope. Subsequent chapters of this book will clarify the nature of the relevant information technologies and their importance to the business.

All of these models together align the design and implementation of the enterprise to deliver value to customers as well as other stakeholders. This delivery of value is fundamental to the viability and success of the enterprise.

Capability-Based Architecture

In this section, we will start by developing an understanding of CBA as a fundamental aspect of VDM that builds on current practices of capability analysis and mapping. We will then examine BCM that addresses the network of collaborations where people, machines, and other participants interact to do the work of the enterprise. Finally, we will briefly describe how VDM brings these together with the creation and delivery of value, to describe a robust representation of how the business works.

Capabilities determine the purpose and scope of building blocks of the agile enterprise. We will consider the design of these building blocks and configuration of the enterprise in detail in Chapter 3. Here, we examine the general characteristics of capabilities as enterprise components.

A capability consists of the knowledge, skills, resources, facilities, and organizational structure to perform certain activities and produce a desired result. A capability method defines the activities, interactions, deliverables, and roles of participants to deliver a particular result from a capability. A capability unit is the organizational unit that manages the capability methods, personnel, other resources, and facilities that provide a particular capability. A capability unit may be an organization unit that is parent to multiple organization units that offer capability methods for more specific capabilities. A capability unit may have multiple capability methods to address different service needs or local circumstances.

CBA is an approach to the design of an enterprise in which distinct business capabilities are offered through well-defined interfaces and media of exchange so that the capabilities can be shared by multiple business endeavors now and in the future. Shared capabilities can be managed for performance, consistency, control, and economies of scale and can be used to configure a new LOB incorporating shareable capabilities. We return to these concepts in the discussion of CBA in Chapter 3.

The concept of CBA as a business architecture is beginning to emerge in the industry. Unfortunately, though the potential benefits are great, the challenges are also great.

Traditional businesses are typically organized around LOB. Each business silo manages all of the capabilities needed to deliver the end product or service. Many duplicated capabilities are embedded in the processes of multiple silos. These represent opportunities for sharing of capabilities to realize economies of scale, achieve consistent control over that aspect of the business, implement improvements more quickly, and develop higher levels of expertise.

Capability Mapping

“Capability mapping” has become a fairly popular technique where capability types are organized in a graphical taxonomy to abstract the capabilities away from the organizations that manage them, see Fig. 1.5 for a simplistic illustration. It helps remove the analysis from more political discussions. This helps clarify the nature of each capability for consideration of where there is a need to invest in development or improvement of certain capabilities. A “capability heat map” is a capability map where capabilities that require attention are highlighted.

The capability map should be supported by information on the associated resources, facilities, and intellectual property. With links to the various capability organization units, the capability map can help identify capabilities that may be consolidated. However, current methods are weak on linking capabilities to organization units, evaluating the potential for consolidation, and determining priorities for investment in capability improvements.

Shared Capabilities

A capability provided by multiple organizations is a candidate for consolidation to be shared by the multiple capability consumers. The sharing of capabilities brings a fundamental change to the architecture of the enterprise.

Traditionally, an enterprise operates as a number of distinct LOB or divisions, each with its own systems and business operations in its own silo, as depicted in Fig. 1.6. In the diagram, A and B might be different divisions or product-line organizations. Each division has its own specialized business units, contributing capabilities to the divisional efforts. Boxes with the same letter are the same capability, performed by different teams. Some of the capabilities are duplicated between business units within a division, but this may not be apparent in the actual operations since they are embedded in the mainstream processes. Some of the capabilities are duplicated across the divisions as indicated by the duplicated boxed letters. Each division has its own computer applications used by people within the division. Interactions with customers and suppliers are through channels that may be different for each division. Access to the internal capabilities is restricted by locked doors and passwords that control access to each division's operations.

Typically, the transfer of business transaction data from one business activity to another also transfers responsibility and control for the transaction. The business units in a division may be using the same system with a single database, or the sending business activity is trusted to send valid records, so the receiving business activity accepts responsibility for the subsequent action. The sources and destinations of these data transfers are well known and persistent. Changes to business processes are restricted by the flow between activities, and the hardcoded processes that define and integrate capabilities.

CBA opens up these silos and makes capabilities within them available for use as sharable services. Similar capabilities can be consolidated for economies of scale and to achieve consistency and control across the enterprise. A single capability may be applied with alternative capability methods depending on specific consumer requirements, but each method should provide a sharable service.

As a result, a CBA has interorganizational interactions and sharing of capabilities at a lower level of granularity. Fig. 1.7 represents a transformation from Fig. 1.6. Each of these boxes, except the top-level A and B, represents a sharable capability although not all of them are shared in the example. Effectively, this transformation replaces product delivery silos with value streams: one driven by capability A and the other driven by capability B. More about value streams, later.

Each of the shared capabilities addresses similar needs in different contexts. The divisions or product lines, A and B, still exist from a mainstream perspective, and they may have capabilities unique to their LOB, such as C and D in business A, and F in business B, but they share services of the common capabilities.

Capabilities, or more specifically, capability methods, become the building blocks for producing new products or services. The services that implement each capability method must have a well-defined interface, so they can be engaged in different contexts.

A capability method may be a consumer of other capability methods. Consequently, a request for one capability method may propagate to many other capability methods. Smaller granularity of capability methods enables them to be more stable and usable in different contexts, both as the enterprise currently operates and in future business endeavors.

Business Collaboration Management

A collaboration is interactions of a group of people (or other collaborations) to achieve a desired result. A collaboration may specify the roles of participants, the activities they perform, and the deliverables they exchange. A collaboration may employ technology for coordination of performance or certain functions, and it may engage other collaborations to obtain supporting services. BCM expands the scope of BPM, a management discipline traditionally focused on management of prescriptive, repeatable business processes. A traditional business process is effectively a collaboration with prescribed activities and flow of control.

Value Delivery Management

VDM builds on CBA and BCM as core design concepts to define an integrated business design that adds the creation, aggregation, and exchange of business value. VDML is the computer-based modeling language to model this integration of VDM, CBM, and BCM that supports the development, analysis, refinement, and transformation of business design.

VDML was recently adopted by the Object Management Group (OMG). It provides integration of multiple dimensions of enterprise design that fills the conceptual modeling gap between strategic planning and operational business design. VDML is discussed in some detail in Chapter 2 and Chapter 3 will describe the details of the integration of capabilities, collaborations, and value streams.

The following paragraphs describe four ways VDM significantly improves strategic planning and transformation.

Performance Management and Corrective Action

VDM provides an abstraction of the operation of the business that is meaningful to top management and aligns with the detailed, operational design. Consequently, VDM can put operating measurements into a meaningful context both for consideration of the impact of performance variations and disruptions, and support drill-down into the business design to understand sources of variation or poor results.

Business Relationships

The relationships between the enterprise of interest and other business entities can be modeled as business networks, along with the exchanges of value propositions or deliverables to provide an understanding of how the enterprise fits into the ecosystem, and to support assessment of the importance and viability of relationships with other entities. Analysis of the exchange of value propositions will reveal if each participant experiences a net gain that is necessary to sustain the relationship. Business leaders need to consider if these relationships can be abandoned or if steps must be taken to strengthen the relationships.

Innovation

In today's world, competitive advantages are temporary. Every enterprise must realize innovations to maintain and improve its competitive position. It is not enough for somebody to have an innovative idea, and the ideas must be validated and implemented in a timely and effective manner.

The value-driven, agile enterprise has several advantages. CBA provides a business design that can be reconfigured to address new requirements, and a shared understanding of the impact of change of a capability method on the consumers of that service. BCM provides model-based and adaptive processes that can rapidly implement new methods as well as an understanding of other collaboration relationships required by the enterprise. VDM provides a conceptual business design that integrates CBA and BCM and supports analysis of the impact of change on customer values and enterprise performance.

VDM also provides an innovator with an ability to explore an innovation in the business context in which an innovation must be implemented. The conceptual design also helps identify other knowledge workers for collaboration on feasibility and implementation issues.

Capability managers should have the funding discretion to implement some innovations, and the support of an innovation assessment process to quickly determine if more substantial funding is justified and is an appropriate investment.

Mergers and Acquisitions

Mergers and acquisitions bring together formerly independent business organizations. In general, it is expected that at least one and potentially both businesses should be improved through access to needed capabilities, synergy between capabilities or economies of scale in addition to potential increase in market share and new business. These all depend on the compatibility of the capabilities.

Typically, the combined enterprise organization reflects aggregation without consolidation. This is common in financial services companies, telecommunications companies, and information technology companies. The synergy and economies of scale that might have been envisioned are typically not achieved, because each organization continues to operate in its own silo, each with its own methods and computer applications. Large corporations with decentralized divisions or product-line organizations typically have similar opportunities for consolidations.

With considerable effort, some consolidation of operations may occur over a period of years. But because mergers and acquisitions occur frequently, especially in the industries noted, it is difficult for operational consolidation efforts to keep up.

In contrast to the norm, an agile enterprise should be able to assess the benefits and define a plan for merger in a fraction of the time and cost experienced by a conventional enterprise. If each of the original companies has implemented CBA, this consolidation can be faster. Even if similar capabilities employ different methods, organizational consolidation of responsibility for similar methods creates the opportunity for reconciliation and economies of scale.

In due diligence, value delivery models of the potentially combined organizations should be developed to clearly identify the capabilities, the contexts in which they are used, and the values they contribute to value streams. The potential consolidation of each of the capabilities, particularly those that are core competencies (providing competitive advantage), must be evaluated to determine the feasibility of consolidation—or the capacity expansion of one capability to replace the other—to fulfill the requirements of all the capability consumers.

From this analysis, top management should realize a reasonable assessment of feasibility, cost, duration, and risk of the merger or acquisition and subsequent transformation.

Divestitures

Divestiture requires the separation of an existing, potentially integrated enterprise into two (or more) viable organizations. If the organization has a CBA structure and model, then the shared capabilities and their resources can be easily identified. In addition, it should be quite easy to configure the business designs of the new organizations.

Conventional shared services (eg, accounting, purchasing, etc.) are, by definition, shared capabilities. The challenge is then to either partition each of the shared capabilities into implementations for each of the new organizations, or create, or acquire equivalent capabilities. Each of the new organizations will have smaller scale requirements for the formerly shared services, so the loss of economy of scale will result in a net increase in cost for the remaining value streams.

There are various solutions to be considered such as (1) partition the shared capabilities and acquire the necessary personnel and facilities to meet the increased needs from reduced economies of scale, (2) outsource shared capabilities for one new organization and scale back for the other, (3) sell the divested organization to another organization that can provide the shared services (scaling up), and scale back the retained organization.

Consolidations

Consolidation is the primary source of benefits in the early stages of CBA adoption. Table 1.1 outlines benefits of consolidation that were claimed by several participants in the SOA Consortium. These examples highlight actual projects in various industries.

These examples are typical of early stages of implementation of CBA. At an early stage, it is not very difficult to recognize some key capabilities that are candidates for consolidation—the “low-hanging fruit.”

In the short term, as an enterprise is moving toward agility, consolidation of redundant capabilities is a major source of value, even when the enterprise is still in the early stages of transformation. These consolidations will often have an IT focus, but the objective is to involve the consolidation of the associated business organizations. This will demonstrate the business value of shared business capabilities and is representative of the current level of transformation of most early adopters. Other benefits of the value-driven agile enterprise are not as apparent in the early stages.

An initial consolidation should have potential for substantial business value because initial implementations bear the burden of implementation of supporting infrastructure, development of the skills and methods for defining and integrating well-defined service interfaces and level of service agreements, and development of the working relationships between capability provider and capability consumer organizations.

Typically, these shared capabilities are fairly large and complex business functions. It is useful, but not necessary, to consider that there are sharable capabilities embedded within the consolidated capabilities. In the long term, these should be factored out and implemented as sharable capabilities as well. In the short term, it will be expedient to develop well-defined interfaces that hide the technology implementation of the legacy system.

In the long term, value stream modeling supports identification of redundant or similar capabilities as candidates for consolidation and defines the contexts in which the shared capabilities will be used. It also supports the impact of value contributions to the value propositions of the affected value streams—there may be competing values that must be resolved by negotiating trade-offs, by accommodating different requirements, or by defining alternative methods for applying the underlying capability.

New Product or LOB Planning

Top management may recognize an opportunity to introduce a new product or enter a new LOB in an emerging marketplace in a way that builds on key strengths of the current enterprise. Though some weaknesses may need to be addressed, rapid entry into a new market will be critical to long-term success.

A traditional enterprise might address this opportunity by forming a separate division or acquiring an existing company that avoids the burden and risks of adapting existing operations to the new business because existing processes and computer applications are designed to optimize each current LOB. However, at the same time, smart management understands that a new business silo will not effectively realize the strengths and potential economies of scale of the parent enterprise.

The agile enterprise is able to engage existing capabilities of the enterprise in the new LOB without penalizing the existing business. Top management is able to quickly configure a value stream in order to consider the impact on existing business, assess the value proposition of the new business, determine realistic operating costs and competitive pricing, assess the required investment, and develop a transformation plan to implement the new business.

The potential benefits of agility in introducing a new product line or business have been recognized in a number of industries, including financial services, telecommunications, pharmaceuticals, and transportation. The benefits include (1) increased visibility and control into the product line, (2) the ability to utilize a core architecture to improve data integration and consistency of implementations, (3) significant improvements in development schedules and time to market, and (4) higher customer satisfaction, in part due to reduced cost and improved quality of using established capabilities.

Outsourcing

Much of the cost of doing business goes into necessary operating activities that are not part the enterprise's core business and do not provide competitive value. Business operations such as finance and accounting, human resource management, and information technology require special skills and are increasingly complex, particularly for multinational enterprises. At the same time, these activities require considerable management attention and are challenged to achieve scalability and industry best practices for regulatory compliance, efficiency, and effectiveness.

Large enterprises have adopted outsourcing as a long-term strategy to mitigate these problems. IT outsourcing has been adopted in all industries. Outsourcing of accounting and human resource management services is gaining in popularity. The agility benefits for outsourcing include (1) scalability—the ability to quickly accommodate increased or reduced workload, (2) expertise—outsourcing providers can maintain skilled people to deal with change such as regulatory requirements, and (3) internationalization—a outsourcing provider should be prepared to support the client for expansion into new countries. It should be noted that small enterprises and startups in all industries can benefit immediately from agile outsourcing by reducing the start-up cost, duration, and risk and gaining scalability.

Outsourcing offers the opportunity to exploit the expertise and economies of scale of a service provider while reducing the management burden associated with these operations. However, the existing capabilities are often intertwined throughout the enterprise, and the divisions of responsibilities may be inconsistent across the enterprise. The disruptive effect of a transition to an outsource service provider could have a major impact on the rest of the business.

VDM can help clarify the scope of capabilities to be outsourced and the interfaces required by internal consumers of the outsourced services. It should also help define service level requirements for those interfaces. In addition, there may be capabilities or resources that are currently shared by the capabilities being outsourced and other internal value streams. This may require consideration of adverse effects on those retained capabilities such as loss of economies of scale and expertise.

The capabilities being outsourced are components of the current enterprise, just as an engine is a component of an automobile. A more powerful engine might require some changes in other automobile components, but the relationships to the controls and other components should be relatively easy to identify and evaluate.

Thus outsourcing is another source of substantial business value that can be realized in fairly early stages of enterprise transformation, as long as the integration is compatible with the strategic information-technology infrastructure. However, outsourcing can be better evaluated and implemented with less risk with VDM.

Governance

Governance involves ensuring that the enterprise is doing the right thing and doing it well. This can be difficult when boards of directors (or other stakeholders) must rely primarily on financial reports, market reports and occasional audit reports. The right thing and doing it well go beyond being profitable and gaining market share. They also go beyond regulatory compliance. A board of directors has a fiduciary responsibility to protect the interests of the stockholders going well beyond the next quarter.

The conventional enterprise reflects adaptations of enterprise designs that, in many cases, predate the use of computers. Responsibility for continued design has been delegated to large departments or LOB that focus on optimization within their local spheres of influence. Large departments or product lines tend to be physically isolated so that there is little interdepartmental collaboration or sharing of resources or expertise. In many cases, capabilities are developed rather than shared because it is easier to develop and adapt a capability if you own it yourself. Separate LOB may be the legacy of earlier, nonreconciled mergers and acquisitions.

The actions that must be controlled or measured for effective governance may be scattered across LOB and various activities embedded in their processes. A VDM conceptual model of the business at an appropriate level of abstraction provides an understanding of the context for governance. Based on this model, controls can be established, relevant events can be reported, and performance can be measured with clear accountability of responsible organizations. Some of these observations may be designed into the business operation, and some controls and performance measures must be independently evaluated to ensure objectivity.

Governance is discussed in more depth in Chapter 11.

Regulatory Compliance

Government regulation is an increasing concern. Managers are being held responsible for the integrity of their operations and protection of stockholder interests. Multinational enterprises must comply with business regulations of countries in which they operate as well as regulations for products or services in countries in which they sell. Not only are regulations constantly changing, but the regulations impose different requirements in different countries and changes to the business organization itself can create risks of violations. Regulatory compliance affects all industries.

Implementation of compliance is a challenge in conventional organizations because the affected processes may be undocumented and may be performed in multiple organizations in different ways.

The agile enterprise is able to quickly and reliably assess the implications of regulations to the business and plan appropriate changes and controls to ensure compliance. The consistent business architecture and robust business design model showing one or more applications of a relevant capability, clarifies responsibility, and accountability for compliance. Formally defined collaborations and business process automation support the implementation and enforcement of regulations. In order to address differences in different countries, capability methods must include business rules that consider the country of delivery and/or the country of origin of the product.

An important aspect of regulatory compliance is reliable recordkeeping. Formal definition and automation of business processes support the capture of appropriate records. Electronic identity and signatures ensure proper authorization and accountability for record content. Where regulated activities involve planning and decision-making by knowledge workers, adaptive case management technology can help apply rules and track compliance.

Outsourcing regulated activities such as accounting, purchasing, human resource management, and information technology development or operations reduces an enterprise's burden and provides greater assurance that appropriate expertise is applied to implementation of regulations and related changes. Of course, outsourcing still requires oversight and performance measurement at the interfaces.

Aspects of regulatory compliance are discussed in Chapters 5, 9, 10, and 11.

Technology Modernization

Technology modernization is required to remove the burden of maintaining obsolete technology and to replace it with solutions that exploit current technology and share the technical infrastructure needed for the agile enterprise.

Technology modernization may encompass broad replacement of legacy systems or any technology upgrade or improvement to a business capability. Many enterprises are captive to information systems developed long ago, many of which have locked the enterprise into ways of doing business that were optimal at the time but have since become outdated. The design of the systems as well as the technology used to implement them may be obsolete and difficult to support, change, or even understand.

Obsolete technology is a challenge in enterprises in every industry. The challenges are particularly pronounced in industries such as financial services and telecommunications, where there have been multiple mergers and acquisitions, with systems implemented in different technologies and tightly coupled to particular product lines or markets. The challenge becomes not only to upgrade technology but to reconcile the business logic and processes and to integrate consolidated capabilities from the legacy systems that support different LOB.

Duplication of functionality also occurs where the legacy systems cannot easily be adapted to support new LOB, so the legacy functions are duplicated in new systems. Replacement of legacy systems almost always requires major investments and entails substantial risk. But replacements of legacy systems without also providing enterprise-wide shared services only leads to more inefficiency and inflexibility—new legacy systems.

Analysis of legacy systems should start with application of VDM to discover the embedded capabilities and provide an abstraction of the structure of the systems and associated business activities. Value measurements can help define priorities and justify transformations.

VDM makes business processes visible and adaptable. Individual capability services should be relatively fine-grained with well-defined interfaces. The technology of implementation of a capability service should be hidden from consumers and other services it consumes behind a well-defined interface. Some capability interfaces may hide capabilities that remain implemented in legacy systems or purchased software products. Upgrades can be smaller in scope and selectively applied based on business value.

Active Governance

Top management, with clear support of the governing board, must be committed to building an agile enterprise as a long-term undertaking. They must ensure that investments, improvements, and economies of scale are considered from a strategic enterprise perspective. In particular, information technology must be managed to control proliferation of diverse technologies, to provide a consistent information infrastructure, and to achieve economies of scale in technical resources. Departmental or line-of-business silos must give up control of duplicated capabilities to realize enterprise-level economies of scale and flexibility of shared services. Service units must be held accountable for compliance with service specifications, business rules, and security requirements. Finally, overall performance and progress must be focused on delivery of customer value and the long-term vision of the enterprise.

Value Delivery Business Models

To optimize enterprise operations and respond effectively to challenges and opportunities, top management must have models that provide information about the enterprise ecosystem, current operations, operating cost, quality and performance, and opportunities for improvements as well as new business. These models go well beyond the “executive dashboard,” to enable analysis of disruptive events and trends, consideration of what-if scenarios, and exercise of operational controls. Value stream analysis must provide an understanding of the contributions to cost, quality, and performance for each current or planned product or service. Business activity monitoring should identify exceptions and trends in performance. Recognition of changing circumstances and tracking of changing circumstances should keep top management aware of the changing ecosystem.

Technical Infrastructure

A shared technical infrastructure must be established and maintained for economies of scale, integration, flexibility, reliability, security, and support for robust enterprise intelligence. This infrastructure requires initial investment that cannot be justified for individual application development projects; it is intended for use by most or all applications. The technical infrastructure includes services such as reliable messaging, authorization, sense and respond directory, regulations and policies directory, event notification, services registry, support for business collaboration, and more.

Service Management

Integration of services is fundamental to the agile enterprise paradigm shift. Managers must start to think in terms of providing services either directly to end customers or to other parts of the enterprise. This means formalizing capability offerings and the form of requests, responses, and related information exchanges. It means determining the costs of service units and the unit cost of using individual shared capabilities, including the costs incurred from other services used. It also means accountability for service level agreements, performance measures, security, compliance with policies and regulations, and responsibility for continuous improvement and adaptation to change. Much of the work of managing every service unit is very similar, and a common framework and supporting technology should be developed to minimize duplicated effort.

Moving Forward

The new way of thinking about, designing, and managing an agile enterprise requires synergy between business systems and supporting information technology. In subsequent chapters, we will discuss requirements of the agile enterprise and the key supporting technologies. The technologies are based on complementary, industry standards, and they represent the state of the art in information technology for business systems.

This book incorporates advances in technology and business methods that have emerged since the first edition. Technology will continue to change as will the business methods it supports. This edition describes the combination of technology and business that represent the current potential of an agile enterprise with consideration of anticipated advances. Chapter 11 outlines expectations for further advances that build on the vision presented in this book.