Introduction to the Value and Governance Model of Service ... · Business value of service-oriented...

Introduction to the Value and Governance Model ofService-Oriented Architecture

© copyright IBM Corporation 2005. All rights reserved.

Table of ContentsBusiness value of service-oriented architecture About this module 2 Business value of service-oriented architecture 3 SOA and Web services synergy 5 Why industry needs SOA 6 Inhibiting factors analyzed (1 of 2) 9 Inhibiting factors analyzed (2 of 2) 10 Overcoming these factors 11 Working toward business agility (1 of 3) 15 Working toward business agility (2 of 3) 16 Working toward business agility (3 of 3) 18 Achieving business agility: SOA's competitive differentiator 19 Catalysts for SOA business agility (1 of 2) 21 Catalysts for SOA business agility (2 of 2) 22 Justifying SOA 24 Customer and analyst evaluations of SOA ROI 26 Documented examples of savings (1 of 2) 28 Documented examples of savings (2 of 2) 29 SOA case study (1 of 2) 31 SOA case study (2 of 2) 32 Summary 34 References 35 Test your knowledge 36

Business value of service-oriented architecture

Introduction to the Value and Governance Model of Service-Oriented Architecture

Page 1Course materials may not be reproduced in whole or in part without the prior written permission of IBM Corp.

About this module

This module provides a description of the business value of service-oriented architecture.

ObjectivesOnce you have completed this module, you should be able to:

n Describe the business value of service-oriented architecturen Identify the primary reason to implement a service-oriented architecture

Before starting this moduleBefore reading this module, review the previous module, Introduction to service-oriented architecture.You should have a good understanding of the concepts of SOA and Web services and a goodunderstanding of the business drivers and value proposition of SOA and Web services.

After completing this moduleWhen you have completed this module, continue to learn more about value sell by continuing to Technicalvalue of service-oriented architecture.



Business value of service-oriented architecture

Why do some companies survive and others fail?

Corporations are built on the assumption of continuity. Their focus is on operations. Capital markets arebuilt on the assumption of discontinuity. Their focus is on creation and destruction. The marketsencourage rapid and extensive creation and greater wealth-building. The markets are less tolerant thanthe corporation is of long-term underperformance. Some of the key reasons for failure are:

n Failing to move to higher value marketsn Inability to address more technologically advanced competitionn Competition from lower cost sources

Consider the following:

In 1917, US Steel led the Forbes list of top businesses and employed 268,000 people. Now its workerpopulation is reduced to about 21,000 employees. In the same year, 1917, there were eight other steelmakers on the Top 100 list and 33 other companies in the business of extracting things out of the earth.About 45% of the list was made up of such resource producers.

Will your company survive the competitive business environment?

Today, 61 of these companies no longer exist. This is a 61% extinction rate. Some of the key companiesthat have survived to the present are six oil companies, two automakers, such as Ford and GM, along withAT&T, Citicorp, DuPont, General Electric, Kodak, and Procter & Gamble.

In 1987, US Steel remained on the list of the 100 most valuable companies but was beginning a gradual



decline. One by one, over a period of many years, the other natural resource companies slipped off the listand change was powerful but slow. Examination of the S&P 500 presents a similar story. Of the 500companies originally making up the S&P 500 in 1957, only 74 remained on the list through 1997. (This isan 85% reduction rate.) It is interesting to note that such drivers still exist today. However, the rate ofchange has increased. In other words, companies are going out of business at a faster rate.

How will companies survive over the long term?The answer is in continuous business transformation.How can companies effectively execute a business plan incorporating continuous businesstransformation?The answer is by the company becoming as agile as possible, both in business process and ITimplementation.How can companies achieve the greatest business agility?The answer is service-oriented architecture (SOA).



SOA and Web services synergy

It is important to recognize that Web services is a part of the wider picture that is SOA. In fact, Webservices is not a mandatory component of an SOA, although increasingly it will be required. Manycompanies use the terms SOA and Web services interchangeably. While technically inaccurate, if acompany intends to attain business agility in order to transform its business to stay competitive, then SOAand Web services belong together.

It is a common belief that SOA is new technology; however, this is not correct. SOA is a previously provenarchitectural schema that has been reinvigorated by a new set of technologies that implement Webservices. While you can have an SOA without using Web services or deploy Web services without anSOA, implementing the two together is far more beneficial than each is individually. In many respects, it isworthwhile to look at one only with the other.

This synergy between SOA and Web services is highlighted by the following quotes.

____________________________________________________________

"85% of the firms we surveyed plan on using Web services, up from 71% a year ago (August2002). Only 3% of firms stated that they are unlikely to adopt any new Web services."

("Web Services Reach the Big Time," Forrester Research, September 11, 2003)

Note: 76% of the survey respondents for Forrester were from firms with annual revenues of greater than$1 billion (U.S.). The remaining respondents represented firms with annual revenues from $500 million to$1 billion.

____________________________________________________________

"Incremental evolution where Web services are leveraged to realize the benefits of low-costintegration and service-oriented architecture (SOA) is what companies have embraced. All ofour recent surveys show that the clear majority of those surveyed have adopted thetechnology. As a result, Web services will become more than just a check-off item forenterprises when evaluating vendor products: Enterprise architects will prefer products thatare based on SOA and designed using service-based design."

("Market Overview 2004: Web Services Solutions," Giga Information Group, December 22, 2003)

____________________________________________________________

From the statements above, it becomes apparent that in order to justify SOA, one must consider thejustification of Web services at the same time. Therefore, SOA benefits with Web services integrated arethe focus of this module. Generally, one can consider it good advice to implement SOA or Web servicesonly if the other will be present.



Why industry needs SOA

Technology innovation fuels economic growth across developed nations, having helped generateproductivity gains for the past nine years. IT investments account for about 48% of all US productivitygains and 41% of Japan's economic expansion since 1995. The US Department of Commerce reports thatUS productivity grew 2.7% per year from 1995 through 2000, and 3.8% since 2001. And in 2003,Professor Dale W. Jorgenson at Harvard University and Professor Kazuyuki Motohashi at the University ofTokyo found that IT investments accounted for 41% of Japan's economic growth in the '90s. Firms face aninnovation double whammy. While demand for technology-enabled innovation explodes, companies'ability to meet that demand declines. Forrester believes to meet the pressures from customers,competition, and regulations, leading companies are replacing their rigid and restrictive approach toinnovation. These firms are adopting a fluid market ecosystem that matches global demand for innovationwith worldwide supply. Forrester calls this dynamic market structure Innovation Networks in which:

Firms seamlessly weave internally and externally available invention and innovation services to optimizethe profitability of their products, services, and business models.

Impact of business models and services that are out of date



In the preceding figure ("Innovation Networks," Navi Radjou, Forrester, June 17, 2004), innovation isstalled. This is the competitive posture of many companies today as their business models and services



fail to keep up with the pace of change.



Inhibiting factors analyzed (1 of 2)

The stifling and inhibiting factors from the table just shown are actually revenue-robbing issues, such asalarm phrases, common among companies right now. SOA can provide real answers, such as solutionSOA, to these vexing problems. The discussion below highlights these issues and provides the areas ofSOA that directly address them.

One-way customer relationships yield market-irrelevant inventions

Obsessed with time-to-market, firms fail to capture customer requirements or test market ideas as theyevolve — resulting in the wrong products or services to market fast. For instance, only 31% of firms in theEuropean services sector seek customer input when inventing new products. The alarm phrases tell youthese companies do not have good relationships or connections with their partners and that they lackagility. Other than face-to-face meetings, SOA is the best way to alleviate these issues.

Alarm phrases: Solution SOA

n Unheeded insights from channel partners(extensibility)

n Rivals exploit customer intimacy to get buy-in(loosely coupled)

n Obliterating existing business models (agility)

Academic (ivory-tower) research and development (R&D) labs slow the rate of invention

R&D organizations can have a tendency to reinvent the wheel. Their focus on perfection over practicalitysometimes slows their productivity and dampens the innovation quality. For example, 90% of newchemical formulas never make it out of R&D labs. The alarm phrases indicate that SOA reuse of stableservices is needed for productivity and to allow business model changes when company leadershipchanges strategic direction (preferable) or when competition forces it (undesirable).


n Reinvention of the wheel (reuse)n Process-based business model innovation

outstrips many product and service inventions forbusiness impact (extensibility)

Organizations sometimes prevent collaborative idea generation

The sharing of ideas to produce integrated solutions and exploit new markets is not accepted by somebusinesses. Sometimes, even within their own company, they fail to collaborate across product units ordivisions. For example, only 35% of multinationals have a central coordination body that formulatesinnovation strategies to cut through business unit boundaries. (Multinationals lack a formal and consistentinvention-to-innovation process that cuts across all their global units. Source: Kathryn Troy, "MakingInnovation Work: From Strategy to Practice," The Conference Board, April 2004.)


n Clumsy knowledge transfer (loosely coupled)n Product-centric business units fail to exploit

cross-unit synergies (loosely coupled)



Inhibiting factors analyzed (2 of 2)

Risk-averse top management avoids radical innovation

Business unit executives avoid disruptive innovations seen as threats to existing product or service linesand business models. The financial markets' short-term revenue expectations drive risk-averse chiefexecutive officers to deny funding for innovation initiatives that pay off only in the long term or that targetnon-core markets.


n Not invented here (reuse)n Reject breakthrough service innovations

(extensibility)

Unskilled partners fail to keep pace with innovation

Suppliers' input and channel partners' selling abilities play primary roles in innovation success. However,these value chain partners severely restrict progress when they fail to stay current.


n Competitors out-innovate by plugging talentednew suppliers and distributors into their valuechain (loosely coupled)

Limited numbers of local talent slow the innovation cycles

The focus on local, internal talent no longer works. In 2000, the US granted only 59,000 bachelor'sdegrees in engineering compared with 103,000 in Japan, 149,000 in Europe, and nearly 207,000 in China.(The US accounted for 7% of the 868,000 bachelor's-level engineering degrees granted worldwide.Source: National Science Foundation's "Science and Engineering Indicators 2002.")


n US firms cannot find the skills needed to invent(Loosely coupled, reuse, extensibility)

The need for businesses to adapt quickly and establish tight integration with their business partnersdemands a level of IT responsiveness and integration that adoption of an SOA can provide. The bankingindustry is examined in this module, but many other industries suffer from the same basic problemsdescribed in this module.

The corporate tendency to just make it work has often resulted in infrastructures with many applications(and departments) that work separately from each other. To interconnect these applications anddepartments, the organization often creates many separate links across each unit that look more like adisorganized mess than a structured enterprise-wide system. Untangling this mess causes a lack of agilitythat seriously impacts the firm’s ability to grow and compete.

Business realities are driving each industry’s standardization of services. As advances in informationtechnology make further industry segmentation possible, affordable, and commonplace, industryreconstruction accelerates. At an enterprise level, industry reconstruction eventually leads to an inspectionof the current business model and its components.



Overcoming these factors

Having gained this level of understanding, enterprises can start to prioritize and act on the business andtechnology opportunities and challenges confronting them. Successful companies typically adopt aportfolio approach, composed of initiatives that exercise one or more levers of shareholder value:

n Revenue growth opportunities challenged by the inability of existing systems to cope withnew circumstances.

n Reducing costs and shifting those costs from fixed to variable. This is challenging whenduplicate isolated organizations are not best-of-breed from a business or technologyperspective.

n Increasing return on invested capital by divesting in non-core capabilities and revitalizingcore assets.

Evolution of the financial services industry

Multi-channel ROI possibilities



As demonstrated in the figure above, enterprises have added new distribution channels as new, enablingtechnologies emerged. In banking, this is exemplified by the trend of the 1980s of establishing onlinebranch offices and the Web commerce sites of the late 1990s. These were built one at a time with the besttechnologies available. Now you know that it would have been preferable if there had been an executablebusiness model and IT strategy that tied them together. However, these isolated organizations showwhere obvious cost savings can be achieved by normalizing the technologies while adding significantimprovements in the customer experience.

In the figure below, these benefits flow directly from the reuse of services and components in the contextof a shared services-oriented infrastructure. From a development perspective, the shared service-orientedarchitecture translates into an entirely new set of dynamics and economics for how applications are builtand maintained.

Multi-channel integration: Shared business infrastructure



Once the infrastructure has been installed and customized to fit the non-functional requirements of theenterprise, business functions may be added one at a time, any time, and in a well-disciplined manner.See figure below.

Building incremental solutions



Since these business functions are built on a shared set of services, SOA implementation, the effort todevelop new business functions becomes progressively less. Customers have seen cost and time savingsfrom this development model starting at 10-20% and accelerating to 80%.



Working toward business agility (1 of 3)

While volatility and the drive for ever-higher productivity are permanently a part of business, it is clear thatgrowth is again becoming important to customers.

Information technology (IT) plays a key role in business transformation, as it implements many of thechanges a business needs to stay competitive. The more quickly IT can change in reaction to businessneeds, the faster business transformation can occur. Sam Palmisano, IBM chairman and CEO, hasstated:

"...an enterprise whose business processes—integrated end-to-end across the company andwith key partners, suppliers and customers—can respond with speed to any customerdemand, market opportunity or external threat."

This dictum describes what an IT organization needs to do to support business transformation. As thebusiness transforms, the IT systems implementing transformations have to be agile enough to changequickly and cost effectively while still performing current business function. Consequently, there needs tobe a deliberate and well conceived path to take the company from the as-is state to the to-be goal.




First step = ComponentizationThe IT infrastructure needs to balance and maximize two major areas: business applications and theiroperating environment. Business applications are the services created or purchased that directly apply toan organization’s business functions, for example:

n Customer relationship management (CRM)n Supply chain management (SCM)n Human resources

The operating environment is the set of services provided by the underlying IT infrastructure that businessapplications utilize, for example:

n Operating systemsn Databasesn Networks

For a business to meet the challenge of quick and cost-effective business transformations, IT mustrespond with incredible agility. IT agility can only be attained if IT has given itself the maximum number ofoptions to solve a problem or business challenge. Flexible options are not an inherent quality in legacyapplications or dated infrastructures. These huge, monolithic systems can be injected with new versatilityby breaking them down into more manageable pieces. These pieces can then be reused rather thanhaving to constantly create new code to use the required function (see figure below). These manageablepieces are really services that are combined and recombined over and over again to form new businessprocesses that efficiently respond to changing business requirements. Process integration events such asacquisitions, mergers, divestitures, and company reorganizations become much easier.

When applications are built, some architecture is always required. But what is the scope of thatarchitecture? That depends on the scope of the solution. Architecture involves not just the finishedapplication, but how the pieces fit together. The larger the structure, the more you need to focus on theinterfaces and how the pieces fit together, rather than the pieces themselves.

Integrating business services with the operating environment



What, then, are the benefits of breaking down these business needs into services?

n Componentization — Allows the containment of complexity by abstracting it intointerconnected services

n Reuse — Uses common services, so they do not have to be created again for differentenvironments or platforms

n Encapsulation — Hides implementation details while exposing well-defined interfacesn Decoupling — Makes the new integrated process a new service in itself that is callable by

other servicesn Quality — Implements services in one place by people skilled in that area




Second step = IntegrationAs the state of modern IT architecture evolves, IT organizations find themselves managing large numbersof legacy applications developed with different architectures, different products, and on different platforms.The most pressing challenge today is to integrate it all. In fact, most CIOs rate integration as the mostimportant challenge facing them today.

Conceptually, integration is very simple. In practice, it can become very complex unless there has been aclear separation of function defined in the enterprise architecture. This separation of function is how thecomponent services are bound in scope. Services, decomposed to the right level, will provide thefoundation for effective integration.

Most IT organizations find there is clear justification for application and data integration. Therefore, thequestion becomes, how do you do it? According to Morgan Stanley, only 1% of CIOs have actuallycompleted an integration project. It is a daunting task. Most enterprises have decades' worth of data,applications, and various do-it-yourself integration frameworks. The task of tying it all together must bedone in an evolutionary manner so that business value can be reaped early and so that existing businessprocesses are not affected. This is extremely important for business justification. Lastly, it must be donedynamically so changes in the business can be accommodated.

Strong enterprise architecture is a prerequisite to building effective business integration architecture. Thatis, well-designed enterprise architecture, with separation of functions enforced, will define the foundationalservices necessary to effectively integrate data and applications as appropriate for your business needs,as well as the means for communicating between the services. An SOA is today's best practice forbuilding a flexible, extendable enterprise architecture that provides a foundation for incrementallyreplacing functionality without impacting existing application users.



Achieving business agility: SOA's competitive differentiator

SOA and Web services have the potential to free up money within an organization, by driving downintegration costs, reducing expensive functionality duplication, and providing new revenue streams fromexisting functionality or data. Company data and processes can now be the basis for a competitivedifferentiator and new product or service offerings. In the past, companies wanted to unlock the value oftangible assets by spinning them off. The same can now be done with non-strategic Web servicecompetencies. For instance, new subscription or pay-per-use business models are now possible. Even aproject to study the possibility of using an SOA can be of great help to an enterprise because it can aid in:

n Determining the company’s core competenciesn Identifying an outsourcing strategyn Defining a plan to reduce complexity of the company’s shared IT infrastructure needs with its

trading partner community, such as cost

Change comes in many forms:

n Marketplacen Technologyn World at large

Companies that make effective use of a changing environment compete more effectively and thrive in anybusiness climate. They are particularly adept in tough economic times, often finding opportunities in themidst of chaos.

Information technology is at the center of business agility discussions. Achieving agility begins withremoving the hindrances that impede it, and the hindrances are usually in the IT infrastructure. In fact,companies are accustomed to the idea that IT creates hindrances within their organization and thattechnology and its limitations often drive business decisions. To meet the needs of the agile enterprise, anorganization must follow the following core SOA principles:

n The business drives the services and the services drive the technology — In essence,services act as a layer of abstraction between the business and the technology. From thebusiness perspective, the services represent the available software functionality. Therefore,the line-of-business can focus on business goals and not on systems and applications.

n Business agility is the fundamental business requirement — The ability to respond tochanging requirements is the new meta-requirement for business. The entire architecture,starting with the hardware, must support the business agility requirement. Any hindrance toincreased agility in an SOA implementation can substantially reduce the flexibility of theentire IT environment, and hence the business as well.

n A successful SOA is always changing — An IT environment is undergoing constant change,and as a result, the work of the service-oriented architect is never done.

Agility will be enhanced as services are used to remove the constraints of a static IT infrastructure,creating greater flexibility for strategic planning.

An SOA provides business agility in three ways: loose coupling, reuse, and extensibility.

Business agility SOA catalyst: Loosely coupled

Loosely coupled services are ones that no longer require the same technological implementation at eachend of the connection. A simple mechanism connects applications regardless of the devices they use ortheir location.

Loosely coupled benefits of an SOA



Catalysts for SOA business agility (1 of 2)

Business agility SOA catalyst: ReuseReuse is one of the most significant advantages of an SOA. The reuse of software, hardware, processes,code, services, and infrastructure provides some of the most measurable factors for an SOA return oninvestment (ROI) calculation.

Dr. Jeffrey S. Poulin is a recognized and quoted authority on software reuse. His book, MeasuringSoftware Reuse, is a watershed work in this area. In his presentation entitled Selling Software Reuse toManagement, he states:

"We believe in truth in metrics." Realistic and honest assumptions combined with a simple,easy to understand business model provide all the necessary evidence to sell reuse tomanagement.

The model starts by asking:"How much effort could you save by reusing something rather than writing it yourself?"

The answers might span a wide range, usually from 50-100%, and depend heavily on factors such as theenvironment and type of application. Based on a plethora of hard data you will find a reasonable savingsdue to reuse to lie right around 80% (allowing 20% effort for locating, understanding, and integrating thereused components). At an industry average cost to develop new software at around $100 per line, adevelopment cost avoidance of 80% will get management's attention every time. ("Selling Software Reuseto Management," Jeffrey S. Poulin, 4th Joint Conference on Information Sciences, Research TrianglePark, NC, 24-28 October 1998, PP.551-552.)

____________________________________________________________

"Organizations — A review of early case studies indicates that organizations that use aservice-oriented architecture (SOA) can reduce integration project development andmaintenance costs by 30% or more. These savings are made possible by the increasedeffectiveness of component reuse that SOA enables."

("Integration in a Service-Oriented World," Ken Vollmer and Mike Galpin, Forrester, July 6, 2004)

____________________________________________________________

Reuse benefits of an SOA



Catalysts for SOA business agility (2 of 2)

Business agility SOA catalyst: ExtensibilityExtensibility is defined as the ability to enlarge scope or operation. One of the primary business benefits ofSOA is the ability to easily expand internal operations with new functions and to easily accessorganizations outside the enterprise.

Over the years the interaction with trading partners has gone through a few iterations. The goals ofbusiness-to-business have changed from reduced transaction costs to improved process efficiencies tofinally, SOA and its connection ease.

Business interaction models approaches compared

Business services are involved with the provisioning and consumption of business interactions. It is criticalthat you understand what is contextual and what is core. A business service is a process or subprocesswithin or between enterprises. Defining a service and configuring it to be customer-specific is the essenceof business services. SOA and Web services technology can be utilized to enable enterprises to provisionand consume business services. The technology can be utilized to enable enterprises to:

n Provide: Create business services that leverage existing core competencies of companiesthat can be offered to existing or new trading partners

n Consume: Consume business services from another trading partner that they view as bettersuited to provide such a service

In extending outward from the enterprise, an SOA can significantly aid in reducing costs.

Extensibility benefits of an SOA



SOA and Web services make infrastructure widespread. With widespread infrastructure, businessservices can be provisioned and offered to any trading partner. Enterprises are deploying Web services inthe context of migrating to an SOA to drive more connections with their trading partners, which can makea better case for return on investment. Lower connection costs are driving the case.

Business agility for competitive advantage is the fundamental business requirement. SOA makes thispossible.



Justifying SOA

ROI calculation methodologyIn order to get the full benefit of SOA, a holistic approach should be taken. Such an approach takesbusiness benefits, development costs, and infrastructure costs into account. In this approach, you dividethe overall transformation into multiple projects and you estimate the ROI based on the costs and benefitsof each project. By considering the costs and benefits in total, you achieve a more balanced view than ifyou consider each project’s costs in isolation.

Many factors go into calculating ROI for SOA. The cost factors are similar to those for other IT projects,and include development costs, hardware costs, software costs, and deployment costs. The benefits aremany and include quantifiable advantages such as revenue increases and cost savings, as well asadvantages that are more difficult to quantify, such as flexibility and responsiveness to change.

Development costs include costs of project managers, consultants, and technical resources such asarchitects and programmers. Software costs include costs of development tools, middleware, such asapplication servers, message-oriented middleware, LDAP and RDBMS systems, and software formonitoring and managing deployed systems. Hardware costs include costs for servers, storage, andnetworking equipment. Some of these costs can be deferred or reduced by using hosting services andhosted applications. Deployment costs include costs for administrators, operators, and support personnel.Some of the people costs could increase at the beginning of an SOA conversion, but are expected todecrease as the benefits of SOA, such as reusability, are factored in the equation. Another factor that willdecrease costs over time is improved technology and tooling, which will improve the productivity of lessskilled developers and even allow business analysts to do tasks that currently require programmers.

The benefits of SOA are varying. They depend on the individual projects. Some projects have easilyquantified benefits, such as savings on materials or supplies. Others have benefits that are more difficultto quantify. If SOA allows you to get to the market faster, because you are able to reuse existing softwareinstead of creating software from scratch, it will increase your sales and take market share from acompetitor. Therefore, the benefits are increased revenue and profitability. If SOA allows you to servemore devices, such as cell phones, PDAs, Web browsers, and so forth, by increasing customersatisfaction, it could increase your sales or decrease your customer support costs, with measurablebenefits on the bottom line. If SOA allows you to reach more customers by integrating with a leadinge-commerce site such as eBay or Amazon, it could increase your sales. If you are in a supply chain andhave to integrate business partners into your network, using SOA makes integration easier. Thisdecreases the cost of integration. If you provide data to customers or suppliers using Web pages,providing the data via SOA eliminates manual touches, decreases error rates, and increases customerand supplier satisfaction. If you provide data to customers, suppliers, or other applications using data files,such as bulk data transfer, providing the data via SOA eliminates latency, which can have an impact onthe bottom line. Providing data via SOA and Web services may also result in a more valuable service foryour customers, resulting in higher revenue.

Most businesses have issues, problems, or pain points that, if solved, would have significant impacts onimportant measures such as revenue, profit, time to market, or ability to respond to new challenges andopportunities. These pain points can be found though a variety of methods, including component basedmodeling. The methods generally focus on the company’s strategic direction, its business processes, andits IT environment. The methods analyze the current state, industry trends, and technology trends as wellas corporate strategy. The result consists of corporate drivers, business objectives, and a set of businessinitiatives that will transform the business to achieve its goals, such as revenue and profit. In most cases,these business initiatives provide opportunities for IT. These opportunities support the initiatives andultimately help the company reach its goals. The opportunities can be categorized based on whether theyare:

n Foundation opportunities — Opportunities that should be initiated prior to other opportunitiesto enable the development and ease of future system integration

n Enhancement opportunities — Opportunities that will improve or expedite current processesn Quick-win opportunities — Opportunities that can be implemented quickly and whose

benefits can be realized in the near termn Transformation opportunities — Opportunities that will change the current operating model



and directly impact the businesses revenue stream or profitability

By examining the opportunities, estimating the costs and benefits of each opportunity, a dependencygraph of opportunities can be created. A dependency graph of opportunities is a graph that shows whichopportunities are prerequisites for others. You can create a roadmap for a transition to SOA anddetermine the ROI for a group of opportunities, thereby justifying the initial outlay for a conversion to SOA.

IBM Global Services Business Consulting Service provides component based modeling services to helpbusiness gain insights into the strategy, technology, operations, and investment alignment of theirorganizations. For more information, see http://www.ibm.com/services/us/index.wss/so/igs/a1005119 .



http://www.ibm.com/services/us/index.wss/so/igs/a1005119

http://www.ibm.com/services/us/index.wss/so/igs/a1005119

Customer and analyst evaluations of SOA ROI

Here are what some of the analysts, consultants, and customers have to say about ROI for SOA and Webservices.

____________________________________________________________

Don Buskard, Senior VP and CTO of AXA Financial states:"The benefits of easier integration and increased agility lead to greater ROI." Buskard sayshe’s achieved a 200 percent return on his SOA investment. One of AXA Financial’s mostpopular SOA-based services is Get Client, in which any front-end app can issue a commandand, after probing around the legacy systems, come back with a complete picture of acustomer’s investments. Buskard says that Get Client is one example of how AXA achievesits ROI — developers design services to be generic enough that they can work with an arrayof front-facing systems, reducing development time and freeing developers to spend moretime on business solutions. In addition, IT workers can easily incorporate new technologiesinto the SOA, reducing risk and expense while speeding development of new applications

("What you need to know about service-oriented architecture." CIO magazine, Jan 15, 2004.)

____________________________________________________________

"How much effort could you save by reusing something rather than writing it yourself?Typical answers span a wide range (usually from 50% to 100% savings) and depend onfactors related to your environment and existing applications."With this in mind (and based on a lot of hard data), we estimate that a reasonable savingsdue to reuse is approximately 80% of the cost needed to develop the same softwaredevelopment asset (SDA) for one-time use. At an industry-average cost to develop newsoftware of around $100 per line, this means that every 1,000 lines of reused code yields adevelopment cost avoidance of $80,000!...."A service-oriented architecture requires developers to design services that have the propergranularity and generality for reuse."

("The business case for software reuse," Jeffrey Poulin and Brent Carlson, Computerworld, February 2,2004.)

____________________________________________________________

"A review of early case studies indicates that organizations that use a service-orientedarchitecture (SOA) can reduce integration project development and maintenance costs by30% or more. These savings are made possible by the increased effectiveness ofcomponent reuse that SOA enables."

("Integration in a Service-Oriented World," Ken Vollmer and Mike Galpin, Forrester, July 6, 2004)

____________________________________________________________

Financial return

IDC conducted a study in 2002 with in-depth interviews of seven IBM customers implementing Webservices. The overall results of the analysis were:

"On average, major benefits projected over three years include a reduction in costs of $39.7million on an investment of $1.8 million, 22% faster time to deployment of key newapplications, and an increase of 47% in developer efficiency."

For most, time to market was the key driver. The ability to deliver services online to employees,customers, partners, and suppliers quickly and easily, using simple interfaces across disparate systems,holds universal appeal. In addition, the ability of external parties to manage their own account informationvia a self-service model was also valued.

The IDC study also found:

n On average, developers became 47% more efficient and companies were able to save $2.2million annually through reallocation of developer assets or meeting increased demand for



applications without hiring additional developers. In addition, companies with call centerswere able to increase the efficiency of their operations by 15%. Because Web services arestandards-based, it also protected prior investments in technology. Companies were notlocked into specific service or platform providers.

n Investment estimates from each organization interviewed found that companies spent, onaverage, $6.76 per user for their Web services projects. Costs ranged from $0.17 to $17.50per user. Users were defined as anyone in contact with the applications launched via Webservices and included employees, partners, distributors, consortia members, customers, andregulated companies.



Documented examples of savings (1 of 2)

Documented savings from IBM customersThe following are some data collected from IBM customers showing the financial returns of Web services:

n One large financial services company was able to save three weeks of time (2,700 hours)and $170,000 in costs by introducing new applications via Web services.

n An online retailer reduced the time required to set up the extranet relationships critical togetting its business functional from six months to two months. This time savings allowed thecompany to gain four additional months of revenue. For this online retailer, the competitiveadvantage came from being first to market.

n A medical service replaced a paper-based forms process where medical forms were sent infor verification. In automating this business process, its partner companies were able toreduce the time required to process claims by 50% through the elimination of paperhandling. Many members were able to raise productive time by approximately 2,400 hoursannually, resulting in collective savings of $1.1 million. The increase in productivity had othersignificant benefits as well that could not be measured directly. For example, many clericalerrors were eliminated, and lost documents due to misfiling and misrouting were reduced.Employees had more time to review forms and implement quality-control measures, whichresulted in more accurate work, faster turnaround, and higher customer satisfaction.

n An online retailer estimates that its revenue increased by 2% due to its distributors beingable to create better business-to-consumer applications. The customer has only 10 retailstores, and it generates about 80% of its business from online sales. Web servicestechnology lets the company get its distributors online faster by using simple interfaces,accelerating time to market. Setup time for initiating extranet relationships has been reducedby 33%, going from one year to eight months. Since Web services can be deployed usingindustry standards, an added benefit has been that the technical staff among its distributorsis more eager to build applications than in the recent past.

n A government agency used a Web-enabled e-commerce system to standardize andautomate the reporting format and data requirements for the companies that it regulates. Inturn, the automation increased the efficiency of the government agency and the companiesbeing regulated by 20–30%. Today, only 10–25% of the companies are involved, and thegovernment agency estimates that by the time all companies are part of the system, it willhave avoided hiring 10–12 people to monitor regulatory compliance.

n An online retailer now has more of its distributors using online systems and estimates that asignificant portion of its call center operation, about 100 people, are approximately 25%more efficient. The ability to reuse software through a Web services architecture makesfeature exposure easier across company organizational lines for this company's 200developers. As a direct result, 50 developers will become 30% more productive over thenear term.



Documented examples of savings (2 of 2)

Documented examples from public sourcesThe following are some real numbers from public sources on the financial returns of implementing SOAand Web services:

AXA Financial:

n Industry: $7.5 billion (U.S.) insurance and financial services companyn Application: Services-based IT infrastructuren "Sticking to a vision has its rewards. For AXA Financial Services LLc, those rewards add up

to about $55 million, which is what IT executives figure they’ve saved by adhering to ablueprint for the services-based computing architecture the company first laid out in1990….The bottom line is that AXA has saved a lot of money," says CIO Bill Levine.

"We spent about $35 million on our architecture, and we estimate it would have cost usabout $90 million to do the same thing had we not had an architecture in place," Levinesays.

("Building an IT architecture for the long term," Computerworld, February 09, 2004.)

Providence Health System:

n Industry: 606,000-member system of hospitals, clinics, and assisted-living complexes in theNorthwest.

n Application: Providence is using Web services to create:". . . a network of reusable components that likely will save it more than $1 million per year,lead to better patient care, and potentially save lives…The project will make medical andother records, which are spread across disparate systems, accessible to patients andphysicians through portal-based applications."

n The system"pulls together in no more than 3 seconds all the electronic medical records a patient’sprimary care physician has stored…The system aggregates data from 27 physician offices."

n "This is more of a business-based ROI based on what this new technology will allowphysicians to do,"

says Mike Reagin, director of research and development."It's significant to say that potentially making this technology available to physicians can saveus $700,000 per year. That is in addition to savings Providence gets with its Profile ManagerWeb service introduced two years ago."

n "As its Web services effort has evolved, Providence has created its version of aservice-oriented architecture (SOA) built on component collection that provides simple andreusable interfaces for incorporating patient data into an application."

("Web services project protects healthcare provider," Network World, March 15, 2004.)

Bekins Company: (More IBM customer references are available athttp://www.ibm.com/software/solutions/webservices/applicationbriefs.html )

n Industry: Moving companyn Application: Logistics managementn Tonnage Broadcast Exchange (TBE) focused on solving a long-standing problem of how to

tender shipping jobs to Bekins agents. In the past, jobs had to be tendered by phone or fax,often causing delays and sometimes a feeling of unfairness on the part of the agents. TBEautomates this process by offering the opportunity to all qualified agents at the same timeand enabling an agent to instantly claim the job, making it no longer available to anyoneelse.



http://www.ibm.com/software/solutions/webservices/applicationbriefs.html


n Reduced operating costs resulted in improving profitability by $1M. TBE enables Bekins topass on lower-margin freight more efficiently to its business partners, reducing its carryingcosts up to 2% while maintaining high levels of customer service.

n Reduced cycle time by 25% and improved customer satisfaction and loyalty. Through theuse of advanced Web services tools and technologies from IBM, which provided extensivesample code, Bekins shaved two-thirds off the development cycle. This saved an estimated$100,000 compared to building the solution from scratch.

Nintendo Australia:

n Industry: PC and video game creatorn Application: Software maintenancen "Odyssey has the potential to save Nintendo around one million Australian dollars over the

course of four to five years,"

Stroud [information technology (IT) Manager at Nintendo Australia] predicts. This year,Nintendo Australia stands to save about AUS$20,000 in maintenance costs alone onancillary software packages that it no longer needs. For example, the distributor cangenerate all of its documents electronically, in PDF format, eliminating the need for paperprocessing, sending, archiving and storage facilities.

A reasonable and justifiable estimate of reduced integration project development and maintenance costsdue to SOA is 30%.



SOA case study (1 of 2)

IntroductionA well-known company in the travel industry needed to become more agile. Customers in the travelindustry were price-sensitive and had little brand loyalty; therefore, the company needed to continuouslyrefine and enhance its services while keeping prices low. It had a legacy reservation system that was coreto its business, but the system was hard to change. There were multiple failed attempts to reengineer thelegacy system, and replacing the system was too expensive. The company needed to support a variety ofdelivery channels, including its own Web site, its own call center, and travel agents. It also needed to beable to support product customization for each of its locations, which numbered in the thousands. In orderto achieve the flexibility that was required, it decided to adopt SOA.

Business contextThe company in this case study was a leader in their field. Their services were used by business travelersin many parts of the world. Like many companies in the travel industry, their services were very similar totheir competitors’ services, and their customers or their customers’ employers were willing to switchbrands based on price and convenience. Because of this, the business needed to be able to change itsservices and prices quickly.

The company sold their services through several channels, including call centers, travel agents, thecompany Web site, and the company's offices.

The company had a legacy reservation system that was crucial to their business. The system managedinformation about:

n Physical assets that are used to provide the company’s servicen Company’s customersn Customers’ reservations

The legacy system was used by employees directly, and by customers via the Web. It also had interfacesto other companies in the travel industry, such as travel agencies.

IT environmentThe company had tried without success to reengineer the legacy reservation system. The company hadconsidered replacing it, but the cost would have been too high. The organization that maintained thesoftware was separate from the organization that provided services to the end customers.

Each of the company’s offices had mainframe terminals, such as 3270s that accessed the reservationsystem. The offices also had printers that used mainframe protocols. Maintaining and supplying theseprinters was relatively expensive, but the legacy system was only able to send printed output to legacydevices.



SOA case study (2 of 2)

Strategy and business caseIn order to increase flexibility and decrease costs, the company decided to build a front end for the legacyreservation system. To realize the benefits of loose coupling and reusability, they decided to use aservice-oriented architecture (SOA). The SOA would allow them to implement new business services andtake advantage of alternative technologies such as TCP/IP-based printers, without changing their legacyreservation system.

Converting to SOA would require service-oriented access to the legacy reservation system andinfrastructure for a service-oriented design and implementation. Converting to SOA would facilitate newapplications for pricing flexibility and reservation printing. The costs of the conversion, infrastructure, andnew applications, compared with the benefits of the new applications, were expected to yield a positiveROI for the entire effort.

RealizationIn order to make the transition to SOA, the company added a service-oriented interface to its legacyreservation system, created infrastructure for service-oriented systems, and wrote new applications thatused Web services.

The company’s infrastructure for SOA consists of the following kinds of commercial off the shelf software:

n Application servers that support Web services protocolsn Message oriented middlewaren Software for maintaining authorization and authentication information using Lightweight

Directory Access Protocol (LDAP)n LDAP databasen Monitoring and management softwaren Application development environments for enterprise Java applicationsn XML editors

Using the above, the company wrote two new applications. One of these applications, when fullydeployed, will save enough money to pay for the entire SOA project. The other application providesflexibility that the company was unable to achieve previously. The realization is shown graphically in thefollowing figure.

The company’s realization of SOA and their transition to SOA will be described further in the moduleTechnical value of service-oriented architecture.

Architecture of company’s SOA realization



ConclusionIn the case study of the company in the travel industry that was presented earlier, four opportunities weredescribed. Adding a service-oriented interface to the legacy reservation system was a foundationopportunity that did not provide benefits in and of itself, but it laid the groundwork for other projects.Creating an LDAP system could be viewed as a foundation or enhancement opportunity. If the company’sexisting Web applications needed a better way of authenticating and authorizing users, it was anenhancement opportunity. The pricing application was a quick-win opportunity. Its benefits were increasedabilities to respond to market forces and business opportunities. The document maintenance and printingapplication was also a quick-win opportunity. Its biggest expected benefit was cost savings because it willallow the business to use more economical printers and supplies. Taken as a whole, these opportunitiesgive the company a solid foundation for the transition to SOA and are expected to have a positive net ROI.

By considering the costs and benefits of individual opportunities and creating a plan containing sequentialand possibly concurrent projects, you can begin to achieve the benefits of SOA with a positive return oninvestment. As foundational projects are completed, they lay the groundwork for more transformationopportunities and allow IT to serve the business in more productive and innovative ways.

By moving to SOA, the company has made it much easier to create new applications. The expected costsavings that result from one application will justify the cost of the conversion to SOA. By using SOA, thecompany will be able to respond quickly to opportunities and threats.



Summary

Now that you have completed this module, you should be able to:

n Describe the business value of service-oriented architecturen Identify the primary reason to implement a service-oriented architecture

Remember, service-oriented architecture provides business agility, which is a significant competitiveadvantage for your customer.

The adoption of SOA-based Web services in the enterprise is almost certain to happen, in the opinion ofmost. The business and technical benefits that SOAs offer companies are significant, and thetechnological barriers to adoption are low. Services, built correctly, will expand beyond the vision of thepeople who built them. The question is not if, but when. SOAs and Web services are approaching thattipping point, whether or not companies plan for it.



References

The following resources provide further reading or sources of help.

n "Building an IT Architecture for the Long Term," Computerworld, February 09, 2004.n "The Business Case for Software Reuse," Jeffrey Poulin and Brent Carlson, Computerworld,

February 2, 2004.n "Executive's Guide to Web Services," Eric A. Marks and Mark J. Werrell. © 2003.n IBM Customer References.

http://www.ibm.com/software/solutions/webservices/applicationbriefs.htmln "Innovation Networks," Navi Radjou. Forrester, June 17, 2004.n "Integration in a Service-Oriented World," Ken Vollmer and Mike Galpin, Forrester, July 6,

2004.n "Making Innovation Work: From Strategy to Practice," Kathryn Troy. The Conference Board,

April 2004.n "Market Overview 2004: Web Services Solutions." Giga Information Group, December 22,

2003.n "Science and Engineering Indicators 2002." National Science Foundation. © 2002.n "Selling Software Reuse to Management," Jeffrey S. Poulin, 4th Joint Conference on

Information Sciences, Research Triangle Park, NC, 24-28 October 1998, PP.551-552.n "Web Services Project Protects Healthcare Provider," Network World, March 15, 2004.n "Web Services Reach the Big Time." Forrester Research, September 11, 2003.n "What you need to know about service-oriented architecture." CIO magazine, Jan 15, 2004.





Test your knowledge

The online version of this lecture contains a quiz you can take to test what you learned in this module.Correct responses and your score are displayed after you answer the questions, but the scores are notreported or recorded. You may take the quiz as often as you want.

To find the quiz, open the online version of Business value of service-oriented architecture to the Testyour knowledge page in the module.



Introduction to the Value and Governance Model of Service ... · Business value of service-oriented...

Documents

Transcript of Introduction to the Value and Governance Model of Service ... · Business value of service-oriented...