Saturday, May 15, 2010

Differentiation and Integration 2

In my previous post on Differentiation and Integration, I mentioned the Operating Model propounded by Jeanne W. Ross, Peter Weill and David C. Robertson in their book Enterprise Architecture as Strategy (Harvard Business School Press 2006). I shall continue to refer to this book as RWR.

The publisher offers a pdf extract from the book, in which you will see the following diagram, depicting what RWR call a “traditional” approach to IT solutions. (It's a secure pdf, so I've had to scan my library copy instead.)


According to RWR, the “traditional” approach is characterized as follows
  • Each strategic initiative results in a separate IT solution, each implemented on a different technology, producing a set of silos.
  • The company’s data is patchy, error-prone, and not up-to-date.
  • Companies often extract from silos to aggregate data from multiple systems in a data warehouse; but the warehouse is useful only as a reference – it does not offer real-time data across applications.
RWR cite a company whose systems were linked together so effectively that no human being ever touched a transaction (straight-through processing - sounds pretty integrated to me) but for some unspecified reason this provided “a lack of foundation for execution”.

Sounds like there is “good integration” and “bad integration”. Which brings us to the squiggles in the diagram. RWR appear to have adopted a notation in which “good integration” is denoted by straight lines and “bad integration” is denoted by squiggly lines. As far as I am aware, this notation has not been not formally defined, and is therefore purely a rhetorical device.

While I accept the need for enterprise architecture to create a powerful strategic narrative, I fear that these rhetorical devices permit and even encourage a kind of woolly uncritical thinking, which is not capable of dealing with the real challenges of enterprise strategy, and could easily be dismissed as intellectually lightweight by sharp CEOs presented with this kind of stuff. Vague diagrams with undefined notation are no substitute for proper analysis.

It doesn't matter how often the three characteristics identified by RWR above are found together, the key question is whether it is possible and practical to separate them. Is data sharing (as RWR believe) the only way to achieve “good integration”, or are (as I believe) other aspects of integration (coordination, organizational intelligence) more strategically important?

Contingency Theory

RWR identify two key questions for determining your organization’s strategy.
  • To determine your organization’s integration requirements, ask yourself to what extent the successful completion of one business unit’s transactions is dependent on the availability, accuracy and timeliness of other business units’ data. (RWR p30)
  • To determine your organization’s standardization requirements, ask yourself to what extent the company benefits by having business units run their operations in the same way. (RWR p30)
These would appear to be critical questions for enterprise architects to consider, so it would surely be useful to have some rigorous methods for analysing these questions systematically, instead of merely a few pen pictures of companies that have followed one or other path.

Furthermore, both questions seem to be questions of degree ("to what extent") rather than questions of kind (either/or) - so where are the examples of companies whose rightful place is half-way along the path, rather than at one or other extreme?

Differentiation

RWR then introduce the notion of strategic differentiation. "The operating model concept requires that management put a stake in the ground and declare which business processes will distinguish a company from its competitors." (RWR p43).

I find this statement puzzling, because there is no obvious connection between the two dimensions of the operating model identified by RWR (viz standardization and integration qua data sharing) and the idea of competitive differentiation.

There are methods that focus on identifying which business processes will distinguish a company from its competitors, such as the method developed by my former CBDI colleagues out of the ideas of Geoffrey Moore (see my post Tesco Outsources Core ECommerce) but this is not the same as the RWR method.

Shared Services

One way of achieving some kinds of standardization is through shared infrastructure. When talking about shared services, RWR implicitly shift the scope of “the enterprise” from a single organization to a partnership ecosystem.

“A strategic partnership forces a shared-services mentality, requiring business leaders to come to agreement on which services will be provided centrally and which will be provided locally.” (RWR p148)

The decision of which services will be provided centrally or locally is a matter of standardization, and therefore an aspect of enterprise-architecture-as-strategy.

Enterprise Architecture as Quantitative Practice

What I find troubling in many popular accounts of enterprise architecture, including RWR, is the apparent disregard for economics. RWR talk glibly about the costs and benefits of standardization, but they are not willing to explore the economies and diseconomies of scale, or the distribution of fixed and variable costs, and there isn't much meaningful quantification. Handwaving as strategy?

5 comments:

Nigel Thomas said...

For future reference, you could have used Prnt Scrn to snapshot your screen, then cut out the diagram using Paint or similar picture editor. It gives a rather clearer result than scanning... (and no need to print off a page or find a library copy).

Regards Nigel

Cybersal said...

Hi Richard
Your point about neglect of economics by RWR and others is well made. A simple interview question for an Enterprise Architect would be to ask them to look at the 'core diagram' of Delta Airlines (supposedly an exemplar of a unification model) on page 53 of that book, and ask them which 'core database' appears to be missing from the diagram. There is no financial database that I can see.

BTW I do think the RWR 4-quadrant model is useful, but I don't think it is what most people would conventionally term an operating model. Some people (including me) consider that an operating model has more to do with how work flows through the organisation.
Sally

Josh Millsapps said...

You mention that you find the discussion and linkage of standardization and integration puzzling. I cover this in depth in a webinar I gave early last year. Thanks for a great article. I'd be interested in your take on my Weekly Webinar: Operating Model Theory at:
http://www.youtube.com/watch?v=wYUgzQLUdGg

Richard Veryard said...

Thanks Josh. As far as I can see, your webinar and blog basically follow the RWR party line. Your webinar explains why different companies should choose any of the four quadrants.

But that's not what was puzzling me. If you look at the previous blog on Differentiation and Integration, you will see that I refer back to some much more fundamental material, and also forward to some more radical strategic thinking. This prompted a great post by Ian Thomas, who explains the following irony: "not is it only possible for a business to pursue both differentiation and standardisation strategies at the same time but rather that they increasingly must do so if they are to optimise their value streams and be competitive".

Richard Veryard said...

The Ross Weill and Robertson book introduces the notion of strategic differentiation. "The operating model concept requires that management put a stake in the ground and declare which business processes will distinguish a company from its competitors." (RWR p43).

But this would imply that each business process might have a different operating model: perhaps only the processes that don't distinguish a company from its competitors should be standardized.

However this is not how the concept of operating model is presented. Instead, we are told that a whole company must choose one of the four operating models.

In my blogpost, I said I was puzzled by the lack of any obvious connection between the two dimensions of the operating model identified by RWR (viz standardization and integration qua data sharing) and the idea of competitive differentiation. If I had wanted to be more outspoken, I would have said that the quote exposes the fallacy of applying the operating model to the whole enterprise. Josh's webinar doesn't tackle this point.

Meanwhile, as Sally points out, calling the RWR matrix an operating model is misleading. The RWR matrix is essentially a contingency theory, because it merely shows some abstract choices without showing how differentiation and integration actually work in a particular enterprise.