Does Britain Need Smaller Banks?

George Osborne, possibly the next Chancellor of the United Kingdom Exchequer, has asked some good questions about the right size of banks. (Robert Peston, Tories to break up banks?, BBC 8th April 2009)

"We cannot allow one part of our economy to behave in a way that puts the rest of the economy at risk when it fails. We need to think deeply about whether we can sustain banks that are not only too big to fail, but potentially too big to bail."

"We should look at whether Britain in fact needs smaller banks. For it would be a bitter irony if we came out of this crisis with a banking system that was even more concentrated and even riskier than the one we had before it."

It is no longer obvious that large banks are any more financially viable than small banks. What seems pretty clear is that large banks are more difficult to regulate. What was the economic logic behind all those mergers and acquisitions in the banking sector anyway? Whatever may have been gained in terms of the economies of scale were totally blown away by the economies of governance.

Umair Haque asks (rhetorically) why bankers never talk about reforming banks. However, as Osborne points out, now that the British government owns a large chunk of the banking sector, there is an opportunity to make radical changes to the sector as a whole, rather than merely controlling the behaviour of each company within the sector. I hope this will allow a serious debate on the scale and granularity of business. See my earlier post on Business Model and Financial Viability.

Update: Here's what Henry Mintzberg has to say about General Motors, in a piece called America's monumental failure of management (Globe and Mail, 16 March 2009).

We hear now about "too big to fail." "Too big to succeed" is more like it. General Motors has been going slowly and painfully bankrupt for decades, managerially as well as financially. The new money will only put off its demise. Americans will have to face this reality sooner or later.

See also Towards Partition (Economic Principles, April 2010).
and Do banks need more intelligence? (Demanding Change, May 2010)

Straight-Through Processing 3

Where have all the agents gone? asks Seth Godin. He is talking about travel agents, stock brokers, real estate, and so on.

"The problem with being a helpful, efficient but largely anonymous middleman is pretty obvious. Someone can come along who is cheaper, faster and more efficient. And that someone might be the customer aided by a computer."

Straight-through processing - sometimes seen as one of the potential sources of value from service-oriented architecture - is a mixed blessing, as I've pointed out before. There is always a danger of disintermediation, especially if the added value provided by the middleman appears trivial or easy to replicate. As Seth Godin points out, if you are just providing an anonymous human approximation of Google, don't bother - Google does it better.

In some industries, the middleman had become lazy - taking a cut for not doing very much. My local travel agent never gave me any useful information or advice, merely handed out brochures from the travel companies and struggled with the complexities of the booking system; so I stopped using them. And in the financial markets there are still companies that think they deserve a percentage of your pension fund in return for pressing a few buttons now and again.

In the past companies like these have often been able to take advantage of a strategic position in some larger process, extracting "rent" but without creating value. And there are doubtless still many niches in the system ecosystem that can be exploited in this way.

However, service ecosystem niches that allow companies to draw rent without creating value are going to be short-lived, and rightly so. In hard times, the percentage should only go to companies that are providing genuine value. (Actually the same principle applies all the time, but people are more motivated to follow this principle now than they have ever been before.) And ecosystem SOA should help us to make sure of this.

Then business strategy in a dynamic service ecosystem should not be based on finding and maintaining positional advantage, but on creating and maintaining genuinely productive relationships.

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Previous posts

• Straight-through processing (Feb 2005)
• Straight-through processing 2 (April 2005)

Business Strategy and Alignment

Which relationships dominate an organization? Some organizations are driven by customer relationships, some by partner/supplier relationships, and some by technology and research.

One of the ideas I picked up many years ago from a paper by Professor Joseph Tidd was the strategic importance of this choice: which external relationships are dominant, and how this affects the internal power relationships within the organization.

• For example, a technology breakthrough strategy would be driven by R&D, often in close collaboration with companies that would normally be regarded as competitors.

• By contrast, a strategy of technology fusion would require a much stronger role for production, with close links to suppliers of component technology.

Obviously such business strategies will need to be supported by information systems that communicate across and between organizations in an appropriate manner. Some strategies may require so-called Chinese walls, providing a level of protection from information leaking prematurely to competitors. Some strategies require a degree of proximity bordering on intimacy - business jargon refers to this as "getting into bed with" your suppliers or customers or business partners.

So I was interested to read an interview with Prith Banerjee, director of HP Labs (Riding the Recession the HP Way, BBC News, 14 March 2009). Here are some key quotes.

The world's largest technology company says a major reorganisation of research efforts last year will help it survive the downturn and secure its future. In 2008 HP announced a "groundbreaking" move to align the work done in its labs more closely with business goals. ... While most companies keep their most valuable research projects under wraps, HP has taken a different tack. Everything is out in the open and there is a real emphasis on collaboration with universities, government and other industry players.

In other words, HP believes the business architecture implemented last year gives it greater viability in the current environment. We shall see if they are right.

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Tidd, J. 'Technological Innovation, Organizational Linkages and Strategic Degrees of Freedom', Technology Analysis and Strategic Management 5(3) 1993, pp 273-284

SaaS for the Pessimists

One of the critical success factors of SaaS is the paradox of confidence.

As I've pointed out here before, SaaS (Software-as-a-Service) helps you to manage your Service-Oriented Cashflow. By shifting from fixed costs upfront to variable costs later, you may be getting a cashflow advantage even if you end up paying more in total.

Now here's the thing about confidence. Optimists prefer fixed costs because they expect to get economies of scale; pessimists prefer variable costs because they fear they might not. So in an economic downturn, it makes sense for pessimists to shift a lot of expenditure to Pay-As-You-Go.

Some analysts are comparing SaaS (Software-as-a-Service) with ASP (application service provision). Although ASP had some notable successes, it wasn't anything like as commercially successful as its champions hoped. However, in times of credit crunch and pessimism, the cashflow arguments may be much more telling this time around.

Now here's the second thing about confidence. Pay-As-You-Go may improve the cashflow for the service consumer, but it typically causes cashflow problems for the service provider. So maybe only the most confident service providers - with the best technology and the most confident investors - can afford to offer services on a Pay-As-You-Go basis.

And here's the third thing about confidence. The consumer needs to be confident that the service provider is going to stick around. That means financial stability as well as technical stability. Does this mean it's the big companies who are going to make all the money from SaaS?

Microsoft certainly hopes that "Customers will write us bigger checks". See comment by Ed Brill (IBM), via Esther Schindler. But Microsoft can probably afford to wait for the cheques to roll in. Smaller companies will somehow have to find a way to finesse the cashflow.

From SOA to Better Judgement

In the comments to my post From Complex Events to Predictive Analytics, I have been debating with Hans Gilde about the causes of the credit crisis, and the possibility that better systems and technologies might have prevented the crisis.

Hans writes

"if people had not deluded themselves into ignoring obvious risks, they would have put more realistic calculations in their spreadsheets, resulting in better judgment that would, AFAIK, have prevented the credit crisis"

Hans is not alone in making this kind of assertion, which appears to be largely based on an optimistic belief in the power of technology to solve problems. But my understanding of economics is that it is a pessimistic (or "dismal") science, in which periodic crises are pretty much unavoidable. Like forest fires or domestic arguments, they can be delayed or suppressed for a while, but that simply makes them bigger when they eventually break out. Certain politicians claimed that "we will never return to the old boom and bust" but, as we now discover, presided over a much larger boom and bust [Channel Four News]. The idea that there is any technocratic solution to fundamental economic problems seems like hubris.


I am also worried by Hans' appeal to "better judgement". Of course we'd all like to think that SOA produces better judgements, so I tried looking for evidence of this, but an internet search for "SOA" and "better judgement" mostly found pages in which the words "better judgement" were preceded by the words "against" or "despite". Oh dear.

But even if SOA does produce better judgements, there is still a problem: better for whom? The service-oriented world is essentially a distributed one, with no central judge, no supreme court. So there is no fixed standard of value.

There was an interesting example just yesterday on a BBC Radio programme called More or Less. Paul Wilmott (described by the BBC as a "financial mathematics guru") explained how a typical bonus system motivates financial traders to copy one another in order to maximize their expected bonus, even though this inhibits portfolio diversification and therefore reduces the overall stability of the bank. So what counts as a better judgement for the trader does not necessarily count as better for the bank and its customers. If you provide better information to the trader, this may well help the trader maximize his bonus, but doesn't necessarily produce better results for anyone else. (The argument can also be found on Paul's blog, in a post called Science in Finance V: Diversification.)

Of course it's easy enough to see what the problem is here - it is that the bonus system is wrong. But if you design computer system improvements without considering the inevitable imperfections in human systems, you are very likely to get a nasty shock.

In any case, even if you had a bonus system that perfectly aligned the motivation of the trader with the interests of the bank, and even if you could produce a computer system that perfectly calculated the True Value of every asset in the world, traders wouldn't use these calculations because they wouldn't generate enough money. What traders really want is a recursive system that calculates what every other trader thinks the value is, in order to spot market movements a few moments before everyone else. But why would anyone expect the widespread possession of such systems to make the global economy any less unstable?

There are many possible positive contributions that SOA might make to the operation and supervision of complex trading systems. But if we want these systems to produce good results for the right people, we have to do some really hard systems thinking, and not just hope that speeding things up is going to solve all the problems.

Market Predictions - CEP

What lies in store?

Complex Event Processing (CEP) guru David Luckham asks What are your predictions for 2009?

What challenges?

Prediction is hard, especially for experts. What is easier is to identify some of the challenges that have to be addressed. For example:

• Detection (Tim Bass)
  
• Interoperability (Opher Etzion, Tim Bass)
• Scope and Terminology (Opher Etzion, Paul Vincent)
  

CEP Products or Services?

David's starting point was a Forrester estimate of the market for CEP software and services. But what kind of services are these? Is Forrester just talking about conventional systems integration services - e.g. paying consultants to build and install your CEP systems? Or are we starting to see a genuine service economy based around the trading and collaborative processing of events?

A certain amount of this kind of thing goes on in the security world, with specialist firms performing what is essentially collective event processing for a number of customers (Monitoring-as-a-Service). But apart from that, I haven't seen much evidence of a distributed economy of complex events.

But why might this kind of thing be particularly interesting in 2009? Because the prevailing economic environment may make it harder to justify people going it alone, building large and complex event-processing applications for their own use.

Shortening the lead

Most people are expecting 2009 to be a tough year. In such circumstances, there is a widespread reluctance to invest scarce resources on remote gains; any vendors trying to sell solutions to business will need to find innovative ways of shortening and tightening the lead between investment and return.

For example, instead of vendors offering an elaborate set of CEP products, together with consultants skilled in wiring them together, there may be demand for out-of-the-box hosted solutions.

Shared Event Semantics

But in order to share events and event processing, firms will need to have a common event model. Which brings us back to some of the challenges identified by Opher, Paul and Tim ...

And Not Just Complex Event Processing ...

These arguments don't just apply to complex event processing, but to many areas of new technology. I'll look at some other areas in subsequent posts ...

Broken Business Models 2

I heard someone on the radio the other day talking about bankruptcy. [BBC Radio 4, InBusiness, 18 December 2008] One of the features of the current economic crisis is that there seems to be a much shorter leadtime between a company's getting into difficulty, its creditors and suppliers getting edgy, and the company directors calling in the administrators.

Once upon a time I worked for a company that sometimes had threadbare cashflow, limping from month to month, the accounts department constantly trying to press customers to pay early and suppliers to accept late payment. (I should say I was not a director of this company, and didn't know much about this until later.) This company survived and prospered; I am sure many now-successful companies have had similar periods of uncertainty in their history.

Directors know they will be held personally liable if the company collapses, especially if they continue to trade when the company is non-viable. This is not just a question of being risk-averse, it is also that there has been a systemic change over the past few years. New kinds of regulation (such as Sarbanes-Oxley) combine with new technologies (such as SOA) to promote and enable maximum transparency and minimum latency. This greatly reduces the ability and willingness of company directors to wing their way through a crisis, thus making the crisis worse.

SOA is in no way responsible for the current crisis, but the presence of SOA and related technologies may have had some effect on the way that the crisis has developed and is continuing to develop.

The answer for risk-averse company directors is not to turn their backs on transparency and rapid-response, but to embrace these things, not just for the sake of their companies but to preserve their own wealth. "SOA or debtor's prison" - now that makes a compelling argument doesn't it?

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This is one of a series of posts on Broken Business Models

• 16 December 2008
• 19 December 2008
• 1 February 2009
• 12 February 2009 

See also Two Kinds of Business Model (December 2008)

Broken Business Models

This is a follow-up to my post on Two Kinds of Business Model. See also discussion on Business Improvement in the CBDI Forum Linked-In group.

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In many different industry sectors, commentators are calling the business models broken.

• Automobiles: Automotive News
• Banking and Finance: Will Hutton, Seeking Alpha, MarketWatch
• Computer Games: Kotaku, Bruce on Games, GigaOm, Broken Toys
• Electronics and EDA (Electronic Design Automation): Sramana Mitra, ZDNet
• Governments: USA Today
• Mail Order: F. Curtis Barry
• Newspapers: Elias Bizannes, Ryan Sholin via Virtual Economics, Louis Gray
• Open Source Software: Business Week
• Printing: EE Times
• Retail: Marketing Week, Lean UK (pdf)
• Venture Capital: VentureBeat
• All Of The Above: Robin Bloor

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Firstly, we don't have to take all of this at face value. I don't know of any sectors that are entirely unaffected by the economic downturn, but struggling isn't the same as broken. Broken doesn't mean having a bad few months, laying some people off, being extra careful (or worried) until economic conditions improve. Broken means fundamentally and irretrievably non-viable. It means that the old way you were making money has gone away and may never come back.

On the radio the other morning there was a discussion of the troubles at the Chicago Tribune. Someone was talking about "the business model" of the great traditional newspapers. Clearly this is Business Model (B) in my terms.

One of the things this kind of business model does is describe where and how value is created - for example whether you are using newspaper sales or advertising revenue to fund high-quality journalism. This is not a value chain in the traditional sense. Capability X generates the funds to support capability Y, but there is strict decoupling between X and Y, so that for example we don't allow advertisers or retail newsagents to influence the news-gathering agenda. There are lots of business models in which one activity subsidizes another one. (Doesn't that mean that enterprise architects need diagrams to show the generation and consumption of funds?)

This is not the only kind of broken business model. In some cases, a business model has long been cracked and it was only a matter of time before things fell apart. For example, people in the telecoms world have known for twenty years that the cost of a telephone call was on a diminishing curve, and that telecoms companies needed to find some other source of revenue.

In some industries, people are putting the blame on complexity. Sometimes even sophisticated investors were unable to understand how their money was being invested. In today's news we discover that a major hedge fund, run by Bernard Madoff, was being run as some kind of Ponzi scheme [BBC News, 16 December 2008, see also Bill Burnham on Madoff Madness]

So what kinds of business model are not broken? Chastened, the surviving hedge fund operators are talking about a return to simplicity and transparency. Complex enterprises based on fragile cross-subsidy may need to be unbundled. Perhaps we shall see a return to business models that we can explain to our children.

After a forest fire, it is the simple pine tree that reappears first, taking advantage of a clear space for quick growth before the more complex trees can get reestablished. Perhaps we may look forward to several years of straight and upright business models?

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This is one of a series of posts on Broken Business Models

• 16 December 2008
• 19 December 2008
• 1 February 2009
• 12 February 2009 

See also Two Kinds of Business Model (December 2008)

SOA Bank

In a discussion on the CBDI Forum Linked-In Group, Dave Ruzius proposes an SOA Bank.

'Did anyone ever consider a "SOA Bank" that would fund initial investments for SOA transformation and service development for a nice cut of the cost savings after x years?'

I love the idea of an "SOA Bank", but there's that voice in the back of my head saying "It will never work". The killer question is of course trust between the "lender" and the "borrower". Unfortunately, there is no agreed benchmark for measuring cost-savings. So there is too much scope for disagreeing (and even cheating) on the actual levels of cost-savings achieved, especially if there is real money at stake. This is ultimately a question of financial governance.

So let's look at the situations where it might work. In a public sector environment, or in a global multinational, you might have a central accounting function with enough power to make this kind of arrangement viable. Or even in an ecosystem dominated by a single player - perhaps a major manufacturer or franchise operation, providing funding for cost-saving initiatives by its suppliers or franchisees.

At the other extreme, you could have some kind of market mechanism. If the cut of the cost-savings is built into the price of using the service, then the SOA Bank will get its money back if and only if enough people are using the service.

I think we can expect organizations to get a lot more savvy about IT procurement generally, and if SOA gives them more negotiating options (for example, pay-as-you-go or payment-by-results) then we can expect people to take advantage of this. And we can expect suppliers to respond to this pressure - there are already many offerings in the "xxx-as-a-service" category, and I am sure more of these will emerge during 2009.

Funding is going to be squeezed all round, so SOA transformation programmes are going to be managed on the basis of just-in-time investment. You need to look carefully at the capabilities needed at each stage, rather than rushing around the SOA supermarket and just chucking everything with an SOA label into your shopping basket in case it might be useful.

Finally, if there was going to be an SOA Bank, whether supporting the demand-side or the supply-side, it would need to check SOA plans for credibility and viability before offering any funding. If this meant that over-ambitious or incoherent plans got sent back to the drawing board and only sensible plans got approved, this would surely be a good thing for SOA. Wouldn't it?

Business Value from SOA - Longtail Optimization

Someone who hides behind the sobriquet "Mr Web Service" has posted an interesting idea: that software-as-a-service permits small firms to optimize fine details of their business operations, where this would previously have required the acquisition and installation of expensive software.[Software as a Service (SaaS) & UK/US Credit Crunch]

The (self-interested) example he posts is route-optimization-as-a-service, which is provided by German firm DNA Evolutions as well as his own company PostcodeAnywhere.

"Who can benefit from this? SMEs in the haulage industry who can’t afford the $90,000+ price-tag on traditional software that does the job. So far they’ve got by without it… all the SMEs have got by without it. This is an extreme example, of course, because route opt can reduce journey times by 30%. A lot of SaaS apps make less obvious savings or increases in efficiency. ... Now we’re facing a recession (sorry … credit crunch…) everybody is going to be forced to tighten their belts. In short, business will have to adopt SaaS in order to remain competitive."

This argument is making a fundamental point about the economics of scale. Whereas in the past this kind of capability only made economic sense for relatively large operations, SaaS makes this optimization capability available to small operations as well. So we are replacing the economics of scale with the economics of scope.

As Mr WebService admits, there may be some resistance to changing business practices in times of trouble (speaking words of wisdom: "Let It Be"). The total cost of deploying this kind of service is not just the cost of the software, but also needs to include the time and effort to get all the bits of the business process to work efficiently and effectively together - process design, testing and management.

So this raises the question how easy is it to use this kind of service - not just calling it in isolation but building it into an idiot-proof business process. How straightforward are the interfaces, how does this route optimization plug together with driver scheduling and vehicle refuelling and all the other capabilities? Do the different service providers have a common protocol, so I can switch easily from using the PostcodeAnywhere service in the UK and the DNA Evolution service in Germany? If I have to ship goods from Newcastle to Neuschwanstein, or from Evenburg to Edinburgh, how do I mix the two services?

Mr Webservice is probably right to identify some potential business value here, but there may be some more work to do to make this a genuine proposition for small companies.

"And when the software's cloudy,
There is still a web service for me.
Optimize tomorrow, let it be."

Event-Driven Financial Catastrophe

Is Complex Event Processing (CEP) part of the problem or part of the solution?

On the one hand, apparently knowledgeable financial journalists tell us that automatic and globalized trading has contributed to an unprecedented level of global volatility. For example, the dramatic rise in Volkswagen shareprice yesterday appears to have been amplified by computer programs automatically reacting to a small price rise by attempting to buy shares (in order to unwind positions resulting from earlier short-selling by hedge funds), thus converting a small price rise into an extremely large one.

On the other hand, I am constantly seeing claims from vendors that their CEP products contain ways of dealing with market volatility, as if the volatility is merely caused by the failure of humans to react as quickly and as intelligently as their software.

But what I don't see in this kind of CEP material is a picture of how the whole system works: an evidence-based explanation as to what causes volatility, and what are the overall consequences of a particular kind of intervention. That kind of whole-system thinking is surely a key responsibility of the architect. By refusing to pay attention to the whole system, this kind of CEP discourse is almost anti-architectural. That's why I think we should call it JBOCE.

(Of course, a lot of so-called architects aren't very good at that kind of whole-system thinking, and indulge in what Nick Malik calls Bizarre Functional Decomposition, but that's another story.)

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Speaking for one of the CEP vendors (Streambase), Mark Palmer (EDA and CEP: Where's the Beef?) protests against recent posts by Jack van Hoof (EDA versus CEP, Again...) and Joe McKendrick (Why 'Event Driven Architecture' is more than Complex Event Processing).

But I think the problem identified by Jack and Joe is not that vendors are asserting that CEP and EDA are the same thing. I am sure all the vendors, including Mark, can point to technical material that explains what these terms really mean. The problem is that the terms are being used in ordinary marketing material as if they were interchangeable - in other words, the vendors are not putting enough emphasis on the practical differences between CEP and EDA. I think the spate of claims about CEP "solving" market volatility is further evidence of this.

Credit Crunch SOA - Innovation

One of a series of posts exploring how the current economic conditions are affecting the SOA world. What are the implications for organizations and individuals?

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Crisis? Hurray, Crisis!

... shouts Ron Tolido (Cap Gemini) (via JackBe)

• headroom for innovation
• it’s in the proverbial pressure-cooker that real innovation occurs
• could uncertain times be a boon for SOA? (Joe McKendrick)

Innovation Loves a Crisis

... boasts Jonathan Schwartz (Sun Microsystems)

• open to change
• technology, not headcount
• driving down cost
• driving up utilization
• driving the changes that yield immediate and long term benefit

Return to the Real World

... predicts Andrew Bartels (Forrester) (via InfoWorld)

• for many vendors, it will mark a return to the real world
• "must-have" software, not "nice-to-have"
• for example, BI and analytics software geared more toward real-world needs than the arcane requirements of investment traders

Do the Real Work

... recommends Dave Linthicum

• don't buy into SOA just to go along with the crowd
• insure that the solution is right for your problem domain

In Short

SOA is not the lazy option: it never was. But in a time of crisis there simply are no lazy options any more. Business survival, for vendors and users alike, means embracing new challenges. Innovation here we come.

Credit Crunch SOA - Restructuring

One of a series of posts exploring how the current economic conditions are affecting the SOA world. What are the implications for organizations and individuals?

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Restructuring

A recent Gartner survey identifies restructuring as the top concern for CEOs in 2009 (SearchCIO.com, 15 October 2008).

• organizational restructuring - layoffs
• financial restructuring - de-leveraging to operate more on a cash basis
• corporate restructurings - spinning off units, preparing to acquire troubled companies or preparing to be acquired
• industry restructuring - who will survive the current economic shakedown

Restructuring has always been a major theme of the SOA world. In his article on the Business Case for Service-Oriented Architecture (November 2004, CBDI subscribers only), David Sprott wrote

"SOA is a structural approach in which business level services are published as atomic units of capability separating and formalizing the concerns of provision and use. ... The restructuring of systems capabilities into services presents a much broader opportunity for restructuring of business responsibilities and processes around the service concept."

But if the credit crunch is putting a new emphasis on structure and restructuring, this creates new opportunities for SOA - provided SOA can be positioned as a more cost-effective way of achieving the necessary restructuring. So let's look at the types of restructuring identified by Gartner.

Organization Restructuring

Organizational restructuring often targets areas that are considered of marginal short-term value to the firm. Vulnerable areas may include marketing, R&D, and (dare I say) enterprise architecture. I worked for a company once that sacked the entire marketing department during an economic downturn.

Let us assume that these areas are all needed for the longer-term survival and viability of the firm. So the challenge here is to keep going with significantly reduced resources, to maintain a minimum level of capability and visible contribution, and to be ready to scale up when conditions improve.

One of the key survival factors is closed-loop management - the ability to link specific activities (such as a given marketing campaign or architectural policy) with specific outcomes (such as sales growth or increased system quality). This allows the individuals working in this area not only to justify their continued presence but also to select those activities where they can make the greatest difference, and it allows senior management to see the wider consequences of a given level of resourcing. The faster and more finely grained the feedback loop, the more useful it is for management.

SOA may be able to help here. Depending on the current state of information systems, you may be able to create quick and dirty management tools, via mashups and other ultra-cheap technologies, to provide a detailed view of the effectiveness of your organization unit. You may also be able to devolve some of the less critical responsibilities to automated procedures and checks, in order to concentrate resources on the most critical responsibilities.

Financial Restructuring

As recently as June 2008, Richard Watson of the Burton Group was worrying about the paradox of too much SOA funding, and the need for financial restructuring. (2 Paradoxes of SOA Funding See also Joe McKendrick SOA funding paradox: pay today, restructure tomorrow?)

"At the peak of the cycle CIOs and CTOs can add some value implementing portfolio management and enterprise architecture. At the trough, CIOs look like mere demand aggregators with little influence to mediate the demand and supply of IT funding. ... An organization’s incentives need to be shaped to promote service provision, service reuse and support for shared infrastructure. Often achieving this means fundamentally restructuring a business into horizontal capabilities."

I don't know of any organizations today that have "too much" SOA funding. As Richard himself says: The paradox of too much funding for SOA has resolved itself. But this exposes a new paradox: it is precisely at the bottom of the trough, when the demands for restructuring are greatest, that CIOs have the least capability to respond to these restructuring demands.

But when Gartner talks about "de-leveraging", I guess this is just a fancy word for "thrift". Not doling out money up-front, not acquiring parcels of dodgy assets, but shifting to a cash economy - in other words, pay-as-you-go. So there is a strong case for SOA here.

Corporate / Industry Restructuring

In good times there were lots of leveraged buy-outs - in other words, mergers and acquisitions whose justification was often more financial juggling than genuine synergy. In bad times there is no leverage, so the emphasis has shifted towards mergers only where this makes operational sense, and a renewed interest in demerger and spin-off.

SOA has a role here - not just in unbundling and in reintegrating the business - but also in finding new ways to connect the organization with its ecosystem, through service-based collaboration.

Overall, the challenge for SOA is to communicate its relevance to business by addressing real business concerns. I'm not saying IT is history, but that's not where business people are going to be investing their attention or their spare cash right now.

Credit Crunch SOA - Outsourcing

One of a series of posts exploring how the current economic conditions are affecting the SOA world. What are the implications for organizations and individuals?

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Outsourcing

At the level of the individual deal/firm, there are clearly going to be some casualties. Obviously the organizations that are in meltdown, or whose funds are currently frozen in some Icelandic bank account, are not going to be spending money they haven't got and can't borrow. And some emergency take-overs in the banking sector are going to reduce the number of banking systems that need to be built and maintained.

But overall, the situation for the outsourcing might not look too bad. Business-as-usual requires systems-as-usual. Indeed, some people in the outsourcing world (for example Phil Morris of EquaTerra via ZDNet) are arguing that outsourcing is countercyclic - in other words, it goes up when the economy as a whole goes down - because it is cheaper and lower-risk than employing people yourself. (I don't remember anyone saying outsourcing was counter-cyclic when the economy was going up, but I must have missed it.)

But what kind of outsourcing is it going to be? Following Archilochus (via Isaiah Berlin and Jim Collins) we can identify two styles of outsourcing: the Fox makes lots of small outsourcing deals and the Hedgehog makes one big outsourcing deal.

Som Sarma of Satyam Computer Services is on the side of the Hedgehogs when he writes "As organisations are driven to focus on IT cost having a single supplier can minimise management, due diligence and supplier selection expenses." [ComputerWorldUK, 2 October 2008] He repeats (in almost identical words) a point made by Martyn Hart back in January who, while acknowledging that the past couple of years has seen a swing away from 'mega deal' towards multi-shoring and choosing separate suppliers for each process, predicted a swing back to the single supplier, arguing that this would provide better cost management. [ComputerWorldUK, 22 January 2008]

However, Som Sarma's colleague Deepak Kataria, speaking at the New Services Environment Summit in Dallas TX (February 2008), warned against over dependency on single vendor. He recommends defining and implementing a conceptual abstract framework for mapping the technology roadmap to multiple vendor platforms and future versions [see Deepak's presentation on SOA Transformation (ppt)].

I'm with Deepak on this point. If you have a first-class architecture (and I admit that is a big IF) you can get the best of both worlds - better governance and risk management, as well as better cost management. With SOA, organizations can choose to manage outsourcing at a finer level of granularity, in order to squeeze extra value from the network, as well as keeping closer control over their suppliers. As organizations develop more sophisticated service management capability, they can move from being a simple hedgehog (hand everything over to XYZ Global Services and hope for the best) to being a clever fox.

One data point here - reported anxiety at General Motors over the merger between HP and EDS, which means GM is now spending a third of its massive technology budget with a single supplier. [HP-EDS Combo makes General Motors uncomfortable].

Meanwhile, both Som and Martyn identify another critical benefit from outsourcing - a shift towards Pay-As-You-Go models. See my previous post on Service-Oriented CashFlow.

Service-Oriented CashFlow

In difficult economic times, the most important business measure for many firms is not profit or revenue growth or cost-saving but cashflow. Which means that the business case for SOA shifts away from relatively boring arguments about cost-saving (economics of scale), and strategic but highly imprecise arguments about flexibility (economics of scope), towards careful comparison of the dynamic economic viability of different business models (economics of governance alignment).

There aren't yet many SOA case studies that talk about cashflow. When I search for "service-oriented" and "cashflow", I keep finding references to a healthcare distribution company Owens & Minor, based in Mechanicsville VA, which started an 4-year SOA project sometime in 2005. (Speed Wins at Owens & Minor, Feb 2005) So nearly finished yet, chaps?

As I've explained in previous posts, the Pay-As-You-Go model has two advantages for the service consumer - better cashflow (because there is less financial latency between expenditure and return) and reduced risk (because you only spend as much as you need). As economic conditions become more volatile, and credit becomes more expensive, both of these advantages become more valuable.

Valuable for the consumer that is. The SaaS vendors (cheerleader Phil Wainewright) quite rightly see this as an opportunity for SaaS. But of course the challenge for the SaaS vendors is how to provide these benefits without themselves incurring excess cost and risk.

Billing and credit control are obviously key elements of the SaaS infrastructure, and some of Phil's clients offer useful services in this space. So are we moving towards a stratified SaaS world: (service-as-a-service)-as-a-service? And what are the economics of that?

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Phil Wainewright on CashFlow: A Few Financial Home Truths. For mechanisms for handling billing see Phil Wainewright on Easing the SaaS-to-cash cycle and Marco Seiriö (RuleCore) on More CEP SaaS Pain.

Note: for various reasons, we now prefer the term Economics of Alignment. 

Updated 25 October 2013

Financial Catastrophe

This might be a bad time to say this, but I have never been very enthusiastic about the opportunities for SOA and CEP in the finance sector. I've not seen much evidence that banks and insurance companies are interested in using SOA and CEP to deliver genuine improvements to customer service and business effectiveness. The published case studies of SOA in the finance sector are mostly pretty dull stuff - consolidation and cost-saving, compliance and risk management, and accelerating/amplifying financial risk-taking.

It would be easy for someone to look at these case studies and think that's all SOA is - just some back-room cost-savings with no visible impact on the business.

Under current economic conditions, banks may be even more desperate to save money, and there will be further waves of merger and acquisition. (See David Sprott's recent post M&A or Business as Usual.) Does this mean they will continue to invest in technologies that help them save and integrate? Those SOA vendors who have allowed themselves to become heavily dependent on the finance sector will now be hoping that this dependence is reciprocated, and that the banks can't survive without SOA.

But it is in other industry sectors, as well as in the public sector, that the more authentic benefits from SOA are to be found. The reason I'm still enthusiastic about SOA is because I still believe in its potential to support the service-based business in engaging with asymmetric demand. If you want to find people who understand this potential, forget about the finance sector, talk to the people in government planning departments, in healthcare strategy, in telecoms and media, in aerospace and defence. Real people doing real jobs.