Smart Business Networks: How the Network Wins

BY ERIC VAN HECK AND PETER VERVEST SMART BUSINESS NETWORKS: HOW THE NETWORK WINS Realizing scenarios in which business is conducted through a rapidly formed O network with anyone, anywhere, nce merely a dream, dig- anytime regardless of different ital networks are now a rapidly maturing reality. computer systems and These digital networks business processes. can expose unexpected behavioral properties of the individual actors. Combined as a swarm, networked businesses are able to produce exceptional or “smart” results they were not previously capable of generating. Companies make different linkages, combine different capabilities from many different parties, are more agile, and move positions faster. What are these “smart” business networks and why are they important? What should chief information officers and IT professionals do to help their companies succeed in a networked world? BEING SMART IN THE BUSINESS NETWORK In less than 10 years, Amazon moved from electronic book retailing to become I l l u s t r a t i o n b y KEN ORVIDAS COMMUNICATIONS OF THE ACM June 2007/Vol. 50, No. 6 29

the world’s leading “e-tailer.” Without stores and Consider the example of Kenny’s Bookshop and with limited inventory, Amazon possibly has more Art Gallery, a family-run small business in Galway, information on retail goods and their buyers and Ireland (www.kennys.ie). It sources valuable sec- sellers than many other businesses. Amazon offers ondhand books and sells them to interested collec- a business platform for the traditional retailer to tors [5]. Established in 1940, Kenny’s began “make a market” [9]. Within the Amazon business focusing on its bookshop customers and then, in networks, the retailer can: the 1970s, by mailing paper catalogs to libraries overseas. In 2003, Kenny’s linked its library man- Table 1. Characteristics of traditional andto the Online Computer Library • Facilitate search by buyers and sellers; agement system new business network approaches. • Discover and help set pricing and other transac- Center (OCLC), a not-for-profit organization that tion conditions; owns the largest database • Manage and coordi- Characteristics Traditional Business New Business of bibliographic records Network Approach Network Approach nate the logistical in the world. Kenny’s Products and Relative simple, unbundled, Relative complex, bundled, services and slowly delivered and fast delivered products processes for transfer was the first business to of the physical or digi- products and services and services have a commercial tal goods; Value creation Supply chains with long Demand networks with arrangement with term connected quick connect and relationships disconnect relationships • Settle payments and OCLC, which allowed it arrange fund transfer; to provide a full elec- Coordination and Hierarchical and central Network orchestration and control control and decision making with distributed control tronic catalog on virtu- and decision making • Authenticate the quality ally any secondhand Information Information sharing with Information sharing over sharing direct business partners and with network partners of the goods sold and book highly efficiently verify the credibility of and faster than anyone Infrastructure Actor platforms with Network platform with buyers and sellers. information silos and networked business else. Kenny’s reaped systems operating system instant financial rewards Thousands of elec- since a cataloged second- Table 1. Characteristics of tronic retailers join traditional and new business hand book is usually valued four times higher than Amazon every month network approaches. an uncataloged item. Through Bookrouter.com, for all or some of these Kenny’s published its rapidly growing stock of VanHeck table 1 (6/07) functions. At the same time many leave, or are now-cataloged secondhand books on multiple rebuked by the Amazon system. Amazon facilitates Internet sites such as Amazon, Alibris, and Bib- product representation, regulatory compliance, liodirect, using their, or other logistics providers, risk management, and conflict resolution; it has physical delivery capabilities. In 2006, Kenny’s quickly established a reputation for trustworthy bookshop went completely online and their shop transactions. EBay, with over 222 million regis- in Galway is now just hosting the art gallery. tered buyers and sellers, has done the same for auc- Kenny’s could have remained a traditional book- tions. At the end of 2006, Skype had attracted 171 shop with others—Amazon and eBay—capturing million registered users. In less than four years, their business. They did the reverse. They became Skype has surpassed anything traditional telephone smart in their business network by capturing a service providers have ever achieved. valuable position and leveraging that position These companies offer platforms on which users across as many links as they could. can freely move and interact as long as the platform Capturing and leveraging a position in a busi- provider allows them. These platforms show a strong ness network does not mean one must own, or network effect: the more users, the more useful the control, the platforms on which those networks network becomes, the more difficult it becomes to run. For example, TheBigWord company switch, and the less likely the user will move to (www.thebigword.com) is able to serve the diverse another network. Albert László Barabási [1] recog- translation needs of large companies worldwide by nized this by analyzing Internet traffic. He demon- sharing a “translation memory” across a network of strated that the Net is not democratic, and the its clients and thousands of local “mother tongue” number of links per node follows a so-called power linguists [7]. It responds almost instantly to trans- law distribution. A few nodes have many links while lation needs—such as for publishing on Web sites many more other nodes have very few links. The in many different languages—by posting the work node with many links attracts nodes with fewer links to targeted groups of qualified translators, dividing faster than the lesser-connected nodes. As the big get and allocating the work, and managing the process bigger, what options do the smaller actors have? in a way that is fully transparent to the client. 30 June 2007/Vol. 50, No. 6 COMMUNICATIONS OF THE ACM

MULTIASISTENCIA: THE NETWORK ORCHESTRATOR By Javier Busquets, Juan Rodón, and Jonathan Wareham perating in Spain, France, the U.K., and Portugal, threshold, loss adjusters can carry out a “desktop audit” on the O Grupo Multiasistencia coordinates home insurance Sidebar (Busquets ) customers. Founded in 1983, it manages small-tradebusiness network actors. profes- Internet; digital photographs are taken on-site by trade profes- claims and repairs serving approximately nine million figure caption: Multiasistencia sionals, sent to the CSR, and reviewed for approval in real time. sionals and has evolved to become a service coordinator for In 2006, Multiasistencia and a European insurer defined a over 100 large corporations including insurance companies, new service to inform end customers about the process when- banks, department stores, and ever a claim was pre- other retail chains. European sented. The application end customers and corporate sends Short Message clients are handled by its 1.a Request for a Services (SMS) messages Madrid-based control center. repair service Corporate Clients through cell phones to Its 375 Customer Service Repre- the end customers. As sentatives (CSR) receive 7. Invoicing, one of the insurer’s exec- 2. Transfer of 8. Survey Information on requests for home repairs by a request for a satisfaction repairs utive explains, “Informa- phone, email, or the Internet repair service and claims tion management has and deploy and control jobs to been the key to increas- a network of 11,000 trade pro- ing loyalty by 20% with 1.b Request fessionals who complete the for a repair our customer base when- service End Customers Multiasistencia repairs. The figure here illus- ever they use the ser- trates the main actors in the vice.” Trade professionals 3. Repair business network. assignment 6. Invoicing also benefit. They use After Multiasistencia’s suc- and order digitalized signatures and cess in managing collectives electronic invoicing, and attracting corporate clients, 4. provision of the service thereby improving cash 5. Invoicing on behalf of eRepairs Trade (when repair not included under policy) it experienced in 2000 declining Professionals collection and reducing quality resulting from the non- administrative costs by scalability of operating all their 40%. communication via the tele- Besides the productiv- phone. In that year the new CEO Multiasistencia business ity gains, this smart business network has also standardized and CIO started to reengineer network actors. the highly fragmented and heterogeneous household repairs using the newest information sector: applying predefined prices, transparent conditions, ser- and communication technolo- VanHeck sidebar (Busquets) fig. quality guarantees, ensuring timely vice performance and (6/07) gies [1]. The result has been a Networked Business Operating response (within 24 hours; three hours for emergencies) and System (BOS) based on their call center, Internet, Web services, warranting the work for six months. and mobile systems. There are two critical challenges for Multiasistencia to sup- The network coordination is highly automated. On a port the business model and the business relationships. The repair order no one needs to intervene unless an exception first challenge is the interfacing of the BOS with human agents. occurs. The BOS tracks more than 100 variables to assure The second challenge is negotiating and finding a balance quality standards and timely execution. With this automated between standardization and innovative environmental coordination, productivity increased to 49.6% and the num- responses. c ber of errors dropped dramatically. The firm has automated almost all human communication except for incoming calls. References Therefore the CSRs do not manage phone calls, they monitor 1. Busquets, J. Multiasistencia on the Internet (A), (B), and (C). the processes to manage exceptions to ensure quality. With Teaching Cases, DVD Multimedia and Teaching Note, European the intense use of ICT, particularly Web services, connected Case Clearing House, 2006; www.ecch.com. and disconnected processes have been integrated and stan- 2. Nohria, N. and Ghoshal, S. The Differentiated Network. Jossey- dardized. Bass, 1997. Rather than technological, a major challenge in implement- 3. Von Hippel, E. Democratizing Innovation. MIT Press, Cambridge, ing the BOS has been ensuring trust with the agents given the MA, 2005. higher levels of standardized processes and transparent control. The BOS also has the capacity to adapt to environmental Javier Busquets (xavier.busquets@esade.edu) is head of the changes by defining behavioral limits as automatic responses Department of Information Systems at ESADE, University Ramon or human-driven actions for exception management. The BOS Llull in Barcelona, Spain. also accommodates idiosyncratic corporate customer demands Juan Rodon (joan.rodon@esade.edu) is an assistant professor as turnkey services. All services are audited through SLAs with of the Department of Information Systems at ESADE, University all agents in the network. Multiasistencia has also boosted Ramon Llull in Barcelona, Spain. value and innovation by collaborating with its corporate clients Jonathan Wareham (wareham@acm.org) is an associate [2, 3]. Approximately 80% of new software development has professor in the Department of Information Systems at ESADE, been done in collaboration with its large customers. For exam- University of Ramon Llull in Barcelona, Spain. ple, in 2005, it created a new desktop telesurvey adjustment service. When the repair assessment exceeds a financial © 2007 ACM 0001-0782/07/0600 $5.00 COMMUNICATIONS OF THE ACM June 2007/Vol. 50, No. 6 31

TheBigWord rewards the translators by paying by tencia. They show how the smart business network the number of words they translate and by provid- approach with embedded business processes leads ing their administration and payment services. to substantial business advantages, demonstrating TheBigWord example demonstrates these business the importance of information sharing in the busi- networks can respond with much more agility ness network and the design and organizational together than acting as an individual company. But dynamics of the infrastructure. what are other characteristics and what are the rea- The pivotal question of smart business net- sons why these new forms are starting to be devel- works concerns the relationship between the strat- oped and implemented now? egy and structure of the business network on one hand and the underlying infrastructure on the A NEW BUSINESS NETWORK APPROACH other. As new technologies, such as RFID, allow Organizations are moving, or must move, from networks of organizations almost complete insight today’s relatively stable and slow-moving business into where their people, materials, suppliers and networks to an open digital platform where busi- customers are at any point in time, the organiza- ness is conducted across a rapidly formed network tions are able to organize differently. But if all with anyone, anywhere, anytime despite different other players in the network space have that same business processes and computer systems. Table 1 insight, the result of the interactions may not be provides an overview of the characteristics of the competitive. Therefore, a first critical step is to traditional and new business network approaches. develop a profound understanding about the func- The disadvantages and associated costs of the more tioning of the business network.1 traditional approaches are caused by the inability to provide relatively complex, bundled, and UNDERSTANDING THE NETWORK quickly delivered products and services. The If two cars drive on the highway with enough dis- potential of the new business network approach is tance between them they have no relationship other to create these types of products and services with than to share the same roadway. If, however, these the help of combining business network insights same cars get very close, they start behaving differ- with telecommunication capabilities. ently. If the first car brakes, the second car will The business is no longer a self-contained orga- brake—but with a delay. If the first car accelerates, nization working together with closely coupled the second car will also speed up; again, with a partners: it is a participant in a number of net- delay. The drivers of these two cars may not notice works where it may lead or act together with oth- much more than the distance between them. But ers. The network includes additional layers of from a helicopter their behavior will appear as a meaning—from the ICT infrastructures to the wave moving along the flow of traffic. Each partic- interactions between businesses and individuals. ipant does not see the behavior of the network but Rather than viewing the business as a sequential responds to the local situation with his or her dri- chain of events (a value chain), actors in a smart ving logic. The impact of the individual driver’s business network seek linkages that are novel and actions in response to their specific situation and different to create remarkable, “better than usual” the road rules they follow creates a collective net- results. “Smart” has a connotation with fashionable work behavior not seen nor understood by the indi- and distinguished but can also be somewhat short- viduals. Each driver acts on self-organizing driving lived. What is smart today will be considered com- logic according to the driving rules of the network. mon tomorrow. Smart is therefore a relative rather The study of networked behavior beyond the than an absolute term. Smartness means the net- familiar territories of business and ICT networks— work of cooperating businesses can create better those of social interactions, ant colonies, bees, and results than other, less smart, business networks or other biological systems—reveals attributes and other forms of business arrangement. To be smart characteristics that can be applied to the design of in business is to be smarter than the competitors smart business networks. The behavior of the indi- just as an athlete who is considered fast means vidual drivers, as described in the preceding exam- faster than the other competitors. ple, demonstrates swarm intelligence: the Another way the new business network emergence of seemingly intelligent or, perhaps, approach distinguishes itself is the way the network smart, behavior from many individuals [2]. Swarm is orchestrated. In the sidebar “Multiasistencia: The Network Orchestrator,” Busquets, Rodón, and 1 See “Decision Making in Very Large Networks,” by Peter J. Denning and Rick Hayes- Wareham introduce the Spanish Grupo Multiasis- Roth in the November 2006 issue of Communications for more detailed information. 32 June 2007/Vol. 50, No. 6 COMMUNICATIONS OF THE ACM

intelligence studies collective behavior in self-orga- As the analysis is applied to larger and more com- nizing systems populated by simple individuals plex networks, more advanced ways are required to interacting locally with one another and with their analyze the structure of the network. In the sidebar environment without centralized control. However, “Network Horizon and Obtaining a Favorable Net- in many cases, despite being unpredictable, such work Position,” van Liere and Koppius use social swarms are able to exhibit impressive capabilities network analysis and simulation techniques to for problem solving to, for example, seek food or explore the concept of the network horizon: the respond to an unforeseen problem. number of nodes an actor can “see” from a specific While these studies provide indicators for net- position in the network [12]. With a larger network work dynamics—formation, change, decay—and horizon a company can take a more advantageous for the ways in which the individual intelligence of network position depending on the distribution of the network actors is combined, the research in the network horizons across all actors and up to a social network analysis has made a significant con- certain saturation point. The results indicate the tribution to a more profound understanding of expansion of the network horizon will soon be a crit- network behavior. Social network researchers take ical success factor for companies. into account the social relationships and ties of Most network scientists analyze the structure individuals and therefore the structure of the net- and dynamics of business networks independent of work. Building on social network analysis using the technologies that enable the networks to per- complex systems theory Dan Braha and Yaneer form. Instead, researchers tend to concentrate on Bar-Yam [3] examined the statistical properties of what makes the network effective, the linked rela- large-scale product development information net- tionships between the actors, and how their intelli- works for vehicle design. They find that such net- gence is combined to reach the network’s goals. works have properties (sparseness, small world, Digital technologies play a fundamental role in scaling regimes) like those of other biological, today’s networks. They have facilitated improve- social, and technological networks. They demon- ments and fundamental changes in the ways in strate that the distribution of incoming communi- which organizations and individuals interact and cation links always has a cut-off—their numbers combine as well as revealing unexpected capabili- are restricted—while the distribution of outgoing ties that create new markets and opportunities. communication links is considered scale-free, One need only consider the rapid rise in digital meaning some nodes act as highly connected hubs. social networks and massive online computer This would be consistent with Herbert Simon’s games such as Second Life. These are exhibiting bounded rationality argument that rational agents capabilities that seem well beyond those of existing experience limits in formulating and solving com- business networks. The next critical step is to plex problems and in processing (receiving, storing, develop a comprehensive understanding of the retrieving, transmitting) information. expected smartness of the business network. Braha and Bar-Yam found it seems easier to trans- mit information than to process information. Like WHAT MAKES A SMART BUSINESS NETWORK? individual human beings, a group of people—or The key characteristics of a smart business network network of nodes—is limited by an inability to are that it has the ability to “rapidly pick, plug, and digest an intense input of data. It seems that smart- play” business processes to configure rapidly to meet ness could be related to the capability to organize the a specific objective, for example, to react to a cus- information flows within the business network as tomer order or an unexpected situation (such as well as to the topological structure of the network. dealing with emergencies) [11]. One might regard a Other researchers have shown the attractiveness smart business network as an expectant web of par- and importance of certain positions in the network, ticipants ready to jump into action (pick) and com- that is, those nodes that are dominant and those bine rapidly (plug) to meet the requirements of a that take subservient roles. For example, in 1992, specific situation (play). On completion, the partic- Ronald Burt identified “bridging positions” where ipants are dispersed to “rest” while, perhaps, being the network participants link through a focal actor active in other business networks or more traditional who holds the bridge [4]. This structure brings supply chains. information and control benefits (a central player) This combination of pick, plug, play, and dis- but also encourages the dependent actors to find perse means the fundamental organizing capabilities alternative routes, for example, to disintermediate for a smart business network are: the ability to the bridger. quickly connect and disconnect with an actor; the COMMUNICATIONS OF THE ACM June 2007/Vol. 50, No. 6 33

Table 2. Critical trade-offs and questions with regard to smart business networks. selection and execution of busi- Issues Trade-Offs Critical Questions ness processes across the net- Network Preferred versus expected outcomes What do customers want in terms of outcomes products and services (quality, work; and establishing the Network versus individual outcomes and complexity, bundling, delivery time, decision rules and the embed- performance price, offline/online)? ded logic within the business How to value customer demand? network. Network Individual versus network execution What can we offer to customers in execution terms of products and services (quality, Simple versus complex transactions complexity, bundling, delivery time, QUICK CONNECT AND DISCONNECT price, offline/online)? Global versus local execution Quick connect requires that, as What actors will work together to a result of an event the smart Integrated versus modular products/ fulfill the customer order? How? services/processes business network must seek and What level of modularity is required? select those members who, Network Central governed versus adaptive, self Who is responsible for the customer order? together, can fulfill the required governance organizing How are decision rights delegated? goal. This means the network Governance to innovate versus governance to operate efficiently How is the relational governance evaluated? logic acts on a menu of poten- Network tial fulfillment partners to select design End-to-end control versus individual control How to keep end-to-end control in the network? those who can combine to pro- Networked business operating system versus actor business operating systems How to design and test the networkked duce the desired results. Once business operating system? the appropriate participants are Global versus local adaptation How to deal with the environmental and found and the connection has Dynamic versus static business network internal dynamics of the business network? been established, the process of Enabling Open technologies versus closed What technologies will be disruptive for “play”—performing the busi- technologies technologies the business network? ness transaction—can begin. Individual versus network technology How to speed up technology adoption in adoption the business network? Goldman, Nagel, and Preiss [6] described this in their discus- Table 2. Critical product design and manufacturing enabling prod- sion of virtual organizations. trade-offs and uct construction of tailored products from stan- questions regarding The capability of quickly con- smart business dardized components: the combination of nected plug-compatibility networks. VanHeck modules (6/07) combined in a specific Lego-like table 2 that are enables a superior response way. Modularity brings the benefits of versatility speed and greater component variety particularly (the diverse set of products that an organization for dealing with new requirements. can produce) and agility (the ability to respond While the ability to quickly connect has received quickly to fulfill an unpredictable customer order) attention, the capability to quickly disconnect while, at the same time, delivering within the requires more. Members will join the business net- boundaries of allowed value chain total costs and work and participate on the basis of risk and lead times. Martijn Hoogeweegen et al. developed reward. While this can be clear while they are a method to design modular business networks and active, rules should be agreed upon for when the to optimize the allocation of tasks in a business actors are disconnected (having completed a spe- network based on modularity principles [8]. The cific customer order or while they will no longer be network nodes will be considered black boxes pro- a member of the network). Decision rules and logic viding the functionality required by the business with regard to connection and disconnection will network and are “played” according to the network be a crucial component for the success of the busi- rules. However, modular design requires much ness network. more coordination than non-modular: the greater the number of components the higher the organiz- PLUG AND PLAY: BRINGING THE NETWORK TOGETHER ing cost. A crucial decision is the degree of modu- When selected, the network participants must be larity or granularity of a system, or business able to interoperate. They must be plugged network, and that is determined by the balance together to enable the required network outcome. between coordination costs and the complexity of This means they must act with modularity: the the network. decomposition of a system by grouping elements into a smaller number of subsystems with rules EMBEDDED BUSINESS LOGIC governing the architecture for mixing and match- Each business network participant has specific ing these components. capabilities captured in its business processes (own The concept of modularity has a long history in business logic) that it executes according to this 34 June 2007/Vol. 50, No. 6 COMMUNICATIONS OF THE ACM

NETWORK HORIZON AND OBTAINING A FAVORABLE NETWORK POSITION By Diederik van Liere and Otto Koppius n the networked world, decision makers must ensure their These findings might explain why network orchestrators in I companies understand their position in the business network. They should see their company as a node in much larger and extensive networks of interdependent firms that are a wide variety of industries are so successful. Companies such as Li & Fung in the apparel industry, Solectron and Flextronics in semiconductors, and Grupo Multiasistencia in home insur- constantly being reconfigured. This perspective implies that deci- ance claims and repairs were among the first to see them- sion makers must be acutely aware of their companies’ unique selves as nodes in a larger business network. In a position in the network; not only the direct (van Liere) figure caption: Bridging position and extensive network Sidebar (supplier or client) homogenous, low-horizon network, their contacts but also the contacts’ contacts, their contacts, and so network horizon in aenabled them to position themselves as network horizon network. forth. The number of nodes that an actor can “see” from a spe- orchestrators connecting otherwise disconnected parts of the cific position in the network is called the network horizon. The network and become significant companies in their respective figure here illustrates how the industries while others network horizon of Firm A is struggled to make the tran- expanded using the opportuni- sition to network thinking. ties of the bridging position in G G We foresee two chal- a business network. Our stud- lenges for organizational ies have indicated the network B B decision makers seeking horizon is an important deter- F E F E the networked approach. minant of both individual firm A A The first challenge is to performance and the overall start to think about a net- network dynamics and perfor- work strategy, rather than D D mance. C C seeking competitive advan- Firm A occupies a bridging position Suppose firm A has a network horizon Research was carried out tage based upon internal by developing a management because it can broker information and that includes firms E, F and G and capabilities. By choosing resources between firms B, C and D recognizes the opportunity to while these are dependent on firm A. strengthen its bridging position. exercise called the Business and maneuvering to the Networking Engine [2] that can Therefore it establishes a relationship correct network position a be used to test the effects of with firm F. firm can reap even more new, networked organizations benefits from its current based on the concepts of mod- capability-based competi- ularity and loosely coupled busi- Bridging position and tive advantage. The second challenge is to identify which net- ness processes. A series of network horizon. works are relevant for their business and where they can experiments with executives expand their network horizon. As business networks continue from the insurance industry to grow, the entire network cannot be scanned. Some parts of showed that firms with a higher network horizon achieved higher VanHeck favorable (Van Liere)more relevant than other the expansion of the performance. These firms were better able to identify sidebar the network are fig. (6/07) advantage is increasingly network-based, parts. As competitive network positions where they could act as a bridge between dif- network horizon will be a crucial success factor in the near ferent parts of the network: a position rich in structural holes [1]. future. c Firms with a lower network horizon rarely identified such opportunities and hence had lower performance. References As the network adapts to its members’ responses to 1. Burt, R.S. Structural Holes: The Social Structure of Competition. changing market conditions and competitor actions, the bridg- Harvard University Press, Cambridge, MA, 1992. ing position advantage may be temporary. So when does a 2. Hoogeweegen, M.R., van Liere, D.W., Vervest, P.H.M., Hagdorn network position confer a sustainable competitive advantage? van der Meijden, L., and de Lepper, I. Strategizing for mass cus- Extensive simulation revealed that a key factor is the way the tomization by playing the business networking game. Decision network horizon is distributed across the different firms (in Support Systems 42, 3 (Mar. 2006), 1402–1412. other words, the network horizon heterogeneity). The results are striking. In the traditional supply chain where all firms More information about the Business Network Engine is available at: bne.rsm.nl. have a low network horizon (that is, the firms know their direct upstream and downstream partners but are aware of little else), a competitive advantage can be sustained for some Diederik van Liere (dliere@rsm.nl) is a Ph.D. candidate at time. the Department of Decision and Information Sciences of RSM However, when the network horizon becomes more Erasmus University in Rotterdam, The Netherlands. heterogeneous across firms, for instance because some firms Otto Koppius (okoppius@rsm.nl) is an assistant professor at start to think in network terms instead of supply chain terms, the Department of Decision and Information Sciences of RSM the situation changes significantly. In heterogeneous networks, Erasmus University in Rotterdam, The Netherlands. a low network horizon confers little advantage but having even a modest network horizon can sustain a competitive advantage for some time. However, once all firms have a high network horizon, the network becomes homogenous again. Any opportunity can be spotted by many firms and any competitive advantage is therefore short-lived. 2007 ACM 0001-0782/07/0600 $5.00 COMMUNICATIONS OF THE ACM June 2007/Vol. 50, No. 6 35

Figure 1. The traditional business network approach. logic. Traditionally, ing each participant to AGENT PRODUCER FORWARDER SHIPPING LINE RETAIL when such participants execute in its own way Transaction combine they create Layer according to this logic. interfaces between capa- BANK INSURER This means that, to be a END CONSUMER bilities: translating from RFID data member of the network, Scanning Scanning RFID data one business logic to INLAND SHIPPING an organization must be data Logistics another and executing PRODUCER able to absorb the accordingly. This can be Layer shared logic and execute SEASHIP seen in the outsourcing ROAD TRANSPORT accordingly. This is the DISTRIBUTION TERMINAL phenomenon: carve out “own business logic” of the total function of a the network that can be particular business oper- Figure 1. The traditionalapproach. enabled by a Networked Business Operating Sys- network business ation and hand it over to tem (BOS). Based on the service-oriented architec- another party. As indicated earlier, traditional busi- ture it resolves the problem of information silos by VanHeck fig 1 (6/07)-19.5 picas ness network approaches lack the ability to rapidly loose coupling of underlying systems, which are pick, plug, and play to configure rapidly to meet a connected together in a business operating layer. specific objective, for example, to react to a cus- This layer allows process execution and manage- tomer order or an unexpected event. Figure 1 pre- ment “from a distance” from the underlying appli- sents part of a global business network. Its focus is cation systems. The enabling interorganizational Figure 2. The new business network approach. on the actors and relationships from manufacturers technology architecture must reflect this loose cou- via multi-modal transportation (road, train, sea- pling. Loose coupling is not synonymous with ship) to retailers. In decentralized processes. most current business Networked Business It is quite the opposite, networks, companies Business Layer Operating Operating System where the processes are are developing capabili- more tightly coordinated Standards ties at the logistics layer EPC because the rigidity of the Global and the transaction PRODUCER FORWARDER IT architecture is no AGENT SHIPPING LINE RETAIL layer. As discussed in Transaction longer a constraint [10]. Layer Table 1, these actors BANK The business operating INSURER END CONSUMER focus on their direct RFID Scanning layer can become rather Scanning data data RFID INLAND SHIPPING data partners and are not complex due to the fact able to have the end-to- Logistics Layer PRODUCER that business logic is SEASHIP ROAD TRANSPORT end management of DISTRIBUTION developed related to such TERMINAL processes running issues as: across many different Figure 2. The new business organizations in many network approach. • Membership Selection: The capabilities to different forms. The decide which business entities can act as nodes actor platforms are of the network; dominated by information silos residing either in • Linking: The positioning and connecting of VanHeck fig 2 (6/07)-19.5 to the other parts of the network. The different places within an organization as “islands,” nodes picas or in two or more different organizations. Individ- linking processes can include the directories ual actors are orchestrating processes in their part (search and select) and routing (path finding) of the supply chain. through the network as well as typical commu- Figure 2 presents an example situation illustrating nications tasks such as handshake, authentica- the use of the new business network approach. The tion, and trust establishment; central idea is that linking partners is on the basis of • Goal Setting: The coordination mechanisms linking processes but allowing individual execution that determine goals in the business network according to those processes: they act individually and the tasks and responsibilities assigned to according to the joint rules of the network. each member node; As shown in Figure 2, each of the smart business • Risk and Reward Management: The division of network participants becomes a “smart insect” in a material results (profit and loss in a monetary goal-seeking swarm. The network separates process but also in a fairly loose and generic sense) and from execution. It shares the processes required to the perceived value by each of the participating achieve its goals (the shared business logic) allow- business entities of its share; 36 June 2007/Vol. 50, No. 6 COMMUNICATIONS OF THE ACM

• Continual Improvement: The capabilities and nies must develop and act “smart” in rapidly chang- processes of joining and leaving the network over ing and expanding business networks enabled by time, of network renewal and sustainability. today’s pervasive communications technologies. • Fault Tolerance: To malfunction of a node, for Chief information officers and professionals must example a business malfunction or bankruptcy. span the boundaries between their own organization and the growing networks in which their orga- The concept of a BOS is analogous to that of the nizations operate. They must understand new computer operating system. The invention of an vocabularies that are not necessarily technically or operating system for the PC in the 1970s allowed business oriented. Decision making in very large application software to be run on different com- networks is fundamentally different from what we puters as long as they conform to the rules of the are used to. Understanding how federated activities operating system. Implementation of a BOS emerge and operate is not a monolithic discipline enables the portability of business processes and and requires the CIO to adapt and adjust to chang- facilitates the end-to-end management of processes ing conditions. c running across many different organizations in many different forms. It coordinates the processes References among the networked businesses and its logic is 1. Barabási, A.L. Linked—How Everything Is Connected to Everything Else and What It Means for Business, Science, and Everyday Life. Pen- embedded in the systems used by these businesses. guin Group, New York, 2003. 2. Bonabeau, E. and Meyer, C. Swarm intelligence: A whole new way to think about business. Harvard Business Review (May 2001), 106–114. QUESTIONS FOR THE CIO 3. Braha, D. and Bar-Yam, Y. Information flow structure in large-scale For those recognizing the promise, or necessity, of product development organizational networks. Journal of Information capturing the capabilities of smart business net- Technology 19, 4 (Dec. 2004), 244–253. 4. Burt, R.S. Structural Holes—The Social Structure of Competition. Har- works to be proactive and effective in this largely vard University Press, Cambridge, MA, 1992. unmapped territory of “being networked” the fun- 5. Golden, W., Hughes, M., and Burke, H. Node to network: Partner- ships in the secondhand book trade. In P. Vervest et al., Smart Busi- damental questions include: ness Networks, Springer, Heidelberg-New York, 2005. 6. Goldman, S.L., Nagel, R.N., and Preiss, K. Agile Competitors and • What are the characteristics of smart business Virtual Organizations: Strategies for Enriching the Customer. Van Nos- trand Reinhold, New York, 1995. networks and how is the current business net- 7. Holland, C., Shaw, D.R., Westwood, J.B., and Harris, I. Marketing work functioning? translation services internationally: Exploiting IT to achieve a smart network. Journal of Information Technology 19, 4 (Dec. 2004), • What are the key enablers and what is the 254–260. expected smartness of the business network? 8. Hoogeweegen, M., Teunissen, W.J., Vervest, P.H.M., and Wagenaar, • How to capture the business logic and what are R. Modular network design: Using information and communications technology to allocate production tasks in a virtual organization. the potential functionalities of the Networked Decision Sciences 30, 4 (Fall 1999), 1073–1103. BOS and how to create this business operating 9. Kambil, A. and van Heck, E. Making Markets: How Firms Can Design layer? and Profit from Online Auctions and Exchanges. Harvard Business School Press, Boston, MA, 2002. • What are the important trade-offs that must be 10. Konsynski, B. and Tiwani, A. The improvisation-efficiency paradox in analyzed and decided upon? inter-firm electronic networks: Governance and architecture consider- ations. Journal of Information Technology 19, 4 (Dec. 2004), 234–243. 11. van Heck, E., Preiss, K., and Pau, L-F. Smart Business Networks. Concerning the last question, we have defined a Springer, Heidelberg-New York, 2005. set of important trade-offs and related specific 12. van Liere, D.W. Dynamics of Network Positions. RSM Erasmus Uni- versity, ERIM Ph.D series, May 2007. questions that must be answered with regard to the business network outcomes, execution, governance, design, and enabling technologies. Table 2 provides Eric van Heck (evanheck@rsm.nl) is professor of information management and markets at the Department of Decision and the trade-offs and critical questions. Information Sciences of RSM Erasmus University and director of doctoral education at Erasmus Research Institute of Management THE CHALLENGE AHEAD (ERIM) in Rotterdam. We may believe that we are familiar with the net- Peter Vervest (vervest@d-age.com) is professor of business networking at the Department of Decision and Information Sciences worked world. However, in recent years our under- of RSM Erasmus University and partner at D-Age. standing has been disturbed by the rapid emergence of digital social networks—a seeming This article is based on our work as discussed in the Smart Business Network Initia- swarm of consumers who are interacting in ways tive (www.sbniweb.org). beyond that of most organizations. The pressures of global competition and the need for effectiveness and agility demand new ways to organize. Compa- © 2007 ACM 0001-0782/07/0600 $5.00 COMMUNICATIONS OF THE ACM June 2007/Vol. 50, No. 6 37

Smart Business Networks: How the Network Wins

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